LAW ENFORCEMENT ACTIONS INVOLVING VIRTUAL CURRENCY
LIBERTY RESERVE
In what is to date the largest online money-laundering case in history, in May 2013, the US Department of Justice charged Liberty Reserve, a Costa Rica-based money transmitter, and seven of its principals and employees with operating an unregistered money transmitter business and money laundering for facilitating the movement of more than 6 billion USD in illicit proceeds. In a coordinated action, the Department of the Treasury identified Liberty Reserve as a financial institution of primary money laundering concern under Section of the USA PATRIOT Act, effectively cutting it off from the US financial system.
Established in 2006, Liberty Reserve was designed to avoid regulatory and law enforcement scrutiny and help criminals distribute, store, and launder the proceeds of credit card fraud, identity theft, investment fraud, computer hacking, narcotics trafficking, and child pornography by enabling them to conduct anonymous and untraceable financial transactions. Operating on an enormous scale, it had more than a million users worldwide, including more than 200 000 in the United States, and handled approximately 55 million transactions, almost all of which were illegal. It had its virtual currency, Liberty Dollars (LR), but at each end, transfers were denominated and stored in fiat currency (US dollars).
To use LR currency, a user opened an account through the Liberty Reserve website. While Liberty Reserve ostensibly required basic identifying information, it did not validate identities. Users routinely established accounts under false names, including blatantly criminal names (“Russia Hackers,” “Hacker Account,” “Joe Bogus”) and blatantly false addresses (“123 Fake Main Street, Completely Made Up City, New York”). To add a further layer of anonymity, Liberty Reserve required users to make deposits and withdrawals through recommended third-party exchangers— generally, unlicensed money-transmitting businesses operating in Russia, and in several countries without significant governmental money laundering oversight or regulation at that time, such as Malaysia, Nigeria, and Vietnam. By avoiding direct deposits and withdrawals from users, Liberty Reserve evaded collecting information about them through banking transactions or other activities that would create a central paper trail. Once an account was established, a user could conduct transactions with other Liberty Reserve users by transferring LR from his or her account to other users, including front company “merchants” that accepted LR as payment.
For an extra “privacy fee” (75 US cents per transaction),
users could hide their Liberty Reserve account numbers when transferring
funds, making the transfers completely untraceable. After learning it
was being investigated by US law enforcement, Liberty Reserve
pretended to shut down in Costa Rica but continued to operate through a
set of shell companies, moving millions through their accounts in
Australia, Cyprus, China, Hong Kong, Morocco, Russia, Spain, and
elsewhere.
In September 2013, the US Department of Justice unsealed a criminal complaint charging the alleged owner and operator of Silk Road, a hidden website designed to enable its users to buy and sell illegal drugs, weapons, stolen identity information, and other unlawful goods and services anonymously and beyond the reach of law enforcement, with narcotics trafficking, computer hacking, and money laundering conspiracies. The Justice Department also seized the website and approximately 173 991 bitcoins, worth more than USD 33.6 million at the time of the seizure, from seized computer hardware. The individual was arrested in San Francisco in October and indicted in February 2014; the investigation is ongoing.
Launched in January 2011, Silk Road operated as a global black-market cyber bazaar that brokered anonymous criminal transactions and was used by several thousand drug dealers and other unlawful vendors to distribute unlawful goods and services to over a hundred thousand buyers, a third of whom are believed to have been in the United States. It allegedly generated total sales revenue of approximately USD 1.2 billion (more than 9.5 million bitcoins) and approximately USD 80 million (more than 600 000 bitcoins) in commissions for Silk Road. Hundreds of millions of dollars were laundered from these illegal transactions (based on bitcoin value as of the dates of seizure). Commissions ranged from 8 to 15 percent of the total sales price.
Silk Road achieved anonymity by operating on the hidden Tor network and accepting only bitcoins for payment. Using bitcoins as the exclusive currency on Silk Road allowed purchasers and sellers to further conceal their identity since senders and recipients of peer-to-peer (P2P) bitcoin transactions are identified only by the anonymous bitcoin address/account. Moreover, users can obtain an unlimited number of Bitcoin addresses and use a different one for each transaction, further obscuring the trail of illicit proceeds. Users can also employ additional “anonymizers,” beyond the Tumbler service built into Silk Road transactions (see discussion below).
