[House Hearing, 109 Congress]
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HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON ENERGY AND
COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
SEPTEMBER 21, 2006
Serial No. 109-141
Printed for the use of the Committee on Energy and Commerce
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, JR., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. "CHIP" PICKERING, Mississippi ALBERT R. WYNN, Maryland
Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DEGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. "BUTCH" OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
BUD ALBRIGHT, Staff Director
DAVID CAVICKE, General Counsel
REID P. F. STUNTZ, Minority Staff Director and Chief Counsel
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
ED WHITFIELD, Kentucky, Chairman
CLIFF STEARNS, Florida BART STUPAK, Michigan
CHARLES W. "CHIP" PICKERING, Mississippi Ranking Member
CHARLES F. BASS, New Hampshire DIANA DEGETTE, Colorado
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MICHAEL C. BURGESS, Texas TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee HENRY A. WAXMAN, California
JOE BARTON, Texas JOHN D. DINGELL, Michigan
(EX OFFICIO) (EX OFFICIO)
CONTENTS
Page
Testimony of:
Christie, Hon. Christopher J., United States Attorney,
District of New Jersey, U.S. Department of Justice 17
Allen, Ernie, President and Chief Executive Officer,
National Center for Missing and Exploited Children 28
Plitt, James, Director, Cyber Crimes Center, Office of
Investigations, U.S. Immigration and Customs
Enforcement, U.S. Department of Homeland Security 33
Christenson, Arne L., Senior Vice President, Federal
Government Affairs, American Express Company 51
Golinsky, Jodi, Vice President and Senior Regulatory
Counsel, MasterCard International, Inc. 60
Sullivan, Joe, Associate General Counsel, PayPal, Inc. 66
McCarthy, Mark, Senior Vice President, Public Policy,
VISA U.S.A., Inc. 70
Jackson, Dr. Douglas, Chairman, e-gold Group, Inc. 73
Matos, William, Senior Director, Credit/Risk, Chase
Paymentech Solutions, L.L.C. 103
Mowder, Senior Vice President, Bank of America 109
Shalom, Ralph, Associate General Counsel for
Litigation, First Data Corporation 115
Strider, David, Executive Vice President, North
American Operations, NOVA Information Systems, U.S. Bancorp 120
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THURSDAY, SEPTEMBER 21, 2006
HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
Room 2123 of the Rayburn House Office Building, Hon. Ed
Whitfield (Chairman) presiding.
Members present: Representatives Whitfield, Stearns,
Pickering, Ferguson, Burgess, Blackburn, Barton (ex officio),
Stupak, DeGette, and Inslee.
Staff Present: Mark Paoletta, Chief Counsel for Oversight and
Investigations; Kelli Andrews, Counsel; Karen Christian, Counsel;
John Halliwell, Policy Coordinator; Ryan Ambrose, Legislative
Clerk; David Nelson, Minority Investigator; Jonathon Brater,
Minority Staff Assistant; and Elizabeth Ertel, Minority Senior Staff
Assistant.
MR. WHITFIELD. I would like to call this hearing to order this
morning, and today the subcommittee will hold its sixth hearing to
explore issues relating to the sexual exploitation of children over
the Internet. I must say for all of us, we have all really been
appalled at how widespread this problem is, not only in America
but around the world. We have learned a lot about this pervasive
problem and the ways in law enforcement and industry can and
should work together to eradicate sites that continue to victimize
children and put perpetrators behind bars.
I would like to highlight several important issues that have
been raised through our hearings. First, Federal, State, and local
law enforcement need more resources to combat these crimes due
to the technological expertise required to catch online pedophiles
and the increasing number of pedophiles that are using the Internet
as a way to victimize children. This July Congress passed and
President Bush signed into law the Adam Walsh Act of 2006,
which in addition to establishing a national sex offender registry
also authorizes additional law enforcement officers and other
resources specifically for combating sexual crimes against
children, and we all support that effort.
Second, we learned that Internet service providers and social
networking sites have information that law enforcement needs
when investigating pedophiles online, and that is the IP address on
a particular date and time that will help identify those involved.
There is disparity among the Internet providers on the length of
time they retain IP address data. Several members of the industry
have agreed to lengthen their data retention time for this particular
data, and we are all pleased with their efforts.
Tuesday a week ago, Attorney General Gonzalez testified
before the Senate that the Department of Justice is supportive of
legislation mandating a 2-year retention policy for IP address
information and investigations involving the sexual exploitation of
children. I would say that most of the members of our panel
probably support that recommendation. Finally, through Marsha
Allen and Justin Berry, two victims of child predators, whose
images were repeatedly sold and traded over the Internet by these
pedophiles, and we know the images of their sexual abuse that are
now on the Internet will be there forever, we must work
aggressively to put the child pornographers out of business.
Today we address another critical component to combating the
sexual exploitation of children over the Internet, the financial
industry's role in shutting down commercial child pornography
sites. This is a multi-billion dollar illicit industry. This business
does not just involve the people that post the sexually exploitive
images of the children, but it also involves a credit card processing
company for the site. We will hear testimony today from the
United States Attorney for New Jersey, Chris Christie, who will
tell us about the RegPay case that his office successfully
prosecuted.
The RegPay case involved a commercial child pornography
site based out of Russia and a credit card processing company in
the U.S. We will also hear from Ernie Allen about the financial
coalition that was formed as an alliance between the National
Center, some members of the financial industry, the Internet
service providers, and law enforcement and how this coalition is
working to shut down commercial child pornography sites.
Immigration and Customs representatives will testify today about
trends they are seeing in the payment world as it relates to
commercial child pornography.
We will also hear about digital currency in lieu of credit cards,
and how that is being used as an alternate method of payment.
These methods of payments make it impossible to track the
purchaser or the merchant and are ripe for abuse by criminals and
are being used to foster crimes including exploiting children
online. We had hoped to hear a John Doe witness today who was
going to be testifying from a Federal penitentiary and how he
became involved with a group from overseas and he was
processing their credit card payments. He is in a Federal prison,
but due to some legal issues and others, we are not going to have
his testimony.
I will tell you though that he was netting over $300,000 a
month in revenue from processing these subscriptions to the
websites, and the Web masters of the child pornography sites, as I
said, all outside the jurisdiction of the U.S., were clearing much
more than that. And we are sorry that he will not be able to testify.
On the third and fourth panels, we will hear from the payment
industry, the acquiring banks, and the merchant processing
companies. The first question that many of us have is why can't
the credit card company just shut a site down once it finds out it
contains sexually exploitive images of children.
Now we know that many steps have been taken by the
processing companies and we commend them on that, but we want
to urge them to do more. And only with continued collaboration
among industry, law enforcement, and the National Center will
these commercial sites be deleted from the Internet once and for
all. I want to thank all the witnesses, and we will be introducing
the panels a little bit later. At this time I would like to recognize
the Ranking Mmember, Mr. Stupak of Michigan.
[The prepared statement of Hon. Ed Whitfield follows:]
PREPARED STATEMENT OF THE HON. ED WHITFIELD, CHAIRMAN,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
Good Morning. Today the Subcommittee will hold its sixth
hearing to explore issues relating to the sexual exploitation of
children over the Internet worldwide. We have learned a lot about
this pervasive problem and the ways in which law enforcement and
industry can and should work together to eradicate sites that
continue to victimize children and put perpetrators behind bars.
I'd like to highlight several important issues that have been raised
through our hearings:
First, Federal, state and local law enforcement need more
resources to combat these crimes due to the technological expertise
required to catch online pedophiles and the increasing number of
pedophiles that are using the internet as to victimize children. This
July, Congress passed, and President Bush signed into law, The
Adam Walsh Act of 2006, which in addition to establishing a
national sex offender registry also authorizes additional law
enforcement officers and other resources specifically for
combating sexual crimes against children.
Second, we learned that Internet Service Providers and social
networking sites have information that law enforcement needs
when investigating pedophiles on-line--the "IP Address" on a
particular date and time that will help identify those involved.
There is disparity among Internet providers on the length of time
they retain IP address data. Several members of the industry have
agreed to lengthen their data retention time for this particular data
and I am pleased with their efforts. Tuesday a week ago, Attorney
General Gonzales testified before the Senate that the Department
of Justice is supportive of legislation mandating a two-year data
retention policy for IP address information in investigations
involving the sexual exploitation of children.
Finally, through Masha Allen and Justin Berry-two victims of
child predators whose images were repeatedly sold and traded over
the Internet by these pedophiles. We have the images of their
sexual abuse that are now on the Internet and will be there forever.
We must work aggressively to put the child pornographers out of
business. It is for all the children whose images are on the Internet
that we must work tirelessly to identify those victims and save
them and to send this child pornography industry into the gutter,
where it belongs.
Today we address another critical component to combating the
sexual exploitation of children over the Internet: the financial
industry's role in shutting down commercial child pornography
sites. This is a multi-billion dollar illicit industry. This business
does not just involve the people that post the sexually exploitative
images of the children but it also involves a credit card processing
company for the site. We will hear testimony today from the
United States Attorney for New Jersey, Chris Christie, who will
tell us about the Regpay case that his office successfully
prosecuted. The Regpay case involved a commercial child
pornography site based out of Russia, and the credit card
processing company was in the U.S. We will also hear from Ernie
Allen about the Financial Coalition that was formed as an alliance
between the National Center, some members of the financial
industry, the internet service providers and law enforcement and
how this coalition is working to shut down commercial child
pornography sites. Immigration and Customs Enforcement reps
will testify about trends they are seeing in the payment world as it
relates to commercial child pornography sites. We will also hear
about digital currency in lieu of credit cards and how it is being
used as an alternate method of payment. These methods of
payments make it impossible to track the purchaser or the
merchant and are ripe for abuse by criminals and are being used to
foster crimes, including exploiting children on-line.
We hoped to hear a John Doe witness today who was going to
be testifying from a federal penitentiary and how he became
involved with a group overseas and he was processing their credit
card payments. He is in federal prison but due to some legal issues
and other we will not have his testimony. He is currently serving a
lengthy federal sentence for these crimes. I will tell you that he
was netting over $300K a month in revenue from processing
subscriptions to these websites and the webmasters of the child
pornography sites who are outside the jurisdiction of the United
States are earning far more. We are sorry he will not be able to
testify.
On the third and fourth panels, we will hear from the payment
industry, the acquiring banks and the merchant processing
companies. The first question that many of us have is--why can't
the credit card company just shut a site down once it finds out it
contains sexually exploitative images of children? I applaud the
industry for all of the proactive measures they are taking to
eradicate commercial child pornography sites from the Internet and
I urge them to continue to do more. Only with the continued
collaboration among industry, law enforcement and the National
Center will these commercial sites be deleted from the Internet
once and for all.
I thank all of the witnesses for being here today and conclude
my opening statement.
MR. STUPAK. Thank you, Mr. Chairman. As you said, this is
our sixth hearing on the scourge of child pornography. The
problem of child pornography is of great concern to all Members
of Congress, Democrats, Republicans, Independents. Until
recently this committee's hearings have been bipartisan. Today's
hearing includes repeat testimony of the August hearing in New
Jersey. This testimony is being repeated today for political and not
meritorious reasons. For the record, the Minority has repeatedly
sought to receive testimony from the Assistant U.S. Attorney that
actually worked on the RegPay case. Also for political reasons,
the Majority rushed to the floor H.R. 5319, a bill to prohibit
websites with sexual content from being accessed by students in
schools and libraries which receive Federal e-rate dollars.
Yet, to this day no one has ever testified that children are in
danger of online predators in schools or libraries. In fact,
testimony has been just the opposite. Children are actually safer
when surfing the net at schools or public libraries. So surfing the
net alone at home makes children susceptible to child predators,
not schools and not libraries. H.R. 5319 is nothing more than an
empty political gesture. Mr. Chairman, the parents of this country
expect us to protect our children from the threats posed by the
50,000 predators that the FBI says are on the Web searching for
our kids right now. Law enforcement has pleaded for our help.
Other countries do a much better job of combating online child
pornography than here in the United States.
Today we will hear from the financial institutions. I believe it
is their responsibility to insure that their firms are not being used as
conduits to further child pornography. To date, financial
institutions' due diligence has been lacking. Child pornographers,
with financial institutions' help have grown their perversion into a
multi-billion dollar industry. Depictions of child rape and sexual
abuse have been facilitated by credit cards, wire transfers, and
other financial transactions. If the financial industry cannot or will
not stop providing the financial conduit which created this multi-
billion dollar industry, Congress must step in to stop this trade.
If the financial industry faced substantial fines for facilitating
child pornography and other unlawful acts over the Internet, I
suspect the American people would see a substantial effort to self
police themselves. Simply the old adage of see no evil will not fly.
Some credit card companies, banks, and other financial institutions
have recently stepped up to the plate and have been partnering with
the National Center for Missing and Exploited Children to try to
cut off the money to commercial child porn sites.
I know Ernie Allen of the National Center is excited about the
potential for this new financial coalition. I look forward to hearing
from him today about the efforts of some of the financial firms that
will be testifying later today. Still I am particularly troubled by the
new digital currency. One digital currency company testifying
today is Eagle. Digital currency companies are completely
unregulated by the Federal government. They are largely based off
shore. My fear is that any efforts by Visa, MasterCard, American
Express, or PayPal to crack down on the use of their credit cards to
purchase child pornography may be undermined if these digital
currency companies are allowed to flourish.
Mr. Chairman, there are important steps we can and should
take before adjourning in the next week or so including holding
financial institutions responsible for facilitating Internet sales of
child pornography. Instead of campaign ads the American public
deserves a comprehensive, bipartisan response to this daily threat
to our children. With that, Mr. Chairman, I thank you and I yield
back the balance of my time.
MR. WHITFIELD. Thank you, Mr. Stupak. At this time, I
recognize the gentleman from New Jersey, Mr. Ferguson, for his
opening statement.
MR. FERGUSON. Thank you, Mr. Chairman. I am pleased that
you have called this hearing, and I am pleased that we have such a
distinguished panel of witnesses, and we certainly shouldn't be
complaining that we have the best people in the business, the most
expert people, and, frankly, the people with the track record of
success in combating this problem. I am delighted that we have
this panel with us here this morning, and I thank you, Mr.
Chairman, for helping to put it together. Throughout the several
months that our committee has explored this problem from
numerous different angles, it never ceases to astonish me how
horrific this industry is and how it succeeded in rooting itself in our
society while avoiding the detection of law enforcement and
educators and lawmakers, and, most importantly, of parents.
I would like to thank all of our witnesses for taking time from
their other work to join us here today. I have had an opportunity to
visit the center and appreciate very much the work that you are
doing there and your staff, and I am particularly pleased that our
U.S. Attorney from New Jersey is here who has been a leader in
combating this problem and sharing his expertise with the
committee. This is the second time Mr. Christie has appeared
before our committee. The first was at a hearing held in our
district in New Jersey at Raritan Valley Community College.
Chris Christie, our U.S. Attorney, has been a tremendous asset not
only to the State of New Jersey, but also to this particular topic. I
can think of no better witness to share with us his experience in
tracking financial records to capture and prosecute these people
who are going to exploit our children online.
The RegPay investigation that our Chairman just mentioned
which was led by Mr. Christie was a landmark child pornography
case in my home State that led to the arrest and conviction of
numerous individuals for child pornography. This case was the
first large scale effort to target the operations of commercial
websites offering access to child pornography over the Internet by
tracking their financial trail. Also, in Operation Falcon agents
pursued the consumers of child pornography by following the
transaction history of those who gained access to the RegPay
supported child pornography websites.
Through February of this year information acquired through
the RegPay investigation has resulted in 341, 341 Federal, State,
and local arrests, and over 700 international arrests. The
defendants include teachers, pediatricians, ministers,
psychologists, all people who are frequently considered pillars of
their community, and who in theory should be dedicating their
lives to helping others. Despite how large these numbers may
appear, we know this really barely scratches the surface of the
problem. However, it is clear that these financial investigations
work to capture people involved in these activities. I look forward
to hearing from our witnesses today, and how we can continue and
strengthen these investigations and hopefully put more people who
prey on our children behind bars.
Unfortunately, child pornography sites are not the only area
where the reputable credit card logo is confusing and even
misleading to the public. Mr. Chairman, I know this is slightly off
topic but I am hopeful that next year we will consider looking at
other ways that this companies deal with sites where fraud is
sometimes also a problem and where music is made available to
consumers through sites that don't have required licenses. We
spent a lot of time in our full committee talking about the problems
of piracy, and we have enacted laws to criminalize the theft of
copyrighted and trademark work. But there are more than a few
illegitimate websites trafficking in pirated music and other
products, and consumers may believe that these sites are legitimate
because the transactions are completed with credit cards that all of
us have come to trust.
Again, I want to thank our witnesses. I look forward to the
opportunity to further introduce Mr. Christie in a moment, but I
thank you, Mr. Chairman, for calling this hearing, and I look
forward to the testimony.
MR. WHITFIELD. Thank you, Mr. Ferguson. At this time I
recognize Ms. DeGette of Colorado.
MS. DEGETTE. Thank you, Mr. Chairman, and I am very
grateful as the other Members are that we are holding this in
another series of investigatory hearings on child exploitation on the
Internet. We have been shocked, I think, all of us, at the growing
problem, and I think all of our constituents should be very
concerned about how pervasive child pornography on the Internet
is becoming. As we now know from previous hearings predators
have taken to using the Internet to hurt our children, to buy and sell
pictures and videos of rape and torture, and also to exchange the
pictures among themselves.
Now in the latter category who were exchanging the images are
now becoming engaged in the practice of sharing the collections
with people--are not involved in just sharing them with people who
give them new photos, but now what is happening is experts are
saying this is partially responsible for the rise in that type of crime
because people who used to just get the photographs are now
themselves becoming perpetrators. This poses a whole new level
of danger to children who travel unwittingly in the spheres of these
pedophiles. And, Mr. Chairman, we looked at this issue from a
number of different angles and you mentioned some of the
different ideas that we have had coming out of these hearings.
One of them that the Chairman mentioned is from Internet
service providers whose networks have been hijacked by these
despicable criminals, and so I have been working on the legislation
that the Chairman mentioned in order to combat this crime. What
the legislation does, and it is a bipartisan bill, we have been
working with Chairman Whitfield and also with the Chairman of
the full committee, Mr. Barton, to mandate that all of these Internet
service providers retain IP addresses for the period of a year. This
is consistent with 49 attorney generals who have recommended
this, as well as the Chairman said the Attorney General of the
United States last week.
This might seem like a minor requirement to some people. We
are not requiring the retention of the communications themselves,
but rather identifying data so that law enforcement officials if they
had probable cause to believe that a crime was being committed
could go in and get a subpoena and subpoena these addresses. We
have heard compelling testimony from more than one witness that
one of the single biggest impediments to capturing these terrible
perpetrators is the destruction of the identifying data because the
law enforcement officials cannot go in and subpoena the location
of the perpetrators. The perpetrators close down their accounts and
they move location, and so tragically we never find the
perpetrators and we never find the children who are their victims.
And so some people have talked to me about privacy
considerations. I am concerned about privacy considerations too,
especially in light of some of what I believe to be the illegal
surveillance of Americans' telephone records by the
Administration, but I have got to say we already require telephone
companies to keep this information for a 1-year period. We are not
requiring content and ISPs across the board do retain this data for
some period of time right now. So all we are doing in this
legislation is requiring a standard in the industry, and we are
requiring very strict probable cause to be shown by law
enforcement before the data can be released.
Mr. Chairman, I bring this up because my staff has been
working diligently with your staff, and I would hope--we have a
bill that is almost complete. I would hope we would be able to
introduce this legislation before we left at the end of next week.
MR. WHITFIELD. Well, I hope we can as well and appreciate
the great effort you are making.
MS. DEGETTE. Thank you so much, Mr. Chairman. Finally, I
am very glad to see the witnesses who are in here today. I think
that we can learn greatly about ways to combat this crime from the
testimony we will hear. And, finally, Mr. Chairman, I would say
that every Internet home page, social networking and chat room
site and sites of this nature should have something similar to the
virtual global network button that will permit children approached
by a predator to immediately report the approach to law
enforcement. I think that reporting technology can be very useful
for kids. I think they will use it, and I hope we can work with
industry and with the ISPs to make this happen. Thank you so
much, Mr. Chairman, and I yield back.
MR. WHITFIELD. Thank you, Ms. DeGette. At this time I
recognize the gentlelady from Tennessee, Mrs. Blackburn.
MRS. BLACKBURN. Thank you, Mr. Chairman, and I also want
to thank you for holding the hearing and for you putting your
attention and your staff's attention on the issue. I also want to
thank our witnesses and welcome them. We look forward to
hearing the information that you have for us today. We realize that
we need to know what you know. Online child pornography is an
ever increasing avenue that child predators are using to exploit our
children. It is unfortunate, but it is one that we are going to have to
work together to address. Millions of images and videos of these
acts are being transmitted daily over the Internet, and it is now a
multi-billion dollar industry in the United States, and one that is of
tremendous concern to us.
As law enforcement must be diligent to investigate these
crimes the financial services industry must insure that it is not
providing economic avenues for people or businesses to obtain
financial gain from these illegal activities. Child pornography is a
horrible and detestable mark of society and people who want to
watch, copy, and sell this to others should be punished. The
Chairman should be applauded for having this hearing today so
that we can insure that the financial services industry is doing all it
can to prohibit the financial transactions that support this activity.
The committee has held hearings, several hearings now, on the
sexual exploitation of our children, and Congress has passed
several measures to begin addressing the situation.
As my colleague from Colorado mentioned, there are other
pieces of legislation that are yet to come before us. On July 27,
'06 the Children Safety Act was signed into law and implements a
nationwide sex offender registry and enhanced criminal penalties
for crimes against children. We have also put measures into place
to help prevent the human sex trafficking of women and children
through the authorization of the Trafficking Protection Act. I do
look forward to the testimony today, and to future hearings on
other issues such as Mr. Ferguson mentioned in his opening
statement on how Congress can assist the financial service industry
and law enforcement in making certain that we address online
child pornography and other issues of fraud and deception. Again,
I thank the Chairman for looking into the delicate issue and
welcome you all to our panel.
MR. WHITFIELD. Thank you, Mrs. Blackburn. At this time I
recognize the gentleman from Texas, Dr. Burgess.
MR. BURGESS. Thank you, Mr. Chairman, and thank you for
this continuation of these very important series of hearings. As
you have already pointed out, we have had several, and over these
last several months our committee has taken up the important
cause of protecting our children from sexual exploitation over the
Internet. It is hard to judge your emotions on a subject like this.
For myself, they range from shock and disbelief to a strong desire
to completely eradicate this problem. I have learned a great deal
more than I have ever wanted to know about this subject, Mr.
Chairman, but it is crucial for the safety of our children for all of
us to know about these evils so that we can help end this abusive
and pernicious practice in our society.
While the pedophiles are our biggest enemy, we must also
continue to look and combat every ancillary agency associated
with this crime. The philosopher journalist H.L. Minkin used to
admonish us to follow the money. Well, I am glad today that we
are focusing on the efforts of the financial industry. The
representatives from reputable credit card companies will provide a
valuable insight into what their respective companies are doing. I
am also very interested in discussing with Dr. Douglas Jackson and
his company, e-gold. I frankly do not understand the need for
completely anonymous digital currency, and look forward to
hearing from Dr. Jackson about his company's due diligence and
role in stopping illegal activities like child pornography.
Today we also have with us Mr. Ernie Allen, the President and
CEO of the National Center for Missing and Exploited Children,
who will be discussing the creation and the role of the financial
coalition against child pornography at the National Center. From
my understanding it has been reported that Mr. Allen believes that
the financial coalition can eradicate commercial child pornography
by 2008. I think I can speak on behalf of the rest of the committee
that we would all like to learn more about how he thinks this goal
is attainable. I do appreciate the efforts of my colleague from
Colorado and her efforts to get legislation that would enforce the
stability of the financial data. Currently it seems that so many of
these numbers just evaporate in the ether and we are unable to
trace these problems to their source, and I look forward to learning
more about her legislation.
And, Mr. Chairman, I too would add my voice to perhaps that
is something that this committee could look at getting done before
the end of the year. Mr. Chairman, I thank you again for your
continued leadership and your dedication to this grave situation. I
know it is unpleasant. I know it is difficult, but it is work that we
must do. I look forward to working with you and others on the
committee as we continue to seek solutions to this most egregious
problem. It is my sincere hope that this hearing will be a catalyst
for more legislation aimed at curbing this problem.
MR. WHITFIELD. Thank you, Dr. Burgess. At this time I
recognize Mr. Barton, the Chairman of the Energy and Commerce
Committee, for his opening statement.
CHAIRMAN BARTON. Thank you, Mr. Chairman. Over the last
9 months, the subcommittee has investigated extensively the issues
surrounding the sexual exploitation of children over the Internet.
Today's hearing is the sixth on this obnoxious subject. We have
listened to witnesses involved in all aspects of the fight against
Internet child pornography, including Federal and State law
enforcement officials, prosecutors, National Center for Missing
and Exploited Children, educators, government officials, and
Internet service providers.
I think it is clear that this fight cannot be won by law
enforcement alone. Internet child pornography is an epidemic in
every sense of the term and it will only be wiped out if everyone
joins the fight. A high priority will be shutting off the flow of
money. Commercial child pornography is big business because as
law enforcement officials and others have testified, it makes so
much money and the payment mechanisms have become so
sophisticated and complex participation of the financial industry in
this fight is absolutely essential. If the criminals who operate
commercial child pornography cannot be paid, they lose the
incentive to create the images of sexual abuse that titillate child
predators.
We must have the cooperation of the financial industry in
identifying and plugging the payment channels, shutting down the
businesses and merchants who profit from the pain and abuse
inflicted on innocent children. From the written testimony for
today's hearing it appears that the financial industry is making
progress towards this goal. I understand that due to the credit
policies and monitoring practice of the credit card associations and
acquiring banks these institutions have seen relatively few cases of
merchants processing child pornography credit card payments on
their system. I commend you for this, but I also hope you continue
to be aggressive and creative in implementing solutions that will
prevent these businesses from using your payment systems.
For this reason, I am interested in learning more about how you
identify merchants who were engaged in child pornography and
how those merchants seek to evade your detection. In addition, I
would like to know what action you take once you discover that a
merchant is engaged in child pornography. For instance, do you
terminate this merchant's account immediately? Do you take steps
to make sure the merchant's website is shut down immediately?
How do you prevent that business from again signing up as a
merchant maybe under another name with your institution?
Finally, how do you interact with law enforcement with respect to
any investigations that are ongoing?
I have posed many of these questions to witnesses for the FBI
when they testified, and I am interested in your perspective. In
addition to the financial companies appearing before us today, we
are joined by Mr. Ernie Allen for the National Center for Missing
and Exploited Children. Once again, the National Center has led
the fight by helping to establish this financial coalition against
child pornography. I want to congratulate Mr. Allen and the
National Center for their dedication.
Finally, we are going to be joined by two members of law
enforcement, United States Attorney for the District of New
Jersey, Chris Christie, and Mr. James Plitt, Director of the Cyber
Crimes Center at the United States Immigration and Customs
Enforcement. Mr. Christie's and Mr. Plitt's offices conducted their
RegPay investigation and prosecution. I look forward to learning
from them about the payment systems that are being used by child
pornography websites and what challenges these systems pose to
their investigations. If there is something that the Congress can do
to provide any of these individuals with the tools that they need to
investigate these websites, we want to learn about it at this hearing
today.
Again, Chairman Whitfield, Ranking Member Stupak, thank
each of you for your personal dedication to this subject. With that,
I yield back the balance of my time.
[The prepared statement of Hon. Joe Barton follows:]
PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN,
COMMITTEE ON ENERGY AND COMMERCE
Thank you, Chairman Whitfield, for convening this hearing.
Over the last nine months, this subcommittee has investigated
extensively the issues surrounding the sexual exploitation of
children over the Internet. Today's hearing is our sixth on this
obnoxious subject. We've listened to witnesses involved in all
aspects of the fight against Internet child pornography, including
federal and state law enforcement officials, prosecutors, the
National Center for Missing and Exploited Children, educators,
government officials, and Internet Service Providers. I believe it is
clear that this fight cannot be won by law enforcement efforts
alone. Internet child pornography is an epidemic, and it will only
be wiped out if everyone joins the fight.
A high priority will be shutting off the flow of money.
Commercial child pornography is big business because, as law
enforcement officials and other witnesses have observed, it makes
so much money and the payment mechanisms have become
sophisticated and complex, the participation of the financial
industry in this fight is essential. If the criminals who operate
commercial child pornography sites cannot be paid, they will lose
the incentive to create those images of sexual abuse that titillate
child predators. We must have the cooperation of the financial
industry in identifying and plugging the payment channels and
shutting down the businesses and merchants who profit from the
pain and abuse inflicted on innocent children.
From the written testimony, it appears that the financial
industry has made significant progress toward this goal. I
understand that, due to the credit policies and monitoring practices
of the credit card associations and acquiring banks, these
institutions have seen relatively few cases of merchants processing
child pornography credit card payments on their systems. I
commend you for this, but I also hope that you continue to be
aggressive and creative in implementing solutions that will prevent
these businesses from using your payment systems. For this
reason, I am interested in learning more about how you identify
merchants who are engaged in child pornography and how these
merchants seek to evade your detection. In addition, I would like
to know what action you take once you discover a merchant is
engaged in commercial child pornography. For instance, do you
terminate this merchant's account immediately? Do you take steps
to make sure that the merchant's website is shut down? How do
you prevent that business from again signing up as a merchant with
your institution? Finally, how do you interact with law
enforcement with respect to these investigations? I posed many of
these questions to witnesses for the Federal Bureau of
Investigation when they testified at our hearing in May, and I am
interested in learning your perspective.
