Notice of Finding That Liberty Reserve S.A. Is a Financial Institution of Primary Money Laundering Concern, 34169-34173 [2013-12944]
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Federal Register / Vol. 78, No. 109 / Thursday, June 6, 2013 / Notices
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Authority: 12 U.S.C. 1834a, 4703, 4703
note, 4713; 12 CFR part 1806.
Dated: May 31, 2013.
Donna J. Gambrell,
Director, Community Development Financial
Institutions Fund.
[FR Doc. 2013–13417 Filed 6–5–13; 8:45 am]
BILLING CODE 4810–70–P
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
Notice of Finding That Liberty Reserve
S.A. Is a Financial Institution of
Primary Money Laundering Concern
Financial Crimes Enforcement
Network (FinCEN), Treasury.
ACTION: Notice of finding.
AGENCY:
This document provides
notice that, pursuant to the authority
contained in 31 U.S.C. 5318A, the
Director of FinCEN found on May 28,
2013, that Liberty Reserve S.A. (Liberty
Reserve) is a financial institution
operating outside the United States that
is of primary money laundering
concern.
SUMMARY:
The finding referred to in this
notice was effective as of May 28, 2013.
FOR FURTHER INFORMATION CONTACT:
FinCEN, (800) 949–2732.
SUPPLEMENTARY INFORMATION:
DATES:
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I. Statutory Provisions
On October 26, 2001, the President
signed into law the Uniting and
Strengthening America by Providing
Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the
USA PATRIOT Act), Public Law 107–
56. Title III of the USA PATRIOT Act
amends the anti-money laundering
provisions of the Bank Secrecy Act
(BSA), codified at 12 U.S.C. 1829b, 12
U.S.C. 1951–1959, and 31 U.S.C. 5311–
5314, 5316–5332, to promote the
prevention, detection, and prosecution
of international money laundering and
the financing of terrorism. Regulations
implementing the BSA appear at 31 CFR
Chapter X. The authority of the
Secretary of the Treasury (the Secretary)
to administer the BSA and its
implementing regulations has been
delegated to the Director of FinCEN.
Section 311 of the USA PATRIOT Act
(Section 311), codified at 31 U.S.C.
5318A, grants the Secretary the
authority, upon finding that reasonable
grounds exist for concluding that a
foreign jurisdiction, financial
institution, class of transaction, or type
of account is of ‘‘primary money
laundering concern,’’ to require
domestic financial institutions and
financial agencies to take certain
‘‘special measures’’ to address the
primary money laundering concern. The
Secretary has delegated this authority
under Section 311 to the Director of
FinCEN.
On May 28, 2013, the Director of
FinCEN found that Liberty Reserve S.A.
(Liberty Reserve) is a financial
institution operating outside the United
States that is of primary money
laundering concern. The Director
considered the factors discussed below
in making this determination.
II. The Extent to Which Liberty Reserve
Has Been Used To Facilitate or Promote
Money Laundering in or Through Costa
Rica and Internationally
Liberty Reserve is a Web-based money
transfer system, or ‘‘virtual currency.’’ It
is a financial institution currently
registered in Costa Rica and has been
operating since 2001. Liberty Reserve’s
system is structured so as to facilitate
money laundering and other criminal
activity, while making any legitimate
use economically unreasonable. The
Department of Justice is taking criminal
action against Liberty Reserve and
related individuals.
Liberty Reserve uses a system of
internal accounts and a network of
virtual currency exchangers to move
funds. Operating under the domain
name www.libertyreserve.com, it
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to maintain Dollar for Dollar and Euro
for Euro reserves to back their virtual
currencies.
To withdraw funds, the user instructs
Liberty Reserve to send funds from the
user’s Liberty Reserve account to a
Liberty Reserve exchanger, which then
sends a bank wire, MSB transfer, or
other transfer method to the user’s or
recipient’s bank account in U.S. dollars
or other major currencies. The
exchangers are independent MSBs
operating around the world. They
charge a commission on each transfer to
and from the Liberty Reserve system.
Once funded, the Liberty Reserve
virtual currency can be transferred
among accounts within the Liberty
Reserve system. The transfers are
anonymous, and the recipient only sees
the account number from which the
funds were transferred. For an
additional fee, even that information
can be eliminated for greater anonymity.
A. History and Ownership
According to reporting of a
Planetgold.com interview in 2003 with
Arthur Budovsky, who founded the
company, Liberty Reserve was then
based in Nevis and began as a private
exchange system for import/export
businesses. In 2002, Budovsky and
another individual, Vladimir Kats, set
up several other companies, including
GoldAge Inc., according to the New
York County District Attorney’s Office.
GoldAge served as a prominent
exchanger for E-Gold, a gold-based
virtual currency system. E-Gold was
charged with money laundering and
operating an illegal MSB, and pled
guilty in 2008. Similar to how Liberty
Reserve operates, customers opened
online GoldAge accounts with only
limited identification documentation
and then could choose their method of
payment, including wire transfers, cash
deposits, postal money orders, or
checks, to GoldAge to buy digital goldbased currency. GoldAge customers
could withdraw their funds by wire
transfers to anywhere in the world or by
having checks sent to an individual.
In March 2004, Liberty Reserve’s Web
site indicated that it was operating out
of Brooklyn, New York. In May 2006,
Liberty Reserve was re-registered in
Costa Rica. In July 2006, Budovsky and
Kats were indicted by the state of New
York for operating an illegal money
transmitting business, GoldAge, out of
their Brooklyn apartments. By that date,
the defendants had transmitted at least
$30 million through GoldAge to digital
currency accounts globally since 2002.
