RESEARCH PROJECT ON

MONEY LAUNDERING & IT ACT, 2000(“CYBER – LAUNDERING”)

Submitted to:

Mr. Kumar Gaurav

(Research Associate – Laws relating to Cyber & Information Technology)

Researched & Authored By:

Aeishwarya Jha

Roll No. 307

CHANAKYA NATIONAL LAW UNIVERSITY

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TABLE OF CONTENTS

ACKNOWLEDGEMENT……………………………………………………………...…………3

RESEARCH OUTLINE................................................................................................................. 4

TABLE OF STATUTES / CONVENTIONS / DECLARATIONS .............................................. 5

CH. 1: AN INTRODUCTION ....................................................................................................... 7

CH. 2: THREATS OF INCREASED MONEY LAUNDERING............................................... 10

CH. 3: STAGES OF MONEY LAUNDERING ........................................................................ 13

CH. 4: INCIDENTS AND MECHANISMS OF CYBER LAUNDERING .............................. 16

CH. 5: THE INTERNATIONAL ANTI-MONEY LAUNDERING REGIME............................ 20

CH. 6: THE INDIAN POLICY TOWARDS CYBER LAUNDERING...................................... 23

CH. 7: BALANCING CONCERNS OF FINANCIAL PRIVACY...............................................27

CH 8: PROPOSED AMENDMENT TO THE INFORMATION TECHNOLOGY ACT…...….29

CH. 9: CONCLUSION AND SUGGESTIONS............................................................................30

BIBLIOGRAPHY………………………………………………………………………………..32

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ACKNOWELEDGEMENT

The research on “Money Laundering & Information Technology Act – Cyber Laundering” is a part of Cyber Law Semester assignment. A humble gratitude is in order, for the subject faculty, Mr. Gaurav, for his pedagogic guidance. Grateful regards for the scholar’s whose work has been referred and are mentioned in the bibliography.

This assignment is relating to emerging trends on the subject area of research.

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RESEARCH OUTLINE

A. CENTRAL ARGUMENT

The central argument of this paper is that Indian Internet Law is desperately in need of a specific

provision to tackle cyber laundering. At the same time, the law must balance the right of

financial privacy of citizens along with legitimate law enforcement needs. The paper proposes

the required changes as an amendment to the Information Technology Act, 2000.

B. RESEARCH SCHEME

C.1 Aims and Objectives

The aim of this study is to understand the concept of cyber laundering, the emerging legal trends

towards this particular crime and the importance to guard against excessive invasion into the

financial privacy of citizens. The paper seeks to propose regulations that promote efficient

transactions over the web while preventing money laundering.

C.2 Limitations

Due to paucity of space and time to some extent, the researcher limits himself only to landmark

decisions of judicial bodies and has not considered the position of every country on the issues

discussed. The discussion on regular money laundering as a crime is also limited.

C.3 Breakup

The paper is spread across ten chapters. After the introduction, the threats of money laundering,

the stages and incidents are discussed. Thereafter, the international and domestic legal regime is

analysed in detail. A comparative study between Indian, US and EU regimes is provided. The

paper then discusses financial privacy rights and draws out the relevant legal amendment based

on the analysis done. A brief conclusion is made at the end with practical suggestions to stem

money laundering, aside from the legal amendments proposed.

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TABLE OF STATUTES / CONVENTIONS / DECLARATIONS

A. INTERNATIONAL INSTRUMENTS

Bank Secrecy Act, 1970 (USA)

EC Directive 2005/60/EC on Prevention of the Use of the Financial System for the

Purpose of Money Laundering and Terrorist Financing, 2005 (EU)

Electronic Communications Privacy Act, 1986 (USA)

European Convention on Human Rights, 1950 (EU)

Financial Action Task Force ―40+9 Recommendations, 2001

Global Programme against Money-Laundering, Proceeds of Crime and the Financing of

Terrorism, 1999

International Convention for the Suppression of the Financing of Terrorism, 1999

International Covenant on Civil and Political Rights, 1966

International Money Laundering Abatement and Anti-Terrorist Financing Act, 2001

(USA)

Money Laundering Control Act, 1986 (USA)

Money Laundering Suppression Act, 1994 (USA)

Privacy Act, 1974 (USA)

Right to Financial Privacy Act, 1978 (USA)

United Nations Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic

Substances, 1988

UN Convention against Transnational Organized Crime, 2000

UN Convention against Corruption, 2003

UN Model Law on Money Laundering and the Financing of Terrorism, 2009

Universal Declaration of Human Rights, 1948

B. DOMESTIC INSTRUMENTS

The Benami Transactions (Prohibition) Act, 1988

Bankers‘ Books Evidence (BBE) Act, 1891

Constitution of India, 1950

Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974

Information Technology Act, 2000

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Information Technology Amendment Act, 2008

Indian Penal Code, 1860

Indian Evidence Act, 1872

Information Technology (Reasonable Security Practices and Procedures and Sensitive

