Globalisation of Companies

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

Submitted to: Submitted by:

Dr.Deepika Prakash Neha Sachdeva

Amity Law School LLM (CBIL) 2022-23

Amity University 2025

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 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 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

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.2 Thus, cyber laundering may be 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.”3
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

1
The Holy Bible, Revelation, 2:17 (Book, Chapter: Verse).
2
Rob McCusker, Underground Banking: Legitimate Remittance Network or Money Laundering System?, Crime
And Justice International 21(89), 4 (2005).
3
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).
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a tokenized’ system and; (iii) operating as a hybrid system. This is similar to the serial numbers
found on physical currency4
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.

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.. 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.

4
DANIEL C. LYNCH & LESLIE LUNDQUIST, DIGITAL MONEY: THE NEW AREA OF INTERNET
COMMERCE 99 (1996)

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 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.

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 widespread availability of the internet provides a convenient
method for terrorist organizations to transfer funds, both illegal and legal, to cells across the
globe.5
(ii) Fuel for Organized Crime:.. 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.6 It is no surprise then that the bulk of the current anti–money laundering7
regime was constructed primarily to control drug trafficking by choking up funds and profits.
(iii) Corruption: In India, the famous Koda Scandal, involving money laundered by the former
Jharkhand Chief Minister, Madhu Koda, is a prime example of such threats.8
(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.

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:

5
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).
6
PETER REUTER, CHASING DIRTY MONEY: THE FIGHT AGAINST MONEY LAUNDERING 41 (2004)
7
Herein after referred as, “AML”.
8
News Report, Madhu Koda and Associates Laundered a Staggering Rs. 3356 crore, INDIA TODAY, February 20,
2012, New Delhi.

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(i) Efficiency: As there is no requirement to physically transport the money, the launderer can
rely on fewer cronies and has less opportunities of being caught.9

(ii) Anonymity: Digital cash is for all practical purposes, unconditionally untraceable, as the
blinding carried out by the user‘s computer makes it impossible to link payments to the payer.10

9
Wendy J. Weimer, Cyberlaundering: An International Cache for Microchip Money, 13 DePaul Bus. L.J. 199, 220
(2001).
10
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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 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.11 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.12 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.13
(ii) Layering: Due to the large number of transactions undertaken each day,
authorities are unlikely to catch a launderer at this stage of the process.14
(iii) Integration: This stage involves the reintroduction of funds back into the
legitimate economy.
Once this is complete, the launderer has cleansed (laundered‘) his ill-gotten money.15

11
JAMES RICHARDS, TRANSNATIONAL CRIMINAL ORGANIZATIONS, CYBERCRIME, & MONEY
LAUNDERING: A HANDBOOK FOR LAW ENFORCEMENTS OFFICERS, AUDITORS, & FINANCIAL
INVESTIGATORS 46-47 (1999).
12
Bank Secrecy Act (BSA), FinCen Form 104.
13
15 Reserve Bank of India, Master Circular on Maintenance of Deposit Accounts, RBI/2012-13/53, July 2, 2012,
¶2.4.
14
ANGELA VENG MEI LEONG, THE DISRUPTION OF INTERNATIONAL ORGANISED CRIME 33 (2007)
7.
15
Supra, note 10, Straub, 519

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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..
(ii) Layering: It is at this stage that the advantages of the internet truly can be
realized, over traditional forms of layering. Online bank transfers are
particularly difficult to trace back, particularly where there is use of disguised
IPs etc.16 The deeper this dirty money gets into the international banking
system, the more difficult it becomes to identify its origin.17
(iii) Integration: Integration is made easier by cyber laundering. 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.18

16
Supra, note 11, RICHARDS 49.
17
Supra, note 2, UNODC Report.
18
Steven Philippsohn, The Dangers of New Technology – Laundering on the Internet, 5 J. Money Laundering
Control 87 (2001).

