Liberty Reserve is not your typical online wallet system. Unlike Paypal
, currently rebranding to Skrill
, Liberty Reserve has no physical backings. There aren't funds in a bank account segregated with the amount in your account. It works as a unit denominated in USD, EURO, or Gold Grams. Funding such an account isn't as easy requiring a payment processing through an exchanger which will typically take the wire transfer, credit card deposit, or such and credit the Liberty Reserve account for the same amount less the transaction fees.
Liberty Reserve has attracted the attention of just about every cyber-criminal in the world with its ability to quickly set up an account with just a name, email address, password, and pin-codes. If you think about it, it is actually possible to remain completely anonymous with such a payment processor. Even IP tracing will prove ineffective if the account was created and accessed via proxies and virtual private networks. The connections will be logged to hundreds of different locations providing no easy means to track the user. Unlike Paypal, Liberty Reserve does not require verification of any kind such as a bank statement, credit card deposits, address verifications, and so on.
However, is every user of this service a cyber-criminal? The answer is no. While the owners of Liberty Reserve, Budovsky and his partner Vladimir Kats, used such service for money laundering, there are many legitimate businesses operating with this system. Some reasons are as followed:
1. Geographic location does not permit certain users to use payment processor such as Paypal. Paypal only recently opened up in Bangladesh, but many countries have yet to receive the same servicing options.
2. Lower fees compared to leading payment processors such as Paypal charging $0.25 + 1% on transactions varying from country to country.
3. Standardized currency expressed in a "unit" which isn't prone to currency fluctuations. The only fluctuation that will occur is when it comes time to cashout.
On Tuesday, the company's website, www.libertyreserve.com
, displayed the message "This domain name has been seized by the United States Global Illicit Financial Team
According to an indictment
filed in U.S. District Court for the Southern District of New York:
Liberty Reserve has emerged as one of the principal means by which cyber-criminals around the world distribute, store and launder the proceeds of their illegal activity.
The indictment said the company had more than a million users worldwide, including at least 200,000 in the United States, and virtually all of its business was related to suspected criminal activity.
It processed around 12 million financial transactions per year. Since it began operating in 2006, the indictment said, Liberty Reserve laundered around $6 billion in criminal proceeds.
It currently remains unclear as to when the two arrested in Brooklyn, New York will appear in court nor whether those arrested in Spain and Costa Rica will be extradited to the United States.
However, on another note, are we one step closer to combating money laundering? The owners of Liberty Reserve were actually previous owners for an exchanger site GoldAge, which came to its end in 2006. Preceding that, it was Storm Pay and e-Gold. While those two were not connected with the owners of Liberty Reserve, it just goes to show how easily one of these sites can be set up and supported by over a million users worldwide.
Are all these users criminals? No, Liberty Reserve gained support and popularity amongst many online services including web domain hosting, server hosting, foreign exchange brokers, and small business owners accepting payments in Liberty Reserve to avoid costly fees.
This, however, does not mean that Liberty Reserve has not been used for money laundering and tax evasion. With this site shut down, it remains uncertain as what the future may hold, especially with the current largest digital currency, Bitcoins
, being a peer network. Controlling a peer network will be significantly harder than a centralized system like Liberty Reserve. Earlier this month, Mt.Gox
, exchanger/ marketplace for bitcoins was fined by Financial Crimes Enforcement Network (FinCEN
) for failing to register and had their US Dollar accounts seized.
It is best to work with an well established payment processor that is backed by a bank rather an intangible digital currency such as Bitcoins.