In addition to the financial companies appearing before us
today, we are joined by Mr. Ernie Allen of the National Center for
Missing and Exploited Children. I understand that, once again, the
National Center has led the fight by helping to establish the
Financial Coalition Against Child Pornography. I would like to
congratulate Mr. Allen and the National Center for their
dedication, and I look forward to learning more about the Financial
Coalition's work.
Finally, we are joined by two members of law enforcement,
United States Attorney for the District of New Jersey Chris
Christie and Mr. James Plitt, Director of the Cyber Crimes Center
at United States Immigration and Customs Enforcement. Mr.
Christie's and Mr. Plitt's offices conducted the Reg Pay
investigation and prosecution. I look forward to learning from
them about the payment systems that are being used by
commercial child pornography websites and what challenges these
systems pose to their investigations. If there is something that
Congress can do to provide you with the tools you need to
investigate these websites, I would be interested in learning this as
well.
Again, I thank Chairman Whitfield for convening this hearing
and I yield back the balance of my time.
MR. WHITFIELD. At this time I recognize the Vice-Chairman
of the Energy and Commerce Committee, Mr. Pickering of
Mississippi.
MR. PICKERING. Mr. Chairman, I thank you for all your work
in this area to protect our children and our families. I look forward
to hearing the testimony today and working with the committee. I
do think that enhanced enforcement, the tools, the resources, the
commitment to do whatever it takes to address this issue. I am also
looking at legislation that would look at means to address the
financing or the purchasing and acquisition of child pornography
but other age-restricted products like alcohol and tobacco so that
we can have a comprehensive approach, common sense approach
that if we can stop the purchase and take away the financial
incentives then hopefully we can make some progress to prevent
before we have to enforce.
I look forward to working with the Chairman on that legislation
and other concerned groups so that we can advance and work in
the next Congress to address these very critical issues. Chairman
Whitfield has done a tremendous job in bringing everyone's
attention and educating and informing. Now is our time and our
responsibility to act. Thank you, Mr. Chairman.
MR. WHITFIELD. Thank you, Mr. Pickering. And at this time,
I want to welcome the first panel, and for the purpose of
introducing the first witness on the first panel, I recognize the
gentleman from New Jersey, Mr. Ferguson.
MR. FERGUSON. Thank you, Mr. Chairman. I am pleased to
recognize and introduce the Honorable Christopher J. Christie. He
is the United States Attorney for the District of New Jersey, my
home State. I have known Mr. Christie for a number of years and
in his 5 plus years as the U.S. Attorney in New Jersey, he has built
an extraordinary reputation of integrity and effectiveness in a
number of different areas. He has been successful in one area in
particular. I will mention several, but in the area of public
corruption he has 97 public corruption guilty pleas or convictions.
That is 97 and 0.
These are folks from both sides of the aisle. He has been a
leader in combating human trafficking. He has been a leader in
combating terrorism and advancing homeland security in New
Jersey. He has had done some extraordinary work in corporate and
non-profit governance. I would venture to say that his record as
U.S. Attorney is second to none across this country, and we are
very, very pleased and fortunate that he has been able to take some
time from his responsibilities in New Jersey.
In addition to the work that he has done on RegPay and some
of the things I mentioned in my opening statement, we are very,
very pleased he is able to be here to share with us some of his
experience, so I am delighted to welcome Chris Christie, the U.S.
Attorney from New Jersey.
MR. WHITFIELD. And in addition to Chris Christie, our
witnesses on the first panel will be Mr. Ernie Allen, who is
President and Chief Executive Officer of the National Center for
Missing and Exploited Children, who is doing a tremendous job in
this area and we appreciate your efforts. Also, Mr. James Plitt,
who is the Director of the Cyber Crimes Center, Office of
Investigations, U.S. Immigration and Customs Enforcement at the
U.S. Department of Homeland Security, and we welcome you Mr.
Plitt.
As you all know, this is an oversight investigations hearing. It
is our custom to take testimony under oath. Do any of you have
any objection to testifying under oath this morning? If you would
stand, I would like to swear you in.
[Witnesses sworn]
MR. WHITFIELD. All of you are now under oath, and, Mr.
Christie, we will recognize you for a 5-minute opening statement.
TESTIMONY OF HONORABLE CHRISTOPHER J. CHRISTIE, UNITED STATES ATTORNEY,
DISTRICT OF NEW JERSEY, U.S. DEPARTMENT OF JUSTICE; ERNIE ALLEN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER, NATIONAL CENTER FOR MISSING AND EXPLOITED
CHILDREN; AND JAMES PLITT, DIRECTOR, CYBER CRIMES CENTER, OFFICE OF
INVESTIGATIONS, U.S. IMMIGRATION AND CUSTOMES ENFORCEMENT, U.S. DEPARTMENT
OF HOMELAND SECURITY
MR. CHRISTIE. Thank you, Mr. Chairman, and thank you,
members of the committee, for asking me to come here today and
talk about a topic that is obviously very important to our office and
to the country as a whole. I want to thank Congressman Ferguson
for his very kind introduction as well. I would like to talk, Mr.
Chairman, about the RegPay case that has been referenced a
number of times in your comments and the comments of the other
members of the committee. The first important thing to know
about the RegPay case is something to understand about Federal
law enforcement, and that is that one small group of people can
make an enormous difference if they want to be creative and attack
a problem on a personal level.
And in our office one Assistant United States Attorney came to
me with an idea of wanting to combat child pornography in a
different way. And we sat and talked a great deal about it and got
buy-in from our other Federal law enforcement partners to undergo
an operation which became the RegPay case. The idea behind that
was previous to this law enforcement's approach had generally
been to follow the purchaser of child pornography and try to trace
that back. Most of the arrests that were done were of the people
who were buying child pornography over the Internet, and you
never got much beyond that.
What we decided to do in New Jersey was to take the approach
of following the money as someone mentioned before in their
opening remarks. We decided that what we wanted to do was try
to get at the people who were putting these websites up, exploiting
the children in the first instance, and also get the money launderers
and the middle men who were processing these transactions for
them and allowing them to profit. We never believed when we
started where this case would take us. It took us from United
States in New Jersey, purchasers there, to money launderers and
middle men in the State of Florida, to child pornographers in
Belarus, and financial institutions in Latvia.
And through the great resources of immigration and customs
enforcement, the IRS, and our office, we were able to trace that
money. And what it did was our first step was in going after the
money launderers, the middle men who were in the United States
and Florida. Once we were able to get enough evidence against
them to execute search warrants on both their computers and other
documents they had to firm up our case against them, we
encouraged them and were able to convince them to cooperate with
us in our investigation.
Once they began to cooperate, they were able then to able to
contact their source people in Belarus, and from there using them
and using them as a lure to bring them, the people from Belarus, to
a country where we could have the foreign government participate
in the arrest and then be able to extradite them to the United States.
These few people in Belarus were gathering child pornographic
images that were incredibly disturbing, incredibly exploitive of
children. And we were able to lure these folks who were making
about $2 million a month on average just from the few websites
that they ran. We were able to lure them to France under the guise
that we the Florida company was willing to up the ante and process
even more of the illicit profits for them and longer.
We got them there. We were able to engage in conversations
with them there which confirmed their very, very deep role in this
plot. We were able to tape those conversations. Arrests were
executed, eventually extradited to the United States, and all of
these people in the RegPay case have now pled guilty and they are
doing sentences ranging anywhere from 17 years to 25 years in
Federal prison for the crimes that they committed. We believe
what we did in the RegPay case was to lay out a template for how
these cases should be done. And we are seeing that incorporated
into the Department's Project Safe Childhood initiative as well
now and being sent around the country to work with organizations
like the National Center, to work with local law enforcement
which we need to have as a partner. It is a three-legged stool.
Federal law enforcement must have the help from local law
enforcement and from these non-governmental organizations to be
able to make this work.
The RegPay case is an enormous triumph for law enforcement
in protecting children, and it should be used now, and I think is
being used now, as a model around the rest of the country on how
to investigate these cases. And so I am enormously proud of the
work that our office did, our assistants and our investigators, and I
think they have laid this out now for other people to use, and I
know it is being used today by my colleagues around the country
as a real example of how to do this kind of work and we are
enormously proud of what happened here, Mr. Chairman.
[The prepared statement of Hon. Christopher J. Christie
follows:]
PREPARED STATEMENT OF THE HON. CHRISTOPHER J. CHRISTIE,
UNITED STATES ATTORNEY, DISTRICT OF NEW JERSEY, U.S.
DEPARTMENT OF JUSTICE
MR. WHITFIELD. Thank you, Mr. Christie. At this time, I
recognize Mr. Allen for a 5-minute opening statement.
MR. ALLEN. Thank you, Mr. Chairman, Congressman Stupak,
members of the committee. First, thank you for your extraordinary
leadership and impact on this problem. I have submitted written
testimony covering a wide range of issues. However, what I would
like to do in my oral testimony very briefly is to focus on five
questions that this committee asked the center to address. The first
was raised by Chairman Barton who said to us why can't we in this
country do what the British are doing in terms of blocking sites and
shutting them down. I think most of you know, and I have
expressed to members of this committee that our first priority has
always been investigation and prosecution, and identifying who the
child victim is, so there is a balance in how we do that.
But based on that idea we met with the leading ISPs and the
U.S. Internet Service Provider Association, and we have found that
they are enthusiastic about such a mechanism. We subsequently
met with our partners in Federal law enforcement and have
developed a process that we are now working to implement. The
first step is that our analyst at the National Center will identify the
illegal sites. Secondly, we will provide these reports to Federal
law enforcement, the Internet Crimes Against Children Task
Forces. Thirdly, we will add the URLs of these sites to a list and
then provide that list to the validated ISPs who are registered with
our Cyber TipLine.
Let me emphasize that in the testimony we work primarily with
the large ISPs and inadvertently I omitted Yahoo, who is very
supportive and very involved in this process. But ultimately all
reporting ISPs, the 255 ISPs for reporting content, will receive this
list and these notifications. We will advise them of the illegal
content in a specific URL and then ask them to enforce their terms
of service agreement. This is a violation of those agreements.
Thus, they will take down the site, block its future access over their
systems using filters, so this is an attempt to give law enforcement
first crack at all of the content but simultaneously develop a system
that will identify the illegal sites, shut them down, and then block
their future access.
So I report this to the committee. This was something the
committee was specifically interested in. Secondly, you have
asked about new technology, how can we develop technology
solutions for this problem. Well, since the last hearing we have
met with Internet industry leaders, AOL, Microsoft, Yahoo,
Google, Earthlink, and United OnLine. They have committed their
best and brightest, and we have created a kind of technology
coalition to try to develop new technology to identify this illegal
content and interdict it. That process has been formed and is
underway, and I will keep you apprised of its progress.
Thirdly, as mentioned in the opening remarks about the poor
reporting. I know Congresswoman DeGette, you have been very
concerned about that. In our most research, we found that just 5
percent of children who are targeted by online sexual exploitation
report it to law enforcement, to AOL, to us at the National Center,
and just 12 percent tell their parents. So overwhelmingly this is a
problem that is underreported. As you know, Congress mandated
the creation of our Cyber TipLine, and last week we handled our
417,000th report. If only 10 percent of the American public is
reporting, it is terrifying to think what the volume really could be,
and we are very supportive and eager to work with industry to
develop new mechanisms including permanent, prominent Cyber
TipLine icons and links so that these things can become a virtual
panic button for children and can get us far greater reporting
volume.
Fourthly, you asked us about modeling sites. We have handled
reports on that. In our judgment, many of these sites which hide
under the "guise" of the First Amendment are in effect masking
other kinds of illegal behavior. We look forward to working with
you and your staff on this problem. And then finally you asked
about our financial coalition, and let me give you a quick update.
We just launched this coalition 6 months ago. We talked about it
at your last hearing. Dr. Burgess mentioned our ambitious goal of
eradicating commercial child pornography by 2008. Today I am
pleased to report that 23 major companies, including leaders of the
credit card industry, major banks, Internet service providers, third
party payment companies, are all engaged in this process.
Those companies represent 87 percent of the U.S. payments
industry measured in dollars running through the system. Our
mission as has been discussed is to follow the money, stop the
payments, shut down the accounts, and put an end to this multi-
billion dollar enterprise. Where we are at this point is we have just
completed a pilot phase. We have developed technology and an
information sharing methodology which has now been tested and
debugged. And we have just launched an effort in which all of
these companies will be participating in this process.
While it is too early to provide real conclusions, and law
enforcement has urged us not to reveal the specific techniques and
methods that we are using in our judgment there is already an
encouraging trend. Because of the unprecedented efforts of law
enforcement at all levels and others, we believe that these
enterprises are already being disrupted. For example, we are
seeing that the credit card logos we are finding on these sites in
most cases do not lead you to an actual account, and what we are
finding is that they are being used for one of two purposes, either
identity theft, and if you attempt to purchase access to a child
pornography site using a credit card and you don't get your
product to whom are you going to report it.
Secondly, they are being used for these sites then to redirect
people to other payment methods, and these include a whole array.
We don't have a lot of detail yet, but I can assure you working
with law enforcement we are pursuing them and will pursue them
as they emerge. The challenges that I present to the committee are
really two fold. One, we are very pleased that 87 percent of the
U.S. payments industry is involved in this effort. It needs to be
100 percent, and we need your help and support to bring the rest of
the financial institutions in this country into the process.
Then, secondly, as you heard from Mr. Christie and you heard
from others, this is not just a domestic problem, it is a global
problem. We have met with the European Banking Federation.
We are meeting with Asian bankers and Central American bankers
and Canadian bankers. The goal is to create a real international
process. And in closing, Mr. Chairman, what I would like to do is
tell you about one company, an international company that is a part
of this coalition, Standard Charter Bank, in Singapore, which is
helping us mobilize Asian bankers around this effort. They are so
motivated that they went to their employees and they raised
$60,000 in employee contributions to create a public awareness
campaign.
They have created a website called Light a Million Candles.
They are trying to get people around the world to sign on to this
process, and they have had responses so far from 130 countries.
So in closing what I would like to do is ask that this PSA that the
Standard Charter Bank developed be shown to the committee. It is
now being shown in Asia, the Middle East, Africa, and expanding
world wide. Thank you, Mr. Chairman.
[Video]
[The prepared statement of Ernie Allen follows:]
PREPARED STATEMENT OF ERNIE ALLEN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NATIONAL CENTER FOR MISSING AND
EXPLOITED CHILDREN
Mr. Chairman and distinguished members of the Committee, I
welcome this opportunity to appear before you to discuss the
commercial distribution of child pornography on the Internet.
Chairman Whitfield, I cannot thank you enough for the attention
that you, Chairman Barton, Congressman Stupak and your
colleagues on the Committee have brought to the problem of child
sexual exploitation this year.
The National Center for Missing & Exploited Children
("NCMEC") joins you in your concern for the safety of the most
vulnerable members of our society and is grateful for your
continued focus on this under-recognized problem.
Let me first provide you with some background information
about the National Center for Missing & Exploited Children
(NCMEC). NCMEC is a not-for-profit corporation, mandated by
Congress and working in partnership with the U.S. Department of
Justice as the national resource center and clearinghouse on
missing and exploited children. NCMEC is a true public-private
partnership, funded in part by Congress and in part by the private
sector. Our federal funding supports specific operational functions
mandated by Congress, including a national 24-hour toll-free
hotline; a distribution system for missing-child photos; a system of
case management and technical assistance to law enforcement and
families; training programs for federal, state and local law
enforcement; and our programs designed to help stop the sexual
exploitation of children.
These programs include the CyberTipline, the "9-1-1 for the
Internet," which serves as the national clearinghouse for
investigative leads and tips regarding crimes against children on
the Internet. The Internet has become a primary tool to victimize
children today, due to its widespread use and the relative
anonymity that it offers child predators. Our CyberTipline is
operated in partnership with the Federal Bureau of Investigation
("FBI"), the Department of Homeland Security's Bureau of
Immigration and Customs Enforcement ("ICE"), the U.S. Postal
Inspection Service, the U.S. Secret Service, the U.S. Department of
Justice's Child Exploitation and Obscenity Section and the Internet
Crimes Against Children Task Forces, as well as state and local
law enforcement. Leads are received in seven categories of
crimes:
possession, manufacture and distribution of child
pornography;
online enticement of children for sexual acts;
child prostitution;
child-sex tourism;
child sexual molestation (not in the family);
unsolicited obscene material sent to a child; and
misleading domain names.
These leads are reviewed by NCMEC analysts, who visit the
reported sites, examine and evaluate the content, use search tools
to try to identify perpetrators, and provide all lead information to
the appropriate law enforcement agency. The FBI, ICE and Postal
Inspection Service have "real time" access to the leads, and all
three agencies assign agents and analysts to work directly out of
NCMEC and review the reports. The results: in the 8 years since
the CyberTipline began operation, NCMEC has received and
processed more than 417,000 leads, resulting in hundreds of arrests
and successful prosecutions.
The vast majority of these reports involve images of sexually
exploited children. Child pornography has become a global crisis.
A recent report by McKinsey Worldwide estimated that today
commercial child pornography is a multi-billion-dollar industry
worldwide, fueled by the Internet. Its victims are becoming
younger. According to NCMEC data, 19% of identified offenders
had images of children younger than 3 years old; 39% had images
of children younger than 6 years old; and 83% had images of
children younger than 12 years old. Children have become a
commodity in this despicable crime.
Who is behind this trade in our children? There are
documented cases in which the enterprise was found to be operated
by an organized crime network. One such case was that of the
Regpay Company, a major Internet processor of subscriptions for
third-party commercial child pornography websites. The site was
managed in Belarus, the credit card payments were processed by a
company in Florida, the money was deposited in a bank in Latvia,
and the majority of the almost 300,000 credit card transactions on
the sites were from Americans.
Another recent case highlights the connection between child
pornography and the financial system. In this case, investigators
identified 70,000 individual customers paying $29.95 per month
and using their credit cards to access graphic images of small
children being sexually assaulted.
This is not acceptable. So we created the Financial Coalition
Against Child Pornography, made up of the world's most
prominent financial institutions and Internet industry leaders who
have joined with NCMEC and its sister organization, the
International Centre for Missing & Exploited Children ("ICMEC")
in the fight against Internet child pornography. There are now 23
members, which include MasterCard, Visa, American Express,
Bank of America, Citibank, PayPal, Microsoft, America Online,
Yahoo and many others. We are bringing new financial
institutions into this Coalition every day. Our newest member is
HSBC North America, and the American Bankers Association has
recently agreed to support the Coalition's efforts. These are
significant additions to our team.
The members of the Coalition represent 87 percent of the U.S.
payments industry, measured in dollars running through the
system. This offers great potential to eradicate the commercial
child pornography industry. We would have a greater chance of
success if we had 100 percent participation by industry players
around the world. ICMEC representatives have met with the heads
of the European Banking Association as well as with officials from
Central American banks. We are also actively recruiting the Asian
banks as well.
Our goal: to eradicate commercial child pornography by 2008.
Our mission: to follow the money. First, we will aggressively seek
to identify child pornography sites with method of payment
information attached. Then we will work with the credit card
industry to identify the merchant bank. Then we will stop the flow
of funds to these sites.
In each case we will work hand-in-hand with federal, state,
local or international law enforcement, and the first priority will be
criminal prosecution. However, our fundamental premise is that it
is impossible to arrest and prosecute everybody. Thus, our goal is
twofold:
(1) To increase the risk of running a child pornography
enterprise; and
(2) To eliminate the profitability.
We have created working groups of industry leaders to explore
the best techniques for detection and eradication. NCMEC serves
as the global clearinghouse for this effort, sharing information and
working together in a truly collaborative way. We are grateful for
the participation of international organizations and law
enforcement agencies, such as the Serious Organised Crime
Agency in the U.K. International cooperation is vital to our success
due to the global nature of these enterprises.
Today I want to update you on the status of these efforts. We
recently completed our pilot phase, from July 7 to September 9.
We created a secure mechanism through which the information
about illegal sites will flow between NCMEC, law enforcement,
and the financial institutions. During this pilot phase the
CyberTipline received 422 reports of commercial child
pornography. NCMEC analysts viewed these sites and confirmed
that the images were illegal. From these site analyses we identified
99 unique commercial child porn websites.
The names of these sites tell it all: "Elite Child Porn," "The
Sick Child Room" and "Loli-Virgins." Each of these 99 websites
offered multiple payment methods for the purchase of illegal
images. We are seeing indications of a trend toward directing
buyers away from credit cards and toward alternative payment
methods to make the actual transaction. We are exploring possible
explanations for this.
This pilot has given us a wealth of information that we could
not have anticipated about the nature of these transactions and how
to improve the flow of information necessary to identify the source
of the images. We now know what we need to move into full
implementation of the program. We need to capitalize on the
investigative talents of multiple law enforcement agencies on a
multi-national basis. And we need full participation by the
payments industry worldwide. Then we will begin to dismantle
these enterprises that profit from the heinous victimization of
children.
Another project we recently began is the Technology Coalition,
funded by AOL, Yahoo, Microsoft, Google, Earthlink and United
Online. These industry leaders will work with NCMEC to develop
and deploy technology solutions that disrupt the ability of
predators to use the Internet to exploit children or traffic in child
pornography. The Technology Coalition has four principal
objectives:
1. Developing and implementing technology solutions;
2. Improving knowledge sharing among industry;
3. Improving law enforcement tools; and
4. Research perpetrators' technologies to enhance industry
efforts.
Bringing together the collective experience, knowledge and
expertise of the members of this Coalition, and applying it to the
problem of child sexual exploitation, is a significant step towards a
safer world for our children.
Chairman Barton, you are the catalyst for our most recent
initiative. You indicated an interest in the idea of a proactive effort
to take down the child pornography websites that are not targeted
by law enforcement for investigation. We have begun to work with
major electronic service providers ("ESP") and the U.S. Internet
Service Provider Association ("USISPA") towards the goal of
making it more difficult to be able to access these sites. Our
current partners in this effort are AOL, Microsoft, Google,
Earthlink and United Online.
NCMEC analysts will identify child pornography websites that
were reported to us without additional information that would
permit a referral to a law enforcement agency. After we confirm
the presence of illegal images on a site, we will add it to a list
which will be provided to those ESPs who report to the
CyberTipline. They will then take down the site and block its
future access over their systems using filters.
We are actively working toward the implementation phase of
this project and will keep you updated on our progress.
Another obstacle we are struggling to overcome is the fact that
research indicates that most of the American public doesn't know
about the CyberTipline. Reporting of child pornography and
online enticement of children should be easier and more universal.
We are eager to work with the industry to explore alternative
reporting mechanisms, such as a link on the screen that enables
reporting at the moment the illegal conduct is detected by the
public.
The recent attention to child modeling websites raises the issue
of whether some of these sites mask the true, illegal nature of their
content. We want to stop these insidious sites that hide behind
purportedly legal businesses to trade in images of sexually
exploited children. We look forward to working with you and your
staff to attack this problem as well.
The National Center for Missing & Exploited Children is
grateful for your support, Chairman Whitfield, and that of your
colleagues, in our efforts to protect children.
Thank you.
MR. WHITFIELD. Mr. Plitt, you are recognized for your 5-
minute opening statement.
MR. PLITT. Thank you. Chairman Whitfield, Ranking
Member Stupak, and distinguished members of the committee;
thank you and good morning. With your permission, I would like
to go ahead and submit the written testimony and just touch on a
couple of issues very quickly. First is, the close cooperation across
all lanes, government, private, NGO, is an absolute imperative.
While the men and women of ICE, U.S. Immigration and Customs
Enforcement, are honored to serve as the Nation's principal
Federal criminal investigators for child exploitation and related
financial crimes across the border, we understand that cooperation
and team work between all of us is essential to cover this enormous
area of criminal activity.
This team work includes our partners in State and local
enforcement, as well as the NGOs. While Federal law
enforcement focuses on the interstate and international child
exploitation crimes our State and local partners arrest the majority
of child abusers and save the majority of the children. Special
agents are grateful for the many prosecutors, companies and NGOs
whose work is invaluable. NGOs, such as the National Center for
Missing and Exploited Children, and initiatives such as the
Financial Coalition Against Child Pornography help all of us in
law enforcement coordinate and target our resources against the
greatest criminal threats.
The NGOs provide countless solid leads, and the investigator-
prosecutor relationship turns those investigative leads and our
evidence into the seizures and convictions that are necessary.
Prosecutors' speed and willingness to reach out to their colleagues
across jurisdiction is vital in the investigation of Internet crimes
against children. Rapid response to ICE requests for help by
Internet and financial service companies are deeply appreciated.
Second, Internet child pornography is a big business. As far back
as 1992, ICE, then the U.S. Customs Service, investigated the sale
of access to Internet bulletin boards containing images of child
abuse, which in one investigation was shown to generate more than
$60,000 per month in proceeds.
Five years later in 1997, another ICE customs investigation
revealed that proceeds from the sale of access to child exploitation
websites can easily exceed $1 million a year. In the 1999 landslide
investigation, we uncovered that the magnitude of illegal revenue
derived from the sale of access to child exploitation websites was
occurring still at that level. ICE addressed the trans border aspect
of the landslide investigation in support of the Dallas Internet
Crimes Against Children Task Force, and of course other Federal
partners, the U.S. Postal Inspection Service, as well as the FBI.
Four years later, ICE seized approximately $800,000 in the 2003
Operation Falcon RegPay case. Currently, open investigations
continue to demonstrate the big money behind this activity.
Third, advances in the Internet and due to technology they are
making it difficult to identify and track the global financial
infrastructure that facilitates Internet child exploitation businesses.
Our laws, the tools that we in law enforcement use to fight these
crimes are not keeping pace with the continued evolution of digital
money. These digital monies move around at the speed of light
and with a click of a mouse. I would also like to indicate that
while the focus today is on child exploitation crimes and the illegal
financial transactions that support them, these same mechanisms,
these same Internet mechanisms, are being used for other Internet
crimes be it property right violations, pharmaceuticals, as well as
the sale and distribution of false identity documents.
In conclusion, on behalf of the men and women of ICE, I wish
to express our gratitude to the subcommittee for continuing this
series of hearings and to the important issue. In this area, we face
massive amounts of criminal activity. Collectively, we understand
the challenge that we face, and we need to study it more. We need
to understand the trends, the techniques, the vulnerabilities of those
engaged in these international criminal business enterprises, and
Congress has a vital role in insuring that law enforcement has the
tools it needs to keep pace with these criminal activities and the
way that these criminals seek to hide within the cutting technology
Internet and computers. Thank you again for this hearing, and I
stand by for your questions.
[The prepared statement of James Plitt follows:]
PREPARED STATEMENT OF JAMES PLITT, DIRECTOR, CYBER CRIMES
CENTER, OFFICE OF INVESTIGATIONS, U.S. IMMIGRATION AND
CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND
SECURITY
INTRODUCTION
Chairman Whitfield, Ranking Member Stupak, and
distinguished Members of the Energy and Commerce Oversight
and Investigations Subcommittee, my name is James Plitt and I am
the Chief of the Cyber Crimes Center at the Department of
Homeland Security's U.S. Immigration and Customs Enforcement
(ICE). I appreciate the opportunity to present an understanding of
ICE's authorities and responsibilities with respect to investigating
international commercial child exploitation websites.
THE COMMERCIAL ONLINE CHILD EXPLOITATION
ENVIRONMENT
The ICE Cyber Crimes Center (C3) is responsible for
investigating violations of immigration and customs laws that
occur in cyberspace, including trans-border sexual exploitation of
children over the Internet. When ICE investigates the online
sexual exploitation of children, we focus on three components of
the Internet: international commercial and non-commercial
websites, international Peer-to-Peer groups, and international
Internet Relay Chat.
Criminal organizations increasingly use the Internet to
internationally advertise, distribute, and receive electronic
contraband, specifically images of child exploitation. In doing so,
they are reaping enormous profits from the sale of access to
websites containing these images. To stop the proliferation of
international commercial child exploitation websites, C3 dedicates
substantial investigative resources to identifying and dismantling
the criminal organizations responsible for such sites and the
exploitation from which they profit.
Although it is difficult to determine the exact number of
websites offering images of child sexual exploitation, observations
from ICE investigations generally support the statistics of non-
governmental organizations like the National Center for Missing
and Exploited Children, which estimates that more than 100,000
such websites exist, more than 1,000 of which are commercial in
nature. Among members-only websites, there is a tremendously
high rate of duplication, with many identical or noticeably similar
sites operated by the same individuals. Furthermore, we often
encounter 10 to 15 different advertising websites operated by the
same individuals, all of which link to the same members-only
website. This renders an accurate count of websites depicting
child exploitation especially difficult to obtain.
Recent investigations, including ICE's unprecedented
Operation Falcon, have revealed a common methodology that
criminal organizations use to commercially distribute images of
child exploitation around the world. Typically, the organization
consists of at least three component groups. The first of these
groups includes the individuals responsible for uploading and
maintaining the advertising and payment websites. These websites
provide willing customers the opportunity to purchase Internet
access to websites with a large volume of child exploitation
images. The second group consists of individuals who facilitate
the payment process. ICE has identified the following online
payment methods used by international commercial child
exploitation organizations: e-Gold, PayPal, Western Union, and
traditional credit card-based merchants. We believe there are
subgroups within this second group with responsibility for
exploiting each type of international Internet payment method.
