Federal law enforcement officials in the United States seized domains belonging to the Costa Rican-based Liberty Reserve, a payment processor, money transfer service, and digital currency exchange reportedly used by criminals as a means for laundering money.
Liberty Reserve was also the subject of an indictment issued by the United States District Court for the Southern District of New York. Signed by U.S. district attorney Preet Bhahara, the indictment accuses Arthur Budovsky, Vladimir Kats, Ahmed Yassine Abdelghani, Allan Esteban Hidalgo Jimenez, Azzeddine El Amine, Mark Marmilev, and Maxim Chukharev of one count of conspiracy to commit money laundering and two counts of conspiracy to operate an unlicensed money transmitting business. The charges leveled against these seven men stem from their varying degrees of involvement with the operation of the exchange.
Reports indicate that Budovksy was recently arrested in Spain.
On the first count, a grand jury alleges that Budovsky and his co-conspirators knowingly created and operated Liberty Reserve as a criminal business venture designed to help criminals conduct illegal transactions anonymously and launder the proceeds of their crimes untraceably. So successful was this business, the grand jury claims, that Liberty Reserve became “a financial hub of the cyber-crime world, facilitating a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking.”
The indictment includes the contents of an online chat obtained by law enforcement in which Kats and Abdelghani openly admit that Liberty Reserve is “illegal” and that “everyone in the U.S.A.” including the Department of Justice knows that “Liberty Reserve is [a] money laundering operation that hackers use.”
From Liberty Reserve’s humble beginnings in 2006 until its ultimate shutdown late last week, the company conducted an estimated 55 million financial transactions in which, prosecutors claim, the company helped to launder more than $6 billion.
According to the indictment, Budovsky is the alleged ring leader, having been the principal founder of Liberty Reserve as well as the supervisor and director of its operations, finances, and corporate strategy. It names Kats as the exchange’s cofounder and charges that he helped run Liberty Exchange until left the company over a dispute with Budovbsky in or around 2009. The indictment accuses that Abdelghani managed day-to-day operations at Liberty Reserve until he too left the company following a dispute with Budovsky, after which point, the day-to-day management role was allegedly filled by Jimenez. Marmilev and Chukharev are accused of having designed and maintained Liberty Reserve’s technology infrastructure.
Liberty Reserve wasn’t Budovsky’s and Kats’ first rodeo. The indictment indicates that in late 2006, the state of New York convicted the two for operating an unlicensed money transmitting business called Gold Age, Inc. Money transmitting businesses must be registered with the U.S. Department of the Treasury. Neither Gold Age nor Liberty Reserve obtained such a registration. Following their conviction, the grand jury asserts that the two set out to establish a similar digital currency that would succeed at evading law enforcement where Gold Age failed. This endeavor led Budovsky and Kats to emigrate to Costa Rica, where they eventually founded and incorporated Liberty Reserve along with Abdelghani.
Liberty Reserve purportedly enabled cybercriminal ventures by allowing users to create accounts under false identities by requiring no real validation of identity. Furthermore, Liberty Reserve, which made money by collecting a 1 percent fee on every transaction, gave sending-users the option of hiding their Liberty Reserve account numbers from their recipients if they paid an additional 75-cent fee, effectively making such transactions completely untraceable, not only to the receiving party, but to the exchange operators as well.
Liberty Reserve achieved another level of anonymity by enforcing a policy that only allowed users to deposit into and withdraw from their Liberty Reserve account through third party “exchanger” services that traded mainstream currency for Liberty Reserve currency. In other words, “exchangers” accepted relatively small cash payments from Liberty Reserve members in exchange for Liberty Reserve currency, which the “exchangers” could credit to Liberty Reserve accounts. The “exchangers” would then turn around and use this mainstream currency to purchase larger bulk amounts of Liberty Reserve money from the company, which they would then sell back to users for real money. If a user wanted to cash out, he would have to do so through an agreement with one of more of these “exchangers.” Both Kats and El Amine are accused of operating such “exchanger” services.
At one point, the indictment alleges, the Costa Rican authorities responsible for regulating financial companies in that country notified Liberty Reserve and told them that they must apply for a license to operate as a money transmitting service. Liberty Reserve submitted such an application, but was denied for not having even basic money laundering controls in place. From there, the indictment claims that the co-defendants designed a system to feign compliance by giving authorities access to fake information rather than remedying the stated deficiencies.
In late 2011, Liberty Reserve was the subject of notice to financial institutions from the Treasury Department’s Financial Crimes Enforcement Network. The FinCEN notice warned institutions about the alleged criminal nature of Liberty Reserve’s operations. Liberty Reserve obtained a copy of this notice and subsequently informed the Costa Rican government that it was no longer operating in that country because they had been bought by a foreign company. This was apparently untrue. Instead, Liberty Reserve’s founders took the business underground and began disseminating the contents of its bank accounts into a series of shell companies in other countries. Costa Rican authorities managed to seize nearly $20 million of Liberty Reserve’s finances.
As previously mentioned, it is a crime in the U.S. to operate an unlicensed money transmitting business. Counts two and three allege that the defendants failed to comply with necessary registration requirements for money transmitting businesses and proceeded to transfer money anyway.
At the time of publication, the Liberty Reserve’s website is hosting a seizure notice signed by the Departments of Justice, Treasure, and Homeland Security as well as the Global Illicit Financial Team and the Secret Service.
You can find the indictment and other related legal documents here on the DoJ website.