WSJ(1/17)Child Porn Is Lucrative Criminal Trade On Internet

On a Saturday morning in October 2003, federal agents raided the apartment of Chicago pediatrician Howard Marc Watzman. They found two computers with more than 3,000 images of boys and girls as young as 4 years old being sexually exploited. Mr. Watzman was later sentenced to five years in prison for possessing child pornography.

The case is one of more than a thousand stemming from a broad international probe into a company called Regpay Co. in the former Soviet republic of Belarus. Regpay gathered lurid images and sold them to pedophiles around the world with the help of U.S. companies that collected credit-card payments.

Regpay offers a window into how the Internet has transformed what was once a cottage industry into a sophisticated business. The company is at the center of what U.S. law-enforcement officials call the largest Internet child-pornography investigation to date and the first to follow the international financial trail of child-porn sales. The probe has discovered the names of some 40,000 Americans who downloaded child porn and led to more than 1,400 arrests world-wide including about 330 in the U.S. At least three users arrested in the U.S. have committed suicide.

Some estimate the Internet child-pornography business could bring in billions of dollars annually. "It has now become a revenue generator for organized groups," says Ernest Allen, head of the National Center for Missing and Exploited Children, an Alexandria, Va., nonprofit.

U.S. and U.K. child-protection experts estimate that there are thousands of commercial Web sites containing child pornography and as many as 100 new ones pop up each month. They say the children being abused are becoming younger and include toddlers. The potential market is large: As many as one in 1,000 men has a sexual interest in children, estimates Hamish McCulloch, assistant director for trafficking in human beings at Interpol, the international police organization. The problem is less common in women, though not unknown.

In the 1980s, a broad crackdown in the U.S. and other countries largely choked off the flow of child pornography, forcing it out of its traditional niche of sex bookshops and into underground networks of collectors. When the Internet became widespread in the 1990s, it instantly proved popular with pedophiles. There was little risk of prosecution amid a lack of law-enforcement scrutiny.

Child-pornography Web sites draw "people who had never dreamed of indulging in the fantasy" by giving them the perception of anonymity, says Kevin Zuccato, director of the Australian federal police's high-tech crime center. Thanks to better Internet connections, Regpay's users were able to download millions of images in just one year, something that "simply wouldn't have been possible" 10 years ago, says Mr. Zuccato, whose team coordinated the arrests of Regpay customers in Australia.

The Internet emboldens consumers of child pornography to seek out increasingly graphic material. "I wanted to see more and more abusive pictures," says Chris, a technician for a leisure company, in a video interview used for training purposes by the Lucy Faithfull Foundation, a British child-protection charity.

In the video, Chris says he started off spending a few minutes a week searching for child porn on the Web. Soon he was spending as much time viewing images "as I humanly could," and he even recalls one 24-hour session. Chris served a three-year probationary sentence for possessing child pornography in a case unrelated to Regpay. The foundation made the video available on condition that his last name not be used.

At first it was mostly pedophiles themselves who distributed the images circulating on the Internet. But the industry's profit potential has increasingly attracted organized criminals who bring with them business and money-laundering skills.

Regpay's president was Yahor Zalatarou, a 27-year-old man with a talent for computers. The son of an engineer and a teacher, Mr. Zalatarou grew up in the Belarus capital of Minsk. He worked with Aliaksandr Boika, 31, who has a background in computer software, and Alexei Buchnev, 28, a translator. All three are now in jail.

U.S. law-enforcement agencies suspect that Mr. Zalatarou had connections to a larger criminal network and say their investigation is continuing. Robert Little, a New Jersey lawyer for Mr. Zalatarou, says there were "levels of hierarchy above him." Mr. Little adds that Mr. Zalatarou denies his bosses were "mafia-related."

The allegations against Regpay are detailed in indictments returned by a Newark, N.J., federal grand jury in December 2003 and October 2004.

At first the company was called Trustbill. It changed its name to Regpay after receiving two cease-and-desist notices from the Michigan attorney general's office in August and September 2002, according to an affidavit by Internal Revenue Service special agent Maria Reverendo attached to a July 2003 complaint against Messrs. Zalatarou and Boika.