Silk Road’s payment system functioned as an internal Bitcoin bank, where every Silk Road user had to hold an account to conduct transactions on the site. Every Silk Road user had at least one Silk Road Bitcoin address (and potentially thousands) associated with the user’s Silk Road account, stored on wallets maintained on servers controlled by Silk Road. To make a purchase, a user obtained bitcoins (typically through a Bitcoin exchanger) and sent them to a Bitcoin address associated with his or her Silk Road account to fund the account. When a purchase was made, Silk Road transferred the user’s bitcoins to an escrow account it maintained, pending completion of the transaction, and then transferred the user’s / buyer’s bitcoins from the escrow account to the vendor’s Silk Road Bitcoin address. As a further step, Silk Road employed a “tumbler” for every purchase, which, as the site explained, “sen[t] all payments through a complex, semi-random series of dummy transactions ... --making it nearly impossible to link your payment with any [bit]coins leaving the site.”
An eight-year investigation of a multinational, Internet-based cybercrime group, the Western Express Cybercrime Group, resulted in convictions or guilty pleas of 16 of its members for their role in a global identity theft/cyber fraud scheme. Members of the cybercrime group interacted and communicated primarily through Internet “carding” websites devoted to trafficking in stolen credit card and personal identifying information and used false identities, anonymous instant messenger accounts, anonymous email accounts, and anonymous virtual currency account to conceal the existence and purpose of the criminal enterprise; avoid detection by law enforcement and regulatory agencies; and maintain their anonymity.
The criminal enterprise was composed of vendors, buyers, cybercrime services providers, and money movers located in numerous countries, ranging from Ukraine and throughout Eastern Europe to the United States. The vendors sold nearly 100 000 stolen credit card numbers and other personal identification information through the Internet, taking payment mostly in e-Gold and WebMoney. The buyers used the stolen identities to forge credit cards and purchase expensive merchandise, which they fenced (including via reshipping schemes), committing additional crimes, such as larceny, criminal possession of stolen property, fraud, and generating about USD 5 million in credit card fraud proceeds. The cybercrime services providers promoted, facilitated, and aided in the purchase, sale, and fraudulent use of stolen credit card numbers and other personal identifying information by providing computer services to the vendors and the buyers. The money mover laundered the cybercrime group’s illicit proceeds in a variety of high-tech ways, moving more than USD 35 million through various accounts.
The hub of the entire operation was Western Express International, Inc., a New York corporation based in Manhattan that operated as a virtual currency exchanger and unregistered money transmitter to coordinate and facilitate the Internet payment methods used by the criminal enterprise, and to launder the group’s proceeds. One of the largest virtual currency exchangers in the United States, Western Express International exchanged a total of USD 15 million in WebMoney and USD 20 million in e-Gold for the cybercrime group and used banks and traditional money transmitters to move large sums of money. It also provided information and assistance through its websites (including Dengiforum.com and Paycard2000.com) on ways to move money anonymously and to insulate oneself from reporting requirements.
Western Express International and its owner/operator, a Ukrainian national, pleaded guilty in February 2013 in New York State to money laundering, fraud, and conspiracy offenses. (In February 2006, Western Express was also indicted for running an illegal check cashing/wire transfer service.) Three other defendants were convicted after trial in June 2013; several more plead guilty in August 2009. Two indicted defendants remain fugitives. The investigation was conducted jointly by the US Secret Service and the Manhattan (New York County) District Attorney’s Office and was successfully prosecuted by the Manhattan District Attorney’s Office.
SILK ROAD
In September 2013, the US Department of Justice unsealed a criminal complaint charging the alleged owner and operator of Silk Road, a hidden website designed to enable its users to buy and sell illegal drugs, weapons, stolen identity information, and other unlawful goods and services anonymously and beyond the reach of law enforcement, with narcotics trafficking, computer hacking, and money laundering conspiracies. The Justice Department also seized the website and approximately 173 991 bitcoins, worth more than USD 33.6 million at the time of the seizure, from seized computer hardware. The individual was arrested in San Francisco in October and indicted in February 2014; the investigation is ongoing.
Launched in January 2011, Silk Road operated as a global black-market cyber bazaar that brokered anonymous criminal transactions and was used by several thousand drug dealers and other unlawful vendors to distribute unlawful goods and services to over a hundred thousand buyers, a third of whom are believed to have been in the United States. It allegedly generated total sales revenue of approximately USD 1.2 billion (more than 9.5 million bitcoins) and approximately USD 80 million (more than 600 000 bitcoins) in commissions for Silk Road. Hundreds of millions of dollars were laundered from these illegal transactions (based on bitcoin value as of the dates of seizure). Commissions ranged from 8 to 15 percent of the total sales price.
