Liberty Reserve: A cyberweb of intrigue

Flashy cars, lavish gifts, multiple identities and armed Russian henchmen for years appeared to be the modus operandi of two naturalized Costa Ricans and others who ran the now shuttered Liberty Reserve digital currency exchange site (www.libertyreserve.com), the largest money laundering operation in history, according to U.S. officials. They ran the $6 billion operation – which U.S. prosecutors called “the bank of choice for the criminal underworld” – from Costa Rica beginning in 2006, sources say.

On Friday, Spanish police working in conjunction with law enforcement in the United States and Costa Rica arrested Arthur Budovsky, 39, and Azzeddine El Amine, described as a company principal. Costa Rican Allan Esteban Hidalgo Jiménez, aka “Allan Garcia,” and Ahmed Yassine, aka “Alex,” a 42-year-old naturalized Costa Rican from Morocco, are still at large, according to Spain’s National Police and The New York Times, citing a senior U.S. law enforcement official.

Yassine is believed to be in Costa Rica, as a search of immigration records by The Tico Times on Monday showed he had not left the country in several years. A source told The Tico Times that Yassine’s passport was seized in an unrelated criminal case in Costa Rica.

In what U.S. authorities have called the largest money laundering probe ever conducted, a three-count indictment unsealed on Tuesday revealed that Liberty Reserve had moved some $6 billion globally in the past seven years, and was the main destination for money laundered from criminal activity.

The indictment alleges that Budovsky and associates “intentionally created, structured, and operated Liberty Reserve as a criminal business venture, one designed to help criminals conduct illegal transactions and launder the proceeds of their crimes.”

The men are charged with conspiracy to commit money laundering, conspiracy to operate an unlicensed money transmitting business and operation of an unlicensed money transmitting business.

According to Spanish authorities, Budovsky and El Amine were arrested at the Madrid airport, where they had arrived from Morocco in transit to Costa Rica. Budovsky’s longtime partner, Vladimir Kats, was arrested in New York.

U.S. prosecutors said Liberty Reserve processed at least 55 million illegal transactions for at least one million users “and facilitated global criminal conduct.”

Prosecutors also accused Liberty Reserve operators of lying to investigators and attempting to cover up their crimes in Costa Rica.

“The defendants also protected the criminal infrastructure they created by, among other things, lying to anti-money laundering authorities in Costa Rica, pretending to shut down Liberty Reserve after learning the company was being investigated by U.S. law enforcement (only to continue operating the business through a set of shell companies), and moving tens of millions of dollars through shell-company accounts maintained in Cyprus, Russia, Hong Kong, China, Morocco, Spain and Australia,” the indictment said.

According to U.S. prosecutors, the probe involved law enforcement in 17 countries and “is believed to be the largest money laundering prosecution in history.”

Last Friday, police in Costa Rica raided offices and homes linked to Budovsky, a Ukrainian-born former U.S. citizen, in the southwestern San José suburbs of Santa Ana and Escazú and Heredia, north of the capital.

Agents from the money laundering division at Costa Rica’s Judicial Investigation Police and the Prosecutor’s Office’s organized crime unit seized computers, files, three Rolls Royce and Jaguar autos worth half a million dollars, along with other items, according to prosecutors.

A Russian man, Maxim Chukharev, also was arrested, according to a statement issued late Monday afternoon by the Costa Rican Prosecutor’s Office, in response to a Tico Times request. The U.S. is seeking Chukharev’s extradition, the statement said. Neither Chukharev nor his lawyer were available for comment. The indictment handed down on Tuesday accuses Chuckharev and Mark Marmilev of “designing and maintaining Liberty Reserve’s technological infrastructure.”

Costa Rican police searched eight sites on Friday, including the offices of companies managed by Budovsky. Companies searched were Silverhand Solutions & Technology S.A. (Santa Ana), Worldwide E-Commerce Business S.A., or WEBSA (Escazú), Grupo Lulu Limitada (Escazú), Triton Group A & A, S.A. (Escazú) and Cyberfuel.com (Santa Ana). Police also raided two private homes in Santa Ana and one in Heredia, reportedly belonging to Budovsky and associates.