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 INCIDENTS AND MECHANISMS OF CYBER LAUNDERING

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.19 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.20

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
(ii) Cash intensive business: 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.21
(iii) Casinos: 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 tax 22.
Presently, the advent of online casinos has made this mechanism all the more viable for

19
Sarah N. Welling, Smurfs, Money Laundering and the Federal Criminal Law, 41 Fla. L. Rev. 287, 290 (1989)
20
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
21
Supra, note 9, Weimer, 222.
22
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%20Se
ctor.pdf

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launderers.
(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
(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.23

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

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$. 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 assets. This was followed by other game developers and now
the entire process is wholly outside the ambit of authorities.24

23
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.
24
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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 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.

A. EFFORTS OF THE UNITED NATIONS AGAINST MONEY LAUNDERING25

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.26

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.

25
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
26
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)
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).27
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
information on the originator.

B. FINANCIAL ACTION TASK FORCE (FATF)

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.”

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.

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

27
UNCOC, Article 58.

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(Amendment Bill), 201128, including securing a more transparent and stable financial system that
is more attractive to foreign investors and preventing terrorist financing

28
Seehttp://www.prsindia.org/uploads/media/Money%20Laundering/SCR%20Prevention%20of%20Money%20Lau
ndering%20Bill%202011.pdf

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 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. Over the decades,
a number of Acts sought to curb the menace of money laundering, though they were not
specifically named with that objective.29 It took until 2002 for Parliament to pass a specific
legislation.

A. PREVENTION OF MONEY LAUNDERING ACT, 2002 (AS AMENDED IN 201230 )

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 ActIn 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.31

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.

29
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
30
Prevention of Money-laundering (Amendment) Act, 2012 (No. 2 of 2013) w.e.f. 15.02.2013
31
B.A. No. 6829 of 2010, 4th February, 2011 (Jharkhand HC) : MANU/JH/0302/2011.

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The practices extend to protection of sensitive data‘, which includes password, details of bank
accounts or card details, medical records etc.32 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.33 These
provisions and Rules thus cover civil liability and corporate responsibility.

32
Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or
Information) Rules, 2011.
33
Ibid.

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 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.

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.34 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.35 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
procedure laid down.

34
Kharak Singh v. State of U.P., AIR 1963 SC 1295; R. Rajagopal v. State of Tamil Nadu, (1994) 6 SCC 632.
35
BENJAMIN E. ROBINSON, FINANCIAL PRIVACY & ELECTRONIC COMMERCE: WHO'S IN MY
BUSINESS 1-2 (2000)

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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;

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 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.36 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.37 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

36
Hannah Purkey, The Art of Money Laundering, 22 Fla. J. Int‘l L. 111, 115 (2010)
37
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
CRIME (2ND ED. 2007)
5. HEBA SHAMS, LEGAL GLOBALIZATION: MONEY LAUNDERING LAW AND
OTHER CASES (2004)
6. BENJAMIN E. ROBINSON, FINANCIAL PRIVACY & ELECTRONIC COMMERCE:
WHO'S IN MY BUSINESS (2ND ED. 2000)
7. FRED H. CATE, FINANCIAL PRIVACY, CONSUMER PROSPERITY, AND THE
PUBLIC GOOD (2ND ED. 2003)
b. Miscellaneous Reports and other References
1. United Nations Office on Drugs and Crime, Money Laundering and Globalization, available
at https://www.unodc.org/unodc/en/money-laundering/globalization.html
2. 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
3. United Nations Office on Drugs and Crime, Model Law, available at
http://www.unodc.org/documents/money-laundering/Model_Provisions_2009_Final.pdf
4. United Nations Office on Drugs and Crime, Objectives of the Global Programme against
Money Laundering, available at http://www.unodc.org/unodc/en/money-laundering/programme-
objectives.html

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c. Articles Referred
1. Rob McCusker, Underground Banking: Legitimate Remittance Network or Money Laundering
System?, Crime And Justice International 21(89), 4 (2005)
2. 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)
3. 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).

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