Silk Road achieved anonymity by operating on the hidden Tor network and accepting only bitcoins for payment. Using bitcoins as the exclusive currency on Silk Road allowed purchasers and sellers to further conceal their identity since senders and recipients of peer-to-peer (P2P) bitcoin transactions are identified only by the anonymous bitcoin address/account. Moreover, users can obtain an unlimited number of Bitcoin addresses and use a different one for each transaction, further obscuring the trail of illicit proceeds. Users can also employ additional “anonymizers,” beyond the Tumbler service built into Silk Road transactions (see discussion below).
Silk Road’s payment system functioned as an internal Bitcoin bank, where every Silk Road user had to hold an account to conduct transactions on the site. Every Silk Road user had at least one Silk Road Bitcoin address (and potentially thousands) associated with the user’s Silk Road account, stored on wallets maintained on servers controlled by Silk Road. To make a purchase, a user obtained bitcoins (typically through a Bitcoin exchanger) and sent them to a Bitcoin address associated with his or her Silk Road account to fund the account. When a purchase was made, Silk Road transferred the user’s bitcoins to an escrow account it maintained, pending completion of the transaction, and then transferred the user’s / buyer’s bitcoins from the escrow account to the vendor’s Silk Road Bitcoin address. As a further step, Silk Road employed a “tumbler” for every purchase, which, as the site explained, “sen[t] all payments through a complex, semi-random series of dummy transactions ... --making it nearly impossible to link your payment with any [bit]coins leaving the site.”
WESTERN EXPRESS INTERNATIONAL
An eight-year investigation of a multinational, Internet-based cybercrime group, the Western Express Cybercrime Group, resulted in convictions or guilty pleas of 16 of its members for their role in a global identity theft/cyber fraud scheme. Members of the cybercrime group interacted and communicated primarily through Internet “carding” websites devoted to trafficking in stolen credit card and personal identifying information and used false identities, anonymous instant messenger accounts, anonymous email accounts, and anonymous virtual currency account to conceal the existence and purpose of the criminal enterprise; avoid detection by law enforcement and regulatory agencies; and maintain their anonymity.
The criminal enterprise was composed of vendors, buyers, cybercrime services providers, and money movers located in numerous countries, ranging from Ukraine and throughout Eastern Europe to the United States. The vendors sold nearly 100 000 stolen credit card numbers and other personal identification information through the Internet, taking payment mostly in e-Gold and WebMoney. The buyers used the stolen identities to forge credit cards and purchase expensive merchandise, which they fenced (including via reshipping schemes), committing additional crimes, such as larceny, criminal possession of stolen property, fraud, and generating about USD 5 million in credit card fraud proceeds. The cybercrime services providers promoted, facilitated, and aided in the purchase, sale, and fraudulent use of stolen credit card numbers and other personal identifying information by providing computer services to the vendors and the buyers. The money mover laundered the cybercrime group’s illicit proceeds in a variety of high-tech ways, moving more than USD 35 million through various accounts.
The hub of the entire operation was Western Express International, Inc., a New York corporation based in Manhattan that operated as a virtual currency exchanger and unregistered money transmitter to coordinate and facilitate the Internet payment methods used by the criminal enterprise, and to launder the group’s proceeds. One of the largest virtual currency exchangers in the United States, Western Express International exchanged a total of USD 15 million in WebMoney and USD 20 million in e-Gold for the cybercrime group and used banks and traditional money transmitters to move large sums of money. It also provided information and assistance through its websites (including Dengiforum.com and Paycard2000.com) on ways to move money anonymously and to insulate oneself from reporting requirements.
Western Express International and its owner/operator, a Ukrainian national, pleaded guilty in February 2013 in New York State to money laundering, fraud, and conspiracy offenses. (In February 2006, Western Express was also indicted for running an illegal check cashing/wire transfer service.) Three other defendants were convicted after trial in June 2013; several more plead guilty in August 2009. Two indicted defendants remain fugitives. The investigation was conducted jointly by the US Secret Service and the Manhattan (New York County) District Attorney’s Office and was successfully prosecuted by the Manhattan District Attorney’s Office.
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