Yesterday, the US Attorney's office in Manhattan brought charges against the founder of LibertyReserve.com, an online e-currency trading company that an indictment handed down in Manhattan federal court claims was “the predominant digital form of money laundering used by cyber-criminals worldwide.” The site was shut down last week and replaced with the nifty image above. Since its founding in 2006, Liberty Reserve has allegedly moved, stored, and laundered over $6 billion from over one million users who range from your workaday hacker and identity thief to large syndicates involved in drugs, bank robbery, child pornography, gambling, human trafficking, and other delightfully illicit activities.
The prosecution of Liberty Reserve will be the largest international money laundering case in the history of forever and it further shows how the internet, with its newfangled monetary creations and anonymity can serve as the locus of all sorts shady transactions.
But how did Liberty Reserve and its made-up currency (called LRs) become what prosecutors describe as “the financial hub of the cybercrime world”? Well, by design.
Two of the defendants in the case, site founder Arthur Budovsky and co-founder Vladimir Kats, are old hands at the e-currency-as-vehicle-for-illicit-activity game, having been a third party “exchangers” for Gold Age, another huge online money-laundering organization brought down by the Department of Justice. They were convicted in 2006 and given five years of probabtion. But that was just a momentary setback. As any good startup entrepreneur will tell you, learn from your failures. For starters, they founded their new company in Costa Rica, outside the reach of US law. And they built in multiple levels of remove between users and transactions that provided the thick skein of anonymity that cyber criminals relished so dearly.
To open an account with Liberty Reserve, you did have to provide basic information, but the website did nothing to verify that info. So your email address, Fraudman420@dongshow.fart, and your address, 123 Fake Street, Nowheresville, Montana, would do just fine. LRs could be transferred to any other Liberty Reserve user, and online merchants could accept LRs as payment for goods and services. What Liberty Reserve got out of it was a 1 percent commission. For an extra 75 cents per transaction users could hide their Liberty Reserve account numbers, effectively making the transactions entirely untraceable. BAM.
In order to add another layer of remove, Liberty Reserve did not allow users to directly withdraw or add money to their account through credit cards or wire transfers. Instead, you had to go through an “exchanger.” These third parties were individuals who bought LRs in bulk from Liberty Exchange and sold and traded with individual users. So the system has no centralized database of user information and nothing linking users and accounts in legitimate banking institutions.
Who are these exchangers? It appears they were murky-ass folk living and working outside of mainstream monetary institutions in countries like Russia, Malaysia, Nigeria, and Vietnam. Presumably a lot of these guys are sitting on now worthless, and potentially criminal, piles of LRs, and the vital information about who all these users actually were.
The defendants, who include five other men, are being charged with two counts of consipiracy and one count of operating an unlicensed money transmitting business. Pretty much every move they made was designed to evade, elude, or dupe authorities in Costa Rica and the US, including offering Costa Rican authorities a fake “portal” through which they could supposedly view transactions. They also claimed to shut down the site in 2011 but continued to operate it through shell companies around the world.
The government is seeking the forfeiture of the more than $6 billion that Liberty Reserve allegedly served as a conduit for. Recovering those funds seems like a long shot, as bank accounts in Cyprus, Spain, Morocco, Australia, and other far-flung locales are listed in the indictment. Details that come out in the discovery phase of this case should be juicy. Stay tuned.