Budovsky pled guilty and was
sentenced to five years of probation.
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B. Liberty Reserve Seeks Out
Jurisdictions With Weak Regulatory
Environments
According to the 2012 International
Narcotics Control Strategy Report
(INCSR) prepared by the U.S.
Department of State, money laundering
in Costa Rica occurs across the formal
and non-formal financial sectors,
especially via both licensed and
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maintains accounts for registered users.
Users fund their accounts by ordering a
bank wire or money services business
(MSB) transfer to the bank of a Liberty
Reserve exchanger. Users can also fund
Liberty Reserve accounts by depositing
cash, postal money orders, or checks
directly into the exchanger’s bank
account. The exchanger then credits a
corresponding value to the user’s
Liberty Reserve account, denominated
in ‘‘Liberty Reserve Dollars’’ or ‘‘Liberty
Reserve Euros.’’ Liberty Reserve claims
Federal Register / Vol. 78, No. 109 / Thursday, June 6, 2013 / Notices
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unlicensed money remitters. According
to the 2013 INCSR, although Costa Rica
continues to take steps to enforce its
financial and non-financial regulatory
regimes to prevent and detect money
laundering, money remittance services
remain a sector of particular concern.
The INCSR notes that ‘‘Costa Rica is
primarily used by foreign organizations
as a bridge to send funds to and from
other jurisdictions using bulk cash
shipments and companies or financial
institutions located offshore.’’
The 2007 INCSR noted that ‘‘[r]eforms
in 2002 to the Costa Rican
counternarcotics law expand the scope
of anti-money laundering regulations,
but also create an invitation to launder
funds by eliminating the government’s
licensing and supervision of casinos,
jewelers, realtors, attorneys, and other
nonbank financial institutions.’’ While
some progress has made been since that
time, regulation of this sector remains a
concern. Thus, when Liberty Reserve
moved its registration to Costa Rica in
2006, Costa Rica was commonly known
to have inadequate regulation of nonbank financial institutions, including
MSBs and internet businesses.
In October 2007, Liberty Reserve’s
official blog explained that registering in
Costa Rica allowed the company to
avoid U.S. authorities because Costa
Rica does not have a mutual legal
assistance treaty with the United States.
Taken together, these facts suggest that
Liberty Reserve has specifically sought
out jurisdictions with weak anti-money
laundering controls and apparent
immunity from U.S. prosecution.
C. Liberty Reserve Is Designed To
Facilitate Money Laundering and Illicit
Finance
To open an account through the
Liberty Reserve Web site, a user is asked
to enter basic identifying information,
such as name, email address, and date
of birth. Liberty Reserve does not
require users to validate any of that
information. Users are also able to open
as many accounts as they want. Liberty
Reserve requires only a working, even if
anonymous, email address. Once a user
has an account with Liberty Reserve, its
anti-money laundering policy (AML
policy) does not suggest that it either
requires or verifies any information
associated with any transaction.
This lack of customer due diligence
means that the accounts can be entirely
anonymous and thus that account
holders can transfer funds to or from
anywhere with anyone with anonymity.
Indeed, Liberty Reserve advertises this
fact as a virtue of the service. The
deliberate lack of verification makes
Liberty Reserve a particularly attractive
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money transfer system for criminal
clientele seeking to launder their
criminal proceeds, to move funds to or
from sanctioned jurisdictions and
entities, or to finance terrorism
internationally. Forcing users to deposit
or withdraw funds through exchangers
creates another layer of anonymity in
the system. To offer even more
anonymity, Liberty Reserve provides an
option, for an additional fee, to conceal
the sole identifier of origin, the
originator’s account number, in
transactions.
Liberty Reserve’s AML policy, issued
in 2010, states that it is illegal for
Liberty Reserve, ‘‘its employees, agents
or exchangers to knowingly engage, or
attempt to engage in a monetary
transaction in criminally derived
property.’’ It also states that it is illegal
to ‘‘transport, transmit or transfer, or
attempt to transport, transmit or transfer
a monetary instrument or funds in
excess of $10,000 . . . either into or out
of Costa Rica and/or any other countries
with similar legislation if the purpose is
to carry out an illegal activity, or to
avoid reporting requirements.’’ Its
citation to these requirements
demonstrates that Liberty Reserve is
well aware of anti-money laundering
laws. However, even having
acknowledged that these activities are
illegal in many jurisdictions in which
they operate, and that they are aware of
applicable laws and regulations in
multiple jurisdictions, Liberty Reserve
has structured its business to separate
itself from knowledge that would allow
it to detect money laundering. Indeed,
the fact that Liberty Reserve has only a
statement in its policy, with no
implementation to address anti-money
laundering concerns or requirements, is
so deficient that it would not comply
with any implementation of
internationally accepted anti-money
laundering requirements, such as the
standards recommended by the
Financial Action Task Force.
