[House Hearing, 109 Congress]
[From the U.S. Government Printing Office]



 
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                                  HEARING

                                 BEFORE THE

               SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                   OF THE 

                          COMMITTEE ON ENERGY AND 
                                  COMMERCE


                          HOUSE OF REPRESENTATIVES


                         ONE HUNDRED NINTH CONGRESS

                               SECOND SESSION


                             SEPTEMBER 21, 2006

                             Serial No. 109-141

         Printed for the use of the Committee on Energy and Commerce





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                   COMMITTEE ON ENERGY AND COMMERCE
                     JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas                      JOHN D. DINGELL, Michigan                 
MICHAEL BILIRAKIS, Florida                  Ranking Member
  Vice Chairman                           HENRY A. WAXMAN, California
FRED UPTON, Michigan                      EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida                    RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                     EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                      FRANK PALLONE, JR., New Jersey
ED WHITFIELD, Kentucky                    SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia                  BART GORDON, Tennessee
BARBARA CUBIN, Wyoming                    BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois                    ANNA G. ESHOO, California
HEATHER WILSON, New Mexico                BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona                  ELIOT L. ENGEL, New York
CHARLES W. "CHIP" PICKERING,  Mississippi ALBERT R. WYNN, Maryland
  Vice Chairman                           GENE GREEN, Texas
VITO FOSSELLA, New York                   TED STRICKLAND, Ohio
ROY BLUNT, Missouri                       DIANA DEGETTE, Colorado
STEVE BUYER, Indiana                      LOIS CAPPS, California
GEORGE RADANOVICH, California             MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire            TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania             JIM DAVIS, Florida
MARY BONO, California                     JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                       HILDA L. SOLIS, California
LEE TERRY, Nebraska                       CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey                 JAY INSLEE, Washington
MIKE ROGERS, Michigan                     TAMMY BALDWIN, Wisconsin
C.L. "BUTCH" OTTER, Idaho                 MIKE ROSS, Arkansas                       
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                    BUD ALBRIGHT, Staff Director
                   DAVID CAVICKE, General Counsel
     REID P. F. STUNTZ, Minority Staff Director and Chief Counsel


              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
                     ED WHITFIELD, Kentucky, Chairman
CLIFF STEARNS, Florida                    BART STUPAK, Michigan
CHARLES W. "CHIP" PICKERING,  Mississippi   Ranking Member
CHARLES F. BASS, New Hampshire            DIANA DEGETTE, Colorado
GREG WALDEN, Oregon                       JAN SCHAKOWSKY, Illinois
MIKE FERGUSON, New Jersey                 JAY INSLEE, Washington
MICHAEL C. BURGESS, Texas                 TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee               HENRY A. WAXMAN, California
JOE BARTON, Texas                         JOHN D. DINGELL, Michigan
  (EX OFFICIO)                              (EX OFFICIO)                            


                               CONTENTS


                                                                      Page
Testimony of:
    Christie, Hon. Christopher J., United States Attorney, 
        District of New Jersey, U.S. Department of Justice	        17
    Allen, Ernie, President and Chief Executive Officer, 
        National Center for Missing and Exploited Children	        28
    Plitt, James, Director, Cyber Crimes Center, Office of 
        Investigations, U.S. Immigration and Customs 
        Enforcement, U.S. Department of Homeland Security	        33
    Christenson, Arne L., Senior Vice President, Federal 
        Government Affairs, American Express Company	                51
    Golinsky, Jodi, Vice President and Senior Regulatory 
        Counsel, MasterCard International, Inc. 	                60
    Sullivan, Joe, Associate General Counsel, PayPal, Inc.	        66
    McCarthy, Mark, Senior Vice President, Public Policy, 
        VISA U.S.A., Inc. 	                                        70
    Jackson, Dr. Douglas, Chairman, e-gold Group, Inc. 	                73
    Matos, William, Senior Director, Credit/Risk, Chase 
        Paymentech Solutions, L.L.C. 	                               103
    Mowder, Senior Vice President, Bank of America	               109
    Shalom, Ralph, Associate General Counsel for 
        Litigation, First Data Corporation	                       115
    Strider, David, Executive Vice President, North 
        American Operations, NOVA Information Systems, U.S. Bancorp    120



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                      THURSDAY, SEPTEMBER 21, 2006

                        HOUSE OF REPRESENTATIVES,
                    COMMITTEE ON ENERGY AND COMMERCE,
              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,
                                                        Washington, DC.

        
	The subcommittee met, pursuant to notice, at 10:05 a.m., in 
Room 2123 of the Rayburn House Office Building, Hon. Ed 
Whitfield (Chairman) presiding.
	Members present:  Representatives Whitfield, Stearns, 
Pickering, Ferguson, Burgess, Blackburn, Barton (ex officio), 
Stupak, DeGette, and Inslee.
	Staff Present:  Mark Paoletta, Chief Counsel for Oversight and 
Investigations; Kelli Andrews, Counsel; Karen Christian, Counsel; 
John Halliwell, Policy Coordinator; Ryan Ambrose, Legislative 
Clerk; David Nelson, Minority Investigator; Jonathon Brater, 
Minority Staff Assistant; and Elizabeth Ertel, Minority Senior Staff 
Assistant.
	MR. WHITFIELD.  I would like to call this hearing to order this 
morning, and today the subcommittee will hold its sixth hearing to 
explore issues relating to the sexual exploitation of children over 
the Internet.  I must say for all of us, we have all really been 
appalled at how widespread this problem is, not only in America 
but around the world.  We have learned a lot about this pervasive 
problem and the ways in law enforcement and industry can and 
should work together to eradicate sites that continue to victimize 
children and put perpetrators behind bars.
	I would like to highlight several important issues that have 
been raised through our hearings.  First, Federal, State, and local 
law enforcement need more resources to combat these crimes due 
to the technological expertise required to catch online pedophiles 
and the increasing number of pedophiles that are using the Internet 
as a way to victimize children.  This July Congress passed and 
President Bush signed into law the Adam Walsh Act of 2006, 
which in addition to establishing a national sex offender registry 
also authorizes additional law enforcement officers and other 
resources specifically for combating sexual crimes against 
children, and we all support that effort.
	Second, we learned that Internet service providers and social 
networking sites have information that law enforcement needs 
when investigating pedophiles online, and that is the IP address on 
a particular date and time that will help identify those involved.  
There is disparity among the Internet providers on the length of 
time they retain IP address data.  Several members of the industry 
have agreed to lengthen their data retention time for this particular 
data, and we are all pleased with their efforts.
	Tuesday a week ago, Attorney General Gonzalez testified 
before the Senate that the Department of Justice is supportive of 
legislation mandating a 2-year retention policy for IP address 
information and investigations involving the sexual exploitation of 
children.  I would say that most of the members of our panel 
probably support that recommendation.  Finally, through Marsha 
Allen and Justin Berry, two victims of child predators, whose 
images were repeatedly sold and traded over the Internet by these 
pedophiles, and we know the images of their sexual abuse that are 
now on the Internet will be there forever, we must work 
aggressively to put the child pornographers out of business.
	Today we address another critical component to combating the 
sexual exploitation of children over the Internet, the financial 
industry's role in shutting down commercial child pornography 
sites.  This is a multi-billion dollar illicit industry.  This business 
does not just involve the people that post the sexually exploitive 
images of the children, but it also involves a credit card processing 
company for the site.  We will hear testimony today from the 
United States Attorney for New Jersey, Chris Christie, who will 
tell us about the RegPay case that his office successfully 
prosecuted.
	The RegPay case involved a commercial child pornography 
site based out of Russia and a credit card processing company in 
the U.S.  We will also hear from Ernie Allen about the financial 
coalition that was formed as an alliance between the National 
Center, some members of the financial industry, the Internet 
service providers, and law enforcement and how this coalition is 
working to shut down commercial child pornography sites.  
Immigration and Customs representatives will testify today about 
trends they are seeing in the payment world as it relates to 
commercial child pornography.
	We will also hear about digital currency in lieu of credit cards, 
and how that is being used as an alternate method of payment.  
These methods of payments make it impossible to track the 
purchaser or the merchant and are ripe for abuse by criminals and 
are being used to foster crimes including exploiting children 
online.  We had hoped to hear a John Doe witness today who was 
going to be testifying from a Federal penitentiary and how he 
became involved with a group from overseas and he was 
processing their credit card payments.  He is in a Federal prison, 
but due to some legal issues and others, we are not going to have 
his testimony.
	I will tell you though that he was netting over $300,000 a 
month in revenue from processing these subscriptions to the 
websites, and the Web masters of the child pornography sites, as I 
said, all outside the jurisdiction of the U.S., were clearing much 
more than that.  And we are sorry that he will not be able to testify.  
On the third and fourth panels, we will hear from the payment 
industry, the acquiring banks, and the merchant processing 
companies.  The first question that many of us have is why can't 
the credit card company just shut a site down once it finds out it 
contains sexually exploitive images of children.
	Now we know that many steps have been taken by the 
processing companies and we commend them on that, but we want 
to urge them to do more.  And only with continued collaboration 
among industry, law enforcement, and the National Center will 
these commercial sites be deleted from the Internet once and for 
all.  I want to thank all the witnesses, and we will be introducing 
the panels a little bit later.  At this time I would like to recognize 
the Ranking Mmember, Mr. Stupak of Michigan.
	[The prepared statement of Hon. Ed Whitfield follows:]

PREPARED STATEMENT OF THE HON. ED WHITFIELD, CHAIRMAN, 
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

	Good Morning.  Today the Subcommittee will hold its sixth 
hearing to explore issues relating to the sexual exploitation of 
children over the Internet worldwide. We have learned a lot about 
this pervasive problem and the ways in which law enforcement and 
industry can and should work together to eradicate sites that 
continue to victimize children and put perpetrators behind bars.  
I'd like to highlight several important issues that have been raised 
through our hearings:
	First, Federal, state and local law enforcement need more 
resources to combat these crimes due to the technological expertise 
required to catch  online pedophiles and the increasing number of 
pedophiles that are using the internet as to victimize children.  This 
July, Congress passed, and President Bush signed into law, The 
Adam Walsh Act of 2006, which in addition to establishing a 
national sex offender registry also authorizes additional law 
enforcement officers and other resources specifically for 
combating sexual crimes against children.  
	Second, we learned that Internet Service Providers and social 
networking sites have information that law enforcement needs 
when investigating pedophiles on-line--the "IP Address" on a 
particular date and time that will help identify those involved. 
There is disparity among Internet  providers on the length of time 
they retain IP address data. Several members of the industry have 
agreed to lengthen their data retention time for this particular data 
and I am pleased with their efforts. Tuesday a week ago, Attorney 
General Gonzales testified before the Senate that the Department 
of Justice is supportive of legislation mandating a two-year data 
retention policy for IP address information in investigations 
involving the sexual exploitation of children.  
	Finally, through Masha Allen and Justin Berry-two victims of 
child predators whose images were repeatedly sold and traded over 
the Internet by these pedophiles. We have the images of their 
sexual abuse that are now on the Internet and will be there forever. 
We must work aggressively to put the child pornographers out of 
business.  It is for all the children whose images are on the Internet 
that we must work tirelessly to identify those victims and save 
them and to send this child pornography industry into the gutter, 
where it belongs. 
	Today we address another critical component to combating the 
sexual exploitation of children over the Internet: the financial 
industry's role in shutting down commercial child pornography 
sites. This is a multi-billion dollar illicit industry. This business 
does not just involve the people that post the sexually exploitative 
images of the children but it also involves a credit card processing 
company for the site.  We will hear testimony today from the 
United States Attorney for New Jersey, Chris Christie, who will 
tell us about the Regpay case that his office successfully 
prosecuted.  The Regpay case involved a commercial child 
pornography site based out of Russia, and the credit card 
processing company was in the U.S. We will also hear from Ernie 
Allen about the Financial Coalition that was formed as an alliance 
between the National Center, some members of the financial 
industry, the internet service providers and law enforcement and 
how this coalition is working to shut down commercial child 
pornography sites. Immigration and Customs Enforcement reps 
will testify about trends they are seeing in the payment world as it 
relates to commercial child pornography sites. We will also hear 
about digital currency in lieu of credit cards and how it is being 
used as an alternate method of payment. These methods of 
payments make it impossible to track the purchaser or the 
merchant and are ripe for abuse by criminals and are being used to 
foster crimes, including exploiting children on-line.  
	We hoped to hear a John Doe witness today who was going to 
be testifying from a federal penitentiary and how he became 
involved with a group overseas and he was processing their credit 
card payments. He is in federal prison but due to some legal issues 
and other we will not have his testimony. He is currently serving a 
lengthy federal sentence for these crimes. I will tell you that he 
was netting over $300K a month in revenue from processing 
subscriptions to these websites and the webmasters of the child 
pornography sites who are outside the jurisdiction of the United 
States are earning far more. We are sorry he will not be able to 
testify.  
	On the third and fourth panels, we will hear from the payment 
industry, the acquiring banks and the merchant processing 
companies.  The first question that many of us have is--why can't 
the credit card company just shut a site down once it finds out it 
contains sexually exploitative images of children? I applaud the 
industry for all of the proactive measures they are taking to 
eradicate commercial child pornography sites from the Internet and 
I urge them to continue to do more.  Only with the continued 
collaboration among industry, law enforcement and the National 
Center will these commercial sites be deleted from the Internet 
once and for all.
	I thank all of the witnesses for being here today and conclude 
my opening statement.    

	MR. STUPAK.  Thank you, Mr. Chairman.  As you said, this is 
our sixth hearing on the scourge of child pornography.  The 
problem of child pornography is of great concern to all Members 
of Congress, Democrats, Republicans, Independents.  Until 
recently this committee's hearings have been bipartisan.  Today's 
hearing includes repeat testimony of the August hearing in New 
Jersey.  This testimony is being repeated today for political and not 
meritorious reasons.  For the record, the Minority has repeatedly 
sought to receive testimony from the Assistant U.S. Attorney that 
actually worked on the RegPay case.  Also for political reasons, 
the Majority rushed to the floor H.R. 5319, a bill to prohibit 
websites with sexual content from being accessed by students in 
schools and libraries which receive Federal e-rate dollars.
	Yet, to this day no one has ever testified that children are in 
danger of online predators in schools or libraries.  In fact, 
testimony has been just the opposite.  Children are actually safer 
when surfing the net at schools or public libraries.  So surfing the 
net alone at home makes children susceptible to child predators, 
not schools and not libraries.  H.R. 5319 is nothing more than an 
empty political gesture.  Mr. Chairman, the parents of this country 
expect us to protect our children from the threats posed by the 
50,000 predators that the FBI says are on the Web searching for 
our kids right now.  Law enforcement has pleaded for our help.  
Other countries do a much better job of combating online child 
pornography than here in the United States.
	Today we will hear from the financial institutions.  I believe it 
is their responsibility to insure that their firms are not being used as 
conduits to further child pornography.  To date, financial 
institutions' due diligence has been lacking.  Child pornographers, 
with financial institutions' help have grown their perversion into a 
multi-billion dollar industry.  Depictions of child rape and sexual 
abuse have been facilitated by credit cards, wire transfers, and 
other financial transactions.  If the financial industry cannot or will 
not stop providing the financial conduit which created this multi-
billion dollar industry, Congress must step in to stop this trade.
	If the financial industry faced substantial fines for facilitating 
child pornography and other unlawful acts over the Internet, I 
suspect the American people would see a substantial effort to self 
police themselves.  Simply the old adage of see no evil will not fly.  
Some credit card companies, banks, and other financial institutions 
have recently stepped up to the plate and have been partnering with 
the National Center for Missing and Exploited Children to try to 
cut off the money to commercial child porn sites.
	I know Ernie Allen of the National Center is excited about the 
potential for this new financial coalition.  I look forward to hearing 
from him today about the efforts of some of the financial firms that 
will be testifying later today.  Still I am particularly troubled by the 
new digital currency.  One digital currency company testifying 
today is Eagle.  Digital currency companies are completely 
unregulated by the Federal government.  They are largely based off 
shore.  My fear is that any efforts by Visa, MasterCard, American 
Express, or PayPal to crack down on the use of their credit cards to 
purchase child pornography may be undermined if these digital 
currency companies are allowed to flourish.
	Mr. Chairman, there are important steps we can and should 
take before adjourning in the next week or so including holding 
financial institutions responsible for facilitating Internet sales of 
child pornography.  Instead of campaign ads the American public 
deserves a comprehensive, bipartisan response to this daily threat 
to our children.  With that, Mr. Chairman, I thank you and I yield 
back the balance of my time.
	MR. WHITFIELD.  Thank you, Mr. Stupak.  At this time, I 
recognize the gentleman from New Jersey, Mr. Ferguson, for his 
opening statement.
	MR. FERGUSON.  Thank you, Mr. Chairman.  I am pleased that 
you have called this hearing, and I am pleased that we have such a 
distinguished panel of witnesses, and we certainly shouldn't be 
complaining that we have the best people in the business, the most 
expert people, and, frankly, the people with the track record of 
success in combating this problem.  I am delighted that we have 
this panel with us here this morning, and I thank you, Mr. 
Chairman, for helping to put it together.  Throughout the several 
months that our committee has explored this problem from 
numerous different angles, it never ceases to astonish me how 
horrific this industry is and how it succeeded in rooting itself in our 
society while avoiding the detection of law enforcement and 
educators and lawmakers, and, most importantly, of parents.
	I would like to thank all of our witnesses for taking time from 
their other work to join us here today.  I have had an opportunity to 
visit the center and appreciate very much the work that you are 
doing there and your staff, and I am particularly pleased that our 
U.S. Attorney from New Jersey is here who has been a leader in 
combating this problem and sharing his expertise with the 
committee.  This is the second time Mr. Christie has appeared 
before our committee.  The first was at a hearing held in our 
district in New Jersey at Raritan Valley Community College.  
Chris Christie, our U.S. Attorney, has been a tremendous asset not 
only to the State of New Jersey, but also to this particular topic.   I 
can think of no better witness to share with us his experience in 
tracking financial records to capture and prosecute these people 
who are going to exploit our children online.
	The RegPay investigation that our Chairman just mentioned 
which was led by Mr. Christie was a landmark child pornography 
case in my home State that led to the arrest and conviction of 
numerous individuals for child pornography.  This case was the 
first large scale effort to target the operations of commercial 
websites offering access to child pornography over the Internet by 
tracking their financial trail.  Also, in Operation Falcon agents 
pursued the consumers of child pornography by following the 
transaction history of those who gained access to the RegPay 
supported child pornography websites.
	Through February of this year information acquired through 
the RegPay investigation has resulted in 341, 341 Federal, State, 
and local arrests, and over 700 international arrests.  The 
defendants include teachers, pediatricians, ministers, 
psychologists, all people who are frequently considered pillars of 
their community, and who in theory should be dedicating their 
lives to helping others.  Despite how large these numbers may 
appear, we know this really barely scratches the surface of the 
problem.  However, it is clear that these financial investigations 
work to capture people involved in these activities.  I look forward 
to hearing from our witnesses today, and how we can continue and 
strengthen these investigations and hopefully put more people who 
prey on our children behind bars.
	Unfortunately, child pornography sites are not the only area 
where the reputable credit card logo is confusing and even 
misleading to the public.  Mr. Chairman, I know this is slightly off 
topic but I am hopeful that next year we will consider looking at 
other ways that this companies deal with sites where fraud is 
sometimes also a problem and where music is made available to 
consumers through sites that don't have required licenses.  We 
spent a lot of time in our full committee talking about the problems 
of piracy, and we have enacted laws to criminalize the theft of 
copyrighted and trademark work.  But there are more than a few 
illegitimate websites trafficking in pirated music and other 
products, and consumers may believe that these sites are legitimate 
because the transactions are completed with credit cards that all of 
us have come to trust.
	Again, I want to thank our witnesses.  I look forward to the 
opportunity to further introduce Mr. Christie in a moment, but I 
thank you, Mr. Chairman, for calling this hearing, and I look 
forward to the testimony.
	MR. WHITFIELD.  Thank you, Mr. Ferguson.  At this time I 
recognize Ms. DeGette of Colorado.
	MS. DEGETTE.  Thank you, Mr. Chairman, and I am very 
grateful as the other Members are that we are holding this in 
another series of investigatory hearings on child exploitation on the 
Internet.  We have been shocked, I think, all of us, at the growing 
problem, and I think all of our constituents should be very 
concerned about how pervasive child pornography on the Internet 
is becoming.  As we now know from previous hearings predators 
have taken to using the Internet to hurt our children, to buy and sell 
pictures and videos of rape and torture, and also to exchange the 
pictures among themselves.
	Now in the latter category who were exchanging the images are 
now becoming engaged in the practice of sharing the collections 
with people--are not involved in just sharing them with people who 
give them new photos, but now what is happening is experts are 
saying this is partially responsible for the rise in that type of crime 
because people who used to just get the photographs are now 
themselves becoming perpetrators.  This poses a whole new level 
of danger to children who travel unwittingly in the spheres of these 
pedophiles.  And, Mr. Chairman, we looked at this issue from a 
number of different angles and you mentioned some of the 
different ideas that we have had coming out of these hearings.
	One of them that the Chairman mentioned is from Internet 
service providers whose networks have been hijacked by these 
despicable criminals, and so I have been working on the legislation 
that the Chairman mentioned in order to combat this crime.  What 
the legislation does, and it is a bipartisan bill, we have been 
working with Chairman Whitfield and also with the Chairman of 
the full committee, Mr. Barton, to mandate that all of these Internet 
service providers retain IP addresses for the period of a year.  This 
is consistent with 49 attorney generals who have recommended 
this, as well as the Chairman said the Attorney General of the 
United States last week.
	This might seem like a minor requirement to some people.  We 
are not requiring the retention of the communications themselves, 
but rather identifying data so that law enforcement officials if they 
had probable cause to believe that a crime was being committed 
could go in and get a subpoena and subpoena these addresses.  We 
have heard compelling testimony from more than one witness that 
one of the single biggest impediments to capturing these terrible 
perpetrators is the destruction of the identifying data because the 
law enforcement officials cannot go in and subpoena the location 
of the perpetrators.  The perpetrators close down their accounts and 
they move location, and so tragically we never find the 
perpetrators and we never find the children who are their victims.
	And so some people have talked to me about privacy 
considerations.  I am concerned about privacy considerations too, 
especially in light of some of what I believe to be the illegal 
surveillance of Americans' telephone records by the 
Administration, but I have got to say we already require telephone 
companies to keep this information for a 1-year period.  We are not 
requiring content and ISPs across the board do retain this data for 
some period of time right now.  So all we are doing in this 
legislation is requiring a standard in the industry, and we are 
requiring very strict probable cause to be shown by law 
enforcement before the data can be released.
	Mr. Chairman, I bring this up because my staff has been 
working diligently with your staff, and I would hope--we have a 
bill that is almost complete.  I would hope we would be able to 
introduce this legislation before we left at the end of next week.
	MR. WHITFIELD.  Well, I hope we can as well and appreciate 
the great effort you are making.
	MS. DEGETTE.  Thank you so much, Mr. Chairman.  Finally, I 
am very glad to see the witnesses who are in here today.  I think 
that we can learn greatly about ways to combat this crime from the 
testimony we will hear.  And, finally, Mr. Chairman, I would say 
that every Internet home page, social networking and chat room 
site and sites of this nature should have something similar to the 
virtual global network button that will permit children approached 
by a predator to immediately report the approach to law 
enforcement.  I think that reporting technology can be very useful 
for kids.  I think they will use it, and I hope we can work with 
industry and with the ISPs to make this happen.  Thank you so 
much, Mr. Chairman, and I yield back.
	MR. WHITFIELD.  Thank you, Ms. DeGette.  At this time I 
recognize the gentlelady from Tennessee, Mrs. Blackburn.
	MRS. BLACKBURN.  Thank you, Mr. Chairman, and I also want 
to thank you for holding the hearing and for you putting your 
attention and your staff's attention on the issue.  I also want to 
thank our witnesses and welcome them.  We look forward to 
hearing the information that you have for us today.  We realize that 
we need to know what you know.  Online child pornography is an 
ever increasing avenue that child predators are using to exploit our 
children.  It is unfortunate, but it is one that we are going to have to 
work together to address.  Millions of images and videos of these 
acts are being transmitted daily over the Internet, and it is now a 
multi-billion dollar industry in the United States, and one that is of 
tremendous concern to us.
	As law enforcement must be diligent to investigate these 
crimes the financial services industry must insure that it is not 
providing economic avenues for people or businesses to obtain 
financial gain from these illegal activities.  Child pornography is a 
horrible and detestable mark of society and people who want to 
watch, copy, and sell this to others should be punished.  The 
Chairman should be applauded for having this hearing today so 
that we can insure that the financial services industry is doing all it 
can to prohibit the financial transactions that support this activity.  
The committee has held hearings, several hearings now, on the 
sexual exploitation of our children, and Congress has passed 
several measures to begin addressing the situation.
	As my colleague from Colorado mentioned, there are other 
pieces of legislation that are yet to come before us.  On July 27, 
'06 the Children Safety Act was signed into law and implements a 
nationwide sex offender registry and enhanced criminal penalties 
for crimes against children.  We have also put measures into place 
to help prevent the human sex trafficking of women and children 
through the authorization of the Trafficking Protection Act.  I do 
look forward to the testimony today, and to future hearings on 
other issues such as Mr. Ferguson mentioned in his opening 
statement on how Congress can assist the financial service industry 
and law enforcement in making certain that we address online 
child pornography and other issues of fraud and deception.  Again, 
I thank the Chairman for looking into the delicate issue and 
welcome you all to our panel.
	MR. WHITFIELD.  Thank you, Mrs. Blackburn.  At this time I 
recognize the gentleman from Texas, Dr. Burgess.
	MR. BURGESS. Thank you, Mr. Chairman, and thank you for 
this continuation of these very important series of hearings.  As 
you have already pointed out, we have had several, and over these 
last several months our committee has taken up the important 
cause of protecting our children from sexual exploitation over the 
Internet.  It is hard to judge your emotions on a subject like this.  
For myself, they range from shock and disbelief to a strong desire 
to completely eradicate this problem.  I have learned a great deal 
more than I have ever wanted to know about this subject, Mr. 
Chairman, but it is crucial for the safety of our children for all of 
us to know about these evils so that we can help end this abusive 
and pernicious practice in our society.
	While the pedophiles are our biggest enemy, we must also 
continue to look and combat every ancillary agency associated 
with this crime.  The philosopher journalist H.L. Minkin used to 
admonish us to follow the money.  Well, I am glad today that we 
are focusing on the efforts of the financial industry.  The 
representatives from reputable credit card companies will provide a 
valuable insight into what their respective companies are doing.  I 
am also very interested in discussing with Dr. Douglas Jackson and 
his company, e-gold.  I frankly do not understand the need for 
completely anonymous digital currency, and look forward to 
hearing from Dr. Jackson about his company's due diligence and 
role in stopping illegal activities like child pornography.
	Today we also have with us Mr. Ernie Allen, the President and 
CEO of the National Center for Missing and Exploited Children, 
who will be discussing the creation and the role of the financial 
coalition against child pornography at the National Center.  From 
my understanding it has been reported that Mr. Allen believes that 
the financial coalition can eradicate commercial child pornography 
by 2008.  I think I can speak on behalf of the rest of the committee 
that we would all like to learn more about how he thinks this goal 
is attainable.  I do appreciate the efforts of my colleague from 
Colorado and her efforts to get legislation that would enforce the 
stability of the financial data.  Currently it seems that so many of 
these numbers just evaporate in the ether and we are unable to 
trace these problems to their source, and I look forward to learning 
more about her legislation.
	And, Mr. Chairman, I too would add my voice to perhaps that 
is something that this committee could look at getting done before 
the end of the year.  Mr. Chairman, I thank you again for your 
continued leadership and your dedication to this grave situation.  I 
know it is unpleasant.  I know it is difficult, but it is work that we 
must do.  I look forward to working with you and others on the 
committee as we continue to seek solutions to this most egregious 
problem.  It is my sincere hope that this hearing will be a catalyst 
for more legislation aimed at curbing this problem.
	MR. WHITFIELD.  Thank you, Dr. Burgess.  At this time I 
recognize Mr. Barton, the Chairman of the Energy and Commerce 
Committee, for his opening statement.
	CHAIRMAN BARTON.  Thank you, Mr. Chairman.  Over the last 
9 months, the subcommittee has investigated extensively the issues 
surrounding the sexual exploitation of children over the Internet.  
Today's hearing is the sixth on this obnoxious subject.  We have 
listened to witnesses involved in all aspects of the fight against 
Internet child pornography, including Federal and State law 
enforcement officials, prosecutors, National Center for Missing 
and Exploited Children, educators, government officials, and 
Internet service providers.
	I think it is clear that this fight cannot be won by law 
enforcement alone.  Internet child pornography is an epidemic in 
every sense of the term and it will only be wiped out if everyone 
joins the fight.  A high priority will be shutting off the flow of 
money.  Commercial child pornography is big business because as 
law enforcement officials and others have testified, it makes so 
much money and the payment mechanisms have become so 
sophisticated and complex participation of the financial industry in 
this fight is absolutely essential.  If the criminals who operate 
commercial child pornography cannot be paid, they lose the 
incentive to create the images of sexual abuse that titillate child 
predators.
	We must have the cooperation of the financial industry in 
identifying and plugging the payment channels, shutting down the 
businesses and merchants who profit from the pain and abuse 
inflicted on innocent children.  From the written testimony for 
today's hearing it appears that the financial industry is making 
progress towards this goal.  I understand that due to the credit 
policies and monitoring practice of the credit card associations and 
acquiring banks these institutions have seen relatively few cases of 
merchants processing child pornography credit card payments on 
their system.  I commend you for this, but I also hope you continue 
to be aggressive and creative in implementing solutions that will 
prevent these businesses from using your payment systems.
	For this reason, I am interested in learning more about how you 
identify merchants who were engaged in child pornography and 
how those merchants seek to evade your detection.  In addition, I 
would like to know what action you take once you discover that a 
merchant is engaged in child pornography.  For instance, do you 
terminate this merchant's account immediately?  Do you take steps 
to make sure the merchant's website is shut down immediately?  
How do you prevent that business from again signing up as a 
merchant maybe under another name with your institution?  
Finally, how do you interact with law enforcement with respect to 
any investigations that are ongoing?
	I have posed many of these questions to witnesses for the FBI 
when they testified, and I am interested in your perspective.  In 
addition to the financial companies appearing before us today, we 
are joined by Mr. Ernie Allen for the National Center for Missing 
and Exploited Children.  Once again, the National Center has led 
the fight by helping to establish this financial coalition against 
child pornography.  I want to congratulate Mr. Allen and the 
National Center for their dedication.
	Finally, we are going to be joined by two members of law 
enforcement, United States Attorney for the District of New 
Jersey, Chris Christie, and Mr. James Plitt, Director of the Cyber 
Crimes Center at the United States Immigration and Customs 
Enforcement.  Mr. Christie's and Mr. Plitt's offices conducted their 
RegPay investigation and prosecution.  I look forward to learning 
from them about the payment systems that are being used by child 
pornography websites and what challenges these systems pose to 
their investigations.  If there is something that the Congress can do 
to provide any of these individuals with the tools that they need to 
investigate these websites, we want to learn about it at this hearing 
today.
	Again, Chairman Whitfield, Ranking Member Stupak, thank 
each of you for your personal dedication to this subject.  With that, 
I yield back the balance of my time.
	[The prepared statement of Hon. Joe Barton follows:]

PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN, 
COMMITTEE ON ENERGY AND COMMERCE

	Thank you, Chairman Whitfield, for convening this hearing.
	Over the last nine months, this subcommittee has investigated 
extensively the issues surrounding the sexual exploitation of 
children over the Internet.  Today's hearing is our sixth on this 
obnoxious subject.  We've listened to witnesses involved in all 
aspects of the fight against Internet child pornography, including 
federal and state law enforcement officials, prosecutors, the 
National Center for Missing and Exploited Children, educators, 
government officials, and Internet Service Providers.  I believe it is 
clear that this fight cannot be won by law enforcement efforts 
alone.  Internet child pornography is an epidemic, and it will only 
be wiped out if everyone joins the fight.
	A high priority will be shutting off the flow of money.  
Commercial child pornography is big business because, as law 
enforcement officials and other witnesses have observed, it makes 
so much money and the payment mechanisms have become 
sophisticated and complex, the participation of the financial 
industry in this fight is essential.  If the criminals who operate 
commercial child pornography sites cannot be paid, they will lose 
the incentive to create those images of sexual abuse that titillate 
child predators.  We must have the cooperation of the financial 
industry in identifying and plugging the payment channels and 
shutting down the businesses and merchants who profit from the 
pain and abuse inflicted on innocent children.
	From the written testimony, it appears that the financial 
industry has made significant progress toward this goal.  I 
understand that, due to the credit policies and monitoring practices 
of the credit card associations and acquiring banks, these 
institutions have seen relatively few cases of merchants processing 
child pornography credit card payments on their systems.  I 
commend you for this, but I also hope that you continue to be 
aggressive and creative in implementing solutions that will prevent 
these businesses from using your payment systems.  For this 
reason, I am interested in learning more about how you identify 
merchants who are engaged in child pornography and how these 
merchants seek to evade your detection.  In addition, I would like 
to know what action you take once you discover a merchant is 
engaged in commercial child pornography.  For instance, do you 
terminate this merchant's account immediately?  Do you take steps 
to make sure that the merchant's website is shut down?  How do 
you prevent that business from again signing up as a merchant with 
your institution?  Finally, how do you interact with law 
enforcement with respect to these investigations?   I posed many of 
these questions to witnesses for the Federal Bureau of 
Investigation when they testified at our hearing in May, and I am 
interested in learning your perspective.
	In addition to the financial companies appearing before us 
today, we are joined by Mr. Ernie Allen of the National Center for 
Missing and Exploited Children.  I understand that, once again, the 
National Center has led the fight by helping to establish the 
Financial Coalition Against Child Pornography.  I would like to 
congratulate Mr. Allen and the National Center for their 
dedication, and I look forward to learning more about the Financial 
Coalition's work.
	Finally, we are joined by two members of law enforcement, 
United States Attorney for the District of New Jersey Chris 
Christie and Mr. James Plitt, Director of the Cyber Crimes Center 
at United States Immigration and Customs Enforcement.  Mr. 
Christie's and Mr. Plitt's offices conducted the Reg Pay 
investigation and prosecution.  I look forward to learning from 
them about the payment systems that are being used by 
commercial child pornography websites and what challenges these 
systems pose to their investigations.  If there is something that 
Congress can do to provide you with the tools you need to 
investigate these websites, I would be interested in learning this as 
well.
	Again, I thank Chairman Whitfield for convening this hearing 
and I yield back the balance of my time.  

