Liberty Reserve bust hits cybercriminals where it hurts

In toppling Liberty Reserve, one of cybercriminals' favorite money-laundering organizations, U.S. prosecutors have attacked Internet crime by targeting its financial infrastructure, a strategy advocated by experts.

The U.S. attorney's office in New York on Tuesday unsealed an indictment charging the operators of Liberty Reserve with money laundering and running an unlicensed money transmitting business.

The site, shuttered on Friday, laundered over $6 billion generated from criminal activity ranging from credit-card fraud and identity theft to child pornography and narcotics trafficking.

"We are now entering the cyber-age of money laundering," said Richard Weber, chief of the Internal Revenue Service, Criminal Investigation. The IRS-CI assisted in the case.

The indictment named seven of the company's principals and employees, including founder Arthur Budovsky, a former U.S. citizen who was arrested on Friday along with four other defendants in Spain, Costa Rica and New York.

The suspects are accused of running an operation that had 1 million users worldwide, including 200,000 in the U.S. The business conducted 55 million transactions since 2006, "virtually all of which were illegal," according to prosecutors.

By going after one of the world's largest online money laundering organizations, law enforcement is pursuing a strategy used in combating the narcotics trade.

"If we take the money out of crime, we put a crimp on crime," said Paul Rosenzweig, founder of Red Branch Consulting, which provides legal and strategic advice on national security. Rosenzweig is a former assistant secretary for policy at the Department of Homeland Security.

[Also see: Anti-money laundering solution to fill gap in the market]

Roel Schouwenberg, a senior researcher for Kaspersky Lab, said that busting up the financial support of cybercriminals makes it a lot harder for them to operate. "I've long advocated going after the money, especially when arrests seemed unlikely," Schouwenberg said. "This will definitely serve as a major disrupter to the underground ecosystem."

Because of the borderless nature of the Internet, clamping down on money laundering will be difficult, Rosenzweig said. Nevertheless, "the instinct [of law enforcement] is the right one."

Most experts advocate a holistic approach to battling cybercrime, which is more than just hacking computers and stealing data -- it's a business. "There is also the market side that converts these activities to real cash for the perpetrators," said Murray Jennex, a computer security expert and associate professor at San Diego State University.

Despite U.S. prosecutors' claims, not all Liberty Reserve users were criminals, the BBC reports. For example, Mitver Holdings, which has offices in Texas and London, used Liberty Reserve as a way to let foreign visitors buy goods from U.S. stores as if they had a locally issued credit card.

Prosecutors will have to prove in court that the main purpose of Liberty Reserve was to meet the financial needs of criminals.

"This case is far from over," Jennex said. "But I do think the action of shutting Liberty Reserve down is legitimate and a good first step."

What made Liberty Reserve so enticing to criminals was the anonymity it provided, prosecutors said. Only a legitimate email was needed to start money transactions.

The company did not handle cash directly. Instead, it used "third-party exchangers" that would actually handle the transactions and credit or debit the Liberty Reserve account, according to the indictment. The system enabled the company to avoid collecting any banking information on its clients, thereby not leaving a centralized paper trail.

Along with shutting down Liberty Reserve, law enforcement seized four currency exchanges that worked with the company and 35 other websites. The case involved 17 countries and is believed to be the largest international money-laundering prosecution in history.

"Given the level of international cooperation involved it would seem that operators of these companies have fewer places to hide -- which is a good thing," said Alphonse Pascual, analyst for Javelin Strategy and Research.

While the sum of money laundered by Liberty Reserve seems large, it represents only a small portion of the revenue generated by online criminal activity. Last year, identity fraud alone cost U.S. consumers $21 billion, the research firm Javelin said.

Read more about malware/cybercrime in CSOonline's Malware/Cybercrime section.

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Tags applicationsData Protection | MalwarelegalLiberty Reservesoftwaredata protectioncybercrimeInternal Revenue Servicemoney laundering

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