Liberty Reserve’s AML policy
provides less than one page regarding
what Liberty Reserve considers a
sufficient response to its risk for money
laundering activity and its legal
requirements. The only component of
the policy that addresses any due
diligence requirement indicates that the
obligation is transferred entirely to the
exchangers. The AML policy states that
Liberty Reserve will verify the identity
of the exchangers and request from them
‘‘a compromise to verify the identity of
their direct clients.’’ Whatever this is
intended to mean, there is no evidence
that Liberty Reserve requires the
accredited exchangers to engage in any
such customer verification. To the
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34171
contrary, exchangers with which Liberty
Reserve continues to work appear to
have no or minimal verification or
monitoring of clients; for example, some
have no anti-money laundering policy,
and others affirmatively advertise that
they conduct no verification. Many of
them are located in countries with lax
money laundering enforcement. As of
2009, Liberty Reserve had outsourced its
own verification process for new
exchangers to a non-affiliated company
for which at least two U.S. banks have
rejected wires due to money laundering
concerns.
Relying on exchangers to conduct
what little due diligence Liberty Reserve
purports to require enhances the gravity
of Liberty Reserve’s money laundering
risk. A review of publicly available
information on Liberty Reserve’s
exchangers indicates that many of them
do not provide names of contact persons
and obscure the country of their
business registration or physical
location. To further conceal their
ownership, several of the exchangers
registered their domain names through
third-party hosting services, and some
of them used a paid service through
their registrars to hide registration
information from the public. Web site
visitor traffic data on the exchangers’
Web sites showed that most exchangers
appear to serve relatively few customers
and produce little online attention.
Liberty Reserve’s AML policy states
that it will verify the identity of any
direct client of Liberty Reserve
‘‘according to the guidelines of various
jurisdictions.’’ However, Liberty Reserve
appears to have no verification
requirements in practice except for a
working email address. Similarly, its
AML policy mentions requirements to
‘‘train staff continuously on anti-money
laundering regulations’’ and to appoint
a compliance officer responsible for
monitoring and reporting ‘‘any and all
suspicious activities.’’ Based on the
information, or lack of information,
collected by Liberty Reserve, it would
be impossible for Liberty Reserve to
operate an AML compliance program
that complied with commonly required
customer due diligence and suspicious
activity reporting requirements.
Liberty Reserve’s AML policy
indicates an understanding of the key
role suspicious activity reporting and
responses play in anti-money
laundering program requirements. The
policy states ‘‘LIBERTY RESERVE is
legally bound to report such
misdemeanors to the relevant
authorities and as such you may be the
[sic] subject to a criminal investigation.’’
Liberty Reserve has structured itself,
however, to ensure that it never has the
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relevant information needed to comply
with any stated obligation.
For all of these reasons, Liberty
Reserve appears designed to facilitate
money laundering and illicit finance.
Funding a Liberty Reserve account,
either through transfers from the owner
of the account or from others, serves to
place funds in the nominally legitimate
stream of commerce. The anonymous
nature of Liberty Reserve means such
placement can be performed by anyone
from anywhere using funds of any
origin. Transfers within Liberty
Reserve’s system, which can be made
between any accounts without record or
identification, serve to structure and
layer movement of funds such that, even
if the initial placement can be traced,
subsequent movement cannot. The ease
and anonymity of account opening
means that such movement could easily
occur among accounts owned by a
single person or entity, completely
obscuring the origin of funds that leave
the system, creating a one-stop money
laundering system.
D. Liberty Reserve Is Regularly Used To
Store, Transfer, and Launder Illicit
Proceeds
Liberty Reserve is used extensively by
criminals to store, transfer, and launder
illicit proceeds, including through U.S.
financial institutions. Information
available to the U.S. government shows
frequent wire transfer activity to or from
Liberty Reserve that indicates money
laundering, in that: (1) The legitimate
business purpose, source of funds, and
validity of the wire transactions could
not be determined or verified; (2) little
or no identifying information appeared
in wire transaction records regarding the
ultimate originators or beneficiaries
such as addresses, telephone numbers,
or identification numbers, with only
Liberty Reserve in the ‘‘reference’’ field,
suggesting an attempt to conceal the
identities of the involved parties; (3)
transactions involved unidentified
entities located and/or banking in
jurisdictions considered vulnerable or
high-risk for money laundering
activities; and (4) transactions involved
large, round-dollar, repetitive
international wire transfers sent to the
same Liberty Reserve exchanger.
Information available to the U.S.
government suggests frequent use of
Liberty Reserve by criminals to receive,
send, or launder funds. For example:
• A U.S. resident, on instructions
from an individual allegedly involved in
online fraud, sent over $150,000 in
possible stolen funds to the individual
through a Liberty Reserve account set
up in the resident’s name.
• Several persons reportedly utilized
a scheme involving identity theft to
create multiple fraudulent corporate
accounts with an online broker/dealer
and funded the accounts with over
$250,000 in allegedly stolen funds. They
then ordered over $100,000 in an
unspecified number of international
wire transfers to be credited to a
specified Liberty Reserve account
number.
• A contact for an international
company sent over $1.3 million in
dozens of large, round-dollar, repetitive
international wire transfers to a Liberty
Reserve account in mid- to late-2012.
The individual was possibly using a
personal bank account to conduct these
business transactions, an indicator of
potential money laundering.
• According to a news article in The
Times of India, two individuals in
Rajasthan, India were arrested in March
2013, for abducting and killing an
individual they targeted through an
online social networking site. The
kidnappers demanded that ransom
money be paid to their Liberty Reserve
account. A cyber security expert cited in
the news article stated that the
kidnappers chose to use Liberty Reserve
to execute their crimes because the
system requires no proof of
identification for the depositor or the
recipient of funds, and Liberty Reserve
will not disclose the internet protocol
address of the recipient, which would
aid law enforcement efforts.