	MR. WHITFIELD.  At this time I recognize the Vice-Chairman 
of the Energy and Commerce Committee, Mr. Pickering of 
Mississippi.
	MR. PICKERING.  Mr. Chairman, I thank you for all your work 
in this area to protect our children and our families.  I look forward 
to hearing the testimony today and working with the committee.  I 
do think that enhanced enforcement, the tools, the resources, the 
commitment to do whatever it takes to address this issue.  I am also 
looking at legislation that would look at means to address the 
financing or the purchasing and acquisition of child pornography 
but other age-restricted products like alcohol and tobacco so that 
we can have a comprehensive approach, common sense approach 
that if we can stop the purchase and take away the financial 
incentives then hopefully we can make some progress to prevent 
before we have to enforce.
	I look forward to working with the Chairman on that legislation 
and other concerned groups so that we can advance and work in 
the next Congress to address these very critical issues.  Chairman 
Whitfield has done a tremendous job in bringing everyone's 
attention and educating and informing.  Now is our time and our 
responsibility to act.  Thank you, Mr. Chairman.
	MR. WHITFIELD.  Thank you, Mr. Pickering.  And at this time, 
I want to welcome the first panel, and for the purpose of 
introducing the first witness on the first panel, I recognize the 
gentleman from New Jersey, Mr. Ferguson.
	MR. FERGUSON.  Thank you, Mr. Chairman.  I am pleased to 
recognize and introduce the Honorable Christopher J. Christie.  He 
is the United States Attorney for the District of New Jersey, my 
home State.  I have known Mr. Christie for a number of years and 
in his 5 plus years as the U.S. Attorney in New Jersey, he has built 
an extraordinary reputation of integrity and effectiveness in a 
number of different areas.  He has been successful in one area in 
particular.  I will mention several, but in the area of public 
corruption he has 97 public corruption guilty pleas or convictions.  
That is 97 and 0.
	These are folks from both sides of the aisle.  He has been a 
leader in combating human trafficking.  He has been a leader in 
combating terrorism and advancing homeland security in New 
Jersey.  He has had done some extraordinary work in corporate and 
non-profit governance.  I would venture to say that his record as 
U.S. Attorney is second to none across this country, and we are 
very, very pleased and fortunate that he has been able to take some 
time from his responsibilities in New Jersey.
	In addition to the work that he has done on RegPay and some 
of the things I mentioned in my opening statement, we are very, 
very pleased he is able to be here to share with us some of his 
experience, so I am delighted to welcome Chris Christie, the U.S. 
Attorney from New Jersey.
	MR. WHITFIELD.  And in addition to Chris Christie, our 
witnesses on the first panel will be Mr. Ernie Allen, who is 
President and Chief Executive Officer of the National Center for 
Missing and Exploited Children, who is doing a tremendous job in 
this area and we appreciate your efforts.  Also, Mr. James Plitt, 
who is the Director of the Cyber Crimes Center, Office of 
Investigations, U.S. Immigration and Customs Enforcement at the 
U.S. Department of Homeland Security, and we welcome you Mr. 
Plitt.
	As you all know, this is an oversight investigations hearing.  It 
is our custom to take testimony under oath.  Do any of you have 
any objection to testifying under oath this morning?  If you would 
stand, I would like to swear you in.
	[Witnesses sworn]
	MR. WHITFIELD.  All of you are now under oath, and, Mr. 
Christie, we will recognize you for a 5-minute opening statement.

TESTIMONY OF HONORABLE CHRISTOPHER J. CHRISTIE, UNITED STATES ATTORNEY, 
DISTRICT OF NEW JERSEY, U.S. DEPARTMENT OF JUSTICE; ERNIE ALLEN, PRESIDENT 
AND CHIEF EXECUTIVE OFFICER, NATIONAL CENTER FOR MISSING AND EXPLOITED 
CHILDREN; AND JAMES PLITT, DIRECTOR, CYBER CRIMES CENTER, OFFICE OF 
INVESTIGATIONS, U.S. IMMIGRATION AND CUSTOMES ENFORCEMENT, U.S. DEPARTMENT 
OF HOMELAND SECURITY

	MR. CHRISTIE.  Thank you, Mr. Chairman, and thank you, 
members of the committee, for asking me to come here today and 
talk about a topic that is obviously very important to our office and 
to the country as a whole.  I want to thank Congressman Ferguson 
for his very kind introduction as well.  I would like to talk, Mr. 
Chairman, about the RegPay case that has been referenced a 
number of times in your comments and the comments of the other 
members of the committee.  The first important thing to know 
about the RegPay case is something to understand about Federal 
law enforcement, and that is that one small group of people can 
make an enormous difference if they want to be creative and attack 
a problem on a personal level.
	And in our office one Assistant United States Attorney came to 
me with an idea of wanting to combat child pornography in a 
different way.  And we sat and talked a great deal about it and got 
buy-in from our other Federal law enforcement partners to undergo 
an operation which became the RegPay case.  The idea behind that 
was previous to this law enforcement's approach had generally 
been to follow the purchaser of child pornography and try to trace 
that back.  Most of the arrests that were done were of the people 
who were buying child pornography over the Internet, and you 
never got much beyond that.
	What we decided to do in New Jersey was to take the approach 
of following the money as someone mentioned before in their 
opening remarks.  We decided that what we wanted to do was try 
to get at the people who were putting these websites up, exploiting 
the children in the first instance, and also get the money launderers 
and the middle men who were processing these transactions for 
them and allowing them to profit.  We never believed when we 
started where this case would take us.  It took us from United 
States in New Jersey, purchasers there, to money launderers and 
middle men in the State of Florida, to child pornographers in 
Belarus, and financial institutions in Latvia.
	And through the great resources of immigration and customs 
enforcement, the IRS, and our office, we were able to trace that 
money.  And what it did was our first step was in going after the 
money launderers, the middle men who were in the United States 
and Florida.  Once we were able to get enough evidence against 
them to execute search warrants on both their computers and other 
documents they had to firm up our case against them, we 
encouraged them and were able to convince them to cooperate with 
us in our investigation.
	Once they began to cooperate, they were able then to able to 
contact their source people in Belarus, and from there using them 
and using them as a lure to bring them, the people from Belarus, to 
a country where we could have the foreign government participate 
in the arrest and then be able to extradite them to the United States.  
These few people in Belarus were gathering child pornographic 
images that were incredibly disturbing, incredibly exploitive of 
children.  And we were able to lure these folks who were making 
about $2 million a month on average just from the few websites 
that they ran.  We were able to lure them to France under the guise 
that we the Florida company was willing to up the ante and process 
even more of the illicit profits for them and longer.
	We got them there.  We were able to engage in conversations 
with them there which confirmed their very, very deep role in this 
plot.  We were able to tape those conversations.  Arrests were 
executed, eventually extradited to the United States, and all of 
these people in the RegPay case have now pled guilty and they are 
doing sentences ranging anywhere from 17 years to 25 years in 
Federal prison for the crimes that they committed.  We believe 
what we did in the RegPay case was to lay out a template for how 
these cases should be done.  And we are seeing that incorporated 
into the Department's Project Safe Childhood initiative as well 
now and being sent around the country to work with organizations 
like the National Center, to work with local law enforcement 
which we need to have as a partner.  It is a three-legged stool.  
Federal law enforcement must have the help from local law 
enforcement and from these non-governmental organizations to be 
able to make this work.
	The RegPay case is an enormous triumph for law enforcement 
in protecting children, and it should be used now, and I think is 
being used now, as a model around the rest of the country on how 
to investigate these cases.  And so I am enormously proud of the 
work that our office did, our assistants and our investigators, and I 
think they have laid this out now for other people to use, and I 
know it is being used today by my colleagues around the country 
as a real example of how to do this kind of work and we are 
enormously proud of what happened here, Mr. Chairman.
	[The prepared statement of Hon. Christopher J. Christie 
follows:]

PREPARED STATEMENT OF THE HON. CHRISTOPHER J. CHRISTIE, 
UNITED STATES ATTORNEY, DISTRICT OF NEW JERSEY, U.S. 
DEPARTMENT OF JUSTICE

 

	MR. WHITFIELD.  Thank you, Mr. Christie.  At this time, I 
recognize Mr. Allen for a 5-minute opening statement.
	MR. ALLEN.  Thank you, Mr. Chairman, Congressman Stupak, 
members of the committee.  First, thank you for your extraordinary 
leadership and impact on this problem.  I have submitted written 
testimony covering a wide range of issues.  However, what I would 
like to do in my oral testimony very briefly is to focus on five 
questions that this committee asked the center to address.  The first 
was raised by Chairman Barton who said to us why can't we in this 
country do what the British are doing in terms of blocking sites and 
shutting them down.  I think most of you know, and I have 
expressed to members of this committee that our first priority has 
always been investigation and prosecution, and identifying who the 
child victim is, so there is a balance in how we do that.
	But based on that idea we met with the leading ISPs and the 
U.S. Internet Service Provider Association, and we have found that 
they are enthusiastic about such a mechanism.  We subsequently 
met with our partners in Federal law enforcement and have 
developed a process that we are now working to implement.  The 
first step is that our analyst at the National Center will identify the 
illegal sites.  Secondly, we will provide these reports to Federal 
law enforcement, the Internet Crimes Against Children Task 
Forces.  Thirdly, we will add the URLs of these sites to a list and 
then provide that list to the validated ISPs who are registered with 
our Cyber TipLine.
	Let me emphasize that in the testimony we work primarily with 
the large ISPs and inadvertently I omitted Yahoo, who is very 
supportive and very involved in this process.  But ultimately all 
reporting ISPs, the 255 ISPs for reporting content, will receive this 
list and these notifications.  We will advise them of the illegal 
content in a specific URL and then ask them to enforce their terms 
of service agreement.  This is a violation of those agreements.  
Thus, they will take down the site, block its future access over their 
systems using filters, so this is an attempt to give law enforcement 
first crack at all of the content but simultaneously develop a system 
that will identify the illegal sites, shut them down, and then block 
their future access.
	So I report this to the committee.  This was something the 
committee was specifically interested in.  Secondly, you have 
asked about new technology, how can we develop technology 
solutions for this problem.  Well, since the last hearing we have 
met with Internet industry leaders, AOL, Microsoft, Yahoo, 
Google, Earthlink, and United OnLine.  They have committed their 
best and brightest, and we have created a kind of technology 
coalition to try to develop new technology to identify this illegal 
content and interdict it.  That process has been formed and is 
underway, and I will keep you apprised of its progress.
	Thirdly, as mentioned in the opening remarks about the poor 
reporting.  I know Congresswoman DeGette, you have been very 
concerned about that.  In our most research, we found that just 5 
percent of children who are targeted by online sexual exploitation 
report it to law enforcement, to AOL, to us at the National Center, 
and just 12 percent tell their parents.  So overwhelmingly this is a 
problem that is underreported.  As you know, Congress mandated 
the creation of our Cyber TipLine, and last week we handled our 
417,000th report.  If only 10 percent of the American public is 
reporting, it is terrifying to think what the volume really could be, 
and we are very supportive and eager to work with industry to 
develop new mechanisms including permanent, prominent Cyber 
TipLine icons and links so that these things can become a virtual 
panic button for children and can get us far greater reporting 
volume.
	Fourthly, you asked us about modeling sites.  We have handled 
reports on that.  In our judgment, many of these sites which hide 
under the "guise" of the First Amendment are in effect masking 
other kinds of illegal behavior.  We look forward to working with 
you and your staff on this problem.  And then finally you asked 
about our financial coalition, and let me give you a quick update.  
We just launched this coalition 6 months ago.  We talked about it 
at your last hearing.  Dr. Burgess mentioned our ambitious goal of 
eradicating commercial child pornography by 2008.  Today I am 
pleased to report that 23 major companies, including leaders of the 
credit card industry, major banks, Internet service providers, third 
party payment companies, are all engaged in this process.
	Those companies represent 87 percent of the U.S. payments 
industry measured in dollars running through the system.  Our 
mission as has been discussed is to follow the money, stop the 
payments, shut down the accounts, and put an end to this multi-
billion dollar enterprise.  Where we are at this point is we have just 
completed a pilot phase.  We have developed technology and an 
information sharing methodology which has now been tested and 
debugged.  And we have just launched an effort in which all of 
these companies will be participating in this process.
	While it is too early to provide real conclusions, and law 
enforcement has urged us not to reveal the specific techniques and 
methods that we are using in our judgment there is already an 
encouraging trend.  Because of the unprecedented efforts of law 
enforcement at all levels and others, we believe that these 
enterprises are already being disrupted.  For example, we are 
seeing that the credit card logos we are finding on these sites in 
most cases do not lead you to an actual account, and what we are 
finding is that they are being used for one of two purposes, either 
identity theft, and if you attempt to purchase access to a child 
pornography site using a credit card and you don't get your 
product to whom are you going to report it.
	Secondly, they are being used for these sites then to redirect 
people to other payment methods, and these include a whole array.  
We don't have a lot of detail yet, but I can assure you working 
with law enforcement we are pursuing them and will pursue them 
as they emerge.  The challenges that I present to the committee are 
really two fold.  One, we are very pleased that 87 percent of the 
U.S. payments industry is involved in this effort.  It needs to be 
100 percent, and we need your help and support to bring the rest of 
the financial institutions in this country into the process.
	Then, secondly, as you heard from Mr. Christie and you heard 
from others, this is not just a domestic problem, it is a global 
problem.  We have met with the European Banking Federation.  
We are meeting with Asian bankers and Central American bankers 
and Canadian bankers.  The goal is to create a real international 
process.  And in closing, Mr. Chairman, what I would like to do is 
tell you about one company, an international company that is a part 
of this coalition, Standard Charter Bank, in Singapore, which is 
helping us mobilize Asian bankers around this effort.  They are so 
motivated that they went to their employees and they raised 
$60,000 in employee contributions to create a public awareness 
campaign.
	They have created a website called Light a Million Candles.  
They are trying to get people around the world to sign on to this 
process, and they have had responses so far from 130 countries.  
So in closing what I would like to do is ask that this PSA that the 
Standard Charter Bank developed be shown to the committee.  It is 
now being shown in Asia, the Middle East, Africa, and expanding 
world wide.  Thank you, Mr. Chairman.
	[Video]
	[The prepared statement of Ernie Allen follows:]

PREPARED STATEMENT OF ERNIE ALLEN, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, NATIONAL CENTER FOR MISSING AND 
EXPLOITED CHILDREN

	Mr. Chairman and distinguished members of the Committee, I 
welcome this opportunity to appear before you to discuss the 
commercial distribution of child pornography on the Internet. 
Chairman Whitfield, I cannot thank you enough for the attention 
that you, Chairman Barton, Congressman Stupak and your 
colleagues on the Committee have brought to the problem of child 
sexual exploitation this year.
	The National Center for Missing & Exploited Children 
("NCMEC") joins you in your concern for the safety of the most 
vulnerable members of our society and is grateful for your 
continued focus on this under-recognized problem.
	Let me first provide you with some background information 
about the National Center for Missing & Exploited Children 
(NCMEC).  NCMEC is a not-for-profit corporation, mandated by 
Congress and working in partnership with the U.S. Department of 
Justice as the national resource center and clearinghouse on 
missing and exploited children.  NCMEC is a true public-private 
partnership, funded in part by Congress and in part by the private 
sector. Our federal funding supports specific operational functions 
mandated by Congress, including a national 24-hour toll-free 
hotline; a distribution system for missing-child photos; a system of 
case management and technical assistance to law enforcement and 
families; training programs for federal, state and local law 
enforcement; and our programs designed to help stop the sexual 
exploitation of children. 
	These programs include the CyberTipline, the "9-1-1 for the 
Internet," which serves as the national clearinghouse for 
investigative leads and tips regarding crimes against children on 
the Internet.  The Internet has become a primary tool to victimize 
children today, due to its widespread use and the relative 
anonymity that it offers child predators.  Our CyberTipline is 
operated in partnership with the Federal Bureau of Investigation 
("FBI"), the Department of Homeland Security's Bureau of 
Immigration and Customs Enforcement ("ICE"), the U.S. Postal 
Inspection Service, the U.S. Secret Service, the U.S. Department of 
Justice's Child Exploitation and Obscenity Section and the Internet 
Crimes Against Children Task Forces, as well as state and local 
law enforcement.  Leads are received in seven categories of 
crimes: 
         possession, manufacture and distribution of child 
pornography;
         online enticement of children for sexual acts;
         child prostitution;
         child-sex tourism;
         child sexual molestation (not in the family);
         unsolicited obscene material sent to a child; and
         misleading domain names.

	These leads are reviewed by NCMEC analysts, who visit the 
reported sites, examine and evaluate the content, use search tools 
to try to identify perpetrators, and provide all lead information to 
the appropriate law enforcement agency. The FBI, ICE and Postal 
Inspection Service have "real time" access to the leads, and all 
three agencies assign agents and analysts to work directly out of 
NCMEC and review the reports.  The results: in the 8 years since 
the CyberTipline began operation, NCMEC has received and 
processed more than 417,000 leads, resulting in hundreds of arrests 
and successful prosecutions. 
	The vast majority of these reports involve images of sexually 
exploited children.  Child pornography has become a global crisis.  
A recent report by McKinsey Worldwide estimated that today 
commercial child pornography is a multi-billion-dollar industry 
worldwide, fueled by the Internet.  Its victims are becoming 
younger.  According to NCMEC data, 19% of identified offenders 
had images of children younger than 3 years old; 39% had images 
of children younger than 6 years old; and 83% had images of 
children younger than 12 years old. Children have become a 
commodity in this despicable crime.
	Who is behind this trade in our children?  There are 
documented cases in which the enterprise was found to be operated 
by an organized crime network. One such case was that of the 
Regpay Company, a major Internet processor of subscriptions for 
third-party commercial child pornography websites. The site was 
managed in Belarus, the credit card payments were processed by a 
company in Florida, the money was deposited in a bank in Latvia, 
and the majority of the almost 300,000 credit card transactions on 
the sites were from Americans.
	Another recent case highlights the connection between child 
pornography and the financial system. In this case, investigators 
identified 70,000 individual customers paying $29.95 per month 
and using their credit cards to access graphic images of small 
children being sexually assaulted.  
	This is not acceptable. So we created the Financial Coalition 
Against Child Pornography, made up of the world's most 
prominent financial institutions and Internet industry leaders who 
have joined with NCMEC and its sister organization, the 
International Centre for Missing & Exploited Children ("ICMEC") 
in the fight against Internet child pornography. There are now 23 
members, which include MasterCard, Visa, American Express, 
Bank of America, Citibank, PayPal, Microsoft, America Online, 
Yahoo and many others.  We are bringing new financial 
institutions into this Coalition every day. Our newest member is 
HSBC North America, and the American Bankers Association has 
recently agreed to support the Coalition's efforts. These are 
significant additions to our team.
	The members of the Coalition represent 87 percent of the U.S. 
payments industry, measured in dollars running through the 
system.   This offers great potential to eradicate the commercial 
child pornography industry. We would have a greater chance of 
success if we had 100 percent participation by industry players 
around the world. ICMEC representatives have met with the heads 
of the European Banking Association as well as with officials from 
Central American banks. We are also actively recruiting the Asian 
banks as well. 
	Our goal: to eradicate commercial child pornography by 2008. 
Our mission: to follow the money.  First, we will aggressively seek 
to identify child pornography sites with method of payment 
information attached.  Then we will work with the credit card 
industry to identify the merchant bank.  Then we will stop the flow 
of funds to these sites.
	In each case we will work hand-in-hand with federal, state, 
local or international law enforcement, and the first priority will be 
criminal prosecution.  However, our fundamental premise is that it 
is impossible to arrest and prosecute everybody.  Thus, our goal is 
twofold:
(1)	To increase the risk of running a child pornography 
enterprise; and
(2)	To eliminate the profitability.

	We have created working groups of industry leaders to explore 
the best techniques for detection and eradication. NCMEC serves 
as the global clearinghouse for this effort, sharing information and 
working together in a truly collaborative way. We are grateful for 
the participation of international organizations and law 
enforcement agencies, such as the Serious Organised Crime 
Agency in the U.K. International cooperation is vital to our success 
due to the global nature of these enterprises.
	Today I want to update you on the status of these efforts. We 
recently completed our pilot phase, from July 7 to September 9. 
We created a secure mechanism through which the information 
about illegal sites will flow between NCMEC, law enforcement, 
and the financial institutions.  During this pilot phase the 
CyberTipline received 422 reports of commercial child 
pornography. NCMEC analysts viewed these sites and confirmed 
that the images were illegal. From these site analyses we identified 
99 unique commercial child porn websites. 
	The names of these sites tell it all: "Elite Child Porn," "The 
Sick Child Room" and "Loli-Virgins." Each of these 99 websites 
offered multiple payment methods for the purchase of illegal 
images. We are seeing indications of a trend toward directing 
buyers away from credit cards and toward alternative payment 
methods to make the actual transaction. We are exploring possible 
explanations for this.
	This pilot has given us a wealth of information that we could 
not have anticipated about the nature of these transactions and how 
to improve the flow of information necessary to identify the source 
of the images. We now know what we need to move into full 
implementation of the program. We need to capitalize on the 
investigative talents of multiple law enforcement agencies on a 
multi-national basis.  And we need full participation by the 
payments industry worldwide. Then we will begin to dismantle 
these enterprises that profit from the heinous victimization of 
children.
	Another project we recently began is the Technology Coalition, 
funded by AOL, Yahoo, Microsoft, Google, Earthlink and United 
Online. These industry leaders will work with NCMEC to develop 
and deploy technology solutions that disrupt the ability of 
predators to use the Internet to exploit children or traffic in child 
pornography. The Technology Coalition has four principal 
objectives:
	1. Developing and implementing technology solutions;
	2. Improving knowledge sharing among industry;
	3. Improving law enforcement tools; and
	4. Research perpetrators' technologies to enhance industry 
efforts.

	Bringing together the collective experience, knowledge and 
expertise of the members of this Coalition, and applying it to the 
problem of child sexual exploitation, is a significant step towards a 
safer world for our children.
	Chairman Barton, you are the catalyst for our most recent 
initiative. You indicated an interest in the idea of a proactive effort 
to take down the child pornography websites that are not targeted 
by law enforcement for investigation. We have begun to work with 
major electronic service providers ("ESP") and the U.S. Internet 
Service Provider Association ("USISPA") towards the goal of 
making it more difficult to be able to access these sites. Our 
current partners in this effort are AOL, Microsoft, Google, 
Earthlink and United Online.
	NCMEC analysts will identify child pornography websites that 
were reported to us without additional information that would 
permit a referral to a law enforcement agency. After we confirm 
the presence of illegal images on a site, we will add it to a list 
which will be provided to those ESPs who report to the 
CyberTipline. They will then take down the site and block its 
future access over their systems using filters.
	We are actively working toward the implementation phase of 
this project and will keep you updated on our progress.
	Another obstacle we are struggling to overcome is the fact that 
research indicates that most of the American public doesn't know 
about the CyberTipline.  Reporting of child pornography and 
online enticement of children should be easier and more universal. 
We are eager to work with the industry to explore alternative 
reporting mechanisms, such as a link on the screen that enables 
reporting at the moment the illegal conduct is detected by the 
public.
	The recent attention to child modeling websites raises the issue 
of whether some of these sites mask the true, illegal nature of their 
content. We want to stop these insidious sites that hide behind 
purportedly legal businesses to trade in images of sexually 
exploited children. We look forward to working with you and your 
staff to attack this problem as well.
	The National Center for Missing & Exploited Children is 
grateful for your support, Chairman Whitfield, and that of your 
colleagues, in our efforts to protect children.
	Thank you.

	MR. WHITFIELD.  Mr. Plitt, you are recognized for your 5-
minute opening statement.
	MR. PLITT.  Thank you.  Chairman Whitfield, Ranking 
Member Stupak, and distinguished members of the committee; 
thank you and good morning.  With your permission, I would like 
to go ahead and submit the written testimony and just touch on a 
couple of issues very quickly.  First is, the close cooperation across 
all lanes, government, private, NGO, is an absolute imperative.  
While the men and women of ICE, U.S. Immigration and Customs 
Enforcement, are honored to serve as the Nation's principal 
Federal criminal investigators for child exploitation and related 
financial crimes across the border, we understand that cooperation 
and team work between all of us is essential to cover this enormous 
area of criminal activity.
	This team work includes our partners in State and local 
enforcement, as well as the NGOs.  While Federal law 
enforcement focuses on the interstate and international child 
exploitation crimes our State and local partners arrest the majority 
of child abusers and save the majority of the children.  Special 
agents are grateful for the many prosecutors, companies and NGOs 
whose work is invaluable.  NGOs, such as the National Center for 
Missing and Exploited Children, and initiatives such as the 
Financial Coalition Against Child Pornography help all of us in 
law enforcement coordinate and target our resources against the 
greatest criminal threats.
	The NGOs provide countless solid leads, and the investigator-
prosecutor relationship turns those investigative leads and our 
evidence into the seizures and convictions that are necessary.  
Prosecutors' speed and willingness to reach out to their colleagues 
across jurisdiction is vital in the investigation of Internet crimes 
against children.  Rapid response to ICE requests for help by 
Internet and financial service companies are deeply appreciated.  
Second, Internet child pornography is a big business.  As far back 
as 1992, ICE, then the U.S. Customs Service, investigated the sale 
of access to Internet bulletin boards containing images of child 
abuse, which in one investigation was shown to generate more than 
$60,000 per month in proceeds.
	Five years later in 1997, another ICE customs investigation 
revealed that proceeds from the sale of access to child exploitation 
websites can easily exceed $1 million a year.  In the 1999 landslide 
investigation, we uncovered that the magnitude of illegal revenue 
derived from the sale of access to child exploitation websites was 
occurring still at that level.  ICE addressed the trans border aspect 
of the landslide investigation in support of the Dallas Internet 
Crimes Against Children Task Force, and of course other Federal 
partners, the U.S. Postal Inspection Service, as well as the FBI.  
Four years later, ICE seized approximately $800,000 in the 2003 
Operation Falcon RegPay case.  Currently, open investigations 
continue to demonstrate the big money behind this activity.
	Third, advances in the Internet and due to technology they are 
making it difficult to identify and track the global financial 
infrastructure that facilitates Internet child exploitation businesses.  
Our laws, the tools that we in law enforcement use to fight these 
crimes are not keeping pace with the continued evolution of digital 
money.  These digital monies move around at the speed of light 
and with a click of a mouse.  I would also like to indicate that 
while the focus today is on child exploitation crimes and the illegal 
financial transactions that support them, these same mechanisms, 
these same Internet mechanisms, are being used for other Internet 
crimes be it property right violations, pharmaceuticals, as well as 
the sale and distribution of false identity documents.
	In conclusion, on behalf of the men and women of ICE, I wish 
to express our gratitude to the subcommittee for continuing this 
series of hearings and to the important issue.  In this area, we face 
massive amounts of criminal activity.  Collectively, we understand 
the challenge that we face, and we need to study it more.  We need 
to understand the trends, the techniques, the vulnerabilities of those 
engaged in these international criminal business enterprises, and 
Congress has a vital role in insuring that law enforcement has the 
tools it needs to keep pace with these criminal activities and the 
way that these criminals seek to hide within the cutting technology 
Internet and computers.  Thank you again for this hearing, and I 
stand by for your questions.
	[The prepared statement of James Plitt follows:]

PREPARED STATEMENT OF JAMES PLITT, DIRECTOR, CYBER CRIMES 
CENTER, OFFICE OF INVESTIGATIONS, U.S. IMMIGRATION AND 
CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND 
SECURITY

INTRODUCTION
	Chairman Whitfield, Ranking Member Stupak, and 
distinguished Members of the Energy and Commerce Oversight 
and Investigations Subcommittee, my name is James Plitt and I am 
the Chief of the Cyber Crimes Center at the Department of 
Homeland Security's U.S. Immigration and Customs Enforcement 
(ICE).  I appreciate the opportunity to present an understanding of 
ICE's authorities and responsibilities with respect to investigating 
international commercial child exploitation websites.