They remain attentive to the development and availability of new
financial methods. The third group consists of those who control
the overall criminal organization, decide which payment method
will be used in a given situation, determine the content of the
members-only child exploitation website, and direct the laundering
and distribution of the proceeds.
ICE's Internet child exploitation investigations have revealed
that many of those who control and profit from these electronic
images are located in Eastern Europe and former Soviet countries.
Furthermore, there is likely some overlap within these
organizations because of the ease with which the three groups
described earlier can provide their services to multiple
organizations at any given time. For example, an organized
payment facilitator can easily accept payments from multiple
advertising websites for access to multiple members-only websites.
A website that advertises access to members-only child
exploitation websites is easy to upload to Internet web servers and
can be operational at multiple locations within one day. Payment
websites have a similar structure and are easy to operate, whereas
members-only websites are much larger and more difficult to
upload. Generally the same members-only website is uploaded on
one Internet web server and allowed to operate for 30 days, after
which its operators remove it from the server and upload it to a
different server.
CONCLUSION
C3 is dedicated to identifying all individuals involved in
international criminal organizations and component groups that
conduct every activity associated with international, commercial
child exploitation websites. This includes those who advertise
specific members-only websites, those who facilitate customer
payments, those who control the members-only websites, and those
who ultimately receive the proceeds from the sale of child
exploitation images. With our expertise in money laundering
investigations, we are working diligently to identify and dismantle
the international criminal organizations that operate these
commercial child exploitation websites, as well as to identify their
many subscribers. ICE coordinates closely with the Internet
Crimes Against Children Task Forces, various elements of the
Department of Justice's Project Safe Childhood initiative, and non-
governmental organizations like the National Center for Missing
and Exploited Children to maximize the effect of these
international investigations and thereby protect this nation's most
valuable resource, our children.
I hope my remarks today have been helpful and informative. I
thank you for inviting me and I will be glad to answer any
questions you may have at this time.
MR. WHITFIELD. Thank you, Mr. Plitt, and I appreciate the
testimony of all three of you. Mr. Christie, let me first begin with
you. The RegPay case, I am assuming, was one of the first and
most comprehensive prosecutions in this entire area, is that
correct?
MR. CHRISTIE. That is correct, Mr. Chairman, yes.
MR. WHITFIELD. And how long did that investigation go on
including the actual trial, what was the time period?
MR. CHRISTIE. The investigations and trial went on for about 3
years, Mr. Chairman.
MR. WHITFIELD. And how many people were actually
convicted, roughly?
MR. CHRISTIE. Roughly, across the country when you look at
all of them there were probably about 200 or so that were
convicted when you take into account also the users and the
purchasers of the information as well.
MR. WHITFIELD. And this was a world wide operation?
MR. CHRISTIE. Yes, it was, sir.
MR. WHITFIELD. But it was headquartered in Belarus?
MR. CHRISTIE. The websites were headquarters and created in
Belarus. The financial transactions occurred mostly in the State of
Florida. Purchasers were all across the United States, and the
money eventually sent to banks in Latvia.
MR. WHITFIELD. Okay. Now what lessons should be learned
from the RegPay case in terms of how to investigate and ultimately
prosecute these complex international commercial child
pornography cases, what lessons did you learn?
MR. CHRISTIE. First and foremost is you have to have the
cooperation of the credit card companies by providing this
information on a real time basis, and one of the things that we did
in the RegPay case was to go to the credit card companies up front
early in the investigation and say to them we want your
cooperation in terms of giving us this information on a real time
basis so we can trace these transactions. That has not always been
the way it was, but I have to say that we had enormous help from
MasterCard and Visa who were willing to do things that really had
not been done before in these investigations in terms of providing
us with that information.
So that is one. You need the cooperation of the credit card
companies to be able to do this. They are the gateway into this. I
think the second is to make sure that all of the law enforcement
agencies involved are on board and ready to cooperate
internationally. You have to reach out to your international
partners. You need them to be a part of the group and they
certainly were in the RegPay case. And I think the third thing that
we learned from the investigation was that you can have success
doing this. Now part of getting law enforcement interested in
devoting the time of enormous resources that we need to devote to
be able to bring this down is hopefully to have prosecutions at the
end of the day, not to have it lead to a dry hole and lead to
frustration.
And what we proved to all the other districts in the country is
that you can do this and you can succeed and you can get these
folks, the really bad people, who are exploiting these children.
And as I said before, Mr. Chairman, the images that were on this
website were incredibly disturbing and exploitive of children. You
had child rape scenes and just the worse things that you can
imagine in children as young as 5 and 6 years old.
MR. WHITFIELD. Were these on demand?
MR. CHRISTIE. Well, no, these were not live shows but they
were depictions of photographs that had been taken and that these
people could get. And the other point that was brought up before
that is something that we are going to need to confront is when
people don't pay with money for these images. We are seeing an
increase in the uploading of pictures so there is ways to join these
sites and have memberships in these sites, and one of the ways is to
pay, but the other way is to say if you are willing to upload to the
site a certain number of new child pornographic images, that can
take care of your membership fee for a certain period of months or
even years depending on how many of these images you have.
So what that is creating is cottage industries of people who
want to create these images as a way of not having to pay to see
other images but create their own images to upload, and that
phenomenon is something that we are very concerned about as
well. So we are focusing on that as well so not to look at the users
anymore. It is just people who are sitting and clicking a mouse and
looking at an image, but also to see them as potential active
pedophiles to try to support their need for further stimulation by
getting these other images.
MR. WHITFIELD. Thank you. Mr. Allen, you had mentioned in
your testimony that 80 percent of the payment processors had
joined your coalition to deal with this issue. Of that 13 percent that
did not join, did they give you any particular reasons for not
joining or was there a theme of why they were not interested?
MR. ALLEN. No, Mr. Chairman, there is really not. We have
had an aggressive recruitment effort, but there are a lot of people in
the financial industry in this country. For example, I just learned
this morning of another company because of your hearing who
wants to be involved, so we just got to try harder and work harder,
and I think frankly the kind of diversity of financial leadership that
is represented here should reassure these companies that this is not
a risky thing to do, this is the right thing to do. It is not only good
for the country but it is good for them.
MR. WHITFIELD. Absolutely. And, ater today we are going to
have the Chairman of e-gold, which is a digital currency company.
Now you are a real expert in this whole area relating to child
pornography, and you have done a great job of setting up this
national center. What sort of problems does this digital currency
present as you try to identify child predators and pornography?
MR. ALLEN. Well, I think our concern initially was that as you
put pressure on the mainstream payment systems the most likely
thing that would happen is they would move to alternative
payments, and that is one of the reasons why one of the first people
we talked to about involvement in this coalition was Dr. Jackson at
e-gold, who has been a part of this process, and has been very
aggressive in our judgment in trying to root this out. Similarly, the
other alternative payment mechanisms have been similarly
aggressive. What we are seeing now, I think, and Mr. Plitt and
others could speak more accurately to that than I, is a kind of
continuing evolution. As you put pressure on one point, they move
somewhere else so we are now seeing the development of small
aggregators and almost customized payment mechanisms.
But I think there is no question that if we are successful, we are
going to keep them moving into new payment devices and we are
going to get them out of the sort of mainstream payment systems.
MR. WHITFIELD. So did Dr. Jackson agree to work with you
to?
MR. ALLEN. Yes, he did, and has.
MR. WHITFIELD. Okay. Now, Mr. Plitt and Mr. Christie,
would you all like to expand on this digital currency and the
problems that that creates?
MR. PLITT. Yes, absolutely. The digital currency methods are
evolving daily. As I mentioned in my 5-minute opening, it is
moving into areas besides just child exploitation so you find that
the digital currency is becoming a substrate for Internet activities.
The only other thing I would like to mention at this point is that the
focus is on the payments associated with joining a commercial
child exploitation website. I would also ask the committee to
consider that on the back end of that the proceeds that are derived
from that activity are also resident on the Internet. They don't
necessarily take the money out as cash or move it to some
legitimate bank account. It can stay on the Internet and those e-
currencies, those currency devices, can be bartered for services that
support those websites such as content.
MR. WHITFIELD. Okay. Mr. Christie.
MR. CHRISTIE. I would agree with what Mr. Plitt said. What it
is creating for law enforcement is additional challenges. As you
knock down one area another one pops up some place else because
you need to understand, I know this committee does after the work
that you have all done, the incredible scope of the money that is
being made here. Billions of dollars are being made. And so
people are not just going to quickly abandon that. They are going
to use their best and brightest to try to work against us as we attack
and defeat one area, and so we have to continue to remain very
nimble.
And I think the work of this committee in drawing all these
different institutions together is going to be very helpful to get
information to everybody on how we can remain at least even with
them if not the goal of getting one step ahead of them and stopping
them before they innovate. But it is an enormous challenge
because of the resources that they bring to bear. Mr. Plitt is right,
they use those resources as a barter system on the Internet to
support their information. That makes it very difficult for law
enforcement to trace those proceeds.
MR. WHITFIELD. In my understanding the digital currency is
not regulated in any way by the Federal government, is that
correct?
MR. CHRISTIE. Correct.
MR. WHITFIELD. At this time right now is Mr. Stupak.
MR. STUPAK. Thank you all for coming. You know, you were
just talking about knocking down sites and another one pops up,
Mr. Christie. Mr. Allen, you were telling us last time when you
testified about Great Britain, how all their ISPs from a coalition,
and they have dropped like in 2 years sexual exploitation from 18
percent down to .04 percent. Now is that a trade association within
Britain that helps monitor this? Explain that to us.
MR. ALLEN. It is the Internet Watch Foundation. It is a non-
profit, non-governmental organization that is basically sustained
through revenues that come through the companies. Let me say we
have great admiration for them. We have included them in our
meetings. We have skepticism about the data. We still identify--
MR. STUPAK. But it is better than what we are doing in this
country, right?
MR. ALLEN. Well, I think what we are trying to do is to adapt
it. The step we are taking here, I mean our concern is that blocking
is not enough.
MR. STUPAK. I agree.
MR. ALLEN. Yeah. Okay.
MR. STUPAK. But could we do things similar to what they are
doing in Great Britain to make it--as Mr. Christie says we shut
down one, another one pops up, we all know. What do we have,
about 1,300 ISPs at least in this country?
MR. ALLEN. At least.
MR. STUPAK. Okay. So have any of them joined an Internet
Watch like they do in Great Britain?
MR. ALLEN. No. I think the step we are trying to take here is
attempting to emulate that so that all ISPs in this country are
required to report child pornography on their systems to us. As we
discussed at the last hearing, there are still some issues regarding
getting everybody to do that.
MR. STUPAK. Correct. The Department had some concerns
about a law Congress passed even though they never used the law
to accuse but they already--okay. Mr. Christie, one of the other
concerns were--you were involved with RegPay, right?
MR. CHRISTIE. Yes.
MR. STUPAK. And I noticed in the testimony about you had to
do search warrants for Connections. This was a company in Fort
Lauderdale that the money went through, correct?
MR. CHRISTIE. Correct.
MR. STUPAK. What problems or one of the concerns of law
enforcement it takes too long to get a search warrant and they talk
about an administrative warrant. Have you seen that problem in
RegPay that took too long to get search warrants to have them be
beneficial?
MR. CHRISTIE. Congressman, I did not see that problem in
RegPay. I think that is because we have developed so much
probable cause so quickly that I did not see the problem in the
RegPay case in terms of the speed of us getting our search
warrants, and so it was not something that we experienced in the
RegPay case as a problem on that specific case. There may be
other instances when that occurs in other districts, but in our
district in that case we did not have that problem.
MR. STUPAK. One of the problems I did see in that one was
trying to get these people who were responsible here for this to
come to another country where they were arrested and all that
because they were from Belarus which didn't handle that. In this
case, RegPay or was it Operation Falcon, I think, was another word
for it?
MR. CHRISTIE. Yes.
MR. STUPAK. If there were 21,000 distinct purchasers of child
pornography off that site, that is here in this country and we
prosecuted less than 500. I have been told that the Australians
have prosecuted about 600 out of 900 to date, and the Dutch have
told our staff that they have prosecuted 629 out of 640. So my
question is from a prosecutor point of view why are prosecutions
so low out of those 21,000?
MR. CHRISTIE. Well, I think part of it is obvious from the
numbers. To give you some example, our office, which is one of
the larger U.S. Attorney's offices in the country, we have about
135 Assistant United States Attorneys, we prosecute to a
conclusion on an average year somewhere between 800 and 900
cases. So if you look at the numbers that you are talking about
with 21,000 purchasers the idea of any one or even a combination
of all 94 U.S. Attorney's offices being able to prosecute the kind of
percentages that you are talking about and comparing to the other
countries when you have 21,000 purchasers it would simply
overwhelm--it would overwhelm our ability to do anything else.
And so what we have tried to do with our law enforcement
partners is to target those folks who have potential for direct
contact with children on an every day basis, people who are
involved in schools and religious organizations, et cetera, and so
we certainly make choices regarding who we pursue and how we
prioritize that.
MR. STUPAK. A figure that sticks in my brain because you
were talking about--this is our sixth hearing, those people in there,
80 percent of them are abusing the people, child pornographers
who view this stuff, a lot of them will abuse their own children or
other children so wouldn't this be a higher prosecution priority of
these 21,000? And also I didn't expect all 94 U.S. District
Attorney offices to prosecute. Why wouldn't you just turn them
over to State and local prosecutors to get a better percentage?
MR. CHRISTIE. Well, there are some instances where it is
appropriate to give those to State and locals, and we do. But as
well I am unsure of the 80 percent number that is used, and that
seems higher than what I have been familiar with before of people
who are proven pedophile abusers who are also viewing this
information. I will tell you, Congressman, it is a very high priority
in our district and the resources that we have placed on it. I have
nearly 10 percent of all my Assistant United States Attorneys in
my office who are working on child pornography, so when you
look at the full plate of things that we have to deal with in the
United States Attorney's Office of our size, we are placing a high
priority on this and moving as many of these cases as we possibly
can.
MR. STUPAK. Of these 21,000 then if they are from let us say
Michigan were the prosecutors, State and local prosecutors, then
notified of these people?
MR. CHRISTIE. Sure. What happens is--
MR. STUPAK. And then it would be up to them?
MR. CHRISTIE. These leads go out through ICE to all their
places, all their different offices across the country. They are
given to both the U.S. Attorneys offices and to their local law
enforcement partners. And so all those leads of those 21,000 are
distributed to law enforcement throughout the country. They are
not ignored, but the question is when do the statistics catch up and
in what percentage can all these people do these cases?
MR. STUPAK. Do you follow up on these 21,000? I would
really be interested to see when they do catch up because I would
be interested in knowing those numbers.
MR. CHRISTIE. I think ICE probably is the focal point for
following up on those leads as they are the lead investigative
agency. We certainly keep up with the ones that occur in New
Jersey, but then once we gather all that information as the lead
U.S. Attorney's Office in the country on a case like RegPay or
Falcon, we turn to ICE to distribute those throughout the country,
and they are really the ones who follow up on those statistics
across the country.
MR. STUPAK. Could you get that information for us? Mr.
Allen, you indicated that 87 percent of financial institutions have
joined your financial coalition, I believe you called it. How do we
persuade the last 13 percent to join?
MR. ALLEN. One at a time. That is exactly what we are trying
to do. And I think frankly one of the greatest successes we have
had is that companies that are part of this coalition are going to
their competitors and colleagues and saying you need to be a part
of this.
MR. STUPAK. Thirteen percent. How many in a raw number?
What would that be of financial institutions that have not yet
participated or not trying to help in this financial coalition? Do
you have a raw number?
MR. ALLEN. I can get that for you. My sense is it is a fairly
large number.
MR. STUPAK. Right, that has been my sense.
MR. ALLEN. Once you get past the big guys then the rest, that
10, 12 percent involves a lot of small institutions, many of whom
probably don't think they have any relevance or connection with
this.
MR. STUPAK. Okay. So the big ones really--e-gold is part of
your financial coalition?
MR. ALLEN. Yes.
MR. STUPAK. And Western Union?
MR. ALLEN. Western Union is not.
MR. STUPAK. I was looking at some of the documents you
gave us, confidential ones, and some of them had Western Union
on there to further the financial transactions.
MR. ALLEN. One of the challenges there and one of the
reasons that Western Union sometimes is used, is if the transaction
is less than $1,000 there is no information about the sender or the
distributor. So that is--first data which I believe is the parent of
Western Union, I think that is right.
MR. STUPAK. But a lot of these sites also say on there if you
use like MasterCard and Visa, and I am trying to find this one right
here, some of them where I had it marked, basically say your name
and address will not be disclosed. Everything is confidential. That
is not necessarily true if you use a MasterCard or Visa or
something like that. There would be a way to erect that
transaction, right?
MR. ALLEN. That is exactly what we are trying to do.
MR. STUPAK. We have had other hearings in Oversight and
Investigations through my years on this committee, and I think,
Mr. Plitt, you mentioned that identity theft, pharmacy, drug
masking agents, would your financial coalition model work to help
stop the drug masking, things being sold through the Internet,
credit card companies, Internet pharmacies that are not proper,
identity theft, do you think your model would work for other
products, if you will?
MR. PLITT. Congressman, I don't know why not. I mean I
think it is a great model because private industry competitors are
coming together, exchanging information, working with law
enforcement to address the financial aspects of this. I think it is
too early to say that this model works but certainly my sense 6
months in is that it is a great model that could be replicable in
many ways.
MR. STUPAK. Thank you.
MR. WHITFIELD. The gentleman from New Jersey is
recognized.
MR. FERGUSON. Thank you, Mr. Chairman. Mr. Christie, my
understanding is that over a thousand arrests came from the
information from the RegPay case, both domestically and
internationally. That is a huge number. We know it only really
begins to scratch the surface of this problem. You have talked
about the enormous resources that your office devotes to this
particular type of activity. What are the--the title of today's
hearing could easily be called follow the money. We are
examining that aspect of it today. What challenges, if any, did you
see in the RegPay investigation that we could learn from your
work with, specifically regarding the financial institutions because
you have set up the model.
This should be hopefully the template for other law
enforcement to be able to use to be able to track down these folks
that are doing this. Were there any challenges that you
experienced in the process of that specifically with regard to the
financial institutions that we could help to address or that we could
try to remedy?
MR. CHRISTIE. Sure. The first one, Congressman, is to have
buy-in from the credit card companies to be up front providing real
time information to law enforcement so that we can trace these
transactions to the processors and the people who are laundering
this money for the people who are setting up these pornographic
websites. And in the RegPay case we were able to get voluntary
buy-in from MasterCard and Visa in what I think one of the first
times that happened on a real time basis. And we went and made
the pitch to them and they cooperated. And so that is very
important, and I don't think you can do one of these investigations
without cooperation from those credit card companies. It is
absolutely vital since still the overwhelming majority of these
transactions are processed in that way.
Secondly is to make sure that you have the type of trained
investigators that you need to follow this. This is not easy stuff. It
is very complex. And so to make sure that ICE has the type of
agents and more of those agents that can trace this type of money
trail, have the training and the expertise to do that. We also utilize
the IRS in this regard and that investigation was a partner with
ICE. And the IRS has enormous expertise for obvious reasons in
following the money trail, and they worked in partnership with
ICE and RegPay and Operation Falcon to be able to do that.
And so making sure that those agencies have the type of
trained investigative personnel in greater numbers than they have
now if we want to try to become even more aggressive about this
because we as prosecutors can't do these cases unless the evidence
trail is built, and it is built by these investigators who work
enormously hard on very, very complex transactions because, as
you know, these folks don't want to be caught so they make these
transactions as complex as they can in an effort to try to frustrate
us off of their trail.
So I think those are the biggest lessons from a financial
prospective. We learned we need to continue to build up the
expertise within ICE and IRS across the whole country to be able
to partner with the U.S. Attorney's Office and local law
enforcement to go after these transactions, and we also need to
make sure that all the people in the financial industry are
committed to working with law enforcement on a real time basis to
get us the information we need to be able to get after these child
predators.
MR. FERGUSON. Now the gentleman from your office who
prosecuted the RegPay case, Carlos Ortiz, is that correct?
MR. CHRISTIE. Yes.
MR. FERGUSON. He is currently in private practice?
MR. CHRISTIE. Yes, he is.
MR. FERGUSON. No longer works in your office?
MR. CHRISTIE. No, he no longer works for me.
MR. FERGUSON. Well, please give him our best and our thanks
if you happen to see him.
MR. CHRISTIE. I speak to Carlos on a regular basis. He is still
very involved with Mr. Allen in his private capacity at the National
Center advising them on these issues, and so we speak frequently
and he is a good friend.
MR. ALLEN. Congressman, could I interject? Carlos Ortiz is
providing legal counsel to our financial coalition through his law
firm in New York on a pro bono basis so that is how committed he
personally is to this whole effort.
MR. FERGUSON. Mr. Plitt, could you follow up on what Mr.
Christie was talking about in terms of the financial institutions and
cooperation that you may have received, and speak specifically--I
don't like to harp on the problems. If someone is doing the right
thing, we like to recognize that, but are there problems, are there
road blocks that you are running into, are there things that we can
be doing or working on together to encourage folks to be more
cooperative
MR. PLITT. Yes. We are getting considerable cooperation
from various financial companies, banks, credit card companies, et
cetera, so I think their heart is in the right place. But this type of
crime and the use of the financial systems and the new financial
systems, the Internet financial systems is causing a lot of people to
learn different things and it takes a while to come up that learning
curve. And just when we get to the point where we have a great
template like the RegPay case it shifts to new methods. For
instance, we are seeing steward value cards. We are seeing non-
credit card based financial transactions used to join these as
members to these websites.
So they are learning as fast as we are. Obviously, I would
think that the financial companies are interested in protecting their
own assets, their own portfolio of customers so it is of value to
them, but from what I hear from our investigators the speed with
which the information is provided to us, the desire to learn with us
as we work the investigations is very high, very appreciated.
MR. FERGUSON. Mr. Allen, thanks again for all of your work
and your staff's work at the center. As you know, I spent an
afternoon over there one day and as horrifying as it is to see the job
that you and your team are doing every day we are so thankful that
you are doing it, so thanks for that. That goes, of course, for Mr.
Christie and Mr. Plitt in your work as well. You talked about the
kind of coalitions and the round tables or I forget the exact term
you used for the way you are bringing people together, both ISPs
and the folks in the financial world. Are you--obviously you are
getting a good bit of cooperation and you come from a gold-plated
organization. You would think someone was crazy not to step up
to help. But are you getting the cooperation that you feel like you
need from all the players here or are there folks that we need to
continue to work with or encourage?
MR. ALLEN. Well, yes, the answer is yes. I think we are
getting great cooperation certainly from Federal law enforcement.
I do want to second what the Chairman said in the beginning
regarding the need for more law enforcement resources in this
area. I was very enthusiastic about Mr. Stupak's proposal to
increase the resources for Mr. Plitt and our friends at ICE. We are
getting great cooperation from these financial companies, and I
really think this is an unprecedented approach because they are
working collaboratively. These are fierce competitors in the day-
to-day world. Where we need help, as I said in my testimony, is I
think this is something we are shining light on the problem and
putting pressure on these companies that are not a part of this effort
is important. I think putting pressure internationally is important.
One of the things we have learned, our international center
reviewed the law, the statutes, in the 184-member countries of
Interpol, and we found that in 95 of those countries child
pornography is not a crime. There is no law.
So in most of the countries that are member nations of Interpol,
this problem, a global phenomenon, is not even against the law.
So we have a lot of work to do internationally, and the reason that
your hearings have been important and the actions that you have
taken are so important is that despite the fact that this is a multi-
national problem, despite the fact that the Internet is a global
phenomenon, I remain convinced that the vast majority of the
consumers are Americans. We just spoke with a Russian legislator
trying to push legislation in Russia on this issue and she said to us
we will propose the legislation but you need to do something about
the demand because the demand is American so there is a lot more
that needs to be done.
MR. FERGUSON. Similar in some ways to the scourge of drugs,
drug use.
MR. ALLEN. Absolutely.
MR. FERGUSON. Just before my time is up, Mr. Allen, but with
the coalition that you announced and have talked about to filter
sites, you explained that the site information is given to law
enforcement before it is given to ISPs to block. Does law
enforcement have the option in terms of asking the ISPs or asking
you all to keep the site up for investigation purposes? As horrible
as that sounds, you can imagine a scenario where that might
actually be more useful in being able to gather information in
terms of looking at down the road. Is that option available?
MR. ALLEN. I obviously don't want to reveal investigative
details, but I think that has long been a practice because as was
discussed earlier developing the necessary investigative
information is the case, and it is certainly one of the things that we
have grappled with in our financial coalition process is how do you
balance the two. These companies want to act immediately. Law
enforcement wants to have an appropriate amount of time to
determine whether they are going to proceed with formal
investigation, and the tension is to find the middle ground. So the
answer generally, Congressman, is yes.
MR. FERGUSON. Thanks, Mr. Chairman.
MR. WHITFIELD. The gentleman's time has expired. We have
three votes on the House floor. We have still about 5 minutes
before the first vote is over, and so Ms. DeGette is going to be
delayed getting back so I am going to recognize her to ask a few
questions.
MS. DEGETTE. Thank you so much, Mr. Chairman. I will be
delayed and I won't be able to fully ask this panel questions, but I
want to thank all three of you for your hard work. Mr. Plitt, we
have seen you before. I just want to ask the three panelists what
their opinion is about the idea that I have been talking about which
is requiring the ISPs to retain the identifying data for a 1-year
period. Do you think that would help with law enforcement
techniques? Mr. Christie, we will just start with you.
MR. CHRISTIE. Absolutely, Congresswoman, I think retaining
that data is very important, and it helps to give us the option to be
able to really follow these trails fully to the end. If that
information goes away, it makes it much more difficult for us.
And so my own opinion in terms of having been at the front of one
of these investigations is we need more and more information and
we need it as quickly as we can possibly get it because how
quickly these sites evolve and change, so it would be helpful.
MS. DEGETTE. Mr. Allen.
MR. ALLEN. Yes, and it is a difficult issue. What we like
about your proposal is that you are not talking about retaining
content. What our focus has been is sort of the connectivity law.
The reality is that law enforcement has to be able to connect the
images that are identified to a particular person and a particular
address, and I think that connectivity aspect is critical. Obviously,
this is as real dilemma for the ISPs for a host of reasons, and I
think there is an appropriate time frame that can be established.
But overwhelmingly we think this is something that law
enforcement needs to have.
MS. DEGETTE. Mr. Plitt.
MR. PLITT. Yes, the data retention is something that is
absolutely necessary. The two enemies in Internet investigations
are time and data volume, and with respect to time I think what we
would find that looking at the 21,000 targets shall we say from the
RegPay Falcon case unfortunately the information wasn't available
so the staleness of probable cause, staleness of information, is a
large matter.
MS. DEGETTE. And I assume though you wouldn't use a 1-
year law as an excuse to drag your feet in investigations in any
way?
MR. PLITT. Oh, no, no. We work the cases as quickly as we
can. These are high priority cases for us.
MS. DEGETTE. Thank you. Thank you very much, Mr.
Chairman, for your accommodation, and thanks again to the panel.
MR. WHITFIELD. Thank you. As I said, we have three votes on
the floor. There is about a minute left on the first vote and then
there will be two 5-minute votes, so it will be our goal to be back
here by 10 till 12:00--no, 5 till 12:00 or 12:00. That is our goal.
And then we have additional questions for the first panel, so we
will recess until about 5 minutes till 12:00.
[Recess]
MR. WHITFIELD. The hearing will come back to order. We are
waiting for a couple other members but in the meantime Mr.
Stupak had a couple of additional questions that he would like to
ask, so I will recognize Mr. Stupak.
MR. STUPAK. Thank you. Mr. Plitt, if I may, I asked Mr.
Christie about search warrants. Do you find search warrants in
these cases problems, take too long, evidence goes cold on you?
What has been your experience in that area?
MR. PLITT. In the first few types of these cases it was an
educational issue for the prosecutors as well as the agents. We
have worked through that. And I will tell you something that is
underway is working through Project Safe Childhood. We are
working to establish the attorney in that area in that particular
jurisdiction who would be able to respond to exigent search
warrant situations, so we are already looking at some of that.
Other than that, not too many problems.
MR. STUPAK. So a regular search warrant or administrative
search warrants, what type would you be seeking?
MR. PLITT. We would usually seek criminal-based search
warrants.
MR. STUPAK. And it is not a problem?
MR. PLITT. It hasn't been a problem, that is correct.
MR. STUPAK. Very good. I have no more questions, Mr.
Chairman.
MR. WHITFIELD. Well, I want to thank the first panel for being
with us this morning. We genuinely appreciate your testimony and
the information you have provided, and we look forward to
continue working with you as we make efforts to make a continued
dent into this problem. And with that, I will release the first panel.
Thank you very much. At this time I would like to call up the
second panel, and are we going to have a second panel, by the
way? Okay. We originally on the second panel had a John Doe
testimony from a Federal corrections institute, and that still has not
been decided completely, so at this time I would like to call up the
third panel.
And on the third panel we have Mr. Arne Christenson, who is
Senior Vice-President, Federal Government Affairs with the
American Express Company. We have Ms. Jodi Golinsky, who is
Vice President and Senior Regulatory Counsel for MasterCard
International. We have Mr. Joe Sullivan, who is the Associate
General Counsel of PayPal. We have Mr. Mark McCarthy, who is
Senior Vice President, Public Policy, for VISA. And then Mr.
Douglas Jackson, who is the Chairman of e-gold Group, and we
would invite him to come up and testify as well.
