Liberty Reserve, a currency digital exchange company in the US, has had an indictment filed against its operators last Friday. 

They have been accused of helping criminals around the world launder more than $6 billion in illicit funds linked to everything from child pornography to software for hacking into banks.  It has been termed the PayPal for criminals.

Liberty Reserve is a Costa Rica-based company and the allegations against its founder, Arthur Budovsky, and six other men connected to the business, were made in an indictment unsealed in New York. The accusations follow a series of arrests late last week in Costa Rica, New York and in Spain, where authorities detained Mr Budovsky.  The indictment said Liberty Reserve had more than a million users worldwide, including at least 200,000 in the United States, and virtually all of its business was related to suspected criminal activity.

Mr Budovsky has been in trouble with US authorities before, having been convicted, along with Liberty Reserve co-founder Vladimir Katz, in December 2006 of operating Gold Age Inc, an unlicensed money transmitting business.

Police raided three homes and five businesses linked to the Costa-Rica-based Liberty Reserve and seized papers and digital documents that will be turned over to US authorities, the statement said. A Russian citizen was also arrested in the case in Costa Rica on Friday and will be extradited to the US. Arthur Budovsky, a naturalised Costa Rican citizen, was detained on Friday. He had renounced his US citizenship and become a resident and citizen of Costa Rica, Costa Rican authorities said.

Pushed by some investors as the future of money, these virtual currencies have gained the attention of US regulators looking to bring them under anti-money laundering rules. The US Treasury said yesterday it named Liberty Reserve under the USA Patriot Act as “specifically designed and frequently used to facilitate money laundering in cyber space.”

That designation is a first against a virtual currency exchange and it prohibits banks or other payment processors from doing business with Liberty Reserve, even under a new name. The Treasury also said Liberty Reserve’s virtual currency was used to anonymously buy and sell software designed to steal personal information and attack financial institutions.

Liberty Reserve called itself the internet’s “oldest, safest and most popular payment processor... serving millions all around a world”. But prosecutors explained it differently.  They claim that the business, which was established in 2006 and was shut down last week, was “one of the principal means by cyber-criminals around the world to distribute, store and launder the proceeds of their illegal activity”. One law enforcement official told The New York Times that Liberty Reserve, which allowed users to transfer large sums money without ever identifying themselves, was “really PayPal for criminals”.

The company allows users to apply for an account by supplying a valid email address. Once a person signs up for an account, Liberty Reserve gives them a user name and an account number and they can start transferring money around the world, Costa Rican officials said. The company shut its offices in Costa Rica in 2011, however, the website continued to operate, although it was offline on Monday.

The company had around 12 million transactions per year and laundered over $6 billion in criminal proceeds since it began operating in 2006, the indictment said. A ring of hackers who recently stole $45 million from two Middle Eastern banks, by hacking prepaid debit cards, used Liberty Reserve to distribute their illegal gains, according to court papers.

The beauty of their system was that there was no way to trace an account because you didn’t have to provide any details like a name or address or other personal details.  Offshore currency centres, generally set up in places beyond the reach of US or European law enforcement, can serve as middlemen between criminals and the mainstream financial world, brokering transactions that turn illegally obtained money into seemingly legitimate currency.  Users were required to supply basic information such as name and date of birth, which was never cross-checked with official documents, or even a credit card. “Accounts could therefore be opened using fictitious or anonymous identities,” according to the indictment, which adds: “Liberty Reserve users routinely established accounts under false names – including such blatantly criminal monikers as ‘Russia Hackers’ and ‘Hacker Account’.”

It seems that Liberty Reserve may have played an important role in laundering the proceeds from the recent theft of some $45m from two Middle Eastern banks, according to legal documents made public by US authorities earlier this month.

The complaint against one of the Dominican Republic gang members allegedly involved in the theft states that thousands of dollars' worth of stolen cash was deposited into two Liberty Reserve accounts via currency centres based in Siberia and Singapore.

The loss of Liberty Reserve has the potential to cause a "major upheaval" in the cybercrime economy, said the investigative journalist Brian Krebs, who is security researcher.  He said in a blog that hackers writing in underground forums were already buzzing with concern over frozen funds.


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