Bitcoin Forum

Liberty Reserve shut down for “money laundering”
May.25, 2013 in MLM

liberty-reserve-shut-down-money-laundering-may-2013

There’s a general consensus in the MLM industry that if you see an MLM company using one of three particular payment processors, then at the very least it’s worth taking a precautionary approach.

Payment processors handle money between MLM companies and their affiliates. In an age where global affiliate membership is the norm, payment processors simplify the process in which companies are able to effectively pay their affiliates commissions.

Today Liberty Reserve, easily one of the most frequently used payment processors in the MLM industry, was shut down following the arrest of its creator and owner in Spain.

Following an investigation that began back in 2011, Costa Rican authorities raided the home of and arrested Arthur Budovsky Belanchuk.

Belanchuk is credited as the creator of Liberty Reserve, with Costa Rican prosecutor José Pablo González stating

    Budovsky, a Costa Rican citizen of Ukrainian origin, has been under investigation since 2011 for money laundering using a company he created in the country called Liberty Reserve.

    Local investigations began after a request from a prosecutor’s office in New York. On Friday, San José prosecutors conducted raids in Budovsky’s house and offices in Escazá, Santa Ana, southwest of San José, and in the province of Heredia, north of the capital.

    Budovsky’s businesses in Costa Rica apparently were financed by using money from child pornography websites and drug trafficking.

Liberty Reserve has been a stalwart on the MLM company payment processor scheme, being used extensively by legitimate and dubious income opportunities alike.

Wikipedia lists Liberty Reserve as a member of the Global Digital Currency association (GDCA). Somewhat ironically, GDCA state on their website that they are

    a trade association of online currency operators, exchangers, merchants and users (with a) declared goal to further the interests of the industry as a whole and help with fighting fraud and other illegal activities.

Guess they must have missed all that money laundering going on.

At the time of publication the Liberty Reserve website is down and returning a 503 “service unavailable” error. Meanwhile the status of and what will happen to the money many MLM affiliates had in the e-wallet is not currently known.

There’s a reason most affiliates who have been in the industry for some time are wary when an MLM company uses one of these particular three payment processors, and not surprisingly as above it’s entirely justified.

Using them for the same reasons child pornographers and drug traffickers do, countless scams have funnelled hundreds if not of millions of dollars through them over the years.

Stay tuned for updates if any additional news comes to hand.

from source behindmlm.com

Is this bad news for bitcoin?

i would think it's good news

It will drive up BTC price because people who used LR for "grey" transactions will probably switch to BTC.

The US authorities seized the funds in Mutum Sigilum's Dwolla account because Mutum Sigilum was operating an unregistered money transmitter business.  The registration requirements seek to prevent money laundering, but there was no evdience (at least that I'm aware of) that Mutum Sigilum was actually laundering money.

Liberty Reserve, however, was shut down for reasons on the flip side of that coin: there was evidence that it was actually involved in laundering money.

Is this bad news for BTC? No. 

The real lessons here are: don't launder money (thanks, Liberty!) and register your unlicensed transmitter business (thanks Mutum!).

I am quite concern with this news, a lot of the LR currency involves in hyip and ponzi scheme, many of us thought that the authorities cannot
touch this entity because it is offshore in Costa Rica or Belize? but time has change .. than I wonder why keep your money offshore.. even offshore is not Safe. May be some long time bitcoin members or lawyers can comment about this recent development..  

Now that I look into it a little more deeply, the Liberty guys had already been convicted in 2006 of precisely what Mutum Sigilum was doing: running an unlicensed money transmitter business.  Apparently they did time in prison for it, then when they were released, fled to Costa Rica to start up again.

Source: http://www.ticotimes.net/More-news/News-Briefs/Costa-Rican-arrested-in-Spain-for-alleged-financial-crimes_Friday-May-24-2013 (http://www.ticotimes.net/More-news/News-Briefs/Costa-Rican-arrested-in-Spain-for-alleged-financial-crimes_Friday-May-24-2013)

It seems to me that the authorities didn't have evidence (didn't or couldn't build a case against them) for money laundering the first time around, even though the authorities may have thought they were laundering money.  The second time around, as soon as these guys popped up on their radar, the authorities realized who they were dealing with.  They took their time and built a case for money laundering in addition to violating the money transmitter laws, then busted them for both.

