Liberty Reserve Case Exemplifies New Focus by Prosecutors on Digital Currency

The shutdown of digital-currency network Liberty Reserve by federal prosecutors on money-laundering charges is part of the increased focus on the virtual-currency market by regulators and law enforcement agencies, but doesn’t necessarily mean all such currencies face the same fate.

While Liberty Reserve shared some common features with Bitcoin and other digital currencies, including the anonymity of users, Liberty was operating outside all guidelines typically followed by other virtual currencies, says David Fish, senior analyst of fraud, risk, and analytics at Mercator Advisory Group.

“The exchanges that deal in Bitcoin, at least the ones doing business in the United States, need to register as [money] transmitters,” Fish says. “So there is some oversight of folks involved in Bitcoin doing business in the U.S. What’s occurring in the case of Liberty Reserve is there’s absolutely no oversight.”

The U.S. Attorney for the Southern District of New York on Tuesday unsealed an indictment charging Liberty Reserve and seven of its principles and employees with laundering more than $6 billion in criminal proceeds—believed to be the biggest money-laundering prosecution in history—and operating an unlicensed money- transmitting business.

Liberty Reserve allegedly has more than 1 million users worldwide, including more than 200,000 in the U.S., who conducted approximately 55 million transactions. Virtually all of these transactions were illegal and included the proceeds from credit card fraud, identity theft, investment fraud, computer hacking, child pornography, narcotics trafficking, and other criminal activities, the indictment charges.

Named in the indictment are: Arthur Budovsky, principal founder of Liberty Reserve; Vladimir Kats, co-founder; Azzeddine el Amine, a manager of Liberty Reserve’s financial accounts; Mark Marmilev and Maxim Chukharev, who helped design and maintain Liberty Reserve’s technological infrastructure; Ahmed Yassine Abdelghani; and Allan Esteban Hidalgo Jimenez.

The defendants “intentionally created, structured and operated Liberty Reserve as a criminal business venture, one designed to help criminals conduct illegal transactions and launder the proceeds of their crimes. The defendants deliberately attracted and maintained a customer base of criminals by making financial activity on Liberty Reserve anonymous and untraceable,” the indictment states.

To use Liberty Reserve digital currency, referred to as LR, a user had to open an account through the Liberty Reserve Website and provide basic identifying information, according to the indictment. Users were not required to validate identities. Users routinely established accounts under false names, including what federal prosecutors termed “blatantly criminal names” such as “Russian Hackers” and “Hacker Account.”

Once an account was established, the user could conduct transactions with other Liberty Reserve users. In these transactions, the users could receive transfers of LR from other users’ accounts and transfer LR from their own account to other users, according to prosecutors. Liberty Reserve charged a 1% fee up to a maximum $2.99 every time a user transferred LR to another user. For an additional “privacy fee” of 75 cents per transaction, a user could hide his Liberty Reserve account number when transferring funds, effectively making the transfer completely untraceable, prosecutors said.

The Liberty Reserve Website recommended “pre-approved” exchanges, which tended to be unlicensed money-transmitting businesses operating in countries without significant governmental money-laundering oversight or regulation, such as Russia, Nigeria, Vietnam, and Malaysia.

Whether other digital currencies will end up like Liberty Reserve “really does come down to who the intermediaries are and how they are complying and not complying with the law,” Fish says.

“When you come down to a service that is enabling nefarious activity, though, that is a very targeted action,” he says.

But digital currencies should be prepared for more involvement by regulators and law-enforcement agencies. The Liberty Reserve indictment is “just the latest iteration of a more concerted level of scrutiny that certainly is focusing not only on Liberty Reserve and that kind of money-transfer service but also virtual currencies like Bitcoin,” Fish adds. “Part of that is related to the fact that the law needs to evolve to accommodate new technologies and it’s playing out through regulatory action as opposed to new legislation.”