THE COMMERCIAL ONLINE CHILD EXPLOITATION 
ENVIRONMENT 
	The ICE Cyber Crimes Center (C3) is responsible for 
investigating violations of immigration and customs laws that 
occur in cyberspace, including trans-border sexual exploitation of 
children over the Internet.  When ICE investigates the online 
sexual exploitation of children, we focus on three components of 
the Internet: international commercial and non-commercial 
websites, international Peer-to-Peer groups, and international 
Internet Relay Chat.  
	Criminal organizations increasingly use the Internet to 
internationally advertise, distribute, and receive electronic 
contraband, specifically images of child exploitation.  In doing so, 
they are reaping enormous profits from the sale of access to 
websites containing these images.  To stop the proliferation of 
international commercial child exploitation websites, C3 dedicates 
substantial investigative resources to identifying and dismantling 
the criminal organizations responsible for such sites and the 
exploitation from which they profit. 
	Although it is difficult to determine the exact number of 
websites offering images of child sexual exploitation, observations 
from ICE investigations generally support the statistics of non-
governmental organizations like the National Center for Missing 
and Exploited Children, which estimates that more than 100,000 
such websites exist, more than 1,000 of which are commercial in 
nature.  Among members-only websites, there is a tremendously 
high rate of duplication, with many identical or noticeably similar 
sites operated by the same individuals.  Furthermore, we often 
encounter 10 to 15 different advertising websites operated by the 
same individuals, all of which link to the same members-only 
website.  This renders an accurate count of websites depicting 
child exploitation especially difficult to obtain.   
	Recent investigations, including ICE's unprecedented 
Operation Falcon, have revealed a common methodology that 
criminal organizations use to commercially distribute images of 
child exploitation around the world.  Typically, the organization 
consists of at least three component groups.  The first of these 
groups includes the individuals responsible for uploading and 
maintaining the advertising and payment websites.  These websites 
provide willing customers the opportunity to purchase Internet 
access to websites with a large volume of child exploitation 
images.  The second group consists of individuals who facilitate 
the payment process.  ICE has identified the following online 
payment methods used by international commercial child 
exploitation organizations: e-Gold, PayPal, Western Union, and 
traditional credit card-based merchants.  We believe there are 
subgroups within this second group with responsibility for 
exploiting each type of international Internet payment method.  
They remain attentive to the development and availability of new 
financial methods.  The third group consists of those who control 
the overall criminal organization, decide which payment method 
will be used in a given situation, determine the content of the 
members-only child exploitation website, and direct the laundering 
and distribution of the proceeds.
	ICE's Internet child exploitation investigations have revealed 
that many of those who control and profit from these electronic 
images are located in Eastern Europe and former Soviet countries.  
Furthermore, there is likely some overlap within these 
organizations because of the ease with which the three groups 
described earlier can provide their services to multiple 
organizations at any given time.   For example, an organized 
payment facilitator can easily accept payments from multiple 
advertising websites for access to multiple members-only websites.  
A website that advertises access to members-only child 
exploitation websites is easy to upload to Internet web servers and 
can be operational at multiple locations within one day.  Payment 
websites have a similar structure and are easy to operate, whereas 
members-only websites are much larger and more difficult to 
upload.  Generally the same members-only website is uploaded on 
one Internet web server and allowed to operate for 30 days, after 
which its operators remove it from the server and upload it to a 
different server.

CONCLUSION
	C3 is dedicated to identifying all individuals involved in 
international criminal organizations and component groups that 
conduct every activity associated with international, commercial 
child exploitation websites.  This includes those who advertise 
specific members-only websites, those who facilitate customer 
payments, those who control the members-only websites, and those 
who ultimately receive the proceeds from the sale of child 
exploitation images.  With our expertise in money laundering 
investigations, we are working diligently to identify and dismantle 
the international criminal organizations that operate these 
commercial child exploitation websites, as well as to identify their 
many subscribers.  ICE coordinates closely with the Internet 
Crimes Against Children Task Forces, various elements of the 
Department of Justice's Project Safe Childhood initiative, and non-
governmental organizations like the National Center for Missing 
and Exploited Children to maximize the effect of these 
international investigations and thereby protect this nation's most 
valuable resource, our children. 
  	I hope my remarks today have been helpful and informative.  I 
thank you for inviting me and I will be glad to answer any 
questions you may have at this time.

	MR. WHITFIELD.  Thank you, Mr. Plitt, and I appreciate the 
testimony of all three of you.  Mr. Christie, let me first begin with 
you.  The RegPay case, I am assuming, was one of the first and 
most comprehensive prosecutions in this entire area, is that 
correct?
	MR. CHRISTIE.  That is correct, Mr. Chairman, yes.
	MR. WHITFIELD.  And how long did that investigation go on 
including the actual trial, what was the time period?
	MR. CHRISTIE.  The investigations and trial went on for about 3 
years, Mr. Chairman.
	MR. WHITFIELD.  And how many people were actually 
convicted, roughly?
	MR. CHRISTIE.  Roughly, across the country when you look at 
all of them there were probably about 200 or so that were 
convicted when you take into account also the users and the 
purchasers of the information as well.
	MR. WHITFIELD.  And this was a world wide operation?
	MR. CHRISTIE.  Yes, it was, sir.
	MR. WHITFIELD.  But it was headquartered in Belarus?
	MR. CHRISTIE.  The websites were headquarters and created in 
Belarus.  The financial transactions occurred mostly in the State of 
Florida.  Purchasers were all across the United States, and the 
money eventually sent to banks in Latvia.
	MR. WHITFIELD.  Okay.  Now what lessons should be learned 
from the RegPay case in terms of how to investigate and ultimately 
prosecute these complex international commercial child 
pornography cases, what lessons did you learn?
	MR. CHRISTIE.  First and foremost is you have to have the 
cooperation of the credit card companies by providing this 
information on a real time basis, and one of the things that we did 
in the RegPay case was to go to the credit card companies up front 
early in the investigation and say to them we want your 
cooperation in terms of giving us this information on a real time 
basis so we can trace these transactions.  That has not always been 
the way it was, but I have to say that we had enormous help from 
MasterCard and Visa who were willing to do things that really had 
not been done before in these investigations in terms of providing 
us with that information.
	So that is one.  You need the cooperation of the credit card 
companies to be able to do this.  They are the gateway into this.  I 
think the second is to make sure that all of the law enforcement 
agencies involved are on board and ready to cooperate 
internationally.  You have to reach out to your international 
partners.  You need them to be a part of the group and they 
certainly were in the RegPay case.  And I think the third thing that 
we learned from the investigation was that you can have success 
doing this.  Now part of getting law enforcement interested in 
devoting the time of enormous resources that we need to devote to 
be able to bring this down is hopefully to have prosecutions at the 
end of the day, not to have it lead to a dry hole and lead to 
frustration.
	And what we proved to all the other districts in the country is 
that you can do this and you can succeed and you can get these 
folks, the really bad people, who are exploiting these children.  
And as I said before, Mr. Chairman, the images that were on this 
website were incredibly disturbing and exploitive of children.  You 
had child rape scenes and just the worse things that you can 
imagine in children as young as 5 and 6 years old.
	MR. WHITFIELD.  Were these on demand?
	MR. CHRISTIE.  Well, no, these were not live shows but they 
were depictions of photographs that had been taken and that these 
people could get.  And the other point that was brought up before 
that is something that we are going to need to confront is when 
people don't pay with money for these images.  We are seeing an 
increase in the uploading of pictures so there is ways to join these 
sites and have memberships in these sites, and one of the ways is to 
pay, but the other way is to say if you are willing to upload to the 
site a certain number of new child pornographic images, that can 
take care of your membership fee for a certain period of months or 
even years depending on how many of these images you have.
	So what that is creating is cottage industries of people who 
want to create these images as a way of not having to pay to see 
other images but create their own images to upload, and that 
phenomenon is something that we are very concerned about as 
well.  So we are focusing on that as well so not to look at the users 
anymore.  It is just people who are sitting and clicking a mouse and 
looking at an image, but also to see them as potential active 
pedophiles to try to support their need for further stimulation by 
getting these other images.
	MR. WHITFIELD.  Thank you.  Mr. Allen, you had mentioned in 
your testimony that 80 percent of the payment processors had 
joined your coalition to deal with this issue.  Of that 13 percent that 
did not join, did they give you any particular reasons for not 
joining or was there a theme of why they were not interested?
	MR. ALLEN.  No, Mr. Chairman, there is really not.  We have 
had an aggressive recruitment effort, but there are a lot of people in 
the financial industry in this country.  For example, I just learned 
this morning of another company because of your hearing who 
wants to be involved, so we just got to try harder and work harder, 
and I think frankly the kind of diversity of financial leadership that 
is represented here should reassure these companies that this is not 
a risky thing to do, this is the right thing to do.  It is not only good 
for the country but it is good for them.
	MR. WHITFIELD.  Absolutely.  And, ater today we are going to 
have the Chairman of e-gold, which is a digital currency company.  
Now you are a real expert in this whole area relating to child 
pornography, and you have done a great job of setting up this 
national center.  What sort of problems does this digital currency 
present as you try to identify child predators and pornography?
	MR. ALLEN.  Well, I think our concern initially was that as you 
put pressure on the mainstream payment systems the most likely 
thing that would happen is they would move to alternative 
payments, and that is one of the reasons why one of the first people 
we talked to about involvement in this coalition was Dr. Jackson at 
e-gold, who has been a part of this process, and has been very 
aggressive in our judgment in trying to root this out.  Similarly, the 
other alternative payment mechanisms have been similarly 
aggressive.  What we are seeing now, I think, and Mr. Plitt and 
others could speak more accurately to that than I, is a kind of 
continuing evolution.  As you put pressure on one point, they move 
somewhere else so we are now seeing the development of small 
aggregators and almost customized payment mechanisms.
	But I think there is no question that if we are successful, we are 
going to keep them moving into new payment devices and we are 
going to get them out of the sort of mainstream payment systems.
	MR. WHITFIELD.  So did Dr. Jackson agree to work with you 
to?
	MR. ALLEN.  Yes, he did, and has.
	MR. WHITFIELD.  Okay.  Now, Mr. Plitt and Mr. Christie, 
would you all like to expand on this digital currency and the 
problems that that creates?
	MR. PLITT.  Yes, absolutely.  The digital currency methods are 
evolving daily.  As I mentioned in my 5-minute opening, it is 
moving into areas besides just child exploitation so you find that 
the digital currency is becoming a substrate for Internet activities.  
The only other thing I would like to mention at this point is that the 
focus is on the payments associated with joining a commercial 
child exploitation website.  I would also ask the committee to 
consider that on the back end of that the proceeds that are derived 
from that activity are also resident on the Internet.  They don't 
necessarily take the money out as cash or move it to some 
legitimate bank account.  It can stay on the Internet and those e-
currencies, those currency devices, can be bartered for services that 
support those websites such as content.
	MR. WHITFIELD.  Okay.  Mr. Christie.
	MR. CHRISTIE.  I would agree with what Mr. Plitt said.  What it 
is creating for law enforcement is additional challenges.  As you 
knock down one area another one pops up some place else because 
you need to understand, I know this committee does after the work 
that you have all done, the incredible scope of the money that is 
being made here.  Billions of dollars are being made.  And so 
people are not just going to quickly abandon that.  They are going 
to use their best and brightest to try to work against us as we attack 
and defeat one area, and so we have to continue to remain very 
nimble.
	And I think the work of this committee in drawing all these 
different institutions together is going to be very helpful to get 
information to everybody on how we can remain at least even with 
them if not the goal of getting one step ahead of them and stopping 
them before they innovate.  But it is an enormous challenge 
because of the resources that they bring to bear.  Mr. Plitt is right, 
they use those resources as a barter system on the Internet to 
support their information.  That makes it very difficult for law 
enforcement to trace those proceeds.
	MR. WHITFIELD.  In my understanding the digital currency is 
not regulated in any way by the Federal government, is that 
correct?
	MR. CHRISTIE.  Correct.
	MR. WHITFIELD.  At this time right now is Mr. Stupak.
	MR. STUPAK.  Thank you all for coming.  You know, you were 
just talking about knocking down sites and another one pops up, 
Mr. Christie.  Mr. Allen, you were telling us last time when you 
testified about Great Britain, how all their ISPs from a coalition, 
and they have dropped like in 2 years sexual exploitation from 18 
percent down to .04 percent.  Now is that a trade association within 
Britain that helps monitor this?  Explain that to us.
	MR. ALLEN.  It is the Internet Watch Foundation.  It is a non-
profit, non-governmental organization that is basically sustained 
through revenues that come through the companies.  Let me say we 
have great admiration for them.  We have included them in our 
meetings.  We have skepticism about the data.  We still identify--
	MR. STUPAK.  But it is better than what we are doing in this 
country, right?
	MR. ALLEN.  Well, I think what we are trying to do is to adapt 
it.  The step we are taking here, I mean our concern is that blocking 
is not enough.
	MR. STUPAK.  I agree.
	MR. ALLEN.  Yeah.  Okay.
	MR. STUPAK.  But could we do things similar to what they are 
doing in Great Britain to make it--as Mr. Christie says we shut 
down one, another one pops up, we all know.  What do we have, 
about 1,300 ISPs at least in this country?
	MR. ALLEN.  At least.
	MR. STUPAK.  Okay.  So have any of them joined an Internet 
Watch like they do in Great Britain?
	MR. ALLEN.  No.  I think the step we are trying to take here is 
attempting to emulate that so that all ISPs in this country are 
required to report child pornography on their systems to us.  As we 
discussed at the last hearing, there are still some issues regarding 
getting everybody to do that.
	MR. STUPAK.  Correct.  The Department had some concerns 
about a law Congress passed even though they never used the law 
to accuse but they already--okay.  Mr. Christie, one of the other 
concerns were--you were involved with RegPay, right?
	MR. CHRISTIE.  Yes.
	MR. STUPAK.  And I noticed in the testimony about you had to 
do search warrants for Connections.  This was a company in Fort 
Lauderdale that the money went through, correct?
	MR. CHRISTIE.  Correct.
	MR. STUPAK.  What problems or one of the concerns of law 
enforcement it takes too long to get a search warrant and they talk 
about an administrative warrant.  Have you seen that problem in 
RegPay that took too long to get search warrants to have them be 
beneficial?
	MR. CHRISTIE.  Congressman, I did not see that problem in 
RegPay.  I think that is because we have developed so much 
probable cause so quickly that I did not see the problem in the 
RegPay case in terms of the speed of us getting our search 
warrants, and so it was not something that we experienced in the 
RegPay case as a problem on that specific case.  There may be 
other instances when that occurs in other districts, but in our 
district in that case we did not have that problem.
	MR. STUPAK.  One of the problems I did see in that one was 
trying to get these people who were responsible here for this to 
come to another country where they were arrested and all that 
because they were from Belarus which didn't handle that.  In this 
case, RegPay or was it Operation Falcon, I think, was another word 
for it?
	MR. CHRISTIE.  Yes.
	MR. STUPAK.  If there were 21,000 distinct purchasers of child 
pornography off that site, that is here in this country and we 
prosecuted less than 500.  I have been told that the Australians 
have prosecuted about 600 out of 900 to date, and the Dutch have 
told our staff that they have prosecuted 629 out of 640.  So my 
question is from a prosecutor point of view why are prosecutions 
so low out of those 21,000?
	MR. CHRISTIE.  Well, I think part of it is obvious from the 
numbers.  To give you some example, our office, which is one of 
the larger U.S. Attorney's offices in the country, we have about 
135 Assistant United States Attorneys, we prosecute to a 
conclusion on an average year somewhere between 800 and 900 
cases.  So if you look at the numbers that you are talking about 
with 21,000 purchasers the idea of any one or even a combination 
of all 94 U.S. Attorney's offices being able to prosecute the kind of 
percentages that you are talking about and comparing to the other 
countries when you have 21,000 purchasers it would simply 
overwhelm--it would overwhelm our ability to do anything else.
	And so what we have tried to do with our law enforcement 
partners is to target those folks who have potential for direct 
contact with children on an every day basis, people who are 
involved in schools and religious organizations, et cetera, and so 
we certainly make choices regarding who we pursue and how we 
prioritize that.
	MR. STUPAK.  A figure that sticks in my brain because you 
were talking about--this is our sixth hearing, those people in there, 
80 percent of them are abusing the people, child pornographers 
who view this stuff, a lot of them will abuse their own children or 
other children so wouldn't this be a higher prosecution priority of 
these 21,000?   And also I didn't expect all 94 U.S. District 
Attorney offices to prosecute.  Why wouldn't you just turn them 
over to State and local prosecutors to get a better percentage?
	MR. CHRISTIE.  Well, there are some instances where it is 
appropriate to give those to State and locals, and we do.  But as 
well I am unsure of the 80 percent number that is used, and that 
seems higher than what I have been familiar with before of people 
who are proven pedophile abusers who are also viewing this 
information.  I will tell you, Congressman, it is a very high priority 
in our district and the resources that we have placed on it.  I have 
nearly 10 percent of all my Assistant United States Attorneys in 
my office who are working on child pornography, so when you 
look at the full plate of things that we have to deal with in the 
United States Attorney's Office of our size, we are placing a high 
priority on this and moving as many of these cases as we possibly 
can.
	MR. STUPAK.  Of these 21,000 then if they are from let us say 
Michigan were the prosecutors, State and local prosecutors, then 
notified of these people?
	MR. CHRISTIE.  Sure.  What happens is--
	MR. STUPAK.  And then it would be up to them?
	MR. CHRISTIE.  These leads go out through ICE to all their 
places, all their different offices across the country.  They are 
given to both the U.S. Attorneys offices and to their local law 
enforcement partners.  And so all those leads of those 21,000 are 
distributed to law enforcement throughout the country.  They are 
not ignored, but the question is when do the statistics catch up and 
in what percentage can all these people do these cases?
	MR. STUPAK.  Do you follow up on these 21,000?  I would 
really be interested to see when they do catch up because I would 
be interested in knowing those numbers.
	MR. CHRISTIE.  I think ICE probably is the focal point for 
following up on those leads as they are the lead investigative 
agency.  We certainly keep up with the ones that occur in New 
Jersey, but then once we gather all that information as the lead 
U.S. Attorney's Office in the country on a case like RegPay or 
Falcon, we turn to ICE to distribute those throughout the country, 
and they are really the ones who follow up on those statistics 
across the country.
	MR. STUPAK.  Could you get that information for us?  Mr. 
Allen, you indicated that 87 percent of financial institutions have 
joined your financial coalition, I believe you called it.  How do we 
persuade the last 13 percent to join?
	MR. ALLEN.  One at a time.  That is exactly what we are trying 
to do.  And I think frankly one of the greatest successes we have 
had is that companies that are part of this coalition are going to 
their competitors and colleagues and saying you need to be a part 
of this.
	MR. STUPAK.  Thirteen percent.  How many in a raw number?  
What would that be of financial institutions that have not yet 
participated or not trying to help in this financial coalition?  Do 
you have a raw number?
	MR. ALLEN.  I can get that for you.  My sense is it is a fairly 
large number.
	MR. STUPAK.  Right, that has been my sense.
	MR. ALLEN.  Once you get past the big guys then the rest, that 
10, 12 percent involves a lot of small institutions, many of whom 
probably don't think they have any relevance or connection with 
this.
	MR. STUPAK.  Okay.  So the big ones really--e-gold is part of 
your financial coalition?
	MR. ALLEN.  Yes.
	MR. STUPAK.  And Western Union?
	MR. ALLEN.  Western Union is not.
	MR. STUPAK.  I was looking at some of the documents you 
gave us, confidential ones, and some of them had Western Union 
on there to further the financial transactions.
	MR. ALLEN.  One of the challenges there and one of the 
reasons that Western Union sometimes is used, is if the transaction 
is less than $1,000 there is no information about the sender or the 
distributor.  So that is--first data which I believe is the parent of 
Western Union, I think that is right.
	MR. STUPAK.  But a lot of these sites also say on there if you 
use like MasterCard and Visa, and I am trying to find this one right 
here, some of them where I had it marked, basically say your name 
and address will not be disclosed.  Everything is confidential.  That 
is not necessarily true if you use a MasterCard or Visa or 
something like that.  There would be a way to erect that 
transaction, right?
	MR. ALLEN.  That is exactly what we are trying to do.
	MR. STUPAK.  We have had other hearings in Oversight and 
Investigations through my years on this committee, and I think, 
Mr. Plitt, you mentioned that identity theft, pharmacy, drug 
masking agents, would your financial coalition model work to help 
stop the drug masking, things being sold through the Internet, 
credit card companies, Internet pharmacies that are not proper, 
identity theft, do you think your model would work for other 
products, if you will?
	MR. PLITT.  Congressman, I don't know why not.  I mean I 
think it is a great model because private industry competitors are 
coming together, exchanging information, working with law 
enforcement to address the financial aspects of this.  I think it is 
too early to say that this model works but certainly my sense 6 
months in is that it is a great model that could be replicable in 
many ways.
	MR. STUPAK.  Thank you.
	MR. WHITFIELD.  The gentleman from New Jersey is 
recognized.
	MR. FERGUSON.  Thank you, Mr. Chairman.  Mr. Christie, my 
understanding is that over a thousand arrests came from the 
information from the RegPay case, both domestically and 
internationally.  That is a huge number.  We know it only really 
begins to scratch the surface of this problem.  You have talked 
about the enormous resources that your office devotes to this 
particular type of activity.  What are the--the title of today's 
hearing could easily be called follow the money.  We are 
examining that aspect of it today.  What challenges, if any, did you 
see in the RegPay investigation that we could learn from your 
work with, specifically regarding the financial institutions because 
you have set up the model.
	This should be hopefully the template for other law 
enforcement to be able to use to be able to track down these folks 
that are doing this.  Were there any challenges that you 
experienced in the process of that specifically with regard to the 
financial institutions that we could help to address or that we could 
try to remedy?
	MR. CHRISTIE.  Sure.  The first one, Congressman, is to have 
buy-in from the credit card companies to be up front providing real 
time information to law enforcement so that we can trace these 
transactions to the processors and the people who are laundering 
this money for the people who are setting up these pornographic 
websites.  And in the RegPay case we were able to get voluntary 
buy-in from MasterCard and Visa in what I think one of the first 
times that happened on a real time basis.  And we went and made 
the pitch to them and they cooperated.  And so that is very 
important, and I don't think you can do one of these investigations 
without cooperation from those credit card companies.  It is 
absolutely vital since still the overwhelming majority of these 
transactions are processed in that way.
	Secondly is to make sure that you have the type of trained 
investigators that you need to follow this.  This is not easy stuff.  It 
is very complex.  And so to make sure that ICE has the type of 
agents and more of those agents that can trace this type of money 
trail, have the training and the expertise to do that.  We also utilize 
the IRS in this regard and that investigation was a partner with 
ICE.  And the IRS has enormous expertise for obvious reasons in 
following the money trail, and they worked in partnership with 
ICE and RegPay and Operation Falcon to be able to do that.
	And so making sure that those agencies have the type of 
trained investigative personnel in greater numbers than they have 
now if we want to try to become even more aggressive about this 
because we as prosecutors can't do these cases unless the evidence 
trail is built, and it is built by these investigators who work 
enormously hard on very, very complex transactions because, as 
you know, these folks don't want to be caught so they make these 
transactions as complex as they can in an effort to try to frustrate 
us off of their trail.
	So I think those are the biggest lessons from a financial 
prospective.  We learned we need to continue to build up the 
expertise within ICE and IRS across the whole country to be able 
to partner with the U.S. Attorney's Office and local law 
enforcement to go after these transactions, and we also need to 
make sure that all the people in the financial industry are 
committed to working with law enforcement on a real time basis to 
get us the information we need to be able to get after these child 
predators.
	MR. FERGUSON.  Now the gentleman from your office who 
prosecuted the RegPay case, Carlos Ortiz, is that correct?
	MR. CHRISTIE.  Yes.
	MR. FERGUSON.  He is currently in private practice?
	MR. CHRISTIE.  Yes, he is.
	MR. FERGUSON.  No longer works in your office?
	MR. CHRISTIE.  No, he no longer works for me.
	MR. FERGUSON.  Well, please give him our best and our thanks 
if you happen to see him.
	MR. CHRISTIE.  I speak to Carlos on a regular basis.  He is still 
very involved with Mr. Allen in his private capacity at the National 
Center advising them on these issues, and so we speak frequently 
and he is a good friend.
	MR. ALLEN.  Congressman, could I interject?  Carlos Ortiz is 
providing legal counsel to our financial coalition through his law 
firm in New York on a pro bono basis so that is how committed he 
personally is to this whole effort.
	MR. FERGUSON.  Mr. Plitt, could you follow up on what Mr. 
Christie was talking about in terms of the financial institutions and 
cooperation that you may have received, and speak specifically--I 
don't like to harp on the problems.  If someone is doing the right 
thing, we like to recognize that, but are there problems, are there 
road blocks that you are running into, are there things that we can 
be doing or working on together to encourage folks to be more 
cooperative
	MR. PLITT.  Yes.  We are getting considerable cooperation 
from various financial companies, banks, credit card companies, et 
cetera, so I think their heart is in the right place.  But this type of 
crime and the use of the financial systems and the new financial 
systems, the Internet financial systems is causing a lot of people to 
learn different things and it takes a while to come up that learning 
curve.  And just when we get to the point where we have a great 
template like the RegPay case it shifts to new methods.  For 
instance, we are seeing steward value cards.  We are seeing non-
credit card based financial transactions used to join these as 
members to these websites.
	So they are learning as fast as we are.  Obviously, I would 
think that the financial companies are interested in protecting their 
own assets, their own portfolio of customers so it is of value to 
them, but from what I hear from our investigators the speed with 
which the information is provided to us, the desire to learn with us 
as we work the investigations is very high, very appreciated.
	MR. FERGUSON.  Mr. Allen, thanks again for all of your work 
and your staff's work at the center.  As you know, I spent an 
afternoon over there one day and as horrifying as it is to see the job 
that you and your team are doing every day we are so thankful that 
you are doing it, so thanks for that.  That goes, of course, for Mr. 
Christie and Mr. Plitt in your work as well.  You talked about the 
kind of coalitions and the round tables or I forget the exact term 
you used for the way you are bringing people together, both ISPs 
and the folks in the financial world.  Are you--obviously you are 
getting a good bit of cooperation and you come from a gold-plated 
organization.  You would think someone was crazy not to step up 
to help.  But are you getting the cooperation that you feel like you 
need from all the players here or are there folks that we need to 
continue to work with or encourage?
	MR. ALLEN.  Well, yes, the answer is yes.  I think we are 
getting great cooperation certainly from Federal law enforcement.  
I do want to second what the Chairman said in the beginning 
regarding the need for more law enforcement resources in this 
area.  I was very enthusiastic about Mr. Stupak's proposal to 
increase the resources for Mr. Plitt and our friends at ICE.  We are 
getting great cooperation from these financial companies, and I 
really think this is an unprecedented approach because they are 
working collaboratively.  These are fierce competitors in the day-
to-day world.  Where we need help, as I said in my testimony, is I 
think this is something we are shining light on the problem and 
putting pressure on these companies that are not a part of this effort 
is important.  I think putting pressure internationally is important.  
One of the things we have learned, our international center 
reviewed the law, the statutes, in the 184-member countries of 
Interpol, and we found that in 95 of those countries child 
pornography is not a crime.  There is no law.
	So in most of the countries that are member nations of Interpol, 
this problem, a global phenomenon, is not even against the law.  
So we have a lot of work to do internationally, and the reason that 
your hearings have been important and the actions that you have 
taken are so important is that despite the fact that this is a multi-
national problem, despite the fact that the Internet is a global 
phenomenon, I remain convinced that the vast majority of the 
consumers are Americans.  We just spoke with a Russian legislator 
trying to push legislation in Russia on this issue and she said to us 
we will propose the legislation but you need to do something about 
the demand because the demand is American so there is a lot more 
that needs to be done.
	MR. FERGUSON.  Similar in some ways to the scourge of drugs, 
drug use.
	MR. ALLEN.  Absolutely.
	MR. FERGUSON.  Just before my time is up, Mr. Allen, but with 
the coalition that you announced and have talked about to filter 
sites, you explained that the site information is given to law 
enforcement before it is given to ISPs to block.  Does law 
enforcement have the option in terms of asking the ISPs or asking 
you all to keep the site up for investigation purposes?  As horrible 
as that sounds, you can imagine a scenario where that might 
actually be more useful in being able to gather information in 
terms of looking at down the road.  Is that option available?
	MR. ALLEN.  I obviously don't want to reveal investigative 
details, but I think that has long been a practice because as was 
discussed earlier developing the necessary investigative 
information is the case, and it is certainly one of the things that we 
have grappled with in our financial coalition process is how do you 
balance the two.  These companies want to act immediately.  Law 
enforcement wants to have an appropriate amount of time to 
determine whether they are going to proceed with formal 
investigation, and the tension is to find the middle ground.  So the 
answer generally, Congressman, is yes.
	MR. FERGUSON.  Thanks, Mr. Chairman.
	MR. WHITFIELD.  The gentleman's time has expired.  We have 
three votes on the House floor.  We have still about 5 minutes 
before the first vote is over, and so Ms. DeGette is going to be 
delayed getting back so I am going to recognize her to ask a few 
questions.
	MS. DEGETTE.  Thank you so much, Mr. Chairman.  I will be 
delayed and I won't be able to fully ask this panel questions, but I 
want to thank all three of you for your hard work.  Mr. Plitt, we 
have seen you before.  I just want to ask the three panelists what 
their opinion is about the idea that I have been talking about which 
is requiring the ISPs to retain the identifying data for a 1-year 
period.  Do you think that would help with law enforcement 
techniques?  Mr. Christie, we will just start with you.
	MR. CHRISTIE.  Absolutely, Congresswoman, I think retaining 
that data is very important, and it helps to give us the option to be 
able to really follow these trails fully to the end.  If that 
information goes away, it makes it much more difficult for us.  
And so my own opinion in terms of having been at the front of one 
of these investigations is we need more and more information and 
we need it as quickly as we can possibly get it because how 
quickly these sites evolve and change, so it would be helpful.
	MS. DEGETTE.  Mr. Allen.
	MR. ALLEN.  Yes, and it is a difficult issue.  What we like 
about your proposal is that you are not talking about retaining 
content.  What our focus has been is sort of the connectivity law.  
The reality is that law enforcement has to be able to connect the 
images that are identified to a particular person and a particular 
address, and I think that connectivity aspect is critical.  Obviously, 
this is as real dilemma for the ISPs for a host of reasons, and I 
think there is an appropriate time frame that can be established.  
But overwhelmingly we think this is something that law 
enforcement needs to have.
	MS. DEGETTE.  Mr. Plitt.
	MR. PLITT.  Yes, the data retention is something that is 
absolutely necessary.  The two enemies in Internet investigations 
are time and data volume, and with respect to time I think what we 
would find that looking at the 21,000 targets shall we say from the 
RegPay Falcon case unfortunately the information wasn't available 
so the staleness of probable cause, staleness of information, is a 
large matter.
	MS. DEGETTE.  And I assume though you wouldn't use a 1-
year law as an excuse to drag your feet in investigations in any 
way?
	MR. PLITT.  Oh, no, no.  We work the cases as quickly as we 
can.  These are high priority cases for us.
	MS. DEGETTE.  Thank you.  Thank you very much, Mr. 
Chairman, for your accommodation, and thanks again to the panel.
	MR. WHITFIELD.  Thank you.  As I said, we have three votes on 
the floor.  There is about a minute left on the first vote and then 
there will be two 5-minute votes, so it will be our goal to be back 
here by 10 till 12:00--no, 5 till 12:00 or 12:00.  That is our goal.  
And then we have additional questions for the first panel, so we 
will recess until about 5 minutes till 12:00.
	[Recess]
	MR. WHITFIELD.  The hearing will come back to order.  We are 
waiting for a couple other members but in the meantime Mr. 
Stupak had a couple of additional questions that he would like to 
ask, so I will recognize Mr. Stupak.
	MR. STUPAK.  Thank you.  Mr. Plitt, if I may, I asked Mr. 
Christie about search warrants.  Do you find search warrants in 
these cases problems, take too long, evidence goes cold on you?  
What has been your experience in that area?
	MR. PLITT.  In the first few types of these cases it was an 
educational issue for the prosecutors as well as the agents.  We 
have worked through that.  And I will tell you something that is 
underway is working through Project Safe Childhood.  We are 
working to establish the attorney in that area in that particular 
jurisdiction who would be able to respond to exigent search 
warrant situations, so we are already looking at some of that.  
Other than that, not too many problems.
	MR. STUPAK.  So a regular search warrant or administrative 
search warrants, what type would you be seeking?
	MR. PLITT.  We would usually seek criminal-based search 
warrants.
	MR. STUPAK.  And it is not a problem?
	MR. PLITT.  It hasn't been a problem, that is correct.
	MR. STUPAK.  Very good.  I have no more questions, Mr. 
Chairman.
	MR. WHITFIELD.  Well, I want to thank the first panel for being 
with us this morning.  We genuinely appreciate your testimony and 
the information you have provided, and we look forward to 
continue working with you as we make efforts to make a continued 
dent into this problem.  And with that, I will release the first panel.  
Thank you very much.  At this time I would like to call up the 
second panel, and are we going to have a second panel, by the 
way?  Okay.  We originally on the second panel had a John Doe 
testimony from a Federal corrections institute, and that still has not 
been decided completely, so at this time I would like to call up the 
third panel.
	And on the third panel we have Mr. Arne Christenson, who is 
Senior Vice-President, Federal Government Affairs with the 
American Express Company.  We have Ms. Jodi Golinsky, who is 
Vice President and Senior Regulatory Counsel for MasterCard 
International.  We have Mr. Joe Sullivan, who is the Associate 
General Counsel of PayPal.  We have Mr. Mark McCarthy, who is 
Senior Vice President, Public Policy, for VISA.  And then Mr. 
Douglas Jackson, who is the Chairman of e-gold Group, and we 
would invite him to come up and testify as well.
	I want to thank all of you for being with us today.  Of course, 
this hearing is really focused on this panel, and we know that you 
all have taken many steps to assist in the significant issue that we 
face.  As you recognize, it is an Oversight and Investigations 
Subcommittee hearing, and we do normally take testimony under 
oath.  Do any of you have any objections to testifying under oath?  
If not, then if you would please stand and raise your right hand, I 
would like to swear you in.
	[Witnesses sworn]
	MR. WHITFIELD.  Thank you very much, and all of you are 
under oath now.  Mr. Christenson, we will recognize you for your 
5-minute opening statement.