There are plenty of lessons to be learned here, but one aspect of this sticks in my mind: Costa Rica?  Why Costa Rica of all places?  These guys wanted to go somewhere where they couldn't be caught, but they chose one of the most lawful, INTERPOL-friendly jurisdictions in the Americas, only to do business directly with US citizens?  This sounds a little lazy to me - like they knew they should have gone off-grid to a developing nation, but just couldn't leave the supermarket behind.  Criminals these days!

I've opened a topic about this matter:
https://bitcointalk.org/index.php?topic=215887.0

In the USA and Mexico large amount of drugs were traded across the border and exchange with US dollars, now should we shut down the US$ because it was involves with drugs and money laundering? or should we go after the US Government who printed this currency.

Now they shut down LR, they caught the owners of LR, this owners of LR wouldn't care what you do with their digital currency, same thing as the US Government they couldn't care what you do with the US$, what you do with the US$ is an individual thing. I hope they could make a decision not to shut down LR but get the culprits which are the owners. 

The US$ is immortal or untouchable because you cannot shut them down, where as other digital currency can be shut down by them
whenever they felt that it is a threat to their banking system or their currency. Really is kind of a double standard. ;D

Everything that's centralized could quite easily be shut down if the right people pull the plug. And besides Liberty Reserve doesn't have the power of the big banks, they're not too big to fail, and as such they're a fairly easy target.

You can be fairly sure that when kiddieporn and drugs are put forward as an excuse, it's not the real reason. How much kiddieporn is bought worldwide every day with the US dollar? Should we shut down the US dollar then ?

It doesn't help to shut down a service if it's used for illegal purposes. Crime online and offline is like water, it always finds a crack to slip through, and when it's sealed, it finds another crack or makes a news one. The US wants to protect their dollar, and as such it's quite convenient to charge operators of online curriences for all sorts of crimes like money laundering, drugs and all sorts of illegal things.

I wonder how many child molesters drive on the US highways every year. Should we not ban the usage of cars, and to be safe, should we not remove the roads alltogether? After all, having good roads helps the criminals to escape the scene of a crime quickly, so roads should be banned, right, right?

If the govt. want to shut you down, they will. If they can't find something you're in violation of, they just interpret the laws in such a way that you can be targeted anyway, and even if you win, you probably get bankrupt in the legal battle, unless you're a very big company that can afford costly lawyers.

The message they're sending is: Don't fuck with our dollar, we will shut you down!

Also, if they really wanted to reduce the usage of drugs and kiddieporn, they would start educating the population more, and looking for the root causes. People with a bad life and no future often resort to drugs. As for offenders that use children, most people despise that, including myself - it's the lowest of the lowest. But child molesters have all the basic needs that the rest of us have - they need to eat, to use the infrastructure, pay for stuff and of course - get their fix, kiddieporn.

If LR is shut down, this does not cure the few sick souls that create the kiddieporn market, it probably puts a dent in their quest for kiddieporn for a little while, but soon enough they will find new ways to get their fix. If the US Govt really wanted to get rid of kiddieporn and send a message, they would go after the producers of kiddieporn, and the buyers, and send home a strong message that you will never be safe if you decide to act on your urges. There could also be a program you could enroll in that could help would be offenders to control their urges so that they could learn to be good citicens.

The truth is however that for the US govt, human lives are not important - but money is. That's a lesson to take home - but it's the truth.

lol..

http://www.youtube.com/watch?v=kSNZSfwtoKE#t=0m30s


http://i3.imageban.ru/out/2013/05/25/6c66564ab880a5389349211419b26c08.jpg (http://imageban.ru)

http://en.wikipedia.org/wiki/First_they_came...

The nature of a decentralized currency is that it cannot be shut down without shutting down the entire open internet. Exchanges and legal entities with significant presence may be shut down, but there will always be OTC trading.