• A facilitator of a foreign extremist
group in 2013 held a Liberty Reserve
account, which may have been used to
collect funds for the group.
• One cybercriminal forum, the
contents of which were recently made
public, has long served as a point of sale
for cybercriminal wares, including
exploit kits, spam services, ransom-ware
programs, botnets, and key-logging
services, payable via Liberty Reserve.
• One hacker, who only accepts
Liberty Reserve as payment, offered to
sell the source code to ‘‘Winlocker,’’ an
application to secure a computer with a
password.
• One hacker claimed to have access
to and control over several top dot-gov,
dot-mil and dot-edu Web sites. The
hacker also purported to sell personally
identifiable information from hacked
sites, for $20 per 1,000 records. These
services were payable only via Liberty
Reserve.
• As of February 2011, the source
code for the latest version of the ZeuS
banking Trojan, the preeminent
cybersecurity threat used to steal bank
account information, was available on
an online criminal forum for a reported
$100,000, payable only through Liberty
Reserve.
E. Liberty Reserve Is Not Designed For
Legitimate Use
Transfers made through Liberty
Reserve currency cost considerably
more than transactions made through
comparable services, providing a
significant disincentive for legitimate
users. For example, a $10,000 transfer
using Liberty Reserve would cost
approximately $248 to $1,946 in fees.
Transferring $10,000 through a
comparable direct bank wire or MSB
transfer costs approximately $40 to
$200. The below chart illustrates some
costs involved with a Liberty Reserve
transfer, where, for example, Person A
has $10,000 to move from a U.S. bank
to Person B’s bank account in another
country through Liberty Reserve:
Process step
Cost
1. Person A wires money from a bank account to an exchanger ..........
Varies. $45 is an approximate average.
Ranges from 1%–10%, with possible flat fees associated with
transaction.
1% of transfer to receive money,
up to a maximum of $2.99.
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2. Exchanger charges fee to convert USD into Liberty Reserve funds
and places funds in Person A’s Liberty Reserve account.
3. Person A instructs Liberty Reserve to move funds from his account
to Person B’s Liberty Reserve account.
4. Person B sends Liberty Reserve funds to exchanger to convert to
USD and send to Person B’s bank account.
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Charges
Ranges from 1%–10%, with possible flat fees associated with
transaction.
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$45.
At 1%: $99 charge.
At 5%: $497 charge.
At 10%: $995 charge.
$2.99. Users can also pay an optional privacy fee to remove
their account number from internal transfers.
At 1%: $98 charge.
At 5%: $472 charge.
At 10%: $896 charge.
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Process step
Cost
5. Person B receives funds in his bank account ....................................
........................................................
Liberty Reserve also is a completely
irrevocable payment system and digital
currency. The fact that the transactions
are irrevocable, meaning that they
cannot be reversed or refunded in the
event of fraud, makes it a highly
desirable system for criminal use and a
highly problematic one for any
legitimate payment functions.
Revocability protects merchants and
users from fraud and is a common
feature of legitimate payment systems.
Despite the security precautions that
make it secure for illicit use, funds
reportedly have been stolen from user
accounts, making it even less attractive
to any potential licit users. The
company has been unresponsive to
these customer complaints.
III. The Extent to Which Liberty
Reserve Is Used for Legitimate Business
Purposes in Costa Rica
FinCEN has found no evidence that
Liberty Reserve is used in Costa Rica for
any business purpose, legitimate or
otherwise. Costa Rican customers have
no direct access to Liberty Reserve’s
offices. The only access to the business,
anywhere in the world, is through its
Web site. As noted above, Liberty
Reserve appears to have chosen to locate
itself in Costa Rica because Costa Rica
is commonly known to have inadequate
regulation of MSBs and internet
businesses, and because the location
allowed the company to avoid U.S.
authorities because Costa Rica does not
have a mutual legal assistance treaty
with the United States.
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IV. The Extent to Which This Action Is
Sufficient To Guard Against
International Money Laundering and
Other Financial Crimes
FinCEN’s finding that Liberty Reserve
is an institution of primary money
laundering concern will guard against
the international money laundering and
other financial crimes described above
directly by restricting the ability of
Liberty Reserve to access the U.S.
financial system to process transactions,
and indirectly by public notification to
the international financial community
of the risks posed by dealing with
Liberty Reserve.
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Dated: May 28, 2013.
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement
Network.
[FR Doc. 2013–12944 Filed 6–5–13; 8:45 am]
BILLING CODE 4810–2P–P
DEPARTMENT OF VETERANS
AFFAIRS
[OMB Control No. 2900–0036]
Proposed Information Collection
(Statement of Disappearance) Activity:
Comment Request
Veterans Benefits
Administration, Department of Veterans
Affairs.
ACTION: Notice.
AGENCY:
The Veterans Benefits
Administration (VBA) is announcing an
opportunity for public comment on the
proposed collection of certain
information by the agency. Under the
Paperwork Reduction Act (PRA) of
1995, Federal agencies are required to
publish notice in the Federal Register
concerning each proposed collection of
information, including each proposed
extension of a currently approved
collection, and allow 60 days for public
comment in response to the notice. This
notice solicits comments on information
needed to determine a presumption of
death of a missing Veteran.
DATES: Written comments and
recommendations on the proposed
collection of information should be
received on or before August 5, 2013.
