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."

Digital Currencies Declared Central to Underground Economy

By John Leyden
The Register
Thursday, October 22, 2009

http://www.theregister.co.uk/2009/10/22/soca_fbi_cybercrime_strategy/

FBI and SOCA plot cybercrime smackdown
White hats get proactive on e-crime

RSA Europe 2009, London -- The FBI and the UK’s Serious and Organised Crime Agency have drawn up a program for dismantling and disrupting cybercrime operations. The effort relies on a better understanding of the business models of carders, malware authors and hacker groups which have increasingly come to resemble those of legitimate businesses.

The three prong strategy aims to target botnet and malware creators, so-called bullet-proof hosting providers that offer hosting services to cybercrooks, and digital currency exchanges. Digital currency exchanges such as WebMoney and Liberty Reserve are central to the operation of the black economy, according to Andy Auld, head of intelligence at SOCA’s e-crime department.

During a keynote presentation at the RSA Europe Conference, Auld and FBI special agent Keith Mularski used the Russian Business Network (RBN) cybercrime network as an example of the type of criminal enterprise they were targeting. The now disbanded group used an IP network allocated by RIPE, a European body that allocates IP resources, to host scam sites, malware and child porn.

RIPE actions might lend themselves to interpretation, viewed in the harshest terms, as being complicit with cybercriminals and "involved in money laundering offences".

"We are not interpreting it that way. Instead we are working in partnership to make internet governance a less permissive environment," Auld said.

The RBN – described as a purpose-built criminal ISP – allegedly paid off local police, judges and government officials in St Petersburg.

"This was a well organized organization not a cottage industry,” Auld explained. “RBN was the e-crime component in a wider criminal portfolio.

“There were strong indications RBN had the local police, local judiciary and local government in St Petersburg in its pocket. Our investigation hit significant hurdles.”

Auld said that although western law enforcement efforts were frustrated, the group was put under surveillance for a short time, during which the group travelled around the Russian city in an Armoured Audi A8 that was always escorted by a Range Rover.

As the heat was turned up on RBN, the group applied a disaster recovery plan, activated in November 2008. However, foreknowledge allowed the FBI and SOCA to shut down new systems before RBN was able to complete its migration.

“All we achieved was disruption, not a prosecution,” Auld explained. “We believe RBN is back in business, pursuing a slightly different business model.”

Zombie botnet taxonomy

The well attended presentation also included a comprehensive taxonomy of botnet types. Network of compromised PCs can be used for multiple purposes include proxies that supply anonymity (based on machines infected by malware strains such as Xsox), credential stealing (the notorious banking Trojan ZeuS and Torpig being the chief irritants in this category), web hosting (ASProx), spam distribution (Srizbi, Storm worm) and malware dropping botnets.

Another vital component of the cybercrime economy is carder forums, described by Mularski as e-crime “supermarkets” for exploits, tools and stolen data that have adopted a mafia-style organisational structure. These forums have splintered after law enforcement efforts that led to the demise of forums such as Shadowcrew and Carderplanet in 2004.

New generation forums are split between Russian and English language sites. Each have hierarchical structures with administrators who take a percentage for running escrow services and control membership at the top. Below these bosses are reviewers who handle site management (capos).

Hackers, carders and data thieves occupy the rung below with mainstream members (associates) below them. The quality of stolen credit card data, for example, is reviewed before a vendor is allowed to sell through these forums.

Counteroffensive

SOCA and the FBI intend to infiltrate groups or cultivate inside sources. The law enforcement agencies will also go after the money by targeting electronic exchanges that are used to transfer funds between criminals. Working with internet governance organisations, such as groups that allocate IP addresses to crooks without realising that the address space will be used for cybercrime, also form part of the clampdown.

The two law enforcement agencies also want to encourage the targets of cybercrime to improve their security while going after locations where crackers upload and store stolen data.

“Traditional policing is reactive,” Auld explained. “Cybercrime enforcement, by contrast, has to be pro-active.”

For further reading:
"FBI and Soca need help", ComputerWeekly, October 22, 2009

Issuer Market Update - September 2009

By Jon Matonis

The Issuer Market Update is a periodic snapshot of active digital gold currency issuers. Only those issuers and currencies that have precious metals backing are included in the analysis, although some issuers may also offer non-metal digital currencies.

Additionally, I have included each issuer's date of founding and the legal jurisdictions for administrative, operational, and guarantor entities, if applicable. Certain companies below will be the focus of issuer highlight studies in the future. Please bear in mind that not all issuers are forthcoming about the full details of their legal and control structure -- a fact that I believe puts them at a relative disadvantage.

