Another Guilty Plea for Unlicensed Money Transmission of Liberty Reserve, the Centralized Virtual Currency Exchanger

Liberty Reserve, the prominent centralized virtual currency exchanger that was shut down by U.S. authorities last summer for numerous violations of operating an unlicensed money transmission business and money laundering charges, continues to work itself through the legal system.  Last Thursday, the Chief Technology Officer for Liberty Reserve pleaded guilty to conspiring to operate an illegal unlicensed money transmitting business that he knew involved the transmission of funds derived from criminal activity.

In October 2013, one of Liberty Reserves co-founders pleaded guilty to one count of conspiring to commit money laundering, which carries a maximum sentence of 20 years in prison; one count of conspiring to operate an unlicensed money transmitting business, which carries a maximum sentence of five years in prison; one count of operating an unlicensed money transmitting business, which carries a maximum sentence of five years in prison; one count of receiving child pornography, which carries a maximum sentence of 40 years in prison and a mandatory minimum sentence of 15 years in prison; and one count of marriage fraud, which carries a maximum sentence of five years in prison.

In May 2013, FinCEN issued a Notice of Finding under Section 311 of the USA PATRIOT Act that Liberty Reserve S.A. was a Financial Institution of primary money laundering concern.  Later that month, the U.S. shut down Liberty Reserve, a web site operated in Costa Rica, engaged in using digital currency (its own called “LR”) for payment processing and money transmission.  The three-part indictment included charges for conspiracy to commit money laundering, conspiracy to operate unlicensed money transmitting business and operation of an unlicensed money transmitting business.  Further, it stated “the defendants deliberately attracted and maintained a customer base of criminals by making financial activity on Liberty Reserve anonymous and untraceable” [emphasis added]. According to the U.S., the site was used primarily to launder the proceeds of illicit activity.

Liberty Reserve maintained more than 200,000 customers in the U.S., yet never registered with FinCEN.  Moreover, Liberty Reserve required users when opening an account to provide basic identifying information, however, in contravention of Customer Identification Program requirements, did not require users to validate their identity information, therefore, accounts could be (and were) opened easily using fictitious or anonymous identities.  Essentially, unverified account holders could use the site to transfer the digital currency, LR, between other unverified accounts holders.

While the indictment laid out Liberty Reserve operation, the The Wall Street Journal provided the following demographic on explaining a virtual currency exchange:

LR_WSJ

Accounts were funded using exchangers, third party entities that maintained bulk quantities of LR that were purchased using traditional funding methods.  The exchangers operated as unlicensed money transmitters.  Technically, the design was to layer funds from the point of origin (traditional funding such as cash or wire transfers) through the exchangers into a digital currency, and then the digital currency could be used to purchase illicit goods or just withdrawn out of Liberty Reserve using a different exchanger.   To add to the layering, account holders had the option to pay a “privacy fee” of $0.75 per transaction to shield their account number when transferring funds.  Unverified users plus a nominal fee to add anonymity to transactions screamed open season for illicit activity.

Liberty reserve is an egregious example of operating an unlicensed money service business, let alone one strategically designed for the criminal element.  An often overlooked component of centralized virtual currencies is that once the administrator of the currency that has been placed into circulation ceases to exist, so does the value of maintaining such currency…