I want to thank all of you for being with us today. Of course,
this hearing is really focused on this panel, and we know that you
all have taken many steps to assist in the significant issue that we
face. As you recognize, it is an Oversight and Investigations
Subcommittee hearing, and we do normally take testimony under
oath. Do any of you have any objections to testifying under oath?
If not, then if you would please stand and raise your right hand, I
would like to swear you in.
[Witnesses sworn]
MR. WHITFIELD. Thank you very much, and all of you are
under oath now. Mr. Christenson, we will recognize you for your
5-minute opening statement.
TESTIMONY OF ARNE L. CHRISTENSON, SENIOR VICE PRESIDENT, FEDERAL GOVERNMENT
AFFAIRS, AMERICAN EXPRESS COMPANY; JODI GOLINSKY, ESQ., VICE PRESIDENT AND
SENIOR REGULATORY COUNSEL, MASTERCARD INTERNATIONAL, INC.; JOE SULLIVAN, ESQ.,
ASSOCIATE GENERAL COUNSEL, PAYPAL, INC.; MARK MCCARTHY, SENIOR VICE PRESIDENT,
PUBLIC POLICY, VISA U.S.A., INC., AND DOUGLAS JACKSON, CHAIRMAN, E-GOLD GROUP,
INC.
MR. CHRISTENSON. Thank you, Chairman Whitfield.
Chairman Whitfield, Ranking Member Stupak, my name is Arne
Christenson. I am a Senior Vice President at American Express for
Federal Government Affairs, and I also serve as our company's
representative on the Financial Coalition Against Child
Pornography. And we at American Express are proud to be
working with the National Center and our colleagues in the
industry on that important effort. It is a privilege to testify today
about our efforts at American Express to block any use of our
cards to purchase child pornography on the Internet.
Today I would like to just briefly describe our business model,
and then list the steps we take so that our network is not used to
fund child pornography and outline what we are doing to focus
even more intensely on combating this evil in the future.
American Express was founded in 1850 and is today a diversified
worldwide company focused on payments, travel, and financial
services. We operate what is often referred to as a closed loop
network, which is distinguished in some ways from major
networks like Visa and MasterCard. In an open network model the
networks process transactions and serve as a connecting point
between an acquiring bank which has the relationship with the
merchant, and an issuing back which has the relationship with the
cardholder. At American Express, all these functions take place
within one company. We issue cards to customers. We operate
the network, and we manage the relationship with merchants who
accept our cards.
Consequently, our work to combat child pornography involves
activities that may be undertaken by two or three different entities
in the open network model. We screen merchants who wish to
accept American Express as an acquiring bank might do in the
open network model. We track activity on our network constantly
to ensure that merchants are not violating our policies, as Visa and
MasterCard do, and we work with law enforcement to respond to
any potential illegal activity on our network, whether that activity
involves cardholders, merchants, or both.
Let me say, first of all, a few words about our due diligence.
We restrict or prohibit the signing of merchants that fall within 16
general categories. First and foremost, we do not accept merchants
that are linked in any way to illegal activities, including child
pornography. In addition, since 2000 we have had a broader ban
on Internet pornography in general. When a merchant wants to
begin accepting the American Express card, we look at a number
of different things, their financial records, their past history with
us, their past history with other card networks, any websites they
might have, and merchants that we view as a higher risk are routed
to an internal contract review team for further investigation.
We decline thousands of merchants every year because they do
not meet our criteria. In addition to this review at the time of
signing, we continually monitor merchant submissions to identify
suspicious activity or patterns that are not consistent with the
merchants identified industry. In doing so, we identify and
investigate transactions that differ in important ways from what
would be customary or expected for a particular merchant. In the
case of Internet merchants, we also conduct ongoing monitoring of
the World Wide Web to detect any violations of our policies.
Our Web crawlers review millions of Web pages each day, and
in the case of child pornography this search includes proprietary
technology designed to detect such sites. When we discover
merchants who are violating our policies, we can take immediate
action and terminate them. By every indication our policies and
procedures have effectively blocked the use of our network to
finance child pornography. In cases where we have found a
website that could be linked to child pornography, we have
terminated the merchant. However, the vast majority of merchant
cancellations in this area stem from violations of our broader
policy on Internet pornography.
The statistics on the National Center are consistent with these
findings. In 2005, a very small percentage of all commercial child
pornography referrals received by NCMEC contained references to
American Express. Our own experience indicates that very few of
those sites that mention American Express would actually connect
to a merchant on our network. While our research shows that very
few child pornography sites take our card, it appears that they often
promote payment by credit cards to make the site appear more
legitimate. Indeed, there is a growing trend toward steering
visitors of these sites to various alternative payment methods.
While our restrictive rules have been broadly effective, we are
focused on two areas where we believe we can do more to be more
effective. First, we have changed our process for monitoring the
Internet. In the past our search for child pornography sites took
place as part of our broader efforts to enforce our Internet
pornography and there was not a clear differentiation between the
two in our review and reporting. We now separately track and, if
necessary, refer to law enforcement any sites that could include
child pornography.
Second, through our work with the Financial Coalition, we
have instituted a more effective, documented, and ongoing
consultation with law enforcement on child pornography issues.
American Express is committed to working in partnership with law
enforcement and others in the industry to deny child pornographers
access to the payment system, and we appreciate your focus on this
important issue. I would be happy to take questions.
[The prepared statement of Arne Christenson follows:]
PREPARED STATEMENT OF ARNE L. CHRISTENSON, SENIOR VICE
PRESIDENT, FEDERAL GOVERNMENT AFFAIRS, AMERICAN EXPRESS
COMPANY
MR. WHITFIELD. Thank you, Mr. Christenson. Ms. Golinsky,
you are recognized for a 5-minute opening statement.
MS. GOLINSKY. Good afternoon, Chairman Whitfield and
Ranking Member Stupak. My name is Jodi Golinsky, and I am
Vice President, Regulatory and Public Policy Counsel at
MasterCard Worldwide. It is my pleasure to appear before you
today to discuss our efforts to prevent the misuse of our system in
connection with online child pornography. We commend the
subcommittee for its leadership on this issue. The efforts of the
subcommittee and its staff have increased the focus on this issue
and have helped bring together a wide range of interests to combat
child pornography.
MasterCard deplores any attempts to use our system for illegal
purposes, and we are deeply committed to combating the sale of
child pornography. Our efforts in this area include, one, working
to prevent offending websites from accepting MasterCard-branded
payment cards, two, detecting websites attempting to circumvent
our prohibition, and, three, assisting law enforcement to detect,
apprehend, and prosecute child pornographers. We have had great
success in impeding these criminals from accessing our system.
We recognize, however, that we see only part of the problem and
that criminals who are denied access to our system are quick to
look for other payment alternatives.
We also recognize that private sector efforts alone are simply
not enough. Collaboration with law enforcement is critical. Law
enforcement must be given the tools and resources to apprehend
and prosecute these criminals, and there must be an effective
mechanism for the private sector to assist law enforcement in
achieving those objectives. To address these issues, MasterCard
has partnered with the National Center for Missing and Exploited
Children to form the Financial Coalition Against Child
Pornography. In conjunction with government leaders and law
enforcement agencies around the world, the coalition has
embarked on a first of its kind globally focused effort to identify
and eliminate commercial sources of child pornography.
I want to discuss more directly MasterCard's efforts to combat
this problem as well. MasterCard has a series of rules that require
financial institutions who contract with merchants, also known as
acquiring banks to insure that the merchants are legitimate and
engaged in solely legal activities. These rules mandate, among
other things, that acquirers perform due diligence before
authorizing merchants to accept MasterCard payment cards and
that acquirers monitor merchants on an ongoing basis for
compliance with the rules. We have also proactively educated our
customer financial institutions around the world about our rules
and their obligations with respect to illegal transactions such a
child pornography.
MasterCard also works closely with law enforcement officials
to assist them in detecting and prosecuting child pornographers. In
addition, we undertake significant efforts to check child
pornographers seeking to circumvent our controls. These efforts
include searching the Internet to identify sites that appear to be
selling child pornography and purporting to accept our cards as
payment. In the overwhelming majority of cases where our brand
appears on the site, we have found the site does not actually accept
our cards but impermissibly displays our logo.
Our success in impeding these criminals from using our system
does not end the problem however. We have seen a clear trend in
which child pornographers denied access to our system are moving
rapidly toward alternative payment methods to avoid detection and
prosecution. We are not, therefore, content to simply drive these
criminals from our system and are devoting considerable resources
to a more comprehensive approach to dealing with the problem.
We believe that our partnership with NCMEC and the coalition
provides such an approach.
MasterCard provides to NCMEC the fruits of our investigative
efforts and other information that may be helpful to them.
NCMEC in turn investigates and then refers this information to the
appropriate law enforcement officials who are given the
opportunity to conduct their own investigation. If law enforcement
decides to proceed with an investigation, we work with law
enforcement to support their efforts. If law enforcement decides
not to proceed, a notice is sent to any payment service provided on
that site and those services work to terminate payment acceptance
at that site.
In addition to our active participation in the coalition,
MasterCard is also a corporate sponsor NCMEC. MasterCard
views our sponsorship of NCMEC as an extension of our fight
against the exploitation of children and dissemination of child
pornography on the Internet, and we are extremely proud to
contribute to their efforts. Chairman Whitfield, Ranking Member
Stupak, thank you again for the opportunity to discuss these
important issues with you today. MasterCard is deeply committed
to doing its part to eliminate the commercial viability of child
pornography on the Internet. It has also been our pleasure to work
with your staff, with NCMEC, with law enforcement and others to
help develop solutions to this problem, and we look forward to
continuing those efforts. I would be happy to answer any
questions that you may have.
[The prepared statement of Jodi Golinsky, Esq. follows:]
PREPARED STATEMENT OF JODI GOLINSKY, ESQ., VICE PRESIDENT
AND SENIOR REGULATORY COUNSEL, MASTERCARD
INTERNATIONAL, INC.,
Good morning, Chairman Whitfield, Ranking Member Stupak,
and Members of the Subcommittee. My name is Jodi Golinsky,
and I am Vice President, Regulatory and Public Policy Counsel at
MasterCard Worldwide in Purchase, New York. It is my pleasure
to appear before you today to discuss our efforts to prevent the
misuse of our system in connection with on-line child
pornography. We commend the Subcommittee for its leadership
on this issue. The efforts of the Subcommittee and its staff have
increased the focus on this issue and have been helpful in bringing
together a wide range of interests to combat child pornography.
MasterCard deplores the use of our system for any illegal
purposes, and we prohibit our system from being used for the sale
of child pornography. We take this matter very seriously, and we
are committed to combating the sale of child pornography. Our
efforts in this area include: (i) working to prevent offending web
sites from accepting MasterCard-branded payment cards;
(ii) investigating and testing to detect web sites attempting to
circumvent our prohibition; and (iii) assisting law enforcement to
detect, apprehend, and prosecute purveyors of child pornography.
These efforts have succeeded in significantly disrupting child
pornography sales. We recognize, however, that we see only part
of the problem and that criminals who are denied access to our
system are quick to look for other payment alternatives, including
new and evolving payment methods designed for Internet-based
transactions. We also recognize that private sector efforts alone
are not enough-collaboration with law enforcement is critical.
Law enforcement must be given the tools and resources to
apprehend and prosecute these criminals, and there must be an
effective mechanism for the private sector to assist law
enforcement in achieving those objectives.
To address these issues, MasterCard has partnered with the
National Center for Missing and Exploited Children ("NCMEC")
to form the Financial Coalition Against Child Pornography
("Coalition"). The Coalition represents a partnership of companies
and governmental entities that have come together to combat child
pornography. It includes a broad range of financial institutions,
Internet service providers, and technology companies committed to
working with NCMEC and governmental agencies to develop a
coordinated approach to detecting and combating child
pornography and provide a critical mechanism for assisting law
enforcement in developing the information needed to apprehend
and prosecute these criminals.
Coordinated by the NCMEC and the International Center for
Missing and Exploited Children, the Coalition has embarked, in
conjunction with government leaders and law enforcement
agencies worldwide, on a first of its kind, globally focused effort to
identify and eliminate commercial sources of child pornography.
The Coalition has defined an initial four-point strategy to combat
child pornography that stresses the sharing of information about
illegal activities among Coalition companies and has created a
centralized system that proactively seeks, reports, and tracks the
dissemination of child pornography. This information sharing is
designed to provide law enforcement the essential information they
need to apprehend and prosecute the criminals that purvey child
pornography. It also provides an efficient mechanism for the
Coalition's private sector participants to obtain the information
needed to shut down the services being utilized by the criminals.
In addition, the Coalition is mobilizing world leaders to
become a part of this global effort to eradicate child pornography.
Through collaboration with this broad range of partners, we are
mounting an aggressive effort against child pornography. Indeed,
as discussed below, the Coalition has developed a mechanism to
allow law enforcement and private sector parties to share valuable
information to reduce the viability of child pornography web sites.
Background
MasterCard is a global organization with 25,000 financial
institution customers that are licensed to use the MasterCard
service marks in connection with a variety of payments systems. It
is important to note that MasterCard itself does not issue payment
cards nor does it contract with merchants to accept those cards.
Instead, those functions are performed by our customer financial
institutions. The financial institutions that issue payment cards
bearing the MasterCard brands are referred to as "card issuers."
The financial institutions that enter into contracts with merchants
to accept MasterCard-branded cards are referred to as "acquirers."
MasterCard provides the networks through which the customer
financial institutions interact to complete payment transactions and
sets the rules regarding those interactions.
Efforts to Address Child Pornography
A fundamental rule of our system is that each customer
financial institution must conduct its MasterCard programs and
activities in accordance with all applicable laws. This includes, for
example, ensuring that any transaction a customer submits into the
MasterCard system pertains to only legal activity. In connection
with this rule, MasterCard expressly prohibits the use of its brand
or system in connection with child pornography transactions,
regardless of any legal ambiguity that may exist in a given
jurisdiction.
MasterCard also has a series of rules that require acquirers to
ensure that the merchants with whom they contract to accept
MasterCard-branded cards are legitimate and engage in solely legal
activities. These rules mandate, among other things, that acquirers
perform due diligence on a merchant before authorizing the
merchant to accept MasterCard payment cards and that acquirers
monitor merchants for compliance with the rules. Acquirers that
fail to comply with the rules may be required to absorb the cost of
any illegal transactions, and may be assessed fines, suspended or
terminated, in MasterCard's sole discretion.
It is important to note that we have been proactive in educating
our customer financial institutions about our rules and their
obligations with respect to illegal transactions, such as child
pornography. For example, MasterCard has provided acquiring
banks with guidance based on intelligence we have gained from
previous investigations so acquirers are better prepared to avoid
criminal or fraudulent schemes. In fact, we have also stressed the
importance and utility of the Coalition to our customer financial
institutions which has resulted in the recruitment of several
Coalition participants.
MasterCard also works extensively with law enforcement
officials to address situations where the legality of activities related
to MasterCard payment card transactions is in question. A major
objective of these efforts is to ensure that MasterCard provides
appropriate support to law enforcement in their efforts to address
illegal activity. We are sensitive to the fact that our efforts to
enforce the MasterCard rules have the potential to hinder ongoing
law enforcement investigations and the like. For example, when a
merchant is shut off from accepting MasterCard-branded cards
because the merchant violated our rules, law enforcement's ability
to gather evidence can be impeded and shutting off a merchant
might alert that merchant to an ongoing investigation.
In addition, MasterCard undertakes significant efforts to detect
child pornographers seeking to circumvent our controls. These
efforts include searching the Internet to identify sites that appear to
be selling child pornography and purporting to accept our cards as
payment. Once such sites have been identified, a painstaking, and
largely manual, investigation is conducted to determine whether
those sites actually accept our cards. In the overwhelming
majority of cases where our brand appears on the site, we find that
the site does not actually accept our cards but impermissibly
displays our logo. Unfortunately, our success in impeding these
criminals from using our system does not end the problem. We
have seen a clear trend in which child pornographers denied access
to our system are moving rapidly toward alternative payment
methods to avoid detection and prosecution.
Consequently, we are not content to simply drive these
criminals from our system and are deeply committed to a more
comprehensive approach to dealing with the problem. We believe
that our partnership with NCMEC and the Coalition provides such
an approach, and we are in the process of conducting a program
with the Coalition and law enforcement which is designed to make
it more difficult for criminals driven from our system to find safe
haven. Under the program, MasterCard is providing to NCMEC
the fruits of our investigative efforts. NCMEC, in return, refers
this information to the appropriate law enforcement officials who
are given the opportunity to conduct their own investigation. If
law enforcement decides to proceed with an investigation, we work
with law enforcement to support their efforts. If law enforcement
decides not to proceed, a notice is provided to any payment service
provided on that site and those services work to terminate payment
acceptance at that site. This approach gives priority to any law
enforcement efforts to investigate and prosecute the offending
criminals but also helps to ensure that the criminals are thwarted
from their efforts to receive payment when law enforcement is
unable to pursue prosecution.
In addition to our active participation in the Coalition,
MasterCard is also a corporate sponsor of NCMEC. MasterCard
views its sponsorship of NCMEC as an extension of our
commitment to helping fight the exploitation of children and
dissemination of child pornography on the Internet, and we are
proud to contribute to NCMEC's efforts.
Conclusion
Chairman Whitfield, Ranking Member Stupak, and Members
of the Subcommittee, thank you again for the opportunity to
discuss these important issues with you today. MasterCard is
deeply committed to doing its part to eliminate the commercial
viability of child pornography on the Internet. It has also been our
pleasure to work with your staff, NCMEC, law enforcement, and
others to develop solutions to combat child pornography. We look
forward to continuing these efforts. I would be glad to answer any
questions you may have.
MR. WHITFIELD. Thank you very much. And, Mr. Sullivan,
you are recognized for 5 minutes.
MR. SULLIVAN. Thank you, Chairman Whitfield, and Ranking
Member Stupak. My name is Joe Sullivan, and I am the Associate
General Counsel at PayPal. I am grateful for the opportunity to
speak with you today about the steps that PayPal has been taking to
combat the financing of child exploitation on the Internet. Both
the efforts we have taken on our own, and the progress we have
made working together with the other members of the Financial
Coalition. I am very familiar with PayPal's efforts in this area. I
spent my first 4 years at the company overseeing our work with
law enforcement, and I have personally engaged the FBI, ICE,
Scotland Yard, and other agencies on this important issue.
I am also very familiar with the challenges of tracking online
predators because I have personally prosecuted Internet child
exploitation cases while working for the Department of Justice,
first as the high tech prosecutor at the U.S. Attorney's Office in
Las Vegas, and later as a founding member of the first full-time
high tech Federal prosecution unit at the U.S. Attorney's Office in
the northern district of California. I am very grateful I had the
opportunity to work under current FBI Director Robert Muller
when he was the U.S. Attorney when he made the smart decision
to found and create the first high tech dedicated unit.
PayPal is the global leader in online payments, and is a wholly
owned subsidiary of eBay. The way PayPal works is to enable
individuals and businesses to pay and accept payments securely on
the Internet. We are built on the existing financial infrastructure of
banks and credit cards. We have more than 114 million accounts
around the world. PayPal is committed to providing a safe and
legal online payment service for its users. We are very clear with
our customers about the types of transactions that we do allow and
don't allow, and certainly the use of PayPal for the purposes of
sending or receiving payment for child pornography is strictly
forbidden.
It is clearly in our interest and that of the public that we know
who our customers are, how they transact online, and whether the
intent to comply with our acceptable use policies. A safe well-lit
Internet serves all constituents as well, and to that end we dedicate
significant resources to our efforts. In particular, we focus on three
areas, technology, partnerships, and coordination with law
enforcement. At its heart, PayPal is a technology company. It is
made up of engineers, statisticians, and scientists, and we use very
sophisticated behavioral and anti-fraud models which literally get
smarter with every transaction that goes through our systems. We
have patented unique and sophisticated anti-fraud techniques and
our approaches are emulated across the Internet.
We view our technology as a strong front door. We use
modeling to screen registrations, evaluate user associations,
scrutinize transaction details, and detect suspicious patterns. On
the topic of modeling, we have developed over time a sophisticated
lexicon of key words to use in child pornography related searches,
and we have done so with the help of law enforcement agencies
such as the FBI's Innocent Images Group and Scotland Yard,
which have contributed significantly to refining our key word lists.
We also proactively searched the Internet using search engines and
Web scraping services and we hire external experts to supplement
our efforts. Collectively, we review hundreds of thousands of
URLs and business models each year.
As part of the united front, we work closely with our partners
at the National Center, the credit card associations, financial
institutions, Internet service providers, and other technology
companies. We are all in this together and we work together well
to leverage our combined expertise and develop best practices to
deter the exploitation of children online. We were excited to be
founding members of the Financial Coalition and even more
excited about the progress the group had made to date. The
passion of Ernie Allen and his team at the National Center
combined with the expertise of the financial industry and the
commitments of law enforcement make a powerful combination.
We also work proactively with law enforcement. We don't
wait to be called. When we find anything remotely linked to the
distribution of child pornography, we do three things. We send a
report to the National Center. We file a suspicious activity report,
and we package the details up in a proactive referral to law
enforcement. We also actively sponsor law enforcement Internet
crime training conferences and we speak regularly at their training
programs. From FLETCE to Quantico to the DOJ National
Advocacy Center to the annual ICAC conference in San Jose our
team of experts is always invited and always welcome.
These efforts together have certainly aided in the deterrence of
child exploitation on the Internet but we are not content to stand
still. We will continue to improve our technology and broaden and
deepen our partnerships. We applaud the efforts of the committee
to facilitate dialogue in further coordination. We believe that there
are additional avenues that would further this objective such as
pushing for Whois standards that will help with transparency for
all commercial actors online, encouraging hosting services to have
the ability to respond to third party requests without risk of
liability, and enhancing dedicated law enforcement funding in this
area.
These steps combined with the ongoing efforts of law
enforcement will go a long way towards eliminating this horrible
crime. Mr. Chairman, Mr. Stupak, thank you for your time, and I
am happy to answer any questions.
[The prepared statement of Joe Sullivan, Esq. follows:]
PREPARED STATEMENT OF JOE SULLIVAN, ESQ., ASSOCIATE
GENERAL COUNSEL, PAYPAL, INC.
MR. WHITFIELD. Thank you, Mr. Sullivan. Mr. McCarthy you
are recognized for 5 minutes.
MR. MCCARTHY. Chairman Whitfield and Ranking Member
Stupak, my name is Mark McCarthy. I am Senior Vice President
for Public Policy for Visa. Thanks for the opportunity to testify
today at this hearing. Mr. Chairman, Visa does not allow its
payment system to be used for any illegal activity, including child
pornography. The crime of child pornography is such a heinous
exploitation of the vulnerable and the innocent that we have
decided to put in place since 2002 a program to search the Internet
to find child pornography merchants and to expel them from our
system. I want to describe that program for you today but first I
want to start with the Coalition Against Child Pornography which
Ernie Allen talked to you about in the earlier panel.
Visa cannot conduct a successful campaign against child porn
alone. We need to share information. We need to work
collaboratively with others. That is why, Mr. Chairman, as you
heard in the previous panel, Visa and other payment systems have
joined with the National Center for Missing and Exploited
Children to form the Financial Coalition Against Child
Pornography. This effort reflects our shared belief that child
pornography is a global problem in need of a coordinated response.
Together with our coalition partners, we will enhance our efforts to
identify websites and pinpoint merchants that are trafficking in this
illegal activity. We will cut them off from the use of our networks
and we will provide assistance as we have in the past to law
enforcement to put them in jail for good.
Our zero tolerance anti-child pornography program has two
parts. The first, as I said, is due diligence requirements to prevent
merchants of this character from entering our system to begin with.
The second is the monitoring program to detect and expel any
child pornography merchants that fraudulently gain access to our
system. A quick word of background on our system. Visa itself
performs the communication and settlement functions for our
financial institutions. It is these financial institutions called
acquirers that have the direct relationships with the merchants.
And our rules oblige these acquirers to assume responsibility for
their relationships with merchants.
A fundamental Visa rule is that they allow only legal
transactions be submitted into the payment system. On child
pornography, Mr. Chairman, our rules are explicit and clear,
acquirers must insure that Internet merchants do not submit child
pornography transactions into the Visa system, and they must
terminate Visa acceptance immediately at any child pornography
site that accepts Visa cards. You will hear more about what our
acquiring financial institutions do in this area on the next panel. In
general, they must determine that a prospective merchant is
financially responsible and will abide by Visa requirements as well
as by applicable law. By taking these precautions acquirers can
and do provide a line of defense against child pornography
merchants getting into our systems but these due diligence
requirements are not a panacea.
Child pornography merchants do not present themselves as
such to acquiring banks. They often appear to be legitimate
merchants. They use a variety of techniques to fool acquirers and
thereby gain access to our system despite the best efforts of our
acquiring banks to keep them out. Accordingly, Visa has a
monitoring system to identify and eliminate child porn
transactions. Since 2002 Visa has retained the services of an
outside firm to search the Internet for child pornography and to
find those sites that are child pornography sites and that are also
accepting Visa cards.
Our search program was designed to identify and expel from
our system exactly the kind of commercial porn schemes that you
might have heard about in the past discussion of this issue. Mr.
Chairman, our search firm uses advanced Web crawling and
filtering technology to detect child porn websites. It looks for
websites that display the Visa logo and that satisfy one or more
indicators that they are engaged in the sale of child pornography or
that they are marketing themselves as engaged in child
pornography. These sweeps are ongoing. They are conducted 24
hours a day, 7 days a week, 365 days a year. Hundreds of millions
of Web pages are searched each month.
When our search firm finds one of these criminal sites, they
conduct test transactions to see whether in fact the site is accepting
Visa cards or whether it is merely purporting to accept Visa cards.
The search firm tells us immediately if they find a child porn site
that is accepting Visa cards and unless requested by law
enforcement to leave the site open Visa tells the acquiring bank to
stop processing these transactions immediately. If these identified
sites are not in fact accepting Visa cards but they are merely using
the trademark Visa uses its best efforts to find the Web hosting
company that is involved to direct them to remove the Visa logo.
We provide this information to NCMEC, to U.S. and
international law enforcement agencies as well. Mr. Chairman,
Visa's anti-child pornography program has made progress since we
started the program in 2002. Our recent numbers tell the story. In
August of this year our search firm examined over 11 million
Internet sites a day and found two child pornography sites that
accepted Visa cards. Of course, that is two too many. Since the
beginning of this year nine such sites have been identified. All of
these sites were quickly expelled from the Visa system.
In conclusion, Mr. Chairman, let me repeat the point that I
began with. The way forward lies in collective action. Visa
intends to continue and to increase our cooperative efforts with law
enforcement and with the Financial Coalition Against Child
Pornography. Mr. Chairman, I would be happy to answer any
questions you might have.
[The prepared statement of Mark McCarthy follows:]
PREPARED STATEMENT OF MARK MCCARTHY, SENIOR VICE
PRESIDENT, PUBLIC POLICY, VISA U.S.A., INC.
Chairman Whitfield, Ranking Member Stupak and Members of
the Subcommittee, my name is Mark MacCarthy. I am the Senior
Vice President for Public Policy for Visa U.S.A. Inc. Thank you
for the invitation to participate in this hearing. Visa appreciates
this opportunity to testify as part of the Committee's investigation
into the exploitation of children on the Internet.
The Visa Payment System is one of the leading consumer
payment systems in the world. Visa itself performs
communication and settlement services for participating financial
institutions. The financial institutions that participate in the Visa
system are the entities that issue Visa payment cards to individual
consumers and authorize merchants to accept Visa payment cards
in payment for transactions. Visa itself does not have direct
relationships with merchants that accept Visa payment cards. In
the jargon of the industry, the financial institutions that have a
direct relationship with the merchants that accept Visa payment
cards are called acquiring financial institutions or acquirers.
Visa rules require acquiring financial institutions to assume
responsibility for their relationships with merchants. A
fundamental Visa rule is that these acquirers submit only legal
transactions into the Visa payment system. In addition, Visa has
an explicit rule obligating acquirers to ensure that Internet
merchants do not submit child pornography transactions into the
Visa system.
Visa recognizes that payment cards are an important part of
electronic commerce and believe that we have responded, and
continue to respond, effectively to the challenges posed by Internet
transactions. In addition to our rule against introducing illegal
transactions into the Visa payment system and our explicit rule
against child pornography transactions, Visa has a long history of
working with law enforcement where the Visa Payment System
may have been used in connection with illegal transactions. In this
regard, Visa maintains ongoing working relationships with a
variety of law enforcement agencies including the Secret Service,
the Federal Bureau of Investigation, the Federal Trade
Commission, and state and local law enforcement.
Our anti-pornography program has two components. The first
is a set of due diligence requirements designed to prevent child
pornography merchants from entering our payment system. The
second is a monitoring program to detect and expel from our
system any child pornography merchants that mange to
fraudulently enter our system despite the best efforts of our
acquiring banks to keep them out.
But first I want to mention our involvement with the Financial
Coalition Against Child Pornography. Visa has made substantial
progress with its own anti-child pornography program. So have
the other major payment systems. But we cannot do it alone. We
need to share information and work collaboratively together. That
is why under the leadership of Senator Shelby, Visa, other payment
systems and financial institutions joined with the National and
International Centers for Missing and Exploited Children to form
the Financial Coalition Against Child Pornography. In March of
this year, there was a public launch of this program at a press
conference with Senator Richard Shelby. This effort reflects our
shared belief that child pornography is a global problem in need of
a coordinated response. For many years, Visa has worked on its
own to rid our system of this deplorable activity. By joining the
Coalition, we reaffirmed and strengthened our long-standing
commitment to doing our part to prevent the exploitation of
children. Together with our Coalition partners, we will enhance
our efforts to identify Web sites and pinpoint merchants that are
trafficking in this illicit activity, cut them off from use of our
networks, and provide assistance to law enforcement to shut them
down for good.
