Cyber Money Laundering in India

10 October 2016

Money is like fire, an element as little troubled by moralizing as earth, air and water. Men can employ it as a tool or they can dance around it as if it were the incarnation of a god. Money votes socialist or monarchist, finds a profit in pornography or translations from the Bible, commissions Rembrandt and underwrites the technology of Auschwitz. It acquires its meaning from the uses to which it is put. Benjamin Franklin said, “Money has never made man happy, nor will it; there is nothing in its nature to produce happiness. The more of it one has the more one wants”.

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Raghu Raman, “Five types of crimes are now converging. Cyber crimes such as identity theft, illegal access to e-mail, and credit card fraud are coming together with money laundering and terrorist activities. Large amounts of money is now stored in digital form. Now you can transfer money through electronic and online gateways to multiple accounts. ” • In the beginning, laundering money was a physical effort. The art of concealing the existence, the illegal source, or illegal application of income, and then disguising that income to make it appear legitimate required that the launderer have the means to physically transport the hard cash.

The trick was, and still is, to avoid attracting unwanted attention, thus alerting the Internal Revenue Service (IRS) and other government agencies involved in searching out ill-gotten gains. In what could be described as the “low-tech” world of money laundering, the process of cleaning “dirty money” was limited by the creative ability to manipulate the physical world. Other than flying cash out of one country and depositing it in a foreign bank with less stringent banking laws, bribing a bank teller, or discretely purchasing real or personal property, the classic approach was for a “smurf” to deposit cash at a bank. Cyber laundering is a new way to hide the proceeds of crime and the advance of technological solutions of electronic payments and online gambling has eliminated the need for time and space as compared to the traditional way of money laundering to achieve Cyber laundering. Countries with bank-secrecy laws are directly connected to countries with bank-reporting laws, making it possible to anonymously deposit “dirty” money in one country and then have it transferred to any other country for use.

Depending on which international agency you ask, criminals launder anywhere between $500 billion and $1 trillion worldwide every year. The global effect is staggering in social, economic and security terms. Terrorist funds are recycled in the financial system through a variety of layering techniques which take advantage of regulatory and supervisory weaknesses. • The abuse of the Internet by money launderers is potentially a significant threat. Till date, there are only few criminal cases concerning so called cyber laundering.

But there are some symptoms observed by international organizations, law enforcement agencies, financial intelligence units and financial institutions. Criminals have been constantly seeking new ways to clean their illicit gains in order to stay ahead of law enforcement. Similar situation was in case of wire transfers in the 80’s and 90’s. Due to its decentralized structure, the internet has increasingly become the mechanism of choice of many criminals to channel funds from one global location to another, sometimes in mere minutes and, if handled professionally, without leaving traces.

Although the amounts thus shifted are currently thought to be still relatively small compared to the overall volume of funds laundered, the practice of using the internet as a tool to hide the origins of illicit funds is growing fast. And as criminals and terrorists across the world get increasingly cyber-savvy, they make more and more frequently use of the above mentioned advantages of the internet and thus succeed in always staying several steps ahead of most law enforcement officers, who are only gradually starting to get to grips with the virtually unlimited possibilities of the worldwide web. WHAT ATTRACTS CYBER MONEY LAUNDRERS?

There are few features of the Internet which attract criminals: 1) Anonymity: The Internet seems to be a “place” where you can hide yourself among millions of other users; where you can pretend to be someone else since no one can truly identify you. But it seems that is no longer true, since there are some legal obligations put on Internet Service Providers to record and keep log files for a long period of time. They show which computer and when was connected to Internet. This measure is being used to fight computer crimes. It makes law enforcement’s work to trace somebody’s activity in cyberspace easier.

Of course there are some means to circumvent them and to keep the anonymity. They include Internet Protocol (IP) spoofing, use of modem connections (every time user connects he gets different IP address), Wireless Fidelity technology which allows to abuse publicly open so called “hot spots” or unprotected routers to connect to the Internet, use of pre-paid phones as modem in order to connect to the Internet (it hides the identity of a user). Also the use of encryption technology (widely available on the Internet) and many proxy servers hinders the efforts of law enforcement to catch cybercriminals. ) No Face-To-Face contact: This is called the depersonalization of financial operations. When we are using one of the financial services available on the Internet, we actually use our computer (and software) which connects to the bank’s server. The whole process of placing orders (making requests) and executing them is fully (or partially) automatic without the presence of a human factor. So in fact we can very easily pretend to be someone else each time we “visit” bank in the cyberspace. The financial institution’s server checks only two things the login (e. . unique ID number) and the password – not the true identity of a customer. If the information is correct (meaning the same as the one stored in server’s memory), the access is granted. As a result, it would be harder to detect and hold up transactions related to money laundering activities. It also cuts out another potential source of reporting suspicious transactions – financial institution employees. 3) Speed of the transactions: Money laundering process would be less expensive and faster as the one using ‘normal’ or old-fashion transactions.

