Digital Funds Transfer Service Shuttered on Money-Laundering Charges

 
 
By Robert Lemos  |  Posted 2013-05-28
 
 
 

U.S. law enforcement shut down online money-transfer service Liberty Reserve and arrested its two founders and three other employees on charges that they operated the service primarily to serve criminals' need to launder money, according to a statement issued May 28 by the U.S. Attorney's Office for the Southern District of New York.

The five defendants, arrested May 24, in Spain, Costa Rica and Brooklyn, N.Y., are charged with one count of conspiracy to commit money laundering and one count of the operation of an unlicensed money-transmitting business, each which carries a maximum penalty of five years in prison. Two remaining defendants are at large in Costa Rica, according to a statement issued by the U.S. Attorney's Office in the Southern District of New York.

Liberty Reserve allegedly had at least 1 million customers worldwide and processed more than $6 billion in transfers. Approximately 55 million transactions were processed, transferring what were thought to be the proceeds of credit-card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking, according to the statement.

"As alleged, 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," U.S. Attorney Preet Bharara said in the statement. "The global enforcement action we announce today is an important step toward reining in the 'Wild West' of illicit Internet banking."

Liberty Reserve rose to popularity following the shutdown in 2007 of the then-popular E-Gold service, which allowed customers to buy and transfer gold online, but which quickly turned into a way for cyber-criminals to transfer money. Liberty Reserve was incorporated in Costa Rica in 2006 and operated an exchange currency known as the Liberty Reserve, or LR.

While the company claimed to be the Internet's "largest payment processor and money transfer system" and served at least 200,000 users in the United State, the owners did not register the company with the U.S. Department of the Treasury as a money-transmitting business, the U.S. attorney's statement alleged.

Digital currencies have typically become popular either because they are used as a virtual currency to purchase virtual goods—-such as the Linden dollar in Second Life or gold in the World of Warcraft—or because their creators wanted a currency, such as Bitcoins, not controlled by any nation's government.

"No financial system is ever free from financial abuse, but it can be minimized through effective regulation," Clare Chambers-Jones, an associate professor in finance law at the University of the West of England at Bristol, told eWEEK in an e-mail interview. "We have seen this through E-Gold and Liberty Reserve."

Liberty Reserve did not check the identities of their customers, allowing them to have anonymity and required that users transfer money into the Liberty Reserve system through third party exchangers, further muddying the trail of any suspicious transactions. For that reason, the Treasury Department and the Financial Crimes Enforcement Network (FinCEN) classified Liberty Reserve on May 28 as a "primary money laundering concern" under Section 311 of the USA PATRIOT Act.

The investigation into Liberty Reserve and the resulting shutdown of the service involved law enforcement agencies in 17 different countries, including Australia, Canada, China, Costa Rica, Cyprus, Latvia, Luxembourg, Morocco, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the United Kingdom and the United States.

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