“The raided companies are, in some manner, related to Liberty Reserve. Costa Rican authorities seized documental proof and digital information that will be turned over to the U.S., via international penal assistance,” the Prosecutor’s Office statement said.

On Tuesday, Cyberfuel.com’s owner, Carlos Moreno, told The Tico Times his company is a “victim” of the Liberty Reserve Case.

“We’re a family-run business. We can’t be responsible for what our clients do, just like the banks can’t,” Moreno said. Cyberfuel.com rented space and a constant energy supply to Liberty Reserve, which used the space to maintain two servers that managed internal company emails and communications from users to two domains, including www.libertyreserve.com, according to Moreno and the U.S. indictment. Agents raiding Cyberfuel.com’s office were interested only in Liberty Reserve’s servers, not other information or hardware owned by Cyberfuel.com, and neither Cyberfuel.com nor any of its owners or employees were targeted by the probe, according to a 28-page search warrant issued by a Costa Rican judge prior to the raid.

The Prosecutor’s Office statement also noted that Budovsky renounced his U.S. citizenship last year and “currently is a citizen and resident of Costa Rica.” He obtained that citizenship by marrying a now 39-year-old Costa Rican woman with the last names Valerio Vargas in June 2008, according to public records. However, Costa Rica’s Immigration Administration has no record of Budovsky entering or leaving the country before May 2011, four years after he received probation in a separate case in New York on charges of operating an illegal financial business, GoldAge Inc.

In a telephone interview on Tuesday, Budovsky’s Costa Rican wife told crhoy.com reporter Álvaro Sánchez that she married Budovsky out of financial need. “An intermediary offered me ₡300,000 [$600], and I badly needed it in that moment,” Valerio told crhoy.com. “The guy who married us was a Gringo attorney, and the person I married I never saw.”

Valerio said she simply showed up at the Immigration Administration in La Uruca, a northwestern district of the capital, with her I.D., and the lawyer made the arrangements. Costa Rica passed a law in 2009 – the year after the marriage – making marriages of convenience illegal.

“With all this happening now, I’m terrified,” Valerio told Sánchez. “I don’t want any troubles with the law.”

Strangely, despite being married in absentia, which also made Budovsky a naturalized Costa Rican, the Immigration Administration’s first record of Budovsky has him leaving the country on May 25, 2011, but there is no record of him entering Costa Rica before that date.

The latest records show he left Costa Rica on Jan. 27.

The Tico Times attempted to contact Budovsky and his attorneys through authorities in Spain, but did not receive a response from Spanish officials on Monday.

A not-so-golden age

Budovsky’s first run-in with U.S. authorities occurred in July 2006, when he and business partner Vladimir Kats, then 33, were indicted in New York on charges of operating an illegal financial business, GoldAge Inc., a parallel company to Liberty Reserve, from their Brooklyn apartments, according to the U.S. Justice Department. U.S. officials said the two had transmitted at least $30 million to digital currency accounts worldwide since beginning operations in 2002.

They were sentenced to five years in prison in 2007 for engaging in the business of transmitting money without a license, a felony violation of state banking law. They received five years probation. According to the indictment, unsealed in New York on Tuesday, Kats and Budovsky had a falling out in 2009.

Companies like GoldAge and Liberty Reserve offer users nearly anonymous digital currency accounts, pegged to the U.S. dollar or euro, with limited documentation of identity required. Deposits are allegedly backed by gold and other precious metals, and customers can withdraw money by requesting wire transfers to accounts anywhere in the world or by having checks sent to individuals.

U.S. officials have targeted companies like GoldAge and Liberty Reserve for years, saying they are hotbeds for criminal activity including money laundering, drug trafficking and tax evasion. They are also used to shuffle around funds from “high-yield” investment operations, which sometimes are Ponzi schemes disguised as legitimate businesses.