Personal Data or Information) Rules, 2011

Prevention of Money Laundering Act, 2002

The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act,

1988

Prevention of Money Laundering Act (Amendment Bill), 2011

Securities and Exchange Board of India, Master Circular on Anti Money Laundering

(AML) Standards/Combating Financing of Terrorism (CFT) Obligations, 2008

Reserve Bank of India Act, 1934

Reserve Bank of India, Master Circular on Maintenance of Deposit Accounts, 2012

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CH. 1: AN INTRODUCTION

“...and I will give him a white pebble, and on that pebble a new name written which no one

knows except the one receiving it.”1

This quote from the Holy Bible best sums up the state of the internet and the predicament

faced by law enforcement agencies. The absence of identification is the biggest benefit for users,

but also the biggest headache for security agencies. This is seen none more so than in the area of

money laundering, which has now moved to the internet, utilizing it as a mode for preparation,

execution and completion. The problem of money laundering has indeed reached epic

proportions. The International Monetary Fund estimates that two to five percent of the global

economy involves laundered money, while the Financial Action Task Force on Money

Laundering, an intergovernmental body set up to combat the problem, simply states that it is

“impossible to produce a reliable estimate of the amount of money laundered.”2 Generally, it has

been characterized to be the world‘s third-largest business’’. What is undisputable is that the

stakes are high, not only because of where the funds may be applied, but also because of the

magnitude of the funds involved.

A. WHAT IS CYBER LAUNDERING

Money laundering generally refers to the process of concealing the source of money that has

been obtained by illicit means.3 It takes its name because it correctly describes what takes place

in the process – illegal, or dirty money is put through a cycle of transactions, or ―washed, so

that it comes out the other end as legal, or clean, money. The origin of the term relates to mafia

members in the US buying Laundromats, so that they could mix their illegal money with the

legal revenue earned by the Laundromats.

With the advent of the internet and its increasing use for financial transactions and business,

money laundering has obtained a new field of operation. Thus, cyber laundering may be

1 The Holy Bible, Revelation, 2:17 (Book, Chapter: Verse). 2 United Nations Office on Drugs and Crime, Money Laundering and Globalization, available at https://www.unodc.org/unodc/en/money-laundering/globalization.html3 Rob McCusker, Underground Banking: Legitimate Remittance Network or Money Laundering System?, Crime And Justice International 21(89), 4 (2005).

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described as the process of “utilizing Internet-based electronic wire transfer methods, such as

Internet banking or online gambling, in furtherance of disguising the source of illegally obtained

money.”4 In essence, the object remains the same i.e. to legitimise illegal funds and hide their

source; however, the classification of an act as cyber laundering rests on the internet being a

mode of preparation, execution or conclusion of that activity.

B. UNDERSTANDING E-CASH

As the financial world moved online, the demand for efficient transactions led to the

establishment of electronic cash or simply E-cash‘. It plays the same role in the virtual world as

physical currency does in the real world and is hence sometimes termed as the “greenback of the

Internet.” The terms digital cash‘, digital currency’ and cyber-currency’ are all synonyms for

such an electronic medium of exchange which has no intrinsic value, being merely binary code

(series of 0‘s and 1‘s) in itself, and the barest trace of physical existence. It comes in three forms:

three forms: (i) operating within traditional financial institutions, such as banks; (ii) operating in

a tokenized’ system and; (iii) operating as a hybrid system. The most common use of e-cash is

through debit and credit cards, though stored value cards are also gaining in popularity. E-cash

allows actual assets to be transferred through digital communications in the form of individually

identified representations of bills and coins. This is similar to the serial numbers found on

physical currency5

For launderers, the key element of e-cash is it’s practically anonymity. Financial security of

internet users means that e-cash transactions require total privacy. This is indicated by ―secure

codes‖ or SSL locks that spring into action, whenever one engages in any e-commerce;

particularly, the use of debit or credit cards online. Money launderers exploit this characteristic

of internet commerce in order to disguise their transactions.

4 Stephen Jeffrey Weaver, Modern Day Money Laundering: Does the Solution Exist in An Expansive System of Monitoring & Record Keeping Regulations? 24 Ann. Rev. Banking & Fin. L. 443, 444 (2005). 5 DANIEL C. LYNCH & LESLIE LUNDQUIST, DIGITAL MONEY: THE NEW AREA OF INTERNET COMMERCE 99 (1996)

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C. LEGAL CROSSROADS

Money laundering itself has a massive social aspect and cyber laundering adds to the

predicament. The application of laws dealing with traditional money laundering to cyber

laundering activities is fraught with difficulty. The fear of money laundering only ends up

increasing regulatory frameworks which, in turn, affect the ability to conduct convenient,

efficient and relatively private financial transactions. In this sense, cyber laundering regulations

walk a tight-rope between individual financial privacy rights and legitimate law enforcement

interests. The paper seeks to unravel this complex web of rights and duties.

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CH. 2: THREATS OF INCREASED MONEY LAUNDERING

Before delving into the depths of the issues at hand, it is worthwhile to consider why

increased money laundering presents is such a matter of concern. It is seen that money

laundering is not per se a dangerous crime; however, it position as a resource for numerous other

dangerous crimes, lends it its classification as a dangerous crime. It is an integral part of the

crime itself, whether that ultimate crime is a blue-collar one, such as drug trafficking or a white-

collar one, such as embezzlement.

A. THREATS DUE TO MONEY LAUNDERING IN WHATEVER FORM

Each of the threats discussed here may arise due to money laundering in the physical form or due

to cyber laundering:

(i) Terrorism Financing: The war against terrorism is a matter of global importance. One facet of

this war is to destroy the support systems that aid in execution of a terrorist attack. This would

include the financing of terror groups, which is usually done using laundered money. The scale

of the problem came to light immediately after the September 11, 2001, attack on the World

Trade Centres in New York. Terrorists themselves are not too concerned about disguising the

origin of the money, but rather on concealing its destination and purpose. The widespread

availability of the internet provides a convenient method for terrorist organizations to transfer

funds, both illegal and legal, to cells across the globe.6

(ii) Fuel for Organized Crime: Laundered money becomes a fuel for organized crime like drug

trafficking. With most countries having strict laws on drug control, money collected from the

sale of drugs will always need to be laundered. Large-scale drug traffickers face a unique

problem of managing large sums of cash, much of it in small bills obtained from the payments

made by customers. For example, in Operation Polar Cap in 1980, US agents acting as

distributors for the Medellin cartel had to handle approximately $1.5 million a week in small

denomination currency.7 Such large and steady cash flows are rare among legitimate businesses.

