Liberty Reserve Joe Bogus account said to reflect evasion

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Preet Bharara, U.S. Attorney for the Southern District of New York, describes a chart showing the global interests of Liberty Reserve, on May 28, 2013. Arthur Budovsky, the founder of Liberty Reserve, was indicted in the United States along with six other people in a $6 billion money-laundering scheme described as "staggering" in its scope, authorities said Tuesday. Photographer: Richard Drew/AP Photo

Liberty Reserve SA, whose operators are charged with running a scheme that masked more than $6 billion of criminal proceeds, was designed to help users evade scrutiny, U.S. prosecutors said.

The digital currency company, unlike traditional banks or legitimate online payment processors, didn't require users to validate their identity and allowed accounts to be opened under fictitious names such as "Russia Hackers" and "Hacker Account," according to prosecutors.

An undercover agent was able to establish a Liberty Reserve account using the alias "Joe Bogus," listing his address as "123 Fake Main Street" in "Completely Made Up City, New York," said Manhattan U.S. Attorney Preet Bharara. He said the prosecution is believed to be the largest money-laundering case brought by the U.S.

Liberty Reserve, incorporated in Costa Rica in 2006, operated as "essentially a black-market bank," Bharara said yesterday at a news conference announcing the unsealing of an indictment against the company and seven principals. The company, which operated as one of the world's most widely used digital currency services, "facilitated global criminal conduct" and was created and structured "as a criminal business venture, one designed to help criminals conduct illegal transactions," Bharara said.

Pornography, narcotics

Liberty Reserve, shut by the U.S. through criminal and civil enforcement actions, helped users launder illegal proceeds from crimes or transfer funds among associates, prosecutors said. Liberty Reserve's digital currency was used by people committing identity theft, credit card fraud, computer hacking, child pornography and narcotics trafficking, prosecutors said.

Liberty Reserve had an estimated 1 million users around the world and conducted a total of about 55 million transactions -- virtually all of them illegal -- including 200,000 in the U.S., Bharara said. U.S. investigators have found that criminal rings that used Liberty Reserve to distribute illicit proceeds operated from Vietnam, Nigeria, Hong Kong, China and the U.S.

"Its entire existence was based on a criminal business model," Bharara said at the news conference.

"The global enforcement action that we announced today is an important step toward reining in the Wild West of illicit Internet banking," he said yesterday. "As detailed in the indictment, Liberty Reserve was intentionally created and structured to facilitate criminal activity."

Officials said the case was a series of firsts for U.S. authorities. In addition to being the largest international money-laundering case brought by the Justice Department, it involved the first search warrant executed by American officials against a cloud-based server. Bharara said 30 search warrants were executed during an 18-month investigation.

Cyber-age laundering

"We're now entering the cyber age of money-laundering," said Richard Weber, chief of the Internal Revenue Service's Criminal Investigation division, who also alluded to Chicago Crime boss Al Capone. "If Al Capone were alive today, this is how he would be hiding his money."

The company operated one of the world's most widely used digital currencies, allowing users to send and receive "instant, real-time currency," according to the indictment in federal court in Manhattan.

Anonymous transfers

Digital currency, such as Bitcoin, was developed as a way to make anonymous transfers over the Internet without paying fees to a bank. The U.S. Justice Department warned as early as 2008 that criminals would increasingly rely on the digital currency industry to launder and move funds because it facilitates financial transactions outside the rules of the traditional banking system.

The alleged crimes involved only Liberty Reserve and its operators, and not any other digital currency, Bharara said.

Yesterday's actions "relate only to Liberty Reserve and no other system," Bharara said. "We're not taking any position on virtual currency generally and we're not taking any position with respect to any particular other company that engages in something that may look on the surface that something that Liberty Reserve was doing."

The U.S. charged seven people, including operators and owners of Liberty Reserve, and alleged that two defendants, Arthur Budovsky, 39, of Costa Rica and Vladimir Kats, 41, of Brooklyn, New York, previously ran a company called Golden Age Inc. that functioned as an exchange for "E-Gold." The two men were convicted in New York state court in December 2006 for operating an unlicensed money-transmitting business, Bharara's office said.

