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US charges Liberty Reserve with $6bn money laundering scam

Liberty Reserve, a Costa Rica-based digital currency service, has been shut down by US authorities and its founder, Arthur Budovsky arrested in Spain, over allegations that the online firm was used by criminals to launder more than $6bn.

According to an indictment lodged by the US attorney for the southern district of New York, Preet Bharara, Liberty Reserve was a “financial hub of the cybercrime world”. Bharara went on to allege that the digital currency firm facilitated a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking and drugs trafficking.

The US indictment follows coordinated law enforcement action in 17 other countries, including in Spain where Liberty Reserve’s founder, Arthur Budovsky, was arrested with four other men. All have been charged with money laundering and operating an unlicensed money transmitting business.

Set up in Costa Rica in 2006, Liberty Reserve is alleged by US authorities to have been specifically established as a bank-payment processor in order to help users conduct anonymous illegal transactions and to launder the proceeds of their crimes via the ‘front’ company.

Liberty Reserve had more than one million users worldwide, conducting approximately 55m transactions, the majority of them resulting in the $6bn worth of laundered money. Five website domain names, including Liberty Reserve's, have also been seized as part of the on-going investigation. $40m in Liberty funds is thought to have found its way into the global banking system and prosecutors have consequently seized 45 bank accounts.

“The only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes - the coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers, and traffickers,” commented US Attorney Bharara. “The global enforcement action is an important step towards reining in the 'wild west' of illicit internet banking.”

According to a report in the ‘Wall St Journal’, Budovsky and one of the other alleged co-conspirators were convicted in 2006 on similar charges for running E-Gold, another digital money transmitting business. Prosecutors said that after this conviction, Budovsky gave up his US citizenship, citing concerns to immigration officials that software he was developing "might open him up to liability in the US". He then moved to Costa Rica, where he set up Liberty Reserve.

In 2011, Liberty Reserve ran into trouble with Costa Rican authorities, according to the indictment, which cited concerns that the firm didn't have tight enough money-laundering controls. It is understood that Budovsky then “went underground”, according to the indictment, and continued to operate illegally in Costa Rica using a “stripped-down staff working out of an office space held in the name of shell companies”.

Market Reaction
Commenting on the investigation, Hugh Jones, president and chief executive officer (CEO) at BankersAccuity, a compliance and sanctions screening provider, said: “Digital currency and the exchanges that manage it are becoming more prevalent and, as in the Liberty Reserve case, can be tied to money laundering.”

“Money laundering activities are naturally attracted to those technologies and geographies where regulatory oversight and understanding is immature,” he continued. “Financial institutions should take note of this risk and what, if any, role they play as a ‘third-party exchanger’. Reviewing and tightening anti-money laundering (AML) policies and procedures will help avoid dirty money from making its way through financial institutions.”