6 Stephen I. Landman, Funding Bin Laden’s Avatar: A Proposal for the Regulation of Virtual Hawalas, 35 Wm. Mitchell L. Rev. 5159, 5169-5171 (2009). 7 PETER REUTER, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY LAUNDERING 41 (2004)

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It is no surprise then that the bulk of the current anti–money laundering8 regime was constructed

primarily to control drug trafficking by choking up funds and profits.

(iii) Corruption: Corrupt public officials have to launder bribes, kick-backs and siphoned public

funds. In India, the famous Koda Scandal, involving money laundered by the former Jharkhand

Chief Minister, Madhu Koda, is a prime example of such threats.9 This leads to reduced

government credibility and affects the quality of public services. Embezzlement, fraud, and tax

evasion proceeds are other avenues for money laundering.

(iv) Negative Impact on the Economy of the Country: Money-laundering may hut a nation‘s

economy by changing the demand for cash, making interest and exchange rates more volatile,

and by causing high inflation.

(v) Loss of foreign investment: Investments, and particularly foreign investments, which aid in

long-term economic growth of a nation, rely on stable conditions and good governance. These

are absent in nations with weak anti-money laundering regimes. Investors demand probity and

integrity from financial institutions that deal with their money and would hence shun an

institution found to assist in money laundering.

B. HEIGHTENED THREATS DUE TO CYBER LAUNDERING

Although the process of cyber laundering mirrors the traditional methods of physical money

laundering, it presents certain other heightened threats as compared to the latter:

(i) Efficiency: Cyber laundering avoids the problems associated with physically transferring large

sums of money, and allows instant transfers of money from and to anywhere in the world. As

there is no requirement to physically transport the money, the launderer can rely on fewer cronies

and has less opportunities of being caught.10

(ii) Anonymity: Cyber laundering removes the need for execution or completion of transactions

in person. In turn, the anonymity of the internet makes it near impossible for governments to

reconstruct the transactions in an audit trail. Digital cash is for all practical purposes,

8 Herein after referred as, “AML”.9 News Report, Madhu Koda and Associates Laundered a Staggering Rs. 3356 crore, INDIA TODAY, February 20, 2012, New Delhi.10 Wendy J. Weimer, Cyberlaundering: An International Cache for Microchip Money, 13 DePaul Bus. L.J. 199, 220 (2001).

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unconditionally untraceable, as the blinding carried out by the user‘s computer makes it

impossible to link payments to the payer.11

11 Jonathan P. Straub, The Prevention of E-Money Laundering: Tracking the Elusive Audit Trail, 25 Suffolk Transnat‘l L. Rev. 515, 522 (2002).

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CH. 3: STAGES OF MONEY LAUNDERING

Money laundering is usually described in terms of three sequential stages – placement,

layering, and integration. It need not be that all three stages occur, or that they can be separated

from each other. Nevertheless, this three-stage classification is a useful decomposition of what is

otherwise a complex process.

A. STAGES IN TRADITIONAL MONEY LAUNDERING

(i) Placement: This is the basic stage where the launderer places the illegal funds into

the financial system. This could be done by depositing it into a bank, or

introducing it into the retail economy through the purchase of goods (usually of

high value), property, or business assets.12 In case of bank deposits, the trend is to

use a process called smurfing, i.e. breaking up of large amounts of cash into

smaller amounts so that the transactions fall below the reporting requirements of a

given jurisdiction. Thus, in USA, banks must report domestic transactions over

$10,000 and international transactions over $5,000 to the Treasury Department

and so transactions will be structured accordingly.13 In India, deposits over Rs.

50,000/- are noted by requiring presentation of the PAN card; thus launderers

would keep their deposits to lesser than this amount.14Thus, the aim of this stage

is to remove the illegal money from the area of acquisition, and escape detection

by the authorities in doing so.

(ii) Layering: This is the process by which the source and ownership of the funds are

sought to be concealed. This is usually done by undertaking multiple and complex

financial transactions, such as international wire transfers or placing funds in an

overseas bank. The aim here is to distance the funds from their criminal origin

and make it difficult for anyone to trace the trail of the funds. Due to the large

12 JAMES RICHARDS, TRANSNATIONAL CRIMINAL ORGANIZATIONS, CYBERCRIME, & MONEY LAUNDERING: A HANDBOOK FOR LAW ENFORCEMENTS OFFICERS, AUDITORS, & FINANCIAL INVESTIGATORS 46-47 (1999). 13 Bank Secrecy Act (BSA), FinCen Form 104. 14 15 Reserve Bank of India, Master Circular on Maintenance of Deposit Accounts, RBI/2012-13/53, July 2, 2012, ¶2.4.

