This day in history: May 27, 2013: Liberty Reserve bites the dust

In episode eight of this series on FinanceFeeds, we take a look back at “This day in history” within the world of FX. Every Friday morning, we take a journey through annuls of time to look at the various groundbreaking developments that continue to take place in our fascinating industry.

Payment solutions providers with intelligent, algorithmic software that facilitates the transfer of client funds from their own personal bank account into trading accounts with online brokers across the entire world have become an instrumental set of service providers to the FX industry recently.

Indeed, this week at the iFXEXPO International 2016 hosted by Conversion Pros in Limassol, Cyprus this week, payment solution providers with ultra high technology were abound.

Furthermore, some companies that provide such services to FX firms are so well established and prominent that they are listed on prestigious stock exchanges and have a sizeable market capitalization. SafeCharge, for example, raised $126 million when it became a publicly listed company on London Stock Exchange’s Alternative Investment Market in 2014, and today has a market capitalization of $344 million. Quite remarkable indeed.

Nowadays, automated payment processing can be conducted via mobile devices, and borders simply do not exist. Risk management is conducted via automated services and no longer is working with companies in China where there are limitations on the free movement of funds an issue.

Not to put too fine a point on it, it is very rare today for a retail FX brokerage to concern itself with any difficulties that many impeded conducting deposit and withdrawal transactions to pretty much anywhere in the world.

This is a relatively new scenario, however, as less than five years ago, ancillary services provided by companies that wanted to remove barriers associated with processing payments were commonplace.

Liberty Reserve, a centralized digital currency service that allowed users to register and transfer money to other users with only a name, email address and date of birth was the darling of the retail FX world.

It was the payment processor of choice for brokerages and traders who conducted business in emerging and frontier markets, which as recently as the early part of this decade, represented a huge sector of the industry.

Today, in 2013, Liberty Reserve’s popularity came to a grinding halt as the company was shut down by the US government, with its owner, Arthur Budovsky Belanchuk arrested in Spain one week later as part of an international operation carried out by the US and Costa Rican government departments that are responsible for investigating financial crime.

The closure of Liberty Reserve and the subsequent arrest of Mr. Belanchuk was a result of investigations dating back to 2009, when the US and Costa Rica began to suspect Liberty Reserve of money laundering.

Additionally, apart from providing services to e-commerce and online trading firms, it was suspected by investigators that Liberty Reserve had been engaging in illicit payments from criminal activity such as drug trafficking and vice.

After a multi-year investigation by officials in 17 countries, a sealed indictment was issued by the US government in May 2013. U.S. prosecutors filed a case against Liberty Reserve, alleging it had handled $6 billion of criminal proceeds.

The Liberty Reserve website was taken offline on May 24 and replaced with a notice saying the domain had been “seized by the United States Global Illicit Financial Team.” In Costa Rica, a court order was issued to seize the “financial products and services” of Mr. Belanchuk, Maxim Chukharev, and the six apparent shell companies. More than a million dollars of luxury automobiles alone were seized.

Preet Bharara, a US prosecutor working on the case called Liberty Reserve a “black market bank”, created and structured to “facilitate criminal activity”. In total, Liberty Reserve “processed an estimated 55 million separate financial transactions and is believed to have laundered more than $6 billion in criminal proceeds”. It has been linked to crimes including credit card fraud, identity theft, investment fraud, computer hacking, vice, and narcotics trafficking.

In its court case, Liberty Reserve was accused by US criminal prosecutors of moving several million dollars through shell companies.

45 bank accounts were seized or restricted by the US federal prosecutors under the Patriot Act and attorney Bharara said that this could set a new precedent as being the largest international money laundering case ever brought to a court by the United States.

On May 24, 2013, Mr. Belanchuk and a second man were jailed by Spanish authorities pending an extradition hearing. Just prior to their arrest, three homes and the five apparent shell businesses owned by Mr. Belanchuk were raided. Four others individuals were then arrested across three countries: Costa Rica, Spain, and the United States and two other suspects were considered to be at large in Costa Rica.

The demise of Liberty Reserve was absolutely earth shattering news at the time, because of its sheer size, and its popularity with retail users of ecommerce sites and online traders.

Major authorities on matters of internet security began to demonstrate their opinions, including investigative reporter Brian Krebs who said at the time that the closure of Liberty Reserve could “cause a major upheaval in the cybercrime economy.”

On May 29, 2013, Mr. Belanchuk’s wife approached the police with an accusation that she had been paid $800 to marry him in order to assist his acquisition of Costa Rican citizenship.

In January this year, Mr. Belanchuk pleaded guilty to one count of conspiring to commit money laundering, and at the beginning of this month, on May 6, 2016, he was sentenced to 20 years in jail.

Photograph: Jaco Beach, Costa Rica. Credit: Costaricapro