
Founder of Liberty Reserve Pleads Guilty to Laundering More Than $250M - us0r
http://www.justice.gov/opa/pr/founder-liberty-reserve-pleads-guilty-laundering-more-250-million-through-his-digital
======
patio11
Liberty Reserve's main line of business was operating a shared ledger trusted
by multiple companies which would exchange cash for ledger entries and ledger
entries for cash, earning a fee each time. Think like Western Union except
minus all the pesky regulated bits.

LR was a direct reaction to what had befallen e-gold, which was in
fundamentally the same business except it did all of the cashing first-party
(early in life, at any rate). e-gold was shut down for being a money
laundering operation, principally because it was a money laundering operation.

LR was also a money laundering operation. It observed various issues e-gold
had had, such as being physically located in the US (though theoretically
registered in a country friendly to money laundering), and intentionally fixed
these bugs with the intent of being the most robust money laundering operation
it could be.

This ended up not working out, which is why the vacuum that urgently desires a
money laundering operation has replicated the same hub-and-spokes model with
the hub being a cryptocurrency (presently Bitcoin) and the spokes being
exchanges and LocalBitcoins sellers. The onramps/offramps to Bitcoin are
exposed to a variety of ways to curtail their operations but the central
trusted DB required for them to cooperate is not controlled by anyone who can
be conveniently extradited. People in the Bitcoin community refer to this
obliquely as either "censorship resistance" or "resistance to policy attacks."

If you're interested in the history of this, Paypal and e-gold were
approximately contemporaries, and one of the reasons Paypal succeeded and
e-gold did not was that Paypal conspicuously courted respectability, so that
even if Paypal was also doing hundreds of millions of dollars of fraud and
illicit transactions it would be unlikely to indict them as a criminal
enterprise because they were a proper company whose lawyers wore suits and
whose VCs were quite respectable. Bitcoin collectively cottoned onto the
wisdom of having its fronts benefit from the same factor as opposed to being,
well, insufficiently socially insulated from legal process. (I can accurately
summarize who makes Bitcoin exchanges but it would read like a parody.)

~~~
driverdan
Bitcoin and other online exchange / transaction systems (e-gold, LR, etc)
represent a small fraction of global money laundering, a small enough fraction
to be laughable and irrelevant.

~~~
anonbanker
One would assume there were more than $250M in bitcoins circulating, which
seems to be the threshold for prosecution here.

------
miles
Perhaps if Liberty Reserve had only aimed higher:

HSBC Judge Approves $1.9B Drug-Money Laundering Accord [1]

 _" U.S. District Judge John Gleeson in Brooklyn, New York, signed off
yesterday on a deferred-prosecution agreement"_

HSBC money-laundering procedures 'have flaws too bad to be revealed' [2]

 _" HSBC’s procedures to prevent money laundering, sanction-breaking and
criminal activity still have deficiencies so serious that to publicly disclose
them would risk serious crime, the US Department of Justice has said."_

[1] [http://www.bloomberg.com/news/articles/2013-07-02/hsbc-
judge...](http://www.bloomberg.com/news/articles/2013-07-02/hsbc-judge-
approves-1-9b-drug-money-laundering-accord)

[2] [http://www.theguardian.com/business/2015/jun/05/hsbc-
money-l...](http://www.theguardian.com/business/2015/jun/05/hsbc-money-
laundering-procedures-flaws-too-bad-to-be-revealed)

------
Kinnard
Money Laundering is Financial Thoughtcrime:
[http://www.americanbanker.com/bankthink/money-laundering-
is-...](http://www.americanbanker.com/bankthink/money-laundering-is-financial-
thoughtcrime-1058902-1.html)

. . . By Former Chief Foreign Exchange Dealer; Director of Credit Card
Interchange @ Visa & Founding Director of the Bitcoin Foundation . . .

~~~
ycmbntrthrwaway
It also falls under "victimless crime" definition.

~~~
SCAQTony
Where is that definition?

~~~
Kinnard
[https://en.wikipedia.org/wiki/Victimless_crime](https://en.wikipedia.org/wiki/Victimless_crime)

------
pakled_engineer
Their biggest issue (besides being a centralized service thus easy targeting)
was not encrypting internal communications and allowing comments to accompany
transfers which were typically "For 200 dumps of CCs" or something similarly
illegal. They tried to avoid KYC regulations by just providing the internal
ledger, you had to go through 3rd party exchangers in order to buy in or cash
out of the system and these parties were supposed to do KYC.

Pecunix and C-gold are other centralized, closed book-entry systems still
around though Pecunix changing to a voucher system.

~~~
atemerev
Well, lots of drugs are sold for cash. Cash is issued by the Fed. Can it be
sued for facilitating drug crime?

~~~
chipperyman573
The feds also actively try to combat drug sales. LR made little to no efforts
to do so.

I agree with what you're saying but I disagree with your example.

~~~
wavefunction
I think op meant the Federal Reserve, who are not involved in the War on
Drugs.

~~~
yardie
Federal Reserve does not issue cash, that is the job of the Treasury
Department.

~~~
Kinnard
Issuance and printing are distinct operations. Federal Reserve Notes are in
fact issued by the Federal Reserve, and printed by the Bureau of Engraving and
Printing, which is a part of the Treasury[1].

