Liberty Reserve Case Study

The founder of Liberty Reserve, a virtual currency once used by cybercriminals around the world to launder the proceeds of their illegal activity, pleaded guilty today to running a massive money laundering enterprise, announced Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and U.S. Attorney Preet Bharara of the Southern District of New York.

Arthur Budovsky, 42, pleaded guilty to one count of conspiring to commit money laundering before U.S. District Judge Denise L. Cote of the Southern District of New York.  He is scheduled to be sentenced on May 6, 2016.

“After a prior conviction for operating an unlicensed money transmitting business, Budovsky developed Liberty Reserve, which quickly became a premier service used by criminals around the world to launder their criminal proceeds,” said Assistant Attorney General Caldwell.  “As a result of this global investigation, however, Budovsky was returned to the United States to face justice once again.”

“Arthur Budovsky founded and operated Liberty Reserve, an underworld cyber-banking system that laundered hundreds of millions of dollars in illicit proceeds for criminals around the world,” said U.S. Attorney Bharara.  “The only liberty that Budovsky and Liberty Reserve promoted was the freedom to commit and profit from crime.  Thanks to this truly global investigation that included cooperation from 17 countries, Liberty Reserve has been shut down, and its founder Arthur Budovsky stands convicted in an American court of law, facing the loss of his own liberty.”

According to the indictment filed against Liberty Reserve, Budovsky and six co-defendants and Budovsky’s admissions at today’s hearing: 

Budovsky specifically designed Liberty Reserve, which billed itself as the Internet’s “largest payment processor and money transfer system,” to help users conduct anonymous and untraceable illegal transactions and launder the proceeds of their crimes.  From its inception in or about 2006, Budovsky directed and supervised Liberty Reserve’s operations, finances and business strategy.  To grow the business and evade the scrutiny and reach of U.S. law enforcement, Budovsky emigrated to Costa Rica, where he and other defendants began operating Liberty Reserve, and in 2011, Budovsky renounced his U.S. citizenship and became a Costa Rican citizen.  Budovsky told U.S. immigration authorities that his company was developing a software that “might open him up to liability in the U.S.”   

Liberty Reserve became one of the principal money-transmitting services used by cybercriminals around the world to amass, distribute, store and launder the proceeds of their illegal activity, including proceeds of investment fraud, credit card fraud, identity theft and computer hacking.  Before the U.S. government shut down Liberty Reserve in May 2013, it had more than 5 million user accounts worldwide, including more than 600,000 accounts associated with users in the United States, and had processed millions of transactions.  Budovsky admitted in his plea agreement to laundering more than $250 million in criminal proceeds.

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Four co-defendants, Vladimir Kats, Azzeddine El Amine, Mark Marmilev and Maxim Chukharev, have already pleaded guilty.  Marmilev and Chukharev were sentenced to five years and three years in prison, respectively.  Kats and El Amine await sentencing before Judge Cote.  Charges remain pending against Liberty Reserve and two individual defendants who are fugitives.

The U.S. Secret Service, the Internal Revenue Service-Criminal Investigation and the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations worked together in this case as part of the Global Illicit Financial Team.  The U.S. Secret Service’s New York Electronic Crimes Task Force assisted with the investigation.  The Judicial Investigation Organization in Costa Rica, Interpol, the National High Tech Crime Unit in the Netherlands, the Spanish National Police, Financial and Economic Crime Unit, the Cyber Crime Unit at the Swedish National Bureau of Investigation and the Swiss Federal Prosecutor’s Office also provided assistance. 

Trial Attorney Kevin Mosley of the Criminal Division’s Asset Forfeiture and Money Laundering Section and Assistant U.S. Attorneys Serrin Turner, Christine Magdo, Christian Everdell and Andrew Goldstein of the Southern District of New York are prosecuting the case.  The Criminal Division’s Office of International Affairs and Computer Crime and Intellectual Property Section provided substantial assistance.

The founder of the Liberty Reserve digital currency business has been arrested in Spain on money-laundering charges, Costa Rican authorities have said.

Officials in the Central American country said in a statement that Arthur Budovsky had been detained as part of an investigation that also involved US authorities.

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, it said.

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.

Liberty Reserve is a company that 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.

They said the company shut its offices in Costa Rica in 2011. The website, however, had continued to operate, although it was offline on Monday.

According to Costa Rica police, Budovsky was sentenced in 2007 to five years' probation after pleading guilty in a New York court to charges he operated an illegal financial services business similar to Liberty Reserve.

Liberty Reserve's origins are obscure, but it had grown into one of the criminal underworld's best-known electronic currency systems, used by hackers the world over to discreetly move large sums of money across borders, experts say.

Liberty Reserve, which conducted its transactions in dollars, euros and roubles, operates as an anonymous, no-questions-asked alternative to the global banking system, said Aditya Sood, a computer science doctoral candidate at Michigan State University who has studied the electronic currency.

"You don't need to provide your full details, or personal information, or things like that," he said in a telephone interview. "There's no way to trace an account. That's the beauty of the system."

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 cash.

Sood said that despite prominent disclaimers warning against money laundering, the currency centres typically have little in the way of serious oversight.

"They don't care," he said. "They have no idea where the money is coming from or where the money is going. That's how they designed the model."

Liberty Reserve appears to 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-turned-security-researcher Brian Krebs, who added in a blogpost that hackers writing in underground forums were already buzzing with concern over frozen funds.

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