Abstract
The purpose of this study is to show how, in addition to cash or other fiat currencies, cryptocurrencies[1] are used by organised crime and economic fraud. We’ll look at the money laundering process, how cryptocurrencies fit into it, and how law enforcement and government agencies responded to this innovative payment mechanism. Peer-to-peer financial transactions using cryptocurrencies eliminate the need for middlemen. The transparency that blockchain technology provides has made cryptocurrencies popular with the darknet and other organised crime groups. The creation of Bitcoin in 2009[2] marked the beginning of the cryptocurrency era. The goal of this type of fully digital money was to seriously undermine the role that the government-backed central banking system plays in managing fiat currencies. A comparison of several cryptocurrency frameworks from across the world with reference to India is part of the study. According to this study, cryptocurrencies are ideal for money laundering because they don’t require location or personal information, giving their owners some degree of anonymity. When this function is used, there is a lessened chance that unlawful activity will be discovered and looked into by law enforcement. Governments are also unable to control bitcoin transactions because cryptocurrency transactions do not need to be verified by banks, governments, or non-governmental groups. A user can conduct transactions from several accounts at once and manage many accounts at once. In a notice published on March 7, the administration stated that activities involving cryptocurrency assets were subject to the Prevention of Money Laundering Act. The article shows how India has not complied with international anti-money laundering legislation and explains why the risk of money laundering connected to cryptocurrencies cannot be sufficiently controlled by current international standards.
Key Words
Money Laundering, Blockchain technology, Cryptocurrency, Bitcoin, White-collar crimes.
Research Methodology
The thesis first examines the efficacy of crypto asset restrictions in India and other countries using the functional technique. The legal parallel focuses on money laundering and other possible criminal wrongdoing by persons or organisations, as well as commercial prohibitions. Such a comparison sheds light on the applicability and practicality of the current Indian laws. Additionally, the coherence of present crypto asset laws and business practices is examined in this thesis through the application of the analytical technique. The rapid growth of fintech has increased the complexity of regulatory frameworks in many countries. Authorities are the primary entities responsible for ensuring market integrity, safeguarding consumers, and maintaining financial stability. Therefore, strict rules may be required. Finally, the thesis assesses the efficacy and consistency of Indian laws and through theoretical methods and comparative analysis, and rules linked to commercial and non-commercial crimes utilising crypto assets. The analytical and functional methods are also included in “the common-core method” approach, one of the comparative methodologies, which allows for a thorough analysis of the efficacy and coherence of present legislation in Australia, the US, the UK, and India.
Money Laundering Using Cryptocurrencies.
The act of using virtual currencies to conceal the ownership and source of illicit payments is known as cryptocurrency money laundering. Here are some common methods:
1. Blending Services: Criminals use mixing[3], or tumbling, services to aggregate cryptocurrency transactions from several sources. When these services mix the cash and distribute them to multiple addresses, it becomes more challenging to determine the source.
2. Cryptocurrency Swaps: Offenders may utilise unauthorised or clandestine cryptocurrency trading platforms to transform counterfeit cash into cryptocurrencies. Through performing this, they can further obscure the actual origin of the payments and increase their level of obscurity.
3. Layering: By executing multiple operations, scammers transfer funds across different cryptocurrency accounts and trades via a chain of intermediaries.
Agents thus discover it tricky to follow the rules and regulations.
4. Integration with Lawful Sources: Funds generated via illegal activities might be used to establish illegal shareholders or firms. They could utilise bitcoin to launch reputable enterprises or purchase commodities like real estate or high-end merchandise; all of these interactions seem to be lawful.
4. Initial Coin Offerings (ICOs): Hackers may employ ICOs[4] to generate funds by releasing tokens. ICOs, or original token products and services, are touted as profitable ventures for shareholders. Still, the funds raised are often diverted or deployed as a cover for illegal expenditures.
