Digital Currency Liberty Reserve Busted for Money Laundering

About 1 million users worldwide, including 200,000 in the U.S.; 55 million transactions; and $6 billion in ill-gotten gains.

Those are the numbers defining the case of Liberty Reserve, a digital currency and online payment service incorporated in Costa Rica in 2006. On Tuesday, an indictment was unsealed showing that seven men have been charged with running the unlicensed Liberty Reserve as a "bank of choice for the criminal underworld." According to The Wall Street Journal, "The system allegedly was designed to give criminals a way to move money earned from credit-card fraud, online Ponzi schemes, child pornography and other crimes without being detected by law enforcement." Five of the seven men are in custody, having been arrested on Friday in Spain, Costa Rica and Brooklyn, N.Y. Extradition will be sought for the suspects who are overseas; the other two remain at large.

For the first time, officials invoked the post-9/11 Patriot Act to shut down a virtual currency when they cut off Liberty Reserve from the U.S. financial system. The drastic measure comes at a time when digital alternatives to traditional currencies such as Bitcoin are drawing wider interest from the public.

Even for an online alternative currency, Liberty Reserve allowed its users an extreme level of opacity. According to Newsday, "Liberty was so lax that investigators were able to open an account in the name of 'Joe Bogus,' listing an address of '123 Fake Main Street' in 'Completely Made Up City, New York,' officials said. Actual accounts bore names like 'Russian Hackers.'"

Liberty reserve
Richard Drew, APPreet Bharara, U.S. Attorney for the Southern District of New York, describes a chart showing the global interests of Liberty Reserve, during a news conference in New York, Tuesday, May 28, 2013.

The service was founded by Arthur Budovsky, and wasn't his first foray into legally questionable money-transmission. In 2006, he was convicted of violating money-laundering laws with a business called Gold Age. Sentenced to five years probation, Budvosky moved to Costa Rica and renounced his U.S. citizenship. When the Costa Rican authorities became suspicious of his new operation, Budovsky told them he'd shut it down, but in fact used shell companies to keep Liberty Reserve running.

In one prominent case of illegal application of Budovsky's services, officials said the eight New Yorkers charged with stealing $45 million from ATMs used Liberty to move their loot. And while better-known online currencies like Bitcoin are being used more legitimately and gaining acceptance among some established merchants, the Liberty Reserve case carries obvious implications for them. Already authorities have confiscated money from the Japan-based Bitcoin exchange Mt. Gox, claiming it was not complying with U.S. money-laundering laws. In an obvious warning to Bitcoin, Acting Assistant Attorney General Mythili Raman told The Washington Post,

"other virtual payment systems should take notice of today's announcement and ensure that they comply with . . . regulatory obligations and ensure they are not designed to be a safe haven for criminals to launder their criminal proceeds."

Which puts Bitcoin in something of a bind: As an alternative to regular dollars, the asset depends for its appeal on greater privacy and flexibility. But those some qualities provide potential prosecutorial openings for the governments whose authority Bitcoin in some measure challenges.

The 8 Best Ways to Spot Counterfeit Money
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Digital Currency Liberty Reserve Busted for Money Laundering
On a real bill, the portrait tends to stand out from the background. However, on a counterfeit bill, the portrait's coloring tends to blend too much with the rest of the bill. In addition, the portrait tends to look "lifeless and flat" on counterfeit bills, according to the Secret Service. Both DeSantis and Lowery pointed out that this difference is due to the different printing processes between real and counterfeit money. Real currency uses printing methods that cannot be replicated by anyone else.
Real bills have tiny red and blue fibers embedded in the paper, and counterfeiters have tried to replicate those. Ink marks can be printed onto the paper to look like hairs, Kersten said. He also noted that people have used cat or human hair that is dyed red or blue to embed into the bill. At close inspection, however, it is clear that the hairs are on the surface of the fake bill and not embedded into the paper. "But most people don't even look for the hairs anymore because you have to look really closely," Kersten said. "That is why the government put bigger things to look for in [the bills]."
The Secret Service points out that the serial numbers on a note must be the same color as the Treasury Seal. The agency also notes that on counterfeit bills,  the numbers "may not be uniformly spaced or aligned," although Kersten believes that this sign of a counterfeit is rare. However, one sure way to spot counterfeit bills is if several have the same serial number. "Face it, if you are running off thousands of those things, you aren't going to bother changing the serial numbers," he said.
On real currency, you will see Federal Reserve and Treasury Seals that are "clear, distinct and sharp," according to the Secret Service, whereas the seals on counterfeit bills "may have uneven, blunt, or broken saw-tooth points." One way to detect a counterfeit is by looking at the coloring. If the color of the Treasury Seal does not match the color of the serial number, the bill is fake.
The outside borders on real paper currency are "clear and unbroken," according to the Secret Service. However, the agency notes, the edges on counterfeit bills may be "blurred and indistinct." Due to the difference in printing methods between genuine and counterfeit bills, the border ink can sometimes bleed on a phony. However, this is not among the most commonly seen mistakes on counterfeit bills.
At many grocery and convenience stores, clerks will use an iodine-based counterfeiting pen. The pen reacts to the starch in the paper. If the bill is real, the ink turns yellow. But if the bill is counterfeit, it will turn a dark blue or black. "Most counterfeiters don't bother to use starch-free paper. They just use paper that simulates the color, thickness and look of real currency," Kersten said. "But if your counterfeiter is good, they will use starch-free paper."
The feel is probably the most common way that people detect counterfeit, Kersten said. Real currency has a "raised texture" to it because of the type of press used to produce the bills. Counterfeit bills feel flat because they are often made digitally or on an offset press. People who handle a lot of cash "can just notice that something doesn't feel right," Kersten said.

The watermark is the shadow of the portrait that appears when you hold the bill up to light. "That is one of the easiest ways for the common citizen to identify counterfeit versus genuine," DeSantis said. Periodically, there are people who attempt to recreate the watermark, he added, but it tends to be of very poor quality.

Counterfeiters whose bills do have watermarks are usually printing large-denomination bills on paper from small-denomination bills that they have bleached. People at stores usually only care that there is a watermark within the bill, Kersten said, but the watermark portrait must actually match the printed portrait to be genuine.

Pictured above is a forged $100 bill with a picture-perfect image of Benjamin Franklin -- but a watermark of Abraham Lincoln.


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