ADDRESSES: Submit written comments
on the collection of information through
Federal Docket Management System
(FDMS) at www.Regulations.gov or to
Nancy J. Kessinger, Veterans Benefits
Administration (20M35), Department of
Veterans Affairs, 810 Vermont Avenue
NW., Washington, DC 20420 or email
nancy.kessinger@va.gov. Please refer to
‘‘OMB Control No. 2900–0036’’ in any
correspondence. During the comment
period, comments may be viewed online
through the FDMS.
FOR FURTHER INFORMATION CONTACT:
Nancy J. Kessinger at (202) 632–8924 or
Fax (202) 632–8925.
SUPPLEMENTARY INFORMATION: Under the
PRA of 1995 (Pub. L. 104–13; 44 U.S.C.
3501–3521), Federal agencies must
SUMMARY:
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Charges
Total cost at 1%: $248.
Total cost at 5%: $1020.
Total cost at 10%: $1946.
obtain approval from the Office of
Management and Budget (OMB) for each
collection of information they conduct
or sponsor. This request for comment is
being made pursuant to Section
3506(c)(2)(A) of the PRA.
With respect to the following
collection of information, VBA invites
comments on: (1) Whether the proposed
collection of information is necessary
for the proper performance of VBA’s
functions, including whether the
information will have practical utility;
(2) the accuracy of VBA’s estimate of the
burden of the proposed collection of
information; (3) ways to enhance the
quality, utility, and clarity of the
information to be collected; and (4)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
the use of other forms of information
technology.
Title: Statement of Disappearance, VA
Form 21–1775.
OMB Control Number: 2900–0036.
Type of Review: Extension of a
currently approved collection.
Abstract: VA Form 21–1775 is used to
gather information from a claimant to
make a decision regarding the
unexplained absence of a Veteran for
over 7 years. The data collected will be
used to determine the claimant’s
entitlement to death benefits.
Affected Public: Individuals or
households.
Estimated Annual Burden: 28 hours.
Estimated Average Burden per
Respondent: 2 hours 45 minutes.
Frequency of Response: One-time.
Estimated Number of Respondents:
10.
Dated: June 3, 2013.
By direction of the Secretary.
Crystal Rennie,
VA Clearance Officer, Enterprise Records
Service, Office of Information and
Technology, U.S. Department of Veterans
Affairs.
[FR Doc. 2013–13430 Filed 6–5–13; 8:45 am]
BILLING CODE 8320–01–P
E:\FR\FM\06JNN1.SGM
06JNN1
]]>Agencies
[Federal Register Volume 78, Number 109 (Thursday, June 6, 2013)]
[Notices]
[Pages 34169-34173]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12944]
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
Notice of Finding That Liberty Reserve S.A. Is a Financial
Institution of Primary Money Laundering Concern
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of finding.
-----------------------------------------------------------------------
SUMMARY: This document provides notice that, pursuant to the authority
contained in 31 U.S.C. 5318A, the Director of FinCEN found on May 28,
2013, that Liberty Reserve S.A. (Liberty Reserve) is a financial
institution operating outside the United States that is of primary
money laundering concern.
DATES: The finding referred to in this notice was effective as of May
28, 2013.
FOR FURTHER INFORMATION CONTACT: FinCEN, (800) 949-2732.
SUPPLEMENTARY INFORMATION:
I. Statutory Provisions
On October 26, 2001, the President signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act),
Public Law 107-56. Title III of the USA PATRIOT Act amends the anti-
money laundering provisions of the Bank Secrecy Act (BSA), codified at
12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-
5332, to promote the prevention, detection, and prosecution of
international money laundering and the financing of terrorism.
Regulations implementing the BSA appear at 31 CFR Chapter X. The
authority of the Secretary of the Treasury (the Secretary) to
administer the BSA and its implementing regulations has been delegated
to the Director of FinCEN.
Section 311 of the USA PATRIOT Act (Section 311), codified at 31
U.S.C. 5318A, grants the Secretary the authority, upon finding that
reasonable grounds exist for concluding that a foreign jurisdiction,
financial institution, class of transaction, or type of account is of
``primary money laundering concern,'' to require domestic financial
institutions and financial agencies to take certain ``special
measures'' to address the primary money laundering concern. The
Secretary has delegated this authority under Section 311 to the
Director of FinCEN.
On May 28, 2013, the Director of FinCEN found that Liberty Reserve
S.A. (Liberty Reserve) is a financial institution operating outside the
United States that is of primary money laundering concern. The Director
considered the factors discussed below in making this determination.
II. The Extent to Which Liberty Reserve Has Been Used To Facilitate or
Promote Money Laundering in or Through Costa Rica and Internationally
Liberty Reserve is a Web-based money transfer system, or ``virtual
currency.'' It is a financial institution currently registered in Costa
Rica and has been operating since 2001. Liberty Reserve's system is
structured so as to facilitate money laundering and other criminal
activity, while making any legitimate use economically unreasonable.
The Department of Justice is taking criminal action against Liberty
Reserve and related individuals.
Liberty Reserve uses a system of internal accounts and a network of
virtual currency exchangers to move funds. Operating under the domain
name www.libertyreserve.com, it
[[Page 34170]]
maintains accounts for registered users. Users fund their accounts by
ordering a bank wire or money services business (MSB) transfer to the
bank of a Liberty Reserve exchanger. Users can also fund Liberty
Reserve accounts by depositing cash, postal money orders, or checks
directly into the exchanger's bank account. The exchanger then credits
a corresponding value to the user's Liberty Reserve account,
denominated in ``Liberty Reserve Dollars'' or ``Liberty Reserve
Euros.'' Liberty Reserve claims to maintain Dollar for Dollar and Euro
for Euro reserves to back their virtual currencies.