Laws pertaining to cryptocurrency and anti-money laundering (AML)
Its goals are to ensure that the rules against money laundering are eventually put into effect and to deter individuals from utilising digital currencies for illicit objectives. Some noteworthy AML laws that frequently address cryptocurrency are as follows:
Customer due diligence (CDD)[5]: The process of running background checks and other screenings on a customer to make sure they are appropriately risk-assessed before being on boarded is known as customer due diligence, or CDD. Know Your Customer (KYC) and Anti-Money Laundering (AML) programmes revolve around CDD. It assists insurance companies and banks in preventing financial offences such as deception, money laundering, financing of terrorism, and the illicit trade of people and drugs.
Know Your Customer (KYC): Businesses that deal in cryptocurrency are usually required to implement KYC[6] procedures. In course of such operations, names, addresses, and other pertinent details regarding the people they serve are gathered. This facilitates the process of finding and identifying cryptocurrency users.
Financial institutions are obligated to report suspicious activity (SAR), which includes bitcoin trades.
Transaction Monetaring: The term “transaction monitoring” describes the process of keeping an eye on consumer transactions, which includes evaluating past and present customer interactions as well as information to give a comprehensive view of consumer behaviour. This can apply to withdrawals, deposits, and transfers. The majority of financial institutions will inevitably evaluate this data using software. Modern AML transaction monitoring systems integrate data, technology, and human understanding. While algorithmic learning performs tedious, monotonous work to analyse thousands of millions of points of information in order to find structures, the human mind is able to take decisions that depend on those trends. Controlling information and taking action is far more productive and effective when supplemented with confidential information and concentrated into a single platform with a user-friendly interface. This enables speedier reaction to any hazards and an improved strategy to conformity.
Legal issues and cryptocurrency’s place in India
It has been the subject of intense discussion and regulatory examination. In India, it is legal[7] for people to purchase, possess, and exchange cryptocurrencies. Nonetheless, the Indian government and regulatory organisations have been striving to create a legal framework since they have voiced worries about the hazards connected to cryptocurrencies. The federal government and the states have equal ability to oversee and control Bitcoins and other cryptocurrencies, as stated in Article 246 read with the 7th Schedule. While not specified explicitly, bitcoins are included in the category of “other similar instruments.” The regulatory framework of cryptocurrencies is outlined by three laws/acts: the FEMA, the Coniage Act, and the RBI Act. In light of this, understanding this position in further detail is essential to understanding cryptocurrencies. When taken as a whole, these three regulations influence how money is created, used, and consumed in addition to defining and controlling it. The fact that neither “lawful tender” nor “banknotes” are included under any of the provisions of these three acts is noteworthy.
Currency
There is no explanation of currency by the RBI. Nonetheless, the FEMA Act[8] defines foreign currency. Any kind of check and other such instruments, banknotes, drafts, money orders, postal orders, traveler’s checks, and others as determined by RBI by FEMA. Something that is not regarded as Indian money is foreign currency. This concept does not apply to one-rupee coins or special banknotes issued in accordance with RBI Act Section 28.
Legal tender
In Indian law, the word “legal tender” is nevertheless undefined. The exclusive right to print banknotes was granted to the Reserve Bank of India. Because of this, the RBI’s banknotes are recognised as legal money in India and are protected under Section 26 of the RBI Act of 1934.
Currency Notes
According to F.E.M.A. Section 2(i), currency notes are defined as money in the form of coins and banknotes. This conclusion holds that as cryptocurrencies like bitcoins have not been issued in accordance with the RBI Act or the Coinage Act, they do not meet this condition. The Central Bank of India is the only entity empowered to issue bank notes, according to Section 22 of the RBI Act of 1934, and both notes and coins issued by the RBI are accepted as legitimate currency throughout India, according to Section 26. Since cryptocurrencies like Bitcoins are not issued by the RBI, the bill will not provide them the same legal tender status as banknotes or other currencies. Cash and banknotes don’t satisfy the criteria to be considered legal tender, therefore they do not qualify as legal tender.