Unless a bunch of lawyers are willing to research *exceptions/exemptions to the various **economic tyranny/protectionist laws and have retainer agreements that they will defend, pro-bono, non-business bitcoin traders maliciously prosecuted without regard to those*, OTC trading will be a black market where there are**.

The point of protectionism is to make the little guy (OTC traders) go bankrupt if we even try to seek legal counsel and/or comply with the laws.

Judging by your signature portfolio, you are not the little guy and can give slightly less of a fuck than us about prosecution, fines, and asset seizure destroying your life.

good post and great comment ..

Mutum Sigilum was allegedly operating an unregistered money transmitting business, but there isn't much evidence of that either.  The informant in the case only sent money back to himself.  And even if Mutum Sigillum was operating a money transmitting business, it isn't clear that they are subject to the reporting requirements of section 5313 (which triggers the registration requirement) because such reports would be filed by Veridian and Wells Fargo.

The legal issues in this case are a lot more complex than you imply.  If Mutum Sigillum was operating an unlicensed money transmitting business, then arguably Dwolla is too, since Dwolla is having Veridian transmit money for Dwolla's customers.  You might also want to read:

http://k.lenz.name/LB/?p=9369

It is not relevant whether mutum was laundering money. It only matters if mutum was engaged in money transmission (without a license). We already know mutum is not licensed, and neither is mutum's affiliate tibanne co. There is a weakness in the government's case here, though. It is not clear to me that mutum was engaged in money transmission. Tibanne probably is under federal guidelines, because it is an exchanger of virtual currency. Not so sure if mutum meets this standard at the federal level, and would have to look closely at MD state law to see if simply processing payments to/from Dwolla counts under state laws. Just a guess, but is it possible that the feds went after mutum b/c it is the account-holder and they wanted to be able to seize the account immediately? Seems like tibanne would have been the better target, except that it would've required that the gov't prove a couple extra steps between tibanne and mutum to go after any of the US accounts or assets.

You are right to say that the legal issues here are complex.  

That said, I've read your point made before, and, respectfully, it ignores the legal standard for federal agency action.  The DOT and FinCEN are empowered to interpret and apply the laws enacted by the legislature.  The federal courts grant them tremendous deference in that respect.  An individual seeking to challenge that interpretation or application may do so, but when it comes down to courtroom brass-tacks, that person doesn't get to rely upon their hypertechnical, ivory-tower legal analysis of the meaning of the statute.  To successfully challenge an agency decision, for example, the challenger must demonstrate not that the regulation is "wrong", or that it does not technically fit into the powers granted to the agency; such a standard would be easy to meet in many cases. No, the challenger must demonstrate that the  agency decision was "arbitrary or capricious," or in some cases, the agency determination will be upheld if it is "rational and credible".  The standards here are a fuzzy and often overlapping, but they almost always favor the agency.

Thus, the DOT's interpretation of BSA are going to be granted quite a bit of deference.  This won't ultimately matter when it comes to Mutum Sigilum's defense, but it is what matters in the long haul, when the DOT finally gets around to promulgating BTC regulations.

So, were the federal agencies acting "correctly" in taking down Mutum Sigilum?  I'm not sure that it matters.  Will the charges stick? Well, it isn't even clear what the charges will be just yet.  I am sure of one thing, though: it's going to be fun to read the briefs!

Edit: ninja'd!

It will be fun to watch as Bitcoin businesses began scrambling to distance themselves from U.S. citizens. The current examples like SatoshiDice are only the beginning. I don't think it will be long before many businesses realize that it's just not worth it to pick on the biggest bully in the schoolyard. 

I don't think it will go beyond S.Dice. If some site owners will refuse U.S. users, someone else will accept them from USA-unfriendly country like Russia or China.

Unfortunate but true, many offshore banks, payment processors, e-currencies are now refusing to serve US customers.
It won't be long before US citizens are financially locked out of doing business with non US based financial companies.

Perhaps, but I still feel that MtGox needs to leave Japan right now to avoid being caught up in the shitstorm that will happen when the Japanese government is solicited to assist the U.S. justice system. Any U.S. business records recovered from MtGox will be thoroughly researched for possible illegal transactions and if they have cut ties with the U.S. it will make their life easier. Once again, Erik Voorhees shows his business acumen by staying ahead of the curve.