New payment technologies permit to move funds more rapidly on long distances and make law enforcement work even more complicated. Some of them are instantaneous e. g. within one financial institution. It allows launderers to move funds very quickly within one country or even worldwide. In essence it makes hiding the illicit source of money easier and difficult to trace. It makes also the whole procedure cheaper. 4) Globalization process: free movement of goods, services, people and new payment technologies: The globalization of economy includes the necessity for people (entrepreneurs nd customers) to move, invest and spend money wherever they want to. In order to achieve that with the help of developing information technology, there have emerged new payment technologies. They allow freeing ourselves from carrying large quantities of cash, as well as to do businesses at a long distance. Another word is “investments’ mobility”. Access to the Internet and to on-line services is easy and common. This channel of the distribution of financial or investment products has become very important factor. These services will become even more significant for financial institutions in the near future.

There is also a trend to reduce any obstacles (including legal ones) in trade between countries or moving funds around the world to find more efficient way of investing them. 5) Cross border activity: involves several jurisdictions, mutual legal assistance treaties issues: The on-line service provider’s abode usually differs from the place where the servers are located in reality, from where these servers are administrated, or from where the client accesses the Internet. The new payment technologies let us conducting business between different countries, various legal systems.

It means there are several jurisdictions involved in the case of an offence. And the cooperation between law enforcement, revenue services and judiciary is one of the most difficult tasks as far as the transnational criminality is concerned. Even though there are plenty of mutual legal assistance treaties and international conventions. So in fact it is easier to get away from the government agencies with money derived from illicit activities. But we cannot stop the development of new payment technologies in order to fight crime (including money laundering), since some of these features are important for lawful commercial activities, too.

They encompass speed of transactions, access to customers or counterparts and capacity to extend beyond national border. As a result we need to find another way to prevent and fight money laundering in the cyberspace. It has to be stressed that the launderers and other criminals sponge on the development of new payment technologies. On the other hand they also stimulate that development by exploiting it. In other words we need to learn the causes and the phenomenology of cyber laundering in order to fight it efficiently or just to control it.

In general ‘Cyber Payments’ can be described as payments which facilitate the transfer of financial value in the Internet. Some call it digital currency or e-cash, but those terms cover only a part of the phenomenon. That technology has a strong impact on the way we do business, transfer money (and other values) and the cash-oriented society. The common element is that these systems provide counterparts with immediate, convenient, secure and sometimes anonymous means by which they can transfer financial value.

Although these systems will provide promptly evident benefits to legitimate commerce, it may also have the potential to facilitate the international movement of illicit funds. At the same time it prevents law enforcement from obtaining necessary information to detect illegal activity. • Any financial institution that offer on-line banking should have procedures, whether it be driven by software, humans or a mix of the two, that verify the identity of the customer who seek to do business with the institution. This can be difficult for on-line banks that often rely on customers to confirm who they are through passwords. There are also different typologies of what is being encompassed by term cyber payments. It may include: 1. Internet Payment Systems Companies provide so called electronic cash or e-cash services to their customers. It is a sort of replacement for physical cash. Usually, software which stores value on the computers of their clients (merchants and consumers) is provided to them. This stored value can than be transmitted via the Internet between personal computers in order to buy and sell goods or services. Example, mobile payments, micro-payments, etc. 2. Stored Value Cards

Also known as “smart cards” or e-purse; those cards are pieces of plastic, typically the size of a credit card. They contain a microchip (a memory chip) to which value can be encoded. These cards can be loaded (or added value) via automatic teller machine, properly equipped telephones, personal computers and from other stored value cards using a device which can transfer value directly. But the range of possibilities depends on the system. Theoretically they can be programmed to store billions of dollars. However, most current stored value card programs place a limit on the amount f value that can be loaded onto any individual card. 3. Smart cards Smart cards may make it easier for the launderer to transfer illicit funds without detection by law enforcement and financial institutions. Because the cash value is stored on the card, there is no need for the merchant to dial up a bank or credit card company to get approval for the transaction. What is more interesting and useful for launderers, funds can be moved from one country to another without alarming financial institution. A card issued in one country can be used to withdraw money in another one. And users may hold numerous cards.

They can allow criminals to move billions of dollars without using banks at all. Digicash was developing a computer-based payment system that involved so called “one way privacy” method. It means that payers can check who received money from them, but does not allow the recipients to find out where it came from. 4. On Line Banking Many financial institutions provide their customers with software to conduct most, if not all, of their banking business via personal computer. 3 This software allows customers to check account balances, transfer funds between accounts and direct payments to creditors.

But these days you don’t need special software. A typical web browser is enough since it uses encrypted connection protocols. You can access also virtual casinos, universities, libraries, bookstores, auction houses, etc. Today, most financial institutions globally, and many non-financial institutions, are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must verify a customer’s identity and, if necessary, monitor transactions for suspicious activity.