Visa's Due Diligence Requirements
Visa requires acquiring financial institutions to ensure that all
merchants are properly qualified to accept Visa cards. Visa
acquirers must determine that a prospective merchant is financially
responsible, and will abide by Visa requirements, as well as
applicable law. There are a variety of methods that acquirers may
use to determine these qualifications, including credit reports,
business financial statements, and income tax returns, conducting
physical inspections of the business premises of a prospective
brick and mortar merchant, and for electronic commerce merchants
obtaining a detailed business description and examining the
merchant's Web site.
By taking these precautions, acquirers can provide a line of
defense against child pornography merchants entering the Visa
system. These due diligence requirements are closely observed by
acquirers, but they are not a panacea for addressing the problem of
the use of Visa cards for child pornography transactions. Child
pornography merchants do not present themselves as such to
acquiring financial institutions. They often appear to be legitimate
merchants. They use a variety of techniques to fool acquirers and
thereby gain access to the Visa system, despite the best efforts of
these acquirers to screen them out of the system.
Anti-Child Pornography Program
Accordingly, Visa has supplemented these due diligence
requirements with an explicit program directed against child
pornography transactions. The elements of this program are
An explicit rule prohibiting any Visa financial institution
from acquiring these transactions
A series of specific penalties for violation of this policy
A program of searching the Internet to detect any website
that appeared to be accepting Visa cards for child
pornography transactions and processes to immediately
stop this acceptance
An explicit ban against child pornography transactions within
the Visa system is the first part of this program. Acquiring
financial institutions are under an obligation to carefully review the
website names and URLs of their Internet merchants to ensure
these prohibited merchants are not operating within their
portfolios. Acquiring financial institutions must ensure that all
prohibited activity is immediately halted.
Violation of this policy may subject the offending acquirer to
significant penalties including the imposition of conditions and
termination of Visa Membership privileges. Visa acquiring
financial institutions have been notified and reminded of these
penalties several times since 2002. If Visa identifies a child
pornography merchant in their portfolio, they must terminate the
merchant immediately. If the merchant is not terminated within 7
calendar days, the bank is fined. Repeated offenses are punished
with a system of escalating fines and other sanctions including
preventing the offending acquiring financial institutions from
signing up any new Internet merchants, requiring them to terminate
existing Internet merchants and ultimately revocation of their Visa
acquiring license.
Visa has not found it necessary to use these sanctions often.
Early in our program some acquiring banks were initially reluctant
to follow these required procedures. They were fined. They got
the message. Since then, Visa acquirers have abided by our policy
against child pornography.
In support of our efforts to keep child pornography transactions
out of the system, Visa maintains a monitoring campaign to
identify and eliminate transactions emanating from child
pornography merchants. Since 2002, Visa has retained the services
of an outside firm to search the Internet for child pornography
websites that appear to be accepting Visa payment cards. This
firm uses advanced web crawling and filtering technology to detect
these websites. It looks for websites that display the Visa logo, and
that satisfy one or more indicators that they are engaged in the sale
of child pornography or are marketing themselves as engaged in
that business. The sweeps are ongoing; they are conducted daily
and search hundreds of millions of web pages each month.
When our search firm detects one of these problematic sites,
they conduct test transactions to see whether in fact the site is
accepting Visa cards or whether they are merely illegally using our
trademark on their site. The search firm tells us immediately if
they find a site that is accepting Visa cards for these transactions.
Unless requested by law enforcement to leave these sites open,
Visa then contacts any acquirer found to be processing these child
pornography transactions and directs them to stop processing these
transactions immediately. If they have not done so within 7
calendar days, they are fined.
If these identified sites are not in fact accepting Visa cards, but are
merely using the Visa trademark on their site, Visa uses its best
efforts to locate the web hosting company to direct them to remove
the Visa logo.
In addition, Visa provides information regarding all these sites
to U.S. and international law enforcement officials and to the
National Center for Missing and Exploited Children. At their
request and as part of an ongoing law enforcement investigation,
Visa would allow these problematic sites to remain operational.
Visa's anti-child pornography program is making significant
progress in the fight against the use of our payment system for
these activities. Our experience is that fewer child pornography
sites are displaying the Visa logo now than when we started the
program in 2002 and that alternative payment mechanisms are
increasingly the way these transactions are financed.
The way forward lies in collective action. We need to share
information and work collaboratively together with other payment
system providers and with law enforcement. Visa has recently
taken an additional cooperative step in its anti-child pornography
efforts. In April 2006 Visa signed a three-year partnership
agreement with the newly created Child Exploitation and Online
Protection Centre (CEOP), a London-based law enforcement
agency. CEOP carries out proactive investigations worldwide and
provides a single point of contact for the public, law enforcers and
the communications industry, enabling suspicious activity to be
reported direct, 24 hours a day. The unit, staffed by about 100
police, computer technicians and child welfare specialists, also
offers advice to parents and potential victims. As a CEOP partner,
Visa will provide not only financial support, but also use our
knowledge and resources to strengthen the Center's Finance Desk.
This uses financial investigation tools to identify people engaged
in the sexual exploitation of children for profit, setting out to
confiscate offenders' assets and disrupt their activities.
In addition to this work with CEOP, Visa intends to continue
and to increase our cooperative efforts with law enforcement and
with other payment systems in the Financial Coalition Against
Child Pornography.
Visa appreciates the opportunity to appear before you today. I
would be happy to answer any questions that you may have.
MR. WHITFIELD. Thank you, Mr. McCarthy. Dr. Jackson, you
are recognized for 5 minutes.
MR. JACKSON. Mr. Chairman, members of the subcommittee,
thank you for the opportunity to participate in these hearings, and,
frankly, to respond to the concerns that have been raised regarding
e-gold, my company. I am Douglas Jackson, the founder and
Chairman of e-gold. I am also the CEO of Gold and Silver
Reserve, which operates the OmniPay service. My background is
that I am a physician, Board-certified in radiation oncology. I have
lived in Melbourne, Florida for the past 14 years. I have been
married for 28 years. I have two children, boys aged 10 and 15. I
conceived of e-gold 10 years ago, and deployed it online in 1996
as institution to advance the material welfare of mankind bringing
access to global markets with reliable, efficient payment
capabilities.
The business case for e-gold is introduced in my submitted
testimony. This morning and in the media, I have heard the chant
anonymous, untraceable, and inaccessible to law enforcement
applied to my company. I am here to tell you that that is simply
nonsense. The inaccessible to law enforcement bit, we have been
reaching out proactively to law enforcement since 1999. Recently,
fortunately, we get some response. Recently, the cooperative
arrangements have improved. We owe a great debt to Ernie Allen
of NCMEC for that relationship which in this area of child
pornography led to a C change. Instead of agencies keeping sites
secret from us on some strange presumption of complicity, instead
bringing them to our attention and getting the initial tools that we
needed to develop the protocols for detection and interdiction.
As far as anonymous and untraceable, it is simply not the case.
E-gold is a book entry mechanism. If a criminal uses e-gold for a
transaction it is the career ending, game over mistake, and our
transactions are permanent. I see my red light is on. I want to
direct your attention to page 13--
MR. WHITFIELD. You still have two minutes and 59 seconds.
We forgot to reset it.
MR. JACKSON. Okay. I don't know how to do that. Sorry.
Page 13 of the submitted testimony has a graph. It tells our whole
story. It shows the success story over the past year where we have
had a 98 percent reduction in the amount of child pornography
payments that are processed through the e-gold system. If there is
the slightest skepticism regarding these numbers, I encourage you
to appoint one of your staffers, one that is technically savvy, detail
them for 2 days, have them spend time with our investigators, and
we will satisfy them that this is the absolute case.
The remaining amount of this crime that is conducted through
e-gold is meager. It is paltry. The declining trend will continue
until we have it suppressed down to zero. I welcome any
questions.
[The prepared statement of Douglas Jackson follows:]
PREPARED STATEMENT OF DOUGLAS JACKSON, CHAIRMAN, E-GOLD
GROUP, INC.
Mr. Chairman, members of the Committee on Energy and
Commerce Subcommittee on Oversight and Investigations: thank
you for the opportunity to participate in these hearings. The
problem of child pornography on the Internet is a serious one, and
I am pleased to see the full involvement of the federal government,
nongovernment organizations, and private industry. Working
cooperatively will certainly help us all in the goal to eradicate this
heinous crime from the Internet.
I would also like to applaud Ernie Allen and the National
Center for Missing & Exploited Children (NCMEC) who have
spearheaded the effort to bring together this financial coalition.
Our aim, along with the NCMEC, is to curb the flow of payments
to these criminals and to help identify perpetrators and their
activity so that law enforcement can take appropriate action. We
strongly support the NCMEC's goal to eradicate child pornography
on the Internet, and I would like to add my thanks to my colleagues
in this coalition.
I would like to take the opportunity to introduce you to e-gold.
Though e-gold is approaching its tenth anniversary in November of
this year, we recognize that we are still not well known in circles
that do not make extensive use of the Internet for commerce. e-
gold, Ltd. is a Nevis, West Indies company. It is operated by Gold
& Silver Reserve (G&SR), headquartered in Melbourne, Florida.
Gold & Silver Reserve also operates a service for the purpose of
buying or selling e-gold, branded as OmniPay.
Gold & Silver Reserve's primary mission is to establish e-gold as a
viable and credible medium/mechanism for Internet payment
transactions, allowing an easy, safe, and secure means to receive
payment via the Internet.
Overview
e-goldr is a unique alternative system that mobilizes the value
of gold for Internet payments. e-gold is designed to provide a
complementary payment system for secure and final Internet
transactions that minimizes exchange risk. Following charge cards,
e-gold has the world's second largest reach as an online payment
system behind PayPal, and it is far more global. Comparative
analysis by websites that measure Internet activity show PayPal
and e-gold first and second respectively in web traffic on payment
system sites.
e-gold differs from every other existing payment system in that
a quantity of e-gold constitutes a liability that, by virtue of a 100%
reserve of physical gold, perfectly embodies the value of gold in
allocated storage. e-gold is denominated in weight units. Transfers
from account to account occur by book entry on dedicated database
servers. E-gold is a closed system; that is, it is impossible for a
user to send value into the system. Increases or decreases of the
overall quantity of e-gold in circulation can be effected by
bailment or redemption of physical gold by a credentialed entity,
either a gold bank or other primary dealer designated by the issuer,
e-gold, Ltd.
e-gold has over 3 million accounts in more than 165 countries
and has the credibility of significant tenure, having been in
operation online for almost 10 years. During e-gold's 10-year
history, numerous other payment mechanisms have attempted to
penetrate the online payment and remittance market, spending
hundreds of millions to do so. PayPal, clearly the market leader,
burned through $275 million of losses before their acquisition by
eBay. e-gold established its position almost entirely through the
personal investment of its founder and a close circle of family and
friends and has carefully continued its progress, relying on
internally generated funds. e-gold has survived and thrived where
most others have failed, due to a sound and coherent business
model and robust, evolving self-governance as described below.
This financing approach has not allowed the speed of growth that,
for example, PayPal has achieved, but it has allowed e-gold to stay
firm to its original mission. Classical market analysis would show
organizations such as PayPal, Western Union, and credit card
companies as competitors. In actuality, however, every seeming
competitor would benefit from a strategic embrace of e-gold,
taking advantage of e-gold's inherently global reach and non-
repudiable settlement protocol to extend their own market
penetration, reduce direct costs, and thereby offer a better service
to their customer base. These same efficiencies, combined with e-
gold's ever more refined capabilities for detection and interdiction
of illicit payment transactions, would provide substantial benefit to
official institutions that accept payment online and/or which
themselves offer remittance and related services, like the U.S.
Postal Service,.
Since its inception, e-gold has settled over 67 million
individual transactions and is today processing 50,000-70,000
account-to-account transfers per day, valued at over $2.0 billion
USD annually.
All e-gold in circulation is backed 100% by a reserve of
physical gold in London Bullion Market Association member
repositories. Currently, reserves amount to nearly 3.6 million Fine
Grams of gold, which would place e-gold 76th among countries for
the value of gold reserves. At today's gold exchange rates, this
reserve is valued at over $68 million USD.
Vision
e-gold was established in 1995 as a viable and credible
medium/mechanism for Internet payment transactions, allowing an
easy, safe, and secure means to make account-to-account transfers
of value on the Internet by anyone, anywhere in the world.
e-gold's governance and transaction model derives from the
dual imperative to assure finality of settlement and freedom from
default risk.
e-gold is a payment system that, unlike any other, allows
people from any region or economic background to operate
globally: a migrant worker can send value back home easily and a
merchant can accept payment from someone in a third-world
country who may be without access to a charge card or bank
account.
e-gold alone is free of chargeback risk, yet the fees for
receiving payment in e-gold are a tiny fraction of those charged by
any other systems.
Thanks to e-gold, for the first time in history, normal people of
modest means worldwide have the option of using a medium of
exchange and store of value that is designed from the ground up to
be immune to debasement with a governance model that precludes
even its management and founders from having the power to
subvert it.
Governance, Security, and Visibility
e-gold has a firm governance model to protect its users, is
highly secure, and offers unprecedented visibility of activity to its
users.
e-gold remains independent of its Operator and any
"exchangers" of e-gold, a separation of roles that further aids in
assuring e-gold's freedom from default risk and finality of
settlement. The operating guidelines are governed by the e-gold
Account User Agreement which can be found on the e-gold
website. The physical gold, stored in London Bullion Market
Association recognized depositories in allocated storage, is titled to
the "e-gold Bullion Reserve Special Purpose Trust," a purpose
trust holding these physical assets for the exclusive benefit of e-
gold account holders. The gold is not under the control of the
owners or operators of e-gold.
Transfers within e-gold are account-to-account, with
immediate settlement by book entry on dedicated servers.
e-gold payments are made in a weight-based unit of (typically)
gold. This medium of payment makes e-gold less subject to
extreme fluctuations in currency exchange rates, especially for
customers in countries with unstable currency. The asset portfolio
backing e-gold, consisting entirely of physical gold, is free from
the financial risks that pertain to securities or other debt
instruments.
Freedom from default and finality of settlement are essential
features that set e-gold apart from other payment systems and have
led to e-gold's firm position in the market. For e-gold to continue
to grow and achieve its original vision, it is imperative that it
maintain its low-risk model and operate at the highest level of
integrity.
The e-gold system is very secure. All transactions occur online.
Account login requires an account number, a pass phrase, human
recognition of a Turing number, and a system verification of the
user's IP address. The only instances e-gold has encountered with
compromised accounts are those in which a user in some manner
surrendered both their account data and access to their personal
email to an unknown party. e-gold maintains significant
information on its website to educate users to the various schemes
used to gain account information.
e-gold abides by an unparalleled standard of transparency. The
"Statistics" and "Examiner" links on the e-gold website publish
real-time data on payment volume and other system usage data as
well as the detailed inventory data for each repository. This
transparency is unique among all online payment systems,
including other precious metal-backed sites. We believe it is of
fundamental importance that our customers fully understand e-
gold's size, growth, and gold backing to establish the credibility
for safe, ongoing use.
Very favorable critiques have been received from respected
business journals. Both Barron's in April 2001 and Grant's
Interest Rate Observer in June 2003 reported favorably on the e-
gold system. Barron's noted: "The ideal e-currency might even be
backed by gold. Encrypted digital units of the precious metal could
in principle be used to pay for anything.....One company, E-gold
already allows on-line users to settle payments using its currency,
which is 100% backed by gold."
e-gold's Commercial Advantages
e-gold offers numerous advantages to both online merchants
(recipients of payment) and to online consumers (payers). (With e-
gold, this traditional merchant/consumer distinction is obsolete-e-
gold is bi-directional, meaning every account can make or receive
payments.) Merchants benefit from fees that are significantly lower
than any other online payment system. All payments are immediate
and final: there are no chargebacks and the possibility of fraudulent
payments is eliminated. e-gold is the most global of all payment
systems, with easy-to-use interfaces, including a shopping cart.
Since e-gold itself is immune to credit-related risks such as default
by a user, recipients of e-gold payments are free of the costs and
risks that other systems are forced to pass to their payment
recipients.
Consumers do not need to share personal information across
the Internet to make a payment. This feature is a great advantage in
reducing identity theft. Payment is immediate, final, and fully
automated, enabling the purchased product or service to reach the
consumer faster. Low transaction fees, coupled with elimination of
costs associated with chargebacks can provide merchants a
competitive edge by enabling cost savings to be passed back to the
buyers. All transactions are fully traceable: if a debate ensues
about a sale, there is a clear and unimpeachable record of the
payment. And importantly, the e-gold payment system is easy to
use.
e-gold "Exchange"
e-gold does not accept "money" (or any other transfer of value
from the public) directly into the system. The only way to obtain e-
gold is from someone who already has it. Many users will buy and
sell their e-gold through a third-party "exchanger." These are
organizations completely independent of e-gold that operate
around the world. The "exchangers" will accept payment for e-
gold in a number of ways, but most typically accept wire transfers
or certified checks. Any entity performing exchange realizes a
business necessity to "know their customer" in order to avoid fraud
losses due to failed or reversed payments transmitted via legacy
(conventional credit-based/bank mediated) mechanisms.
Gold & Silver Reserve's OmniPay serves as an exchanger and
is the primary source of e-gold, buying from or selling to other
exchangers as the market requires. OmniPay has implemented
significant controls on how and to whom they buy or sell e-gold.
When a new user profile is created, it requires e-mail validation
followed by confirmation of the postal address. The user is also
required to prove control of any e-gold account to or from which
the user intends to transact with OmniPay. User profiles are
screened against OFAC and similar lists upon creation and with
each exchange transaction that exceeds a threshold.
OmniPay will only sell e-gold upon confirmed receipt of a
bank wire, further guaranteeing "know your customer"
considerations. Upon selling e-gold, OmniPay will transmit by
bank wire or a check delivered to the validated postal address.
All bank wires are reviewed to assure the transmitter name
matches the name of the OmniPay user that entered the "exchange"
order, and a permanent file of wire notifications is maintained.
OmniPay restricts daily exchange from one party to $100,000. If a
larger amount is necessary, OmniPay requires significantly more
due diligence, including notarized residence documents and copies
of a government-issued photo ID. Inbound wire transfers are
reviewed to ensure that the sending bank is not proscribed by U.S.
Treasury guidelines.
e-gold is Not Hospitable to Illicit or Criminal Activity
All online payment systems are subject to the attempts of
individuals to use them inappropriately, whether for acceptance of
illegal funds, money laundering, or other illicit activity. e-gold's
unique features and investigative protocols make it the poorest
choice a criminal could make.
Two fundamental elements coupled with numerous
programmatic processes and controls eliminate the possibility of e-
gold serving as a source of indirection or successful obfuscation of
money trails.
1. The public is incapable of sending "money" into the
system. e-gold, Ltd. has no bank accounts and no capability
of accepting payment or holding value in the form of any
national currency. Value can be added (via the bailment of
good delivery bars into the Trust) only by an entity that has
been fully vetted by one of the gold banks that comprise
membership of the LBMA. Currently, only G&SR is
credentialed to bail additional precious metal reserves into
the system. A normal account user can obtain a quantity of
the circulating medium (e-metal) only by receiving it in
payment from another account user who already has some.
2. Value in the system is fully traceable. Transfers are
executed by book entry, creating a permanent record of the
lineage of every particle of value within the system.
Records are maintained perpetually: the details of any
transfer since the beginning of e-gold are available.
One of duties of the e-gold Operator (G&SR) is to conduct
investigations pursuant to lawfully executed subpoenas or court
orders. The organization of e-gold as a closed system where all
transfers settle by book entry and all transactions capture
supplemental
information of potential forensic value eliminates the possibilities
of a miscreant successfully using the system in an anonymous or
untraceable fashion, even if false contact information has been
provided. Upon its creation, an e-gold account contains no value
and can only be "funded" by receiving payment from another user,
thereby linking the newly funded account to a web of
counterparties, some of whom inevitably will have provided
correct and discoverable contact information. There has never been
an investigation (over 75 performed per year) where the e-gold
investigative staff has failed to identify the true identity of a
suspect.
A new user may create an account online. The prospective user
is required to provide contact information, including name, e-mail
address, postal address, and telephone number. To validate the e-
mail address, the system sends a welcome message to the specified
e-mail address, also notifying the account-holder of the assigned
account number. Each day, e-gold's due diligence and
investigative staff screens all accounts created since their previous
screening session to locate accounts with false or inadequate
contact information. The screening is assisted by a series of pre-
configured database queries that flag suspicious patterns that have
been found to be associated with false information. Accounts
suspected of false identities are immediately blocked, rendering
them incapable of receiving e-gold transfers.
Whenever a transaction occurs or a user update of contact
information is committed to the database, the system captures a
permanent record of the IP number and timestamp. This vital data
is key to investigative techniques that require linking accounts in a
constellation quietly controlled by a single entity seeking to mask
their identity.
In 2004, e-gold implemented a countermeasure to mitigate
phishing exploits (a form of identity theft). The e-gold system
keeps track of the IP number and browser agent data from which a
user logs into their e-gold account. If a login attempt is made from
a different IP number or computer, the system will not allow
access and will issue a challenge, e-mailing a one time PIN to the
e-mail address registered with the account. This e-mail serves the
dual purpose of notifying the rightful user of an unauthorized
attempt to access their account and alerting them to the fact that
their account information may have been compromised. The
system also captures a permanent record of the IP number from
which the attempt was made.
e-gold users are encouraged to supply complete and accurate
information when they establish their account and to update their
information if the contact data does change. If an account holder
loses their passphrase, this contact data is required before a new
one will be issued.
Of particular importance is e-gold's Right-of-Association in
the e-gold User's Agreement. e-gold reserves the right to refuse to
do business with individuals and entities at the sole discretion of e-
gold. This right enables e-gold, Ltd. to refuse an active account to
any entity suspected of engaging in illicit activities. This right is
imposed by blocking the suspected account, preventing it from
receiving transfers. Blocking an account still allows a user to spend
the existing value in their account. A feature implemented in 2005,
however, enables account users to refuse to accept Spends from
blocked accounts. In the case of suspected child pornography,
accounts are frozen outright, pending full investigation, thereby
stopping all account activity.
e-gold has initiated a major system improvement to change
from an account-based login process to a user-based login. With
the implementation of this change e-gold will dramatically
streamline the ability to capture only accurate user identity
information and further reduce the already poor hospitability of e-
gold for illicit activity. This change is significant requiring
substantial programming and implementation switchover
processes, and is expected to be deployed early in 2007.
e-gold is not a major payment system for Child Pornography
e-gold first experienced the possible use of e-gold for CP
payment in early 2003. Those indications proved to be "phishing"
sites using the bait of CP to learn account data of e-gold users,
suggesting CP availability though apparently not actually selling it.
e-gold blocked those accounts from further use of e-gold as well as
all associated accounts.
At the beginning of 2004, e-gold investigators received a small
number of third-party reports that proved to be real cases of CP
sites accepting e-gold. As these sites were identified, they were
blocked, along with all associated accounts. Recognizing the
problem was real and growing, e-gold began to reach out to third-
party watchdog organizations to help in the alert process. This
reaching out was frankly very difficult: e-gold was not well known
or understood, and often, responses from these third parties were
limited. e-gold did increase its in-house investigative activities and
continued efforts with law enforcement. In mid 2005, the National
Center for Missing and Exploited Children initiated their work that
led to this financial coalition, which has helped significantly. e-
gold is very proud to be one of the founding members of this very
worthwhile coalition.
During this time period, e-gold received adverse press that
came close to implying complicity in this problem, but it was press
that was not justified. Based upon the financial size of the CP trade
identified by the NCMEC and our review of historical transactions,
e-gold has been the payment mechanism abused in less than one
hundredth of one percent of the CP payment dollar volume since
this problem surfaced. The NCMEC CyberTipLine sends alerts to
Financial Coalition members, and alerts are received from other
third-party sources as well. Since collaborative efforts started, the
activity has decreased dramatically. When an alert is investigated,
95% of the time the account has already been identified and
blocked through e-gold's own internal investigative efforts, almost
always detected upon the first payment or before a single payment
has been received.
The following chart represents all CP alerts from all sources
since December 2005.
e-gold investigators estimate that 90-95% of the alerts received
are for CP websites for which e-gold has already blocked the
applicable account.
The very favorable trend shown in the chart is not an accident.
e-gold continues to refine its protocols to detect and interdict CP
payments. Investigative protocols are routinely upgraded as more
is learned about the behavior of the perpetrators and enormous
personnel resources are applied. e-gold's cost for investigative and
preventive actions to stop the use of e-gold for illicit activity,
especially CP, is the single largest element of expense in its
business. e-gold will continue to apply this attention and resource
until the problem no longer exists.
The following graph illustrates the declining dollar volume
that, unfortunately, has escaped detection before the accounts were
ultimately identified and blocked. It is evident that the visibility we
gained from our association with NCMEC in the fall of 2005 was a
turning point in our efforts to prevent e-gold being used at all for
CP payment. The declining value depicts the evolving capability of
our investigative techniques and show we have reduced e-gold
abuse to a marginal level.
e-gold is not limiting its efforts to its own data base. Whenever
a CP buyer account is identified, e-gold investigators alert the
exchange provider from whom the perpetrator purchased their e-
gold. The exchange providers are proving very helpful in
suppressing CP from the demand side. It has been highly
encouraging to see how strongly these organizations are supporting
efforts to deter this crime.
As low as the escape payments have become, we will still
remain vigilant: we know full well that these criminals will not
stop until the risks of their activity outweigh any possible
commercial incentive. We will continue to strenuously support the
NCMEC and law enforcement until the problem is gone.
Justice Department Investigation
In a spirit of full cooperation and disclosure, it is fair to inform
the Committee that Gold & Silver Reserve is under investigation
by the United States Justice Department. G&SR remains confused
as to why this investigation was undertaken, why it continues, and
why G&SR and its founder, Dr. Douglas Jackson, have been
treated in such an abusive manner.
In December of 2005, the Secret Service conducted a "raid" of
the Gold & Silver Reserve offices and Dr. Jackson's home. Bank
accounts were frozen, and company funds were seized. In an
emergency hearing in U.S. District Court on January 13, 2006, the
freeze order on Gold & Silver Reserve's bank accounts was lifted.
Though numerous criminal claims had been made in obtaining the
search and seizure warrants, the government made no attempt to
sustain such allegations. The only claim at that time and continuing
now is a contention that G&SR is operating as a currency
exchange without the proper license. G&SR had previously
proposed to the Government that e-gold be classified for regulatory
purposes as a currency, enabling G&SR to register as a currency
exchange. In a Treasury report released January 11, 2006,
however, the Department of Treasury reaffirmed their
interpretation of the USC and CFR definitions of currency as
excluding e-gold.
As early as 2001, Gold & Silver Reserve attempted to make
contact with the United States Secret Service to explain how the e-
gold system works and to illustrate the advanced protocols for
interdiction and investigation of potential criminal use. Dr.
Jackson, e-gold and Gold & Silver Reserve's founder and CEO,
scheduled meetings to meet with the Secret Service in
Washington-meetings which were postponed and subsequently
canceled by the USSS. These rebuffs by the Secret Service
continued during the time period when an investigation of the
Shadow Crew, a carder ring, was made public approximately a
month before the raid. At no time did the Secret Service engage
with e-gold investigators, even though the company volunteered to
assist the Secret Service by obtaining information to assist in their
investigations under proper subpoena. Throughout this period,
Gold & Silver Reserve cooperated with numerous other U.S. and
international law enforcement agencies and expeditiously
answered subpoenas.
G&SR, for nearly a year, had been engaged with an agency of
Treasury in a BSA (Bank Secrecy Act) compliance examination it
had voluntarily initiated for the purpose of determining how Gold
& Silver Reserve, Inc. should be regulated.
In order to obtain the subpoena allowing the search and seizure
in December, it would also have been necessary to show the court
that there existed a high probability of flight or destruction of
records. Dr. Jackson, his wife, and their two children have lived in
Melbourne, Florida for the past 14 years. Gold & Silver Reserve
has regularly cooperated with all law enforcement in the United
States as well as with non-U.S governments, regularly providing
information to law enforcement under due process. As noted
earlier, Gold & Silver Reserve had contacted the Secret Service
repeatedly to explain the system, the data it held, and how Gold &
Silver Reserve and law enforcement could cooperate.
Online payment systems, credit cards, money transfer systems,
and banks are all subject to attempts by criminal elements to use
them for moving illegally obtained funds. No one is exempt from
the threat. Extensive public scrutiny has recently been provided to
a U.S. government program to review international Swift
transactions of major financial institutions, a program seen as
important and necessary, looking for money laundering activity. In
the Shadow Crew case itself, public pronouncements identified
other systems, including well-known PayPal and Western Union.
From Gold & Silver Reserve's own investigation, it is certain
many large U.S. banks have had illegal funds processed into and
out of their accounts. Gold & Silver Reserve does not know why it
has been singled out for investigation when the other larger
institutions have not, especially considering Gold & Silver Reserve
has possibly the best ability to track payments and identify those
making transactions and had made repeated offers to assist if
provided with proper legal direction.
