Prosecutors in the United States have accused Liberty Reserve of being an unlicensed money-transfer business that laundered $6 billion. According to court documents, Liberty Reserve handled financial transactions that resulted from a number of illegal activities, including "identity theft, access device fraud, computer hacking, wire fraud, child pornography and narcotics trafficking." Authorities said the service sported one million users and handled 55 million transactions, but failed to register as a money-transmitting service in the United States, despite having 200,000 users here.
According to authorities, Kats co-founded Liberty Reserve in 2006, then helped run the company -- which billed itself as the world's "largest payment processor and money transfer system" -- until 2009, when he had a falling out with co-founder Arthur Budovsky. Liberty Reserve promised anonymity -- an account could be created using only an email address -- and untraceability, in return taking a 1% commission on all transactions. For just 75 cents more per transaction, the service would also hide users' account numbers on their transactions.
[ Why are consumers stuck cleaning up data breach messes? See Experian Breach Fallout: ID Theft Nightmares Continue. ]
"As a co-founder and operator of Liberty Reserve, Vladimir Kats served as a global banker for criminals, giving them an anonymous, online forum to hide the proceeds of their illegal and dangerous activities," said Manhattan U.S. attorney Preet Bharara in a statement.
The Justice Department shut down Liberty Reserve in May 2013 and indicted seven people on related charges, and authorities in the United States, Costa Rica and Spain made a number of related arrests. Notably, Kats was busted in Brooklyn, N.Y., while Budovsky -- a Costa Rica citizen of Ukrainian origin -- was arrested in Spain.
Where Kats is concerned, the Department of Justice didn't just bust him on charges relating to Liberty Reserve, but also on one count each of receiving child pornography, as well as committing marriage fraud. According to court documents, "Kats received and attempted to receive files containing child pornography over the Internet via a file-sharing network, following a prior conviction" in New York County Supreme Court on child pornography possession charges on December 1, 2006. On the marriage front, meanwhile, according to court documents, Kats married a woman in July 2002 "for the purpose of helping her fraudulently obtain U.S. citizenship."
Kats, appearing Thursday in Manhattan federal court, pleaded guilty to all five charges filed against him. He now faces up to 30 years in jail just for the Liberty Reserve charges. In addition, he also faces up to 40 years in jail -- and a minimum 15-year sentence -- relating to the charge of receiving child pornography, plus up to five years more in jail for marriage fraud. His sentencing date has not yet been set.
The Liberty Reserve shutdown, meanwhile, reportedly created a panic in cybercrime circles, with the administrator of one bulletproof hosting service reporting that he lost $25,000 as a result. Other users, meanwhile, took to underground discussion forums to try to identify a replacement technique for anonymously moving illicit gains.
According to court documents, Liberty Reserve had been playing a cat-and-mouse game with Costa Rica banking authorities for several years. Notably, the operators of the service allegedly created a fake portal for demonstrating compliance with the country's banking regulations. But according to court documents, communications between company employees acknowledged that the portal was fake.
In 2011, facing increased pressure from U.S. financial crime investigators, the company told Costa Rica authorities that they'd sold the business to a foreign company. But according to authorities, the business continued to operate through a network of shell companies, and the owners began moving funds to an account based in Cyprus, then to accounts in Russia. After Costa Rica authorities seized $19.5 million, Liberty Reserve's operators allegedly began moving money to more than 20 shell-company accounts held in Australia, China, Cyprus, Hong Kong, Morocco and Spain.