To withdraw funds, the user instructs Liberty Reserve to send funds
from the user's Liberty Reserve account to a Liberty Reserve exchanger,
which then sends a bank wire, MSB transfer, or other transfer method to
the user's or recipient's bank account in U.S. dollars or other major
currencies. The exchangers are independent MSBs operating around the
world. They charge a commission on each transfer to and from the
Liberty Reserve system.
Once funded, the Liberty Reserve virtual currency can be
transferred among accounts within the Liberty Reserve system. The
transfers are anonymous, and the recipient only sees the account number
from which the funds were transferred. For an additional fee, even that
information can be eliminated for greater anonymity.
[GRAPHIC] [TIFF OMITTED] TN06JN13.002
A. History and Ownership
According to reporting of a Planetgold.com interview in 2003 with
Arthur Budovsky, who founded the company, Liberty Reserve was then
based in Nevis and began as a private exchange system for import/export
businesses. In 2002, Budovsky and another individual, Vladimir Kats,
set up several other companies, including GoldAge Inc., according to
the New York County District Attorney's Office. GoldAge served as a
prominent exchanger for E-Gold, a gold-based virtual currency system.
E-Gold was charged with money laundering and operating an illegal MSB,
and pled guilty in 2008. Similar to how Liberty Reserve operates,
customers opened online GoldAge accounts with only limited
identification documentation and then could choose their method of
payment, including wire transfers, cash deposits, postal money orders,
or checks, to GoldAge to buy digital gold-based currency. GoldAge
customers could withdraw their funds by wire transfers to anywhere in
the world or by having checks sent to an individual.
In March 2004, Liberty Reserve's Web site indicated that it was
operating out of Brooklyn, New York. In May 2006, Liberty Reserve was
re-registered in Costa Rica. In July 2006, Budovsky and Kats were
indicted by the state of New York for operating an illegal money
transmitting business, GoldAge, out of their Brooklyn apartments. By
that date, the defendants had transmitted at least $30 million through
GoldAge to digital currency accounts globally since 2002. Budovsky pled
guilty and was sentenced to five years of probation.
B. Liberty Reserve Seeks Out Jurisdictions With Weak Regulatory
Environments
According to the 2012 International Narcotics Control Strategy
Report (INCSR) prepared by the U.S. Department of State, money
laundering in Costa Rica occurs across the formal and non-formal
financial sectors, especially via both licensed and
[[Page 34171]]
unlicensed money remitters. According to the 2013 INCSR, although Costa
Rica continues to take steps to enforce its financial and non-financial
regulatory regimes to prevent and detect money laundering, money
remittance services remain a sector of particular concern. The INCSR
notes that ``Costa Rica is primarily used by foreign organizations as a
bridge to send funds to and from other jurisdictions using bulk cash
shipments and companies or financial institutions located offshore.''
The 2007 INCSR noted that ``[r]eforms in 2002 to the Costa Rican
counternarcotics law expand the scope of anti-money laundering
regulations, but also create an invitation to launder funds by
eliminating the government's licensing and supervision of casinos,
jewelers, realtors, attorneys, and other nonbank financial
institutions.'' While some progress has made been since that time,
regulation of this sector remains a concern. Thus, when Liberty Reserve
moved its registration to Costa Rica in 2006, Costa Rica was commonly
known to have inadequate regulation of non-bank financial institutions,
including MSBs and internet businesses.
In October 2007, Liberty Reserve's official blog explained that
registering in Costa Rica allowed the company to avoid U.S. authorities
because Costa Rica does not have a mutual legal assistance treaty with
the United States. Taken together, these facts suggest that Liberty
Reserve has specifically sought out jurisdictions with weak anti-money
laundering controls and apparent immunity from U.S. prosecution.
C. Liberty Reserve Is Designed To Facilitate Money Laundering and
Illicit Finance
To open an account through the Liberty Reserve Web site, a user is
asked to enter basic identifying information, such as name, email
address, and date of birth. Liberty Reserve does not require users to
validate any of that information. Users are also able to open as many
accounts as they want. Liberty Reserve requires only a working, even if
anonymous, email address. Once a user has an account with Liberty
Reserve, its anti-money laundering policy (AML policy) does not suggest
that it either requires or verifies any information associated with any
transaction.
This lack of customer due diligence means that the accounts can be
entirely anonymous and thus that account holders can transfer funds to
or from anywhere with anyone with anonymity. Indeed, Liberty Reserve
advertises this fact as a virtue of the service. The deliberate lack of
verification makes Liberty Reserve a particularly attractive money
transfer system for criminal clientele seeking to launder their
criminal proceeds, to move funds to or from sanctioned jurisdictions
and entities, or to finance terrorism internationally. Forcing users to
deposit or withdraw funds through exchangers creates another layer of
anonymity in the system. To offer even more anonymity, Liberty Reserve
provides an option, for an additional fee, to conceal the sole
identifier of origin, the originator's account number, in transactions.