Virtual Currency–
Do virtual currencies have the same legal status as cash in India? Do Bitcoins and other cryptocurrencies count as currencies? The dictum “express um facit cessare taciturn,” which states that what is not stated explicitly is excluded, is upheld by Indian courts. was brought up in the cases of Union of India v. Tulsiram Patel (1985)[9] and Shankara Rao Badam v. State of Mysore (1969). Given the aforementioned, Bitcoins and other cryptocurrencies cannot be referred to as currencies because they are not defined as such. It appears that the RBI will need to issue a notification in order to bring Bitcoins and other cryptocurrencies under the jurisdiction of Section 2(h) of the RBI Act, although it can also be brought under the definition of such other similar instruments under that section.
The Indian Government’s Concerns About Cryptocurrencies
The cautious approach taken by the Indian government towards cryptocurrencies aims to strike a balance between innovation and regulatory concerns. Indian authorities have acknowledged the potential of blockchain technology[10], but they are hesitant to support the use of cryptocurrencies as a means of trade because of worries about consumer protection, money laundering, and financial stability. To address these issues, the government has put out a number of regulation proposals in recent years, such as legislation regulating cryptocurrencies and a complete ban on their use. Industry participants and cryptocurrency aficionados, on the other hand, have opposed these suggestions, arguing for a more progressive and inclusive regulatory framework.
The government said that transactions involving cryptocurrency assets were governed by the Prevention of Money Laundering Act in a notice released on March 7. This thesis offers solutions to control the problem of money laundering through the use of cryptocurrencies. Although current anti-money laundering laws now cover the aspect of cryptocurrencies, they are still insufficient to address aspects of blockchain technology like stake, security, or identity verification. A hands-off approach was taken by the R.B.I. until April 2018, as a result of the Central Government’s strategy being delayed. However, in a statement released on April 6, 2018, the RBI forbade banks from offering financial services to individuals or groups that engaged in cryptocurrency trading in India. such an advisory would go unnoticed by the government. It looks to be in the hold and observe state.
As to sources, the Reserve Bank of India[11] was monitoring data from other countries regarding the hazards linked to cryptocurrencies, namely the possibility of money laundering and unsatisfactory investment prospects. In addition to pointing out that mining, trading, or taking bitcoin as payment was not accepted as legal, the Central Bank of India released a warning in 2014 about the following hazards.
1. Cryptocurrencies are digital money stored in electronic wallets. Value loss could occur from lost passwords, hacking, etc.
2. Since cryptocurrency trading, purchasing, and selling are prohibited by the central bank and the Indian government, no approved parties or exchanges will be responsible for any losses that occur.
3. A user may not be allowed to take action in court if they suffer an inconvenience when using peer-to-peer transaction.
KYC
KYC stands for “know your customer,” and it’s a useful tool for an organisation to validate a customer’s identity. Before investing in any kind of instrument, the customer must submit all necessary KYC papers. Before granting any consumer the ability to conduct financial activities, the RBI has mandated that all financial institutions do the KYC procedure for each and every one of its clients. This is an easy one-time procedure that the customer can do online or offline, depending on their preference for KYC verification.
The Reserve Bank of India has instructed all banks to adhere to the KYC—Know your Customer[12]—Norms to safeguard customer accounts and ensure compliance with the Anti-Money Laundering and Countering Financing of Terrorism Act. This also holds for investments made in stocks, commodities, and other financial markets. Clients may occasionally be asked to submit KYC documentation, and if necessary, physical verification of the individual and the location may also be conducted. It is imperative that any customer who deviates from their regular payment schedule or accounts for any unusual transactions be notified right away.
