On Tuesday, May 28, 2013, the Department of Justice (DOJ) announced the unsealing of an indictment against Liberty Reserve, S.A. (Liberty Reserve) in the Southern District of New York for operating a $6 billion money laundering scheme. Liberty Reserve and seven of its employees are alleged to have laundered the funds in nearly 55 million transactions since 2006. Based out of Costa Rica, the company, which has been shut down, was a large internet-based payment processor and money transfer system. Despite never registering with the Department of Treasury as a money transmitting business, the company had more than one million customers, 200,000 of which were in the United States. Any customers who were engaged in legitimate business activities have also been unable to access the funds in their Liberty Reserve accounts as a result of the indictment.
Liberty Reserve operated with a digital currency known as LR. Customers were permitted to open accounts under fictitious names with the company, and then, using a third party intermediary known as an "exchanger," deposit funds into their accounts. For small transaction fees, customers would be permitted to move funds between their own accounts and accounts of other Liberty Reserve customers, and withdraw funds. Like deposits, cash withdrawals were not permitted directly through Liberty Reserve, but were, instead, undertaken through a third-party exchanger. Unlike traditional banking institutions that comply with U.S. law, Liberty Reserve did not require accountholders to verify their identities. The lack of identifying information, the use of exchangers and the deliberate concealment of financial transfers by the removal of account numbers from inter-account transfers resulted in a system perfectly designed for money laundering. There was no screening of clients, and fictitious monikers such as "Russian Hacker" and "Hacker Account" were permitted to open accounts and conduct business through the site.
Federal authorities allege that $6 billion was laundered through the site in connection with credit card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking, among other illicit activities. Much of the money was moved through shell accounts in at least 17 countries, including Costa Rica, the Netherlands, Spain, Morocco, Sweden, Switzerland, Cyprus, Australia, China, Norway, Latvia, Luxembourg, the United Kingdom, Russia, Canada and the United States.
In addition to the Justice Department's criminal indictment, the Treasury Department also took action on Tuesday by declaring Liberty Reserve a "money laundering organization." This designation under § 311 of the PATRIOT Act bans Liberty Reserve, and those continuing to do business with the company, from the U.S. financial system. This designation by Treasury is the first time the Department has made such a designation against a virtual currency provider. U.S. Attorney Preet Bharara recognized this prosecution as an important step to reign in the "Wild West" of criminal internet banking, noting that "[a]s crime goes increasingly global, the long arm of the law has to get even longer, and in this case, it encircled the earth."
The proliferation of money laundering through cyberspace is an increasing threat. Criminal organizations no longer have to rely on the physical transfer of suitcases of cash across borders to "clean" the proceeds of their unlawful activities. As these organizations become more sophisticated in finding ways to bank their criminally derived proceeds outside of the regulated financial system, many crimes will become increasingly difficult to detect.
Companies utilizing technology to conduct their business activities, whether they are financial institutions, funds transfer processors or users of these services, must develop compliance controls to ensure they do not become vehicles for money laundering and are not doing business with such organizations. Facilitating money laundering has harsh consequences, and even the unwitting use of a money launderer such as Liberty Reserve can result in the freezing of a legitimate company's assets or blockage from the U.S. financial system. Today, more than 74 countries have anti-money laundering statutes, and companies engaged in cross-border activity must ensure that their policies comply not only with the policies of the United States but also with the laws and regulations of other countries where they do business. Companies are advised to vet vendors and other service providers to identify suspicious activity in order to avoid criminal exposure for transaction activity that violates federal law and protect against the commercial consequences of doing business with an entity that becomes the target of government prosecution and forfeiture.
More broadly, as companies increasingly entrust their account and financial information to internet banking services that are vulnerable to data breach, they should have cybersecurity response plans in the event those services are criminally compromised. With legal and consulting specialists advising a company's internal technology team, these threats can be reduced and addressed with cybersecurity contingency plans put in place before the a company's financial information is jeopardized by digital hacking and virtual espionage.