U.S. Shuts Liberty Reserve Currency Exchange

By Jon Matonis
Forbes
Tuesday, May 28, 2013

http://www.forbes.com/sites/jonmatonis/2013/05/28/u-s-authorities-close-another-digital-currency-exchange

In conjunction with Costa Rican authorities and Spanish police, U.S.
law enforcement participated in a joint operation on Friday to arrest
the founder of Liberty Reserve S. A., a private digital currency exchange service based in Costa Rica.

U.S. authorities accused the currency exchange of facilitating $6
billion worth of money laundering, calling it a “bank of choice for the
criminal underworld.”

Today, the website domain is resolving again but a notice
on the homepage states: “THIS DOMAIN NAME HAS BEEN SEIZED by the United
States Global Illicit Financial Team.” Domain names were also seized
for asianagold.com, exchangezone.com, moneycentralmarket.com and
swiftexchanger.com most likely for their affiliation with Liberty
Reserve.

According to the indictment unsealed today, U.S. prosecutors said
that the case involved law enforcement agencies in 17 countries and “is
believed to be the largest international money laundering prosecution
in history.” This latest action follows the 2007 closure of Doug Jackson’s famous e-gold service and this month’s seizure of Mt. Gox’s assets and account facility at U.S.-based Dwolla.

Arthur Budovsky, 39, a former U.S. citizen and naturalized Costa Rican of Ukrainian origin, was arrested
in Spain and U.S. officials are likely to seek his extradition. He has
been under investigation in Costa Rica since 2011 for suspicion of money
laundering and for using various shell companies to operate Liberty
Reserve.

On Friday, San José prosecutors raided Budovsky’s home and offices in
Escazú and Santa Ana, southwest of San José, and in the northern
province of Heredia. Agents from the organized crime unit of the Costa
Rican Prosecutor’s Office seized documents, computers, three Rolls Royce
and Jaguar automobiles, and a motorcycle. A Russian national with the
last name Chukharev was also arrested and the U.S. is seeking his
extradition as well.

Costa Rica state prosecutor José Pablo Gonzalez said that Costa
Rica’s financial regulator, Financial Institution Superintendency
(SUGEF), had refused to issue a license to Liberty Reserve in 2011 due to concerns about its transparency and funding procedures.

Investigators allege that Budovsky’s businesses in Costa Rica were
used to launder funds from drug trafficking, identity theft, and
pornography websites. The seized digital and physical evidence from the
companies will be turned over to U.S. law enforcement in accordance with
“international penal assistance.” The involved companies are Silverhand
Solutions & Technology S.A. (Santa Ana), Worldwide E-Commerce
Business S.A., or WEBSA (Escazú), Grupo Lulu Limitada (Escazú), Triton
Group A & A, S.A. (Escazú), and Cyberfuel.com (Santa Ana).

Some Liberty Reserve users are estimating that the company may have held customer funds in excess of $150 million at the time of the seizure. There has been no statement from authorities on the reclamation process.

Since 2002, Liberty Reserve had been operating one of the oldest and
most popular payment processors in the world with millions of clients.
Vitalik Buterin of Bitcoin Magazine credits
the company with being “one of the chief enablers of the Bitcoin
economy’s early growth.” Payment methods such as credit cards and ACH
transfers are not a great match for the irreversible bitcoin, because
those payment methods can be reversed, or charged back. In 2010 and 2011
with the bitcoin exchanges struggling for irreversible inbound payment
methods, Liberty Reserve Dollars and Liberty Reserve Euros were
proprietary digital units that satisfied the need for payment finality.

Although security researcher Brian Krebs emphasizes the more salacious cyber crime aspects of the case, Liberty Reserve was also utilized by many legal businesses.

According to Forex Magnates, Liberty Reserve was “the leading payment
channel for traders in emerging and frontier markets” and it was used
by several international forex brokers, such as Marketiva, FXOpen,
Markets.com, and Instaforex. Citing
Masroor Ghoori, a foreign exchange broker in Pakistan, Forex Magnates
said, “Forex brokers have been benefiting from Liberty Reserve’s vast
access as a payment provider, especially in countries where traders face
difficulties in transferring funds. Liberty Reserve was a ‘gift’ for
several traders, especially after the State Banks’ (State Bank of
Pakistan) changes to international money transfers.”

In a separate report, Forex Magnates predicts
that bitcoin may be a viable alternative for payments to introducing
brokers and even direct forex account funding now that centralized
systems are under attack.

Mitchell Rossetti, co-founder of virtual prepaid ePay Cards, told the BBC
that his company now faces an “uphill battle” to make up potentially
lost funds because his business had about $28,000 sitting in a Liberty
Reserve account at the time the site went offline. The cards allow
consumers outside the U.S. to purchase goods from stores in the country
as if they owned a locally-issued Visa or Mastercard credit card. Based
in Texas and London, the firm allowed its customers to load their
virtual prepaid cards with Liberty Reserve because it was quick,
efficient and secure.

Demonstrating that those most harmed in targeted digital currency
shutdowns are law-abiding U.S. citizens, Panamanian payment system
Perfect Money announced the following on Saturday:

“Due to changes in our policy we forbid new registrations
from individuals or companies based in the United States of America.
This includes US citizens residing overseas. If you fall under the above
mentioned category or a US resident, please do not register an account
with us. We apologize for inconvenience caused.”