In December 2005, the Secret Service confiscated all records
and documentation from the e-gold system and Gold & Silver
Reserve's offices. It has the entire history of every e-gold
transaction ever made. As of December, e-gold had processed over
55 million individual financial transactions-the greatest majority
from U. S. citizens. Since the December 2005 government actions,
e-gold has cooperated fully with the government. Despite the fact
that the U.S. government has all the records, Gold & Silver
Reserve has continued to support government investigations and
respond to individual subpoenas. This assistance includes
supporting an investigation of this same carder ring by other
agencies of the U.S. government.
Gold & Silver Reserve regrets being in this conflict situation
with a service of the United States government and does not
understand why. Seized funds continue to be held, pending what
appears to be a never-ending investigation we now believe to be
over two years long. These funds were designated for ongoing
improvements of the e-gold system, which would have the effect
of making the e-gold system even less hospitable for criminal
abuse. Employees and contractors of Gold & Silver Reserve have
had their lives interrupted, being called from Florida to
Washington for testimony, having never been interviewed
previously. The ongoing legal issue is depleting resources for Gold
& Silver Reserve's defense against apparently uncertain claims
since the Government itself has deemed e-gold not a currency,
thereby rendering the claim of not being licensed as an exchange
service unfounded. e-gold continues to labor under a cloud of
unwarranted suspicion, which is clearly impacting business
operations and its ability to reach out with marketing intiatives to
natural strategic partners, such as the very financial institutions that
participate in this coalition.
Gold & Silver Reserve hopes this issue is settled quickly, that
seized funds are returned, and that proper attention be given to the
investigation, apprehension, and prosecution of the criminals now
operating at will. G&SR will continue, as always, to obey the law
and support law enforcement through every possible means to stop
true criminal activity.
e-gold's Future
e-gold, despite unwarranted adverse press and intense
government investigation, is remaining true to its initial vision.
With the ever-increasing online commerce and globalization, the
need for a cross border, risk free, low-cost payment and remittance
system is growing. The ability to provide a service to individuals
from all backgrounds and economic conditions will serve to
simplify increasing world commerce and allow the migrant worker
to perform his business in one country and then buy goods or send
money home across a border easily and inexpensively. This ability
can only serve to bring all the economic interests and people across
the world closer together.
Historically, e-gold has been viewed by some as presenting a
potential risk, possibly facilitating improper cross border
movement of funds. It has been difficult to fully educate everyone
involved in a rapidly changing economic online world. This risk,
however, is clearly not the case. It is more important that a proper
focus be given to e-gold's ability to better monitor and control
those cross-border transactions while providing enhanced service
to individuals.
Multiple U. S. government agencies could benefit from using
e-gold, including the U.S. Postal Service, the Internal Revenue
Service, and the U.S. Mint. Low transaction fees, finality of
settlement, and transaction traceability are all positive features
supporting agency adoption. For example, the U.S. Postal Service
deals in Postal Money Orders and a cross-border remittance
program. The inherent risks of money laundering would be
significantly reduced by encouraging a combination of the USPS'
over-the-counter cash functions with the flexibility of user-directed
transfers via e-gold. Rather than outlawing informal value transfer
systems or leaving the unbanked no alternative to monopolistic
remittance processors, this flexible combination with permanent
records on a single database would capture significant market
share while eliminating a potential channel for terrorist funding or
money laundering.
Summation
e-gold is a business, but within its mission is also a fervent
desire to bring a benefit to the world. It is not now nor ever has
been a suitable vehicle for persons engaged in illicit activity. With
the full cooperation of law enforcement, e-gold is, in fact, one of
the least hospitable systems a criminal could use. The NCMEC's
Financial Coalition is demonstrating how a strong level of
cooperation can lead to the reduction and, hopefully, elimination of
crime on the Internet.
It is certainly e-gold's objective, working with the NCMEC
and our coalition partners, to completely eradicate child
pornography on the Internet.
Again, thank you for the opportunity to participate in your
Committee's hearings. We remain willing to help in any manner
possible.
MR. WHITFIELD. Thank you very much for all of your
testimony. Dr. Jackson, I will start with you because to be truthful,
I have not really been aware of digital currency for a very long
period of time, but when I do hear about digital currency I do hear
those words, anonymous and untraceable. But you are refuting
that, and it is your position that that is not the case. Is that my
understanding?
MR. JACKSON. That is correct. Like in this particular area
there is concern with the buyers, and there is concern with the
sellers of these materials. Now there is a disparity between them.
The sellers, the ones that survive and remain online, they are very
good. They are world class experts in concealing their identity.
We know a great deal about them, and have interfaced with law
enforcement. We know what country they operate out of, and it is
quite possible that they will soon be apprehended. The buyers,
however, are total amateurs when it comes to trying to conceal
their identity. If you want 3,000 conformed identities of United
States citizens that have made these sort of purchases find the
appropriate way to service with the request for information and it
is yours. If you want additional information on another 2,000
individuals in Australia, the UK, German, Japan, we have that
information as well.
MR. WHITFIELD. What due diligence do you undertake before
you open an account?
MR. JACKSON. Here is where it gets confusing. We are
different than the card processors. Our investigative tools are
database. We have a permanent record of every transfer that has
been made back to, well, since 1996, including let us call it
forensic information that is made a permanent record by the direct
interaction of the user with the database.
MR. WHITFIELD. And where is that permanent record located?
MR. JACKSON. It is on our database servers in the United
States. Let me try to clarify that part because this may be
technically difficult. As an illustration we had an inquiry this week
from SEOP, the agency in the UK. Their question was, well, you
have identified Mr. So and So as a purchaser of hard core
pornography. How do you know that he has done this? And when
I reviewed our answer, it required five dense paragraphs of
technical jargon and it could be baffling to people to understand
how we can know so much about people from a consolidated
database.
MR. WHITFIELD. Well, what about due diligence on the
merchant side?
MR. JACKSON. We make no distinction between a merchant
and a consumer where a merchant is somebody that can receive
payment, and a consumer is somebody that makes payments. That
doesn't exist within our system. Every account has the capability
to make and receive payments to have the efficiencies of
automation interfaces and so forth. I believe what you are asking
is the sort of information that we gather on account creation.
There we require the individual to give us a contact name and
address, telephone number, and an e-mail address. At the present
time, we don't verify any of that data except for the e-mail address.
However, it is very much in the interest of the user to supply
correct information. Where the rubber tends to meet the road is in
the event that somebody has bobbled their password or in some
way needs to reacquire assess to their account they contact
customer service, and it is that contact information that enables
them to re-establish contact with the account. In the majority of
cases though people simply provide correct information. In the
instance of an investigation, however, it doesn't matter if
somebody has provided false information because of the fact that
unlike every other payment system in the world, the end user
directly logs in and is interacting in the database in a fashion that
leaves behind what are called forensic scruff. That is the sort of
clues at the low tech end, items such as their ID number, but other
identifying factors that enable us to link up a constellation of
accounts that may belong to the same entity and ultimately connect
them up with a true identity.
MR. WHITFIELD. Now how do you know that most people
provide correct information?
MR. JACKSON. Well, focusing particularly in this category of
crime not uncommonly we called them up and told them that they
must not do this anymore, that we know what they are up to.
MR. WHITFIELD. Well, I have some other questions for you but
I need to move on. Mr. McCarthy, I have here an e-mail between
you and Kelli Andrews on our staff, and it talks about the number
of new child pornography sites being identified that say they
accept Visa, actual or just displaying your mark, and it says that
they are decreasing. In 2005, for example, there were 132 sites.
And then you had mentioned in this e-mail that you retest the sites
that you have identified as child pornography and those that say
they are accepting Visa, and 91 percent of those that you retested
are now not using Visa, but what about these other 9 percent that
say they are still using Visa? I think you have had an opportunity
maybe to look into this. Could you elaborate on that for us?
MR. MCCARTHY. Thank you, Mr. Chairman. We have an
internal program that is designed to measure the effectiveness of
our steps to remove the Visa brand from the websites that are
engaged in child pornography. And the numbers, they show a
decline over time in the numbers that continue to maintain the Visa
logo on the website, so the most recent numbers from 2006 show
that if you look at the websites that we have originally identified as
purporting to accept Visa and then retest those sites, 5 percent of
them still have the Visa logo appearing on it.
We have done additional research into that area to look at that
and our search firm completed a sweep in the last week to look at
the number of sites that are actually present in the Visa system
during the retest ,because what these numbers indicate are not the
ones that are actually in the system, it is the ones that are
purportedly in the system. Just last week the search firm looked at
3,700 sites that had been in their data bases that at some time or
other had accepted payment cards for child pornography purposes.
That includes Visa, MasterCard, PayPal, and a number of other
operations as well. They found of the ones that had originally been
identified 25 sites that were originally identified as involved in
child pornography still maintained a Visa logo on the website.
They were able to do a transaction involving a Visa card with
only 10 of those sites. The other sites, even though they purported
to be accepting Visa cards you could not even do a test transaction
on the website.
MR. WHITFIELD. So we are talking about maybe around 12
sites in 2005?
MR. MCCARTHY. Let me just finish the data dump because
this is the number I want you to focus on.
MR. WHITFIELD. Okay.
MR. MCCARTHY. After they did the test transactions on those
10 sites they found 25 that had been able to be identified as
perhaps using Visa cards. Ten they did the test transactions on.
They found one site that was actually accepting Visa cards.
MR. WHITFIELD. Okay. So you are saying in 2005 of the 12
sites that were still in operation after detected that it was a child
pornography site using Visa that after you did the re-test, only 12
sites were still accepting Visa, and is that what the situation is?
MR. MCCARTHY. There is a series of confusing measurement
concepts here. The important measurement concept that those
numbers that you have relayed to is not sites actually accepting
Visa cards. Those are sites that appear to be accepting Visa cards.
The logo is on the site.
MR. WHITFIELD. Okay. So what you are saying, these sites
appear to be accepting Visa?
MR. MCCARTHY. The logo is on the site or they say please
enter your Visa card number to make a purchase.
MR. WHITFIELD. Okay.
MR. MCCARTHY. When you look at those sites upon retest you
find that 5 percent of the original sites still claim to be accepting
Visa cards. When we did our real test last week with our search
engine you went from 25 sites that said they would accept Visa
cards to 10 tests that we were able to perform. We couldn't even
perform the tests on the other 15. And only one of the sites was
actually accepting Visa cards at that point.
MR. WHITFIELD. So you are saying that of these 12 sites or so
only one are still accepting Visa so why would you--
MR. MCCARTHY. It is even worse than that. Of all the sites
that have ever been investigated by our search firm, 3,700, they
have looked at those sites over the last several years. They have
found only one site that has been still in the system after all these
years.
MR. WHITFIELD. And what site is that?
MR. MCCARTHY. The name is irrelevant. We immediately
notified the acquiring bank about the problem. It was not an
acquiring bank in the United States. It was outside of the United
States and it will be shut down.
MR. WHITFIELD. It will be shut down.
MR. MCCARTHY. Yes.
MR. WHITFIELD. All right. Mr. Sullivan, since a PayPal
account must be backed by financial instrument, usually a credit
card or bank account, explain the benefits of opening a PayPal
account rather than using a credit card.
MR. SULLIVAN. Certainly. And every account would need to
be backed by a credit card or a bank account. PayPal emerged in
the late '90s as a means for small businesses and individuals to
make payments on the Internet. In particular, it grew out of the
eBay environment, and if you think of an eBay transaction, I
personally list items for sale on eBay, and when I list an item on
eBay it is available to the world to purchase. I want to be able to
accept payments from anyone on the Internet. Before PayPal came
along if you were the purchaser of my item you would have had to
write a check, take it to the bank account to take it to the post
office and mail it to me. I would have to receive it, deposit it, wait
till it cleared.
With PayPal you could then take the money from your bank
account using PayPal, have PayPal transfer it to my PayPal
account and then I could move it into my bank account. And so it
brought efficiency to a very inefficient process.
MR. WHITFIELD. My time has expired. Mr. Stupak.
MR. STUPAK. Thank you, Mr. Chairman. In listening to the
testimony here this afternoon, I would believe we would have no
trouble with child pornography because you all are doing such a
wonderful job, but the facts belie the fact of the testimony. You
say look for child pornography, if you use those words on the
Internet you aren't going to find any because no one uses those
words. And if you terminate all transactions that could be child
pornography, how do we get to the point then where we are at $21
billion a year, three times greater than downloading music. Music
is a legitimate business on the Interment and that is $7 billion.
Child pornography is estimated to be $21 billion. If we are all
policing the Internet so wonderful, how does it happen then? How
do we get $21 billion? Anyone want to take a stab at that?
MR. JACKSON. Does it occur to you to question that number?
MR. STUPAK. Pardon?
MR. JACKSON. Does it occur to you to question that number?
MR. STUPAK. Yes, we have, a number of times. This is our
sixth hearing, and we have gone over those numbers quite closely.
MR. JACKSON. We can account since the dawn of time for
about $3 million.
MR. STUPAK. That is just you.
MR. JACKSON. Yeah.
MR. STUPAK. All right. Did you shut down Child Dreams--
Children Dreams, I mean, that has your gold--
MR. JACKSON. We shut them down about twice a day.
MR. STUPAK. Your e-gold on there.
MR. JACKSON. We find them about twice a day and shut them
down either before they receive a payment or upon their first
payment.
MR. STUPAK. As testimony was even earlier today too, you
said you find two a day. No sooner do you shut one down and
another one pops up just under a different name. So I guess my
question would be you have these Web crawlers. How often do
you require your Web crawlers to update the terminology and the
characteristics they are using to identify pornography sites, once a
year, once a week? Anyone want to answer that?
MR. JACKSON. Is the question directed to--
MR. STUPAK. Any one of you.
MR. JACKSON. Okay.
MR. STUPAK. Do you use Web crawlers?
MR. JACKSON. At this point things are suppressed down so low
each individual case that escapes, each individual payment, enables
us to review it against our protocols and see if a change of protocol
is needed. A year ago--
MR. STUPAK. I am talking about Web crawlers that look for
pornography sellers.
MR. JACKSON. We don't use Web crawlers. We don't need
Web crawlers. We have no idea--
MR. STUPAK. Then don't answer my question. Let me ask
someone who uses a Web crawler then.
MS. GOLINSKY. I can answer the question. For MasterCard we
are changing the lexicon to terminology constantly. We are
looking at the Web 24 hours a day.
MR. STUPAK. How often do you change it then?
MS. GOLINSKY. How often are we changing the words that we
are using?
MR. STUPAK. Yes.
MS. GOLINSKY. It is an iteration process so the company that
we use that does this for us. They are constantly learning and
trying to keep ahead of what the terminology is and changing it as
they know that it is changing.
MR. CHRISTENSON. And, Congressman, the same is true of
American Express.
MR. STUPAK. They tell us that on websites now if they don't
use any terms but a picture there is no way to determine that, right?
You can't determine that as a pornographic site or a possible
pornographic site. Anyone want to answer that? The Web
crawlers somehow can't detect that.
MR. CHRISTENSON. The Web crawlers normally key off of key
words.
MR. STUPAK. Right, not off of a pictureb so if I just have a
picture up there.
MR. CHRISTENSON. I am not a technologist. My understanding
is that you would have to actually download the picture so that you
could search the Web looking for a match of that picture.
Otherwise, they would have to be looking for words.
MR. STUPAK. Correct.
MS. GOLINSKY. But the Web crawlers are not only doing word
searches but also looking at a million pages a day so they are doing
both.
MR. STUPAK. Sure. As long as it is like Joel and then there is
a picture, we are not picking that up is what they are telling us
because the Web crawlers can't pick up the borders of the
photographs.
MR. CHRISTENSON. One of the advantages, I think, of the
Financial Coalition is that you have two different things going on.
A lot of the companies will use these automated searches of the
Web that can cover millions of pages a day. The Cyber TipLine is
based on people who call in or e-mail in information that they
come across through the human search of the Web so we are
having now the National Center reporting to all of us information
they come across which could just include a picture in addition to
the Web crawlers that we are using.
MR. STUPAK. Well, the National Center, did they not, Mr.
Christenson, give you 24 referrals this summer to investigate?
MR. CHRISTENSON. That is right, and as part of the test period
they passed on 24 websites.
MR. STUPAK. What would happen on those referrals? How
many child pornography sites have you found?
MR. CHRISTENSON. Well, as I detail in my written testimony
by the time we got down to actually finding a site that accepted
American Express card, we were down to one site which we
immediately terminated and reported back to the National Center
and to law enforcement on that.
MR. STUPAK. What happened on the Landslide case then? I
guess that involved American Express cards without any
independent due diligence. Apparently the owner of the Landslide
was merely asked whether or not they wanted to add the American
Express card by his bank and so how does your system prevent that
from happening? If I am a customer and my bank says, here, do
you want to use American Express, how would you make sure I
am using it then for proper purposes and not improper purposes?
MR. CHRISTENSON. As I detail in my testimony, when
someone sends in an application we have a whole due diligence at
the beginning to look at a number of things. And then we also
have an ongoing search of the Web so that we can find out if they
are violating our contract in what they are putting up on the Web
and trying to sell. The Landslide case goes back a number of
years. We terminated that merchant in February of 2000. And so
some of the iterations we made and the improvements in our
processes have taken place since then.
MR. STUPAK. American Express, Visa, or MasterCard, if my
bank where I am doing my banking gives me the credit card you
still have responsibility then to review how that card is being used
and make sure it is being used properly?
MR. CHRISTENSON. Absolutely. In the American Express
model, we may have some people who will refer us applications,
but it is our responsibility to review the application and to decide
whether to sign a merchant up or not.
MR. STUPAK. And I take it that wasn't done in the Landslide
case then?
MR. CHRISTENSON. I don't know any particulars on that.
MR. STUPAK. Is there--let me ask you this, anyone of you, if
you would like. Is there any way to even know whether
MasterCard or Visa or American Express could be given as a gift
card, how would you handle that? You know, gift cards seem to
be the new rage. How would you handle that? I could use it then--
they are already issued, right, and it is like prepaid so you can't
really monitor that, can you?
MR. MCCARTHY. Mr. Stupak, can I answer that?
MR. STUPAK. Sure.
MR. MCCARTHY. The gift card that Visa has--gift cards I think
all of the other payment mechanisms here have gift cards, they turn
out to be part of the solution in this area. We have provided to the
law enforcement officials at ICE 100 of these prepaid cards for
their use in tracking down the child pornography merchants on the
Internet. When they are trying to find out the name of the
merchant, they do a test transaction. The test transaction can then
be tracked in any one of our payment systems. We can go back
through our records and find the bank that is associated with the
transaction.
MR. STUPAK. But those are the cards given to law
enforcement.
MR. MCCARTHY. These are regular, ordinary gift cards that are
provided--
MR. STUPAK. But you would have all those numbers
beforehand. How would you stop me from using one of these
cards? How would you--
MR. MCCARTHY. In the context in which we are working with
law enforcement right now the major effort is to identify the Web
merchant and those prepaid cards are useful in identifying the Web
merchant. For technical reasons it turns out to be slightly better to
use a gift card than it is to use a debit card or a credit card to
identify the merchant in the system. And so that is the function
that those cards are being used for right now by ICE under the law
enforcement agencies. We delivered 100 of them 2 weeks ago to
the ICE personnel for their use in this area.
MR. STUPAK. So this is just an experiment you are starting
then? You started it a week ago, right?
MR. MCCARTHY. Those are the cards that we use in our own
test transactions. We are sharing them now with law enforcement
for them to use in their transactions as well.
MR. STUPAK. What I still don't understand, and maybe I am
missing it, if I get a gift card, Visa gift card, and I use it, how is
that going to--how are you going to discover that?
MR. MCCARTHY. In many cases gift cards are traceable. They
are reloadable cards.
MR. STUPAK. Traceable to who? How would you know?
Wouldn't the purchaser be anonymous?
MR. MCCARTHY. I got one that I give to my kid and it is a
Bucks card. He has to fill out an application. I have to sign for it.
They know who has got that card. If the card is not reloadable, it
is an anonymous card, then that kind of information isn't available.
But the point is that on the merchant side it is those cards that are
the most useful to find the merchant. And when law enforcement
comes to us what they are asking us almost all the time is to help
them locate the merchant.
MR. STUPAK. I agree giving a hundred to law enforcement
because you have the numbers there and you can track it, but if I
get a gift card how would you ever know who owned it to begin
with? You wouldn't, right?
MR. MCCARTHY. Some gift cards are anonymous. Some of
our programs have anonymous gift cards. Many other programs
use anonymous gift cards.
MS. GOLINSKY. Congressman, if I may from a MasterCard
perspective.
MR. STUPAK. Sure.
MS. GOLINSKY. For our gift cards, stored value cards, we
generally require the issuers who issue those cards to conduct the
same sort of due diligence and know the requirements they would
for any other program. With respect to--
MR. STUPAK. Yeah, but require due diligence if I fill out one
of these gift cards and I give it to a friend and he uses it wrongly,
how do I have responsibility for I gave it to that friend?
MS. GOLINSKY. I hear what you are saying, but what we do is
we make sure that we track any sort of program that we have in our
system. Our rules apply to all of our cards whether they are stored
value cards or credit cards or debit cards except in limited
instances where we are talking about low value dollar cards that
cannot reloadable we require customer identification. That is, you
can trace it to someone. It might not be the person who you gave
that card to cannot be traced in the system. Our efforts right now
are focused on taking away the ability to use our cards period,
regardless of the type of card to be used.
MR. STUPAK. One more, if I may, Mr. Chairman. How long
do you retain your records, your financial transactions?
MR. CHRISTENSON. We retain records 7 years.
MR. STUPAK. Seven years. Is that IRS requirement or so?
MR. CHRISTENSON. Pardon me?
MR. STUPAK. Is that an IRS requirement?
MR. CHRISTENSON. It is a little bit beyond what the legal
requirement is.
MR. STUPAK. Okay. Because it is a big issue up here how
long ISPs and do we apply that same standard to financial
institutions. Seven years is about right too for MasterCard?
MS. GOLINSKY. Congressman, I would have to get back to you
but it is several years.
MR. STUPAK. How about you, Mr. Sullivan, on PayPal?
MR. SULLIVAN. Minimum of 2 years.
MR. STUPAK. Minimum of 2 years. Okay. And, Mr.
McCarthy.
MR. MCCARTHY. We retain their records for years, but the real
point is that we turn over information instantaneously to law
enforcement. It is not as though they are coming after us for a
transaction that is a year or two old. We get it to them right away
when we see the problem.
MR. STUPAK. Mr. Jackson, Dr. Jackson, how long do you keep
your records?
MR. JACKSON. Forever.
MR. STUPAK. You said since 1996 or something I think you
said in your--
MR. JACKSON. Well, that is our forever.
MR. STUPAK. Thank you.
MR. WHITFIELD. I think all of us are quite aware of the
difficulty in dealing with this issue, and there are so many different
aspects of it, but as you listen to American Express and
MasterCard and PayPal and whatever, we know that there is a lot
of due diligence that is conducted before you sign up a merchant or
your acquiring banks sign up merchants. In the case of American
Express you do it yourself when you look at credit histories and
you get a lot of information and so forth and so forth. And then all
of you seem to be going back and you monitor websites
periodically, merchants that you are dealing with. Is that accurate?
That is sort of a layman's statement. Overall that is pretty
accurate, isn't it?
But in your case, Dr. Jackson, the clear sense here is that you
don't really distinguish between a merchant and a buyer. You just
have an account and you can deal with it any way you want to. I
get the impression that there is not a lot of due diligence in the
sense of looking at credit histories and ongoing monitoring of
websites of people that have accounts with you. Would that be
accurate or am I inaccurate in that?
MR. JACKSON. It is difficult to compare e-gold with Legacy
Payment Systems. The nature of the transaction, it will confuse
people. Let us say, for instance, that you create an account and
you are trying to demonstrate some thesis like, oh, look, this is
anonymous. And so you create an account with nonsense
information. What you have is an empty account that is going to
remain empty with no value forever. Now the logic that makes e-
gold extremely traceable is twofold. One, it is a closed system
unlike every other payment system in the world which is an
extension of existing banking mechanisms. E-gold is completely
independent. It is a closed universe, a closed universe of value
backed by gold.
To send value into the system is impossible for the user. Now
combined with that inability to add value to the e-gold universe is
the fact that every transfer value within the universe has a
permanent record, and so it is like touching a spider web. If you
have that empty account that is going to remain empty forever, the
only way we will ever have any e-gold is to receive a payment
from somebody that has already got some, thereby creating a
permanent discoverable linkage to that person so you can trace the
lineage of every particle of value back to Adam and Eve or more
relevantly back to perhaps an exchange entity who may have
bought or sold e-gold.
That person will have very good reason to keep track of the
identity of their customer because they may accept payment
through one of the other payment systems represented here which
are highly reversible and therefore they have an extreme need to
know who they are dealing with in case a person tries to stiff them
or reverse the payment. And so we work in complement with the
exchange services sometimes for flushing out the identity. Even
though these exchange services are independent of e-gold and
competitive with one another it is the virtual equivalent to a
worldwide network of agents that have supplemental information
regarding the identity of these users.
MR. WHITFIELD. The bottom line is it appears to me that if I
am a person dealing in child pornography or using a site and have
subscribers that are paying for viewing child predator type scenes
it would be much easier to use your system, much less traceable to
use your system than any of these other systems. But I would ask
you, Mr. Christenson, would you agree with my assessment
knowing what you do about digital currency or would you not
agree with it?
MR. CHRISTENSON. Well, I am no expert on digital currency,
but I would say that we do quite a bit to understand both who the
merchant is and who our cardholders are, and so you have to
provide a lot of information. You are going to look at your credit
records. You are going to have to confirm location and all those
kind of things. So we do a lot of due diligence to know our
customers, and I think that that has a big impact when you then
find somebody who is involved in illegal activity. You can quickly
follow up on who those people are.
MR. WHITFIELD. Ms. Golinsky, what would you say of the
statement I just made, is that a fair statement or is that not a fair
statement?
MS. GOLINSKY. Mr. Chairman, like Mr. Christenson I don't
know enough about digital currency. I will tell you that it is
something in terms of the sales on the Internet it is something that
MasterCard is looking at, but I couldn't say more about it because
I don't understand how--
MR. WHITFIELD. What about you, Mr. Sullivan, do you have
any comment?
MR. SULLIVAN. I am afraid I too am not an expert on e-
currencies.
MR. WHITFIELD. And, Mr. McCarthy, what about you?
MR. MCCARTHY. I am going to take a pass as well, Mr.
Chairman.
MR. WHITFIELD. Okay. Well, Dr. Jackson, I have here some
featured sites off of your website, off your e-gold directory. And it
has, for example, getafreelancer.com, hushmail.com, mozilla.org,
agentgold.com. I mean what can you tell us about--I got eight
pages of these. Do you have detailed information on all these?
MR. JACKSON. Absolutely. The people that are linked on the
website, of course we have certainty of knowledge as to every
detail of who the company is and the principals.
MR. WHITFIELD. So you would have information about the
principals for every one of these sites?
MR. JACKSON. Certainly.
MR. WHITFIELD. Did you do a credit check on that?
MR. JACKSON. No, because unlike every other payment system
here we are absolutely immune to the credit risks of the users,
which is an important point to understand. This is part of why we
are going to bring benefits to this economy. Every other payment
system if a user defaults somebody is going to pay the price.
Typically that loss is to be passed through to the end recipient who
will have the payment sucked back from them. Since default
cannot happen in the e-gold system there is no element of credit. It
is on a strict debit basis.
MR. WHITFIELD. How do you know if these businesses are
legitimate or not legitimate?
MR. JACKSON. We do not vouch for their so-called legitimacy,
but what we do know is who they are. Of course, if we were to
hear some sort of a complaint regarding them they are going to be
pulled from the website. But in the absence of that complaint we
are content to simply know their identity. Now we have of course
debated as to whether it is appropriate to continue to even list links
to sites since the fed doesn't link sites that accept dollars, and at
some point we are going to move away from that model as it
becomes more ubiquitous.
MR. WHITFIELD. Now I have been told that the exchanger for
e-gold is in the U.S., but everything else is outside the U.S. Is that
a true statement or not?
MR. JACKSON. The e-gold system, everything about its setup,
its governance model, is designed to serve the dual imperatives of
freedom from default risk and finality of settlement. Before e-gold
the only institutions in the world that could claim to attain those
attributes were government central banks. In many regards we are
modeled after the Federal Reserve with its fed wire settlement
platform, which is a real time gross settlement platform. Now to
try to achieve freedom from default risk, we have to look at every
category of threat that could intervene that could cause e-gold to
fail in its contractual obligation to have gram for gram 100 percent
backing of physical gold.
One of those elements is a separation of roles between the
exchange function, which does entail business risks, and the core
functions of settlement and issuance of these liabilities.
MR. WHITFIELD. But what part of your business is in the U.S.
and what part is out of the U.S.?
MR. JACKSON. Okay. The central contractor for the e-gold
liability, that is, e-gold's obligations are memorialized in the e-
gold account user agreement. That is an agreement between the
user and the issuer of e-gold, which is a company called e-gold
Limited, which is domiciled in Nevis. However, all operational
and fiduciary roles for the operation of the system, and those
consist of the operator of the Mint, the escrow agent, and in fact
the physical entities that perform the repository function, those are
all at the moment United States companies. E-gold is operated out
of Melbourne, Florida, quite frankly.
MR. WHITFIELD. So it is operated out of Melbourne and then
you have part of it in Nevis, is that correct?
MR. JACKSON. The only part that resides in Nevis is it is where
the general contractor is domiciled. The wisdom of that decision I
think was very well borne out last December when there was a
shoot first, ask questions later intervention by an agency of this
government.
