BITTER LESSON FOR LIBERTY RESERVE people

Tuesday 28 May 2013 08.32 BST
Liberty Reserve founder arrested in Spain
Arthur Budovsky, who set up digital currency
business, is held as part of money-laundering
investigation involving US
Liberty Reserve lets people discreetly move
large sums of money across borders, experts
say. Photograph: Martin Rogers/Workbook
Stock/Getty Images
Associated Press in Costa Rica
The founder of the Liberty Reserve digital
currency business has been arrested in Spain
on money-laundering charges, Costa Rican
authorities have said.
Officials in the Central American country said
in a statement that Arthur Budovsky had been
detained as part of an investigation that also
involved US authorities.
Police raided three homes and five businesses
linked to the Costa-Rica-based Liberty
Reserve and seized papers and digital
documents that will be turned over to US
authorities, the statement said. A Russian
citizen was also arrested in the case in Costa
Rica on Friday and will be extradited to the
US, it said.
Budovsky, a naturalised Costa Rican citizen,
was detained on Friday. He had renounced his
US citizenship and become a resident and
citizen of Costa Rica, Costa Rican authorities
said.
Liberty Reserve is a company that allows users
to apply for an account by supplying a valid
email address. Once a person signs up for an
account, Liberty Reserve gives them a user
name and an account number and they can
start transferring money around the world,
Costa Rican officials said.
They said the company shut its offices in
Costa Rica in 2011. The website, however, had
continued to operate, although it was offline
on Monday.
According to Costa Rica police, Budovsky was
sentenced in 2007 to five years' probation
after pleading guilty in a New York court to
charges he operated an illegal financial
services business similar to Liberty Reserve.
Liberty Reserve's origins are obscure, but it
had grown into one of the criminal
underworld's best-known electronic currency
systems, used by hackers the world over to
discreetly move large sums of money across
borders, experts say.
Liberty Reserve, which conducted its
transactions in dollars, euros and roubles,
operates as an anonymous, no-questions-asked
alternative to the global banking system, said
Aditya Sood, a computer science doctoral
candidate at Michigan State University who
has studied the electronic currency.
"You don't need to provide your full details, or
personal information, or things like that," he
said in a telephone interview. "There's no way
to trace an account. That's the beauty of the
system."
Offshore currency centres, generally set up in
places beyond the reach of US or European law
enforcement, can serve as middlemen between
criminals and the mainstream financial world,
brokering transactions that turn illegally
obtained money into seemingly legitimate cash.
Sood said that despite prominent disclaimers
warning against money laundering, the
currency centres typically have little in the
way of serious oversight.
"They don't care," he said. "They have no idea
where the money is coming from or where the
money is going. That's how they designed the
model."
Liberty Reserve appears to have played an
important role in laundering the proceeds from
the recent theft of some $45m from two
Middle Eastern banks, according to legal
documents made public by US authorities
earlier this month.
The complaint against one of the Dominican
Republic gang members allegedly involved in
the theft states that thousands of dollars'
worth of stolen cash was deposited into two
Liberty Reserve accounts via currency centres
based in Siberia and Singapore.
The loss of Liberty Reserve has the potential
to cause a "major upheaval" in the cybercrime
economy, said the investigative-journalist-
turned-security-researcher Brian Krebs, who
added in a blogpost that hackers writing in
underground forums were already buzzing with
concern over frozen funds.