TESTIMONY OF ARNE L. CHRISTENSON, SENIOR VICE PRESIDENT, FEDERAL GOVERNMENT 
AFFAIRS, AMERICAN EXPRESS COMPANY; JODI GOLINSKY, ESQ., VICE PRESIDENT AND 
SENIOR REGULATORY COUNSEL, MASTERCARD INTERNATIONAL, INC.; JOE SULLIVAN, ESQ., 
ASSOCIATE GENERAL COUNSEL, PAYPAL, INC.; MARK MCCARTHY, SENIOR VICE PRESIDENT, 
PUBLIC POLICY, VISA U.S.A., INC., AND DOUGLAS JACKSON, CHAIRMAN, E-GOLD GROUP, 
INC.

	MR. CHRISTENSON.  Thank you, Chairman Whitfield.  
Chairman Whitfield, Ranking Member Stupak, my name is Arne 
Christenson.  I am a Senior Vice President at American Express for 
Federal Government Affairs, and I also serve as our company's 
representative on the Financial Coalition Against Child 
Pornography.  And we at American Express are proud to be 
working with the National Center and our colleagues in the 
industry on that important effort.  It is a privilege to testify today 
about our efforts at American Express to block any use of our 
cards to purchase child pornography on the Internet.
	Today I would like to just briefly describe our business model, 
and then list the steps we take so that our network is not used to 
fund child pornography and outline what we are doing to focus 
even more intensely on combating this evil in the future.  
American Express was founded in 1850 and is today a diversified 
worldwide company focused on payments, travel, and financial 
services.  We operate what is often referred to as a closed loop 
network, which is distinguished in some ways from major 
networks like Visa and MasterCard.  In an open network model the 
networks process transactions and serve as a connecting point 
between an acquiring bank which has the relationship with the 
merchant, and an issuing back which has the relationship with the 
cardholder.  At American Express, all these functions take place 
within one company.  We issue cards to customers.  We operate 
the network, and we manage the relationship with merchants who 
accept our cards.
	Consequently, our work to combat child pornography involves 
activities that may be undertaken by two or three different entities 
in the open network model.  We screen merchants who wish to 
accept American Express as an acquiring bank might do in the 
open network model.  We track activity on our network constantly 
to ensure that merchants are not violating our policies, as Visa and 
MasterCard do, and we work with law enforcement to respond to 
any potential illegal activity on our network, whether that activity 
involves cardholders, merchants, or both.
	Let me say, first of all, a few words about our due diligence.  
We restrict or prohibit the signing of merchants that fall within 16 
general categories.  First and foremost, we do not accept merchants 
that are linked in any way to illegal activities, including child 
pornography.  In addition, since 2000 we have had a broader ban 
on Internet pornography in general.  When a merchant wants to 
begin accepting the American Express card, we look at a number 
of different things, their financial records, their past history with 
us, their past history with other card networks, any websites they 
might have, and merchants that we view as a higher risk are routed 
to an internal contract review team for further investigation.
	We decline thousands of merchants every year because they do 
not meet our criteria.  In addition to this review at the time of 
signing, we continually monitor merchant submissions to identify 
suspicious activity or patterns that are not consistent with the 
merchants identified industry.  In doing so, we identify and 
investigate transactions that differ in important ways from what 
would be customary or expected for a particular merchant.  In the 
case of Internet merchants, we also conduct ongoing monitoring of 
the World Wide Web to detect any violations of our policies.
	Our Web crawlers review millions of Web pages each day, and 
in the case of child pornography this search includes proprietary 
technology designed to detect such sites.  When we discover 
merchants who are violating our policies, we can take immediate 
action and terminate them.  By every indication our policies and 
procedures have effectively blocked the use of our network to 
finance child pornography.  In cases where we have found a 
website that could be linked to child pornography, we have 
terminated the merchant.  However, the vast majority of merchant 
cancellations in this area stem from violations of our broader 
policy on Internet pornography.
	The statistics on the National Center are consistent with these 
findings.  In 2005, a very small percentage of all commercial child 
pornography referrals received by NCMEC contained references to 
American Express.  Our own experience indicates that very few of 
those sites that mention American Express would actually connect 
to a merchant on our network.  While our research shows that very 
few child pornography sites take our card, it appears that they often 
promote payment by credit cards to make the site appear more 
legitimate.  Indeed, there is a growing trend toward steering 
visitors of these sites to various alternative payment methods.
	While our restrictive rules have been broadly effective, we are 
focused on two areas where we believe we can do more to be more 
effective.  First, we have changed our process for monitoring the 
Internet.  In the past our search for child pornography sites took 
place as part of our broader efforts to enforce our Internet 
pornography and there was not a clear differentiation between the 
two in our review and reporting.  We now separately track and, if 
necessary, refer to law enforcement any sites that could include 
child pornography.
	Second, through our work with the Financial Coalition, we 
have instituted a more effective, documented, and ongoing 
consultation with law enforcement on child pornography issues.  
American Express is committed to working in partnership with law 
enforcement and others in the industry to deny child pornographers 
access to the payment system, and we appreciate your focus on this 
important issue.  I would be happy to take questions.
	[The prepared statement of Arne Christenson follows:]



PREPARED STATEMENT OF ARNE L. CHRISTENSON, SENIOR VICE 
PRESIDENT, FEDERAL GOVERNMENT AFFAIRS, AMERICAN EXPRESS 
COMPANY

 


	MR. WHITFIELD.  Thank you, Mr. Christenson.  Ms. Golinsky, 
you are recognized for a 5-minute opening statement.
	MS. GOLINSKY.  Good afternoon, Chairman Whitfield and 
Ranking Member Stupak.  My name is Jodi Golinsky, and I am 
Vice President, Regulatory and Public Policy Counsel at 
MasterCard Worldwide.  It is my pleasure to appear before you 
today to discuss our efforts to prevent the misuse of our system in 
connection with online child pornography.  We commend the 
subcommittee for its leadership on this issue.  The efforts of the 
subcommittee and its staff have increased the focus on this issue 
and have helped bring together a wide range of interests to combat 
child pornography.
	MasterCard deplores any attempts to use our system for illegal 
purposes, and we are deeply committed to combating the sale of 
child pornography.  Our efforts in this area include, one, working 
to prevent offending websites from accepting MasterCard-branded 
payment cards, two, detecting websites attempting to circumvent 
our prohibition, and, three, assisting law enforcement to detect, 
apprehend, and prosecute child pornographers.  We have had great 
success in impeding these criminals from accessing our system.  
We recognize, however, that we see only part of the problem and 
that criminals who are denied access to our system are quick to 
look for other payment alternatives.
	We also recognize that private sector efforts alone are simply 
not enough.  Collaboration with law enforcement is critical.  Law 
enforcement must be given the tools and resources to apprehend 
and prosecute these criminals, and there must be an effective 
mechanism for the private sector to assist law enforcement in 
achieving those objectives.  To address these issues, MasterCard 
has partnered with the National Center for Missing and Exploited 
Children to form the Financial Coalition Against Child 
Pornography.  In conjunction with government leaders and law 
enforcement agencies around the world, the coalition has 
embarked on a first of its kind globally focused effort to identify 
and eliminate commercial sources of child pornography.
	I want to discuss more directly MasterCard's efforts to combat 
this problem as well.  MasterCard has a series of rules that require 
financial institutions who contract with merchants, also known as 
acquiring banks to insure that the merchants are legitimate and 
engaged in solely legal activities.  These rules mandate, among 
other things, that acquirers perform due diligence before 
authorizing merchants to accept MasterCard payment cards and 
that acquirers monitor merchants on an ongoing basis for 
compliance with the rules.  We have also proactively educated our 
customer financial institutions around the world about our rules 
and their obligations with respect to illegal transactions such a 
child pornography.
	MasterCard also works closely with law enforcement officials 
to assist them in detecting and prosecuting child pornographers.  In 
addition, we undertake significant efforts to check child 
pornographers seeking to circumvent our controls.  These efforts 
include searching the Internet to identify sites that appear to be 
selling child pornography and purporting to accept our cards as 
payment.  In the overwhelming majority of cases where our brand 
appears on the site, we have found the site does not actually accept 
our cards but impermissibly displays our logo.
	Our success in impeding these criminals from using our system 
does not end the problem however.  We have seen a clear trend in 
which child pornographers denied access to our system are moving 
rapidly toward alternative payment methods to avoid detection and 
prosecution.  We are not, therefore, content to simply drive these 
criminals from our system and are devoting considerable resources 
to a more comprehensive approach to dealing with the problem.  
We believe that our partnership with NCMEC and the coalition 
provides such an approach.
	MasterCard provides to NCMEC the fruits of our investigative 
efforts and other information that may be helpful to them.  
NCMEC in turn investigates and then refers this information to the 
appropriate law enforcement officials who are given the 
opportunity to conduct their own investigation.  If law enforcement 
decides to proceed with an investigation, we work with law 
enforcement to support their efforts.  If law enforcement decides 
not to proceed, a notice is sent to any payment service provided on 
that site and those services work to terminate payment acceptance 
at that site.
	In addition to our active participation in the coalition, 
MasterCard is also a corporate sponsor NCMEC.  MasterCard 
views our sponsorship of NCMEC as an extension of our fight 
against the exploitation of children and dissemination of child 
pornography on the Internet, and we are extremely proud to 
contribute to their efforts.  Chairman Whitfield, Ranking Member 
Stupak, thank you again for the opportunity to discuss these 
important issues with you today.  MasterCard is deeply committed 
to doing its part to eliminate the commercial viability of child 
pornography on the Internet.  It has also been our pleasure to work 
with your staff, with NCMEC, with law enforcement and others to 
help develop solutions to this problem, and we look forward to 
continuing those efforts.  I would be happy to answer any 
questions that you may have.
	[The prepared statement of Jodi Golinsky, Esq. follows:]

PREPARED STATEMENT OF JODI GOLINSKY, ESQ., VICE PRESIDENT 
AND SENIOR REGULATORY COUNSEL, MASTERCARD 
INTERNATIONAL, INC.,

	Good morning, Chairman Whitfield, Ranking Member Stupak, 
and Members of the Subcommittee.  My name is Jodi Golinsky, 
and I am Vice President, Regulatory and Public Policy Counsel at 
MasterCard Worldwide in Purchase, New York.  It is my pleasure 
to appear before you today to discuss our efforts to prevent the 
misuse of our system in connection with on-line child 
pornography.  We commend the Subcommittee for its leadership 
on this issue.  The efforts of the Subcommittee and its staff have 
increased the focus on this issue and have been helpful in bringing 
together a wide range of interests to combat child pornography.  
	MasterCard deplores the use of our system for any illegal 
purposes, and we prohibit our system from being used for the sale 
of child pornography.  We take this matter very seriously, and we 
are committed to combating the sale of child pornography.  Our 
efforts in this area include:  (i) working to prevent offending web 
sites from accepting MasterCard-branded payment cards; 
(ii) investigating and testing to detect web sites attempting to 
circumvent our prohibition; and (iii) assisting law enforcement to 
detect, apprehend, and prosecute purveyors of child pornography.  
	These efforts have succeeded in significantly disrupting child 
pornography sales.  We recognize, however, that we see only part 
of the problem and that criminals who are denied access to our 
system are quick to look for other payment alternatives, including 
new and evolving payment methods designed for Internet-based 
transactions.  We also recognize that private sector efforts alone 
are not enough-collaboration with law enforcement is critical.  
Law enforcement must be given the tools and resources to 
apprehend and prosecute these criminals, and there must be an 
effective mechanism for the private sector to assist law 
enforcement in achieving those objectives.  
	To address these issues, MasterCard has partnered with the 
National Center for Missing and Exploited Children ("NCMEC") 
to form the Financial Coalition Against Child Pornography 
("Coalition").  The Coalition represents a partnership of companies 
and governmental entities that have come together to combat child 
pornography.  It includes a broad range of financial institutions, 
Internet service providers, and technology companies committed to 
working with NCMEC and governmental agencies to develop a 
coordinated approach to detecting and combating child 
pornography and provide a critical mechanism for assisting law 
enforcement in developing the information needed to apprehend 
and prosecute these criminals.
	Coordinated by the NCMEC and the International Center for 
Missing and Exploited Children, the Coalition has embarked, in 
conjunction with government leaders and law enforcement 
agencies worldwide, on a first of its kind, globally focused effort to 
identify and eliminate commercial sources of child pornography.  
The Coalition has defined an initial four-point strategy to combat 
child pornography that stresses the sharing of information about 
illegal activities among Coalition companies and has created a 
centralized system that proactively seeks, reports, and tracks the 
dissemination of child pornography.  This information sharing is 
designed to provide law enforcement the essential information they 
need to apprehend and prosecute the criminals that purvey child 
pornography.  It also provides an efficient mechanism for the 
Coalition's private sector participants to obtain the information 
needed to shut down the services being utilized by the criminals.  
	In addition, the Coalition is mobilizing world leaders to 
become a part of this global effort to eradicate child pornography.  
Through collaboration with this broad range of partners, we are 
mounting an aggressive effort against child pornography.  Indeed, 
as discussed below, the Coalition has developed a mechanism to 
allow law enforcement and private sector parties to share valuable 
information to reduce the viability of child pornography web sites.  

Background
	MasterCard is a global organization with 25,000 financial 
institution customers that are licensed to use the MasterCard 
service marks in connection with a variety of payments systems.  It 
is important to note that MasterCard itself does not issue payment 
cards nor does it contract with merchants to accept those cards.  
Instead, those functions are performed by our customer financial 
institutions.  The financial institutions that issue payment cards 
bearing the MasterCard brands are referred to as "card issuers."  
The financial institutions that enter into contracts with merchants 
to accept MasterCard-branded cards are referred to as "acquirers."  
MasterCard provides the networks through which the customer 
financial institutions interact to complete payment transactions and 
sets the rules regarding those interactions.  

Efforts to Address Child Pornography
	A fundamental rule of our system is that each customer 
financial institution must conduct its MasterCard programs and 
activities in accordance with all applicable laws.  This includes, for 
example, ensuring that any transaction a customer submits into the 
MasterCard system pertains to only legal activity.  In connection 
with this rule, MasterCard expressly prohibits the use of its brand 
or system in connection with child pornography transactions, 
regardless of any legal ambiguity that may exist in a given 
jurisdiction.  
	MasterCard also has a series of rules that require acquirers to 
ensure that the merchants with whom they contract to accept 
MasterCard-branded cards are legitimate and engage in solely legal 
activities.  These rules mandate, among other things, that acquirers 
perform due diligence on a merchant before authorizing the 
merchant to accept MasterCard payment cards and that acquirers 
monitor merchants for compliance with the rules.  Acquirers that 
fail to comply with the rules may be required to absorb the cost of 
any illegal transactions, and may be assessed fines, suspended or 
terminated, in MasterCard's sole discretion.  
	It is important to note that we have been proactive in educating 
our customer financial institutions about our rules and their 
obligations with respect to illegal transactions, such as child 
pornography.  For example, MasterCard has provided acquiring 
banks with guidance based on intelligence we have gained from 
previous investigations so acquirers are better prepared to avoid 
criminal or fraudulent schemes.  In fact, we have also stressed the 
importance and utility of the Coalition to our customer financial 
institutions which has resulted in the recruitment of several 
Coalition participants.
	MasterCard also works extensively with law enforcement 
officials to address situations where the legality of activities related 
to MasterCard payment card transactions is in question.  A major 
objective of these efforts is to ensure that MasterCard provides 
appropriate support to law enforcement in their efforts to address 
illegal activity.  We are sensitive to the fact that our efforts to 
enforce the MasterCard rules have the potential to hinder ongoing 
law enforcement investigations and the like.  For example, when a 
merchant is shut off from accepting MasterCard-branded cards 
because the merchant violated our rules, law enforcement's ability 
to gather evidence can be impeded and shutting off a merchant 
might alert that merchant to an ongoing investigation.  
	In addition, MasterCard undertakes significant efforts to detect 
child pornographers seeking to circumvent our controls.  These 
efforts include searching the Internet to identify sites that appear to 
be selling child pornography and purporting to accept our cards as 
payment.  Once such sites have been identified, a painstaking, and 
largely manual, investigation is conducted to determine whether 
those sites actually accept our cards.  In the overwhelming 
majority of cases where our brand appears on the site, we find that 
the site does not actually accept our cards but impermissibly 
displays our logo.  Unfortunately, our success in impeding these 
criminals from using our system does not end the problem.  We 
have seen a clear trend in which child pornographers denied access 
to our system are moving rapidly toward alternative payment 
methods to avoid detection and prosecution.  
	Consequently, we are not content to simply drive these 
criminals from our system and are deeply committed to a more 
comprehensive approach to dealing with the problem.  We believe 
that our partnership with NCMEC and the Coalition provides such 
an approach, and we are in the process of conducting a program 
with the Coalition and law enforcement which is designed to make 
it more difficult for criminals driven from our system to find safe 
haven.  Under the program, MasterCard is providing to NCMEC 
the fruits of our investigative efforts.  NCMEC, in return, refers 
this information to the appropriate law enforcement officials who 
are given the opportunity to conduct their own investigation.  If 
law enforcement decides to proceed with an investigation, we work 
with law enforcement to support their efforts.  If law enforcement 
decides not to proceed, a notice is provided to any payment service 
provided on that site and those services work to terminate payment 
acceptance at that site.  This approach gives priority to any law 
enforcement efforts to investigate and prosecute the offending 
criminals but also helps to ensure that the criminals are thwarted 
from their efforts to receive payment when law enforcement is 
unable to pursue prosecution.  
	In addition to our active participation in the Coalition, 
MasterCard is also a corporate sponsor of NCMEC.  MasterCard 
views its sponsorship of NCMEC as an extension of our 
commitment to helping fight the exploitation of children and 
dissemination of child pornography on the Internet, and we are 
proud to contribute to NCMEC's efforts.  

Conclusion
	Chairman Whitfield, Ranking Member Stupak, and Members 
of the Subcommittee, thank you again for the opportunity to 
discuss these important issues with you today.  MasterCard is 
deeply committed to doing its part to eliminate the commercial 
viability of child pornography on the Internet.  It has also been our 
pleasure to work with your staff, NCMEC, law enforcement, and 
others to develop solutions to combat child pornography.  We look 
forward to continuing these efforts.  I would be glad to answer any 
questions you may have.  

	MR. WHITFIELD.  Thank you very much.  And, Mr. Sullivan, 
you are recognized for 5 minutes.
	MR. SULLIVAN.  Thank you, Chairman Whitfield, and Ranking 
Member Stupak.  My name is Joe Sullivan, and I am the Associate 
General Counsel at PayPal.  I am grateful for the opportunity to 
speak with you today about the steps that PayPal has been taking to 
combat the financing of child exploitation on the Internet.  Both 
the efforts we have taken on our own, and the progress we have 
made working together with the other members of the Financial 
Coalition.  I am very familiar with PayPal's efforts in this area.  I 
spent my first 4 years at the company overseeing our work with 
law enforcement, and I have personally engaged the FBI, ICE, 
Scotland Yard, and other agencies on this important issue.
	I am also very familiar with the challenges of tracking online 
predators because I have personally prosecuted Internet child 
exploitation cases while working for the Department of Justice, 
first as the high tech prosecutor at the U.S. Attorney's Office in 
Las Vegas, and later as a founding member of the first full-time 
high tech Federal prosecution unit at the U.S. Attorney's Office in 
the northern district of California.  I am very grateful I had the 
opportunity to work under current FBI Director Robert Muller 
when he was the U.S. Attorney when he made the smart decision 
to found and create the first high tech dedicated unit.
	PayPal is the global leader in online payments, and is a wholly 
owned subsidiary of eBay.  The way PayPal works is to enable 
individuals and businesses to pay and accept payments securely on 
the Internet.  We are built on the existing financial infrastructure of 
banks and credit cards.  We have more than 114 million accounts 
around the world.  PayPal is committed to providing a safe and 
legal online payment service for its users.  We are very clear with 
our customers about the types of transactions that we do allow and 
don't allow, and certainly the use of PayPal for the purposes of 
sending or receiving payment for child pornography is strictly 
forbidden.
	It is clearly in our interest and that of the public that we know 
who our customers are, how they transact online, and whether the 
intent to comply with our acceptable use policies.  A safe well-lit 
Internet serves all constituents as well, and to that end we dedicate 
significant resources to our efforts.  In particular, we focus on three 
areas, technology, partnerships, and coordination with law 
enforcement.  At its heart, PayPal is a technology company.  It is 
made up of engineers, statisticians, and scientists, and we use very 
sophisticated behavioral and anti-fraud models which literally get 
smarter with every transaction that goes through our systems.  We 
have patented unique and sophisticated anti-fraud techniques and 
our approaches are emulated across the Internet.
	We view our technology as a strong front door.  We use 
modeling to screen registrations, evaluate user associations, 
scrutinize transaction details, and detect suspicious patterns.  On 
the topic of modeling, we have developed over time a sophisticated 
lexicon of key words to use in child pornography related searches, 
and we have done so with the help of law enforcement agencies 
such as the FBI's Innocent Images Group and Scotland Yard, 
which have contributed significantly to refining our key word lists.  
We also proactively searched the Internet using search engines and 
Web scraping services and we hire external experts to supplement 
our efforts.  Collectively, we review hundreds of thousands of 
URLs and business models each year.
	As part of the united front, we work closely with our partners 
at the National Center, the credit card associations, financial 
institutions, Internet service providers, and other technology 
companies.   We are all in this together and we work together well 
to leverage our combined expertise and develop best practices to 
deter the exploitation of children online.  We were excited to be 
founding members of the Financial Coalition and even more 
excited about the progress the group had made to date.  The 
passion of Ernie Allen and his team at the National Center 
combined with the expertise of the financial industry and the 
commitments of law enforcement make a powerful combination.
	We also work proactively with law enforcement.  We don't 
wait to be called.  When we find anything remotely linked to the 
distribution of child pornography, we do three things.  We send a 
report to the National Center.  We file a suspicious activity report, 
and we package the details up in a proactive referral to law 
enforcement.  We also actively sponsor law enforcement Internet 
crime training conferences and we speak regularly at their training 
programs.  From FLETCE to Quantico to the DOJ National 
Advocacy Center to the annual ICAC conference in San Jose our 
team of experts is always invited and always welcome.
	These efforts together have certainly aided in the deterrence of 
child exploitation on the Internet but we are not content to stand 
still.  We will continue to improve our technology and broaden and 
deepen our partnerships.  We applaud the efforts of the committee 
to facilitate dialogue in further coordination.  We believe that there 
are additional avenues that would further this objective such as 
pushing for Whois standards that will help with transparency for 
all commercial actors online, encouraging hosting services to have 
the ability to respond to third party requests without risk of 
liability, and enhancing dedicated law enforcement funding in this 
area.
	These steps combined with the ongoing efforts of law 
enforcement will go a long way towards eliminating this horrible 
crime.  Mr. Chairman, Mr. Stupak, thank you for your time, and I 
am happy to answer any questions.
	[The prepared statement of Joe Sullivan, Esq. follows:]



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

 

	MR. WHITFIELD.  Thank you, Mr. Sullivan.  Mr. McCarthy you 
are recognized for 5 minutes.
	MR. MCCARTHY.  Chairman Whitfield and Ranking Member 
Stupak, my name is Mark McCarthy.  I am Senior Vice President 
for Public Policy for Visa.  Thanks for the opportunity to testify 
today at this hearing.  Mr. Chairman, Visa does not allow its 
payment system to be used for any illegal activity, including child 
pornography.  The crime of child pornography is such a heinous 
exploitation of the vulnerable and the innocent that we have 
decided to put in place since 2002 a program to search the Internet 
to find child pornography merchants and to expel them from our 
system.  I want to describe that program for you today but first I 
want to start with the Coalition Against Child Pornography which 
Ernie Allen talked to you about in the earlier panel.
	Visa cannot conduct a successful campaign against child porn 
alone.  We need to share information.  We need to work 
collaboratively with others.  That is why, Mr. Chairman, as you 
heard in the previous panel, Visa and other payment systems have 
joined with the National Center for Missing and Exploited 
Children to form the Financial Coalition Against Child 
Pornography.  This effort reflects our shared belief that child 
pornography is a global problem in need of a coordinated response.  
Together with our coalition partners, we will enhance our efforts to 
identify websites and pinpoint merchants that are trafficking in this 
illegal activity.  We will cut them off from the use of our networks 
and we will provide assistance as we have in the past to law 
enforcement to put them in jail for good.
	Our zero tolerance anti-child pornography program has two 
parts.  The first, as I said, is due diligence requirements to prevent 
merchants of this character from entering our system to begin with.  
The second is the monitoring program to detect and expel any 
child pornography merchants that fraudulently gain access to our 
system.  A quick word of background on our system.  Visa itself 
performs the communication and settlement functions for our 
financial institutions.  It is these financial institutions called 
acquirers that have the direct relationships with the merchants.  
And our rules oblige these acquirers to assume responsibility for 
their relationships with merchants.
	A fundamental Visa rule is that they allow only legal 
transactions be submitted into the payment system.  On child 
pornography, Mr. Chairman, our rules are explicit and clear, 
acquirers must insure that Internet merchants do not submit child 
pornography transactions into the Visa system, and they must 
terminate Visa acceptance immediately at any child pornography 
site that accepts Visa cards.  You will hear more about what our 
acquiring financial institutions do in this area on the next panel.  In 
general, they must determine that a prospective merchant is 
financially responsible and will abide by Visa requirements as well 
as by applicable law.  By taking these precautions acquirers can 
and do provide a line of defense against child pornography 
merchants getting into our systems but these due diligence 
requirements are not a panacea.
	Child pornography merchants do not present themselves as 
such to acquiring banks.  They often appear to be legitimate 
merchants.  They use a variety of techniques to fool acquirers and 
thereby gain access to our system despite the best efforts of our 
acquiring banks to keep them out.  Accordingly, Visa has a 
monitoring system to identify and eliminate child porn 
transactions.  Since 2002 Visa has retained the services of an 
outside firm to search the Internet for child pornography and to 
find those sites that are child pornography sites and that are also 
accepting Visa cards.
	Our search program was designed to identify and expel from 
our system exactly the kind of commercial porn schemes that you 
might have heard about in the past discussion of this issue.  Mr. 
Chairman, our search firm uses advanced Web crawling and 
filtering technology to detect child porn websites.  It looks for 
websites that display the Visa logo and that satisfy one or more 
indicators that they are engaged in the sale of child pornography or 
that they are marketing themselves as engaged in child 
pornography.  These sweeps are ongoing.  They are conducted 24 
hours a day, 7 days a week, 365 days a year.  Hundreds of millions 
of Web pages are searched each month.
	When our search firm finds one of these criminal sites, they 
conduct test transactions to see whether in fact the site is accepting 
Visa cards or whether it is merely purporting to accept Visa cards.  
The search firm tells us immediately if they find a child porn site 
that is accepting Visa cards and unless requested by law 
enforcement to leave the site open Visa tells the acquiring bank to 
stop processing these transactions immediately.  If these identified 
sites are not in fact accepting Visa cards but they are merely using 
the trademark Visa uses its best efforts to find the Web hosting 
company that is involved to direct them to remove the Visa logo.
	We provide this information to NCMEC, to U.S. and 
international law enforcement agencies as well.  Mr. Chairman, 
Visa's anti-child pornography program has made progress since we 
started the program in 2002.  Our recent numbers tell the story.  In 
August of this year our search firm examined over 11 million 
Internet sites a day and found two child pornography sites that 
accepted Visa cards.  Of course, that is two too many.  Since the 
beginning of this year nine such sites have been identified.  All of 
these sites were quickly expelled from the Visa system.
	In conclusion, Mr. Chairman, let me repeat the point that I 
began with.  The way forward lies in collective action.  Visa 
intends to continue and to increase our cooperative efforts with law 
enforcement and with the Financial Coalition Against Child 
Pornography.  Mr. Chairman, I would be happy to answer any 
questions you might have.
	[The prepared statement of Mark McCarthy follows:]



PREPARED STATEMENT OF MARK MCCARTHY, SENIOR VICE 
PRESIDENT, PUBLIC POLICY, VISA U.S.A., INC.

	Chairman Whitfield, Ranking Member Stupak and Members of 
the Subcommittee, my name is Mark MacCarthy.  I am the Senior 
Vice President for Public Policy for Visa U.S.A. Inc.  Thank you 
for the invitation to participate in this hearing.  Visa appreciates 
this opportunity to testify as part of the Committee's investigation 
into the exploitation of children on the Internet.  
	The Visa Payment System is one of the leading consumer 
payment systems in the world.  Visa itself performs 
communication and settlement services for participating financial 
institutions.  The financial institutions that participate in the Visa 
system are the entities that issue Visa payment cards to individual 
consumers and authorize merchants to accept Visa payment cards 
in payment for transactions.  Visa itself does not have direct 
relationships with merchants that accept Visa payment cards.  In 
the jargon of the industry, the financial institutions that have a 
direct relationship with the merchants that accept Visa payment 
cards are called acquiring financial institutions or acquirers. 
	Visa rules require acquiring financial institutions to assume 
responsibility for their relationships with merchants.  A 
fundamental Visa rule is that these acquirers submit only legal 
transactions into the Visa payment system.  In addition, Visa has 
an explicit rule obligating acquirers to ensure that Internet 
merchants do not submit child pornography transactions into the 
Visa system.
	Visa recognizes that payment cards are an important part of 
electronic commerce and believe that we have responded, and 
continue to respond, effectively to the challenges posed by Internet 
transactions.  In addition to our rule against introducing illegal 
transactions into the Visa payment system and our explicit rule 
against child pornography transactions, Visa has a long history of 
working with law enforcement where the Visa Payment System 
may have been used in connection with illegal transactions.  In this 
regard, Visa maintains ongoing working relationships with a 
variety of law enforcement agencies including the Secret Service, 
the Federal Bureau of Investigation, the Federal Trade 
Commission, and state and local law enforcement. 
	Our anti-pornography program has two components. The first 
is a set of due diligence requirements designed to prevent child 
pornography merchants from entering our payment system.  The 
second is a monitoring program to detect and expel from our 
system any child pornography merchants that mange to 
fraudulently enter our system despite the best efforts of our 
acquiring banks to keep them out. 
	But first I want to mention our involvement with the Financial 
Coalition Against Child Pornography.  Visa has made substantial 
progress with its own anti-child pornography program.  So have 
the other major payment systems.  But we cannot do it alone.  We 
need to share information and work collaboratively together.  That 
is why under the leadership of Senator Shelby, Visa, other payment 
systems and financial institutions joined with the National and 
International Centers for Missing and Exploited Children to form 
the Financial Coalition Against Child Pornography.  In March of 
this year, there was a public launch of this program at a press 
conference with Senator Richard Shelby.  This effort reflects our 
shared belief that child pornography is a global problem in need of 
a coordinated response.  For many years, Visa has worked on its 
own to rid our system of this deplorable activity.  By joining the 
Coalition, we reaffirmed and strengthened our long-standing 
commitment to doing our part to prevent the exploitation of 
children.  Together with our Coalition partners, we will enhance 
our efforts to identify Web sites and pinpoint merchants that are 
trafficking in this illicit activity, cut them off from use of our 
networks, and provide assistance to law enforcement to shut them 
down for good. 



