Justice

U.S. Shuts Currency Exchange Allegedly Tied To $6B In Money Laundering

In conjunction with Costa Rican authorities and Spanish police, U.S. law enforcement participated in a joint operation to arrest the founder of Liberty Reserve S. A., a private digital currency exchange service based in Costa Rica.

U.S. authorities accused the currency exchange of facilitating $6 billion worth of money laundering, calling it a “bank of choice for the criminal underworld.”

Today, the website domain is resolving again but a notice on the homepage states: “THIS DOMAIN NAME HAS BEEN SEIZED by the United States Global Illicit Financial Team.” Domain names were also seized for asianagold.com, exchangezone.com, moneycentralmarket.com and swiftexchanger.com most likely for their affiliation with Liberty Reserve.

According to the indictment unsealed today, U.S. prosecutors said that the case involved law enforcement agencies in 17 countries and “is believed to be the largest international money laundering prosecution in history.” This latest action follows the 2007 closure of Doug Jackson’s famous e-gold service and this month’s seizure of Mt. Gox’s assets and account facility at U.S.-based Dwolla.

Arthur Budovsky, 39, a former U.S. citizen and naturalized Costa Rican of Ukrainian origin, was arrested in Spain and U.S. officials are likely to seek his extradition. He has been under investigation in Costa Rica since 2011 for suspicion of money laundering and for using various shell companies to operate Liberty Reserve.

On Friday, San José prosecutors raided Budovsky’s home and offices in Escazú and Santa Ana, southwest of San José, and in the northern province of Heredia. Agents from the organized crime unit of the Costa Rican Prosecutor’s Office seized documents, computers, three Rolls Royce and Jaguar automobiles, and a motorcycle. A Russian national with the last name Chukharev was also arrested and the U.S. is seeking his extradition as well.

Costa Rica state prosecutor José Pablo Gonzalez said that Costa Rica’s financial regulator, Financial Institution Superintendency (SUGEF), had refused to issue a license to Liberty Reserve in 2011 due to concerns about its transparency and funding procedures.

Investigators allege that Budovsky’s businesses in Costa Rica were used to launder funds from drug trafficking, identity theft, and pornography websites. The seized digital and physical evidence from the companies will be turned over to U.S. law enforcement in accordance with “international penal assistance.” The involved companies are Silverhand Solutions & Technology S.A. (Santa Ana), Worldwide E-Commerce Business S.A., or WEBSA (Escazú), Grupo Lulu Limitada (Escazú), Triton Group A & A, S.A. (Escazú), and Cyberfuel.com (Santa Ana).

Some Liberty Reserve users are estimating that the company may have held customer funds in excess of $150 million at the time of the seizure. There has been no statement from authorities on the reclamation process.

Since 2002, Liberty Reserve had been operating one of the oldest and most popular payment processors in the world with millions of clients. Vitalik Buterin of Bitcoin Magazine credits the company with being “one of the chief enablers of the Bitcoin economy’s early growth.” Payment methods such as credit cards and ACH transfers are not a great match for the irreversible bitcoin, because those payment methods can be reversed, or charged back. In 2010 and 2011 with the bitcoin exchanges struggling for irreversible inbound payment methods, Liberty Reserve Dollars and Liberty Reserve Euros were proprietary digital units that satisfied the need for payment finality.

Although security researcher Brian Krebs emphasizes the more salacious cyber crime aspects of the case, Liberty Reserve was also utilized by many legal businesses.

According to Forex Magnates, Liberty Reserve was “the leading payment channel for traders in emerging and frontier markets” and it was used by several international forex brokers, such as Marketiva, FXOpen, Markets.com, and Instaforex. Citing Masroor Ghoori, a foreign exchange broker in Pakistan, Forex Magnates said, “Forex brokers have been benefiting from Liberty Reserve’s vast access as a payment provider, especially in countries where traders face difficulties in transferring funds. Liberty Reserve was a ‘gift’ for several traders, especially after the State Banks’ (State Bank of Pakistan) changes to international money transfers.”

In a separate report, Forex Magnates predicts that bitcoin may be a viable alternative for payments to introducing brokers and even direct forex account funding now that centralized systems are under attack.

Mitchell Rossetti, co-founder of virtual prepaid ePay Cards, told the BBC that his company now faces an “uphill battle” to make up potentially lost funds because his business had about $28,000 sitting in a Liberty Reserve account at the time the site went offline. The cards allow consumers outside the U.S. to purchase goods from stores in the country as if they owned a locally-issued Visa or Mastercard credit card. Based in Texas and London, the firm allowed its customers to load their virtual prepaid cards with Liberty Reserve because it was quick, efficient and secure.

Demonstrating that those most harmed in targeted digital currency shutdowns are law-abiding U.S. citizens, Panamanian payment system Perfect Money announced the following on Saturday:

Due to changes in our policy we forbid new registrations from individuals or companies based in the United States of America. This includes US citizens residing overseas. If you fall under the above mentioned category or a US resident, please do not register an account with us. We apologize for inconvenience caused.

by Jon Matonis

originally released on Forbes, reblogged with permission

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Jon Matonis

Jon Matonis is an e-Money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. His career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail. Currently, he serves on the Board of Directors for the Bitcoin Foundation. Follow Jon's blog on Forbes.

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