Charges filed in $6 billion money laundering case

The U.S. Attorney in Manhattan filed charges Tuesday against Liberty Reserve in an alleged $6 billion money laundering network. There’s nothing better than a large criminal network for business journalism.

Here are some of the details from the New York Times story:

The operators of what the authorities described as one of the world’s largest online money laundering organizations, a central hub for criminals trafficking in everything from stolen identities to child pornography, were charged in an indictment unsealed by federal prosecutors on Tuesday.

The organization, Liberty Reserve, was responsible for laundering over $6 billion over the last seven years, with millions of customers around the world, according to the indictment. Prosecutors said that the company “facilitated global criminal conduct” and that the case, which involved law enforcement agencies in 17 countries, is believed to be the largest international money laundering prosecution in history.

The charges detailed a complicated system designed to allow people to move sums of money both large and small around the world with virtual anonymity, according to a three-count indictment announced by the United States attorney’s office in Manhattan.

“This was really PayPal for criminals,” a senior law enforcement official said, calling the company and a system of related businesses “a shadow banking system for criminal conduct” that was “able to facilitate all sorts of criminal conduct that would not otherwise happen.”

The indictment charges seven of the company’s principals and employees. Five of them were arrested Friday in Spain, Costa Rica and Brooklyn.

The Wall Street Journal reported that it was more than just money laundering and that principals in the company committed various other crimes as well:

Prosecutors in Manhattan said that they arrested five of the seven men charged—including Arthur Budovsky, the founder of the company—late last week in Spain, Costa Rica, and New York. Prosecutors charged them with money laundering and with operating an unlicensed money transmitting business. The other two men are at large, said prosecutors, who added that they will be seeking extradition.

According to an indictment unsealed Tuesday, Mr. Budovsky and six others created Liberty Reserve, based in Costa Rica, for the sole purpose of setting up a digital currency exchange that could be used to launder money. The indictment alleged the operation laundered the money through 55 million separate transactions for at least one million users globally.

Prosecutors also accused the company, its founder and employees of using Liberty Reserve accounts to commit crimes involving credit card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking.

A senior law-enforcement official described Liberty Reserve as a shadow banking system for cybercriminals and said Tuesday’s case may push regulators to look even more closely at other virtual currencies.

In order to convert traditional currency into Liberty Reserve dollars, customers were required to use third-party “exchangers,” who would then forward the money to Liberty Reserve, according to the indictment. Prosecutors said that allowed Liberty Reserve to avoid a “financial paper trail.”

In addition to the criminal charges, prosecutors said they seized 45 bank accounts and five domain names allegedly used for the operation, including the domain name of Liberty Reserve. Prosecutors said on Tuesday that the investigation involved law enforcement actions in 17 countries.

This wasn’t Budovsky’s first criminal enterprise, according to the Associated Press (via the Washington Post). He and partner Vladimir Katz were previously convicted of money-related crimes:

Budovsky and Katz have previous convictions on charges related to an unlicensed money-transmitting business, according to court papers. After that case, the pair decided to move their operation to Costa Rica, where Budovsky officially renounced his U.S. citizenship, the papers say.

In an online chat captured by law enforcement, Katz admitted Liberty Reserve was “illegal” and noted that authorities in the United States knew it was “a money laundering operation that hackers use.”

Aditya Sood, a computer science doctoral candidate at Michigan State University who has studied the underground economy, described Liberty Reserve as a no-questions-asked alternative to the global banking system, with little more than a valid email needed to open an account and start moving money across borders.

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

Liberty Reserve’s ease of use — and rock-bottom processing fees — also attracted a thriving community of tech-savvy users in countries with limited access to credit cards, said Mitchell Rossetti, whose Houston, Texas-based ePayCards.com was one of several mainstream merchants that accepted the online-only currency.

Just when the summer slowdown was about to occur, this little gem falls. It will be interesting to watch not only the trial unfold and reveal details, but also to see if regulators seek to enact more rules over online transactions.