The founder of digital currency system Liberty Reserve has been indicted in the United States along with six other people in a $6 billion money-laundering scheme, in what authorities are calling the largest international money-laundering case ever prosecuted, according to documents unsealed today.
Dubbed the "financial hub of the cyber-crime world," authorities say Liberty Reserve had more than 1 million users worldwide and processed more than 12 million transactions annually as the favored money-laundering service for carders, hackers and other cybercriminals in the digital underground who used it to transfer money around the world effortlessly and anonymously.
According to the indictment (.pdf), Liberty Reserve was used to launder more than $6 billion in criminal proceeds.
Arthur Budovsky, a Costa Rican citizen of Ukrainian origin, and the founder of the currency system, was arrested in Spain last Friday, while others were arrested in Costa Rica and New York. Police in Costa Rica also raided three homes and five businesses linked to Liberty Reserve, according to the Associated Press. The digital currency's site went offline last week, with its front page replaced by a notice saying that the domain had been seized by the United States Global Illicit Financial Team.
Budovsky's fellow indictees include Vladimir Kats, Ahmed Yassine Abdelghani, Allan Esteban Hidalgo Jimenez, Azzeddine el Amine, Mark Marmilev and Maxim Chukharev. Authorities say Katz operated Liberty Reserve with Budovsky until the two had a falling-out in 2009.
Liberty Reserve was incorporated in Costa Rica in 2006 and had at least 200,000 customers in the U.S., but failed to register in the U.S. as a money-transmitting service.
Liberty Reserve required only a valid email address to open an account and initiate transactions. It charged a 1 percent fee for each transaction and, for an additional 75 cents, offered to hide a user's account number in transactions.
Although the service had legitimate customers, the anonymity it provided attracted a large clientele from the criminal underground who relied on offshore Liberty Reserve currency exchangers to move their ill-gotten cash in and out of the financial system.
"Through the defendants' efforts, Liberty Reserve has emerged as one of the principal means by which cyber-criminals around the world distribute, store, and launder the proceeds of their illegal activity," authorities said in the indictment.
The service was allegedly favored by cybercriminals and mules who participated in a recent $45 million coordinated bank heist that involved laundering cash that was drained from two Middle Eastern banks via ATMs around the world.
This is the second time Budovsky has been charged with operating an illegal money operation. In 2006 he and Vladimir Katz were indicted for operating another illegal financial services business called Gold Age that was similar to Liberty Reserve. Budovsky was sentenced in 2007 to five years of probation after pleading guilty in New York to those charges.
The same year he was indicted in the U.S., he established Liberty Reserve in Costa Rica. Authorities say that after Budovsky learned in 2011 that Liberty Reserve was being investigated, he pretended to shut down the service in that country, but instead allegedly began operating it through shell companies. Authorities say he also began emptying million of dollars from Liberty Reserve's bank accounts in Costa Rica and laundered it through shell companies in Cyprus, Russia, Hong Kong and other countries. He also allegedly set up a portal that appeared to give Costa Rican regulators a view of transactions to monitor them for money laundering, but fed fake transactions to the portal to throw authorities off, according to the indictment.
Kats allegedly told Abdelghani in an online chat captured by authorities that he was aware that Liberty Reserve's activities were illegal and that everyone in the U.S. knew that "LR is [a] money laundering operation that hackers use."
Liberty Reserve is not the first digital currency to get raided by the feds. In 2005, federal agents raided the offices of Gold and Silver Reserve, the Florida-based company that operated E-Gold, the premier digital currency of its time.
E-Gold founder Douglas Jackson pleaded guilty in 2008 to money laundering-related crimes, and to operating an unlicensed money-transmitting service.
The federal government began to take notice of E-Gold and other money-transmitting services in 2003, when the Secret Service launched an undercover operation against a website called Shadowcrew — a legendary forum for “carders” who trafficked in stolen credit and debit card numbers. Cybercrooks in Eastern Europe were stealing millions of card numbers in phishing and skimming scams, then passing the data to accomplices around the world. The low-end cashers coded the numbers onto blank cards, then siphoned money from ATMs and transmitted the bulk of proceeds back to the former Soviet bloc.
When authorities monitored the criminals’ communications, they discovered that E-Gold was among the carders’ preferred money-transfer methods, because the system allowed users to open accounts and transfer funds anonymously anywhere in the world.
When the Shadowcrew investigation wrapped in October 2004 with the shuttering of the site — and the arrest of more than a dozen members — the Justice Department turned its sights on E-Gold. Its goal was to force the service to comply with regulations governing money-transmitting services like Western Union and Travelex. Federal regulations required those businesses to register with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), to be licensed in states that required it, to diligently authenticate the identity of customers and to file suspicious-activity reports on shady-looking customers.
Jackson believed E-Gold was exempt from regulation because it was a payment system, not a money transmitter, but this didn't protect him from the feds.
The feds turned E-Gold for a time into one of law enforcement’s most productive honey pots, gleaning information from files seized in its raid that helped lead to the arrest and conviction of some of the web’s most wanted credit card thieves and hackers.
Authorities say that after the raid on E-Gold, Budovsky set out to fill the void and become the predominant digital money-laundering service in the world. But he vowed to succeed where E-Gold failed by building his digital currency empire outside the U.S. to elude law enforcement, according to authorities. He even renounced his U.S. citizenship to become a Costa Rican national, allegedly telling immigration authorities that he feared his software company would open him up to liability in the U.S.