Great news! A huge payment system used by many. Finally the crowd will obviously move to Bitcoin, as it has grown bigger than any non fiat based system ever. I guess its only a matter of time before Bitcoin swallows all non fiat systems. Liberty Reserve was actually the last and biggest of them all standing, now that is gone and it proves once again E-gold, LR and such systems are here to disappear.

Are you sure that the japanese governemnet will allow that?

I went to business school in japan, and I don't think they will.

Could they write new regulations?  Sure, but they haven't done that yet.

Were Mutum Sigilum's actions prohibited under the current rules?  That's not so clear.


The basis of the seizure warrant was 18 USC section 1960.  So that's what we're dealing with right now.  Could the feds add some additional charges?  Sure, but that hasn't happened yet.  You're proposing a lot of hypotheticals, and it's not yet clear how this will play out.

You're right this is going to be an interesting case.

As long as this is the Japanese military I'll have my doubts about the independence of the Japanese government. http://www.stripes.com/news/some-normalcy-returns-to-bases-relief-for-japanese-rolls-in-1.137612 (http://www.stripes.com/news/some-normalcy-returns-to-bases-relief-for-japanese-rolls-in-1.137612)

Thanks all for the sharing , here is some more news : Liberty Reserve Founder Indicted on $6 Billion Money-Laundering ...
Wired-13 hours ago
The founder of digital currency system Liberty Reserve has been indicted in the United States along with six other people in a $6 billion ...

Feds shut down payment network Liberty Reserve. Is Bitcoin next?
Washington Post (blog)-by Ezra Klein-11 hours ago
Federal prosecutors have shut down Liberty Reserve, an alternative payment network that they say was a $6 billion scam “designed to help ...

Note their story on Bitcoin ....>>

Of course, that description could just as easily describe Bitcoin. Anyone can create a new address for accepting bitcoins and then transmit funds to other Bitcoin addresses without furnishing identifying information. This feature has raised concerns that the currency has been used for activities such as drug dealing or illegal gambling.

The U.S. government faults Liberty Reserve for requiring users to fund their accounts through intermediaries called “exchangers.” In the prosecutors’ view, these intermediaries helped the core Liberty Reserve network avoid collecting identifying information about their users. The Bitcoin economy has a similar structure. Users buy bitcoins with conventional currencies via online exchanges. Some of these intermediaries do collect information about their users, but once users have purchased their bitcoins they can conduct unregulated, and practically untraceable, transactions with other Bitcoin users.

For their part, leaders of the Bitcoin community have tried to stay within the bounds of the law. ”If the U.S. government decided that Bitcoin was a bad thing and told me, ‘Stop doing what you’re doing,’ I’d stop doing what I’m doing,” said Gavin Andressen, Bitcoin’s lead developer, in a recent interview.

But there’s also at least one important difference between Bitcoin and Liberty Reserve: If the authorities concluded that Bitcoin were a money laundering scheme, it’s not clear whom they’d prosecute. There’s no Budovsky for Bitcoin. Rather, the online currency was created by “Satoshi Nakamoto,” widely regarded as a pseudonym. Bitcoin transactions are processed in a distributed fashion by thousands of “miners” around the world. It would be difficult for the United States to indict all of them, and doing so would likely drive Bitcoin mining underground — which could make it even more attractive to criminals.

That sprawling, decentralized network would create a dilemma for federal regulators if former Liberty Reserve users switched to Bitcoin. The crypto currency doesn’t fit well into existing money-laundering laws, and there’s no one who can be required to reform the network to bring it into compliance. Trying to shut down Bitcoin could prove futile — the feds can make life hard for individual Bitcoin users but likely could not destroy the network altogether.

Civil libertarians have long lauded the Internet’s ability to resist government’s efforts to control the flow of information. The emergence of Bitcoin could threaten the United States’ ability to control the flow of electronic funds, too.

An indictment! Everyone gets an indictment! [/Oprah]

So that's true? He would just put his work down like that after being picked on by once by the US Govt ? Wonderful... 

That was what he say, but btc has a few developers ya..