Liberty Reserve was founded in the U.S. in 2002 and relocated to Costa Rica in May 2006 – two months before the U.S. indictment landed against Budovsky and Kats – according to a document obtained by The Tico Times from Costa Rica’s National Registry.

The company operated without oversight from any global agency, and was a convenient tool for foreign currency brokers, as it allowed them to bypass local legislation and avoid exchange rate fluctuations, particularly in developing countries. It was also a popular payment-processing site for the multilevel marketing industry. But its lack of oversight also attracted organized criminal elements, prosecutors said.

“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, adding that the company facilitated “a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking, child pornography and narcotics trafficking.”

A 2008 report by the U.S. National Drug Intelligence Center noted that, “Payment in digital currencies makes it easier for traffickers to launder funds that no longer need to be placed into the traditional financial system. Payment can be immediately forwarded to an international digital currency account, perhaps in payment to the original source of supply, or further layered through multiple digital currency accounts and exchangers until reintegrated into the legitimate economy.”

In Costa Rica, Liberty Reserve S.A. was founded with 10 shares each of ₡10,000 ($20) for a total shareholder value of ₡100,000 ($200). To open a Liberty Reserve account, users needed only to submit a name, address, email address, date of birth and occupation. By 2013, Liberty Reserve was processing more than 12 million financial transactions annually, at a value of $1.4 billion per year, prosecutors allege.

On Tuesday, the Associated Press reported that Liberty Reserve may have been used to launder proceeds from a recent theft of some $45 million from two Middle Eastern banks. “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 centers based in Siberia and Singapore,” the AP reported.

Other reports noted that some of the funds stolen in a recent sophisticated and well-coordinated attack on ATMs around the world were laundered through Liberty Reserve.

Prosecutors also allege that Liberty Reserve was used to launder money from drug trafficking and child pornography sites, according to Costa Rican prosecutor José Pablo González. In addition to Budovsky, González said 10 other Liberty Reserve associates are under criminal investigation.

The closing of Liberty Reserve’s site on Thursday has left in limbo the fate of billions of dollars pumped into company accounts from around the world.

On Monday, the Costa Rican Prosecutor’s Office did not comment on the closing of the site, or the fate of funds tied up in Liberty Reserve, citing the ongoing money laundering investigation and the forthcoming announcement of charges in the U.S. on Tuesday.

Red flags and multiple identities

Another similarity between GoldAge and Liberty Reserve is the alleged use of numerous identities by Budovsky and business associates, according to sources familiar with both operations. In 2002, Budovsky granted an “interview” to Ragnar Danneskjold, described as “editor of Planetgold.com,” in which Budovsky, who says he is married to a “wonderful wife with two beautiful daughters,” announces the May 28, 2002 launch of Liberty Reserve. Asked about the risk of attracting organized criminal elements, he said he “would be only too happy to cooperate with authorities in situations” involving “a murderer, kidnapper, or drug kingpin.”

A source who has investigated GoldAge said he believes the editor, Danneskjold, is actually Kats, Budovsky’s partner at the time. Ragnar Danneskjöld is the name of a character in Ayn Rand’s novel “Atlas Shrugged.” In the book, Danneskjöld is a philosopher-turned-privateer, a “friend of the friendless” who thumbed his nose at the U.S. Navy.

Months before the 2006 indictment, and his probation the following year, the real privateer, Budovsky, relocated the company to Costa Rica, where in 2008 he married Valerio Vargas, according to Supreme Elections Tribunal records.

Kats, arrested in New York, appears to have continued business as usual with his long-term partner until about 2009. In Costa Rica, Budovsky, who a source familiar with Liberty Reserve operations said “was the boss,” also teamed up with Yassine, a Moroccan man who was naturalized as a Costa Rican through a November 2006 marriage to a Costa Rican woman. The two were divorced in March 2010, according to public records.