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number of transactions undertaken each day, authorities are unlikely to catch a

launderer at this stage of the process.15

(iii) Integration: This stage involves the reintroduction of funds back into the

legitimate economy. This could be done by various means that bring legitimacy to

the funds – most common are creating anonymous dummy corporations or

investing in real estate. Once this is complete, the launderer has cleansed

(laundered‘) his ill-gotten money.16

B. THE IDEAL CONDITIONS FOR EXECUTION OF THE STAGES IN CYBER

LAUNDERING

(i) Placement: At this stage, cyber launderers benefit from the anonymity of

internet transactions and e-Cash. The transactions are thus not face-to-face or

even physical. This allows them to go by undetected, by avoiding the strict

reporting requirements imposed on traditional financial institutions.

(ii) Layering: It is at this stage that the advantages of the internet truly can be

realized, over traditional forms of layering. The launderer must find an

institution, such as an online gambling site will permit him to set up an

account without physical verification or documentary identification. This

makes it extraordinarily difficult for enforcement authorities to trace the

account back to the cyber launderer. Furthermore, the internet provides near

instantaneous transfer of funds which can occur anywhere in the world, as the

only requirement is to possess an internet connection. Online bank transfers

are particularly difficult to trace back, particularly where there is use of

disguised IPs etc.17 The deeper this dirty money gets into the international

banking system, the more difficult it becomes to identify its origin.18

(iii) Integration: Integration is made easier by cyber laundering. For instance, a

launderer could setup an online gambling site and transfer illegal funds,

15 ANGELA VENG MEI LEONG, THE DISRUPTION OF INTERNATIONAL ORGANISED CRIME 33 (2007) 7.16 Supra, note 10, Straub, 51917 Supra, note 11, RICHARDS 49.18 Supra, note 2, UNODC Report.

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mixing it with the proceeds of the site itself. The funds then appear legitimate

to authorities tracing the audit trail of the profits. In fact, the launderer could

use legitimate bankers and lawyers at this stage, without too much hassle.

Other modes of integration include using debit cards issued by offshore banks

to make purchases online, fake loans from offshore companies, or simply

executing a traditional integration measure, like purchase of real estate,

online.19

19 Steven Philippsohn, The Dangers of New Technology – Laundering on the Internet, 5 J. Money Laundering Control 87 (2001).

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CH. 4: INCIDENTS AND MECHANISMS OF CYBER LAUNDERING

The methods by which money may be laundered are varied and can range in

sophistication. Earlier, laundering money was a physical effort of actually transporting currency,

which has been eliminated by cyber laundering. It was limited by the creative ability to

manipulate the physical world. The classic methods were flying hard cash out of one country and

depositing it in a foreign bank, bribing a bank teller, discretely purchasing property, or for smurfs

to deposit small cash amounts at a bank to avoid reporting requirements.20 These methods have

now evolved with the advent of cyber laundering.

The goal of any mechanism applied by the launderer is to convert one liquid asset into another

asset, which is preferably in a less liquid form, so as to make identification of the source of the

acquisition as difficult as possible. It should be noted that money is only a means of exchange

rather than an end it itself. This is known as the dispositional imperative of money i.e. it is

useless to keep as a product in itself, and needs to be disposed to yield any benefit to the holder. 21

The mechanisms of money laundering focus on this characteristic of money in seeking to

legitimise illegally obtained money. At the same time, it is this characteristic that provides

enforcement authorities with effective leverage to entrap transgressors, since the points of

disposal are where the offenders may be caught. The mechanisms and incidents of cyber

laundering should be understood in this light.

A. TRADITIONAL MECHANISMS THAT MAY BE APPLIED FOR CYBER

LAUNDERING

(i) Wire Transfers: This is akin to the physical transfers of money that would happen earlier.

However, wire transfers i.e. electronic transfers allow swift and nearly risk free conduit for

moving money between countries. Considering that on average 700,000 wire transfers occur

daily in any major jurisdiction like the US, UK or India, moving billions of dollars, illicit wire

transfers are easily hidden. This is often employed for bulk-cash movements across jurisdictions

and into banks where the regulations are not so strict.

20 Sarah N. Welling, Smurfs, Money Laundering and the Federal Criminal Law, 41 Fla. L. Rev. 287, 290 (1989)21 Brett Watson, The Global Response To Money Laundering, available at http://www.aic.gov.au/events/aic%20upcoming%20events/2002/~/media/conferences/2002-ml/part1.pdf

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(ii) Cash intensive business: Any business typically involved in receiving large cash inflows will

use its accounts to deposit both legitimate and criminally derived cash, claiming all of it as

legitimate earnings. A service-based business is best suited for such a mechanism of laundering.

Modern versions of this comprise online based cash intensive businesses like data-entry,

translations and software support that are even often be entirely fictitious. The source of the fund

is difficult to trace when payment is made in cash.22

(iii)Casinos: These are themselves a cash intensive business, and were a hotbed for money

laundering activity earlier. The individual would walk in to a casino with cash and buy chips,

play for a while and then cash in his chips, for which he would be issued a cheque. He could

deposit this into his bank account, and claim it as gambling winnings, for which he would then

pay a negligible (as compared to his total illegal earning) amount of tax23. Presently, the advent

of online casinos has made this mechanism all the more viable for launderers. There is no need to

take physical cash anywhere, E cash may be spent at the online casinos and then winnings can be

converted into legitimate physical currency.

(iv) Trade-based laundering: In trade based transactions, laundering could be done by under-

valuing or over-valuing invoices in order to disguise the movement of illegal funds. Online trade

based laundering operates in a similar manner and invoices can be quickly created and easily

tampered with in order to adjust illegal amounts.

