(Bloomberg) — The operators of Liberty Reserve SA were indicted for a conspiracy that masked more than $6 billion of criminal proceeds in what Manhattan’s top federal prosecutor said is probably the largest U.S. money-laundering case.
Liberty Reserve, incorporated in Costa Rica in 2006, “facilitated global criminal conduct” and was created and structured “as a criminal business venture, one designed to help criminals conduct illegal transactions and launder the proceeds of their crimes,” Manhattan U.S. Attorney Preet Bharara said in an indictment unsealed today.
“Its existence was based on a criminal business model,” Bharara said at a press conference.
The company helped at least 1 million users, many of them criminals, process an estimated 55 million financial transactions during the past seven years, according to Bharara’s office. 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.
Digital currency, also called Bitcoin, was developed as a way to make payments 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.
“Liberty Reserve has become a financial hub of the cyber- crime world, facilitating a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking,” prosecutors said in the indictment.
The U.S. charged seven people, including operators and owners of Liberty Reserve and alleged that two defendants, Arthur Budovsky and Vladimir Kats, 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 for operating an unlicensed money-transmitting business in December 2006, Bharara’s office said.
Budovsky then moved to Costa Rica where he and Ahmed Yassine Abdelghani incorporated Liberty Reserve, the U.S. alleged.
Liberty Reserve “grew exponentially,” prosecutors in Bharara’s office said, and eventually the company became “the predominant digital form or 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, New York, prosecutors said.
Azzeddine El Amine, a principal deputy to Budovsky, was arrested in Spain, the U.S. said. Mark Marmilev and Maxim Chukharev, 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, are 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 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. has also filed civil actions and seized accounts tied to the defendants. At least 45 bank accounts have been restrained or seized, the U.S. said. 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.
The U.S. Treasury Department today said in a statement that Liberty Reserve is primarily a money-laundering concern in what the department called the first use of certain authorities in the U.S. Patriot Act against a virtual currency provider.
“Liberty Reserve’s virtual currency has become a preferred method of payment on websites dedicated to the promotion and facilitation of illicit web-based activity, including identity fraud, credit-card theft, online scams and dissemination of computer malware,” Treasury said in the statement.
The Treasury’s Financial Crimes Enforcement Network has proposed rules that would bar U.S. financial institutions from dealing with foreign banks that handled transactions for Liberty Reserve, it said in today’s statement. The Patriot Act gives Treasury a range of such options to protect the U.S. financial system from money laundering and terrorist financing risks, it said.
Bitcoin Inc., which developed a digital currency in 2009, describes on its website the new form of money as 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 subsidiary 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 the virtual currency does log each transaction centrally, no national government regulates it.
The case is U.S. v. Liberty Reserve, 13-cr-368, U.S. District Court, Southern District of New York (Manhattan).