Arthur Budovsky, the founder of Liberty Reserve, was arrested in Spain by Spanish authorities on Friday, along with Azzeddine El Amine, described as his principal deputy. The two men are fighting extradition to the United States. Authorities said Budovsky is a former U.S. citizen who renounced his citizenship and become a Costa Rican national. Five other defendants also face charges.
Liberty Reserve was shut down over the weekend. According to the indictment, it had touted itself as the Internet's "largest payment processor and money transfer system." But authorities said it had never registered with the U.S. Treasury Department as a money transferring business, even though it had more than 1 million customers worldwide, including 200,000 U.S. customers. It handled 12 million financial transactions a year, according to the U.S Attorney.
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 Treasury Department also took action Tuesday, naming Liberty Reserve as a money laundering organization, using powers under the Patriot Act to effectively cut the company off from the U.S. financial system. Any global bank that does business with Liberty Reserve could also be cut off from transactions with U.S. banks. Treasury said this is the first time it's used that power in relation to a cybercurrency provider.
Guess the most painful part, clients funds have been frozen with no hope of the funds being returned .. For shame! oh for shame!
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