An Israeli Court in the month of August 2017 ruled that Israeli banks are not obligated to provide financial services to companies whose primary business is trading in crypto-currencies such as Bitcoin or Ethereum , for that matter any other virtual currency. The Court reasoned that banks should not have to assume the risks associated with providing a financial platform to these digital currency businesses. A cryptocurrency we know is a digital or virtual currency that uses cryptography for security that is encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds(for details about cryptocurrencies and their working you consult my already published with title Bitcoin Bubble).Critics of crypto-currency point to the lack of identifying information throughout digital transactions as a substantial obstacle to existing AML (Anti Money Laundering) surveillance and enforcement capabilities. First of all let’s try to understand the concept of money laundering and then try to figure out its mechanism of working. Money laundering is concealing the transformation of profits from illegal activities and corruption into ostensibly “legitimate” assets (Wikipedia).It is the process by which large amounts of illegally obtained money from drug trafficking, terrorist activities or other serious crimes are given the appearance of being originated from a legitimate source. If Money laundering activity is completed successfully it allows the criminals to maintain control over their proceedings and ultimately provides legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of drug trafficking, terrorists, the insider dealers and tax evaders. According to the United States Treasury Department “Money laundering is the process of making illegally-gained proceeds appear legal .First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the “dirty money” appears “clean.” Money laundering is the crucial step in the success of drug trafficking and terrorist activities. So many organizations around the world are trying to curb the money laundering activities. Most common players in the money laundering are drug traffickers, embezzlers, corrupt politicians and public officials.
Money laundering has the following basic steps –
(i) Placement: At this stage launderer saves the illegal money into legitimate financial institution like banks. This will be like cash bank deposits and this is the most risky and toughest stage of laundering process. Large amount of cash and high value transaction should be reported by banks to their central bank.
(ii) Layering: Layering involves sending the money through various financial transactions to change its form. Layering consists of several bank to bank transfers between different accounts in different names in different countries. Making deposits and withdrawals to continually vary the account of money in the accounts. Changing the money currency and purchasing the high value items to change the form of money. Layering helps in making the dirty money to legitimate money hard to trace.
(iii) Integration: At this stage money re-enters the main stream economy in the legitimate form. It appears in the way as it came from a legal transaction. This may involve final bank transfer into the account of local business. It is very difficult to catch the launderer during the integration stage.
In 1996, the International Monetary Fund estimated that 2–5% of the worldwide global economy involved laundered money. The effort to combat money laundering is never-ending because criminals always seek new ways to move the proceeds of crime. It is a battle that requires constant vigilance, and is not so much a matter of winning or losing, but of just trying to stay current with the latest tactics. In 2002, the Parliament of India passed an Act called the Prevention of Money Laundering Act 2002 and came into force with effect from July 1, 2005 to provide for confiscation of properties either derived or involved in money laundering. The Act and Rules notified there under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information It also accounts for mutual legal assistance in India by making enabling provisions for agreements with foreign countries to enforce this act, assistance to a contracting state in the investigation of an offence, reciprocal arrangements for processes and assistance for transfer of accused persons and attachment, seizure and confiscation of property in a contracting State or India.
With the emergence of crypto currencies and paradigm shift to digital transactions by banks , it has become a challenge in this technological advanced age to detect or have control over money laundering despite having different anti money laundering laws in several countries. Various countries including India have declared that crypto currencies are not a legal tender because of difficulty in tracking money laundering activities because of the blockchain technology in case of these currencies than normal currencies. Despite having laws in India as well as in other nations, more often than not money launderers fly to those nations or hide their money in the banks other than their resident ones like Swiss banks where it is difficult to bring them back for the purpose of prosecution. Irrespective of the situation, still there are various ways by which it can be prevented:
Financial institution or intermediaries have to maintain records in detail about the nature and value of transaction whether such transaction comprise a single transaction or series of connected transactions.
Information on transactions to be informed to the central bank like RBI.
Control over cryptocurrencies as is the case with normal currencies by respective governments.
Monitoring of entry of cash into the financial system, transfers to and from the financial system and cross border flow of cash.
Regulatory focus on digital payment-related issues centered on containing money-laundering risks associated with new payment methods like mobile wallets, e-payments, and e-money issuers.
Top priority should be accorded to combating cybercrime and curbing potential money-laundering risks associated with virtual currencies.
Third-party services such as the shared services utility model for KYC compliance, managed services for transaction monitoring, and browser- based delivery of commercial watch lists should be leveraged by several banks.
However to curb the money laundering, focus should be on the initial stage i.e. placement stage (entry of cash into the financial system) where the launderer is most vulnerable to detection. International cooperation is essential in identification, tracking and prosecuting of illegal proceedings of crime. To eradicate the money laundering completely all countries should come to one agreement and they should cooperate with each other if a criminal goes into hiding.
(The author is a freelancer. His views are personal)