[1] [http://economics.stackexchange.com/questions/8320/how-and-
wh...](http://economics.stackexchange.com/questions/8320/how-and-when-
is-m0-money-created)

------
ycmbntrthrwaway
Why is it illegal to operate money transfer? Why founders are responsible for
the crimes committed by its users? Are they guilty because the business was
"unlicensed" or did they specifically promoted crime in some way?

~~~
dogma1138
You can't operate MSB these days without complying with regulations regardless
of where you operate from.

Laws for MSB's anywhere require them to comply with legislation based on where
their costumers are originated.

When you move money from your US account to your friends in the UK through say
PayPal; PayPal has to comply with the regulations in both the US and the UK.

Amongst those things the MSB also needs to ensure that they do their due
diligence to ensure that they do not provide a service to launder money or
facilitate other illegal activities this often includes running background and
credit checks on the costumers, providing notifications of transfers to the
authorities, checking their costumer base against a list of known criminal
organizations and suspect individuals, and in general even required to report
any set of transactions which fit a certain pattern.

LR (just like say Megaupload with it's "reversed" payment model) was designed
to circumvent all of this intentionally while there might be some legitimate
use for it it's primary use was to transfer funds and exchange currency in an
unregulated manner which makes it attractive to only a certain type of
individuals which seek that intentionally, anyone else would not want to use
it using an unlicensed MSB is a sure way of getting your funds frozen and
putting you under investigation.

I don't even understand how people can support them, even if they did not do
so intentionally they've put their entire costumer base under a microscope if
people used this service thinking it was a legitimate MSB they were defrauded.
Money laundering and tax evasion is tricky, many laws in many countries are
often structured in such manner that the accused has to prove that those funds
were acquired legitimately and that all taxes were paid as due. Even if LB did
this out of sheer stupidity (which obviously they didn't) they deserve to get
their asses handed out to them just for putting every person who ever used
them at risk of going to jail or getting in debt due to financial
irregularities.

~~~
niij
I agree. You have to look at the intent of the business. LR's primary use was
illicit, whether they explicitely advertised themselves as such or not, they
were still out of regulation and obviously not innocent.

Also it's customer, not costumer.

~~~
aminorex
Strong accusations.

~~~
mikeyouse
No longer accusations when they've been convicted in the court of law to the
exact claims made.

------
rasengan
This is serious stuff, and I want to mention to anybody on HN who is thinking
about running a business like this given the rise in cryptocurrency related
platforms, please consult a lawyer before you embark on your quest.

These are serious laws and it doesn't cost much to find out if you're in or
outside of MSB regulations.

~~~
pakled_engineer
Some additional advice for anybody doing so regardless of where they live or
the market they service:

\- Contract a legitimate 3rd party ID verification service like bitstamp does.
You get API access where the entire verification process can be automated on
your end, and it's out of your hands, so you have some kind of legal
protection offloading the KYC risk to that party.

\- Encrypt all internal employee messages, regardless if they are totally
innocent looking a prosecutor will find some way to twist the emails and chats
into a crime. Have a written data deletion policy for internal messaging so
they are not saved forever, as deleting them to satisfy a business operations
policy will prevent possible future obstruction or evidence tampering nonsense
charges.

\- Avoid any and all political ideology, don't call your service
DownWithTheFedCoin. Notice how the prosecutors made a point about Liberty
Reserve's name.

\- If you create an asset pegged to a currency don't use USD.

Finally have clear, concise instructions to resolve disputes, and some kind of
phone number escalation procedure for users to actually talk to somebody.
Better yet have a disinterested 3rd party to help moderate customer disputes
in a totally transparent way instead of merely freezing accounts and ignoring
their emails. As soon as somebody has their funds seized or delayed they run
to regulators and lawyers to complain which in turn spawns government
attention on your little cryptocurrency related service.

------
kregasaurusrex
For anyone who doesn't know about Liberty Reserve, here's a good back story:
[http://www.theatlantic.com/magazine/archive/2015/05/bank-
of-...](http://www.theatlantic.com/magazine/archive/2015/05/bank-of-the-
underworld/389555/)

------
atemerev
Read: "refused to cooperate with government ops".

Thank goodness they didn't find Satoshi yet.

------
ycmbntrthrwaway
Feel free to look at their indictment. The crime is providing too much
anonymity and not centralizing enough. See "The criminal design of Liberty
Reserve", starting from point 14.

[http://www.justice.gov/sites/default/files/usao-
sdny/legacy/...](http://www.justice.gov/sites/default/files/usao-
sdny/legacy/2015/03/25/Liberty%20Reserve%2C%20et%20al.%20Indictment%20-%20Redacted_0.pdf)

------
aminorex
Compliance with tyranny is treason.

~~~
anonbanker
the reason why your comment is greyed out directly correlates with why I left
the country back in Bush II.

------
stickfigure
Isn't every non-US country, and every bank in those countries, operating an
"unlicensed money-transmitting service" as far as the US government is
concerned? I'm a little curious about where the lines are drawn.

~~~
gamblor956
No, see 31 US 5330 and related code sections.

~~~
stickfigure
I don't get it:
[https://www.law.cornell.edu/uscode/text/31/5330](https://www.law.cornell.edu/uscode/text/31/5330)
doesn't seem to mention anything relevant.

I also don't understand the downvotes. I'm asking a serious question because
I'm curious - if this company was operated by a Russian citizen living in
Moscow (or by an Albanian citizen in Albania, or a Swiss citizen in
Switzerland, or even let's say by the North Korean government) - what would
have happened here?