(v) Round Tripping: In this mechanism of laundering, money would be deposited in a controlled

foreign corporation offshore, such as in a tax haven with minimum regulatory requirements, and

then shipped back as foreign direct investments, exempt from taxation.24 Jurisdictions which

allow related transactions to be done electronically, simply make the task simpler for the

launderers.

(vi) Shell companies / Black Salaries / Fictitious Loans: Shell companies are meant

to disguise the true beneficial owner of the assets. Black salaries are either where salaries are

paid to employees who don‘t actually exist, or illegal funds are used to pay parts of the salaries

22 Supra, note 9, Weimer, 222.23 Financial Action Task Force, Report on the Vulnerabilities of Casinos and the Gaming Sector, 1 February 2012, available at http://www.fatfgafi.org/media/fatf/documents/reports/Vulnerabilities%20of%20Casinos%20and%20Gaming%20Sector.pdf 24 See the definition given by the Supreme Court of India in Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 369, ¶105.

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of employees.25 Fictitious loans are advanced to launderers who repay them using their illegal

funds.

(vii) Bank Capture: Launderers would simply buy controlling interest in a bank and use it at their

whims for their illegalities. The advent of online banks and payment portals, like PayPal and

DigiCash mean that such a mechanism can easily be moved online.

(viii) Internet Banking: This works in a similar manner to the physical world. It is generally an

avenue for smurfing activities by launderers. They undertake small transactions through internet

banks and avoid reporting requirements.

(ix) Real Estate and Online Auctions: The advent of online shopping through MagicBricks26, 99

Acres, and other such property portals has meant that money laundering through the purchase of

real estate can now move online. Online auctions are another mechanism, by creating fake

auctions, or grossly overstating the price or worth of goods.

B. ONLINE GAMES: MONEY LAUNDERING AS THE LATEST CHEAT CODE

Online games are arguably the most notorious space for money laundering online that is

available today. Multiplayer online role-playing games, called Massive Multi-player Online Role

Playing Games (MMORPG), like Linden Lab‘s ―Second Life and Blizzard Entertainment‘s

―World of Warcraft, offer a nearly foolproof way to disguise and move money across

jurisdictions. Most of these games have various opportunities for money based transactions, such

as buying of virtual property, or gaming props etc. For instance, Second Life, which has

approximately 21.3 million account holders globally, uses a virtual currency called ―Linden

dollars for its transactions. Although the exchange rate fluctuates, on average, approximately 100

Linden dollars is equivalent to 1 US$. The virtual account is tied up to an actual bank account,

and the daily turnover generated by the game is estimated at almost 1.5 million US$. Earlier,

digital earnings had to be converted into real currency directly through the use of virtual

currency arbitrage trading websites, which was at least a small opportunity for regulators to keep

an eye on transactions. But in May 2006 Entropia Universe introduced real world ATM cards to

its 250,000 players, allowing them to instantly withdraw hard cash from their virtual world

25 Kim-Kwang Raymond Choo and Russell G. Smith, Criminal Exploitation of Online Systems by Organised Crime Groups, Asian journal of criminology 3(1) 37-59, 46 (2008)26 See http://www.magicbricks.com/; http://www.99acres.com/

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assets. This was followed by other game developers and now the entire process is wholly outside

the ambit of authorities.27

27 Angela Irwin & Jill Slay, Detecting Money Laundering and Terrorism Financing Activity in Second Life and World of Warcraft, International Cyber Resilience Conference (2010), available at http://ro.ecu.edu.au/cgi/viewcontent.cgi?article=1004&context=icr

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CH. 5: THE INTERNATIONAL ANTI-MONEY LAUNDERING REGIME

Money laundering is usually a transnational activity and hence, the anti-money

laundering regime has to be at an international level. It comes as little surprise then that the

United Nations has been at the helm of the anti-money laundering regime and ensured co-

ordinate efforts by member States to tackle this menace. International efforts to curb money-

laundering reflect a strategy aimed at attacking the economic power of criminals in order to

weaken them by preventing their benefiting or using illicit proceeds and, equally, at forestalling

the nefarious effects of the criminal economy.

A. EFFORTS OF THE UNITED NATIONS AGAINST MONEY LAUNDERING28

The main objective was set up by the General Assembly at its Twentieth Special Session,

8-10 June, 1998, for all member States on the drug trafficking problem.29 The issue was seen as a

key element of the drug trafficking, as the finance and profits of this activity were obtained

through money laundering. Several international conventions followed, which are discussed

briefly below:

a. United Nations Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic

Substances, 1988 (―Vienna Convention) this was the first international legal instrument to

embody the money-laundering aspect and the first instrument which criminalised money

laundering. Article 3(v)(b)(i) and Article 3(v)(b)(ii) criminalize the financing of any of the

offences covered under the Convention and attempts to disguise the source of funds used for

such financing. The elements of the crime are essentially (a) knowingly engaging in a financial

transaction; (b) with the proceeds of a crime; (c) for the purpose of concealing or disguising the

illicit origin of the property. As this Convention was formulated in 1988, there is no specific

provision dealing with cyber laundering, though this definition is quite wide to encompass cyber

laundering used to finance or disguise the profits obtained by drug trafficking.

28 See also United Nations Office on Drugs and Crime, An Overview of the UN Conventions and other International Standards concerning Anti-Money Laundering and Countering the Financing of Terrorism , (2007), available at http://www.imolin.org/pdf/imolin/Overview%20Update_0107.pdf 29 UNGA Special Session on Drugs, Twentieth Special Session, Resolution A/S-20/14.

