Liberty Reserve Money Laundering Scandal – Sanction Scanner



Understanding Liberty Reserve

Liberty Reserve used to be a Costa Rican business that let customers send and receive safe payments without giving their account details or their identity. The company’s electronic currency, Liberty Reserves (LRs), could be changed back and forth between US dollars and Euros. The organization run by Arthur Budovsky, who gave up his American citizenship to start a new life in Costa Rica, ran from 2006 to 2013, when police realized it was a major multi-billion dollar money laundering operation.

Customers utilized Liberty Reserve’s online exchange service to make payments and add or withdraw money from their accounts. An account could be created with just a name, birth date, and email address, which did not need to be confirmed. With little to no regulation of foreign financial transactions in Costa Rica, Liberty Reserve was free to establish a money exchange company where legitimate, though unregulated, transactions could occur but where unlawful money laundering could readily slip through the cracks. Each transaction charge was 1% of the total amount handled, or $2.99, whichever was smaller. Liberty Reserve had over one million clients globally, including 200,000 in the United States, and took roughly 12 million transactions every year, allowing Budovsky and his partners to grow.

Liberty Reserve was one of the most frequently used digital currency platforms globally, with over one million subscribers. In a news article, the Department of Justice claimed that nearly all of Liberty Reserve’s five million transactions were illegal and were used to launder more than $6 billion in suspected proceeds from crimes such as drug smuggling, child porn, personal information theft, Ponzi schemes, cybercrime, and poorly regulated gambling. On the other hand, Liberty Reserve has enacted an Anti-Money Laundering policy, stating that it would not “do the job with anyone suspected of, or actively participating in money laundering.” The importance of this strategy has yet to be assessed, but the company’s conviction shows that having a hands-on Anti-Money Laundering Compliance Program is essential in a sector where a record settlement with US authorities ($1.9 billion) was reached in 2012.

Because Liberty Reserve handled USD internationally, the Patriot Act allowed US authorities to pursue the institution. The Patriot Act’s mandate included ensuring that terrorists could not utilize USD to fund their activities. The United States confiscated and shut down Liberty Reserve in 2013, and a year later, Budovsky and five other former Liberty Reserve employees were arrested in Spain and extradited to the United States on allegations of money laundering conspiracy. Budovsky first pled not guilty to the accusations, but he altered his plea to guilty six months later in a compromise with prosecutors. Some of the company’s former employees received relatively smaller punishments and sentences. On the other hand, the mastermind, Budovsky, was convicted to 20 years in prison in 2016.

Liberty Reserve Laundered Money by Slipping Through the Cracks

The newly disclosed indictment details an alleged illegal scheme that began with the creation of a Liberty Reserve account. Although a name was necessary, Liberty Reserve did not appear to verify its users’ identities by seeking formal identification. According to investigators, this behavior indicates that Liberty Reserve intended its users to stay anonymous while transferring money from unlawful conduct. The Liberty Reserve user could conduct transactions with other Liberty Reserve users after opening an account. Users, on the other hand, did not transfer actual money. Rather, users exchanged Liberty Reserve’s digital money, known as “LR,” among themselves. Every time a user moved LR to another user, Liberty Reserve purportedly levied a one percent fee (up to a peak of $2.99). 

The firm did not let consumers fill their accounts by sending money directly to Liberty Reserve (from regular bank accounts). Instead, users were compelled to make all deposits through third-party exchangers, who were businesses who had direct financial contacts with Liberty Reserve and bought LR in bulk in return for conventional cash. The exchangers reportedly subsequently sold this LR to end-users in smaller transactions in return for conventional money. Similarly, users who wanted to withdraw LR from their accounts had to send their LR to an exchanger, who subsequently arranged for them to get an equivalent amount of conventional currency.

According to the Department of Justice, the Liberty Reserve website listed a number of preapproved exchangers, all of which were reportedly unregistered money transmission enterprises operating in countries with lax money laundering laws, such as Malaysia, Russia, Nigeria, and Vietnam. The costs imposed by the exchangers were purportedly greater than those charged by traditional banks for equivalent money transactions. However, no exchangers or users were named in the grand jury indictment.

Five people were arrested as a consequence of Liberty Reserve’s operational activities, including Arthur Budovsky, the company’s principal founder, who was arrested in Spain; Vladimir Kats, the company’s founding partner, who was convicted in Brooklyn, New York; Azzeddine El Amine, a manager at Liberty Reserve, who was also imprisoned in Spain; and Mark Marmilev and Maxim Chukharev, who was arrested in Russia. In Brooklyn, New York, and Costa Rica, Marmilev and Chukharev were caught. The arrests, which took place on both sides of the Atlantic, imply that the US had much foreign help investigating and prosecuting Liberty Reserve and its leaders. In fact, Liberty Reserve was founded in Costa Rica rather than the United States. Following a request from US criminal enforcement officials, the Costa Rican government took roughly $19.5 million from the company’s Costa Rican bank accounts as part of this collaboration.

Forfeiture  

The US government is seeking at least $6 billion in forfeiture as a result of the alleged money laundering activities, in addition to cash that the corporation and the accused people reportedly put in bank accounts in Costa Rica, Cyprus, Russia, Hong Kong, China, Morocco, Spain, and Australia. As a result, more international collaboration is envisaged. Furthermore, if convicted, Liberty Reserve’s leaders may face a maximum sentence of 20 years in jail for the one count of money laundering conspirators they were convicted for, among other offenses.

Best Practices  

Financial institutions can assess if any of their procedures need to be amended by comparing them to the facts charged in the indictment. Financial institutions should also guarantee that they have a solid compliance procedure internally reviewed and enforced, as they should in many other areas. At the very least, banks and digital currency institutions must be attentive in getting to know their consumers and avoiding the usage of third parties as much as possible while performing financial transactions.

With Sanction Scanner Know Your Customer solutions, it can get to know its customers and identify their risks. Know who you work with and establish a business relationship with Sanction Scanner.