Yassine, who reportedly has an explosive temper, is being sought by authorities and is wanted in the U.S. On a Liberty Reserve company profile from November 2008 (and still online in June 2010), Yassine is listed under the apparent pseudonym Amed Mekovar as Liberty Reserve’s “corporate director,” say sources close to the company.

“Liberty Reserve was acquired by Amed Mekovar in May of 2006,” the profile states, although there is no mention of Yassine (or Mekovar) in the official company registration document on file at the National Registry.

Budovsky, despite being a founder and boss at the company, also is not listed on the profile or the National Registry document. However, a source familiar with how the business was managed who asked to remain anonymous said Budovsky used the alias Eric Paltz, whom the profile describes as head of “business development.”

“Arthur was the boss,” the source told The Tico Times. But Budovsky, Yassine and other employees rarely used their real names in business dealings or in front of outsiders, the source said.

Sandro Castro, listed on the profile as Liberty Reserve’s head of “Abuse and Business Department inquiries,” is also likely the alias of Allan Esteban Hidalgo Jiménez. Public records in Costa Rica name Hidalgo as Liberty Reserve’s president.

Other names on the 2008 company profile appear to be legitimate employees.

The Tico Times could not reach any of the company officers for comment on Monday.

The secrecy surrounding the identities of the principals was also reflected in their business model. Paying a 1 percent fee, users of Liberty Reserve could conduct transactions with other users. But for an additional “privacy fee” of 75 cents, the user’s account number could be hidden, “effectively making the transfer completely untraceable, even within Liberty Reserve’s already opaque system,” the indictment stated.

Snags

While Budovsky, Yassine and other employees of Liberty Reserve in Costa Rica protected themselves with Russian gunmen, according to a source familiar with the company, they reportedly also tried to present a positive image of Liberty Reserve by allegedly lavishing gifts on influential people and donating computers to local schools. But they faced several snags along the way, including the refusal in 2011 by the Financial Institution Superintendency (SUGEF), Costa Rica’s financial regulatory authority, to license the company, citing a lack of transparency and accounting of funding management.

Nevertheless, Liberty Reserve continued operating, accepting account deposits and transferring funds without SUGEF certification. Liberty Reserve used accounts in the following Costa Rican banks, according to the U.S. indictment: Banco Crédito Agrícola de Cartago, Grupo Mutual Alajuela, Banco Lafise, Banco Nacional and BAC San José.

But without SUGEF’s approval Budovsky, Yassmine and other associates found it increasingly difficult to conduct business through banks in Costa Rica and Panama.

By 2011, U.S. officials had already started collaborating with Costa Rican officials on an investigation of the company. But Budovsky and his partners had been tipped off by a U.S. Treasury Department report warning financial institutions to watch out for Liberty Reserve. They began moving millions of dollars from their Costa Rican bank accounts first into a bank account in Cyprus and then into one in Russia. However, Costa Rican authorities acting on behalf of the U.S. government were able to seize $19.5 million from the company’s bank accounts in Costa Rica, the indictment stated.

Budovsky and other principals responded by moving remaining funds to two dozen shell company accounts in Cyprus, Hong Kong, China, Morocco, Australia and Spain, according to U.S. officials.

The company also relocated its network servers – as many as seven – from Costa Rica to the Netherlands, Switzerland and other countries, a source said.

Eventually, the probe culminated with last Friday’s arrests, searches and seizures, and Tuesday’s indictment.

“Because virtually all of Liberty Reserve’s business derived from suspected criminal activity, the scope of the defendants’ unlawful conduct is staggering,” Tuesday’s indictment stated.

The company has been shut down, and its remaining employees laid off. On Tuesday, an announcement finally appeared – after four long days – on LibertyReserve.com: “This domain name has been seized by the United States Global Illicit Financial Team.” And Liberty customers, who had anxiously waited for word about the fate of their funds, could finally stop clicking “refresh.”

Updated Wednesday at 1:12 p.m., with added statements from Cyberfuel.com’s owner, Carlos Moreno, and information about Budovsky’s marriage of convenience.