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b. UN Convention against Transnational Organized Crime, 2000 (Palermo Convention)

The Palermo Convention was the second international instrument that considered the

issue of money laundering and criminalized several facets of the offence. It widened the scope of

the money-laundering offence by applying it to the proceeds of all serious crimes, and not just

drug trafficking. Article 6 criminalizes the laundering of proceeds of crime by requiring State

parties to adopt legislative and other measures against conversion or transfer of property,

knowing that such property is the proceeds of a crime, for the purpose of concealing or

disguising the illicit origin of such property. Another interesting provision is Article 19 of the

Convention, which provides for joint investigation by States for cross border offences. This

provision is of significance in the context of cyber laundering, which always has an international

element.

c. UN Convention against Corruption, 2003 (UNCOC)

The UNCOC creates a comprehensive domestic supervisory and regulatory regime for

banks and non-banking financial institutions, as well as any entities particularly susceptible to

being involved in money-laundering. It also calls for the establishment of Financial Intelligence

Units (FIUs).30 Article 23 deals with the laundering of the proceeds of an act of corruption. The

provision is similar to Article 6 of the Palermo Convention, except that it relates to money

laundering concerned with offences of corruption alone. Article 24 criminalizes concealment of

property when then person involved knows that such property is the result of any of the offences

under the UNCOC. This would cover the position of intermediaries that help carry out

transactions, including over the internet. Article 27 criminalizes the participation and attempt to

launder money as well, while Article 28 clarifies that knowledge, intent or purpose, established

from objective circumstances is required to prove the offence.

The UNCOC also has a specific provision covering cyber laundering. Article 14(3) deals with

preventive measures against money laundering and requires financial institutions and money

remitters ‘ton include on forms for the electronic transfer of funds and related messages, certain

accurate and meaningful information on the originator, maintain such information throughout the

payment chain, and apply enhanced scrutiny to transfers of funds that do not contain complete

30 UNCOC, Article 58.

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information on the originator. This provision is an excellent trend to dealing with the problem of

cyber laundering, but attempting to eliminate anonymity of the transacting parties.

B. FINANCIAL ACTION TASK FORCE (FATF)

In 1989, an intergovernmental body, known as the Financial Action Task Force (FATF)

was setup to combat money laundering and provide an international coordinated response to it.

The main objective of the FATF is “the development of and promotion of policies, both at

national and international levels, to combat money laundering and terrorist financing.”

The FATF‘s efforts brought anti-money laundering guidelines into prominence globally. In

1990, the FATF issued a set of 40 Recommendations for improving national legal systems,

enhancing the role of the financial sector and increasing cooperation. These were revised first in

1996 and again in 2003 to reflect changes in money laundering techniques, including cyber

laundering. These measures are considered the “international measure for anti-money

laundering programs” and “benchmark standard” around the world. Following the 9/11 terror

attack, 9 special recommendations that deal specifically with terrorist financing were prepared

and the collation is now called the ―40+9 Recommendations.

Recommendation 1 requires that countries criminalise money laundering based on the Vienna

and Palermo Conventions. The effort must be to include the widest range of predicate offences.

Recommendation 20 requires development of modern and secure techniques of money

management that are less vulnerable to cyber laundering.

The benefits of implementing the FATF Recommendations have been recognized by the

Parliamentary Standing Committee, in its report on the Prevention of Money Laundering Act

(Amendment Bill), 201131, including securing a more transparent and stable financial system that

is more attractive to foreign investors and preventing terrorist financing. After India prepared an

Action Plan for changes in legislations, regulatory and institutional framework to confirm to

FATF standards, it was finally granted membership in the FATF in June 2010.

31Seehttp://www.prsindia.org/uploads/media/Money%20Laundering/SCR%20Prevention%20of%20Money%20Laundering%20Bill%202011.pdf

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CH. 6: THE INDIAN POLICY TOWARDS CYBER LAUNDERING

The concept of money laundering in India can be traced back to the infamous ―Hawala

transactions that ruled the decades prior to liberalization and continue to do so. The hawala

mechanism was traditional money laundering setups that physically transported hard cash

overseas or helped convert black money to white money domestically. It remains popular even

today, especially for many organized crime syndicates. Over the decades, a number of Acts

sought to curb the menace of money laundering, though they were not specifically named with

that objective.32 It took until 2002 for Parliament to pass a specific legislation. Needless to say,

the issue of cyber laundering remained unattended, though as will be seen, a wide interpretation

may be given to bring it within the framework of the legislations.

A. PREVENTION OF MONEY LAUNDERING ACT, 2002 (AS AMENDED IN 201233 )

The central objective of the Act was to provide for confiscation of property derived from,

or involved in, money laundering. Interestingly, the term ―money laundering is not specifically

defined in the Act. Section 3, as the charging section, specifies money laundering as directly or

indirectly attempting to indulge or actually being involved in any process or activity connected

with the proceeds of crime and projecting it as untainted property. In Hari Narayan Rai v. Union

of India, the Jharkhand High Court held that the term ―laundering as used in the Section

comprises involvement in “any process or activity by which the illicit money is being projected

as untainted.” The relevant date was not the date of acquisition of illicit money but the date on

which it was being processed for projecting it untainted.34

32 See for instance, Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; The Benami Transactions (Prohibition) Act, 1988; The Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988 33 Prevention of Money-laundering (Amendment) Act, 2012 (No. 2 of 2013) w.e.f. 15.02.201334 B.A. No. 6829 of 2010, 4th February, 2011 (Jharkhand HC) : MANU/JH/0302/2011.