1. c-gold (2007) - Seychelles, Malaysia
   
2. e-dinar (2000) - Dubai, Malaysia
3. e-gold (1996) - Nevis, USA
4. EuroGoldCash (2008) - Panama
5. GoldExchange (2006) - Costa Rica
   
6. GoldMoney (2001) - British Channel Islands
7. GoldNowBanc (1999) - unknown jurisdiction
8. Gold-Pay (2008) - Panama, Costa Rica
9. iGolder (2009) - Belize
10. Liberty Reserve (2005) - Costa Rica
11. Pecunix (2001) - Panama, Vanuatu
12. Perfect Money (2007) - Panama
13. WebMoney (1998) - Belize, Lithuania, Russia, Dubai

Interviews with Issuers:
"Interview with c-gold", DGC Magazine, June 19, 2009
"Interview with iGolder", DGC Magazine, April 16, 2009
"Interview with e-gold", DGC Magazine, March 20, 2009
"Interview with Gold-Pay", DGC Magazine, March 20, 2009
"Interview with Perfect Money", Ecommerce Journal, January 23, 2009
"Interview with e-dinar", DGC Magazine, October 22, 2008
"Interview with WebMoney", DGC Magazine, October 22, 2008
"Interview with GoldMoney", DGC Magazine, October 22, 2008
"Interview with Liberty Reserve", Planetgold.com, May 20, 2002

Interview with Liberty Reserve

Interview with Arthur Budovsky of Liberty Reserve
Conducted by Ragnar Danneskjold, editor
Planetgold.com
Monday, May 20, 2002

http://web.archive.org/web/20030416025128/planetgold.com/interview.asp?SPID=08248138

planetgold: Today, Planetgold is pleased to interview Arthur Budovsky, of Liberty Reserve.

planetgold: Welcome, Arthur. Thank you for agreeing to be interviewed.

Arthur: It’s my pleasure.

planetgold: Please tell us about Liberty Reserve.

Arthur: Liberty Reserve was originally an escrow service for our private clients engaged mostly in the international import and export business. We have been operating for about three years, and only recently decided to expand Liberty Reserve into a digital currency.

planetgold: Why the expansion?

Arthur: In effect, it was our clients who asked us to provide digital currency type services (similar to e-gold). For example, we would see more and more clients simply accumulating money in their escrow accounts and then calling us with instructions to send money to one place or another or to simply debit and credit their accounts between various third party accounts. We were transformed into a stored value type system without even realizing it. The next step was obvious.

We started work on an online digital currency but with a slightly different edge. We are currently backed by the U.S. dollar, and in the near future, we will add an option for gold backing. We may also add backing for other popular currencies, depending on demand.

planetgold: Do you still provide escrow services?

Our clients can use escrow at no additional cost

Arthur: Of course. We have integrated the Liberty Reserve digital currency business into our escrow and fulfillment services. From our experience with our clients, trade on the internet is still viewed as risky, and clients demand a service where risk can be limited. More can be done to assure the security of business transactions. Nobody wants to pay $1,000 for a product at an auction and then never receive the goods. Our clients can now use our escrow service online, at no additional cost, to make sure the seller delivers before he is paid. It’s built into the system. We are, in fact, the first digital currency to have an escrow service built in. We’ve been doing escrow for three years, although without a web presence. And we also need entities such as the eCTA or GDCA that you mentioned to help consumers distinguish between reputable businesses from dishonest ones.

planetgold: Tell us a little about your family background.

Arthur: I am a single child of a German mother and Ukrainian father. My parents immigrated to the United States about 15 years ago from Ukraine. I have a wonderful wife, and two beautiful daughters.

planetgold: What about your professional and educational background?

Arthur: I have a university degree in international business and economics from the International Management Institute of Kiev. In the states, I started a business exporting computers and electronics. During the ten years of running my business, I got acquainted with my current partner, Michael Klein. Together, we developed the business to include escrow services for a myriad of import and export companies.

We started transferring millions of dollars of client funds

The rest, as they say, is history. There was a greater demand for escrow services, and we were only too happy to accommodate our clients. Eventually, clients started to bypass banks and simply let their money accumulate with us. We started transferring millions of dollars of client funds from one client account to another. We were like a central clearing house for a bunch of import and export companies. The evolution to a digital currency was a logical development.

planetgold: Do those clients still use your service?

Arthur: Sure they do. Except now, instead of calling ourselves, “International Import/Export Exchange,” we transformed into, “Liberty Reserve,” and “Liberty Escrow.”

