In a massive takedown announced earlier today, the US Attorney’s Office for the Southern District of New York criminally charged Liberty Reserve S.A., creator of one of the most widely-used digital currencies, with operating a criminal money laundering business intentionally “designed to help criminals conduct illegal transactions and launder the proceeds of their crimes.” The scope of the case is impressive, and with consumers and retailers more frequently eying with interest the world of digital currency, the outcome of the Liberty Reserve case doubtless will have impact on the digital currency landscape going forward.
Law enforcement officials from 17 different countries reportedly were involved in the investigation and takedown, which included five arrests on Friday in Spain, Costa Rica and New York. The US Attorney believes the case is the largest international money laundering prosecution in history, and with good reason: the indictment alleges a $6 billion scheme to launder money using Liberty Reserve’s digital currency. Of the estimated million users worldwide, almost all of Liberty Reserve’s business allegedly derived from criminal activity, making it “the bank of choice for the criminal underworld.”
The indictment reads like movie plot. As you’d expect, there’s plenty about how drug traffickers, computer hackers, child pornographers and other criminals used the company’s digital currency to facilitate their criminal enterprises and launder money. But the indictment takes things a big step forward, alleging that Liberty Reserve was deliberately set up to cater to a criminal underworld. The indictment alleges that Liberty Reserve took a number of deliberate steps to help criminals launder money, including setting things up so users could create accounts using fake identities and employing third-party “exchangers” to effect transactions, which had the effect of preventing the end-stream user from transmitting mainstream currency directly to Liberty Reserve. Liberty Reserve also allegedly displayed a remarkable disdain for regulators: among other things, it allegedly feigned compliance with Costa Rican anti-money laundering procedures and pretended to shut down its operations in 2011 after learning of US inquiries while it continued to operate through international shell companies.
The Liberty Reserve indictment serves as a stark example of the lengths that criminal organizations may go to in their efforts to launder money. Regulation of internet financial transactions naturally has been increasing, and legitimate companies may well take comfort in knowing that law enforcement is helping level the playing field by shutting down companies that decide to thumb their noses at the rules. And we probably can expect more regulation going forward. In March of this year, for example, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) issued what appears to be the first federal guidance on application of the Bank Secrecy Act to digital currency. FinCEN clarified that digital currency exchangers and administrators are considered “money transmitters” and are required to register as money services businesses (MSBs) subject to FinCEN’s regulations. While FinCEN confirmed that a digital currency user is not subject its regulations, consumers paying with digital currencies and retailers receiving them may be liable for using an unlicensed money transmitting business. The Commodity Futures Trading Commission also has indicated that it may enter the digital currency regulatory fray. Stay tuned.