"˜Grew exponentially'

Budovsky then moved to Costa Rica where he and another defendant, Ahmed Yassine Abdelghani, 46, incorporated Liberty Reserve that year, the U.S. alleged. Kats helped operate Liberty Reserve until 2009, prosecutors said in the indictment.

Liberty Reserve "grew exponentially," prosecutors said, and eventually the company became "the predominant digital form of money laundering used by cyber criminals worldwide."

Five people tied to the case were arrested on May 24, including Budovsky, who was arrested in Spain and is the principal founder of Liberty Reserve, the U.S. said. Kats, the co-founder of Liberty Reserve, was arrested in Brooklyn, prosecutors said.

Azzeddine El Amine, 46, of Costa Rica, a principal deputy to Budovsky, was arrested in Spain, the U.S. said. Mark Marmilev, 33, of Brooklyn and Maxim Chukharev, 27, of Costa Rica, who helped designed and maintained the operation's technological infrastructure, were arrested in Brooklyn and Costa Rica respectively, Bharara's office said.


Two others, Abdelghani and Allan Esteban Hidalgo Jimenez, 28, of Costa Rica, are fugitives who remain at large in Costa Rica, Bharara's office said.

The indictment includes a count of conspiracy to commit money laundering, conspiracy to operate an unlicensed money transmitting business and operation of an unlicensed money transmitting business. The seven individual defendants are all charged with one count of conspiracy to commit money laundering, which carries a term of as long as 20 years in prison.

The U.S. also seized five domain names tied to Liberty Reserve and the domain names of four exchanger websites that were controlled by the defendants.

The U.S. also has filed civil actions and seized accounts tied to the defendants. At least 45 bank accounts with a total of $25 million have been restrained or seized, Bharara said yesterday. A related civil action was filed by the U.S. against 35 exchanger websites seeking the forfeiture of the exchanger's domain names over claims they were used to facilitate the money laundering conspiracy.

Proposed rules

David Cohen, Under Secretary for Terrorism and Financial Intelligence for the U.S. Treasury Department, yesterday said at the press conference in Manhattan that Treasury officials have issued a notice of proposed rulemaking that would prohibit U.S. financial institutions from maintaining accounts for foreign banks that process transactions involving Liberty Reserve, cutting it off from the U.S. financial system.

He said it was the first use of certain provisions in the U.S. Patriot Act against a digital currency provider.

"We took this action because Liberty Reserve, a web-based money transfer system or virtual currency, is being exploited by criminals worldwide to store, transfer and launder the proceeds of a wide variety of illegal activity," Cohen said yesterday.

The action doesn't mean the U.S. is attempting to eliminate virtual currencies and their providers, he said.

'Ill-gotten gains'

"But where, as here, an online money transmitter is deliberately designed to avoid regulatory scrutiny and tailors its services to illicit actors looking to launder their ill-gotten gains, Treasury will act to prevent abuse of the financial system," Cohen said.

The Patriot Act gives Treasury a range of such options to protect the U.S. financial system from money laundering and terrorist financing risks, the department said.

Bitcoin was developed as a digital currency in 2009. It was described on its website as a new form of money using cryptography "to control its creation and transactions, rather than relying on central authorities."

This month, the U.S. Department of Homeland Security seized a financial account with online payment processor Dwolla, registered in the name of a unit of Mt. Gox, the world's largest exchange of cyber currency, according to a warrant signed by a federal judge in Baltimore on May 14. Requesting the warrant, a special agent of the department said he had cause to believe the account was part of an unlicensed money transfer business.

Law enforcement officials alleged that the company was engaged in a money-service business without first registering with the Financial Crimes Enforcement Network. While virtual currency does log each transaction centrally, no national government regulates it.

The case is U.S. v. Kats, 13-cr-00368, U.S. District Court, Southern District of New York (Manhattan).

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