On May 28, 2013, the United States Department of Justice (“DOJ”) announced the unsealing of the indictment that charged Liberty Reserve (“the company”) and related individuals with conspiracy to commitmoney laundering and operating an unlicensedmoney transmitting business.
Liberty Reserve operated one of the world'smost widely used digital currency services, withmore than onemillion users worldwide. DOJ indicated in its press release that virtually all fivemillion transactions conducted through Liberty Reserve were allegedly illegal and used to launder more than $6 billion in suspected proceeds from crimes, including drug trafficking, child pornography, personal identity theft, ponzi schemes, computer hacking and unregulated gambling. Liberty Reserve, however, had established an anti-money laundering policy, whereby the company would not “do business with anyone suspected of, or directly involved inmoney laundering.” The significance of this policy is yet to be determined, but themere indictment of the company is a clear indication that employing a hands-on anti-money laundering compliance programis amust in an industry that produced a record settlement with U.S. authorities ($1.9 billion) in 2012.1
The unsealed indictment describes an alleged criminal design that started with the opening of an account through the Liberty Reserve website. Although a name was required, Liberty Reserve apparently did not validate the identity of its users by requesting official identification. This practice, officials say, suggests that Liberty Reserve intended for its users to remain anonymous and be able to transfer proceeds fromillegal activity. Once an account was opened, the Liberty Reserve user could conduct transactions with other Liberty Reserve users. However, no real currency was exchanged among users. Rather, users transferred among themselves Liberty Reserve’s digital currency, commonly referred to as “LR.” Liberty Reserve allegedly charged a one percent fee every time a user would transfer LR to another user (up to a maximum of $2.99). Among the users were alsomerchants that accepted LR as payment.
The company did not permit its users to fund their accounts by transferringmoney to Liberty Reserve directly (fromregular bank accounts). Instead, users were required tomake any deposits through the use of third-party exchangers, who were entities thatmaintained direct financial relationships with Liberty Reserve, buying LR “in bulk” fromthe company in exchange for mainstreamcurrency. The exchangers then allegedly sold this LR in smaller transactions to end users in exchange for mainstream currency. Likewise, if users wished to withdraw LR fromtheir accounts, they were required to transfer their LR fromtheir accounts to an exchanger, and the exchanger thenmade arrangements to provide themwith a corresponding amount ofmainstreamcurrency.
According to DOJ, the Liberty Reserve website recommended several preapproved exchangers, who apparently were unlicensedmoney transmitting businesses operating in countries withminimalmoney laundering regulations, such as Malaysia, Russia, Nigeria, and Vietnam. The exchangers allegedly charged higher fees than the fees charged by regular banks for comparablemoney transfers. No exchanger or user was charged in the grand jury indictment, however.
Liberty Reserve's operations also resulted in five arrests, including the arrests of Arthur Budovsky, the principal founder of Liberty Reserve, who was arrested in Spain; Vladimir Kats, the cofounder of the company, who was arrested in Brooklyn, New York; Azzeddine El Amine, amanager at Liberty Reserve, who was also arrested in Spain; and Mark Marmilev and MaximChukharev, whomaintained the company's technological infrastructure. Marmilev and Chukharev were arrested in Brooklyn, New York and Costa Rica, respectively. The arrests, which were conducted on both sides of the Atlantic, suggest that the United States received substantial international cooperation while investigating and charging Liberty Reserve and its principals. Indeed, Liberty Reserve was not even incorporated in the United States, but in Costa Rica. In furtherance of this cooperation, the Costa Rican government seized approximately $19.5 million fromthe company's Costa Rican bank accounts pursuant to a request by U.S. law enforcement authorities.
In addition to criminal charges being brought, five domain names were seized, including the domain name of Liberty Reserve and the domain names of four exchanger websites that were allegedly controlled by one or more defendants.
Use of Digital Currency
Over the last decade, digital currency has become increasingly popular. The use of such currency, however, is expected to be closely watched by regulators. To that effect, RichardWeber of the Internal Revenue Service (“IRS”) indicated that “We are now entering the cyber age ofmoney laundering. Technology advancements over the last several years have dramatically increased opportunities for criminals tomove, conceal and enjoy the ill-gotten gains.”
As a result of the allegedmoney laundering offenses, the U.S. government is seeking the forfeiture of at least $6 billion, in addition to funds that the company and the charged individuals allegedly deposited in bank accounts in Costa Rica, Cyprus, Russia, Hong Kong, China, Morocco, Spain and Australia. Further international cooperation is thus expected. Additionally, if convicted, Liberty Reserve's principals could be facing amaximum termof 20 years in prison for the one count of conspiracy to commitmoney laundering that they were charged with, among other charges.
Financial institutions can compare their practices with the facts alleged in the indictment to determine whether any of their practices need to be revised. And, as with somany other areas, financial institutions should ensure that they have a robust compliance programthat is internallymonitored and enforced. At aminimum, banks and digital currency institutions have to be diligent in order to "know their customers," and avoid, to the extent possible, the use of third parties while conducting financial transactions.