MR. WHITFIELD. Shoot first, ask questions later, what are you
referring to?
MR. JACKSON. It is detailed in the written testimony, but my
company, Gold and Silver Reserve, located in Melbourne, Florida,
was host to the Secret Service taking all of our books and records,
going into Orlando, an AT&T co-location facility where the e-gold
and OmniPay servers are located, taking us off line for 36 hours,
taking complete record of all these transactions, including those of
American citizens back to 1996, invading my home, taking things
like my wife's address book, the children's passports, credit cards I
happened to leave on the night stand, all of this, based on some
sort of a presumption that we are okay with criminal activity,
which is quite the contrary to the case.
All we have ever desired is a constructive relationship with law
enforcement. We have the same interest as anybody else in rooting
out criminal abuse of our system as would any other company in
the financial services area.
MR. WHITFIELD. One other question. Ms. Golinsky, how long
has MasterCard participated in the MATCH system, and could you
describe what this entails for your merchant banks?
MS. GOLINSKY. Sure. I don't know the exact date for how
long you participated in it. We are one of the founding members
of it. And the way the system works is it is a joint database of
terminated merchants that MasterCard runs with other payment
networks. So when we have terminated a merchant or one of our
client banks has terminated a merchant for whatever reason, they
have to enter that merchant into MATCH and it is a requirement
for our banks when they sign up a new merchant that they check
MATCH to make sure that they are not signing up a merchant that
has been terminated for some reason including illegal purposes.
MR. WHITFIELD. Mr. Stupak.
MR. MCCARTHY. Mr. Chairman, could I add to that? Visa is
not an operating partner with the MATCH system, but we have a
similar requirement for our banks. If they are going to sign up a
new merchant they have to check that database to make sure that
he hasn't been terminated in another fashion.
MR. WHITFIELD. Mr. Stupak.
MR. STUPAK. Thank you, Mr. Chairman. Mr. Jackson, you
stated that e-gold doesn't pose a greater risk for use in other
financial methods, but yet you will monitor your users and you
claim it is not your responsibility to do so. You say you know
their identity, but you don't check to see if they are who they claim
they are. So how can you make a statement about knowing the
merchants you conduct business with when you do no due
diligence or oversight?
MR. JACKSON. We have convened this panel today to discuss
child pornography, a case study of how extremely effective our
investigative techniques are in finding an identified category of
crime. The numbers speak for themselves, do they not?
MR. STUPAK. Wait a minute. You said e-gold posed no
greater risk for use than other financial methods, did you not?
MR. JACKSON. When I described the default risk, I am talking
about what is the possibility that a gram of e-gold would decline in
its exchange value--
MR. STUPAK. No, forget the gold stuff. Just answer the
question. You stated that e-gold does not pose a greater risk than
other financial methods, yes or no?
MR. JACKSON. I guess I don't understand the question. What I
was describing was freedom from default. Are you describing in
terms of the risk of criminal abuse?
MR. STUPAK. You said to the Chairman, you said you know
the identity of all of your users, right?
MR. JACKSON. No. But I did describe extreme traceability.
MR. STUPAK. Okay. How do you identify the person who
buys e-gold? How do you identify him? How do you check to see
if they are who they say they are? If I say I am Ed Whitfield, how
do you check to make sure I am Ed Whitfield?
MR. JACKSON. A person who is selling e-gold--
MR. STUPAK. No, no. I want to sign up for e-gold. All I have
to do is go on the Internet, right, do a few clicks and I can register
and I can buy e-gold, right? Can I have an account with you?
MR. JACKSON. I am trying to answer your question.
MR. STUPAK. Right.
MR. JACKSON. You can't possibly obtain e-gold from the e-
gold company. There is no mechanism for doing that.
MR. STUPAK. I can set up with the company, right?
MR. JACKSON. You need to receive in payment--
MR. STUPAK. And I am backed up by your gold?
MR. JACKSON. --from somebody who already has some.
MR. STUPAK. I can go on there and I can apply to be part of e-
gold, right?
MR. JACKSON. Yes, you can create an account online.
MR. STUPAK. I can use your e-mittal pay order, right?
MR. JACKSON. Not unless you have e-gold.
MR. STUPAK. Right. But I can go and sign up for e-gold, can I
not?
MR. JACKSON. You can create an account which makes you
capable of receiving an e-gold payment.
MR. STUPAK. Okay. My question is how do you know who I
am when I sign up on e-gold?
MR. JACKSON. At that point we don't have certainty of
knowledge. Now of course--
MR. STUPAK. You have no knowledge of who I am, correct?
MR. JACKSON. --it is a system that is evolving.
MR. STUPAK. Answer the question. You have no knowledge
who I am even though I may have the right--
MR. JACKSON. No, the person that has that empty account we
don't know much about.
MR. STUPAK. You don't know anything about them. That is--
MR. JACKSON. Well, actually we do know quite a bit. We
know the IP number that they created it from.
MR. STUPAK. Sure. You know the IP number but you don't
know who that person is.
MR. JACKSON. We have their e-mail address.
MR. STUPAK. I could be a pedophile for all you know or I
could not be.
MR. JACKSON. If it is a pedophile and if you are interested in
them we can give you thousands of them.
MR. STUPAK. How many--if you can give me thousands of
pedophiles, how many of those names have you turned over to law
enforcement?
MR. JACKSON. I don't know an exact number. I saw one of
them in the newspaper last week.
MR. STUPAK. That your company turned over to law
enforcement?
MR. JACKSON. Yeah, it was our bust, but it made it look like e-
gold was somehow--it was the typical kind of press treatment
where e-gold is mentioned--
MR. STUPAK. I don't care about the press. I just want to know
how many have you turned over to law enforcement if you know
thousands of pedophiles.
MR. JACKSON. I would need to look that up. The difficulty has
been one of jurisdiction, and this has been an area of discussion
with the Cyber TipLine when we give a tip about users--
MR. STUPAK. No, no. I am just trying to get these numbers.
More than one, more than ten?
MR. JACKSON. I can check.
MR. STUPAK. More than a hundred? Okay.
MR. JACKSON. Probably in the range of hundreds but I could
certainly give you an exact number if you would like. The point is
we do more to reach out to the buyer than any other system that I
know of. The buyer feels the hand of God come down on him
right away within minutes after he has done this purchase.
MR. STUPAK. Well, law enforcement, as Mr. Plitt and others
have testified, e-gold is one of those that is commonly used by
child predators. What active steps have you taken to keep
predators from using your technology?
MR. JACKSON. If you are describing the predators as being the
purchasers of child pornography--
MR. STUPAK. Yes, or sellers. How about sellers?
MR. JACKSON. The sellers are difficult. There is a handful of
sellers, and these people are very capable--
MR. STUPAK. So what do you do to crack down on the sellers
of child pornography?
MR. JACKSON. What we do to crack down on the sellers is we
find a new account that they create either before it has received its
first payment or we detect it upon its first payment. We block it
from receiving further payments and we freeze it. If they have
managed to exchange value that they received for some other form
of payment such as Web Money, we notify Web Money and
continue in hot pursuit so they notify law enforcement.
MR. STUPAK. How about Invisible Net where invisibility is the
best, how would you stop them from selling child pornography?
MR. JACKSON. I am sorry. Who are we talking about?
MR. STUPAK. One of your customers, Invisible Net.
Invisibility is the best defense, it says. So how would you stop
them if they were selling child pornography?
MR. JACKSON. If we knew the identity of a seller because we
are all looking at the same sellers. There is a handful--
MR. STUPAK. What do you do to verify that Invisible Net is
conducting a legitimate business?
MR. JACKSON. We are talking about pornography and what I
can do to find--
MR. STUPAK. My question was any legitimate business.
Maybe they are selling us--
MR. JACKSON. If there is a staffer that can work with us for
some period of time and then he can come back at his leisure and
explain it how we find--
MR. STUPAK. Well, you are here today so I am asking you the
question. How do you verify Invisible Net is a legitimate
company, selling legitimate products, how do you do that? How
does e-gold--
MR. JACKSON. All I know about that company is who they are
and we have not received complaints about them.
MR. STUPAK. So that is all you know?
MR. JACKSON. If you would like, we can stop linking to any
companies on the website. We are not certain that it is of any
value, but the point is they are utterly irrelevant to the child
pornography discussion. If you want to find child pornography,
come to us. We are the world's experts at finding it in our
database and we have suppressed it down to the point where it is
virtually negligible.
MR. STUPAK. Then you are the world expert, then how many
of these illegal sites have been turned over to law enforcement or
the National Center for Missing and Exploited Children?
MR. JACKSON. We report to the Cyber TipLine just as
everybody else does. However--
MR. STUPAK. How many have you in the last week?
MR. JACKSON. We can find them without ever seeing a site.
MR. STUPAK. Mr. Jackson, how many have you turned in in
the last week?
MR. JACKSON. I would have to check.
MR. STUPAK. You don't know?
MR. JACKSON. There are three or four payments that slipped
through in the past week. I am not sure that we even know of the
site.
MR. STUPAK. Well, you are the first world expert who doesn't
seem to know any answers to any of the questions I ask.
MR. JACKSON. Well, I don't think you are understanding me,
sir. We don't need to know about the site to find the child
pornography. We can find it in our database because we have such
a sophisticated profiling--
MR. STUPAK. Have you done that?
MR. JACKSON. --of the buyers and the sellers.
MR. STUPAK. Have you done that? You said you can go
through your database and find those who are selling or buying on
your system. Have you done that?
MR. JACKSON. Absolutely. That is what is responsible for this
radical drastic decline in successful attempts to buy child
pornography.
MR. STUPAK. I will look forward to your answers to the
committee on how many you have turned in to law enforcement.
You will provide that to us?
MR. JACKSON. Sure. That is fine.
MR. STUPAK. Thank you.
MR. WHITFIELD. I would like to ask the entire panel have you
noticed any change in the number of reports that you are sending in
to NCMEC, are you finding more, less or about average amounts
of reports to the Cyber TipLine.
MR. CHRISTENSON. I would say it is about the same over the
past year.
MS. GOLINSKY. Mr. Chairman, I think that we are seeing some
reports go down. We have reported approximately 86 sites to
NCMEC in the last several months, but I think that as I mentioned
in my testimony we are seeing some of our efforts are successful,
that we are seeing a lot less direct acceptance of our cards on these
sites but we are still making the same number of referrals
nevertheless.
MR. SULLIVAN. On behalf of PayPal, I would say that we are
seeing a slight decline.
MR. MCCARTHY. It is approximately the same over the last
year.
MR. JACKSON. I haven't kept track of information we upload.
In terms of alerts that were received from all sources they are
plummeting.
MR. WHITFIELD. Dr. Jackson, I would ask you one, do you
have a money transmitting license or is that something that you do
not feel you are required to have?
MR. JACKSON. There is litigation that is being pursued on this.
It is a legal question, and I guess I am hesitant to try to express a
legal opinion.
MR. WHITFIELD. But at this time you do not have a money
transmitting license?
MR. JACKSON. We have looked at this carefully. We engaged
with the BSA group from Treasury approximately a year ago
trying to find an appropriate regulatory rubric or an exchange
provider such as Gold and Silver Reserve. This group was
established to have the competence and the authority to aid in
innovative type of situations where somebody simply doesn't fit
into one of the existing frameworks. The difficulty with Gold and
Silver Reserve whose activity very much resembles currency
exchange is the fact that heretofore the United States Treasury has
deemed that e-gold can't really be classified as a currency.
MR. WHITFIELD. Okay. Well, I don't want to get into all of
the legal discussions about it. I am just asking a question, do you
have a money transmitting license or do you not?
MR. JACKSON. No, because neither e-gold nor Gold and Silver
Reserve are money transmitting businesses.
MR. WHITFIELD. Okay. Okay. I want to thank this panel very
much for your testimony. We appreciate the work that you are
doing, the improvements that are being made, and hope that you
will continue to be aggressive in your efforts to curtail this, and
with that this panel is dismissed. Thank you. At this time, I would
like to call up the fourth and last panel. And on this panel we have
Mr. David Strider, who is Executive Vice President, North
American Operations for NOVA Information Systems with U.S.
Bancorp, and Mr. Ralph Shalom, Associate General Counsel for
Litigation, First Data Corporation, Mr. William Matos, Senior
Director of Credit Risk, Chase Paymentech Solutions, and Ms.
Kim Mowder, Senior Vice President, Bank of America.
Thank all of you for joining us today, and we certainly thank
you for your patience. I am sure you have heard more about digital
currency than you ever cared about hearing about but as you know
this is an oversight investigation. We do take testimony under
oath. Do any of you have any objection to testifying under oath?
If not, if you would please stand.
[Witnesses sworn]
MR. WHITFIELD. Okay. All of you are under oath now, and
we will begin, I will recognize Mr. William Matos for Chase
Paymentech for your 5-minute opening statement.
TESTIMONY OF WILLIAM MATOS, SENIOR DIRECTOR, CREDIT/RISK, CHASE PAYMENTECH
SOLUTIONS, L.L.C.; KIM MOWDER, SENIOR VICE PRESIDENT, BANK OF AMERICA; RALPH
SHALOM, ESQ., ASSOCIATE GENERAL COUNSEL FOR LITIGATION, FIRST DATA
CORPORATION; AND DAVID STRIDER, EXECUTIVE VICE-PRESIDENT, NORTH AMERICAN
OPERATIONS, NOVA INFORMATION SYSTEMS
MR. MATOS. Thank you. Good morning, Chairman Whitfield,
Ranking Member Stupak, and members of the subcommittee. My
name is Bill Matos, and I am the Group Manager and Senior
Director of Credit and Risk Management at Chase Paymentech
Solutions. Chase Paymentech is strongly committed to combating
child pornography, and it is my pleasure to appear before you
today to discuss this important issue. Chase Paymentech is
headquartered in Dallas, Texas, and is one of the Nation's largest
processors of bankcard payment transactions for merchants.
One of our primary roles is to contract with, and provide
services to, merchants to enable them to accept credit cards and
other payment methods. Chase Paymentech has a strict prohibition
against our services being used in connection with child
pornography or any other illegal activity. We have strict standards
that must be met before we approve a merchant's application for
our services. For example, we collect detailed information about
each merchant applicant and thoroughly review the applicant of
each potential merchant to insure the merchant meets our credit
and risk management requirements.
Not only must we collect information to assess an applicant's
credit risk, but we also engage in a thorough review of the
compliance risks the merchant may present. Before we approve
any applicant as one of our merchants, we must understand the
applicant's business model and product line thoroughly. For
online merchants, this includes an examination of the merchant's
entire site including links the merchant intends to display. We also
investigate the website domain ownership and navigate through the
checkout process in order to more fully understand the merchant's
activities.
Chase Paymentech also participates in the MATCH program,
which is hosted by MasterCard. The MATCH database lists
merchants who have been terminated by other acquiring banks and
serves as a reference tool to help protect payment processors like
Chase Paymentech from entering into business with merchants that
have known problems. In addition to engaging in a thorough
review of merchant applicants, we proactively monitor our existing
merchant base via a periodic review of the merchant itself. This
procedure is similar to our initial due diligence and includes a
subsequent review of the merchant's entire website.
We also make anonymous purchases at random merchant sites
and at sites where something just does not look right. We also rely
on transaction monitoring which is a continuous process that
allows us to flag and review factors that are indicative of
suspicious or unusual merchant activity. If we have any reason to
believe that any suspicious activity has taken place, we file the
appropriate suspicious activity reports with the authorities and
investigate further.
In addition, we obtain information from MasterCard and Visa
relating to suspicious merchant activity. In these circumstances we
work with MasterCard and Visa to investigate and address the
issue as quickly and thoroughly as possible. In the course of our
processing payments for a large portfolio of merchants, we are
aware of two legitimate merchants who have fallen prey to
fraudulent and criminal activity to child pornographers. In both
cases, those merchants unwittingly became conduits for child
pornography related transactions.
I should note that in another circumstance a merchant was
foolish enough to apply to us directly for payment services even
though its website had links to child pornography. We discovered
the child pornography during our review, reported the merchant to
law enforcement, and denied the application. Although it is
extremely rare for a child pornographer to gain access to our
system, we remain extremely watchful and have an action plan we
execute if such access occurs. For example, we immediately
suspend our processing services for the merchant in question and
visit the merchant's site to obtain as much information as possible
to determine the scope and nature of the merchant's activities. We
also notify NCMEC through a dedicated website. We notify the
nearest office of the FBI and where appropriate we notify local law
enforcement.
Any ultimate termination of the merchant account is also
reported to the MATCH system maintained by MasterCard. In
summary, Chase Paymentech strictly prohibits the use of its
payment processing services in connection with child pornography.
We have sophisticated and effective tools to prevent child
pornographers from using our services and we constantly strive to
stay one step ahead of the criminals. Chase Paymentech looks
forward to working with the subcommittee as we coordinate our
resources to eliminate the financial viability of child pornographers
on the Internet.
[The prepared statement of William Matos follows:]
PREPARED STATEMENT OF WILLIAM MATOS, SENIOR DIRECTOR,
CREDIT/RISK, CHASE PAYMENTECH SOLUTIONS, L.L.C.
Good morning Chairman Whitfield, Ranking Member Stupak,
and Members of the Subcommittee. My name is Bill Matos, and I
am the Group Manager and Senior Director of Credit and Risk
Management at Chase Paymentech Solutions, LLC. Chase
Paymentech is strongly committed to combating child
pornography, and it is my pleasure to appear before you today to
discuss this important issue.
Chase Paymentech is one of the nation's largest processors of
bankcard (e.g., MasterCard or Visa) payment transactions for
merchants. One of our primary roles is to contract with, and
provide services to, merchants to enable them to accept
MasterCard and Visa payment cards. The activities we perform in
the bankcard systems are commonly referred to as "acquiring" or
"payment processing" services. We provide these services for
many types of electronic payment transactions, including those
conducted by credit card, debit card, gift card, electronic check,
and other payment methods. We are headquartered in Dallas,
Texas and have facilities in Florida, New Hampshire, and Arizona
among other states.
In General
Chase Paymentech has a strict prohibition against our services
being used in connection with child pornography or any other
illegal activity. Our credit and risk management team for our e-
commerce merchant platform consists of 20 employees dedicated
to screening potential merchants and monitoring our existing
merchant base for a variety of risks, including those relating to
child pornography. Our proactive efforts to screen and monitor
our merchant base involve an extremely thorough and
comprehensive process designed to ensure that our merchants are
engaged in legal activities in compliance with our standards and
those of MasterCard and Visa. In addition to the resources we
dedicate to prevent the processing of child pornography-related
transactions, Chase Paymentech has also coordinated with the
National Center for Missing and Exploited Children ("NCMEC"),
a variety of law enforcement agencies, and other companies to
combat child pornography on the Internet.
Proactive Due Diligence
Chase Paymentech has strict standards that must be met before
we approve a merchant's application for our services. We collect
detailed information about merchant applicants and thoroughly
review the application of each potential merchant to ensure the
merchant meets our credit and risk management guidelines. This
review process can take anywhere from two days for more well
known merchants to five days for higher-risk merchants.
Depending on the circumstances, we may collect the applicant's
financial statements and other financial information, tax returns,
corporate documents, background information on the applicant's
ownership, detailed information relating to the applicant's business
and its history with respect to payment card acceptance, and other
information required by the USA PATRIOT Act to properly
understand who the merchant applicant is and to assess our credit
and risk exposure as a result of processing the merchant's
transactions.
Not only do we assess the financial risks the merchant may
pose to us as its payment processor, but we also engage in a
thorough review of the compliance risks the merchant may present.
Before we approve an applicant as one of our merchants, for
example, we must understand the applicant's business model and
product line thoroughly. For on-line merchants, this includes a
web site review by a member of our credit and risk management
team who examines the merchant's entire site, including links the
merchant intends to display. We also investigate the web site
domain ownership and navigate through the checkout process in
order to understand more fully the merchant's activities. If a
merchant's site is not live or fully functional at the time of
application, approval is placed into a "funds hold" status which
prevents the merchant from being funded for any transactions until
such time as the live site can be thoroughly reviewed. Chase
Paymentech also participates in the MATCH program, which is
hosted by MasterCard. The MATCH database lists merchants who
have been terminated by other acquiring banks and serves as a
reference tool to help protect acquiring banks, like Chase
Paymentech, from entering into business with merchants that are
known problems.
It is our experience that child pornographers and others who
engage in illegal activity rarely apply directly to us to obtain
payment processing services. This is probably due in large part to
the increasing sophistication of the criminals, their awareness of
the due diligence we undertake as part of the application process,
and their awareness of our on-going monitoring activities
described below. For example, a sophisticated criminal enterprise
is unlikely to subject itself to our review of its financial situation,
its ownership, its lines of business, and its web site. This type of
direct scrutiny is a strong deterrent to child pornographers as well
as other unqualified or unscrupulous applicants. If, nonetheless,
we do uncover any activity or material that is illegal, we promptly
report it to the appropriate law enforcement agency and offer our
assistance in any law enforcement investigation.
On-Going Monitoring
In addition to engaging in a thorough initial review of
applications, we also proactively monitor our existing merchants.
In fact, there are three proactive means by which we monitor our
Internet merchant base. The first method we use is a periodic
review of the merchant itself. This procedure is similar to our
initial due diligence and consists of a member of our risk
management team reviewing the merchant's business including its
entire web site. We engage in the review for several purposes,
such as ensuring that the merchant has not established new lines of
business or activities without notifying us, and ensuring that the
merchant's practices have not evolved in a manner that creates a
legal or compliance risk for us.
The second mechanism involves the use of anonymous visits
and purchases from the merchant's web site, also known as
"mystery shopping." We engage in mystery shopping based on
random samplings of merchants. We also engage in mystery
shopping if we believe there are unusual transaction patterns or if
"something just does not look right" with respect to the merchant's
transactions based on the merchant's profile. We then assess
whether the transaction pattern suggests a more significant
problem and further investigation is warranted. The use of
mystery shopping allows us to verify the products that are actually
delivered to the consumer, and to make sure that the web site
transaction process is not simply a "cover" for unscrupulous
activities.
The third tool in our on-going review of merchants is
transaction monitoring. Transaction monitoring is a continuous
process that allows us the opportunity to flag and review factors
that are indicative of suspicious or unusual activity on the part of a
merchant. Our monitoring of transactions can take a variety of
forms. For example, we monitor the volume of transactions for
each merchant as well as the merchant's average transaction
amount to ensure that those parameters are consistent with that
merchant's general business profile and comport with the
parameters that were established upon our initial approval of the
merchant. Any material discrepancy with respect to those
parameters may suggest that the merchant is not engaged in the
activities it once was or that the merchant is impermissibly
processing transactions for another entity. Such unusual patterns
would be a red flag indicating that the merchant should be
examined more closely to ensure that it is still operating in a
legitimate manner. If we have any reason to believe that any
suspicious activity has taken place, we file the appropriate
Suspicious Activity Reports with the authorities and investigate
further. We also have the ability to suspend payment processing
for that merchant.
In addition to our proactive efforts, we also obtain information
from MasterCard and/or Visa relating to unusual activity that may
be indicative of suspicious merchant behavior. For example, a
bankcard association can analyze transaction activity involving a
variety of card issuers and merchant acquirers to detect patterns
that an acquirer alone may not be able to detect. MasterCard and
Visa can also monitor the Internet for misuse of their brands by
merchants, which is then relayed back to us and others whose
merchant business may be affected. In these circumstances we
work in concert with MasterCard and/or Visa to investigate and
address the issue as quickly and thoroughly as possible.
Response to Child Pornography
As I described above, Chase Paymentech currently provides
payment processing services for a large portfolio of merchants. In
the course of our processing payments for that portfolio, we are
aware of two legitimate merchants who have fallen prey to
fraudulent and criminal activity by child pornographers. In both
cases, those merchants unwittingly became conduits for child
pornography-related transactions that the merchants, in turn,
submitted to us for processing. (I should note that in another
circumstance, a merchant was foolish enough to apply to us
directly for payment services, even though its web site had links to
child pornography. We discovered the child pornography, reported
the merchant to law enforcement, and denied the application.)
Although it is extremely rare for a child pornographer to gain
access to our system, we remain extremely vigilant and have an
action plan we execute if such access occurs. If we become aware
of facts suggesting that someone is attempting to process child
pornography-related transactions through us, such as by doing so
through another merchant, we immediately suspend our processing
services for the merchant in question. It is important to understand
that ceasing payment processing is a delicate issue, as it could "tip
off" the criminals, in which case they would likely disappear
without a trace. We therefore work closely with law enforcement
authorities and, in addition to our efforts to stop payment
processing, we immediately engage in other remedial action. For
example, we visit the merchant's web site and engage in other
research to obtain as much information as possible to determine the
scope and nature of the merchant's activities. We also notify
NCMEC through a dedicated web site, we notify the nearest office
of the Federal Bureau of Investigation, and, where appropriate, we
notify local law enforcement. Any ultimate termination of the
merchant account is also reported to the MATCH system
maintained by MasterCard.
Conclusion
Chase Paymentech strictly prohibits the use of its payment
processing services in connection with child pornography. We
have sophisticated and effective mechanisms to prevent child
pornographers from using our services, and we have been
successful in our efforts to combat child pornography on the
Internet. Chase Paymentech looks forward to working with the
Subcommittee as we coordinate our resources to eliminate the
financial viability of child pornographers on the Internet. It has
been my pleasure to describe our efforts to thwart payments for
child pornography, and I would be happy to answer any questions
you may have.
MR. WHITFIELD. Thank you very much. Ms. Mowder, you are
recognized for 5 minutes.
MS. MOWDER. Chairman Whitfield, and members of the
committee, my name is Kim Mowder, and I am the head of Risk
and Fulfillment for BA Merchant Services, a subsidiary of Bank of
America. BA Merchant Services provides card processing services
across the United States. We applaud the committee's focus on
this issue, and the coalition that Ernie Allen so ably chairs. We are
proud to be a part of the collective effort and equally proud to be
associated with the National Center for Missing and Exploited
Children. I would like to begin my testimony by emphasizing that
Bank of America's policy and practice is to vigorously screen for
and avoid signing merchants that are engaged in any kind of
questionable activity, let alone child pornography, and to terminate
any relationships that subsequently change in that direction should
that happen.
We simply have zero tolerance when it comes to issues like
child pornography, and we are closely aligned with and cooperate
with law enforcement at every level in their efforts to combat this
issue. Bank of America is the second largest acquirer of merchants
credit card processing in America. We have been processing credit
cards for merchants since 1958, and have approximately 700,000
active merchants in our portfolio. We take great pride in our very
conservative risk averse approach to the merchant services
business and do not hesitate to decline nearly 2,000 applications a
year because the activity of the merchant is inconsistent with our
policies.
Our underwriting policy clearly defines those merchant types
whom we deem to be unacceptable for a card servicing
relationship, and we are much more conservative than required by
law. The business types routinely declined by us include adult
entertainment products and services, dating and escort services,
debt collection firms, pornography products and services, tobacco
products being sold via mail order, telephone order or Internet
sales, wire transfer of money, and any money service businesses
including payday loans and check cashing. No exceptions are
made on these businesses entities, and, again, we have zero
tolerance for issues like child pornography.
Our process begins with the salesperson talking directly to a
merchant, often face-to-face. Together they complete a merchant
application that is then sent to our underwriting experts in our
processing center. Our process is based on the principle of know
your customer; not only to screen out undesirable activities, but
also for potential business opportunities. Merchant applications
contain profile information on the merchant's business including a
description of the products and/or services being sold, how those
sales occur, and demand deposit banking information. In addition,
the merchant application may include personal name, address, and
social security number information of the owner or officer of the
business.
Underwriters reviewing new merchant applications validate the
merchant's physical business address, confirmation of the products
or services being sold, and the methods of sale. They also examine
all pages and links in a merchant's website if there is one. All
validations are documented should later comparisons become
necessary. I have listed in my written testimony nine of the tools
we use to properly evaluate merchant applications, including
verifying physical inventory and contacting neighboring
businesses. Based upon information received from these sources,
the underwriter may find it necessary to perform additional due
diligence, and should the merchant be selling products or services
via the Internet, the merchant's Internet site is reviewed in depth,
with substantial focus on embedded links to any other sites.
This identifies merchants that might be assisting other parties
in sale of products or services that are unacceptable under our
policies. Screening for unacceptable activities does not end
without additional due diligence process. The BA Merchant
Services Risk Department performs daily monitoring of merchant
transaction histories on existing merchant accounts. Investigators
use an in house merchant transaction tracking tool designed to
closely monitor daily processing activity, and based upon
parameters preset at the time of approval, daily activity reports are
generated on those merchants that appear to be processing sales
transactions contrary to the expected norm based on the original
terms of their processing agreement and the business size and type.
Risk investigators utilize the same due diligence previously
described for new applicants to examine merchants appearing on
any exception reporting in an effort to ascertain the merchant's
current processing behavior. Should the investigation determine
that the merchant subsequently has been engaging in unacceptable
activities immediate actions are taken. We may terminate the
merchant. The profile information is forwarded to the bank's
investigation services, and the bank coordinates with law
enforcement at that time. We, of course, work in close partnership
with the card associations. They employ on our behalf a vast array
of protocols designed to be a formidable line of defense and
capture real time potential illegal activities.