Since Bitcoins are peer-to-peer in nature and are based on Blockchains with long transaction histories, they are pseudo-anonymous and cannot be used in the Indian system due to KYC reporting requirements. In India, exchanges only permit account opening after KYC requirements have been satisfied. It is mandatory for banks and other financial institutions to gather transactional data about their clients and to provide it to law enforcement when there is a reason for concern.
Section 3 of the Prevention of Money Laundering Act[13], 2002 (the “PMLA”) defines the act of money laundering. In PMLA Section 3, the word “cryptocurrency” was recently added. Peer-to-peer exchanges keep the trade secret from outside parties, which may impede the flow of information to the agencies about tainted or suspicious transactions.
Therefore, it would appear that new legislation as well as amendments to related acts will be needed to address the issues raised by these and other cryptocurrencies. It also appears that the current laws are unable to effectively regulate transactions involving Bitcoin or other cryptocurrencies. On exchanges registered for cryptocurrencies in India, transactions are limited to electronic transfers only, and they are subject to strict Know Your Customer regulations. They are following the guidelines to ensure that neither they nor their clients are impacted by the laws about money laundering. It is irrelevant to ask if K.Y.C. standards as they are applied in India are sufficient to stop money laundering.
Position of virtual currencies in Foreign Countries
Different foreign nations have different views about cryptocurrencies. While some nations have welcomed cryptocurrencies and legalized them, others have issued advisories or imposed limitations on them. For example, under the Bank Secrecy Act (BSA), cryptocurrency money transmitters in the US are regulated by the Financial Crimes Enforcement Network (FinCEN). Certain cryptocurrencies[14] are now governed by securities laws and regulations after being categorized as securities by the Securities and Exchange Commission (SEC).
The EU’s cryptocurrency regulations are outlined in the Fifth Anti-Money Laundering Directive (5AMLD). It requires custodian wallet providers and cryptocurrency exchanges to follow anti-money laundering (AML) and know-your-customer (KYC) guidelines.
According to the Payment Services Act, cryptocurrencies are accepted as valid forms of payment in Japan. The country has enforced license requirements for cryptocurrency exchanges to further protect consumers and prevent money laundering.
Suggestions and Recommendations
Global recommendations that India can put into practice
Presenting the Japan Model, where licenses are easily obtained and can be easily tracked down.
The Payment Services Act in Japan, which has the most advanced Bitcoin laws globally, recognizes Bitcoin and other virtual currencies as legitimate property (PSA).
As a result of these laws, cryptocurrency exchanges operating in Japan must apply for and comply with standard AML/CFT regulations. In December 2017, the National Tax Agency declared that gains made from cryptocurrency should be considered as “miscellaneous income” and that traders should receive the appropriate charges. The world’s largest Bitcoin market is located in Japan.
The Financial Instruments and Exchange Act (FlEA) and the PSA are two of the most recent regulations, and they will take effect in May 2020. The modifications rename “virtual currency” as “crypto-assets,” tighten regulations on crypto financial derivatives, and reinforce restrictions on managing users’ virtual money. As per the updated guidelines, the FIEA covers cryptocurrency-swapping businesses, while the PSA covers custodial internet providers for cryptocurrencies in Japan that do not purchase or sell crypto assets.
Japan Cryptocurrency Exchange Regulations
Japan has progressive laws governing bitcoin trading as well. Only companies with highly qualified financial agencies are allowed to function as bitcoin exchanges under the PSA. However, foreign cryptocurrency exchanges are required to sign if they can show proof of a corresponding enrollment guideline in their host country, to Japan’s liberal mindset.
Although exchanges are allowed in Japan, the country has become more aware of crypto regulations following several high-profile thefts, such as the infamous Coin cheque robbery of $530 million in virtual currency. The Financial Services Agency (FSA) of Japan has put a lot of effort into policing cryptocurrency exchanges within the country. The FSA must now be contacted for cryptocurrency trading to be operational, as a result of PSA amendments. Stricter guidelines for AML/CFT[15] and information security are imposed, and this process may take up to six months. Exchange-based laws in Japan are primarily concerned with maintaining market integrity; subscribers, dealers, and exchanges must adhere to particular record-keeping requirements and submit a financial statement to the Financial Services Agency (FSA).