Liberty Reserve's AML policy, issued in 2010, states that it is
illegal for Liberty Reserve, ``its employees, agents or exchangers to
knowingly engage, or attempt to engage in a monetary transaction in
criminally derived property.'' It also states that it is illegal to
``transport, transmit or transfer, or attempt to transport, transmit or
transfer a monetary instrument or funds in excess of $10,000 . . .
either into or out of Costa Rica and/or any other countries with
similar legislation if the purpose is to carry out an illegal activity,
or to avoid reporting requirements.'' Its citation to these
requirements demonstrates that Liberty Reserve is well aware of anti-
money laundering laws. However, even having acknowledged that these
activities are illegal in many jurisdictions in which they operate, and
that they are aware of applicable laws and regulations in multiple
jurisdictions, Liberty Reserve has structured its business to separate
itself from knowledge that would allow it to detect money laundering.
Indeed, the fact that Liberty Reserve has only a statement in its
policy, with no implementation to address anti-money laundering
concerns or requirements, is so deficient that it would not comply with
any implementation of internationally accepted anti-money laundering
requirements, such as the standards recommended by the Financial Action
Task Force.
Liberty Reserve's AML policy provides less than one page regarding
what Liberty Reserve considers a sufficient response to its risk for
money laundering activity and its legal requirements. The only
component of the policy that addresses any due diligence requirement
indicates that the obligation is transferred entirely to the
exchangers. The AML policy states that Liberty Reserve will verify the
identity of the exchangers and request from them ``a compromise to
verify the identity of their direct clients.'' Whatever this is
intended to mean, there is no evidence that Liberty Reserve requires
the accredited exchangers to engage in any such customer verification.
To the contrary, exchangers with which Liberty Reserve continues to
work appear to have no or minimal verification or monitoring of
clients; for example, some have no anti-money laundering policy, and
others affirmatively advertise that they conduct no verification. Many
of them are located in countries with lax money laundering enforcement.
As of 2009, Liberty Reserve had outsourced its own verification process
for new exchangers to a non-affiliated company for which at least two
U.S. banks have rejected wires due to money laundering concerns.
Relying on exchangers to conduct what little due diligence Liberty
Reserve purports to require enhances the gravity of Liberty Reserve's
money laundering risk. A review of publicly available information on
Liberty Reserve's exchangers indicates that many of them do not provide
names of contact persons and obscure the country of their business
registration or physical location. To further conceal their ownership,
several of the exchangers registered their domain names through third-
party hosting services, and some of them used a paid service through
their registrars to hide registration information from the public. Web
site visitor traffic data on the exchangers' Web sites showed that most
exchangers appear to serve relatively few customers and produce little
online attention.
Liberty Reserve's AML policy states that it will verify the
identity of any direct client of Liberty Reserve ``according to the
guidelines of various jurisdictions.'' However, Liberty Reserve appears
to have no verification requirements in practice except for a working
email address. Similarly, its AML policy mentions requirements to
``train staff continuously on anti-money laundering regulations'' and
to appoint a compliance officer responsible for monitoring and
reporting ``any and all suspicious activities.'' Based on the
information, or lack of information, collected by Liberty Reserve, it
would be impossible for Liberty Reserve to operate an AML compliance
program that complied with commonly required customer due diligence and
suspicious activity reporting requirements.
Liberty Reserve's AML policy indicates an understanding of the key
role suspicious activity reporting and responses play in anti-money
laundering program requirements. The policy states ``LIBERTY RESERVE is
legally bound to report such misdemeanors to the relevant authorities
and as such you may be the [sic] subject to a criminal investigation.''
Liberty Reserve has structured itself, however, to ensure that it never
has the
[[Page 34172]]
relevant information needed to comply with any stated obligation.
For all of these reasons, Liberty Reserve appears designed to
facilitate money laundering and illicit finance. Funding a Liberty
Reserve account, either through transfers from the owner of the account
or from others, serves to place funds in the nominally legitimate
stream of commerce. The anonymous nature of Liberty Reserve means such
placement can be performed by anyone from anywhere using funds of any
origin. Transfers within Liberty Reserve's system, which can be made
between any accounts without record or identification, serve to
structure and layer movement of funds such that, even if the initial
placement can be traced, subsequent movement cannot. The ease and
anonymity of account opening means that such movement could easily
occur among accounts owned by a single person or entity, completely
obscuring the origin of funds that leave the system, creating a one-
stop money laundering system.
D. Liberty Reserve Is Regularly Used To Store, Transfer, and Launder
Illicit Proceeds
Liberty Reserve is used extensively by criminals to store,
transfer, and launder illicit proceeds, including through U.S.
financial institutions. Information available to the U.S. government
shows frequent wire transfer activity to or from Liberty Reserve that
indicates money laundering, in that: (1) The legitimate business
purpose, source of funds, and validity of the wire transactions could
not be determined or verified; (2) little or no identifying information
appeared in wire transaction records regarding the ultimate originators
or beneficiaries such as addresses, telephone numbers, or
identification numbers, with only Liberty Reserve in the ``reference''
field, suggesting an attempt to conceal the identities of the involved
parties; (3) transactions involved unidentified entities located and/or
banking in jurisdictions considered vulnerable or high-risk for money
laundering activities; and (4) transactions involved large, round-
dollar, repetitive international wire transfers sent to the same
Liberty Reserve exchanger.
Information available to the U.S. government suggests frequent use
of Liberty Reserve by criminals to receive, send, or launder funds. For
example:
A U.S. resident, on instructions from an individual
allegedly involved in online fraud, sent over $150,000 in possible
stolen funds to the individual through a Liberty Reserve account set up
in the resident's name.
Several persons reportedly utilized a scheme involving
identity theft to create multiple fraudulent corporate accounts with an
online broker/dealer and funded the accounts with over $250,000 in
allegedly stolen funds. They then ordered over $100,000 in an
unspecified number of international wire transfers to be credited to a
specified Liberty Reserve account number.