Visa's Due Diligence Requirements
	Visa requires acquiring financial institutions to ensure that all 
merchants are properly qualified to accept Visa cards.  Visa 
acquirers must determine that a prospective merchant is financially 
responsible, and will abide by Visa requirements, as well as 
applicable law.  There are a variety of methods that acquirers may 
use to determine these qualifications, including credit reports, 
business financial statements, and income tax returns, conducting 
physical inspections of the business premises of a prospective 
brick and mortar merchant, and for electronic commerce merchants 
obtaining a detailed business description and examining the 
merchant's Web site.  
	By taking these precautions, acquirers can provide a line of 
defense against child pornography merchants entering the Visa 
system. These due diligence requirements are closely observed by 
acquirers, but they are not a panacea for addressing the problem of 
the use of Visa cards for child pornography transactions. Child 
pornography merchants do not present themselves as such to 
acquiring financial institutions.  They often appear to be legitimate 
merchants.  They use a variety of techniques to fool acquirers and 
thereby gain access to the Visa system, despite the best efforts of 
these acquirers to screen them out of the system. 

Anti-Child Pornography Program
	Accordingly, Visa has supplemented these due diligence 
requirements with an explicit program directed against child 
pornography transactions. The elements of this program are
         An explicit rule prohibiting any Visa financial institution 
from acquiring these transactions
         A series of specific penalties for violation of this policy
         A program of searching the Internet to detect any website 
that appeared to be accepting Visa cards for child 
pornography transactions and processes to immediately 
stop this acceptance

	An explicit ban against child pornography transactions within 
the Visa system is the first part of this program. Acquiring 
financial institutions are under an obligation to carefully review the 
website names and URLs of their Internet merchants to ensure 
these prohibited merchants are not operating within their 
portfolios. Acquiring financial institutions must ensure that all 
prohibited activity is immediately halted. 
	Violation of this policy may subject the offending acquirer to 
significant penalties including the imposition of conditions and 
termination of Visa Membership privileges. Visa acquiring 
financial institutions have been notified and reminded of these 
penalties several times since 2002.  If Visa identifies a child 
pornography merchant in their portfolio, they must terminate the 
merchant immediately.  If the merchant is not terminated within 7 
calendar days, the bank is fined. Repeated offenses are punished 
with a system of escalating fines and other sanctions including 
preventing the offending acquiring financial institutions from 
signing up any new Internet merchants, requiring them to terminate 
existing Internet merchants and ultimately revocation of their Visa 
acquiring license.
	Visa has not found it necessary to use these sanctions often.  
Early in our program some acquiring banks were initially reluctant 
to follow these required procedures.  They were fined.  They got 
the message. Since then, Visa acquirers have abided by our policy 
against child pornography. 
	In support of our efforts to keep child pornography transactions 
out of the system, Visa maintains a monitoring campaign to 
identify and eliminate transactions emanating from child 
pornography merchants. Since 2002, Visa has retained the services 
of an outside firm to search the Internet for child pornography 
websites that appear to be accepting Visa payment cards.  This 
firm uses advanced web crawling and filtering technology to detect 
these websites. It looks for websites that display the Visa logo, and 
that satisfy one or more indicators that they are engaged in the sale 
of child pornography or are marketing themselves as engaged in 
that business.  The sweeps are ongoing; they are conducted daily 
and search hundreds of millions of web pages each month.  
	When our search firm detects one of these problematic sites, 
they conduct test transactions to see whether in fact the site is 
accepting Visa cards or whether they are merely illegally using our 
trademark on their site.  The search firm tells us immediately if 
they find a site that is accepting Visa cards for these transactions. 
Unless requested by law enforcement to leave these sites open, 
Visa then contacts any acquirer found to be processing these child 
pornography transactions and directs them to stop processing these 
transactions immediately.  If they have not done so within 7 
calendar days, they are fined.
If these identified sites are not in fact accepting Visa cards, but are 
merely using the Visa trademark on their site, Visa uses its best 
efforts to locate the web hosting company to direct them to remove 
the Visa logo.
	In addition, Visa provides information regarding all these sites 
to U.S. and international law enforcement officials and to the 
National Center for Missing and Exploited Children. At their 
request and as part of an ongoing law enforcement investigation, 
Visa would allow these problematic sites to remain operational.
	Visa's anti-child pornography program is making significant 
progress in the fight against the use of our payment system for 
these activities.  Our experience is that fewer child pornography 
sites are displaying the Visa logo now than when we started the 
program in 2002 and that alternative payment mechanisms are 
increasingly the way these transactions are financed. 
	The way forward lies in collective action. We need to share 
information and work collaboratively together with other payment 
system providers and with law enforcement.  Visa has recently 
taken an additional cooperative step in its anti-child pornography 
efforts. In April 2006 Visa signed a three-year partnership 
agreement with the newly created Child Exploitation and Online 
Protection Centre (CEOP), a London-based law enforcement 
agency.  CEOP carries out proactive investigations worldwide and 
provides a single point of contact for the public, law enforcers and 
the communications industry, enabling suspicious activity to be 
reported direct, 24 hours a day. The unit, staffed by about 100 
police, computer technicians and child welfare specialists, also 
offers advice to parents and potential victims. As a CEOP partner, 
Visa will provide not only financial support, but also use our 
knowledge and resources to strengthen the Center's Finance Desk. 
This uses financial investigation tools to identify people engaged 
in the sexual exploitation of children for profit, setting out to 
confiscate offenders' assets and disrupt their activities. 
	In addition to this work with CEOP, Visa intends to continue 
and to increase our cooperative efforts with law enforcement and 
with other payment systems in the Financial Coalition Against 
Child Pornography.  
	Visa appreciates the opportunity to appear before you today.  I 
would be happy to answer any questions that you may have.

	MR. WHITFIELD.  Thank you, Mr. McCarthy.  Dr. Jackson, you 
are recognized for 5 minutes.
	MR. JACKSON.  Mr. Chairman, members of the subcommittee, 
thank you for the opportunity to participate in these hearings, and, 
frankly, to respond to the concerns that have been raised regarding 
e-gold, my company.  I am Douglas Jackson, the founder and 
Chairman of e-gold.  I am also the CEO of Gold and Silver 
Reserve, which operates the OmniPay service.  My background is 
that I am a physician, Board-certified in radiation oncology.  I have 
lived in Melbourne, Florida for the past 14 years.  I have been 
married for 28 years.  I have two children, boys aged 10 and 15.  I 
conceived of e-gold 10 years ago, and deployed it online in 1996 
as institution to advance the material welfare of mankind bringing 
access to global markets with reliable, efficient payment 
capabilities.
	The business case for e-gold is introduced in my submitted 
testimony.  This morning and in the media, I have heard the chant 
anonymous, untraceable, and inaccessible to law enforcement 
applied to my company.  I am here to tell you that that is simply 
nonsense.  The inaccessible to law enforcement bit, we have been 
reaching out proactively to law enforcement since 1999.  Recently, 
fortunately, we get some response.  Recently, the cooperative 
arrangements have improved.  We owe a great debt to Ernie Allen 
of NCMEC for that relationship which in this area of child 
pornography led to a C change.  Instead of agencies keeping sites 
secret from us on some strange presumption of complicity, instead 
bringing them to our attention and getting the initial tools that we 
needed to develop the protocols for detection and interdiction.
	As far as anonymous and untraceable, it is simply not the case.  
E-gold is a book entry mechanism.  If a criminal uses e-gold for a 
transaction it is the career ending, game over mistake, and our 
transactions are permanent.  I see my red light is on.  I want to 
direct your attention to page 13--
	MR. WHITFIELD.  You still have two minutes and 59 seconds.  
We forgot to reset it.
	MR. JACKSON.  Okay.  I don't know how to do that.  Sorry.  
Page 13 of the submitted testimony has a graph.  It tells our whole 
story.  It shows the success story over the past year where we have 
had a 98 percent reduction in the amount of child pornography 
payments that are processed through the e-gold system.  If there is 
the slightest skepticism regarding these numbers, I encourage you 
to appoint one of your staffers, one that is technically savvy, detail 
them for 2 days, have them spend time with our investigators, and 
we will satisfy them that this is the absolute case.
	The remaining amount of this crime that is conducted through 
e-gold is meager.  It is paltry.  The declining trend will continue 
until we have it suppressed down to zero.  I welcome any 
questions.
	[The prepared statement of Douglas Jackson follows:]

PREPARED STATEMENT OF DOUGLAS JACKSON, CHAIRMAN, E-GOLD 
GROUP, INC.

	Mr. Chairman, members of the Committee on Energy and 
Commerce Subcommittee on Oversight and Investigations: thank 
you for the opportunity to participate in these hearings. The 
problem of child pornography on the Internet is a serious one, and 
I am pleased to see the full involvement of the federal government, 
nongovernment organizations, and private industry. Working 
cooperatively will certainly help us all in the goal to eradicate this 
heinous crime from the Internet.
	I would also like to applaud Ernie Allen and the National 
Center for Missing & Exploited Children (NCMEC) who have 
spearheaded the effort to bring together this financial coalition. 
Our aim, along with the NCMEC, is to curb the flow of payments 
to these criminals and to help identify perpetrators and their 
activity so that law enforcement can take appropriate action. We 
strongly support the NCMEC's goal to eradicate child pornography 
on the Internet, and I would like to add my thanks to my colleagues 
in this coalition.
	I would like to take the opportunity to introduce you to e-gold. 
Though e-gold is approaching its tenth anniversary in November of 
this year, we recognize that we are still not well known in circles 
that do not make extensive use of the Internet for commerce. e-
gold, Ltd. is a Nevis, West Indies company. It is operated by Gold 
& Silver Reserve (G&SR), headquartered in Melbourne, Florida. 
Gold & Silver Reserve also operates a service for the purpose of 
buying or selling e-gold, branded as OmniPay.
Gold & Silver Reserve's primary mission is to establish e-gold as a 
viable and credible medium/mechanism for Internet payment 
transactions, allowing an easy, safe, and secure means to receive 
payment via the Internet.

Overview 
	e-goldr is a unique alternative system that mobilizes the value 
of gold for Internet payments. e-gold is designed to provide a 
complementary payment system for secure and final Internet 
transactions that minimizes exchange risk. Following charge cards, 
e-gold has the world's second largest reach as an online payment 
system behind PayPal, and it is far more global. Comparative 
analysis by websites that measure Internet activity show PayPal 
and e-gold first and second respectively in web traffic on payment 
system sites.
	e-gold differs from every other existing payment system in that 
a quantity of e-gold constitutes a liability that, by virtue of a 100% 
reserve of physical gold, perfectly embodies the value of gold in 
allocated storage. e-gold is denominated in weight units. Transfers 
from account to account occur by book entry on dedicated database 
servers. E-gold is a closed system; that is, it is impossible for a 
user to send value into the system. Increases or decreases of the 
overall quantity of e-gold in circulation can be effected by 
bailment or redemption of physical gold by a credentialed entity, 
either a gold bank or other primary dealer designated by the issuer, 
e-gold, Ltd. 
	e-gold has over 3 million accounts in more than 165 countries 
and has the credibility of significant tenure, having been in 
operation online for almost 10 years. During e-gold's 10-year 
history, numerous other payment mechanisms have attempted to 
penetrate the online payment and remittance market, spending 
hundreds of millions to do so. PayPal, clearly the market leader, 
burned through $275 million of losses before their acquisition by 
eBay. e-gold established its position almost entirely through the 
personal investment of its founder and a close circle of family and 
friends and has carefully continued its progress, relying on 
internally generated funds. e-gold has survived and thrived where 
most others have failed, due to a sound and coherent business 
model and robust, evolving self-governance as described below. 
This financing approach has not allowed the speed of growth that, 
for example, PayPal has achieved, but it has allowed e-gold to stay 
firm to its original mission. Classical market analysis would show 
organizations such as PayPal, Western Union, and credit card 
companies as competitors. In actuality, however, every seeming 
competitor would benefit from a strategic embrace of e-gold, 
taking advantage of e-gold's inherently global reach and non-
repudiable settlement protocol to extend their own market 
penetration, reduce direct costs, and thereby offer a better service 
to their customer base. These same efficiencies, combined with e-
gold's ever more refined capabilities for detection and interdiction 
of illicit payment transactions, would provide substantial benefit to 
official institutions that accept payment online and/or which 
themselves offer remittance and related services, like the U.S. 
Postal Service,.
 	Since its inception, e-gold has settled over 67 million 
individual transactions and is today processing 50,000-70,000 
account-to-account transfers per day, valued at over $2.0 billion 
USD annually. 
 	All e-gold in circulation is backed 100% by a reserve of 
physical gold in London Bullion Market Association member 
repositories. Currently, reserves amount to nearly 3.6 million Fine 
Grams of gold, which would place e-gold 76th among countries for 
the value of gold reserves. At today's gold exchange rates, this 
reserve is valued at over $68 million USD.

Vision
	e-gold was established in 1995 as a viable and credible 
medium/mechanism for Internet payment transactions, allowing an 
easy, safe, and secure means to make account-to-account transfers 
of value on the Internet by anyone, anywhere in the world.
	e-gold's governance and transaction model derives from the 
dual imperative to assure finality of settlement and freedom from 
default risk.
	e-gold is a payment system that, unlike any other, allows 
people from any region or economic background to operate 
globally: a migrant worker can send value back home easily and a 
merchant can accept payment from someone in a third-world 
country who may be without access to a charge card or bank 
account.
	e-gold alone is free of chargeback risk, yet the fees for 
receiving payment in e-gold are a tiny fraction of those charged by 
any other systems.
	Thanks to e-gold, for the first time in history, normal people of 
modest means worldwide have the option of using a medium of 
exchange and store of value that is designed from the ground up to 
be immune to debasement with a governance model that precludes 
even its management and founders from having the power to 
subvert it.

Governance, Security, and Visibility
	 e-gold has a firm governance model to protect its users, is 
highly secure, and offers unprecedented visibility of activity to its 
users.
	e-gold remains independent of its Operator and any 
"exchangers" of e-gold, a separation of roles that further aids in 
assuring e-gold's freedom from default risk and finality of 
settlement. The operating guidelines are governed by the e-gold 
Account User Agreement which can be found on the e-gold 
website. The physical gold, stored in London Bullion Market 
Association recognized depositories in allocated storage, is titled to 
the "e-gold Bullion Reserve Special Purpose Trust," a purpose 
trust holding these physical assets for the exclusive benefit of e-
gold account holders. The gold is not under the control of the 
owners or operators of e-gold.
	Transfers within e-gold are account-to-account, with 
immediate settlement by book entry on dedicated servers.
	e-gold payments are made in a weight-based unit of (typically) 
gold. This medium of payment makes e-gold less subject to 
extreme fluctuations in currency exchange rates, especially for 
customers in countries with unstable currency. The asset portfolio 
backing e-gold, consisting entirely of physical gold, is free from 
the financial risks that pertain to securities or other debt 
instruments.
	Freedom from default and finality of settlement are essential 
features that set e-gold apart from other payment systems and have 
led to e-gold's firm position in the market. For e-gold to continue 
to grow and achieve its original vision, it is imperative that it 
maintain its low-risk model and operate at the highest level of 
integrity.
	The e-gold system is very secure. All transactions occur online. 
Account login requires an account number, a pass phrase, human 
recognition of a Turing number, and a system verification of the 
user's IP address. The only instances e-gold has encountered with 
compromised accounts are those in which a user in some manner 
surrendered both their account data and access to their personal 
email to an unknown party. e-gold maintains significant 
information on its website to educate users to the various schemes 
used to gain account information.
	e-gold abides by an unparalleled standard of transparency. The 
"Statistics" and "Examiner" links on the e-gold website publish 
real-time data on payment volume and other system usage data as 
well as the detailed inventory data for each repository. This 
transparency is unique among all online payment systems, 
including other precious metal-backed sites. We believe it is of 
fundamental importance that our customers fully understand e-
gold's size, growth, and gold backing to establish the credibility 
for safe, ongoing use. 
	Very favorable critiques have been received from respected 
business journals. Both Barron's in April 2001 and Grant's 
Interest Rate Observer in June 2003 reported favorably on the e-
gold system. Barron's noted: "The ideal e-currency might even be 
backed by gold. Encrypted digital units of the precious metal could 
in principle be used to pay for anything.....One company, E-gold 
already allows on-line users to settle payments using its currency, 
which is 100% backed by gold."  

e-gold's Commercial Advantages
	e-gold offers numerous advantages to both online merchants 
(recipients of payment) and to online consumers (payers). (With e-
gold, this traditional merchant/consumer distinction is obsolete-e-
gold is bi-directional, meaning every account can make or receive 
payments.) Merchants benefit from fees that are significantly lower 
than any other online payment system. All payments are immediate 
and final: there are no chargebacks and the possibility of fraudulent 
payments is eliminated. e-gold is the most global of all payment 
systems, with easy-to-use interfaces, including a shopping cart. 
Since e-gold itself is immune to credit-related risks such as default 
by a user, recipients of e-gold payments are free of the costs and 
risks that other systems are forced to pass to their payment 
recipients.
	Consumers do not need to share personal information across 
the Internet to make a payment. This feature is a great advantage in 
reducing identity theft. Payment is immediate, final, and fully 
automated, enabling the purchased product or service to reach the 
consumer faster. Low transaction fees, coupled with elimination of 
costs associated with chargebacks can provide merchants a 
competitive edge by enabling cost savings to be passed back to the 
buyers. All transactions are fully traceable: if a debate ensues 
about a sale, there is a clear and unimpeachable record of the 
payment. And importantly, the e-gold payment system is easy to 
use.

e-gold "Exchange"
	e-gold does not accept "money" (or any other transfer of value 
from the public) directly into the system. The only way to obtain e-
gold is from someone who already has it. Many users will buy and 
sell their e-gold through a third-party "exchanger." These are 
organizations completely independent of e-gold that operate 
around the world. The "exchangers" will accept payment for e-
gold in a number of ways, but most typically accept wire transfers 
or certified checks. Any entity performing exchange realizes a 
business necessity to "know their customer" in order to avoid fraud 
losses due to failed or reversed payments transmitted via legacy 
(conventional credit-based/bank mediated) mechanisms.  
	Gold & Silver Reserve's OmniPay serves as an exchanger and 
is the primary source of e-gold, buying from or selling to other 
exchangers as the market requires. OmniPay has implemented 
significant controls on how and to whom they buy or sell e-gold. 
When a new user profile is created, it requires e-mail validation 
followed by confirmation of the postal address. The user is also 
required to prove control of any e-gold account to or from which 
the user intends to transact with OmniPay. User profiles are 
screened against OFAC and similar lists upon creation and with 
each exchange transaction that exceeds a threshold.
	OmniPay will only sell e-gold upon confirmed receipt of a 
bank wire, further guaranteeing "know your customer" 
considerations. Upon selling e-gold, OmniPay will transmit by 
bank wire or a check delivered to the validated postal address.
	All bank wires are reviewed to assure the transmitter name 
matches the name of the OmniPay user that entered the "exchange" 
order, and a permanent file of wire notifications is maintained. 
OmniPay restricts daily exchange from one party to $100,000. If a 
larger amount is necessary, OmniPay requires significantly more 
due diligence, including notarized residence documents and copies 
of a government-issued photo ID. Inbound wire transfers are 
reviewed to ensure that the sending bank is not proscribed by U.S. 
Treasury guidelines.

e-gold is Not Hospitable to Illicit or Criminal Activity
	All online payment systems are subject to the attempts of 
individuals to use them inappropriately, whether for acceptance of 
illegal funds, money laundering, or other illicit activity. e-gold's 
unique features and investigative protocols make it the poorest 
choice a criminal could make. 
	Two fundamental elements coupled with numerous 
programmatic processes and controls eliminate the possibility of e-
gold serving as a source of indirection or successful obfuscation of 
money trails.
1.	The public is incapable of sending "money" into the 
system. e-gold, Ltd. has no bank accounts and no capability 
of accepting payment or holding value in the form of any 
national currency. Value can be added (via the bailment of 
good delivery bars into the Trust) only by an entity that has 
been fully vetted by one of the gold banks that comprise 
membership of the LBMA. Currently, only G&SR is 
credentialed to bail additional precious metal reserves into 
the system. A normal account user can obtain a quantity of 
the circulating medium (e-metal) only by receiving it in 
payment from another account user who already has some.
2.	Value in the system is fully traceable. Transfers are 
executed by book entry, creating a permanent record of the 
lineage of every particle of value within the system. 
Records are maintained perpetually: the details of any 
transfer since the beginning of e-gold are available.

	One of duties of the e-gold Operator (G&SR) is to conduct 
investigations pursuant to lawfully executed subpoenas or court 
orders. The organization of e-gold as a closed system where all 
transfers settle by book entry and all transactions capture 
supplemental
information of potential forensic value eliminates the possibilities 
of a miscreant successfully using the system in an anonymous or 
untraceable fashion, even if false contact information has been 
provided. Upon its creation, an e-gold account contains no value 
and can only be "funded" by receiving payment from another user, 
thereby linking the newly funded account to a web of 
counterparties, some of whom inevitably will have provided 
correct and discoverable contact information. There has never been 
an investigation (over 75 performed per year) where the e-gold 
investigative staff has failed to identify the true identity of a 
suspect.
	A new user may create an account online. The prospective user 
is required to provide contact information, including name, e-mail 
address, postal address, and telephone number. To validate the e-
mail address, the system sends a welcome message to the specified 
e-mail address, also notifying the account-holder of the assigned 
account number. Each day, e-gold's due diligence and 
investigative staff screens all accounts created since their previous 
screening session to locate accounts with false or inadequate 
contact information. The screening is assisted by a series of pre-
configured database queries that flag suspicious patterns that have 
been found to be associated with false information. Accounts 
suspected of false identities are immediately blocked, rendering 
them incapable of receiving e-gold transfers.
	Whenever a transaction occurs or a user update of contact 
information is committed to the database, the system captures a 
permanent record of the IP number and timestamp. This vital data 
is key to investigative techniques that require linking accounts in a 
constellation quietly controlled by a single entity seeking to mask 
their identity.
	In 2004, e-gold implemented a countermeasure to mitigate 
phishing exploits (a form of identity theft). The e-gold system 
keeps track of the IP number and browser agent data from which a 
user logs into their e-gold account. If a login attempt is made from 
a different IP number or computer, the system will not allow 
access and will issue a challenge, e-mailing a one time PIN to the 
e-mail address registered with the account. This e-mail serves the 
dual purpose of notifying the rightful user of an unauthorized 
attempt to access their account and alerting them to the fact that 
their account information may have been compromised. The 
system also captures a permanent record of the IP number from 
which the attempt was made.
	e-gold users are encouraged to supply complete and accurate 
information when they establish their account and to update their 
information if the contact data does change. If an account holder 
loses their passphrase, this contact data is required before a new 
one will be issued.
	Of particular importance is e-gold's Right-of-Association in 
the e-gold User's Agreement. e-gold reserves the right to refuse to 
do business with individuals and entities at the sole discretion of e-
gold. This right enables e-gold, Ltd. to refuse an active account to 
any entity suspected of engaging in illicit activities. This right is 
imposed by blocking the suspected account, preventing it from 
receiving transfers. Blocking an account still allows a user to spend 
the existing value in their account. A feature implemented in 2005, 
however, enables account users to refuse to accept Spends from 
blocked accounts. In the case of suspected child pornography, 
accounts are frozen outright, pending full investigation, thereby 
stopping all account activity.
	e-gold has initiated a major system improvement to change 
from an account-based login process to a user-based login. With 
the implementation of this change e-gold will dramatically 
streamline the ability to capture only accurate user identity 
information and further reduce the already poor hospitability of e-
gold for illicit activity. This change is significant requiring 
substantial programming and implementation switchover 
processes, and is expected to be deployed early in 2007.

e-gold is not a major payment system for Child Pornography
	e-gold first experienced the possible use of e-gold for CP 
payment in early 2003. Those indications proved to be "phishing" 
sites using the bait of CP to learn account data of e-gold users, 
suggesting CP availability though apparently not actually selling it. 
e-gold blocked those accounts from further use of e-gold as well as 
all associated accounts.
	At the beginning of 2004, e-gold investigators received a small 
number of third-party reports that proved to be real cases of CP 
sites accepting e-gold. As these sites were identified, they were 
blocked, along with all associated accounts. Recognizing the 
problem was real and growing, e-gold began to reach out to third-
party watchdog organizations to help in the alert process. This 
reaching out was frankly very difficult: e-gold was not well known 
or understood, and often, responses from these third parties were 
limited. e-gold did increase its in-house investigative activities and 
continued efforts with law enforcement. In mid 2005, the National 
Center for Missing and Exploited Children initiated their work that 
led to this financial coalition, which has helped significantly. e-
gold is very proud to be one of the founding members of this very 
worthwhile coalition.
	During this time period, e-gold received adverse press that 
came close to implying complicity in this problem, but it was press 
that was not justified. Based upon the financial size of the CP trade 
identified by the NCMEC and our review of historical transactions, 
e-gold has been the payment mechanism abused in less than one 
hundredth of one percent of the CP payment dollar volume since 
this problem surfaced. The NCMEC CyberTipLine sends alerts to 
Financial Coalition members, and alerts are received from other 
third-party sources as well. Since collaborative efforts started, the 
activity has decreased dramatically. When an alert is investigated, 
95% of the time the account has already been identified and 
blocked through e-gold's own internal investigative efforts, almost 
always detected upon the first payment or before a single payment 
has been received. 
	The following chart represents all CP alerts from all sources 
since December 2005.

 

	e-gold investigators estimate that 90-95% of the alerts received 
are for CP websites for which e-gold has already blocked the 
applicable account. 
	The very favorable trend shown in the chart is not an accident. 
e-gold continues to refine  its protocols to detect and interdict CP 
payments. Investigative protocols are routinely upgraded as more 
is learned about the behavior of the perpetrators and enormous 
personnel resources are applied. e-gold's cost for investigative and 
preventive actions to stop the use of e-gold for illicit activity, 
especially CP, is the single largest element of expense in its 
business. e-gold will continue to apply this attention and resource 
until the problem no longer exists.
	The following graph illustrates the declining dollar volume 
that, unfortunately, has escaped detection before the accounts were 
ultimately identified and blocked. It is evident that the visibility we 
gained from our association with NCMEC in the fall of 2005 was a 
turning point in our efforts to prevent e-gold being used at all for 
CP payment. The declining value depicts the evolving capability of 
our investigative techniques and show we have reduced e-gold 
abuse to a marginal level.

 

	e-gold is not limiting its efforts to its own data base. Whenever 
a CP buyer account is identified, e-gold investigators alert the 
exchange provider from whom the perpetrator purchased their e-
gold. The exchange providers are proving very helpful in 
suppressing CP from the demand side. It has been highly 
encouraging to see how strongly these organizations are supporting 
efforts to deter this crime.
	As low as the escape payments have become, we will still 
remain vigilant: we know full well that these criminals will not 
stop until the risks of their activity outweigh any possible 
commercial incentive. We will continue to strenuously support the 
NCMEC and law enforcement until the problem is gone. 

