Liberty Reserve was a Costa Rica-based centralized digital currency service that billed itself as the "oldest, safest and most popular payment processor, serving millions all around a world". The site had over one million users when it was shut down by the United States government. Prosecutors argued that due to lax security, alleged criminal activity largely went undetected, which ultimately led to them seizing the service.
In May 2013, Liberty Reserve was shut down by United States federal prosecutors under the Patriot Act after an investigation by authorities across 17 countries. The United States charged founder Arthur Budovsky and six others with money laundering and operating an unlicensed financial transaction company. Liberty Reserve is alleged to have been used to launder more than $6 billion in criminal proceeds during its history.
Background
Based in San José, Costa Rica, Liberty Reserve was a centralized digital currency service that allowed users to register and transfer money to other users with only a name, e-mail address, and birth date. No efforts were made by the site to verify identities of its users, making it an attractive payment processor to scam artists. Deposits could be made through third parties using a credit card or bankwire, among other deposit options. Liberty Reserve did not directly process deposits or withdrawals. Deposited funds were then "converted" into Liberty Reserve Dollars or Liberty Reserve Euros, which were tied to the value of the U.S. dollar and the euro, respectively, or to ounces of gold. No limits were placed on transaction sizes. The service made money by charging a small fee, about 1%, on each transfer. Transactions were "100% irrevocable". Liberty Reserve also offered shopping cart functionality and other merchant services.
Service was popular among currency brokers and multilevel marketing companies. According to Forex Magnates, a specialized forex news service, Liberty Reserve was "the leading payment channel for traders in emerging and frontier markets." Richard Weber, head of the U.S. Internal Revenue Service criminal investigation unit, declared, "If Al Capone were alive today, this is how he would be hiding his money". At the time of its closure, Liberty Reserve had more than 1 million registered users, 200,000 of which were from the United States. It was a member of the Global Digital Currency Association.
Liberty employees were required to sign a confidentiality agreement to "maintain in strict confidentiality all information" about the company, including "administrative affairs, operations and financial details" for 15 years after leaving the company. Additionally they were required to notify management if issued a warrant to reveal such information.
History
From 2002 to 2006, United States businessmen Arthur Budovsky and Vladimir Kats ran a digital currency exchange service known as Gold Age. In July 2006, the duo were indicted on charges of operating an illegal financial business, a felony. They were sentenced to five years in prison in 2007, but the sentence was reduced to five years of probation. Budovsky fled the country, settling in Costa Rica. He subsequently became a naturalized citizen of Costa Rica when he married a Costa Rican woman in 2010, and renounced his American citizenship in 2012.
Liberty Reserve was incorporated by Budovsky in Costa Rica in 2006. A 2007 interview with Joul Lee, the company's marketing manager, claimed it was founded as "a private currency exchange system for import/export businesses" and opened to the public in 2007.
Criminal investigation and charges
Costa Rican authorities became aware of Liberty Reserve in 2009 and informed the business it needed a license to operate as a money transmitting business. In 2011, Liberty Reserve was denied a business license in Costa Rica, according to state prosecutor José Pablo González, due to lack of transparency about how the business was funded. The business formally disbanded at that time, but company founder Arthur Budovsky continued to operate the business by funneling it through five other Costa Rican businesses, according to authorities. A criminal investigation was launched March 7, 2011 following "suspicious" bank activity. Later in 2011, the United States authorities asked Costa Rica to begin investigating Budovsky's business dealings. According to Bernardita Marín, associate director of the Costa Rican Drug Institute, Costa Rica seized funds from Liberty Reserve on three occasions from 2011 to 2013.