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TABLE OF CONTENTS



ACKNOWLEDGEMENT
RESEARCH OUTLINE
CH. 1: AN INTRODUCTION
CH. 2: THREATS OF INCREASED MONEY LAUNDERING
CH. 3: STAGES OF MONEY LAUNDERING
CH. 4: THE INDIAN POLICY TOWARDS CYBER LAUNDERING
CH 5: PROPOSED AMENDMENT TO THE INFORMATION TECHNOLOGY ACT
CH. 6: CONCLUSION AND SUGGESTIONS
BIBLIOGRAPHY











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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. sunil sir, for his pedagogic guidance. Grateful regards for the scholars 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

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.

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.

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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CH. 1: AN INTRODUCTION

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.
1
Generally, it has been characterized to be the worlds 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.
2
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
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
In essence, the object remains the same i.e. to legitimise illegal funds and hide their

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
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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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 0s and 1s) 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 currency
4

For launderers, the key element of e-cash is its 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.

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,

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

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.
5

(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

5
Stephen I. Landman, Funding Bin Ladens Avatar: A Proposal for the Regulation of Virtual Hawalas, 35 Wm.
Mitchell L. Rev. 5159, 5169-5171 (2009).
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distributors for the Medellin cartel had to handle approximately $1.5 million a week in small
denomination currency.
6
Such large and steady cash flows are rare among legitimate businesses.
It is no surprise then that the bulk of the current antimoney laundering
7
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.
8
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 nations
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.
9


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.
9
Wendy J. Weimer, Cyberlaundering: An International Cache for Microchip Money, 13 DePaul Bus. L.J. 199, 220
(2001).
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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.
10
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.
11
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.
12
Thus, 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

10
JAMES RICHARDS, TRANSNATIONAL CRIMINAL ORGANIZATIONS, CYBERCRIME, & MONEY
LAUNDERING: A HANDBOOK FOR LAW ENFORCEMENTS OFFICERS, AUDITORS, & FINANCIAL
INVESTIGATORS 46-47 (1999).
11
Bank Secrecy Act (BSA), FinCen Form 104.
12
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.
13

(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.
14


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.
15
The deeper this dirty money gets into the international
banking system, the more difficult it becomes to identify its origin.
16

(iii) Integration: Integration is made easier by cyber laundering. For instance, a
launderer could setup an online gambling site and transfer illegal funds,

13
ANGELA VENG MEI LEONG, THE DISRUPTION OF INTERNATIONAL ORGANISED CRIME 33 (2007)
7.
14
Supra, note 10, Straub, 519
15
Supra, note 11, RICHARDS 49.
16
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
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CH 4. : 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.
17
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 2012
18
)

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.
19





17
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
18
Prevention of Money-laundering (Amendment) Act, 2012 (No. 2 of 2013) w.e.f. 15.02.2013
19
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:


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.
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.
20
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.
21
These provisions and Rules
thus cover civil liability and corporate responsibility.




20
Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or
Information) Rules, 2011.
21
Ibid.
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CH 5 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. 6: CONCLUSION AND SUGGESTIONS

This paper set out to consider whether the internet had the potential to become a money
launderers 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.
22
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.
23
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 researchers
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
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.

22
Hannah Purkey, The Art of Money Laundering, 22 Fla. J. Intl L. 111, 115 (2010)
23
Internet World Stats, Internet Usage Statistics: The Internet Big PictureWorld Internet Users and Population
Stats (2010), http://www.internetworldstats.com/stats.htm.
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BIBLIOGRAPHY


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)