Justice Department Investigation
	In a spirit of full cooperation and disclosure, it is fair to inform 
the Committee that Gold & Silver Reserve is under investigation 
by the United States Justice Department. G&SR remains confused 
as to why this investigation was undertaken, why it continues, and 
why G&SR and its founder, Dr. Douglas Jackson, have been 
treated in such an abusive manner.  
	In December of 2005, the Secret Service conducted a "raid" of 
the Gold & Silver Reserve offices and Dr. Jackson's home. Bank 
accounts were frozen, and company funds were seized. In an 
emergency hearing in U.S. District Court on January 13, 2006, the 
freeze order on Gold & Silver Reserve's bank accounts was lifted. 
Though numerous criminal claims had been made in obtaining the 
search and seizure warrants, the government made no attempt to 
sustain such allegations. The only claim at that time and continuing 
now is a contention that G&SR is operating as a currency 
exchange without the proper license. G&SR had previously 
proposed to the Government that e-gold be classified for regulatory 
purposes as a currency, enabling G&SR to register as a currency 
exchange. In a Treasury report released January 11, 2006, 
however, the Department of Treasury reaffirmed their 
interpretation of the USC and CFR definitions of currency as 
excluding e-gold.
	As early as 2001, Gold & Silver Reserve attempted to make 
contact with the United States Secret Service to explain how the e-
gold system works and to illustrate the advanced protocols for 
interdiction and investigation of potential criminal use. Dr. 
Jackson, e-gold and Gold & Silver Reserve's founder and CEO, 
scheduled meetings to meet with the Secret Service in 
Washington-meetings which were postponed and subsequently 
canceled by the USSS. These rebuffs by the Secret Service 
continued during the time period when an investigation of the 
Shadow Crew, a carder ring, was made public approximately a 
month before the raid. At no time did the Secret Service engage 
with e-gold investigators, even though the company volunteered to 
assist the Secret Service by obtaining information to assist in their 
investigations under proper subpoena. Throughout this period, 
Gold & Silver Reserve cooperated with numerous other U.S. and 
international law enforcement agencies and expeditiously 
answered subpoenas.
	G&SR, for nearly a year, had been engaged with an agency of 
Treasury in a BSA (Bank Secrecy Act) compliance examination it 
had voluntarily initiated for the purpose of determining how Gold 
& Silver Reserve, Inc. should be regulated.
	In order to obtain the subpoena allowing the search and seizure 
in December, it would also have been necessary to show the court 
that there existed a high probability of flight or destruction of 
records. Dr. Jackson, his wife, and their two children have lived in 
Melbourne, Florida for the past 14 years. Gold & Silver Reserve 
has regularly cooperated with all law enforcement in the United 
States as well as with non-U.S governments, regularly providing 
information to law enforcement under due process. As noted 
earlier, Gold & Silver Reserve had contacted the Secret Service 
repeatedly to explain the system, the data it held, and how Gold & 
Silver Reserve and law enforcement could cooperate.
	Online payment systems, credit cards, money transfer systems, 
and banks are all subject to attempts by criminal elements to use 
them for moving illegally obtained funds. No one is exempt from 
the threat. Extensive public scrutiny has recently been provided to 
a U.S. government program to review international Swift 
transactions of major financial institutions, a program seen as 
important and necessary, looking for money laundering activity. In 
the Shadow Crew case itself, public pronouncements identified 
other systems, including well-known PayPal and Western Union. 
From Gold & Silver Reserve's own investigation, it is certain 
many large U.S. banks have had illegal funds processed into and 
out of their accounts. Gold & Silver Reserve does not know why it 
has been singled out for investigation when the other larger 
institutions have not, especially considering Gold & Silver Reserve 
has possibly the best ability to track payments and identify those 
making transactions and had made repeated offers to assist if 
provided with proper legal direction.
	In December 2005, the Secret Service confiscated all records 
and documentation from the e-gold system and Gold & Silver 
Reserve's offices. It has the entire history of every e-gold 
transaction ever made. As of December, e-gold had processed over 
55 million individual financial transactions-the greatest majority 
from U. S. citizens. Since the December 2005 government actions, 
e-gold has cooperated fully with the government. Despite the fact 
that the U.S. government has all the records, Gold & Silver 
Reserve has continued to support government investigations and 
respond to individual subpoenas. This assistance includes 
supporting an investigation of this same carder ring by other 
agencies of the U.S. government.
	Gold & Silver Reserve regrets being in this conflict situation 
with a service of the United States government and does not 
understand why. Seized funds continue to be held, pending what 
appears to be a never-ending investigation we now believe to be 
over two years long. These funds were designated for ongoing 
improvements of the e-gold system, which would have the effect 
of making the e-gold system even less hospitable for criminal 
abuse. Employees and contractors of Gold & Silver Reserve have 
had their lives interrupted, being called from Florida to 
Washington for testimony, having never been interviewed 
previously. The ongoing legal issue is depleting resources for Gold 
& Silver Reserve's defense against apparently uncertain claims 
since the Government itself has deemed e-gold not a currency, 
thereby rendering the claim of not being licensed as an exchange 
service unfounded. e-gold continues to labor under a cloud of 
unwarranted suspicion, which is clearly impacting business 
operations and its ability to reach out with marketing intiatives to 
natural strategic partners, such as the very financial institutions that 
participate in this coalition.
	Gold & Silver Reserve hopes this issue is settled quickly, that 
seized funds are returned, and that proper attention be given to the 
investigation, apprehension, and prosecution of the criminals now 
operating at will. G&SR will continue, as always, to obey the law 
and support law enforcement through every possible means to stop 
true criminal activity.

e-gold's Future
	e-gold, despite unwarranted adverse press and intense 
government investigation, is remaining true to its initial vision. 
With the ever-increasing online commerce and globalization, the 
need for a cross border, risk free, low-cost payment and remittance 
system is growing. The ability to provide a service to individuals 
from all backgrounds and economic conditions will serve to 
simplify increasing world commerce and allow the migrant worker 
to perform his business in one country and then buy goods or send 
money home across a border easily and inexpensively. This ability 
can only serve to bring all the economic interests and people across 
the world closer together.
	Historically, e-gold has been viewed by some as presenting a 
potential risk, possibly facilitating improper cross border 
movement of funds. It has been difficult to fully educate everyone 
involved in a rapidly changing economic online world. This risk, 
however, is clearly not the case. It is more important that a proper 
focus be given to e-gold's ability to better monitor and control 
those cross-border transactions while providing enhanced service 
to individuals. 
	Multiple U. S. government agencies could benefit from using 
e-gold, including the U.S. Postal Service, the Internal Revenue 
Service, and the U.S. Mint. Low transaction fees, finality of 
settlement, and transaction traceability are all positive features 
supporting agency adoption. For example, the U.S. Postal Service 
deals in Postal Money Orders and a cross-border remittance 
program. The inherent risks of money laundering would be 
significantly reduced by encouraging a combination of the USPS' 
over-the-counter cash functions with the flexibility of user-directed 
transfers via e-gold. Rather than outlawing informal value transfer 
systems or leaving the unbanked no alternative to monopolistic 
remittance processors, this flexible combination with permanent 
records on a single database would capture significant market 
share while eliminating a potential channel for terrorist funding or 
money laundering. 

Summation
	e-gold is a business, but within its mission is also a fervent 
desire to bring a benefit to the world. It is not now nor ever has 
been a suitable vehicle for persons engaged in illicit activity. With 
the full cooperation of law enforcement, e-gold is, in fact, one of 
the least hospitable systems a criminal could use. The NCMEC's 
Financial Coalition is demonstrating how a strong level of 
cooperation can lead to the reduction and, hopefully, elimination of 
crime on the Internet.
	It is certainly e-gold's objective, working with the NCMEC 
and our coalition partners, to completely eradicate child 
pornography on the Internet.
	Again, thank you for the opportunity to participate in your 
Committee's hearings. We remain willing to help in any manner 
possible.

	MR. WHITFIELD.  Thank you very much for all of your 
testimony.  Dr. Jackson, I will start with you because to be truthful, 
I have not really been aware of digital currency for a very long 
period of time, but when I do hear about digital currency I do hear 
those words, anonymous and untraceable.  But you are refuting 
that, and it is your position that that is not the case.  Is that my 
understanding?
	MR. JACKSON.  That is correct.  Like in this particular area 
there is concern with the buyers, and there is concern with the 
sellers of these materials.  Now there is a disparity between them.  
The sellers, the ones that survive and remain online, they are very 
good.  They are world class experts in concealing their identity.  
We know a great deal about them, and have interfaced with law 
enforcement.  We know what country they operate out of, and it is 
quite possible that they will soon be apprehended.  The buyers, 
however, are total amateurs when it comes to trying to conceal 
their identity.  If you want 3,000 conformed identities of United 
States citizens that have made these sort of purchases find the 
appropriate way to service with the request for information and it 
is yours.  If you want additional information on another 2,000 
individuals in Australia, the UK, German, Japan, we have that 
information as well.
	MR. WHITFIELD.  What due diligence do you undertake before 
you open an account?
	MR. JACKSON.  Here is where it gets confusing.  We are 
different than the card processors.  Our investigative tools are 
database.  We have a permanent record of every transfer that has 
been made back to, well, since 1996, including let us call it 
forensic information that is made a permanent record by the direct 
interaction of the user with the database.
	MR. WHITFIELD.  And where is that permanent record located?
	MR. JACKSON.  It is on our database servers in the United 
States.  Let me try to clarify that part because this may be 
technically difficult.  As an illustration we had an inquiry this week 
from SEOP, the agency in the UK.  Their question was, well, you 
have identified Mr. So and So as a purchaser of hard core 
pornography.  How do you know that he has done this?  And when 
I reviewed our answer, it required five dense paragraphs of 
technical jargon and it could be baffling to people to understand 
how we can know so much about people from a consolidated 
database.
	MR. WHITFIELD.  Well, what about due diligence on the 
merchant side?
	MR. JACKSON.  We make no distinction between a merchant 
and a consumer where a merchant is somebody that can receive 
payment, and a consumer is somebody that makes payments.  That 
doesn't exist within our system.  Every account has the capability 
to make and receive payments to have the efficiencies of 
automation interfaces and so forth.  I believe what you are asking 
is the sort of information that we gather on account creation.  
There we require the individual to give us a contact name and 
address, telephone number, and an e-mail address.  At the present 
time, we don't verify any of that data except for the e-mail address.
	However, it is very much in the interest of the user to supply 
correct information.  Where the rubber tends to meet the road is in 
the event that somebody has bobbled their password or in some 
way needs to reacquire assess to their account they contact 
customer service, and it is that contact information that enables 
them to re-establish contact with the account.  In the majority of 
cases though people simply provide correct information.  In the 
instance of an investigation, however, it doesn't matter if 
somebody has provided false information because of the fact that 
unlike every other payment system in the world, the end user 
directly logs in and is interacting in the database in a fashion that 
leaves behind what are called forensic scruff.  That is the sort of 
clues at the low tech end, items such as their ID number, but other 
identifying factors that enable us to link up a constellation of 
accounts that may belong to the same entity and ultimately connect 
them up with a true identity.
	MR. WHITFIELD.  Now how do you know that most people 
provide correct information?
	MR. JACKSON.  Well, focusing particularly in this category of 
crime not uncommonly we called them up and told them that they 
must not do this anymore, that we know what they are up to.
	MR. WHITFIELD.  Well, I have some other questions for you but 
I need to move on.  Mr. McCarthy, I have here an e-mail between 
you and Kelli Andrews on our staff, and it talks about the number 
of new child pornography sites being identified that say they 
accept Visa, actual or just displaying your mark, and it says that 
they are decreasing.  In 2005, for example, there were 132 sites.  
And then you had mentioned in this e-mail that you retest the sites 
that you have identified as child pornography and those that say 
they are accepting Visa, and 91 percent of those that you retested 
are now not using Visa, but what about these other 9 percent that 
say they are still using Visa?  I think you have had an opportunity 
maybe to look into this.  Could you elaborate on that for us?
	MR. MCCARTHY.  Thank you, Mr. Chairman.  We have an 
internal program that is designed to measure the effectiveness of 
our steps to remove the Visa brand from the websites that are 
engaged in child pornography.  And the numbers, they show a 
decline over time in the numbers that continue to maintain the Visa 
logo on the website, so the most recent numbers from 2006 show 
that if you look at the websites that we have originally identified as 
purporting to accept Visa and then retest those sites, 5 percent of 
them still have the Visa logo appearing on it.
	We have done additional research into that area to look at that 
and our search firm completed a sweep in the last week to look at 
the number of sites that are actually present in the Visa system 
during the retest ,because what these numbers indicate are not the 
ones that are actually in the system, it is the ones that are 
purportedly in the system.  Just last week the search firm looked at 
3,700 sites that had been in their data bases that at some time or 
other had accepted payment cards for child pornography purposes.  
That includes Visa, MasterCard, PayPal, and a number of other 
operations as well.  They found of the ones that had originally been 
identified 25 sites that were originally identified as involved in 
child pornography still maintained a Visa logo on the website.
	They were able to do a transaction involving a Visa card with 
only 10 of those sites.  The other sites, even though they purported 
to be accepting Visa cards you could not even do a test transaction 
on the website.
	MR. WHITFIELD.  So we are talking about maybe around 12 
sites in 2005?
	MR. MCCARTHY.  Let me just finish the data dump because 
this is the number I want you to focus on.
	MR. WHITFIELD.  Okay.
	MR. MCCARTHY.  After they did the test transactions on those 
10 sites they found 25 that had been able to be identified as 
perhaps using Visa cards.  Ten they did the test transactions on.  
They found one site that was actually accepting Visa cards.
	MR. WHITFIELD.  Okay.  So you are saying in 2005 of the 12 
sites that were still in operation after detected that it was a child 
pornography site using Visa that after you did the re-test, only 12 
sites were still accepting Visa, and is that what the situation is?
	MR. MCCARTHY.  There is a series of confusing measurement 
concepts here.  The important measurement concept that those 
numbers that you have relayed to is not sites actually accepting 
Visa cards.  Those are sites that appear to be accepting Visa cards.  
The logo is on the site.
	MR. WHITFIELD.  Okay.  So what you are saying, these sites 
appear to be accepting Visa?
	MR. MCCARTHY.  The logo is on the site or they say please 
enter your Visa card number to make a purchase.
	MR. WHITFIELD.  Okay.
	MR. MCCARTHY.  When you look at those sites upon retest you 
find that 5 percent of the original sites still claim to be accepting 
Visa cards.  When we did our real test last week with our search 
engine you went from 25 sites that said they would accept Visa 
cards to 10 tests that we were able to perform.  We couldn't even 
perform the tests on the other 15.  And only one of the sites was 
actually accepting Visa cards at that point.
	MR. WHITFIELD.  So you are saying that of these 12 sites or so 
only one are still accepting Visa so why would you--
	MR. MCCARTHY.  It is even worse than that.  Of all the sites 
that have ever been investigated by our search firm, 3,700, they 
have looked at those sites over the last several years.  They have 
found only one site that has been still in the system after all these 
years.
	MR. WHITFIELD.  And what site is that?
	MR. MCCARTHY.  The name is irrelevant.  We immediately 
notified the acquiring bank about the problem.  It was not an 
acquiring bank in the United States.  It was outside of the United 
States and it will be shut down.
	MR. WHITFIELD.  It will be shut down.
	MR. MCCARTHY.  Yes.
	MR. WHITFIELD.  All right.  Mr. Sullivan, since a PayPal 
account must be backed by financial instrument, usually a credit 
card or bank account, explain the benefits of opening a PayPal 
account rather than using a credit card.
	MR. SULLIVAN.  Certainly.  And every account would need to 
be backed by a credit card or a bank account.  PayPal emerged in 
the late '90s as a means for small businesses and individuals to 
make payments on the Internet.  In particular, it grew out of the 
eBay environment, and if you think of an eBay transaction, I 
personally list items for sale on eBay, and when I list an item on 
eBay it is available to the world to purchase.  I want to be able to 
accept payments from anyone on the Internet.  Before PayPal came 
along if you were the purchaser of my item you would have had to 
write a check, take it to the bank account to take it to the post 
office and mail it to me.  I would have to receive it, deposit it, wait 
till it cleared.
	With PayPal you could then take the money from your bank 
account using PayPal, have PayPal transfer it to my PayPal 
account and then I could move it into my bank account.  And so it 
brought efficiency to a very inefficient process.
	MR. WHITFIELD.  My time has expired.  Mr. Stupak.
	MR. STUPAK.  Thank you, Mr. Chairman.  In listening to the 
testimony here this afternoon, I would believe we would have no 
trouble with child pornography because you all are doing such a 
wonderful job, but the facts belie the fact of the testimony.  You 
say look for child pornography, if you use those words on the 
Internet you aren't going to find any because no one uses those 
words.  And if you terminate all transactions that could be child 
pornography, how do we get to the point then where we are at $21 
billion a year, three times greater than downloading music.  Music 
is a legitimate business on the Interment and that is $7 billion.  
Child pornography is estimated to be $21 billion.  If we are all 
policing the Internet so wonderful, how does it happen then?  How 
do we get $21 billion?  Anyone want to take a stab at that?
	MR. JACKSON.  Does it occur to you to question that number?
	MR. STUPAK.  Pardon?
	MR. JACKSON.  Does it occur to you to question that number?
	MR. STUPAK.  Yes, we have, a number of times.  This is our 
sixth hearing, and we have gone over those numbers quite closely.
	MR. JACKSON.  We can account since the dawn of time for 
about $3 million.
	MR. STUPAK.  That is just you.
	MR. JACKSON.  Yeah.
	MR. STUPAK.  All right.  Did you shut down Child Dreams--
Children Dreams, I mean, that has your gold--
	MR. JACKSON.  We shut them down about twice a day.
	MR. STUPAK.  Your e-gold on there.
	MR. JACKSON.  We find them about twice a day and shut them 
down either before they receive a payment or upon their first 
payment.
	MR. STUPAK.  As testimony was even earlier today too, you 
said you find two a day.  No sooner do you shut one down and 
another one pops up just under a different name.  So I guess my 
question would be you have these Web crawlers.  How often do 
you require your Web crawlers to update the terminology and the 
characteristics they are using to identify pornography sites, once a 
year, once a week?  Anyone want to answer that?
	MR. JACKSON.  Is the question directed to--
	MR. STUPAK.  Any one of you.
	MR. JACKSON.  Okay.
	MR. STUPAK.  Do you use Web crawlers?
	MR. JACKSON.  At this point things are suppressed down so low 
each individual case that escapes, each individual payment, enables 
us to review it against our protocols and see if a change of protocol 
is needed.  A year ago--
	MR. STUPAK.  I am talking about Web crawlers that look for 
pornography sellers.
	MR. JACKSON.  We don't use Web crawlers.  We don't need 
Web crawlers.  We have no idea--
	MR. STUPAK.  Then don't answer my question.  Let me ask 
someone who uses a Web crawler then.
	MS. GOLINSKY.  I can answer the question.  For MasterCard we 
are changing the lexicon to terminology constantly.  We are 
looking at the Web 24 hours a day.
	MR. STUPAK.  How often do you change it then?
	MS. GOLINSKY.  How often are we changing the words that we 
are using?
	MR. STUPAK.  Yes.
	MS. GOLINSKY.  It is an iteration process so the company that 
we use that does this for us.  They are constantly learning and 
trying to keep ahead of what the terminology is and changing it as 
they know that it is changing.
	MR. CHRISTENSON.  And, Congressman, the same is true of 
American Express.
	MR. STUPAK.  They tell us that on websites now if they don't 
use any terms but a picture there is no way to determine that, right?  
You can't determine that as a pornographic site or a possible 
pornographic site.  Anyone want to answer that?  The Web 
crawlers somehow can't detect that.
	MR. CHRISTENSON.  The Web crawlers normally key off of key 
words.
	MR. STUPAK.   Right, not off of a pictureb so if I just have a 
picture up there.
	MR. CHRISTENSON.  I am not a technologist.  My understanding 
is that you would have to actually download the picture so that you 
could search the Web looking for a match of that picture.  
Otherwise, they would have to be looking for words.
	MR. STUPAK.  Correct.
	MS. GOLINSKY.  But the Web crawlers are not only doing word 
searches but also looking at a million pages a day so they are doing 
both.
	MR. STUPAK.  Sure.  As long as it is like Joel and then there is 
a picture, we are not picking that up is what they are telling us 
because the Web crawlers can't pick up the borders of the 
photographs.
	MR. CHRISTENSON.  One of the advantages, I think, of the 
Financial Coalition is that you have two different things going on.  
A lot of the companies will use these automated searches of the 
Web that can cover millions of pages a day.  The Cyber TipLine is 
based on people who call in or e-mail in information that they 
come across through the human search of the Web so we are 
having now the National Center reporting to all of us information 
they come across which could just include a picture in addition to 
the Web crawlers that we are using.
	MR. STUPAK.  Well, the National Center, did they not, Mr. 
Christenson, give you 24 referrals this summer to investigate?
	MR. CHRISTENSON.  That is right, and as part of the test period 
they passed on 24 websites.
	MR. STUPAK.  What would happen on those referrals?  How 
many child pornography sites have you found?
	MR. CHRISTENSON.  Well, as I detail in my written testimony 
by the time we got down to actually finding a site that accepted 
American Express card, we were down to one site which we 
immediately terminated and reported back to the National Center 
and to law enforcement on that.
	MR. STUPAK.  What happened on the Landslide case then?  I 
guess that involved American Express cards without any 
independent due diligence.  Apparently the owner of the Landslide 
was merely asked whether or not they wanted to add the American 
Express card by his bank and so how does your system prevent that 
from happening?  If I am a customer and my bank says, here, do 
you want to use American Express, how would you make sure I 
am using it then for proper purposes and not improper purposes?
	MR. CHRISTENSON.  As I detail in my testimony, when 
someone sends in an application we have a whole due diligence at 
the beginning to look at a number of things.  And then we also 
have an ongoing search of the Web so that we can find out if they 
are violating our contract in what they are putting up on the Web 
and trying to sell.  The Landslide case goes back a number of 
years.  We terminated that merchant in February of 2000.  And so 
some of the iterations we made and the improvements in our 
processes have taken place since then.
	MR. STUPAK.  American Express, Visa, or MasterCard, if my 
bank where I am doing my banking gives me the credit card you 
still have responsibility then to review how that card is being used 
and make sure it is being used properly?
	MR. CHRISTENSON.  Absolutely.  In the American Express 
model, we may have some people who will refer us applications, 
but it is our responsibility to review the application and to decide 
whether to sign a merchant up or not.
	MR. STUPAK.  And I take it that wasn't done in the Landslide 
case then?
	MR. CHRISTENSON.  I don't know any particulars on that.
	MR. STUPAK.  Is there--let me ask you this, anyone of you, if 
you would like.  Is there any way to even know whether 
MasterCard or Visa or American Express could be given as a gift 
card, how would you handle that?  You know, gift cards seem to 
be the new rage.  How would you handle that?  I could use it then--
they are already issued, right, and it is like prepaid so you can't 
really monitor that, can you?
	MR. MCCARTHY.  Mr. Stupak, can I answer that?
	MR. STUPAK.  Sure.
	MR. MCCARTHY.  The gift card that Visa has--gift cards I think 
all of the other payment mechanisms here have gift cards, they turn 
out to be part of the solution in this area.  We have provided to the 
law enforcement officials at ICE 100 of these prepaid cards for 
their use in tracking down the child pornography merchants on the 
Internet.  When they are trying to find out the name of the 
merchant, they do a test transaction.  The test transaction can then 
be tracked in any one of our payment systems.  We can go back 
through our records and find the bank that is associated with the 
transaction.
	MR. STUPAK.  But those are the cards given to law 
enforcement.
	MR. MCCARTHY.  These are regular, ordinary gift cards that are 
provided--
	MR. STUPAK.  But you would have all those numbers 
beforehand.  How would you stop me from using one of these 
cards?  How would you--
	MR. MCCARTHY.  In the context in which we are working with 
law enforcement right now the major effort is to identify the Web 
merchant and those prepaid cards are useful in identifying the Web 
merchant.  For technical reasons it turns out to be slightly better to 
use a gift card than it is to use a debit card or a credit card to 
identify the merchant in the system.  And so that is the function 
that those cards are being used for right now by ICE under the law 
enforcement agencies.  We delivered 100 of them 2 weeks ago to 
the ICE personnel for their use in this area.
	MR. STUPAK.  So this is just an experiment you are starting 
then?  You started it a week ago, right?
	MR. MCCARTHY.  Those are the cards that we use in our own 
test transactions.  We are sharing them now with law enforcement 
for them to use in their transactions as well.
	MR. STUPAK.  What I still don't understand, and maybe I am 
missing it, if I get a gift card, Visa gift card, and I use it, how is 
that going to--how are you going to discover that?
	MR. MCCARTHY.  In many cases gift cards are traceable.  They 
are reloadable cards.
	MR. STUPAK.  Traceable to who?  How would you know?  
Wouldn't the purchaser be anonymous?
	MR. MCCARTHY.  I got one that I give to my kid and it is a 
Bucks card.  He has to fill out an application.  I have to sign for it.   
They know who has got that card.  If the card is not reloadable, it 
is an anonymous card, then that kind of information isn't available.  
But the point is that on the merchant side it is those cards that are 
the most useful to find the merchant.  And when law enforcement 
comes to us what they are asking us almost all the time is to help 
them locate the merchant.
	MR. STUPAK.  I agree giving a hundred to law enforcement 
because you have the numbers there and you can track it, but if I 
get a gift card how would you ever know who owned it to begin 
with?  You wouldn't, right?
	MR. MCCARTHY.  Some gift cards are anonymous.  Some of 
our programs have anonymous gift cards.  Many other programs 
use anonymous gift cards.
	MS. GOLINSKY.  Congressman, if I may from a MasterCard 
perspective.
	MR. STUPAK.  Sure.
	MS. GOLINSKY.  For our gift cards, stored value cards, we 
generally require the issuers who issue those cards to conduct the 
same sort of due diligence and know the requirements they would 
for any other program.  With respect to--
	MR. STUPAK.  Yeah, but require due diligence if I fill out one 
of these gift cards and I give it to a friend and he uses it wrongly, 
how do I have responsibility for I gave it to that friend?
	MS. GOLINSKY.  I hear what you are saying, but what we do is 
we make sure that we track any sort of program that we have in our 
system.  Our rules apply to all of our cards whether they are stored 
value cards or credit cards or debit cards except in limited 
instances where we are talking about low value dollar cards that 
cannot reloadable we require customer identification.  That is, you 
can trace it to someone.  It might not be the person who you gave 
that card to cannot be traced in the system.  Our efforts right now 
are focused on taking away the ability to use our cards period, 
regardless of the type of card to be used.
	MR. STUPAK.  One more, if I may, Mr. Chairman.  How long 
do you retain your records, your financial transactions?
	MR. CHRISTENSON.  We retain records 7 years.
	MR. STUPAK.  Seven years.  Is that IRS requirement or so?
	MR. CHRISTENSON.  Pardon me?
	MR. STUPAK.  Is that an IRS requirement?
	MR. CHRISTENSON.  It is a little bit beyond what the legal 
requirement is.
	MR. STUPAK.  Okay.  Because it is a big issue up here how 
long ISPs and do we apply that same standard to financial 
institutions.  Seven years is about right too for MasterCard?
	MS. GOLINSKY.  Congressman, I would have to get back to you 
but it is several years.
	MR. STUPAK.  How about you, Mr. Sullivan, on PayPal?
	MR. SULLIVAN.  Minimum of 2 years.
	MR. STUPAK.  Minimum of 2 years.  Okay.  And, Mr. 
McCarthy.
	MR. MCCARTHY.  We retain their records for years, but the real 
point is that we turn over information instantaneously to law 
enforcement.  It is not as though they are coming after us for a 
transaction that is a year or two old.  We get it to them right away 
when we see the problem.
	MR. STUPAK.  Mr. Jackson, Dr. Jackson, how long do you keep 
your records?
	MR. JACKSON.  Forever.
	MR. STUPAK.  You said since 1996 or something I think you 
said in your--
	MR. JACKSON.  Well, that is our forever.
	MR. STUPAK.  Thank you.
	MR. WHITFIELD.  I think all of us are quite aware of the 
difficulty in dealing with this issue, and there are so many different 
aspects of it, but as you listen to American Express and 
MasterCard and PayPal and whatever, we know that there is a lot 
of due diligence that is conducted before you sign up a merchant or 
your acquiring banks sign up merchants.  In the case of American 
Express you do it yourself when you look at credit histories and 
you get a lot of information and so forth and so forth.  And then all 
of you seem to be going back and you monitor websites 
periodically, merchants that you are dealing with.  Is that accurate?  
That is sort of a layman's statement.  Overall that is pretty 
accurate, isn't it?
	But in your case, Dr. Jackson, the clear sense here is that you 
don't really distinguish between a merchant and a buyer.  You just 
have an account and you can deal with it any way you want to.  I 
get the impression that there is not a lot of due diligence in the 
sense of looking at credit histories and ongoing monitoring of 
websites of people that have accounts with you.  Would that be 
accurate or am I inaccurate in that?
	MR. JACKSON.  It is difficult to compare e-gold with Legacy 
Payment Systems.  The nature of the transaction, it will confuse 
people.  Let us say, for instance, that you create an account and 
you are trying to demonstrate some thesis like, oh, look, this is 
anonymous.  And so you create an account with nonsense 
information.  What you have is an empty account that is going to 
remain empty with no value forever.  Now the logic that makes e-
gold extremely traceable is twofold.  One, it is a closed system 
unlike every other payment system in the world which is an 
extension of existing banking mechanisms.  E-gold is completely 
independent.  It is a closed universe, a closed universe of value 
backed by gold.
	To send value into the system is impossible for the user.  Now 
combined with that inability to add value to the e-gold universe is 
the fact that every transfer value within the universe has a 
permanent record, and so it is like touching a spider web.  If you 
have that empty account that is going to remain empty forever, the 
only way we will ever have any e-gold is to receive a payment 
from somebody that has already got some, thereby creating a 
permanent discoverable linkage to that person so you can trace the 
lineage of every particle of value back to Adam and Eve or more 
relevantly back to perhaps an exchange entity who may have 
bought or sold e-gold.
	That person will have very good reason to keep track of the 
identity of their customer because they may accept payment 
through one of the other payment systems represented here which 
are highly reversible and therefore they have an extreme need to 
know who they are dealing with in case a person tries to stiff them 
or reverse the payment.  And so we work in complement with the 
exchange services sometimes for flushing out the identity.  Even 
though these exchange services are independent of e-gold and 
competitive with one another it is the virtual equivalent to a 
worldwide network of agents that have supplemental information 
regarding the identity of these users.
	MR. WHITFIELD.  The bottom line is it appears to me that if I 
am a person dealing in child pornography or using a site and have 
subscribers that are paying for viewing child predator type scenes 
it would be much easier to use your system, much less traceable to 
use your system than any of these other systems.  But I would ask 
you, Mr. Christenson, would you agree with my assessment 
knowing what you do about digital currency or would you not 
agree with it?
	MR. CHRISTENSON.  Well, I am no expert on digital currency, 
but I would say that we do quite a bit to understand both who the 
merchant is and who our cardholders are, and so you have to 
provide a lot of information.  You are going to look at your credit 
records.  You are going to have to confirm location and all those 
kind of things.  So we do a lot of due diligence to know our 
customers, and I think that that has a big impact when you then 
find somebody who is involved in illegal activity.  You can quickly 
follow up on who those people are.
	MR. WHITFIELD.  Ms. Golinsky, what would you say of the 
statement I just made, is that a fair statement or is that not a fair 
statement?
	MS. GOLINSKY.  Mr. Chairman, like Mr. Christenson I don't 
know enough about digital currency.  I will tell you that it is 
something in terms of the sales on the Internet it is something that 
MasterCard is looking at, but I couldn't say more about it because 
I don't understand how--
	MR. WHITFIELD.  What about you, Mr. Sullivan, do you have 
any comment?
	MR. SULLIVAN.  I am afraid I too am not an expert on e-
currencies.
	MR. WHITFIELD.  And, Mr. McCarthy, what about you?
	MR. MCCARTHY.  I am going to take a pass as well, Mr. 
Chairman.
	MR. WHITFIELD.  Okay.  Well, Dr. Jackson, I have here some 
featured sites off of your website, off your e-gold directory.  And it 
has, for example, getafreelancer.com, hushmail.com, mozilla.org, 
agentgold.com.  I mean what can you tell us about--I got eight 
pages of these.  Do you have detailed information on all these?
	MR. JACKSON.  Absolutely.  The people that are linked on the 
website, of course we have certainty of knowledge as to every 
detail of who the company is and the principals.
	MR. WHITFIELD.  So you would have information about the 
principals for every one of these sites?
	MR. JACKSON.  Certainly.
	MR. WHITFIELD.  Did you do a credit check on that?
	MR. JACKSON.  No, because unlike every other payment system 
here we are absolutely immune to the credit risks of the users, 
which is an important point to understand.  This is part of why we 
are going to bring benefits to this economy.  Every other payment 
system if a user defaults somebody is going to pay the price.  
Typically that loss is to be passed through to the end recipient who 
will have the payment sucked back from them.  Since default 
cannot happen in the e-gold system there is no element of credit.  It 
is on a strict debit basis.
	MR. WHITFIELD.  How do you know if these businesses are 
legitimate or not legitimate?
	MR. JACKSON.  We do not vouch for their so-called legitimacy, 
but what we do know is who they are.  Of course, if we were to 
hear some sort of a complaint regarding them they are going to be 
pulled from the website.  But in the absence of that complaint we 
are content to simply know their identity.  Now we have of course 
debated as to whether it is appropriate to continue to even list links 
to sites since the fed doesn't link sites that accept dollars, and at 
some point we are going to move away from that model as it 
becomes more ubiquitous.
	MR. WHITFIELD.  Now I have been told that the exchanger for 
e-gold is in the U.S., but everything else is outside the U.S.  Is that 
a true statement or not?
	MR. JACKSON.  The e-gold system, everything about its setup, 
its governance model, is designed to serve the dual imperatives of 
freedom from default risk and finality of settlement.  Before e-gold 
the only institutions in the world that could claim to attain those 
attributes were government central banks.  In many regards we are 
modeled after the Federal Reserve with its fed wire settlement 
platform, which is a real time gross settlement platform.  Now to 
try to achieve freedom from default risk, we have to look at every 
category of threat that could intervene that could cause e-gold to 
fail in its contractual obligation to have gram for gram 100 percent 
backing of physical gold.
	One of those elements is a separation of roles between the 
exchange function, which does entail business risks, and the core 
functions of settlement and issuance of these liabilities.
	MR. WHITFIELD.  But what part of your business is in the U.S. 
and what part is out of the U.S.?
	MR. JACKSON.  Okay.  The central contractor for the e-gold 
liability, that is, e-gold's obligations are memorialized in the e-
gold account user agreement.  That is an agreement between the 
user and the issuer of e-gold, which is a company called e-gold 
Limited, which is domiciled in Nevis.  However, all operational 
and fiduciary roles for the operation of the system, and those 
consist of the operator of the Mint, the escrow agent, and in fact 
the physical entities that perform the repository function, those are 
all at the moment United States companies.  E-gold is operated out 
of Melbourne, Florida, quite frankly.
	MR. WHITFIELD.  So it is operated out of Melbourne and then 
you have part of it in Nevis, is that correct?
	MR. JACKSON.  The only part that resides in Nevis is it is where 
the general contractor is domiciled.  The wisdom of that decision I 
think was very well borne out last December when there was a 
shoot first, ask questions later intervention by an agency of this 
government.
	MR. WHITFIELD.  Shoot first, ask questions later, what are you 
referring to?
	MR. JACKSON.  It is detailed in the written testimony, but my 
company, Gold and Silver Reserve, located in Melbourne, Florida, 
was host to the Secret Service taking all of our books and records, 
going into Orlando, an AT&T co-location facility where the e-gold 
and OmniPay servers are located, taking us off line for 36 hours, 
taking complete record of all these transactions, including those of 
American citizens back to 1996, invading my home, taking things 
like my wife's address book, the children's passports, credit cards I 
happened to leave on the night stand, all of this, based on some 
sort of a presumption that we are okay with criminal activity, 
which is quite the contrary to the case.
	All we have ever desired is a constructive relationship with law 
enforcement.  We have the same interest as anybody else in rooting 
out criminal abuse of our system as would any other company in 
the financial services area.
	MR. WHITFIELD.  One other question.  Ms. Golinsky, how long 
has MasterCard participated in the MATCH system, and could you 
describe what this entails for your merchant banks?
	MS. GOLINSKY.  Sure.  I don't know the exact date for how 
long you participated in it.  We are one of the founding members 
of it.  And the way the system works is it is a joint database of 
terminated merchants that MasterCard runs with other payment 
networks.  So when we have terminated a merchant or one of our 
client banks has terminated a merchant for whatever reason, they 
have to enter that merchant into MATCH and it is a requirement 
for our banks when they sign up a new merchant that they check 
MATCH to make sure that they are not signing up a merchant that 
has been terminated for some reason including illegal purposes.
	MR. WHITFIELD.  Mr. Stupak.
	MR. MCCARTHY.  Mr. Chairman, could I add to that?  Visa is 
not an operating partner with the MATCH system, but we have a 
similar requirement for our banks.  If they are going to sign up a 
new merchant they have to check that database to make sure that 
he hasn't been terminated in another fashion.
	MR. WHITFIELD.  Mr. Stupak.
	MR. STUPAK.  Thank you, Mr. Chairman.  Mr. Jackson, you 
stated that e-gold doesn't pose a greater risk for use in other 
financial methods, but yet you will monitor your users and you 
claim it is not your responsibility to do so.  You say you know 
their identity, but you don't check to see if they are who they claim 
they are.  So how can you make a statement about knowing the 
merchants you conduct business with when you do no due 
diligence or oversight?
	MR. JACKSON.  We have convened this panel today to discuss 
child pornography, a case study of how extremely effective our 
investigative techniques are in finding an identified category of 
crime.  The numbers speak for themselves, do they not?
	MR. STUPAK.  Wait a minute.  You said e-gold posed no 
greater risk for use than other financial methods, did you not?
	MR. JACKSON.  When I described the default risk, I am talking 
about what is the possibility that a gram of e-gold would decline in 
its exchange value--
	MR. STUPAK.  No, forget the gold stuff.  Just answer the 
question.  You stated that e-gold does not pose a greater risk than 
other financial methods, yes or no?
	MR. JACKSON.  I guess I don't understand the question.  What I 
was describing was freedom from default.  Are you describing in 
terms of the risk of criminal abuse?
	MR. STUPAK.  You said to the Chairman, you said you know 
the identity of all of your users, right?
	MR. JACKSON.  No.  But I did describe extreme traceability.
	MR. STUPAK.  Okay.  How do you identify the person who 
buys e-gold?  How do you identify him?  How do you check to see 
if they are who they say they are?  If I say I am Ed Whitfield, how 
do you check to make sure I am Ed Whitfield?
	MR. JACKSON.  A person who is selling e-gold--
	MR. STUPAK.  No, no.  I want to sign up for e-gold.  All I have 
to do is go on the Internet, right, do a few clicks and I can register 
and I can buy e-gold, right?   Can I have an account with you?
	MR. JACKSON.  I am trying to answer your question.
	MR. STUPAK.  Right.
	MR. JACKSON.  You can't possibly obtain e-gold from the e-
gold company.  There is no mechanism for doing that.
	MR. STUPAK.  I can set up with the company, right?
	MR. JACKSON.  You need to receive in payment--
	MR. STUPAK.  And I am backed up by your gold?
	MR. JACKSON.  --from somebody who already has some.
	MR. STUPAK.  I can go on there and I can apply to be part of e-
gold, right?
	MR. JACKSON.  Yes, you can create an account online.
	MR. STUPAK.  I can use your e-mittal pay order, right?
	MR. JACKSON.  Not unless you have e-gold.
	MR. STUPAK.  Right.  But I can go and sign up for e-gold, can I 
not?
	MR. JACKSON.  You can create an account which makes you 
capable of receiving an e-gold payment.
	MR. STUPAK.  Okay.  My question is how do you know who I 
am when I sign up on e-gold?
	MR. JACKSON.  At that point we don't have certainty of 
knowledge.  Now of course--
	MR. STUPAK.  You have no knowledge of who I am, correct?
	MR. JACKSON.  --it is a system that is evolving.
	MR. STUPAK.  Answer the question.  You have no knowledge 
who I am even though I may have the right--
	MR. JACKSON.  No, the person that has that empty account we 
don't know much about.
	MR. STUPAK.  You don't know anything about them.   That is--
	MR. JACKSON.  Well, actually we do know quite a bit.  We 
know the IP number that they created it from.
	MR. STUPAK.  Sure.  You know the IP number but you don't 
know who that person is.
	MR. JACKSON.  We have their e-mail address.
	MR. STUPAK.  I could be a pedophile for all you know or I 
could not be.
	MR. JACKSON.  If it is a pedophile and if you are interested in 
them we can give you thousands of them.
	MR. STUPAK.  How many--if you can give me thousands of 
pedophiles, how many of those names have you turned over to law 
enforcement?
	MR. JACKSON.  I don't know an exact number.  I saw one of 
them in the newspaper last week.
	MR. STUPAK.  That your company turned over to law 
enforcement?
	MR. JACKSON.  Yeah, it was our bust, but it made it look like e-
gold was somehow--it was the typical kind of press treatment 
where e-gold is mentioned--
	MR. STUPAK.  I don't care about the press.  I just want to know 
how many have you turned over to law enforcement if you know 
thousands of pedophiles.
	MR. JACKSON.  I would need to look that up.  The difficulty has 
been one of jurisdiction, and this has been an area of discussion 
with the Cyber TipLine when we give a tip about users--
	MR. STUPAK.  No, no.  I am just trying to get these numbers.  
More than one, more than ten?
	MR. JACKSON.  I can check.
	MR. STUPAK.  More than a hundred?  Okay.  
	MR. JACKSON.  Probably in the range of hundreds but I could 
certainly give you an exact number if you would like.  The point is 
we do more to reach out to the buyer than any other system that I 
know of.  The buyer feels the hand of God come down on him 
right away within minutes after he has done this purchase.
	MR. STUPAK.  Well, law enforcement, as Mr. Plitt and others 
have testified, e-gold is one of those that is commonly used by 
child predators.  What active steps have you taken to keep 
predators from using your technology?
	MR. JACKSON.  If you are describing the predators as being the 
purchasers of child pornography--
	MR. STUPAK.  Yes, or sellers.  How about sellers?
	MR. JACKSON.  The sellers are difficult.  There is a handful of 
sellers, and these people are very capable--
	MR. STUPAK.  So what do you do to crack down on the sellers 
of child pornography?
	MR. JACKSON.  What we do to crack down on the sellers is we 
find a new account that they create either before it has received its 
first payment or we detect it upon its first payment.  We block it 
from receiving further payments and we freeze it.  If they have 
managed to exchange value that they received for some other form 
of payment such as Web Money, we notify Web Money and 
continue in hot pursuit so they notify law enforcement.
	MR. STUPAK.  How about Invisible Net where invisibility is the 
best, how would you stop them from selling child pornography?
	MR. JACKSON.  I am sorry.  Who are we talking about?
	MR. STUPAK.  One of your customers, Invisible Net.  
Invisibility is the best defense, it says.  So how would you stop 
them if they were selling child pornography?
	MR. JACKSON.  If we knew the identity of a seller because we 
are all looking at the same sellers.  There is a handful--
	MR. STUPAK.  What do you do to verify that Invisible Net is 
conducting a legitimate business?
	MR. JACKSON.  We are talking about pornography and what I 
can do to find--
	MR. STUPAK.  My question was any legitimate business.  
Maybe they are selling us--
	MR. JACKSON.  If there is a staffer that can work with us for 
some period of time and then he can come back at his leisure and 
explain it how we find--
	MR. STUPAK.  Well, you are here today so I am asking you the 
question.  How do you verify Invisible Net is a legitimate 
company, selling legitimate products, how do you do that?  How 
does e-gold--
	MR. JACKSON.  All I know about that company is who they are 
and we have not received complaints about them.
	MR. STUPAK.  So that is all you know?
	MR. JACKSON.  If you would like, we can stop linking to any 
companies on the website.  We are not certain that it is of any 
value, but the point is they are utterly irrelevant to the child 
pornography discussion.  If you want to find child pornography, 
come to us.  We are the world's experts at finding it in our 
database and we have suppressed it down to the point where it is 
virtually negligible.
	MR. STUPAK.  Then you are the world expert, then how many 
of these illegal sites have been turned over to law enforcement or 
the National Center for Missing and Exploited Children?
	MR. JACKSON.  We report to the Cyber TipLine just as 
everybody else does.  However--
	MR. STUPAK.  How many have you in the last week?
	MR. JACKSON.  We can find them without ever seeing a site.
	MR. STUPAK.  Mr. Jackson, how many have you turned in in 
the last week?
	MR. JACKSON.  I would have to check.
	MR. STUPAK.  You don't know?
	MR. JACKSON.  There are three or four payments that slipped 
through in the past week.  I am not sure that we even know of the 
site.
	MR. STUPAK.  Well, you are the first world expert who doesn't 
seem to know any answers to any of the questions I ask.
	MR. JACKSON.  Well, I don't think you are understanding me, 
sir.  We don't need to know about the site to find the child 
pornography.  We can find it in our database because we have such 
a sophisticated profiling--
	MR. STUPAK.  Have you done that?
	MR. JACKSON.  --of the buyers and the sellers.
	MR. STUPAK.  Have you done that?  You said you can go 
through your database and find those who are selling or buying on 
your system.  Have you done that?
	MR. JACKSON.  Absolutely.  That is what is responsible for this 
radical drastic decline in successful attempts to buy child 
pornography.
	MR. STUPAK.  I will look forward to your answers to the 
committee on how many you have turned in to law enforcement.  
You will provide that to us?
	MR. JACKSON.  Sure.  That is fine.
	MR. STUPAK.  Thank you.
	MR. WHITFIELD.  I would like to ask the entire panel have you 
noticed any change in the number of reports that you are sending in 
to NCMEC, are you finding more, less or about average amounts 
of reports to the Cyber TipLine.
	MR. CHRISTENSON.  I would say it is about the same over the 
past year.
	MS. GOLINSKY.  Mr. Chairman, I think that we are seeing some 
reports go down.  We have reported approximately 86 sites to 
NCMEC in the last several months, but I think that as I mentioned 
in my testimony we are seeing some of our efforts are successful, 
that we are seeing a lot less direct acceptance of our cards on these 
sites but we are still making the same number of referrals 
nevertheless.
	MR. SULLIVAN.  On behalf of PayPal, I would say that we are 
seeing a slight decline.
	MR. MCCARTHY.  It is approximately the same over the last 
year.
	MR. JACKSON.  I haven't kept track of information we upload.  
In terms of alerts that were received from all sources they are 
plummeting.
	MR. WHITFIELD.  Dr. Jackson, I would ask you one, do you 
have a money transmitting license or is that something that you do 
not feel you are required to have?
	MR. JACKSON.  There is litigation that is being pursued on this.  
It is a legal question, and I guess I am hesitant to try to express a 
legal opinion.
	MR. WHITFIELD.  But at this time you do not have a money 
transmitting license?
	MR. JACKSON.  We have looked at this carefully.  We engaged 
with the BSA group from Treasury approximately a year ago 
trying to find an appropriate regulatory rubric or an exchange 
provider such as Gold and Silver Reserve.  This group was 
established to have the competence and the authority to aid in 
innovative type of situations where somebody simply doesn't fit 
into one of the existing frameworks.  The difficulty with Gold and 
Silver Reserve whose activity very much resembles currency 
exchange is the fact that heretofore the United States Treasury has 
deemed that e-gold can't really be classified as a currency.
	MR. WHITFIELD.  Okay.  Well, I don't want to get into all of 
the legal discussions about it.  I am just asking a question, do you 
have a money transmitting license or do you not?
	MR. JACKSON.  No, because neither e-gold nor Gold and Silver 
Reserve are money transmitting businesses.
	MR. WHITFIELD.  Okay.  Okay.  I want to thank this panel very 
much for your testimony.  We appreciate the work that you are 
doing, the improvements that are being made, and hope that you 
will continue to be aggressive in your efforts to curtail this, and 
with that this panel is dismissed.  Thank you.  At this time, I would 
like to call up the fourth and last panel.  And on this panel we have 
Mr. David Strider, who is Executive Vice President, North 
American Operations for NOVA Information Systems with U.S. 
Bancorp, and Mr. Ralph Shalom, Associate General Counsel for 
Litigation, First Data Corporation, Mr. William Matos, Senior 
Director of Credit Risk, Chase Paymentech Solutions, and Ms. 
Kim Mowder, Senior Vice President, Bank of America.
	Thank all of you for joining us today, and we certainly thank 
you for your patience.  I am sure you have heard more about digital 
currency than you ever cared about hearing about but as you know 
this is an oversight investigation.  We do take testimony under 
oath.  Do any of you have any objection to testifying under oath?  
If not, if you would please stand.
	[Witnesses sworn]
	MR. WHITFIELD.  Okay.  All of you are under oath now, and 
we will begin, I will recognize Mr. William Matos for Chase 
Paymentech for your 5-minute opening statement.

