The Liberty Reserve Indictment

The Defendants

Liberty Reserve S.A., Arthur Bodovsky (owner), Vladimir Kats (left the business in 2009), Ahmed Yassine Abdelghani (left the business in 2009), Allen Esteban Hidalgo Jimenez, Asseddine El Aminr, Mark Marmilev, Maxim Chukharev.

The Charges

1. Conspiracy to Commit Money Laundering

2. Conspiracy to Operate Unlicensed Money Transmitting Business

3. Operation of an Unlicensed Money Transmitting Business

Read the indictment here.

Liberty Reserve owner, Arthur Budovsky, a former U.S. citizen and naturalized Costa Rican of Ukrainian origin, was arrested in Spain last Friday. U.S. officials will likely to seek his extradition.

Also on Friday, in San José Costa Rican prosecutors raided Budovsky’s home and offices. They seized documents, computers, three Rolls Royce, Jaguar automobiles, and a motorcycle.

Seizure

US officials have seized the following domain names, Libertyreserve.com, Exchangezone.com, Swiftexchanger.com, Moneycentralmarket.com, Asianagold.com and are seeking the forfeiture of the following domain names for related exchanger sites: Wm-center.com, e-naira.com, ecardone.com, ebuygold.com, getemoney.com, epaymonster.com, instantgoldng.com, jtgold.com, goldnairaexchange.com, superchange.ru, webmoney.co.nz, m-gold.com, goldmediator.com, absolutexchange.eu, mewahgold.com, centregold.ca, electrumz.com, tukarduid.com, entelnova.com, tacoauthorized.com, intexchange.com, ukrnetmoney.com, wmirk.com, nigeriagoldexchanger.com, edealspot.com, duyduychanger.com, magnetic-exchange.com, moneyexchange.vn, abc-ex.net, mi-billetera.com, nicciexchange.com, exhere.com, alertexchanger.com, velaexchange.com, goldexpay.com.

Read it here.

28 bank accounts have been seized and the indictment is seeking the forfeiture of “all funds” in 45 different bank accounts in 9 different countries.

Patriot Act

The shutdown of Liberty Reserve was initiated and orchestrated by the Treasury. While Liberty Reserve was based in Panama and the owner had given up his US citizenship, US officials conducted the investigation using a provision of the Patriot Act that allows “the prevention, detection and prosecution of international money laundering and the financing of terrorism.” Via the Patriot Act Liberty Reserve was declared to be “a Financial Institution of Primary Money Laundering Concern”.

Liberty Reserve did have US customers (20k according to estimates by US officials), however, the Treasury made it very clear that they intend to go after businesses regardless of location stating “We are prepared to target and disrupt illicit financial activity wherever it occurs – domestically, at the far reaches of the globe or across the internet.”

Legitimate Use

Almost certainly the service was used by thieves, but US officials failed to see any legitimate use for the service calling it “structured so as to facilitate money laundering” and stating that its structure made “any legitimate use economically unreasonable”.

I personally know a number of businesses that used the service legitimately and a number of news stories have noted legitimate business who have had their funds caught up in the shutdown. A few examples are forex brokers based in countries where it is difficult to transfer funds and e-pay cards, a service that allowed consumers outside the US to fund cards that could be used similarly to US-issued Visa or Mastercard credit cards.

AML and Anonymity

Liberty Reserve did not comply with standard KYC and AML policies allowing customers to use the service without providing proof of identity. However, the Treasury seems to equate privacy with criminal behaviour.

“This lack of customer due diligence means that the accounts can be entirely anonymous and thus that account holders can transfer fund to or from anywhere with anyone with anonymity. Indeed, Liberty Reserve advertises this fact as a virtue of the service.“

Avoiding the US

It is interesting to note that Liberty Reserve’s owners took many steps to remove themselves from US jurisdiction and avoid direct violations of US anti-money laundering laws. Many would see this as a prudent move for owners of alternative financial services; however, US officials see this as a sign of guilt.

“In October 2007, Liberty Reserve’s official blog explained that registering in Costa Rica allowed the company to avoid U.S. authorities because Costa Rica does not have a mutual legal assistance treaty with the United States. Taken together, these facts suggest that Liberty Reserve has specifically sought out jurisdiction with weak anti-money laundering controls and apparent immunity from U.S. prosecution.“

Liberty Reserve used third party exchanges to move funds into the service; it did not directly accept money wires, etc.

“Liberty Reserve has structured its business to separate itself from knowledge that would allow it to detect money laundering.”

“As of 2009, Liberty Reserve had outsourced its own verification process for new exchangers to a non-affiliated company …. Relying on exchangers to conduct what little due diligence Liberty Reserve purports to require enhances the gravity of Liberty Reserve’s money laundering risk.”

FinCEN’s Special Measure

In an effort to cut Liberty Reserve off from the US financial system, it FinCEN has proposed a special measure. This new rule would require US financial institutions to perform special due diligence to ensure that correspondent accounts held by foreign banks are not used for transactions involving Liberty Reserve.

History

This isn’t the first time Liberty Reserve’s founders have had a run-in with US officials. Arthur Bodovsky and Vladimir Kats previously ran GoldAge which was an E-gold exchanger. Both were convicted in New York State of operating an unlicensed money transmitting business. Bodovsky was placed on probation, renounced his US citizenship and immigrated to Costa Rica where he became a citizen.

Search Warrants

The investigation involved more than a dozen countries and many search warrants were issued for covering phone, email, bank records, and “’cloud’-based search warrants, directed to a service provider used to process Liberty Reserve’s Internet traffic.” Authorities also “captured” online chats between two of the defendants.

Costa Rican Troubles

In 2009 Costa Rican regulators, Superintendencia General de Entidades Financieras (SUGEF), notified Liberty Reserve that it needed to apply for a license to operate as a money transmitting business. Liberty Reserve did not obtain a license and allegedly reported to Costa Rican officials that they had sold the business, emptied their Costa Rican bank accounts and setup shell companies in other countries.

Anonymity not Allowed

Secret Service Special Agent-in-Charge Steven G. Hughes said:

“These arrests are an example of the Secret Service’s commitment to investigate and apprehend criminals engaged in the misuse of virtual currencies to conduct global monetary fraud. Cyber criminals should be reminded today that they are unable to hide behind the anonymity of the Internet to avoid regulated financial systems.”

It seems clear that US regulators do not want to allow anonymous money transmitting businesses and/or money businesses outside the financial system to exist, anywhere.

I’ll just end with this tweet from the always entertaining Max Keiser…