Adhering to FATF guidelines regarding cryptocurrency
The advantages of information assets are numerous. They could speed up, simplify, and reduce the cost of the transaction while offering options to those who cannot access traditional financial products. However, they run the risk of becoming a legitimate haven for money laundering and terrorist activities in the absence of regulatory oversight. The Financial Action Task Force (FATF) has been keeping a close eye on changes in the bitcoin industry. Several regional
governments have begun to regulate the virtual currency market, and some have outright prohibited digital commodities.
However, the majority of governments haven’t taken any action yet. Terrorists and other criminals have a lot of opportunities thanks to these holes in the international regulatory framework.
With the support of the G20, the FATF has established globally enforceable standards to forbid the misuse of virtual assets for money laundering and financing terrorism. A virtual commodity is any valuable software program that can be transferred, exchanged, and used in exchange for money. There is no mention of the fiat currency digital model.
By applying the same restrictions that apply to the finance industry, the FATF guidelines guarantee that virtual resources are fairly represented. The FATF standards apply when virtual resources are converted from one digital commodity to another and when they are exchanged for fiat money.
Conclusion
To stop financial fraud, it’s critical to improve your ability to monitor commodity derivatives providers and examine digital commodities. Fighting criminal financing requires an interdisciplinary agency that works with public and private partnerships.
New technologies can help prevent financial fraud involving cryptocurrencies by being integrated into networks of illicit financing. More ways to prevent money laundering with cryptocurrencies include passing privacy laws, using “White Caps,” and allowing banks to examine currency transactions online. Cryptocurrencies are a long-term threat to the nation because they are illegal. They should be subject to the same laws that govern other currencies, and the appropriate steps should be taken.
Notes
[1] https://www.unive.it/pag/fileadmin/user_upload/dipartimenti/economia/doc-eng/eudifin/wp/WP10.pdf
[2] https://ideas.repec.org/a/rej/journl/v22y2020i76p66-71.html
[3] https://boldergroup.com/insights/money-laundering-in-cryptocurrency/
[4] https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp#:~:text=Initial%20coin%20offerings%20(ICOs)%20are,have%20yielded%20returns%20for%20investors.
[5] https://notabene.id/crypto-travel-rule-101/aml-crypto#is-there-money-laundering-in-crypto-transactions
[6] https://www.elliptic.co/anti-money-laundering-aml-in-cryptocurrency
[7] https://www.forbes.com/advisor/in/investing/cryptocurrency/crypto-bill/#:~:text=Is%20Cryptocurrency%20In%20India%20Legal,disputes%20while%20dealing%20with%20cryptocurrency.
[8] https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=829#:~:text=In%20terms%20of%20sub%2Dsection,held%20or%20owned%20by%20such
[9] https://blog.ipleaders.in/union-of-india-v-tulsiram-patel-case-analysis/
[10] https://www.linkedin.com/pulse/governments-response-cryptocurrency-india-news-coverage2018-pgrxc
[11] https://www.businesstoday.in/latest/corporate/story/cryptocurrency-in-india-what-the-govt-stand-legal-status-its-future-296570-2021-05-20
[12] https://www.rbi.org.in/CommonPerson/english/scripts/notification.aspx?id=2607
[13] https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_2_00035_200315_1517807326550§ionId=25469§ionno=3&orderno=3
[14] https://blog.ipleaders.in/status-cryptocurrency-india-foreign-countries/
[15] https://www.investopedia.com/cryptocurrency-regulations-around-the-world-5202122#:~:text=15-,Japan,comply%20with%20AML%2FCFT%20obligations.
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Author: Mansi Tyagi, Law College Dehradun