TESTIMONY OF WILLIAM MATOS, SENIOR DIRECTOR, CREDIT/RISK, CHASE PAYMENTECH 
SOLUTIONS, L.L.C.; KIM MOWDER, SENIOR VICE PRESIDENT, BANK OF AMERICA; RALPH 
SHALOM, ESQ., ASSOCIATE GENERAL COUNSEL FOR LITIGATION, FIRST DATA 
CORPORATION; AND DAVID STRIDER, EXECUTIVE VICE-PRESIDENT, NORTH AMERICAN 
OPERATIONS, NOVA INFORMATION SYSTEMS
	
        MR. MATOS.  Thank you.  Good morning, Chairman Whitfield, 
Ranking Member Stupak, and members of the subcommittee.  My 
name is Bill Matos, and I am the Group Manager and Senior 
Director of Credit and Risk Management at Chase Paymentech 
Solutions.  Chase Paymentech is strongly committed to combating 
child pornography, and it is my pleasure to appear before you 
today to discuss this important issue.  Chase Paymentech is 
headquartered in Dallas, Texas, and is one of the Nation's largest 
processors of bankcard payment transactions for merchants.
	One of our primary roles is to contract with, and provide 
services to, merchants to enable them to accept credit cards and 
other payment methods.  Chase Paymentech has a strict prohibition 
against our services being used in connection with child 
pornography or any other illegal activity.  We have strict standards 
that must be met before we approve a merchant's application for 
our services.  For example, we collect detailed information about 
each merchant applicant and thoroughly review the applicant of 
each potential merchant to insure the merchant meets our credit 
and risk management requirements.
	Not only must we collect information to assess an applicant's 
credit risk, but we also engage in a thorough review of the 
compliance risks the merchant may present.  Before we approve 
any applicant as one of our merchants, we must understand the 
applicant's business model and product line thoroughly.  For 
online merchants, this includes an examination of the merchant's 
entire site including links the merchant intends to display.  We also 
investigate the website domain ownership and navigate through the 
checkout process in order to more fully understand the merchant's 
activities.
	Chase Paymentech also participates in the MATCH program, 
which is hosted by MasterCard.  The MATCH database lists 
merchants who have been terminated by other acquiring banks and 
serves as a reference tool to help protect payment processors like 
Chase Paymentech from entering into business with merchants that 
have known problems.  In addition to engaging in a thorough 
review of merchant applicants, we proactively monitor our existing 
merchant base via a periodic review of the merchant itself.  This 
procedure is similar to our initial due diligence and includes a 
subsequent review of the merchant's entire website.
	We also make anonymous purchases at random merchant sites 
and at sites where something just does not look right.  We also rely 
on transaction monitoring which is a continuous process that 
allows us to flag and review factors that are indicative of 
suspicious or unusual merchant activity.  If we have any reason to 
believe that any suspicious activity has taken place, we file the 
appropriate suspicious activity reports with the authorities and 
investigate further.
	In addition, we obtain information from MasterCard and Visa 
relating to suspicious merchant activity.  In these circumstances we 
work with MasterCard and Visa to investigate and address the 
issue as quickly and thoroughly as possible.  In the course of our 
processing payments for a large portfolio of merchants, we are 
aware of two legitimate merchants who have fallen prey to 
fraudulent and criminal activity to child pornographers.  In both 
cases, those merchants unwittingly became conduits for child 
pornography related transactions.
	I should note that in another circumstance a merchant was 
foolish enough to apply to us directly for payment services even 
though its website had links to child pornography.  We discovered 
the child pornography during our review, reported the merchant to 
law enforcement, and denied the application.  Although it is 
extremely rare for a child pornographer to gain access to our 
system, we remain extremely watchful and have an action plan we 
execute if such access occurs.  For example, we immediately 
suspend our processing services for the merchant in question and 
visit the merchant's site to obtain as much information as possible 
to determine the scope and nature of the merchant's activities.  We 
also notify NCMEC through a dedicated website.  We notify the 
nearest office of the FBI and where appropriate we notify local law 
enforcement.
	Any ultimate termination of the merchant account is also 
reported to the MATCH system maintained by MasterCard.  In 
summary, Chase Paymentech strictly prohibits the use of its 
payment processing services in connection with child pornography.  
We have sophisticated and effective tools to prevent child 
pornographers from using our services and we constantly strive to 
stay one step ahead of the criminals.  Chase Paymentech looks 
forward to working with the subcommittee as we coordinate our 
resources to eliminate the financial viability of child pornographers 
on the Internet.
	[The prepared statement of William Matos follows:]

PREPARED STATEMENT OF WILLIAM MATOS, SENIOR DIRECTOR, 
CREDIT/RISK, CHASE PAYMENTECH SOLUTIONS, L.L.C.

	Good morning Chairman Whitfield, Ranking Member Stupak, 
and Members of the Subcommittee.  My name is Bill Matos, and I 
am the Group Manager and Senior Director of Credit and Risk 
Management at Chase Paymentech Solutions, LLC.  Chase 
Paymentech is strongly committed to combating child 
pornography, and it is my pleasure to appear before you today to 
discuss this important issue.  
	Chase Paymentech is one of the nation's largest processors of 
bankcard (e.g., MasterCard or Visa) payment transactions for 
merchants.  One of our primary roles is to contract with, and 
provide services to, merchants to enable them to accept 
MasterCard and Visa payment cards.  The activities we perform in 
the bankcard systems are commonly referred to as "acquiring" or 
"payment processing" services.  We provide these services for 
many types of electronic payment transactions, including those 
conducted by credit card, debit card, gift card, electronic check, 
and other payment methods.  We are headquartered in Dallas, 
Texas and have facilities in Florida, New Hampshire, and Arizona 
among other states.    

	In General
	Chase Paymentech has a strict prohibition against our services 
being used in connection with child pornography or any other 
illegal activity.  Our credit and risk management team for our e-
commerce merchant platform consists of 20 employees dedicated 
to screening potential merchants and monitoring our existing 
merchant base for a variety of risks, including those relating to 
child pornography.  Our proactive efforts to screen and monitor 
our merchant base involve an extremely thorough and 
comprehensive process designed to ensure that our merchants are 
engaged in legal activities in compliance with our standards and 
those of MasterCard and Visa.  In addition to the resources we 
dedicate to prevent the processing of child pornography-related 
transactions, Chase Paymentech has also coordinated with the 
National Center for Missing and Exploited Children ("NCMEC"), 
a variety of law enforcement agencies, and other companies to 
combat child pornography on the Internet.

	Proactive Due Diligence
	Chase Paymentech has strict standards that must be met before 
we approve a merchant's application for our services.  We collect 
detailed information about merchant applicants and thoroughly 
review the application of each potential merchant to ensure the 
merchant meets our credit and risk management guidelines.  This 
review process can take anywhere from two days for more well 
known merchants to five days for higher-risk merchants.  
Depending on the circumstances, we may collect the applicant's 
financial statements and other financial information, tax returns, 
corporate documents, background information on the applicant's 
ownership, detailed information relating to the applicant's business 
and its history with respect to payment card acceptance, and other 
information required by the USA PATRIOT Act to properly 
understand who the merchant applicant is and to assess our credit 
and risk exposure as a result of processing the merchant's 
transactions.  
	Not only do we assess the financial risks the merchant may 
pose to us as its payment processor, but we also engage in a 
thorough review of the compliance risks the merchant may present.  
Before we approve an applicant as one of our merchants, for 
example, we must understand the applicant's business model and 
product line thoroughly.  For on-line merchants, this includes a 
web site review by a member of our credit and risk management 
team who examines the merchant's entire site, including links the 
merchant intends to display.  We also investigate the web site 
domain ownership and navigate through the checkout process in 
order to understand more fully the merchant's activities.  If a 
merchant's site is not live or fully functional at the time of 
application, approval is placed into a "funds hold" status which 
prevents the merchant from being funded for any transactions until 
such time as the live site can be thoroughly reviewed.  Chase 
Paymentech also participates in the MATCH program, which is 
hosted by MasterCard.  The MATCH database lists merchants who 
have been terminated by other acquiring banks and serves as a 
reference tool to help protect acquiring banks, like Chase 
Paymentech, from entering into business with merchants that are 
known problems.  
	It is our experience that child pornographers and others who 
engage in illegal activity rarely apply directly to us to obtain 
payment processing services.  This is probably due in large part to 
the increasing sophistication of the criminals, their awareness of 
the due diligence we undertake as part of the application process, 
and their awareness of our on-going monitoring activities 
described below.  For example, a sophisticated criminal enterprise 
is unlikely to subject itself to our review of its financial situation, 
its ownership, its lines of business, and its web site.  This type of 
direct scrutiny is a strong deterrent to child pornographers as well 
as other unqualified or unscrupulous applicants.  If, nonetheless, 
we do uncover any activity or material that is illegal, we promptly 
report it to the appropriate law enforcement agency and offer our 
assistance in any law enforcement investigation.  

	On-Going Monitoring
	In addition to engaging in a thorough initial review of 
applications, we also proactively monitor our existing merchants.  
In fact, there are three proactive means by which we monitor our 
Internet merchant base.  The first method we use is a periodic 
review of the merchant itself.  This procedure is similar to our 
initial due diligence and consists of a member of our risk 
management team reviewing the merchant's business including its 
entire web site.  We engage in the review for several purposes, 
such as ensuring that the merchant has not established new lines of 
business or activities without notifying us, and ensuring that the 
merchant's practices have not evolved in a manner that creates a 
legal or compliance risk for us.  
	The second mechanism involves the use of anonymous visits 
and purchases from the merchant's web site, also known as 
"mystery shopping."  We engage in mystery shopping based on 
random samplings of merchants.  We also engage in mystery 
shopping if we believe there are unusual transaction patterns or if  
"something just does not look right" with respect to the merchant's 
transactions based on the merchant's profile.  We then assess 
whether the transaction pattern suggests a more significant 
problem and further investigation is warranted.  The use of 
mystery shopping allows us to verify the products that are actually 
delivered to the consumer, and to make sure that the web site 
transaction process is not simply a "cover" for unscrupulous 
activities.
	The third tool in our on-going review of merchants is 
transaction monitoring.  Transaction monitoring is a continuous 
process that allows us the opportunity to flag and review factors 
that are indicative of suspicious or unusual activity on the part of a 
merchant.  Our monitoring of transactions can take a variety of 
forms.  For example, we monitor the volume of transactions for 
each merchant as well as the merchant's average transaction 
amount to ensure that those parameters are consistent with that 
merchant's general business profile and comport with the 
parameters that were established upon our initial approval of the 
merchant.  Any material discrepancy with respect to those 
parameters may suggest that the merchant is not engaged in the 
activities it once was or that the merchant is impermissibly 
processing transactions for another entity.  Such unusual patterns 
would be a red flag indicating that the merchant should be 
examined more closely to ensure that it is still operating in a 
legitimate manner.  If we have any reason to believe that any 
suspicious activity has taken place, we file the appropriate 
Suspicious Activity Reports with the authorities and investigate 
further.  We also have the ability to suspend payment processing 
for that merchant.
	In addition to our proactive efforts, we also obtain information 
from MasterCard and/or Visa relating to unusual activity that may 
be indicative of suspicious merchant behavior.  For example, a 
bankcard association can analyze transaction activity involving a 
variety of card issuers and merchant acquirers to detect patterns 
that an acquirer alone may not be able to detect.  MasterCard and 
Visa can also monitor the Internet for misuse of their brands by 
merchants, which is then relayed back to us and others whose 
merchant business may be affected.  In these circumstances we 
work in concert with MasterCard and/or Visa to investigate and 
address the issue as quickly and thoroughly as possible.

	Response to Child Pornography
	As I described above, Chase Paymentech currently provides 
payment processing services for a large portfolio of merchants.  In 
the course of our processing payments for that portfolio, we are 
aware of two legitimate merchants who have fallen prey to 
fraudulent and criminal activity by child pornographers.  In both 
cases, those merchants unwittingly became conduits for child 
pornography-related transactions that the merchants, in turn, 
submitted to us for processing.  (I should note that in another 
circumstance, a merchant was foolish enough to apply to us 
directly for payment services, even though its web site had links to 
child pornography.  We discovered the child pornography, reported 
the merchant to law enforcement, and denied the application.)  
Although it is extremely rare for a child pornographer to gain 
access to our system, we remain extremely vigilant and have an 
action plan we execute if such access occurs.  If we become aware 
of facts suggesting that someone is attempting to process child 
pornography-related transactions through us, such as by doing so 
through another merchant, we immediately suspend our processing 
services for the merchant in question.  It is important to understand 
that ceasing payment processing is a delicate issue, as it could "tip 
off" the criminals, in which case they would likely disappear 
without a trace.  We therefore work closely with law enforcement 
authorities and, in addition to our efforts to stop payment 
processing, we immediately engage in other remedial action.  For 
example, we visit the merchant's web site and engage in other 
research to obtain as much information as possible to determine the 
scope and nature of the merchant's activities.  We also notify 
NCMEC through a dedicated web site, we notify the nearest office 
of the Federal Bureau of Investigation, and, where appropriate, we 
notify local law enforcement.  Any ultimate termination of the 
merchant account is also reported to the MATCH system 
maintained by MasterCard.

	Conclusion
	Chase Paymentech strictly prohibits the use of its payment 
processing services in connection with child pornography.  We 
have sophisticated and effective mechanisms to prevent child 
pornographers from using our services, and we have been 
successful in our efforts to combat child pornography on the 
Internet.  Chase Paymentech looks forward to working with the 
Subcommittee as we coordinate our resources to eliminate the 
financial viability of child pornographers on the Internet.  It has 
been my pleasure to describe our efforts to thwart payments for 
child pornography, and I would be happy to answer any questions 
you may have.