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With the advent of amendment to PMLA, “In the Schedule to the principal Act, — (i) for Part A,

the following Part stands substituted, namely:—

PARAGRAPH 22: OFFENCES UNDER THE INFORMATION TECHNOLOGY ACT, 2000

72. Penalty for breach of confidentiality and privacy.

75. Act to apply for offence or contravention committed outside India.”

These aforesaid provisions from Information Technology act, amendment are treated as

scheduled offences under PMLA in accordance with section 2 (y) of PMLA, 2002.

The FATF did point out several concerns with the PMLA, when India sought membership

initially in 2006, including certain concerns relating to electronic transactions:

a) Commodities market out of the ambit of PMLA.

b) Designated Non-Financial Businesses and Professions, aside from casinos are also not

subjected to PMLA.

c) The identification and verification of beneficial ownership of legal persons is not required,

which is significant in cases of cyber laundering.

d) Ineffective sanctions regime for non-compliance with reporting and recording obligations.

B. INFORMATION TECHNOLOGY ACT, 2000 (AS AMENDED IN 2008)

One would expect that this comprehensive legislation ought to have a provision to deal with

cyber laundering. But that is not so. In fact, the existing provisions themselves may be

insufficient to prosecute a launderer under the IT Act based on even a wide interpretation.

The Act does extend to any offence committed outside India by any person and thus recognizes

the cross-border nature of offences. The words computer and computer system, in Section 2(i)

and 2(l) respectively, have been also widely defined to include all electronic devices with data

processing capability.

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Section 43 deals with the civil offence of theft of data and damage to computers, computer

system. There is no real scope to seek damages for cyber laundering activities under this section.

Section 43-A is a more relevant provision, making a body corporate that is negligent in

implementing reasonable security practices and thereby causes wrongful loss or gain to any

person, liable to pay damages by way of compensation to the person so affected. The practices

extend to protection of sensitive data‘, which includes password, details of bank accounts or card

details, medical records etc.35 Under the Rules, in the event of an information security breach, the

body corporate shall be required to demonstrate that they have implemented security control

measures as per the documented information security program.36 These provisions and Rules thus

cover civil liability and corporate responsibility.

The cyber crimes covered under the Act are quite limited. Section 65 criminalizes tampering

with source documents. Section 66 covers several computer related offences, including criminal

liability for data theft covered under Section 43, when done dishonestly and fraudulently. The

other offences covered from Section 66A to Section 66F, introduced by the Amendment in 2008,

are sending offensive messages, dishonestly receiving stolen computer resource, electronic

signature or other identity theft, cheating by impersonation using a computer resource, violations

of privacy and cyber terrorism respectively. All these offences are cognizable and non-bailable.

In the penultimate chapter, the researcher proposes Section 66G to deal with cyber laundering

specifically.

The IT Act has also brought about relevant amendments into other legislations like the Indian

Penal Code, 1860, the Indian Evidence Act, 1872 etc. to ensure that they are updated to deal with

cyber crimes. Some of the relevant provisions to deal with cyber laundering include the

admissibility of electronic records as evidence as provided for in Section 65B of the Evidence

Act. The Bankers‘ Books Evidence (BBE) Act, 1891, was amended to allow as evidence cash-

books, account-books etc., stored as electro-magnetic data in any storage device. Finally, the

Reserve Bank of India Act, 1934, has been amended in Section 58(2) to include a sub-clause

relating to the regulation of funds transfer through electronic means between banks (i.e.

35 Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011.36 Ibid.

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transactions like RTGS and NEFT) to facilitate such wire transfers and ensure legal admissibility

of documents and records. This is a significant development in the context of wire transfers,

although it remains to be seen whether the provision is extended to require documents relating to

online electronic transfers of money, over internet banking etc.

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CH. 7: BALANCING CONCERNS OF FINANCIAL PRIVACY

Before proceeding to propose the relevant changes to Indian law to effectively tackle

cyber laundering, it would be worthwhile to briefly consider the impact of any changes on the

right of financial privacy of citizens. The internet offers complete anonymity and financial

privacy, as discussed above. However, this allows it to become a money launderer‘s paradise. At

the same time, removal of anonymity on the internet would allow every activity of a user to be

tracked by authorities. This has the potential for abuse and may lead to a surveillance state. The

fear of money laundering only serves to increase banking regulations which, in turn, affect

everyone‘s ability to conduct convenient, efficient and relatively private financial transactions.

Evidently, privacy rights, internet security and prevention of money laundering have a significant

societal aspect. Thus any provision suggested must be a balance between individual financial

privacy rights and legitimate law enforcement interests.

A. PRIVACY AS REGARDS ‘CORRESPONDENCE’

The right to privacy has itself been recognized by the Supreme Court to be part of the

Right to Life, guaranteed under Article 21 of the Constitution.37 Data privacy itself was not

particularly considered in these decisions, which dealt with personal details.

