DELETING COMMERCIAL 

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THIS PROBLEM 

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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31-467PDF 
COMMITTEE ON ENERGY AND COMMERCE 

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

 Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. “CHIP” PICKERING, Mississippi 

 Vice Chairman

VITO FOSSELLA, New York 

ROY BLUNT, Missouri

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. “BUTCH” OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

 Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

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 

CHARLES W. “CHIP” PICKERING, Mississippi 

CHARLES F. BASS, New Hampshire 

GREG WALDEN, Oregon 

MIKE FERGUSON, New Jersey 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOE BARTON, Texas 

 (EX OFFICIO)

BART STUPAK, Michigan 

 Ranking Member 

DIANA DEGETTE, Colorado 

JAN SCHAKOWSKY, Illinois 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

HENRY A. WAXMAN, California 

JOHN D. DINGELL, Michigan 

 (EX OFFICIO)

(II)
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 

(III) 

(1) 

DELETING COMMERCIAL 

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THIS PROBLEM 

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 
2

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 
3

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 
4

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 
5

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 
6

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 
7

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. 
8

 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. 
9

 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 
10

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 
11

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 
12

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 
13

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 
14

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 
15

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 
16

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 
17

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
18
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 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 
26

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 
27

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 
28

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 
29

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, 
30

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.1

 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 

 

1

 Nilson Report, No. 849, 850, 851 (2006). 
31

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 
32

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 investigatorprosecutor 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 
33

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 
34

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. 
35

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 
36

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. 
37

 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 
38

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? 
39

 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 
40

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? 
41

 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 
42

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. 
43

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. 
44

 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 
45

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. 
46

 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. 
47

 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 
48

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 
49

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 
50

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:] 
51

PREPARED STATEMENT OF ARNE L. CHRISTENSON, SENIOR VICE PRESIDENT, FEDERAL 

GOVERNMENT AFFAIRS, AMERICAN EXPRESS COMPANY
52
53
54
55
56
57
58

 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. 
59

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 
60

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. 
61

 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 MasterCardbranded cards are referred to as “acquirers.” MasterCard provides the networks through 
62

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 
63

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. 
64

 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. 
65

 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:] 
66

PREPARED STATEMENT OF JOE SULLIVAN, ESQ., ASSOCIATE GENERAL COUNSEL, PAYPAL,

INC. 
67

 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 
68

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 
69

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:] 
70

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. 
71

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 
72

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-
73

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. Egold 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 
74

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. egold, 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-gold® 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. Egold 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 egold’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 egold 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 
75

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 accountto-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. 
76

 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 egold 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 
77

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 (emetal) 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 
78

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. egold 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 thirdparty 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 
79

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. 

All CP Alerts

0

20

40

60

80

100

120

140

160

Dec Jan Feb Mar April May June July Aug Sept

Month

Sites

 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. 
80

Abuse of e-gold for Child Pornography 

Payment Volume per Week

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

9/10/2005

9/24/2005

10/8/2005

10/22/2005

11/5/2005

11/19/2005

12/3/2005

12/17/2005

12/31/2005

1/14/2006

1/28/2006

2/11/2006

2/25/2006

3/11/2006

3/25/2006

4/8/2006

4/22/2006

5/6/2006

5/20/2006

6/3/2006

6/17/2006

7/1/2006

7/15/2006

7/29/2006

8/12/2006

8/26/2006

9/9/2006

 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. 
81

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 
82

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 egold’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 
83

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 
84

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 email 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 
85

,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. 
86

 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 
87

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? 
88

 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? 
89

 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 
90

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? 
91

 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. 
92

 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 
93

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, 
94

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. 
95

 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 egold, 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 
96

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 egold? 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-- 
97

 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? 
98

 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? 
99

 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 
100

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 
101

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 

 
102

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. 
103

 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 
104

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 
105

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 
106

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 
107

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. 
108

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. 
109

 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. 
110

 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 
111

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 inhouse. 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. 
112

 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 faceto-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 
113

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 
114

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 
115

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 
116

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 online 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 
117

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 
118

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 whollyowned 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 
119

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:] 
120

PREPARED STATEMENT OF DAVID STRIDER, EXECUTIVE VICE PRESIDENT, NORTH 

AMERICAN OPERATIONS, NOVA INFORMATION SYSTEMS, U.S. BANCORP
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 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 
126

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. 

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 [Whereupon, at 1:50 p.m., the subcommittee was adjourned.] 

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