[Federal Register Volume 78, Number 109 (Thursday, June 6, 2013)]
[Notices]
[Pages 34169-34173]
From the Federal Register Online via the Government Publishing 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.

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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