Regpay processed payments for more than 50 third-party child-pornography sites, and ran at least five of its own with names like darkfeeling.com, lust-gallery.com and lolittles.com. "All girls are under 14," read the advertising blurb for the lolittles.com site, according to Ms. Reverendo's affidavit. Another site advertised "6,000 high-resolution professional images."

The majority of images of child pornography come from the U.S. or Western Europe, law-enforcement officials say. Abusers typically are family members or someone else known to the victim. The advent of digital cameras and camcorders has fueled an explosion in the material available online. Because pedophiles often are willing to share their images at little or no cost by uploading them to the Internet, it is easy for third parties like Regpay to obtain and package content on their own sites.

Lawyers for Messrs. Zalatarou, Boika and Buchnev say their clients weren't involved in making child pornography. Some U.S. law-enforcement officials suspect links between Regpay and the producers of some images on its Web sites because Belarus authorities said they found a studio used to make pornographic pictures in the same building as Regpay's offices in Minsk. But U.S. authorities say they haven't recovered any child pornography from that studio.

Subscribers paid up to $75 per month to access Regpay's sites and the sites for which it handled payments, says Kevin O'Dowd, an assistant U.S. attorney in Newark and a lead prosecutor on the case. Regpay processed about $8 million in payments from June 2002 to June 2003 and pocketed more than 75% of that, according to U.S. authorities. They believe Mr. Zalatarou personally earned only about $20,000 to $50,000 a month, bolstering suspicions that he was part of a larger enterprise.

The key to Regpay's business was getting money from the credit cards of subscribers in the U.S., Europe and elsewhere into its own accounts, at least one of which was in Latvia, a former Soviet republic neighboring Belarus. Credit-card payments from many customers went first to a small Fort Lauderdale, Fla., company called Connections USA Inc. Connections, which had a legal business in online and telephone dating services, had signed up as a merchant in credit-card networks. Both Visa and MasterCard cooperated in the investigation.

Connections forwarded subscriber payments to a Regpay account in Latvia, according to the indictments. The money was transferred from a Morgan Stanley account -- apparently the business account for Connections -- to a Deutsche Bank AG account and from there to Aizkraukles Bank in Riga, Latvia, according to the IRS agent's affidavit.

Altogether Connections helped launder about $3 million from June 2002 through June 2003 in return for a commission of more than 11% on the funds transferred, according to the indictments.

No banks have been charged in the Regpay case. Financial institutions have a duty under U.S. law to know their customers and file reports if they detect suspicious activity, but how much a bank should investigate "is still very much a judgment call," says Karen Petrou, managing partner of Federal Financial Analytics Inc., a research and consulting firm in Washington.

The three banks declined to comment on whether they reported suspicious activity in this case. Morgan Stanley spokesman Hugh Fraser says his institution "performed appropriate diligence on the account" and has been cooperating with law enforcement. A Deutsche Bank spokeswoman declined to comment.

Aizkraukles Bank said in a statement that laws prohibit it from talking about specific clients but that in 2003 it investigated several transactions related to the sale of child pornography online and reported its findings to authorities in Latvia.

Mr. O'Dowd, the assistant U.S. attorney in Newark, declined to comment on whether any bank was a target of investigation. In general, he says, banks "really need to focus on continuing due diligence" but "sometimes the ongoing due diligence isn't there."

Regpay also used another U.S. company, LB Systems Inc., run by a Belarussian man living in Los Angeles, to transfer funds to a Regpay account in Latvia, according to the indictments.

The U.S. investigation began in early 2003 when undercover federal agents in Newark and Washington began purchasing child pornography from Web sites in an attempt to track down people producing and profiting from the sites. It marked the first time the U.S. government followed the financial trail of online child pornography, according to U.S. Immigration and Customs Enforcement. The effort was conducted by the U.S. attorney's office in Newark in conjunction with IRS agents, postal inspectors and immigration officials.