We earlier reported that Google (news, site) has set aside US$ 500 million from its 1Q 2011 earnings for a possible settlement with the Department of Justice for a yet-undisclosed issue. Sources indicate that this is likely due to Google's running of ads from illegal pharmacies.

While the SEC filing only indicated that Google was in trouble for "the use of Google advertising by certain advertisers," sources cited by the Wall Street Journal indicate that the criminal investigation was over allegations that the search giant accepted ads from online pharmacies that break US laws to the tune of "hundreds of millions of dollars."

The DoJ is supposedly investigating if Google was culpable for accepting these ads, although neither Google nor DoJ representatives would not comment on the matter.

Is There a Precedent?

Search engines that have been found profiting from illegal activity have previously been meted with fines. In December 2007, for example, Google, Microsoft and Yahoo! settled a combined US$ 31.5 million in a civil lawsuit involving illegal gambling sites. From a legal standpoint, though, the contention would be whether these illegal online pharmacies appeared as part of natural search listings (which are determined by algorithm), or under its paid AdWords program.

Google introduced updates to its advertising policy in February 2010 to state that the company is only allowing ads from accredited US and Canadian pharmacies. Google also filed a federal lawsuit last September against several advertisers that violated these very policies. In a Google Blog post at that time, litigation counsel Michael Zwibelman says the search company had been encountering advertisers circumventing its policies, despite best efforts to enforce new safeguards and guidelines.

It's been an ongoing, escalating cat-and-mouse game as we and others build new safeguards and guidelines, rogue online pharmacies always try new tactics to get around those protections and illegally sell drugs on the Web.

What's the Bottom line?

Google's setting aside of the half-billion dollars for the DoJ is tantamount to saying they're indeed paying the fine, if only to avoid further pressure and even potential litigation. Now the question here is whether the US$ 500 million is a fair amount. The DoJ's investigation supposedly involves hundreds of millions of dollars in advertising earned from illegal activity. Google says in its SEC 10-Q filing that the fine will not have adverse effects on their bottom line.

Although we cannot predict the ultimate outcome of this matter, we believe it will not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.

Therefore, does this mean that Google earned more from the illegal ads than the US$ 500 million? Are they simply passing on the money obtained from illegal sources? Furthermore, since they're suing the illegal pharmacies for ToS violations, does Google, in essence, get to receive even more money than it is paying? If so, then US$ 500 million sounds like a small price to pay for Google.