Can Not Create SQL Mobile Database On Server: The Operating System Does Not Support Encryption

I have code that creates a SQL Mobile database on a server. It has worked in many environments, but I have one customer experiencing an issue. It will not create the database on their server. I would appreciate any thoughts.

The exact error message I get is "the operating system does not support encryption"

I am getting it on the line: SQLCeEngine.CreateDatabase()

Here is the code:
SQLCeEngine = New SqlServerCe.SqlCeEngine(SQLConnectionString)
ReturnValue += ": Declare new"
SQLCeEngine.CreateDatabase()
ReturnValue += ":Create"
SQLCeEngine.Dispose()
ReturnValue += ": Dispose"

Here is the error message I get from our application- the part after Err: is the actual error message from the system:
Data Source = D:EVADATAWebServiceDownloads est;Password=test;Persist Security Info=False;: Declare new:Error!:Err:The operating system does not support encryption.

When I go into SQL Express and create a SQL Mobile database using it, it can be created. So, I have to believe it can be done on the server, but I don't know why the code can not do it.
(e.g. FileConnect Object ExplorerServer Type: SQL Server compact Edition and create a database). The database is successfully created if I do it manually this way. It even creates fine if I select the 'Encrypt' button.

The machine is a Windows 2000 Server sp4 version 5.00.2195
SQL 2000 is installed
SQL 2005 Express is installed
I ran the SQLServerCE31-EN.msi file and it is installed. (I have also re-run and repaired it)
I have also copied over the newest version of our code from scratch.

SQL Server mgmt Studio: 9.00.3042.00
MDAC 2000.085.1128.00
MSXML 2.3 3.1 4.0 5.0 6.0
IE 6.0.2800.1106
.NET Framework 2.0.50727.42
Operating System 5.0.2195