How Arthur Budovsky ran the biggest money-laundering operation in history

In the days following Arthur Budovsky's arrest at a Spanish airport last week, a US investigator observed that "if Al Capone was alive today", he'd probably have hidden his money on the virtual currency exchange, Liberty Reserve. Why not? The system, allegedly overseen by Budovsky from his base in Costa Rica, is estimated by US authorities to be "the biggest money-laundering operation in history", says The Sunday Times. They reckon that from 2006 until May this year, it processed 50 million transactions worth $6bn via a network of third-party 'exchangers' stretching from Latin America to Vietnam.

Layers of anonymity, and "a devil-may-care stance" on who used the service, made it "the cyberbank of choice" for criminals from identity thieves to drug dealers.

Budovsky, 39, is a mysterious figure. The only known source of information on his early life is an interview from 2002 published on Planetgold.com (probably one of his own sites) in which he claims to have emigrated from the Ukraine to the US with his parents in the late 1980s. His first venture was as an exporter focusing on electronics, which "developed to include escrow services". By 2002, he was offering clients a digital currency service, supposedly backed by gold.

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Budovsky had his "first brush with the law" in 2006, when he and his partner, Vladimir Kats, were prosecuted in New York for transmitting money without a licence, and sentenced to five months' probation, says the Financial Times. Budovsky simply moved the outfit to Costa Rica, gaining citizenship in 2008 via an arranged marriage with a woman he'd never met. She told a local reporter she was offered US$600 to do the deed, which was performed (then perfectly legally) in Budovsky's absence.

Having renounced his US citizenship, Budovsky considered himself safe from US law, says the local Tico Times, because "Costa Ricans are protected by the constitution from extradition".

Budovsky still took elaborate precautions, surrounding himself with gun-toting "Russian henchman" and deploying "multiple identities". But he appears to have "enjoyed a rock n' roll lifestyle" on the back of the hundreds of millions of dollars in transaction fees, says The Sunday Times. Costa Rican police have impounded five luxury cars from properties connected to the ring.

When Budovsky hit problems with the local authorities he bought them off with "lavish gifts". But as the international investigation against him gathered pace, he took the operation underground, relocating servers to Switzerland and Sweden and "running the business through shell companies", says The Economist. It could take years before the authorities discover the full extent of this "cyberweb of intrigue". Meanwhile, Budovsky awaits extradition to America in a Spanish jail. If convicted, he faces a possible 30 years behind bars.

The murky world of digital currencies

Given the set-up of the scheme, it's a wonder it lasted so long, says James Surowiecki in The New Yorker. The LR was supposedly pegged to the US dollar on a one-for-one basis. But there was nothing to stop Budovsky flooding the market and devaluing everyone else's holding. Hordes of criminals nonetheless put their faith in the system. "Like good disciples of Adam Smith," they relied "not on Budovsky's benevolence but on his pursuit of his own self-interest": the long-term value of the business "depended on it not screwing over its customers". It's a testament to markets' capacity to flourish without legal enforcement that there is "honour even among thieves".

But anyone with cash in the system when the Feds swooped is nursing large losses now, notes Brian Krebs on Krebsonsecurity.com. Liberty Reserve's shutdown has caused "a major upheaval" in the cybercrime economy. It's also "shaken the burgeoning world of digital currencies", leaving some wondering who'll be next, says Schumpeter in The Economist. Attention has inevitably turned to that "darling of virtual currencies", the Bitcoin. "But the two are not the same."

Bitcoin, while hardly squeaky clean, is already a mainstream currency and aficionados argue that the Liberty takedown will only strengthen Bitcoin's viability if it leads to improvements in regulatory oversight. That's already starting to happen, says Stephen Foley in the FT. Criminals might have been "the first adopters" of digital money but it's here to stay.