Our efforts and theirs are not discrete but a seamless and
cooperative venture to ensure we all prevent the use of our
payment networks for such purposes. It is a partnership, made
stronger by the coalition Ernie chairs. We have seen this work first
hand. Although we are aware of only one instance in our nearly 5
decades of experience with our 700,000 active merchants, in 2005
MasterCard did alert us to the potential for child pornography
being offered through a link that appeared on a merchant's website
that was opened for the sale of software. The merchant filed a
police report to substantiate that they knew nothing about the link,
and we do not know if the site was pirated from overseas or
whether the merchant changed it after the account was opened.
For our purposes, that did not matter. We immediately closed
the account, consistent with our zero tolerance policy. But this
does demonstrate the effectiveness of the partnerships between the
acquirers and the associations, in addition to the due diligence we
perform in combating these types of activities. This single
instance also highlights another point I would like to make. The
merchant, in question, even though they may have been victimized,
was acquired by an independent sales organization and approved
through a subsidiary that became affiliated with the bank in 2004.
We have announced the divestiture of this company and are
bringing all merchant acquiring in-house. We believe this
strengthens our ability to vet, sign, and re-verify merchant activity
to ensure it is consistent with our policy.
In summary, Bank of America has a zero tolerance policy for
anything related to child pornography. We believe strongly that
our investigations and due diligence procedures provide assurance
that child pornography is not being processed through our service
and we work closely with the card associations to close any
merchants they identify as posing a risk. Finally, we support the
collective efforts of the coalition to ensure that the legitimate
electronic payments industry is neither wittingly or unwittingly
facilitating the sale of online child pornography.
[The prepared statement of Kim Mowder follows:]
PREPARED STATEMENT OF KIM MOWDER, SENIOR VICE PRESIDENT,
BANK OF AMERICA
Chairman Whitfield, Congressman Stupak and members of the
committee, my name is Kim Mowder, and I am the Head of Risk
and Fulfillment for BA Merchant Services, a subsidiary of Bank of
America. BA Merchant Services provides card processing services
for approximately 700,000 merchants across the United States.
First, like my colleagues, we applaud the Committee's focus on
this issue and the coalition that Ernie Allen so ably chairs. We are
proud to be a part of this collective effort. We are equally proud to
be associated with the National Center for Missing and Exploited
Children. We subscribe to and whole heartedly agree with all the
benefits and progress Mr. Allen has described for you.
I would like to begin my testimony by emphasizing that Bank
of America's policy and practice is to vigorously screen for and
avoid signing merchants that are engaged in any kind of
questionable activity, let alone child pornography, and to terminate
any relationships that subsequently change in that direction, should
that happen. We simply have zero tolerance when it comes to
issues like child pornography. And like our colleagues, we are
closely aligned with and cooperative with law enforcement at
every level in their efforts to combat this issue.
Bank of America is the second largest acquirer of merchant
credit card processing in America. We have been processing credit
cards for merchants since 1958 and have approximately 700,000
active merchants in our portfolio. We take great pride in our very
conservative, risk averse approach to the merchant services
business and do not hesitate to decline nearly 2,000 applications a
year because the activity of the merchant is inconsistent with our
policies.
In that regard, our underwriting policy clearly defines those
merchant types whom we deem to be "unacceptable" for a card
servicing relationship. We are much more conservative than what
is legally permissible. The following business types are routinely
declined by us:
Adult entertainment products/services
Dating/escort services
Debt collection firms
Pornography products/services
Tobacco products being sold via mail order, telephone
order or Internet sales
Wire transfer of money or any money service businesses
(MSB) including payday loans and check cashing
No exceptions are made on these businesses entities and, again, we
have zero tolerance for issues like child pornography.
Our process of thoroughly vetting merchant applications begins
with a sales person talking directly to a merchant, often face-to-
face. Together they complete a merchant application package that
is then sent to the underwriting experts in our processing center.
Our process is based on the principle of "know your customer,"
not only to screen out undesirable activities but also to look for
other potential business opportunities.
Merchant application packages contain profile information on
the merchant's business that includes, but is not limited to, a
description of products and/ or services being sold, a description of
how sales will occur, and demand deposit banking information. In
addition, the merchant application may include personal name,
address and social security number information on the
owner/officer of the business if it is a small or new business. This
information is used in the due diligence process to validate the
business type and ownership.
Underwriters reviewing new merchant application packages are
charged with validating the merchant's physical business address,
confirmation of the products or services being sold, and the
methods of sale (retail store front, mail order, Internet, etc.). All
verifications are documented should later comparisons become
necessary.
And, of course, all pages and links in a merchant's web site are
examined, copied and maintained for future comparisons.
We believe that validation of ownership, business address and
type is a simple but critical part of this process and we use sources
of information like the following to verify all application
information:
Local, state and federal record sites (county clerk,
secretary of state, etc.)
Multiple search engines (yellow pages, phone number
search, reverse information look- up services)
Telephone contact with nearby businesses to secure
knowledge of merchant activity
Calls to trade associations familiar with the merchant or
merchant business type
Better Business Bureau Reports
Dun & Bradstreet Business Reports
Marketing materials requested from the merchant
Invoices for store inventory confirming products in
inventory
Invoices for previous sales (calls frequently made to
buyers to confirm products purchased)
Based upon information received from the above sources, the
underwriter may find it necessary to perform additional due
diligence to arrive at a sound business decision. We will do
whatever is necessary to ensure we are signing merchants
consistent with our policies.
Again, should the merchant be selling products or services via
the Internet, the merchant's Internet site is reviewed in depth, with
substantial focus on embedded links to any other sites to identify
products/services offered for sale through links in the merchant's
site. This identifies merchants that may be assisting other parties
in sale of products or services that are unacceptable under our
policies. The underwriter copies all internet pages that have been
reviewed and stores them in the merchant file, primarily so they
can be periodically checked for subsequent deviations.
Screening for unacceptable activities does not end with the
initial due diligence process. BA Merchant Services' Risk
Department performs daily monitoring of merchant transaction
histories on existing merchant accounts. Investigators use an in
house merchant transaction tracking tool with features that are
designed to ensure close monitoring of merchant's daily processing
activity. Based upon parameters preset at the time of approval,
daily activity reports are generated on those merchants that appear
to be processing sales transactions that are contrary to the expected
norm based on the original terms of their processing agreement and
the business size and type.
Risk investigators utilize the same due diligence tools to
investigate merchants appearing on any exception reporting as
those used by the underwriters on new merchant applications, all in
an effort to gain an understanding of merchant's current processing
behavior. Due diligence may include but not be limited to talking
directly to cardholders to confirm transaction validity and makeup,
communicating with the merchant's banking representative and
speaking directly with the merchant to gain answers to specific
questions. From their investigation, the investigator will determine
what, if any, post due diligence action is required by our policies.
The risk investigator may elect to terminate the merchant
account based upon the risk associated with the new information
obtained in the investigation, establish a loss reserve fund to
compensate for any elevated risk associated with the merchant's
new method of operation, or take no action at all, if new
information learned falls into acceptable parameters for the
business type.
Should the investigation determine that the merchant
subsequently has begun engaging in unacceptable activities, the
following actions are taken immediately:
1. Merchant processing capability is terminated immediately;
2. Merchant profile information is forwarded to Bank of
America's Investigative Services Division for immediate
investigation; and
3. The bank coordinates with law enforcement.
And, of course, we work in close partnership with the Card
Associations. They employ on our behalf a vast array of protocols,
all designed to be a formidable line of defense and capture real
time potential illegal activities. Our efforts and their efforts are not
discrete but a seamless and cooperative venture to ensure we all
prevent the use of our payment networks for such purposes. It is a
partnership, made stronger by the coalition Ernie chairs.
We have seen this work first hand. Although we are aware of
only one instance in our nearly five decades of experience and with
our 700,000 merchants, in 2005 MasterCard did alert us to the
potential for child pornography being offered through a link that
subsequently appeared on a merchant's web site, a merchant
account that was opened for the sale of software. The merchant
filed a police report to substantiate they knew nothing about the
link and we do not know if the site was pirated from overseas or
whether the merchant added it after the account was opened. For
our purposes, it did not matter. We immediately closed the
account, consistent with our zero tolerance policy. But this does
demonstrate the effectiveness of the partnerships between
acquirers and the associations, in addition to the due diligence we
perform in combating these types of activities.
This single instance also highlights another point I would like
to make. The merchant in question, even though they may have
been victims, was acquired by a sales organization subsidiary that
became affiliated with the bank in 2004. We have announced the
divestiture of this company and are bringing all merchant acquiring
in-house. We believe this strengthens our ability to vet, sign and
re-verify merchant activity to ensure it is consistent with our
policy.
In summary, Bank of America has a zero tolerance for
anything related to child pornography. We believe strongly that
our investigations and due diligence procedures provide assurance
that no undesirable merchant activities are being processed through
our service and we work closely with Card Associations to close
any merchants they identify as posing a risk. Finally, we support
the collective efforts of the coalition and of this committee to
ensure the legitimate electronic payments industry is neither
wittingly or unwitting facilitating the sale of online child
pornography.
MR. WHITFIELD. Thank you very much. Mr. Shalom, you are
recognized for 5 minutes.
MR. SHALOM. Thank you. Good afternoon, Mr. Chairman,
and members of the committee. My name is Ralph Shalom, and I
am Associate General Counsel at First Data Corporation. I am
pleased to be here today to discuss First Data's role in the
payments industry, specifically merchant processing, as the
committee continues its hearings into Internet child pornography.
Let me begin my testimony by describing First Data, and the
unique role we play helping millions of consumers, businesses, and
governmental entities buy products and services on a daily basis.
Many of you do business with First Data every day whether using
an ATM/debit card to pay at a gas station, writing a check for
groceries, buying a book online. There is a good chance that First
Data is moving that transaction, at least part of the way, between
the merchant and the consumer.
Although we have many interesting products and services that
provide some type of payment processing, I will focus my
testimony on merchant processing. Our merchant services
business segment facilitates the ability of merchants to accept
consumer transactions at the point of sale, whether the merchant
operates a physical store, brick and mortar, or whether the
merchant has a virtual or online presence. Our services enable
businesses of all sizes to accept various forms of payments from
consumers, including credit and debit cards. Together with the
various financial institutions with which we work, we provide
merchant processing services for 3.5 million merchants in the
United States.
When we sign up or acquire merchants for processing services,
we make great efforts to understand, one, who are our clients, and,
two, what type of products or services do they sell. The answers to
these questions not only drive technical aspects of how the
accounts are set up, but they also inform us of the risk that the
merchant might present to us, and, indeed, whether we are willing
to accept the merchant at all. When merchants apply for services,
they are asked questions to help us understand who they are,
including providing taxpayer ID numbers, Social Security
numbers, and other information. If the sale is made face-to-face
the sales representatives are trained to make notations about the
physical aspects of the merchant operations.
If the merchant is an online vendor, we require the merchant to
provide us with the website address, which is then reviewed by our
credit department. There are many businesses that we simply
refuse to accept under our credit policies in which we operate.
None of these policies allow for adult online video content.
Merchant whose businesses are involved in what we understand to
be illegal dealings, including the sexual exploitation of children,
are automatically excluded. Several years ago we also made the
determination to avoid businesses providing sexually oriented
online video. When a merchant applies for an account with us as
part of the initial underwriting reviews, we pull a credit report,
review the materials provided with the application, check the
industry High Risk files, which you have heard about today as the
MATCH file, and check the website if the business is described as
being online.
We would disqualify a merchant from receiving an account if
the merchant is involved in online gambling, online cigarette sales,
online firearms sales, and certainly they are involved in sexually
oriented online video content to name a few reasons. Merchants
don't always tell us the truth when they describe what they are
going to sell. Even if they have provided a processor like us with a
website that describes their business, a merchant can operate
another website that presents a different business proposition to the
consumer. There is nothing in the credit card transaction record
itself that would prevent a merchant from taking transactions and
paying on one website and submitting them through an account
that, in our records, we have associated with a legitimate website.
Also, sometimes legitimate merchants will get co-opted into
running transactions for another business.
As a result, our review of merchant activity continues beyond
the initial underwriting. We review transaction activity for our
merchants to determine if their processing has materially changed
in ways that suggest the merchant is not who they claimed to be.
Further, we continually evaluate new software and technology
solutions to help us identify when a merchant has associated itself
with illegal activity. Equally important, we maintain a liaison with
law enforcement so that we can be notified when they are targeting
specific merchants for illegal behavior.
From a merchant processing perspective, we see the financial
piece of the transaction, which for most transactions is primarily
the date, time, amount of sale, and card number. We don't know
what the cardholder saw or what the cardholder was told when
they were presented with the bank account information to complete
the sale, nor do we know what the merchant presented to the
cardholder to generate that sale. With billions of transactions
running through our systems, individual transactions cannot be
investigated. However, we do review merchant deposits for
patterns that, in our experience, suggest the merchant may be of a
different type than we originally understood.
For example, we might look at significant increases in
transaction volume, in excess of what might be expected as normal
growth, patterns of transaction amounts larger than would be
expected for a business of the type described, abnormally high
transactions which are questioned by cardholders or charged back,
among other criteria. We process more than 100 pattern filters to
identify patterns which suggest merchants that require additional
review. We have a fraud department that is tasked with reviewing
accounts that have tripped some of our suspicious activity patterns
to determine whether there is anything that suggests we can or
should stop providing processing services.
As a result of the work of this department, we have terminated
nearly 4,000 merchant accounts in the past 5 years. In preparation
for this hearing, I have surveyed our managers in these areas and it
appears that we have not seen incidents of child pornography in
these reviews. However, we have identified instances where
merchants submitted transactions for others, or we have found that
some merchants were involved in sexually explicit materials
against our credit policy. In these cases, we immediately shut
down the merchant's accounts. It may very well be that some of
these accounts that we shut down could have carried transactions
originating in other types of material.
Let me be clear. We take this issue very seriously and we have
cooperated extensively with law enforcement. For instance, we
have kept accounts open at the request of law enforcement for
limited times when we have been told that it is necessary to
facilitate ongoing investigations. We have provided information
and access to funds which resulted in criminal convictions and
significant seizures of funds associated with criminal activity. At
First Data, we have no tolerance for the sexual exploitation of
children. Although identifying online merchants engaged in child
pornography can be challenging, we are committed to taking
additional steps to identify these entities and preventing them from
using our systems to fund their illicit activities.
First, we are participating in a pilot project with MasterCard to
identify illegal or unacceptable merchant activity by searching the
Internet for Web pages that engage in sexual exploitation of
children. Second, we participate in Financial Coalition Against
Child Pornography. Two of the key components of the coalition
are the creation of a clearinghouse, which will facilitate the sharing
of information among the payments industry. We believe that this
will be a valuable tool to help eradicate such illicit activity from
the payment system. In addition, the coalition's efforts determine
the best way to perform test transactions on targeted websites will
help us more quickly and accurately identify who is processing
particular payment transactions, so that we can work effectively
with law enforcement to shut them down.
First Data takes seriously its role in protecting the payment
system from activities that are illegal or against our policies and
the card association rules. We provide effective, front-end
diligence procedures to help us identify unqualified merchants, and
we impose checks on existing merchants when they trip any of our
existing suspicious activity patterns. The measures being
undertaken by the Financial Coalition Against Child Pornography
will help all of us in the payment system identify and deter the
funding for the online exploitation of children. Thank you.
[The prepared statement of Ralph Shalom, Esq. follows:]
PREPARED STATEMENT OF RALPH SHALOM, ESQ., ASSOCIATE
GENERAL COUNSEL FOR LITIGATION, FIRST DATA CORPORATION
Good morning, Mr. Chairman and members of the Committee.
My name is Ralph Shalom, and I am Associate General Counsel at
First Data Corporation. I am pleased to be here today to discuss
First Data's role in the payments industry, specifically merchant
processing, as the Committee continues its hearings into Internet
child pornography.
Let me begin my testimony by describing First Data, and the
unique role we play helping millions of consumers, businesses, and
governmental entities buy products and services on a daily basis.
Most people don't realize it, but First Data's products and services
touch people's lives every day. We make buying and selling
easier. It is that simple. Many of you do business with First Data
everyday - whether you are using an ATM/debit card to pay for gas
at the gas station, writing a check to pay for groceries, buying a
book online, getting cash from an ATM, paying for dinner with a
credit card or using a gift card - there is a good chance that First
Data is moving that transaction at least part of the way between the
merchant and the consumer.
Although we have many interesting products and services that
provide some type of payment processing, I will focus my
testimony on merchant processing. Our merchant services
business segment facilitates the ability of merchants to accept
consumer transactions at the point of sale, whether the merchant
operates a physical store (brick and mortar) or whether the
merchant has a virtual - or online - presence. Our services enable
businesses of all sizes to accept various forms of payments from
consumers, including credit and debit cards. The term
"processing" can be described as those functions associated with
authorizing, capturing, and settling merchants' credit, debit, stored
value and loyalty card transactions. We provide merchant
processing services for some 3.5 million merchants in the U.S.
At First Data, a majority of these services are offered through
alliance relationships with financial institutions. These
arrangements are established as either revenue sharing alliances or
equity alliances. We have revenue sharing alliances with financial
institutions like SunTrust, CitiGroup, and Huntington Bank. We
have equity alliances with major financial institutions like Wells
Fargo, PNC, and JPMorgan Chase. Our equity alliances are run as
independent companies and compete against one another and
against our Revenue Sharing Alliances in the market place.
Understanding How New Merchants Are Acquired
When we sign up, or acquire, merchants for processing
services, we make great efforts to understand (1) who are our
clients and (2) what type of products or services do they sell? The
answers to these questions not only drive certain technical aspects
of how the accounts are set up, but these questions also inform us
of the risk that the merchant might present to us and, indeed,
whether we are willing to accept the merchant at all. When
merchants apply for services, they are asked questions to help us
understand who they are, including obtaining their taxpayer
identification number or their Social Security number. If the sale
is made face-to-face, sales representatives are trained to make
notations about the physical aspects of the merchant. If the
merchant is an online vendor, we require the merchant to provide
us with its Web site address which is then reviewed by our credit
department.
There are many businesses that we simply refuse to accept
under the credit policies in which we operate. Each of the
alliances has its own credit policy that was developed jointly with
First Data. None of these policies allow for adult online video
content. Merchants whose businesses are involved in what we
understand to be illegal dealings, including the sexual exploitation
of children, are automatically excluded. Several years ago we also
made the determination to avoid businesses providing sexually
oriented on-line video content. When a merchant applies for an
account with us, as part of the initial underwriting reviews, we pull
a credit report, review the materials provided with the application,
check the industry High Risk files, and check the Web site if the
business is described as being online. We might disqualify a
merchant from receiving an account from us if the merchant is
involved in online gambling, online cigarette sales, online firearms
sales, or if they are involved in sexually oriented online video
content, to name a few reasons. In addition, we conduct additional
policing on non face-to-face prescription drug sellers.
Understanding How Merchants Are Monitored for Fraud or
Other Illegal or Unacceptable Practices
Merchants don't always tell us the truth when they describe
what they are going to sell. Even if they have provided a processor
like us with a Web site that describes their business, a merchant
can easily operate other Web sites that present a different business
proposition to the consumer. There is nothing in the credit card
transaction record that would prevent a merchant from taking
transactions obtained on one Web site and submitting them
through an account that, in our records, we have associated with a
legitimate Web site. Also, sometimes legitimate merchants will
get co-opted into running transactions for another business.
As a result, our review of merchant activity continues beyond
the initial underwriting of the account. We review the transaction
activity for our merchants to determine if their processing
materially changes in ways that suggest the merchant is not who
they claimed to be. Further, we continually evaluate new software
and technology solutions to help us identify when a merchant has
associated itself with illegal activity. Equally important, we
maintain a liaison with law enforcement so that we can be notified
when they are targeting specific merchants for illegal behavior.
From a merchant processing perspective, we see the financial
piece of the transaction, which for most transactions is simply the
date, time, amount of sale and card number, as well as industry
specific criteria necessary for assisting bank card issuers in making
authorization decisions and for qualifying a transaction through the
card associations (e.g. VISA and MasterCard) to obtain certain
interchange rates. In other words, we don't know what the
cardholder saw or what the cardholder was told when he or she
presented their bank card account information to complete the sale.
Nor do we know what the merchant presented to the cardholder
that generated the sale.
With billions of transactions running through our systems,
individual transactions cannot be investigated. However, we do
review merchant deposits for patterns that, in our experience,
suggest the merchant may be of a different type than we originally
understood. For example, we might look at significant increases in
transaction volume, in excess of what we might expect as normal
growth; patterns of transaction amounts larger than would be
expected for the type of business described; an abnormally high
number of transactions which are questioned by the cardholders or
charged back; among others. We also run bank card transactions
through more than 100 pattern filters to identify which merchants
merit an additional review.
We have a fraud prevention department that is tasked with
reviewing accounts that have tripped some of our suspicious
activity patterns to determine whether there is anything that
suggests we can or should stop providing processing services. As
a result of the work of this department, we have terminated nearly
4,000 merchant accounts in the past five years. In preparation for
this hearing, I have surveyed our managers in these areas and it
appears that we have not seen incidents of child pornography in
these reviews. However, we have identified instances where
merchants submitted transactions for others, or we have found that
some merchants were involved in sexually explicit materials. In
these cases, we immediately shut down the merchant's accounts. It
may very well be that some of these accounts that we shut down
could have carried transactions originating with sexually explicit
material.
Let me be very clear: We take this issue very seriously and
have cooperated extensively with law enforcement. For instance,
we have kept accounts open for a limited time when we have been
told that is necessary to facilitate an ongoing investigation and
have provided information and access to funds which have resulted
in criminal convictions and significant seizures of funds associated
with criminal activity.
First Data Participates in the Financial Coalition Against Child
Pornography
At First Data, we have no tolerance for the sexual exploitation
of children. Although identifying online merchants engaged in
child pornography can be challenging, we are committed to taking
additional steps to help identify these entities and prevent them
from using our systems to fund their illicit activities. First, we are
participating in a pilot project with MasterCard to identify illegal
or unacceptable merchant activity by searching the Internet for
Web sites that engage in the sexual exploitation of children.
Second, we participate in the Financial Coalition Against Child
Pornography. As you know, the goals of the Coalition are to: (1)
establish a global clearinghouse on child pornography; (2) create a
proactive system to enable the financial services industry to deal
with illegal uses of its systems to disseminate child pornography;
(3) create a system for reporting suspected child pornography; and
(4) implement monitoring and due diligence checks. Two of the
key components of the Coalition are the creation of the
clearinghouse, which will facilitate the sharing of information
among the payments industry. We believe this will be a valuable
tool to help eradicate such illicit activity from the payments
system. In addition, the Coalition's efforts to determine the best
way to perform test transactions on targeted Web sites will help us
more quickly and accurately identify who is processing those
particular payment transactions, so that we can work effectively
with law enforcement to shut them down.
Conclusion
In summary, First Data takes seriously its role in protecting the
payments system from activities that are illegal or against our
policies and the card association rules. We employ effective,
front-end due diligence procedures to help us identify unqualified
merchants, and we impose checks on existing merchants when they
trip any one of our existing suspicious activity patterns. Finally,
the measures being undertaken by the Financial Coalition Against
Child Pornography will help all of us in the payments system
identify and deter the funding for the online exploitation of
children.
Thank you.
MR. WHITFIELD. Thank you, Mr. Shalom. Mr. Strider, you are
recognized for 5 minutes.
MR. STRIDER. Good afternoon, Mr. Chairman, and members of
the subcommittee. On behalf of NOVA, I would like to thank you
for the opportunity to address NOVA's efforts as a member of the
financial services industry, to combat the sale and distribution of
child pornography over the Internet. Specifically, I would like to
provide the subcommittee with an overview of the due diligence
NOVA conducts before approving a new merchant and the
ongoing monitoring NOVA performs on existing merchants, and
the actions that NOVA takes if a merchant is subsequently engaged
in prohibited or illegal activity, which would include child
pornography.
Nova is committed to preventing merchants engaged in child
pornography from using its payment services. In addition to
NOVA's individual efforts, which I will describe during my
testimony, NOVA has joined forced with others in the financial
services community such as the FCACP. By way of background,
NOVA provides integrated credit and debit payment processing, e-
check, gift card and prepaid solutions, and software applications to
businesses. Established in 1991, NOVA is currently the third
largest acquirer of credit card transactions in the United States with
approximately 800,000 merchants nationwide. Since its
acquisition by U.S. Bancorp in 2001, NOVA has been a wholly-
owned subsidiary of U.S. Bank National Association, the sixth
largest financial institution in the U.S.
NOVA is somewhat unique in the acquiring industry since it is
a wholly-owned subsidiary of a national banking organization.
This means that in addition to being subject to the rules and
regulations of the card associations, NOVA is also regulated and
routinely audited by the Office of the Comptroller of the Currency
and the Federal Reserve. The regulators regularly review NOVA's
sales and operations departments to ensure compliance with the
policies and procedures of both NOVA and U.S. Bank. I would
like to turn now to a brief review of NOVA's operational policies
and procedures regarding the approval of new merchants, the
monitoring of existing accounts, and the steps NOVA would take
in the event a merchant was suspected of being engaged in child
pornography. It is important to note Nova applies these policies
and procedures to every prospective and approved merchant
account serviced by NOVA.
First and foremost, NOVA has a strict policy against
processing for a merchant engaged in any illegal activity including
child pornography. Moreover, NOVA's credit and underwriting
policy strictly prohibits the approval of any adult business
regardless of the legality of such activity. NOVA strives to
prevent any such business from being approved by employing a
very strict credit and underwriting policy, and undertaking a
rigorous due diligence review of every prospective merchant
account.
NOVA also conducts a rigorous due diligence review of every
prospective due diligence account. The due diligence process
generally starts with a physical site survey of a brick and mortar
merchant to confirm the existence of the merchant and the type of
goods and services sold. Merchants engaged in business on the
Internet for whom a physical site survey is not possible are
classified as higher risk and subjected to additional scrutiny by
NOVA's credit and underwriting unit. This additional scrutiny
includes a full scan of the merchant's website as well as all links to
other websites, a search of the merchant's name on Lexis/Nexis,
Google, and other search engines, cross-reference of the merchant
name, address, and other information pertinent to that account, a
credit report, a telephone interview that includes challenge
questions to confirm the applicant and the merchant are one and
the same.
Credit and background checks of the business and, in many
instances, its principals or owners are also a regular part of
NOVA's due diligence process. NOVA also queries the MATCH
file to determine if the business or its principals, partners, or
owners have been reported by a previous acquirer for violations of
the card association rules. Additionally, NOVA's Anti-Money
Laundering Policy requires NOVA to screen all prospective
merchants against various sanctions including the list maintained
by the Office of Foreign Asset Control.
In most cases, NOVA is able to confirm a prospective account
is legitimate and creditworthy through the diligence process. From
time to time, however, information discovered during the diligence
process phase raises a red flag for NOVA leading to further
investigation, and in certain cases there is a decline of an account.
Red flags indicating a prospective account may not be legitimate
include the use of false names, addresses, social security numbers,
no refund policy posted on the website, products and services
offered for sale other than those described in the application, and,
with respect, to adult businesses specifically, lines to adult
websites and advertisements for things such as sex toys.
Once a merchant account is approved, NOVA continues to
monitor the account for changes in processing parameters through
automated systems that queue a merchant for further review if
certain changes are noted.
[The prepared statement of David Strider follows:]
PREPARED STATEMENT OF DAVID STRIDER, EXECUTIVE VICE
PRESIDENT, NORTH AMERICAN OPERATIONS, NOVA INFORMATION
SYSTEMS, U.S. BANCORP
MR. WHITFIELD. Mr. Strider, excuse me for interrupting you
but time has expired, and we have votes on the floor, and I just
missed one vote. Because we have another series of votes, we
could keep you here for quite a while, but I think what I am going
to do is just ask a couple of brief questions that can be answered
rather quickly, and we have your testimony which we appreciate
your preparing very much.
I want to just ask a couple of questions, and then we are just
going to adjourn this hearing but we may be back in touch with all
of you as we move forward on some specific things that have come
up. But I do thank you for your time and for testifying here today
and for your patience.
Here is one of the questions. Over the last 4 years, I would just
like to know, if you can answer this question, how many Internet
merchants have you identified that were engaged in commercial
child pornography? Mr. Matos, can you answer that question?
MR. MATOS. That would be two merchants that were actually
engaged.
MR. WHITFIELD. Two. Okay. Ms. Mowder.
MS. MOWDER. One.
MR. WHITFIELD. One.
MR. SHALOM. We haven't identified any on our reviews that
engaged in Internet child pornography. We have been advised by
law enforcement by investigations they were conducting in one
instance.
MR. WHITFIELD. Okay. Mr. Strider.
MR. STRIDER. Two, and two others were notified by law
enforcement.
MR. WHITFIELD. Okay. Now one other question. When
determining whether to sign up a merchant do, the Internet
merchants receive any greater scrutiny than a brick and mortar
merchant?
MR. MATOS. Absolutely, Mr. Chairman. Our present platform
which would include Internet e-commerce based merchants, we
consider those high risk transactions and those receive a much
greater scrutiny than retail.
MR. WHITFIELD. Okay. Ms. Mowder.
MS. MOWDER. Yes, Mr. Chairman, very similar to my
colleague.
MR. WHITFIELD. Okay.
MR. SHALOM. Our approach is consistent with that.
MR. STRIDER. It is the same.
MR. WHITFIELD. Okay. Well, you all have been great. Thank
you so much for taking time to be with us. We look forward to
working with you, and I would adjourn the hearing at this point.
[The information follows:]
[Whereupon, at 1:50 p.m., the subcommittee was adjourned.]
Nilson Report, No. 849, 850, 851 (2006).
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