Wednesday, May 29, 2013


How were the principals of Liberty Reserve able to operate for so many years before they were indicted ? It appears that they took full advantage of a number of weaknesses in the global financial structure:

(1) They employed digital currency as the medium of exchange, which required customers to first send funds in dollars to third parties, who then forwarded them on. This additional step, which involved money transmitters in notoriously unregulated, and remote, jurisdictions, effectively provided an additional layer of protection, insulating Liberty from their customers. That makes law enforcement's job much more difficult, as there was lack of direct contact with the clients' money.

(2) Liberty took advantage of the lax regulation in Costa Rica, to operate as an unlicensed entity; it also repeatedly deceived regulators there about its activities. (Do you have any bank clients operating there, and if so, what sort of financial activities are they engaged in) ? Is it not now finally time for Costa Rica to clean up its facilitation of illicit commerce, or should the US impose sanctions until it does ?

(3) Most of the third-party money transmitters used as intermediaries were reportedly not licensed in their countries. Where were the local law enforcement agencies and regulators, allowing these illegal operations ? Bank accounts were located in offshore financial centres. Why didn't regulators in those tax haven jurisdictions investigate the huge cash flows ?

(4) Law enforcement, and the financial community, are just now starting to learn how digital currency can be used for illicit purposes, and the legal systems of developed countries has not yet enacted specific legislation to deal with it. See the recently released FinCEN material on the subject.

The scheme allowed criminal organisations to move, and store, billions of dollars of the proceeds of crime as digital wealth. You can expect that all manner of businesses involved in digital currency commerce will come under law enforcement's microscope in the near future.

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