Panic spread on the Internet as word about Arthur Budovsky Belanchuk’s arrest reached users of his digital currency business Liberty Reserve, which was shut down on Thursday.
Budovsky, 39, was arrested on Friday in Spain as part of a money laundering investigation performed jointly by police agencies in the United States and Costa Rica. U.S. officials likely will seek his extradition.
Costa Rican prosecutor José Pablo González said Budovsky, a former U.S. citizen and naturalized Costa Rican of Ukrainian origin, has been under investigation since 2011 in Costa Rica for suspected money laundering using apparent shell companies he created to run Liberty Reserve.
Budovsky relocated to Costa Rica after he and partner Vladimir Kats were indicted on July 27, 2006, in New York on charges of operating an illegal financial business, GoldAge Inc. – a precursor to Liberty Reserve – from their Brooklyn apartments, according to the U.S. Justice Department. U.S. officials said the two had transmitted at least $30 million to digital currency accounts worldwide since beginning operations in 2002.
Budovsky and Kats were sentenced to five years in prison in 2007 for engaging in the business of transmitting money without a license, a felony violation of state banking law. They received five years probation.
Officials have not commented on how much money Liberty Reserve accounts handled (in U.S. dollars and euros), nor how many clients are affected by its closing. But those numbers could be higher than in the GoldAge case. As news circulated of Budovsky’s arrest and the shuttering of Liberty Reserve’s website, anxious clients took to chat rooms and Twitter hoping for information on the fate of their funds, some commentators claiming losses of $50,000 or more.
Neither Costa Rican nor U.S. officials have commented on the apparent seizure of the site and the fate of likely millions of dollars of funds, and with a long holiday weekend in the U.S., it’s not clear when those answers will begin to emerge.
The Costa Rican daily La Nación reported that Budovsky, a naturalized Costa Rican, renounced his U.S. citizenship last year, after the joint investigation of Liberty Reserve began. The Tico Times could not independently verify that information, as Costa Rican government agencies are closed for the weekend.
In 2011, Costa Rica’s financial regulatory authority, the Financial Institution Superintendency (SUGEF), closed the company Liberty Reserve, citing a lack of transparency and accounting of funding sources, La Nación reported.
However, Budovsky continued operating the site in conjunction with other Costa Rican corporations, including Silverhand Solutions and Technology S. A, Worldwide E-Commerce Business S .A., Grupo Lulu Limitada, Triton Group A and A, S. A. and Cyberfuel.com.
The same year SUGEF ordered Liberty Reserve closed, U.S. prosecutors based in New York asked Costa Rican officials to begin investigating Budovsky and his companies. On Friday, San José prosecutors raided Budovsky’s home and offices in Escazú and Santa Ana, southwest of San José, and in the province of Heredia, north of the capital.
Investigators allege that Budovsky’s businesses in Costa Rica were used to launder funds from child pornography websites and drug trafficking.
Both GoldAge and Liberty Reserve operated under a similar system, allowing users to nearly anonymously open accounts with limited documentation of identity. Deposits are backed by gold and other precious metals, and customers could withdraw money by requesting wire transfers to accounts anywhere in the world or by having checks sent to individuals.
U.S. officials have targeted companies like GoldAge and Liberty Reserve for years, saying they are hotbeds for criminal activity including money laundering, drug trafficking and tax evasion.
“The ability to conduct transactions in digital currencies is constantly available, making digital currencies more convenient than other methods of funds transfer, which may be limited by normal business hours and international time zones. Additionally, digital currency transactions can be conducted from any location or device with Internet access,” a 2008 report by the U.S. National Drug Intelligence Center stated.
“Because most digital currencies are denominated into internationally recognized weights of precious metals, inconveniences traditionally associated with international financial transactions, such as calculating international exchange rates for another nation’s currency, are eliminated,” the report added.
Liberty Reserve, which operated without oversight from any global agency, was a convenient tool for foreign currency brokers, as it allowed them to bypass local legislation and avoid exchange rate fluctuations, particularly in developing countries. It was also a popular payment processing site for the multilevel marketing industry. But its lack of oversight also attracted organized criminal elements, prosecutors said.
“Payment in digital currencies makes it easier for traffickers to launder funds that no longer need to be placed into the traditional financial system. Payment can be immediately forwarded to an international digital currency account, perhaps in payment to the original source of supply, or further layered through multiple digital currency accounts and exchangers until reintegrated into the legitimate economy,” the National Drug Intelligence Center stated.
To open a Liberty Reserve account, users needed only to submit a name, address, email address, date of birth and occupation.
Forex Magnates, which describes itself as a “specialized forex news and research source,” called Liberty Reserve “the leading payment channel for traders in emerging and frontier markets.”
Citing a broker and analyst in Pakistan, Forex Magnates said, “Forex brokers have been benefiting from Liberty Reserve’s vast access as a payment provider, especially in countries where traders face difficulties in transferring funds. Liberty Reserve was a ‘gift’ for several traders, especially after the State Banks’ (State Bank of Pakistan) changes to international money transfers.”
Online reaction has also come from Nigeria, Malaysia and other countries.
On Saturday, digital payment site PerfectMoney.com announced it was no longer accepting U.S. citizens as customers, posting the following message: “We bring to your attention that due to changes in our policy we forbid new registrations from individuals or companies based in the United States of America. This includes US citizens residing overseas. If you fall under the above mentioned category or a US resident, please do not register an account with us.”
Other cybercurrency companies, particularly Bitcoin, are already positioned to take advantage of the possible demise of companies like Liberty Reserve.
According to cybercrime expert Brian Krebs, domain registration records for Liberty Reserve and several other digital currency exchanges on Friday began pointing to Shadowserver.org, an organization that fights global computer crime.
“The trouble started on Thursday,” Krebs writes, “when libertyreserve.com inexplicably went offline. The outage set off increasingly anxious discussions on several major cybercrime forums online, as many that work and ply their trade in malicious software and banking fraud found themselves unable to access their funds.”
Krebs’ story cites one hacker who said the Liberty Reserve shutdown “could be the most massive ownage in the history of e-currency.”
One strong indication that the action against the site – along with at least five other digital currency exchanges – may have originated from U.S. law enforcement is that domain name servers for Liberty Reserve were changed and pointed to ns1.sinkhole.shadowserver.org and ns2.sinkhole.shadowserver.org. The sites milenia-finance.com, asiangold.com, exchangezone.com, moneycentralmarket.com and swiftexchanger.com also were directed to shadowserver. Shadowserver.org helps Internet providers target malware, but it also helps U.S. law enforcement cybercrime divisions.
Krebs reported that shadowserver.org suffered a botnet attack over the weekend, possibly in retaliation by hackers who lost funds.
Some Liberty Reserve users, however, are hoping for a different explanation, perhaps that Liberty Reserve competitors attacked the site. In the meantime, they can only sit and wait for updates, frantically clicking refresh on www.libertyreserve.com.
“[M]illions of client of Liberty reserve now worried for money around the world , plz give few more info..LR site is down now,” one anxious reader posted on The Tico Times Facebook page.
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Story updated May 26 at 9 p.m.