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2013-05-30 07:58:08
May 29th 2013, 21:02
A CRIMINAL indictment, filed in New York against Liberty Reserve (LR) and seven
current and former employees, has shaken the burgeoning world of digital
currencies. The defendants are charged with running a money-laundering
operation that allegedly acted as a financial hub of the cybercrime world ,
serving credit-card fraudsters, identity thieves, hackers and drug-traffickers.
Authorities estimate that LR processed 55m transactions worth $6 billion
between 2006 and May 2013. That makes it the largest case in the history of
cross-border money laundering.
With LR s website shut down and regulators recently issuing a warning that
virtual currencies should follow anti-money-laundering rules more assiduously
cyber-enthusiasts have been left wondering which digital-money business will be
next in the prosecutors sights. Attention has inevitably turned to Bitcoin,
the darling of virtual currencies, which is widely used on Silk Road, an online
marketplace for illegal drugs.
But the two are not the same. LR was essentially no more than a digital Western
Union or PayPal, albeit one designed to break the rules. Users had to provide a
name, address and date of birth, but the firm did not verify the information.
It charged a 1% fee per transfer, plus a 75-cent privacy fee to ensure
untraceability (even within LR s system). To dodge regulations and avoid
creating a paper trail, LR made users deposit and withdraw funds through
third-party exchangers .
Bitcoin is more of a proper currency, because it can be transferred without
recourse to a central clearing house rather like bundles of dollar bills. But
businesses which trade Bitcoins for central bank-issued money, such as Mt.Gox,
an exchange based in Japan, resemble Liberty Reserve. They could find
themselves chased down by prosecutors if too much dirty money starts flowing
through Bitcoin. On May 16th federal agents seized some funds from an account
held by Mt.Gox at Dowalla, another online transfer service, on the basis that
laws governing money transfers were not being followed closely enough.
If prosecutors look for more cases, the most likely targets are online payment
services that allow cash to be moved without verifying users identities. The
number that merely pretend to apply know your customer and other
anti-laundering rules is thought to be in the dozens. The scale of the LR case
will make regulators warier of all digital-money innovations such as Bitcoin.
The case highlights how hard it is to track such operations. LR s founder,
Arthur Budovsky (pictured, after his arrest), had been known to the authorities
for years. After being prosecuted in America for running an unlicensed
money-transmission firm (the home of E-Gold, a now-defunct digital currency),
he moved the business to Costa Rica and renamed it. When local regulators grew
concerned, he allegedly bought time by designing a fake compliance portal, then
pretended to shut the firm down while in fact taking it underground and running
it through shell companies.
But crimefighters techniques have evolved too. As well as creating undercover
LR accounts, they wiretapped internet connections and executed search warrants
for e-mail accounts and internet service providers. Prosecutors offices are
investing heavily in their cybercrime labs. Money-moving businesses that
facilitate digital dodginess will find it increasingly hard to stay a step
ahead.