A contact for an international company sent over $1.3
million in dozens of large, round-dollar, repetitive international wire
transfers to a Liberty Reserve account in mid- to late-2012. The
individual was possibly using a personal bank account to conduct these
business transactions, an indicator of potential money laundering.
According to a news article in The Times of India, two
individuals in Rajasthan, India were arrested in March 2013, for
abducting and killing an individual they targeted through an online
social networking site. The kidnappers demanded that ransom money be
paid to their Liberty Reserve account. A cyber security expert cited in
the news article stated that the kidnappers chose to use Liberty
Reserve to execute their crimes because the system requires no proof of
identification for the depositor or the recipient of funds, and Liberty
Reserve will not disclose the internet protocol address of the
recipient, which would aid law enforcement efforts.
A facilitator of a foreign extremist group in 2013 held a
Liberty Reserve account, which may have been used to collect funds for
the group.
One cybercriminal forum, the contents of which were
recently made public, has long served as a point of sale for
cybercriminal wares, including exploit kits, spam services, ransom-ware
programs, botnets, and key-logging services, payable via Liberty
Reserve.
One hacker, who only accepts Liberty Reserve as payment,
offered to sell the source code to ``Winlocker,'' an application to
secure a computer with a password.
One hacker claimed to have access to and control over
several top dot-gov, dot-mil and dot-edu Web sites. The hacker also
purported to sell personally identifiable information from hacked
sites, for $20 per 1,000 records. These services were payable only via
Liberty Reserve.
As of February 2011, the source code for the latest
version of the ZeuS banking Trojan, the preeminent cybersecurity threat
used to steal bank account information, was available on an online
criminal forum for a reported $100,000, payable only through Liberty
Reserve.
E. Liberty Reserve Is Not Designed For Legitimate Use
Transfers made through Liberty Reserve currency cost considerably
more than transactions made through comparable services, providing a
significant disincentive for legitimate users. For example, a $10,000
transfer using Liberty Reserve would cost approximately $248 to $1,946
in fees. Transferring $10,000 through a comparable direct bank wire or
MSB transfer costs approximately $40 to $200. The below chart
illustrates some costs involved with a Liberty Reserve transfer, where,
for example, Person A has $10,000 to move from a U.S. bank to Person
B's bank account in another country through Liberty Reserve:
------------------------------------------------------------------------
Process step Cost Charges
------------------------------------------------------------------------
1. Person A wires money from a Varies. $45 is an $45.
bank account to an exchanger. approximate
average.
2. Exchanger charges fee to Ranges from 1%- At 1%: $99 charge.
convert USD into Liberty 10%, with At 5%: $497
Reserve funds and places funds possible flat charge.
in Person A's Liberty Reserve fees associated At 10%: $995
account. with transaction. charge.
3. Person A instructs Liberty 1% of transfer to $2.99. Users can
Reserve to move funds from his receive money, up also pay an
account to Person B's Liberty to a maximum of optional privacy
Reserve account. $2.99. fee to remove
their account
number from
internal
transfers.
4. Person B sends Liberty Ranges from 1%- At 1%: $98 charge.
Reserve funds to exchanger to 10%, with At 5%: $472
convert to USD and send to possible flat charge.
Person B's bank account. fees associated At 10%: $896
with transaction. charge.
[[Page 34173]]
5. Person B receives funds in .................. Total cost at 1%:
his bank account. $248.
Total cost at 5%:
$1020.
Total cost at 10%:
$1946.
------------------------------------------------------------------------
Liberty Reserve also is a completely irrevocable payment system and
digital currency. The fact that the transactions are irrevocable,
meaning that they cannot be reversed or refunded in the event of fraud,
makes it a highly desirable system for criminal use and a highly
problematic one for any legitimate payment functions. Revocability
protects merchants and users from fraud and is a common feature of
legitimate payment systems. Despite the security precautions that make
it secure for illicit use, funds reportedly have been stolen from user
accounts, making it even less attractive to any potential licit users.
The company has been unresponsive to these customer complaints.
III. The Extent to Which Liberty Reserve Is Used for Legitimate
Business Purposes in Costa Rica
FinCEN has found no evidence that Liberty Reserve is used in Costa
Rica for any business purpose, legitimate or otherwise. Costa Rican
customers have no direct access to Liberty Reserve's offices. The only
access to the business, anywhere in the world, is through its Web site.
As noted above, Liberty Reserve appears to have chosen to locate itself
in Costa Rica because Costa Rica is commonly known to have inadequate
regulation of MSBs and internet businesses, and because the location
allowed the company to avoid U.S. authorities because Costa Rica does
not have a mutual legal assistance treaty with the United States.
IV. The Extent to Which This Action Is Sufficient To Guard Against
International Money Laundering and Other Financial Crimes
FinCEN's finding that Liberty Reserve is an institution of primary
money laundering concern will guard against the international money
laundering and other financial crimes described above directly by
restricting the ability of Liberty Reserve to access the U.S. financial
system to process transactions, and indirectly by public notification
to the international financial community of the risks posed by dealing
with Liberty Reserve.
Dated: May 28, 2013.
Jennifer Shasky Calvery,
Director, Financial Crimes Enforcement Network.
[FR Doc. 2013-12944 Filed 6-5-13; 8:45 am]
BILLING CODE 4810-2P-P