Our interface is top notch. Lots of stuff that we did before manually is automated. Exchanges are instantaneous. I don’t need to be awakened in the middle of the night by a client from Eastern Europe who needs to transfer funds to a third party. He can do it all by himself now.

planetgold: How does Liberty Reserve distinguish itself from other digital currencies?

We intend to link anonymous debit cards to client accounts in the near future

Arthur: Well, the escrow service is one way; plus, we’ve been around longer than most (except maybe e-gold) as a hybrid stored value/escrow service type company; we have an excellent staff; we are negotiating with several market makers in various countries to make a market in Liberty Reserve currency for the benefit of our clients; we intend to link anonymous debit cards to client accounts in the near future so that clients can have easy and discreet access to their funds, at any time; and most importantly, we are first and foremost dedicated to exceptional customer service. We are not a bank, and don’t treat our clients with a suspicious or haughty attitude.

I’d like to add that I was pleasantly surprised at the revolutionary idea behind e-gold. I must admit that it was looking at e-gold that gave us the final push to realize that we were doing something similar. We just never realized, until we saw e-gold, that someone would have the audacity to compete with the Federal Reserve, to claim that their money is better money. e-gold changes the way people think about money, for the better! We hope to one day be able to integrate our service with e-gold to provide our clients with seamless currency transactions across most avenues of worldwide commerce. We see how other digital currencies are popping up and offering their own currencies and it is up to so-called, exchange providers, to make a market in all of these currencies so that the public can have some integration. But it is far from seamless. We looked at merchantgold.com, and that service is a very good start to aid in seamless integration between fiat and digital. But the digital currency world needs even more integration. We are currently looking into the idea of backing our currency with e-gold.

planetgold: Do you have any legal concerns about this type of business, such as government regulation or invasion of privacy?

We don’t collect much in the way of personal information

Arthur: Since we’re based in the Caribbean (Nevis to be exact), we have not to date, nor do we anticipate any sort of problems of that type. We do respect our clients’ privacy and only a subpoena served in Nevis would prompt us to consider providing anyone’s personal information to a third party. However, since we’re not a bank, we don’t collect much in the way of personal information anyway.

Because we’re based in Nevis, you have to be a murderer, kidnapper, or drug kingpin for us to be forced to divulge any sensitive information. Of course, if you ARE such a person, we do not want you as a client, and we would be only too happy to cooperate with authorities in situations like that. As far as client privacy, all our files and communications with clients are encrypted and stored on offshore servers. All online transactions are conducted through a secured socket layer protocol (SSL). We have taken other steps, but they are proprietary in nature.

planetgold: Have you had any problems with fraud?

Arthur: We’ve had no fraud attempts in the past because most of our clients were well established. I know that fraud is a prevalent problem in this industry because better money attracts thieves. But we are ready to face the challenges, and we are working on proprietary systems to help alleviate fraud problems.

planetgold: What are your fees?

Arthur: There is no fee to obtain or to store Liberty Reserve digital currency.

planetgold: How’s that?!

Arthur: It’s true. You can obtain Liberty Reserve currency dollar for dollar, plus bank fees. There are no storage or set-up fees. Spends are only 1% with a maximum fee of 25 cents. For example, you can obtain LR digital currency of $100,000 (minus bank charges), and spend it to a third party for a fee of 25 cents. We want to encourage the growth of digital currencies outside the snooping banking environment. We’d like people to recognize that Liberty Reserve (especially once we have gold-backing) is better money and hoard it. Therefore, there is a 2% fee for out-exchanges (we have to make at least a little money for providing the valuable service).

planetgold: Why don’t you offer gold-backing immediately? Why wait until later?

Arthur: We considered waiting. But there is really no reason to wait. Once Liberty Reserve obtains gold-backing, current customers will have an option to convert their currency to gold at extreme discounts. I guess it was a business decision to enter the online digital currency market as soon as possible.

planetgold: What information or procedures do you require for people to open an account at Liberty Reserve?

Arthur: Anyone can enjoy the benefits of Liberty Reserve. Signing up is a cinch. All you need to do is fill out an online form, and you will instantly receive an account number that you can use right away.

planetgold: What are your plans for the future?

Arthur: We plan to integrate Liberty Reserve with online bill paying services so that our clients can pay most or all of their bills with digital currencies. We are constantly on the lookout for ideas and services that would help our clients make the most of Liberty Reserve and to switch their financial transactions from the established bank monopoly to a better form of currency and value storage system.

planetgold: So when is the official launch date for Liberty Reserve online?

Arthur: We’ve set a launch date for the online business for Tuesday, May 28, 2002.

planetgold: This concludes our interview with Arthur Budovsky of Liberty Reserve.