	MR. WHITFIELD.  Thank you very much.  Ms. Mowder, you are 
recognized for 5 minutes.
	MS. MOWDER.  Chairman Whitfield, and members of the 
committee, my name is Kim Mowder, and I am the head of Risk 
and Fulfillment for BA Merchant Services, a subsidiary of Bank of 
America.  BA Merchant Services provides card processing services 
across the United States.  We applaud the committee's focus on 
this issue, and the coalition that Ernie Allen so ably chairs.  We are 
proud to be a part of the collective effort and equally proud to be 
associated with the National Center for Missing and Exploited 
Children.  I would like to begin my testimony by emphasizing that 
Bank of America's policy and practice is to vigorously screen for 
and avoid signing merchants that are engaged in any kind of 
questionable activity, let alone child pornography, and to terminate 
any relationships that subsequently change in that direction should 
that happen.
	We simply have zero tolerance when it comes to issues like 
child pornography, and we are closely aligned with and cooperate 
with law enforcement at every level in their efforts to combat this 
issue.  Bank of America is the second largest acquirer of merchants 
credit card processing in America.  We have been processing credit 
cards for merchants since 1958, and have approximately 700,000 
active merchants in our portfolio.  We take great pride in our very 
conservative risk averse approach to the merchant services 
business and do not hesitate to decline nearly 2,000 applications a 
year because the activity of the merchant is inconsistent with our 
policies.
	Our underwriting policy clearly defines those merchant types 
whom we deem to be unacceptable for a card servicing 
relationship, and we are much more conservative than required by 
law.  The business types routinely declined by us include adult 
entertainment products and services, dating and escort services, 
debt collection firms, pornography products and services, tobacco 
products being sold via mail order, telephone order or Internet 
sales, wire transfer of money, and any money service businesses 
including payday loans and check cashing.  No exceptions are 
made on these businesses entities, and, again, we have zero 
tolerance for issues like child pornography.
	Our process begins with the salesperson talking directly to a 
merchant, often face-to-face.  Together they complete a merchant 
application that is then sent to our underwriting experts in our 
processing center.  Our process is based on the principle of know 
your customer; not only to screen out undesirable activities, but 
also for potential business opportunities.  Merchant applications 
contain profile information on the merchant's business including a 
description of the products and/or services being sold, how those 
sales occur, and demand deposit banking information.  In addition, 
the merchant application may include personal name, address, and 
social security number information of the owner or officer of the 
business.
	Underwriters reviewing new merchant applications validate the 
merchant's physical business address, confirmation of the products 
or services being sold, and the methods of sale.  They also examine 
all pages and links in a merchant's website if there is one.  All 
validations are documented should later comparisons become 
necessary.  I have listed in my written testimony nine of the tools 
we use to properly evaluate merchant applications, including 
verifying physical inventory and contacting neighboring 
businesses.  Based upon information received from these sources, 
the underwriter may find it necessary to perform additional due 
diligence, and should the merchant be selling products or services 
via the Internet, the merchant's Internet site is reviewed in depth, 
with substantial focus on embedded links to any other sites.
	This identifies merchants that might be assisting other parties 
in sale of products or services that are unacceptable under our 
policies.  Screening for unacceptable activities does not end 
without additional due diligence process.  The BA Merchant 
Services Risk Department performs daily monitoring of merchant 
transaction histories on existing merchant accounts.  Investigators 
use an in house merchant transaction tracking tool designed to 
closely monitor daily processing activity, and based upon 
parameters preset at the time of approval, daily activity reports are 
generated on those merchants that appear to be processing sales 
transactions contrary to the expected norm based on the original 
terms of their processing agreement and the business size and type.
	Risk investigators utilize the same due diligence previously 
described for new applicants to examine merchants appearing on 
any exception reporting in an effort to ascertain the merchant's 
current processing behavior.  Should the investigation determine 
that the merchant subsequently has been engaging in unacceptable 
activities immediate actions are taken.  We may terminate the 
merchant.  The profile information is forwarded to the bank's 
investigation services, and the bank coordinates with law 
enforcement at that time.  We, of course, work in close partnership 
with the card associations.  They employ on our behalf a vast array 
of protocols designed to be a formidable line of defense and 
capture real time potential illegal activities.
	Our efforts and theirs are not discrete but a seamless and 
cooperative venture to ensure we all prevent the use of our 
payment networks for such purposes.  It is a partnership, made 
stronger by the coalition Ernie chairs.  We have seen this work first 
hand.  Although we are aware of only one instance in our nearly 5 
decades of experience with our 700,000 active merchants, in 2005 
MasterCard did alert us to the potential for child pornography 
being offered through a link that appeared on a merchant's website 
that was opened for the sale of software.  The merchant filed a 
police report to substantiate that they knew nothing about the link, 
and we do not know if the site was pirated from overseas or 
whether the merchant changed it after the account was opened.
	For our purposes, that did not matter.  We immediately closed 
the account, consistent with our zero tolerance policy.  But this 
does demonstrate the effectiveness of the partnerships between the 
acquirers and the associations, in addition to the due diligence we 
perform in combating these types of activities.  This single 
instance also highlights another point I would like to make.  The 
merchant, in question, even though they may have been victimized, 
was acquired by an independent sales organization and approved 
through a subsidiary that became affiliated with the bank in 2004.  
We have announced the divestiture of this company and are 
bringing all merchant acquiring in-house.  We believe this 
strengthens our ability to vet, sign, and re-verify merchant activity 
to ensure it is consistent with our policy.
	In summary, Bank of America has a zero tolerance policy for 
anything related to child pornography.  We believe strongly that 
our investigations and due diligence procedures provide assurance 
that child pornography is not being processed through our service 
and we work closely with the card associations to close any 
merchants they identify as posing a risk.  Finally, we support the 
collective efforts of the coalition to ensure that the legitimate 
electronic payments industry is neither wittingly or unwittingly 
facilitating the sale of online child pornography.
	[The prepared statement of Kim Mowder follows:]

PREPARED STATEMENT OF KIM MOWDER, SENIOR VICE PRESIDENT, 
BANK OF AMERICA

	Chairman  Whitfield, Congressman Stupak and members of the 
committee, my name is Kim Mowder, and I am the Head of Risk 
and Fulfillment for BA Merchant Services, a subsidiary of Bank of 
America.  BA Merchant Services provides card processing services 
for approximately 700,000 merchants across the United States.
	First, like my colleagues, we applaud the Committee's focus on 
this issue and the coalition that Ernie Allen so ably chairs.  We are 
proud to be a part of this collective effort.  We are equally proud to 
be associated with the National Center for Missing and Exploited 
Children.   We subscribe to and whole heartedly agree with all the 
benefits and progress Mr. Allen has described for you.  
	I would like to begin my testimony by emphasizing that Bank 
of America's policy and practice is to vigorously screen for and 
avoid signing merchants that are engaged in any kind of 
questionable activity, let alone child pornography, and to terminate 
any relationships that subsequently change in that direction, should 
that happen.  We simply have zero tolerance when it comes to 
issues like child pornography.  And like our colleagues, we are 
closely aligned with and cooperative with law enforcement at 
every level in their efforts to combat this issue.
	Bank of America is the second largest acquirer of merchant 
credit card processing in America.  We have been processing credit 
cards for merchants since 1958 and have approximately 700,000 
active merchants in our portfolio. We take great pride in our very 
conservative, risk averse approach to the merchant services 
business and do not hesitate to decline nearly 2,000 applications a 
year because the activity of the merchant is inconsistent with our 
policies.    
	In that regard, our underwriting policy clearly defines those 
merchant types whom we deem to be "unacceptable" for a card 
servicing relationship.  We are much more conservative than what 
is legally permissible.  The following business types are routinely 
declined by us:
         Adult entertainment products/services
         Dating/escort services
         Debt collection firms
         Pornography products/services 
         Tobacco products being sold via mail order, telephone 
order or Internet sales
         Wire transfer of money or any money service businesses 
(MSB) including payday loans and check cashing
No exceptions are made on these businesses entities and, again, we 
have zero tolerance for issues like child pornography.  
	Our process of thoroughly vetting merchant applications begins 
with a sales person talking directly to a merchant, often face-to-
face. Together they complete a merchant application package that 
is then sent to the underwriting experts in our processing center. 
	Our process is based on the principle of "know your customer," 
not only to screen out undesirable activities but also to look for 
other potential business opportunities. 
	Merchant application packages contain profile information on 
the merchant's business that includes, but is not limited to, a 
description of products and/ or services being sold, a description of 
how sales will occur, and demand deposit banking information.  In 
addition, the merchant application may include personal name, 
address and social security number information on the 
owner/officer of the business if it is a small or new business.   This 
information is used in the due diligence process to validate the 
business type and ownership.
	Underwriters reviewing new merchant application packages are 
charged with validating the merchant's physical business address, 
confirmation of the products or services being sold, and the 
methods of sale (retail store front, mail order, Internet, etc.).  All 
verifications are documented should later comparisons become 
necessary.
	And, of course, all pages and links in a merchant's web site are 
examined, copied and maintained for future comparisons.
	We believe that validation of ownership, business address and 
type is a simple but critical part of this process and we use sources 
of information like the following to verify all application 
information:
         Local, state and federal record sites (county clerk, 
secretary of state, etc.)
         Multiple search engines (yellow pages, phone number 
search, reverse information look-  up services)
         Telephone contact with nearby businesses to secure 
knowledge of merchant activity
         Calls to trade associations familiar with the merchant or 
merchant business type
         Better Business Bureau Reports
         Dun & Bradstreet Business Reports
         Marketing materials requested from the merchant
         Invoices for store inventory confirming products in 
inventory
         Invoices for previous sales (calls frequently made to 
buyers to confirm products purchased)

	Based upon information received from the above sources, the 
underwriter may find it necessary to perform additional due 
diligence to arrive at a sound business decision.  We will do 
whatever is necessary to ensure we are signing merchants 
consistent with our policies.
	Again, should the merchant be selling products or services via 
the Internet, the merchant's Internet site is reviewed in depth, with 
substantial focus on embedded links to any other sites to identify 
products/services offered for sale through links in the merchant's 
site.  This identifies merchants that may be assisting other parties 
in sale of products or services that are unacceptable under our 
policies.  The underwriter copies all internet pages that have been 
reviewed and stores them in the merchant file, primarily so they 
can be periodically checked for subsequent deviations.  
	Screening for unacceptable activities does not end with the 
initial due diligence process.  BA Merchant Services' Risk 
Department performs daily monitoring of merchant transaction 
histories on existing merchant accounts.  Investigators use an in 
house merchant transaction tracking tool with features that are 
designed to ensure close monitoring of merchant's daily processing 
activity.  Based upon parameters preset at the time of approval, 
daily activity reports are generated on those merchants that appear 
to be processing sales transactions that are contrary to the expected 
norm based on the original terms of their processing agreement and 
the business size and type.
	Risk investigators utilize the same due diligence tools to 
investigate merchants appearing on any exception reporting as 
those used by the underwriters on new merchant applications, all in 
an effort to gain an understanding of merchant's current processing 
behavior.  Due diligence may include but not be limited to talking 
directly to cardholders to confirm transaction validity and makeup, 
communicating with the merchant's banking representative and 
speaking directly with the merchant to gain answers to specific 
questions.  From their investigation, the investigator will determine 
what, if any, post due diligence action is required by our policies. 	
	
	The risk investigator may elect to terminate the merchant 
account based upon the risk associated with the new information 
obtained in the investigation, establish a loss reserve fund to 
compensate for any elevated risk associated with the merchant's 
new method of operation, or take no action at all, if new 
information learned falls into acceptable parameters for the 
business type.
	Should the investigation determine that the merchant 
subsequently has begun engaging in unacceptable activities, the 
following actions are taken immediately: 
	1. Merchant processing capability is terminated immediately;
	2. Merchant profile information is forwarded to Bank of 
America's Investigative Services Division for immediate 
investigation; and 
	3. The bank coordinates with law enforcement.

	And, of course, we work in close partnership with the Card 
Associations.  They employ on our behalf a vast array of protocols, 
all designed to be a formidable line of defense and capture real 
time potential illegal activities.  Our efforts and their efforts are not 
discrete but a seamless and cooperative venture to ensure we all 
prevent the use of our payment networks for such purposes.  It is a 
partnership, made stronger by the coalition Ernie chairs.
	We have seen this work first hand.  Although we are aware of 
only one instance in our nearly five decades of experience and with 
our 700,000 merchants, in 2005 MasterCard did alert us to the 
potential for child pornography being offered through a link that 
subsequently appeared on a merchant's web site, a merchant 
account that was opened for the sale of software.  The merchant 
filed a police report to substantiate they knew nothing about the 
link and we do not know if the site was pirated from overseas or 
whether the merchant added it after the account was opened.  For 
our purposes, it did not matter.  We immediately closed the 
account, consistent with our zero tolerance policy. But this does 
demonstrate the effectiveness of the partnerships between 
acquirers and the associations, in addition to the due diligence we 
perform in combating these types of activities.  
	This single instance also highlights another point I would like 
to make.  The merchant in question, even though they may have 
been victims, was acquired by a sales organization subsidiary that 
became affiliated with the bank in 2004.  We have announced the 
divestiture of this company and are bringing all merchant acquiring 
in-house.  We believe this strengthens our ability to vet, sign and 
re-verify merchant activity to ensure it is consistent with our 
policy. 
	In summary, Bank of America has a zero tolerance for 
anything related to child pornography.  We believe strongly that 
our investigations and due diligence procedures provide assurance 
that no undesirable merchant activities are being processed through 
our service and we work closely with Card Associations to close 
any merchants they identify as posing a risk.  Finally, we support 
the collective efforts of the coalition and of this committee to 
ensure the legitimate electronic payments industry is neither 
wittingly or unwitting facilitating the sale of online child 
pornography.  

	MR. WHITFIELD.  Thank you very much.  Mr. Shalom, you are 
recognized for 5 minutes.
	MR. SHALOM.  Thank you.  Good afternoon, Mr. Chairman, 
and members of the committee.  My name is Ralph Shalom, and I 
am Associate General Counsel at First Data Corporation.  I am 
pleased to be here today to discuss First Data's role in the 
payments industry, specifically merchant processing, as the 
committee continues its hearings into Internet child pornography.  
Let me begin my testimony by describing First Data, and the 
unique role we play helping millions of consumers, businesses, and 
governmental entities buy products and services on a daily basis.  
Many of you do business with First Data every day whether using 
an ATM/debit card to pay at a gas station, writing a check for 
groceries, buying a book online.  There is a good chance that First 
Data is moving that transaction, at least part of the way, between 
the merchant and the consumer.
	Although we have many interesting products and services that 
provide some type of payment processing, I will focus my 
testimony on merchant processing.  Our merchant services 
business segment facilitates the ability of merchants to accept 
consumer transactions at the point of sale, whether the merchant 
operates a physical store, brick and mortar, or whether the 
merchant has a virtual or online presence.  Our services enable 
businesses of all sizes to accept various forms of payments from 
consumers, including credit and debit cards.  Together with the 
various financial institutions with which we work, we provide 
merchant processing services for 3.5 million merchants in the 
United States.
	When we sign up or acquire merchants for processing services, 
we make great efforts to understand, one, who are our clients, and, 
two, what type of products or services do they sell.  The answers to 
these questions not only drive technical aspects of how the 
accounts are set up, but they also inform us of the risk that the 
merchant might present to us, and, indeed, whether we are willing 
to accept the merchant at all.  When merchants apply for services, 
they are asked questions to help us understand who they are, 
including providing taxpayer ID numbers, Social Security 
numbers, and other information.  If the sale is made face-to-face 
the sales representatives are trained to make notations about the 
physical aspects of the merchant operations.
	If the merchant is an online vendor, we require the merchant to 
provide us with the website address, which is then reviewed by our 
credit department.  There are many businesses that we simply 
refuse to accept under our credit policies in which we operate.  
None of these policies allow for adult online video content.  
Merchant whose businesses are involved in what we understand to 
be illegal dealings, including the sexual exploitation of children, 
are automatically excluded.  Several years ago we also made the 
determination to avoid businesses providing sexually oriented 
online video.  When a merchant applies for an account with us as 
part of the initial underwriting reviews, we pull a credit report, 
review the materials provided with the application, check the 
industry High Risk files, which you have heard about today as the 
MATCH file, and check the website if the business is described as 
being online.
	We would disqualify a merchant from receiving an account if 
the merchant is involved in online gambling, online cigarette sales, 
online firearms sales, and certainly they are involved in sexually 
oriented online video content to name a few reasons.  Merchants 
don't always tell us the truth when they describe what they are 
going to sell.  Even if they have provided a processor like us with a 
website that describes their business, a merchant can operate 
another website that presents a different business proposition to the 
consumer.  There is nothing in the credit card transaction record 
itself that would prevent a merchant from taking transactions and 
paying on one website and submitting them through an account 
that, in our records, we have associated with a legitimate website.  
Also, sometimes legitimate merchants will get co-opted into 
running transactions for another business.
	As a result, our review of merchant activity continues beyond 
the initial underwriting.  We review transaction activity for our 
merchants to determine if their processing has materially changed 
in ways that suggest the merchant is not who they claimed to be.  
Further, we continually evaluate new software and technology 
solutions to help us identify when a merchant has associated itself 
with illegal activity.  Equally important, we maintain a liaison with 
law enforcement so that we can be notified when they are targeting 
specific merchants for illegal behavior.
	From a merchant processing perspective, we see the financial 
piece of the transaction, which for most transactions is primarily 
the date, time, amount of sale, and card number.  We don't know 
what the cardholder saw or what the cardholder was told when 
they were presented with the bank account information to complete 
the sale, nor do we know what the merchant presented to the 
cardholder to generate that sale.  With billions of transactions 
running through our systems, individual transactions cannot be 
investigated.  However, we do review merchant deposits for 
patterns that, in our experience, suggest the merchant may be of a 
different type than we originally understood.
	For example, we might look at significant increases in 
transaction volume, in excess of what might be expected as normal 
growth, patterns of transaction amounts larger than would be 
expected for a business of the type described, abnormally high 
transactions which are questioned by cardholders or charged back, 
among other criteria.  We process more than 100 pattern filters to 
identify patterns which suggest merchants that require additional 
review.  We have a fraud department that is tasked with reviewing 
accounts that have tripped some of our suspicious activity patterns 
to determine whether there is anything that suggests we can or 
should stop providing processing services.
	As a result of the work of this department, we have terminated 
nearly 4,000 merchant accounts in the past 5 years.  In preparation 
for this hearing, I have surveyed our managers in these areas and it 
appears that we have not seen incidents of child pornography in 
these reviews.  However, we have identified instances where 
merchants submitted transactions for others, or we have found that 
some merchants were involved in sexually explicit materials 
against our credit policy.  In these cases, we immediately shut 
down the merchant's accounts.  It may very well be that some of 
these accounts that we shut down could have carried transactions 
originating in other types of material.
	Let me be clear.  We take this issue very seriously and we have 
cooperated extensively with law enforcement.  For instance, we 
have kept accounts open at the request of law enforcement for 
limited times when we have been told that it is necessary to 
facilitate ongoing investigations.  We have provided information 
and access to funds which resulted in criminal convictions and 
significant seizures of funds associated with criminal activity.  At 
First Data, we have no tolerance for the sexual exploitation of 
children.  Although identifying online merchants engaged in child 
pornography can be challenging, we are committed to taking 
additional steps to identify these entities and preventing them from 
using our systems to fund their illicit activities.
	First, we are participating in a pilot project with MasterCard to 
identify illegal or unacceptable merchant activity by searching the 
Internet for Web pages that engage in sexual exploitation of 
children.  Second, we participate in Financial Coalition Against 
Child Pornography.  Two of the key components of the coalition 
are the creation of a clearinghouse, which will facilitate the sharing 
of information among the payments industry.  We believe that this 
will be a valuable tool to help eradicate such illicit activity from 
the payment system.  In addition, the coalition's efforts determine 
the best way to perform test transactions on targeted websites will 
help us more quickly and accurately identify who is processing 
particular payment transactions, so that we can work effectively 
with law enforcement to shut them down.
	First Data takes seriously its role in protecting the payment 
system from activities that are illegal or against our policies and 
the card association rules.  We provide effective, front-end 
diligence procedures to help us identify unqualified merchants, and 
we impose checks on existing merchants when they trip any of our 
existing suspicious activity patterns.  The measures being 
undertaken by the Financial Coalition Against Child Pornography 
will help all of us in the payment system identify and deter the 
funding for the online exploitation of children.  Thank you.
	[The prepared statement of Ralph Shalom, Esq. follows:]

PREPARED STATEMENT OF RALPH SHALOM, ESQ., ASSOCIATE 
GENERAL COUNSEL FOR LITIGATION, FIRST DATA CORPORATION

	Good morning, Mr. Chairman and members of the Committee.  
My name is Ralph Shalom, and I am Associate General Counsel at 
First Data Corporation.  I am pleased to be here today to discuss 
First Data's role in the payments industry, specifically merchant 
processing, as the Committee continues its hearings into Internet 
child pornography.
	Let me begin my testimony by describing First Data, and the 
unique role we play helping millions of consumers, businesses, and 
governmental entities buy products and services on a daily basis.  
Most people don't realize it, but First Data's products and services 
touch people's lives every day.  We make buying and selling 
easier. It is that simple. Many of you do business with First Data 
everyday - whether you are using an ATM/debit card to pay for gas 
at the gas station, writing a check to pay for groceries, buying a 
book online, getting cash from an ATM, paying for dinner with a 
credit card or using a gift card - there is a good chance that First 
Data is moving that transaction at least part of the way between the 
merchant and the consumer. 
	Although we have many interesting products and services that 
provide some type of payment processing, I will focus my 
testimony on merchant processing.  Our merchant services 
business segment facilitates the ability of merchants to accept 
consumer transactions at the point of sale, whether the merchant 
operates a physical store (brick and mortar) or whether the 
merchant has a virtual - or online - presence. Our services enable 
businesses of all sizes to accept various forms of payments from 
consumers, including credit and debit cards.  The term 
"processing" can be described as those functions associated with 
authorizing, capturing, and settling merchants' credit, debit, stored 
value and loyalty card transactions.  We provide merchant 
processing services for some 3.5 million merchants in the U.S.
	At First Data, a majority of these services are offered through 
alliance relationships with financial institutions.  These 
arrangements are established as either revenue sharing alliances or 
equity alliances.  We have revenue sharing alliances with financial 
institutions like SunTrust, CitiGroup, and Huntington Bank.  We 
have equity alliances with major financial institutions like Wells 
Fargo, PNC, and JPMorgan Chase.  Our equity alliances are run as 
independent companies and compete against one another and 
against our Revenue Sharing Alliances in the market place.  

Understanding How New Merchants Are Acquired
	When we sign up, or acquire, merchants for processing 
services, we make great efforts to understand   (1) who are our 
clients and (2) what type of products or services do they sell?  The 
answers to these questions not only drive certain technical aspects 
of how the accounts are set up, but these questions also inform us 
of the risk that the merchant might present to us and, indeed, 
whether we are willing to accept the merchant at all. When 
merchants apply for services, they are asked questions to help us 
understand who they are, including obtaining their taxpayer 
identification number or their Social Security number.  If the sale 
is made face-to-face, sales representatives are trained to make 
notations about the physical aspects of the merchant.  If the 
merchant is an online vendor, we require the merchant to provide 
us with its Web site address which is then reviewed by our credit 
department. 
	There are many businesses that we simply refuse to accept 
under the credit policies in which we operate.  Each of the 
alliances has its own credit policy that was developed jointly with 
First Data.  None of these policies allow for adult online video 
content.  Merchants whose businesses are involved in what we 
understand to be illegal dealings, including the sexual exploitation 
of children, are automatically excluded.  Several years ago we also 
made the determination to avoid businesses providing sexually 
oriented on-line video content. When a merchant applies for an 
account with us, as part of the initial underwriting reviews, we pull 
a credit report, review the materials provided with the application, 
check the industry High Risk files, and check the Web site if the 
business is described as being online.   We might disqualify a 
merchant from receiving an account from us if the merchant is 
involved in online gambling, online cigarette sales, online firearms 
sales, or if they are involved in sexually oriented online video 
content, to name a few reasons.  In addition, we conduct additional 
policing on non face-to-face prescription drug sellers.  

Understanding How Merchants Are Monitored for Fraud or 
Other Illegal or Unacceptable Practices
	Merchants don't always tell us the truth when they describe 
what they are going to sell.  Even if they have provided a processor 
like us with a Web site that describes their business, a merchant 
can easily operate other Web sites that present a different business 
proposition to the consumer.  There is nothing in the credit card 
transaction record that would prevent a merchant from taking 
transactions obtained on one Web site and submitting them 
through an account that, in our records, we have associated with a 
legitimate Web site.  Also, sometimes legitimate merchants will 
get co-opted into running transactions for another business.  
	As a result, our review of merchant activity continues beyond 
the initial underwriting of the account.  We review the transaction 
activity for our merchants to determine if their processing 
materially changes in ways that suggest the merchant is not who 
they claimed to be.   Further, we continually evaluate new software 
and technology solutions to help us identify when a merchant has 
associated itself with illegal activity.  Equally important, we 
maintain a liaison with law enforcement so that we can be notified 
when they are targeting specific merchants for illegal behavior.
	From a merchant processing perspective, we see the financial 
piece of the transaction, which for most transactions is simply the 
date, time, amount of sale and card number, as well as industry 
specific criteria necessary for assisting bank card issuers in making 
authorization decisions and for qualifying a transaction through the 
card associations (e.g. VISA and MasterCard) to obtain certain 
interchange rates.  In other words, we don't know what the 
cardholder saw or what the cardholder was told when he or she 
presented their bank card account information to complete the sale.  
Nor do we know what the merchant presented to the cardholder 
that generated the sale.  
	With billions of transactions running through our systems, 
individual transactions cannot be investigated.  However, we do 
review merchant deposits for patterns that, in our experience, 
suggest the merchant may be of a different type than we originally 
understood.  For example, we might look at significant increases in 
transaction volume, in excess of what we might expect as normal 
growth; patterns of transaction amounts larger than would be 
expected for the type of business described; an abnormally high 
number of transactions which are questioned by the cardholders or 
charged back; among others.  We also run bank card transactions 
through more than 100 pattern filters to identify which merchants 
merit an additional review.  
	We have a fraud prevention department that is tasked with 
reviewing accounts that have tripped some of our suspicious 
activity patterns to determine whether there is anything that 
suggests we can or should stop providing processing services.  As 
a result of the work of this department, we have terminated nearly 
4,000 merchant accounts in the past five years.   In preparation for 
this hearing, I have surveyed our managers in these areas and it 
appears that we have not seen incidents of child pornography in 
these reviews. However, we have identified instances where 
merchants submitted transactions for others, or we have found that 
some merchants were involved in sexually explicit materials.  In 
these cases, we immediately shut down the merchant's accounts.  It 
may very well be that some of these accounts that we shut down 
could have carried transactions originating with sexually explicit 
material.
	Let me be very clear: We take this issue very seriously and 
have cooperated extensively with law enforcement.  For instance, 
we have kept accounts open for a limited time when we have been 
told that is necessary to facilitate an ongoing investigation and 
have provided information and access to funds which have resulted 
in criminal convictions and significant seizures of funds associated 
with criminal activity. 

First Data Participates in the Financial Coalition Against Child 
Pornography
	At First Data, we have no tolerance for the sexual exploitation 
of children. Although identifying online merchants engaged in 
child pornography can be challenging, we are committed to taking 
additional steps to help identify these entities and prevent them 
from using our systems to fund their illicit activities.  First, we are 
participating in a pilot project with MasterCard to identify illegal 
or unacceptable merchant activity by searching the Internet for 
Web sites that engage in the sexual exploitation of children.    
Second, we participate in the Financial Coalition Against Child 
Pornography.  As you know, the goals of the Coalition are to: (1) 
establish a global clearinghouse on child pornography; (2) create a 
proactive system to enable the financial services industry to deal 
with illegal uses of its systems to disseminate child pornography; 
(3) create a system for reporting suspected child pornography; and 
(4) implement monitoring and due diligence checks.  Two of the 
key components of the Coalition are the creation of the 
clearinghouse, which will facilitate the sharing of information 
among the payments industry.  We believe this will be a valuable 
tool to help eradicate such illicit activity from the payments 
system.  In addition, the Coalition's efforts to determine the best 
way to perform test transactions on targeted Web sites will help us 
more quickly and accurately identify who is processing those 
particular payment transactions, so that we can work effectively 
with law enforcement to shut them down.

Conclusion
	In summary, First Data takes seriously its role in protecting the 
payments system from activities that are illegal or against our 
policies and the card association rules.  We employ effective, 
front-end due diligence procedures to help us identify unqualified 
merchants, and we impose checks on existing merchants when they 
trip any one of our existing suspicious activity patterns.  Finally, 
the measures being undertaken by the Financial Coalition Against 
Child Pornography will help all of us in the payments system 
identify and deter the funding for the online exploitation of 
children.
	Thank you.

	MR. WHITFIELD.  Thank you, Mr. Shalom.  Mr. Strider, you are 
recognized for 5 minutes.
	MR. STRIDER.  Good afternoon, Mr. Chairman, and members of 
the subcommittee.  On behalf of NOVA, I would like to thank you 
for the opportunity to address NOVA's efforts as a member of the 
financial services industry, to combat the sale and distribution of 
child pornography over the Internet.  Specifically, I would like to 
provide the subcommittee with an overview of the due diligence 
NOVA conducts before approving a new merchant and the 
ongoing monitoring NOVA performs on existing merchants, and 
the actions that NOVA takes if a merchant is subsequently engaged 
in prohibited or illegal activity, which would include child 
pornography.
	Nova is committed to preventing merchants engaged in child 
pornography from using its payment services.  In addition to 
NOVA's individual efforts, which I will describe during my 
testimony, NOVA has joined forced with others in the financial 
services community such as the FCACP.  By way of background, 
NOVA provides integrated credit and debit payment processing, e-
check, gift card and prepaid solutions, and software applications to 
businesses.  Established in 1991, NOVA is currently the third 
largest acquirer of credit card transactions in the United States with 
approximately 800,000 merchants nationwide.  Since its 
acquisition by U.S. Bancorp in 2001, NOVA has been a wholly-
owned subsidiary of U.S. Bank National Association, the sixth 
largest financial institution in the U.S.
	NOVA is somewhat unique in the acquiring industry since it is 
a wholly-owned subsidiary of a national banking organization.  
This means that in addition to being subject to the rules and 
regulations of the card associations, NOVA is also regulated and 
routinely audited by the Office of the Comptroller of the Currency 
and the Federal Reserve.  The regulators regularly review NOVA's 
sales and operations departments to ensure compliance with the 
policies and procedures of both NOVA and U.S. Bank.  I would 
like to turn now to a brief review of NOVA's operational policies 
and procedures regarding the approval of new merchants, the 
monitoring of existing accounts, and the steps NOVA would take 
in the event a merchant was suspected of being engaged in child 
pornography.  It is important to note Nova applies these policies 
and procedures to every prospective and approved merchant 
account serviced by NOVA.
	First and foremost, NOVA has a strict policy against 
processing for a merchant engaged in any illegal activity including 
child pornography.  Moreover, NOVA's credit and underwriting 
policy strictly prohibits the approval of any adult business 
regardless of the legality of such activity.  NOVA strives to 
prevent any such business from being approved by employing a 
very strict credit and underwriting policy, and undertaking a 
rigorous due diligence review of every prospective merchant 
account.
	NOVA also conducts a rigorous due diligence review of every 
prospective due diligence account.  The due diligence process 
generally starts with a physical site survey of a brick and mortar 
merchant to confirm the existence of the merchant and the type of 
goods and services sold.  Merchants engaged in business on the 
Internet for whom a physical site survey is not possible are 
classified as higher risk and subjected to additional scrutiny by 
NOVA's credit and underwriting unit.  This additional scrutiny 
includes a full scan of the merchant's website as well as all links to 
other websites, a search of the merchant's name on Lexis/Nexis, 
Google, and other search engines, cross-reference of the merchant 
name, address, and other information pertinent to that account, a 
credit report, a telephone interview that includes challenge 
questions to confirm the applicant and the merchant are one and 
the same.
	Credit and background checks of the business and, in many 
instances, its principals or owners are also a regular part of 
NOVA's due diligence process.  NOVA also queries the MATCH 
file to determine if the business or its principals, partners, or 
owners have been reported by a previous acquirer for violations of 
the card association rules.  Additionally, NOVA's Anti-Money 
Laundering Policy requires NOVA to screen all prospective 
merchants against various sanctions including the list maintained 
by the Office of Foreign Asset Control.
	In most cases, NOVA is able to confirm a prospective account 
is legitimate and creditworthy through the diligence process.  From 
time to time, however, information discovered during the diligence 
process phase raises a red flag for NOVA leading to further 
investigation, and in certain cases there is a decline of an account.  
Red flags indicating a prospective account may not be legitimate 
include the use of false names, addresses, social security numbers, 
no refund policy posted on the website, products and services 
offered for sale other than those described in the application, and, 
with respect, to adult businesses specifically, lines to adult 
websites and advertisements for things such as sex toys.
	Once a merchant account is approved, NOVA continues to 
monitor the account for changes in processing parameters through 
automated systems that queue a merchant for further review if 
certain changes are noted.
	[The prepared statement of David Strider follows:]



PREPARED STATEMENT OF DAVID STRIDER, EXECUTIVE VICE 
PRESIDENT, NORTH AMERICAN OPERATIONS, NOVA INFORMATION 
SYSTEMS, U.S. BANCORP

 

	MR. WHITFIELD.  Mr. Strider, excuse me for interrupting you 
but time has expired, and we have votes on the floor, and I just 
missed one vote.  Because we have another series of votes, we 
could keep you here for quite a while, but I think what I am going 
to do is just ask a couple of brief questions that can be answered 
rather quickly, and we have your testimony which we appreciate 
your preparing very much.
	I want to just ask a couple of questions, and then we are just 
going to adjourn this hearing but we may be back in touch with all 
of you as we move forward on some specific things that have come 
up.  But I do thank you for your time and for testifying here today 
and for your patience.
	Here is one of the questions.  Over the last 4 years, I would just 
like to know, if you can answer this question, how many Internet 
merchants have you identified that were engaged in commercial 
child pornography?  Mr. Matos, can you answer that question?
	MR. MATOS.  That would be two merchants that were actually 
engaged.
	MR. WHITFIELD.  Two.  Okay.  Ms. Mowder.
	MS. MOWDER.  One.
	MR. WHITFIELD.  One.
	MR. SHALOM.  We haven't identified any on our reviews that 
engaged in Internet child pornography.  We have been advised by 
law enforcement by investigations they were conducting in one 
instance.
	MR. WHITFIELD.  Okay.  Mr. Strider.
	MR. STRIDER.  Two, and two others were notified by law 
enforcement.
	MR. WHITFIELD.  Okay.  Now one other question.  When 
determining whether to sign up a merchant do, the Internet 
merchants receive any greater scrutiny than a brick and mortar 
merchant?
	MR. MATOS.  Absolutely, Mr. Chairman.  Our present platform 
which would include Internet e-commerce based merchants, we 
consider those high risk transactions and those receive a much 
greater scrutiny than retail.
	MR. WHITFIELD.  Okay.  Ms. Mowder.
	MS. MOWDER.  Yes, Mr. Chairman, very similar to my 
colleague.
	MR. WHITFIELD.  Okay.
	MR. SHALOM.  Our approach is consistent with that.
	MR. STRIDER.  It is the same.
	MR. WHITFIELD.  Okay.  Well, you all have been great.  Thank 
you so much for taking time to be with us.  We look forward to 
working with you, and I would adjourn the hearing at this point.
	[The information follows:]

 



	[Whereupon, at 1:50 p.m., the subcommittee was adjourned.]
	
  Nilson Report, No. 849, 850, 851 (2006).











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