The United States government has shut down a digital currency website and jailed its executives for allegedly operating the largest money laundering scheme ever, considered by some to be “PayPal for criminals.”
Costa Rica-based Liberty Reserve has been seized by authorities
in the US following the unsealing of a federal grand jury
indictment Tuesday that charged the website and its
administrators with conspiracy to commit money laundering and
conspiracy to operate an unlicensed money transmitting business
by providing a means of channeling a currency without registering
in the US. Law enforcement agencies in 17 countries assisted with
the investigation.
In the complaint, Manhattan Attorney Preet Bharara said Liberty
Reserve was structured “as a criminal business venture, one
designed to help criminals conduct illegal transactions and
launder the proceeds of their crimes.”
“Its existence was based on a criminal business model,”
Bharara added at a Tuesday press conference.
Since 2006, Liberty Reserve has served as a portal for Internet
customers to make anonymous financial transitions on the Web, but
investigators say that service thrived on and encouraged illegal
activity. Under the guise of a currency transferring site,
authorities allege the executives of Liberty Reserve laundered
billions of dollars and “facilitated global criminal
conduct.”
“This was really PayPal for criminals,” a senior law
enforcement official told the New York Times, equating Liberty
Reserve as “a shadow banking system for criminal conduct” that
was “able to facilitate all sorts of criminal conduct that would
not otherwise happen.”
Liberty Reserve allowed users to pay for goods and services using
a digital currency that could not be traced back to a consumer
such as with a credit card by allowing customers to create
accounts using only a name, email address and date of birthday.
Because the company did not verify the identity of its users,
accounts could be created in any name. In exchange, the company
took one percent for each transaction and for an additional 75
cents offered to hide a user’s account number.
This, allege investigators, allowed Liberty Reserve to become in
a matter of just a few years the international "financial
hub" for identity theft, credit-card fraud, hacking, child
pornography and narcotics trafficking.
"The defendants deliberately attracted and maintained a
customer base of criminals by making financial activity on
Liberty Reserve anonymous and untraceable," the indictment
said.
An estimate one million users around the world have used the site
for 51 million illicit transactions at a rate of more than 12
million transactions each year, authorities claim. In all, the
site is accused of laundering over $6 billion.
Liberty Reserve’s website went offline last Thursday and its main
homepage was replaced with a Department of Justice notice that
the United States Global Illicit Financial Team, a previously
unknown association compromised of the US Secret Service, the
Treasury and the Department of Homeland Security, had seized the
site.
“Liberty Reserve’s virtual currency has become a preferred
method of payment on websites dedicated to the promotion and
facilitation of illicit web-based activity, including identity
fraud, credit-card theft, online scams and dissemination of
computer malware,” the Treasury said in the statement that
followed.
Arthur Budovsky, Liberty Reserve’s founder, was arrested Friday
in Spain on suspicion of money laundering. Four days later the
indictment was unsealed and Bharara then made his remarks about
the investigation.
Budovsky had previously operated a similar exchange site,
GoldAge, but had that operation shut down in 2006 after being
charged by American officials with operating an illegal financial
services business. He then fled to Costa Rica while serving
probation for his felony conviction, renounced his US citizenship
and registered Liberty Reserve. When word of an investigation
surfaced in 2011, Budovsky told authorities he shut-down
Liberty’s
Costa Rican operations. According to the indictment, though, the
company actually continued to function and funds were cycled
through a number of shell companies across the globe.
Security researcher Brian Krebs wrote on his blog Tuesday that
the indictment has the potential to cause a “major
upheaval” in the cybercrime economy. The charges against
Liberty Reserve come just days after Mt. Gox, the biggest name in
the Bitcoin cryptocurrency, had its assets seized by the federal
government. The US Department of Homeland Security intervened in
Mt. Gox’s operations after a federal judge signed a warrant for
the website on May 14 on suspicion of it being an unlicensed
money transfer business, also because they failed to register in
the US. Liberty Reserve did not use Bitcoin in its transactions,
instead relying on its own digital currency, the LR.
Authorities add Liberty Reserve co-founder, Vladimir Kats, was
arrested in Brooklyn, New York as part of the complaint. At least
three others have been arrested at this time, including one other
man in Brooklyn and another in Costa Rica.