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Community or Crime Syndicate? Feds bust online trading scheme

Wednesday, May 24 2000
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May 24, 2000
Washington, D.C. -- When a team of federal agents stormed the suburban Virginia home of Miguel and Abi Guzman early one Monday morning, the neighbors suspected the worst. Recently arrived from Miami, the couple was seldom seen outside of the house and appeared to keep irregular hours. But in a matter of days, it would be their neighbors on the Internet who would rally to the Guzmans' defense.

According to the U.S. Treasury Department, which led the raid, the Guzmans benefited from a vast online network of business contacts and conducted millions of dollars in transactions without paying taxes or adhering to U.S. trade laws. Sources close to the investigation put the total number of persons involved in the "electronic black market" scheme in the thousands, with participants in all 50 U.S. states.

"These two individuals have defrauded the American people," declared J. Lee Thomas, director of Treasury's Financial Crimes Enforcement Network (FinCEN), "and they have broken the trust that is so essential to our national economy." FinCEN's agents, ordinarily assigned to money-laundering operations, began tracking the Guzmans' operations in the fall of 1997, on a tip from the Internal Revenue Service. The IRS began investigating the Guzmans in 1995 for alleged tax evasion in a complex online bartering scheme. Because no actual money was involved and the shadowy transactions were so complex, the IRS eventually handed the case to FinCEN.

Denied bail at their May 10 arraignment in District Court in Washington, D.C., the Guzmans are awaiting trial for what could be the first major setback to the unruly, frontier culture of commerce on the Internet. Through their lawyers, the Guzmans contend that they are, in fact, the nation's first "political prisoners" in a growing federal war against the Internet community. Their hope is to convince both the general public and their captors that they are guilty only of trading gifts with their "online neighbors."

"The Guzmans are upstanding citizens who are being punished for building friendships over the Internet," argued Naomi Bustamante, the attorney representing Abi Guzman. "If the Guzmans are not free to exchange gifts with their online friends, we are living in a Nazi nightmare."

But what the Guzmans call "gifts," the government calls unreported financial transactions. At the heart of the contentious and far-reaching dispute is a software system developed by Miguel Guzman that enables people to swap goods and services over the Internet. Guzman, who formerly worked as a system administrator for the University of Miami, first developed his program to simplify the process of scheduling the hundreds of classes taught on campus each semester. It was in 1995 that the clever programmer "ported" his analysis and scheduling tool to the Web.

Dubbed CuppaSugar, Guzman's program allows for dozens of parties to participate in serial trades in which goods may change hands several times before any given transaction is completed. For example if a man in Long Beach wants 10 packages of buffalo jerky sold only in South Dakota, he can place his request through CuppaSugar and will eventually receive the jerky along with a request for another good or service of equal value, such as picking up a video rental and delivering it to someone in his town. By 1999, CuppaSugar was arranging over 50 such transactions per minute, with "gifts" exchanged ranging from new cars and dentistry to homemade cookies and dry cleaning. Participants who failed to reciprocate properly were blocked from using the system.

While CuppaSugar's countless users laud the service as utopian, federal authorities consider it no different from the illegal economies operated by organized crime syndicates. "If enough people were drawn into the Guzmans' network, public schools and federal highways would disappear," warned Donald Hanover, the federal prosecutor handling the case against the Guzmans, "because there simply wouldn't be any tax money to fund them." He further insinuated that this economy of IOUs is rife with the possibility of extortion and is operated outside of the protection of police.

Internet industry analysts, however, are queasy about the government crackdown on Internet trade and consider the CuppaSugar network, like Napster, to be a prototype for the global, Internet-based economic structures of the future. "Just because 'money' isn't involved doesn't mean it can't be monetized in some other way," explains Lorne Weller, a partner with Internet Capital Group. "Nothing can stop the Internet from replacing society, and if that includes the economy, then so be it."

South to the Future's stories contain fictional and factual elements. Except when public figures are being satirized, any use of real names is accidental and coincidental. Comments? Holler@sttf.org.

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