How NOT to Launder a Billion Dollars

Government Cracks Down on Digital Currencies

Written by Jimmy Mengel
Posted May 31, 2013

In this country, there are two ways to operate a criminal enterprise: totally underground or hiding in plain sight. 

Liberty Reserve has learned the hard way that if you want to launder billions of dollars for criminals, you had better choose the latter.

The currency company just got nailed for washing $6 billion worth of criminal funds through their secretive online currency.

In case you're wondering, theirs was a relatively simple scheme...

Here's how it worked: You opened an account with Liberty Reserve using a fake name and email address. You sent your U.S. dollars to an unregulated currency exchange in Russia, Nigeria, or Vietnam, where the unscrupulous currency exchanger coverts your dollars to LRs, Liberty Reserve's online currency.

Those LRs were then transferred to another Liberty Reserve member in return for drugs, stolen credit card numbers, or any other type of illegal item or service. The recipient was then sending their ill-gotten gains to the unregulated currency exchange, who converted the LRs back into dollars.

Liberty Reserve made its money by charging users 1% transaction fees and $0.75 "privacy fees" to facilitate the exchanges. This scheme allowed “the bank of choice for the underworld” to conduct 55 million transactions for its one million users before getting busted.

This is one of the biggest money-laundering schemes ever hatched — and the founders of Liberty Reserve, Arthur Budovsky and Vladimir Kats, now find themselves facing what could be decades in prison.

Some of the their more clownish clients actually opened up accounts with names like “Russian Hackers” and “Hacker Account.” Cute.

Here's the type of criminals that were using Liberty Reserve:

  • Traffickers of stolen credit card data and personal identity information

  • Peddlers of various types of online Ponzi schemes

  • Computer hackers for hire

  • Unregulated gambling enterprises

  • Underground drug-dealing websites

  • Child pornographers

Not necessarily the most endearing of folks, to be sure...

However, these thugs don't look so bad when compared to the actions of “legitimate” superbanks like HSBC.

Too Big to Jail

Here's a rundown of HSBC's crimes:

  • Illegally conducted transactions on behalf of Mexican drug lords and terrorists

  • Moved tainted money for Saudi banks tied to terrorist groups

  • Illegally catered to customers in Cuba, Iran, Libya, Sudan, and Burma — countries that are all blacklisted by U.S. sanctions

And these mega-laundering schemes weren't the work of some renegade HSBC employee...

Investigations all pointed to senior bank officials complicity in the activities. Hell, one HSBC exec actually argued that they should continue working with the Saudi Al Rajhi Bank, which has knowingly supported Al Qaeda!

Now I don't want to split hairs here, but doesn't the whole funding terrorism thing AUTOMATICALLY require a jail sentence for somebody?

If you or I so much as donate money to a charity that is found to have ties to terrorism, we'd be stretched over the rack quicker than you can say "Patriot Act"...

"Given that over 35,000 people were brutally slain in Mexico at the hands of drug traffickers while HSBC laundered at least $880m of their money, it's shocking that the current system of sanctions does not include senior executives being held personally responsible for the actions of their institutions,” Stuart McWilliam of Global Witness told the Guardian.

“Is HSBC too big to jail?" McWilliam asks. It certainly seems that way. HSBC has around 7,200 offices in 85 countries around the world. They cater to roughly 89 million customers and claims assets of $2.69 trillion.

As of last year, it was the world's sixth-largest public company and the single largest bank in terms of assets, according to Forbes. These guys make Liberty Reserve look like a child's piggy bank.

And yet not one person involved went to jail.

In fact the Justice Department came out and straight up admitted that their hands were tied.

U.S. Attorney General Eric Holder made this maddening confession to the Senate Judiciary Committee:

I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.

In a delicious bit of irony, the Wall Street Journal, while describing the Liberty Reserve case, contended: “Law enforcement officials are concerned about criminals ability to move around money outside of the regulated world of banks.

What they really mean is if you want to launder money, you had better give the big banks a large enough cut in order to protect your identity.

Paying for protection: an old school racket if I ever saw one.

The Italian mafioso called it pizzo... We call it international finance.

Bitcoin, We're Coming for You

My first thought when I heard about the Liberty Reserve case?

Bitcoin, you'd better watch out. 

“I think is just another giant, flashing warning light to bitcoin exchanges: If you are not compliant, there are some serious risks, both at the federal and state levels,” said Patrick Murck, legal counsel for the Bitcoin Foundation.

The government actually tapped the Patriot Act for the first time in such a case in order to take Liberty Reserve down. It may allow them to set up a precedent for eventually taking down Bitcoin.

But Bitcoin does have some crucial differences working in its favor...

For one, it is a decentralized organization — so while the Feds could easily target Liberty Reserve founder Arthur Budovsky, there's no head to chop off at Bitcoin.

From Timothy Lee at the Washington Post:

There’s also at least one important difference between Bitcoin and Liberty Reserve: If the authorities concluded that Bitcoin were a money laundering scheme, it’s not clear whom they’d prosecute. There’s no Budovsky for Bitcoin. Rather, the online currency was created by “Satoshi Nakamoto,” widely regarded as a pseudonym. Bitcoin transactions are processed in a distributed fashion by thousands of “miners” around the world. It would be difficult for the United States to indict all of them, and doing so would likely drive Bitcoin mining underground — which could make it even more attractive to criminals.

That sprawling, decentralized network would create a dilemma for federal regulators if former Liberty Reserve users switched to Bitcoin. The crypto currency doesn’t fit well into existing money-laundering laws, and there’s no one who can be required to reform the network to bring it into compliance. Trying to shut down Bitcoin could prove futile — the feds can make life hard for individual Bitcoin users but likely could not destroy the network altogether.

So keep your eyes peeled, bitcoin holders. It looks as though you'll be the ones taking the brunt in the face of another government crackdown.

Dirty Laundry

The moral of this story is if you want to launder money, for whatever purpose, you had better do so with a too-big-to-jail bank. Otherwise, the long arm of the law will come down swiftly.

While Liberty Reserve's owners and operators will most certainly meet the business end of a judge's gavel in the coming months, HSBC's higher-ups are made in the shade...

HSBC's investors just reelected chief executive Stuart Gullivar as a director by a 99.7% margin. Gulliver also raked in $3 million in annual bonuses while nailing down a sweet incentive plan that would net him another $4.5 million over the long term.

Sure beats a concrete prison cell.

Alas, it's just another day in the international criminal cartel we call the banking industry.

As it turns out, liberty is reserved for the Insiders.


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