B. FINANCIAL PRIVACY

Financial privacy specifically refers to an evolving relationship between technology and

the legal right to, or at least, the public expectation of privacy of one‘s financial data.38 This right

has not specifically been declared to be part of the right to privacy in India. The IT Act has

substantial emphasis on data privacy and information security, but Section 69 empowers the

Government or certain agencies, to intercept, monitor or decrypt any information generated,

transmitted, received or stored in any computer resource, subject to compliance with the

37 Kharak Singh v. State of U.P., AIR 1963 SC 1295; R. Rajagopal v. State of Tamil Nadu, (1994) 6 SCC 632.38 BENJAMIN E. ROBINSON, FINANCIAL PRIVACY & ELECTRONIC COMMERCE: WHO'S IN MY BUSINESS 1-2 (2000)

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procedure laid down. It may be exercised for security of the state and preventing incitement to

the commission of any cognizable offence, both of which may be read broadly to encompass

cyber laundering and terrorist financing using the internet.

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CH 8: PROPOSED AMENDMENT TO THE INFORMATION TECHNOLOGY ACT TO

COVER CYBER LAUNDERING AS A DISTINCT OFFENCE

The following amendment is proposed and is self-explanatory:

Section 66G. – Cyber Laundering

Whoever commits intentionally, by use of a computer, computer system or communication

device,

a) the conversion or transfer of property, knowing that such property is the proceeds or profits of

an illegal activity, for the purpose of concealing the illegal origin of such property;

b) the concealment or disguise of the true nature, source, disposition, movement, or rights with

respect to property, knowing that such property is proceeds or profits of an illegal activity;

c) the acquisition, possession or use of property, knowing, at the time of receipt, that such

property is proceeds or profits of an illegal activity;

d) participates, abets, conspires to commit, or attempts to commit any of the above;

is guilty of the offence of cyber laundering and shall be punished in accordance with the

provisions of this Act and in the Prevention of Money Laundering Act, 2002.

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CH. 9: CONCLUSION AND SUGGESTIONS

This paper set out to consider whether the internet had the potential to become a money

launderer‘s paradise, and found that indeed it did. Indeed, cyber laundering is the latest technique

of money laundering, that is presenting serious difficulties for law enforcement authorities. The

application of present law dealing with traditional methods of money laundering to cyber

laundering is fraught with difficulty.39 The mechanisms and incidents of cyber laundering are

becoming more complex by the day. Globally, nearly two billion individuals have Internet

access, and that number is only going to rise in the coming years.40 There is clearly a need for

major changes in law and practice to stem this problem.

This paper has not delved into practical changes, as these are largely outside the researcher‘s

expertise. Briefly, some PRACTICAL MEASURES that may be explored include:

a. Enforcing regulatory reporting requirements as against internet banks and businesses;

b. Mandating KYC and identity verification for online transactions;

c. Using better anti-money laundering software to catch suspicious transactions;

d. Blacklisting money launders from online transactions to promote responsible use of digital

cash transactions.

What this paper has considered are the LEGAL PROVISIONS to tackle cyber laundering and it

has found that provisions of Indian law are woefully inadequate. Therefore, it has suggested a

comprehensive provision, proposed Section 66G in the IT Act, 2000, to tackle cyber laundering

as a distinct offence. In doing so, it has been mindful of the delicate balance between financial

privacy rights and legitimate law enforcement interests. It asserts that prohibiting or secretly

monitoring E-cash transactions on the grounds that such transactions are more difficult to trace is

not sufficient justification by authorities. The State cannot turn private agencies into its

surveillance agents. Equally, there is the need avoid a “social panic approach”, which only

serves to drive legislation on rhetoric and ill-guided activism in order to be ―seen to be doing

39 Hannah Purkey, The Art of Money Laundering, 22 Fla. J. Int‘l L. 111, 115 (2010) 40 Internet World Stats, Internet Usage Statistics: The Internet Big Picture—World Internet Users and Population Stats (2010), http://www.internetworldstats.com/stats.htm.

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something rather than by an objective understanding of its impact. A situation where the cost of

anti-money laundering regimes escalate above the benefits they bring is to be avoided. The

proposed Section 66G strikes that balance by providing the authorities with teeth while allowing

individuals to keep their rights.

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BIBLIOGRAPHY

a. Books Referred

1. DANIEL C. LYNCH & LESLIE LUNDQUIST, DIGITAL MONEY: THE NEW AREA OF

INTERNET COMMERCE (1ST ED. 1996)

2. PETER REUTER, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY

LAUNDERING (1ST REV. ED. 2004)

3. JAMES RICHARDS, TRANSNATIONAL CRIMINAL ORGANIZATIONS,

CYBERCRIME, & MONEY LAUNDERING: A HANDBOOK FOR LAW ENFORCEMENTS

OFFICERS, AUDITORS, & FINANCIAL INVESTIGATORS (1ST ED. 1999)

4. ANGELA VENG MEI LEONG, THE DISRUPTION OF INTERNATIONAL ORGANISED

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3. United Nations Office on Drugs and Crime, Model Law, available at

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5. Wendy J. Weimer, Cyberlaundering: An International Cache for Microchip Money, 13

DePaul Bus. L.J. 199, 220 (2001).

6. Jonathan P. Straub, The Prevention of E-Money Laundering: Tracking the Elusive Audit Trail,

25 Suffolk Transnat‘l L. Rev. 515, 522 (2002).

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http://www.aic.gov.au/events/aic%20upcoming%20events/2002/~/media/conferences/2002-ml/

part1.pdf

8. Kim-Kwang Raymond Choo and Russell G. Smith, Criminal Exploitation of Online Systems

by Organised Crime Groups, Asian journal of criminology 3(1) 37-59, 46 (2008).

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at http://www.box.net/shared/nikjjgng3m

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13. Sarah N. Welling, Smurfs, Money Laundering and the Federal Criminal Law, 41 Fla. L. Rev.

287, 290 (1989)

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