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Liberty Reserve Case Highlights Need for Careful Vigilance on Money Laundering

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June 10, 2013

Late last month, the Justice Department shut down Liberty Reserve, a company that facilitated international money laundering by using digital currency to transmit funds.

The company appeared to be legitimate, but according to prosecutors, it laundered over $6 billion in proceeds from activities such as cybercrime, Ponzi schemes, child pornography, identity theft and crimes.

Joe Bognanno, director of AML product marketing at the anti-money laundering technology provider NICE Actimize, sees implications for the accounting profession, particularly forensic accountants, and those who have clients who act as money transmitters.

“It’s an extremely interesting case,” he said. “A lot of what Liberty Reserve did was classic money laundering. There are three steps that are typically looked at as the standard way in which money is laundered: placement, layering and integration. Placement tends to be the riskiest step for money launderers, where the dirty money obtained through an illegal activity needs to be placed in the legitimate financial system to make it look like it came from a legitimate source and move it around. With its structure, as well as its relationship with nefarious third-party exchange services, Liberty Reserve was able to obscure that placement process through a number of intricate maneuvers.”

Bognanno believes it’s important for accountants to be on the lookout for the placement step to make sure that illicit money isn’t being laundered. “It’s understanding what the scenario was, what those steps were, especially the placement step, and then looking at their customers, to understand whether or not their customer could fit into that scenario,” he said. “A good forensic accountant is someone who is looking for the unusual but is very suspicious when things look too normal. That was what they were trying to do, to make things look normal, like Liberty Reserve was operating aboveboard. They applied for a license when they were operating in Costa Rica. They told regulators that they had anti-money laundering programs in place when in fact they didn’t. They tried to look as if they were very aboveboard.”

He pointed to the importance of the due diligence process. “It’s not just the first time around, with the initial due diligence of where the source of funds come from, and just assuming that every subsequent transaction is similar,” Bognanno added. “It’s ongoing due diligence.”

He pointed out that Liberty Reserve grew out of a previously known money laundering company that also relied on digital currency. Two of the principals used to operate a company called Gold Age Inc., which transmitted funds through a digital currency called E-Gold. They were convicted of running an unlicensed money transmitter business, and E-Gold’s founders eventually pleaded guilty to money laundering.

Some watchdogs are now sounding warnings about the growing popularity of newer digital currencies, notably Bitcoin. Bognanno also sees risks in the use of Bitcoin, although the technology has not been tied to any illicit activity.

“Not to disparage them, but they certainly do represent the same kind of risk, because of the nature of the technology that enables them and the ability of regulators to get sufficient insight into their operations,” he said. “The nature of them being digital currencies means they may not reside in one particular location. They’re out there digitally, and that makes it so much more challenging. Institutions like Bitcoin have recently been making strong attempts to legitimize themselves and perhaps distance themselves from organizations like Liberty Reserve."

"They do represent risk, but because it is a useful service, there will continue to be services like this offered, and there will be some that are legitimate and others that are much more nefarious, like Liberty Reserve," he added. "I think it’s a reality of today’s world and therefore requires diligence and close attention and any attempt to mitigate those risks. But those risks are certainly there.”

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