Money-laundering scheme hid $6 billion for fraudsters like 'Joe Bogus'

Criminal investigators slammed the digital door on a massive $6 billion cyber money-laundering scheme with 1 million users worldwide, including more than 200,000 users in the US, according to court documents.

Operating out of Costa Rica, the creators of Liberty Reserve billed their online company as an “instant, real-time currency for international commerce,” which could be used to “send and receive payments from anyone, anywhere on the globe,” the documents said. But investigators from the US Secret Service, Internal Revenue Service, Immigrations and Customs Enforcement saw only a scam.

From the start, Liberty Reserve’s creators are alleged to have to crafted a global electronic network intended as a conduit for criminals to launder their ill-gotten gains, according to the federal indictment and other court documents unveiled in New York City Tuesday.

From 2006 to 2013, Liberty Reserve grew exponentially to become one of the world’s most widely used digital currency services, the documents say. But in short order, the company became a “financial hub of the cybercrime world,” anonymously processing profits from criminal activity that ranged from identity theft and credit card fraud to computer hacking, investment fraud, child pornography, and drug trafficking, the indictment alleges.

Not everyone who used Liberty Reserve to transmit a type of digital currency instantly and anonymously around the world was a criminal. But most were,         federal investigators said. Court documents describe an Internet-based operation of “staggering” scope that served as a vital tool for cyber thieves and criminals to first convert ill-gotten cash to an anonymous digital currency – then, later, convert it back into cash and transmit it to banks worldwide.

Anonymity was the real currency, however. With no real names necessary, and no proof of identification required, anonymous accounts could be opened and cash deposited at Liberty Reserve-affiliated “exchangers” worldwide.

It was common, for instance, for Liberty Reserve users to establish accounts under false names, including such obvious criminal names as “Russia Hackers” and “Hacker Account,” the court documents said. During the investigation, one agent opened and executed transactions under the name of “Joe Bogus” with the address “123 Fake Main Street” in “Completely Made Up City, New York.”

Once an account was set up, the user could transfer a digital currency called “LR” to other account holders. In these transactions, the user could receive LR transfers, including any “merchants” that accepted LR as payment. Along the way, Liberty Reserve charged a percent fee for every transfer.

For a “privacy fee” of 75 cents per transaction, a user could hide their Liberty Reserve account number when transferring funds, making the transfer completely untraceable, the indictment said.

Cyber bank thieves who recently stole $45 million by hacking into two Middle Eastern banks, and then raising the limits on prepaid debit cards, used Liberty Reserve to distribute their proceeds, the court documents allege.

“The only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes – the coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers, and traffickers,” Manhattan US Attorney Preet Bharara said, in a statement. “As crime goes increasingly global, the long arm of the law has to get even longer, and in this case, it encircled the earth.”

Seven principals of Liberty Reserve are charged with money laundering and operating an unlicensed money transmitting business that processed 55 million transactions worth $6 billion, virtually all illegal. Five arrests were announced along with the seizure of online domains linked to Liberty Reserve, digital storefronts or “exchangers” that were vital conduits for bringing cash into the global network.

Among the five arrested were Arthur Budovsky, the principal founder of Liberty Reserve, who was arrested in Spain. Vladimir Kats, the company’s co-founder, was arrested in the Brooklyn borough of New York.

In all, 45 bank accounts were frozen and forfeiture sought for 35 exchanger websites, including the exchangers’ domain names, because the websites were used “to facilitate the Liberty Reserve money laundering,” the indictment said.

Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen told reporters that the government was not trying to crack down on new digital currencies. "I want to make clear that today's action does not mean that we are trying to eliminate virtual currencies and their providers," he said.

But the message to future digital currency criminals was equally clear. Anyone visiting the company website on Wednesday would have seen an unambiguous message: "This domain name has been seized by the United States Global Illicit Financial Team."