This is often termed as KYC – “know your customer”. This means, to begin with, knowing the identity of the customers, and further, understanding the kinds of transactions in which the customer is likely to engage. By knowing one’s customers, financial institutions will often be able to identify unusual or suspicious behaviour, termed anomalies, which may be an indication of money laundering. • Bank employees, such as tellers and customer account representatives, are trained in anti-money laundering and are instructed to report activities that they deem suspicious.

Additionally, anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds, a large withdrawal, or moving money to a bank secrecy jurisdiction. Smaller transactions that meet certain criteria may also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software will also flag names that have been placed on government “blacklists” and transactions involving countries that are thought to be hostile to the host nation.

Once the software has mined data and flagged suspect transactions, it alerts bank management, who must then determine whether to file a report with the government. Online services are those services which are present in the world of cyber space. These services are very much helpful in developing our economy. However, these services are more prone to attack by the cyber criminals. On-line banks are a prime target for money launderers. Banks, in general, provide the widest range of financial services.

This is the reason why they are always targeted by launderers. What is more important, the regulations concerning opening an Internet bank account are different from one jurisdictions to another. It leads to asymmetric regulations between jurisdictions. The less information is required, the better for the launderer because it conceals her/his identity from law enforcement. • One can come up with simple modus operandi: <> Bank transfer funds to another bank account; and this is a legitimate company’s income. The service might be a fake.

On the other hand, if service is being provided also for “normal” customers, it gives the opportunity to use the blending technique which makes things even more difficult for law enforcement or financial institution to mark transactions as suspicious. • Some of the online services which are much affected by cyber crimes, are as follows: 1) PayPal : It acts as non-bank, Internet-based agent – payments intermediary for individuals and organizations that want to trade or transfer funds via the Internet. A person sets up a pre-paid account in his name with this agent.

It can be funded from a credit or debit card or a bank account. Using those pre-paid funds, person can buy goods or transfer funds to other agent’s account holders. The payment or transfer of funds occurs as a book-entry transaction between the agent’s accounts. When an account holder wishes to access the funds located in his account, he order agent to credit his credit or debit card or bank account via a credit transfer or a paper check. 2) Credit cards: There is a very similar situation with the use of credit cards or e-cards. They are widely use by customers who wish to pay for services available on the Internet.

None of other companies involved in the process would think that there was anything suspicious about the transactions. 3) Pre-paid cards: According to Financial Action Task Force report, the most popular method of cyber laundering is the use of pre-paid cards. 7 There are two types of cards: open and close system. First one is a typical debit card with which everyone can pay for services, goods or withdraw money from ATM. Second concerns systems like pre-paid telephone cards which can be bought and then resold. They can be exploiting in all three stages of money laundering (NDIC, 2006).

The pre-paid cards are especially good to transfer funds across borders. 4) On-line Gambling: Internet gambling has been identified – by experts in the field of money laundering and tax evasion – as a potentially ideal web-based service to legitimize ill-gotten gains. In the real world casinos are used to launder dirty money. The same thing can be done by on-line gambling sites. There are two possibilities: launderer exploits legitimate web-based service or launderer sets up an on-line gambling company in order to clean money. It is an excellent method because transactions are conducted primarily through credit cards as mentioned earlier.

Additional obstacle is the place where on-line gambling companies operate. Usually, they are based in off-chore financial centers which lack regulatory or prudential measures. This method can affect a normal bank since such companies have their accounts in offshore banks that, in turn, use a reputable United States correspondent bank. The tracing of the source and ownership of the illegal money that moves through these accounts is difficult or impossible for enforcement and regulatory agencies in the United States and elsewhere. 5) On-line Auctions: Another business that can be useful for launderers is the auction sale.

It is a booming industry in the Internet. It allows its registered users to put items on a sale or to buy such items. There are auction sites which offer some basic financial services, too. They do it for security reasons for persons buying and selling things. The buyer sends money to company’s bank account and the seller sends the item to the buyer. If everything is “all right” and the item is exactly as it was promised by the seller, the company sends money to him/her. It also gives the whole process the appearance of licit business activities since it involves reputable auction company and its bank account.

Since this is auction price has no limits and the Smurf can bid higher and higher. Actually the higher the price is, the more dirty money receive legitimate appearance. 6) Mobile-payments: Mobile payments can be described as payments done through the use of services via mobile phone or any other communication device (FATF, 2001). Payments are initiated using voice access, text messaging protocols, or wireless application protocols (WAP) that allow the device to access the Internet. However new mobile payments services are not based on an underlying bank or credit card account.

The telecommunication operator acts as a financial intermediary to authorize, clear, and settle the payment between its client and the mobile service provider. The GSM operator engaged in these activities usually are not overseen by a country’s central bank or other banking regulators but may be subject to anti-money laundering measures. There are two possibilities. The operator may either: a. allow customer to charge transactions to the phone bill (post-paid), or; b. may permit the phone owner to fund an account held by the telecom operator for the purposes of making payments (pre-paid).

Pre-paid phone gives also a sense of anonymity since usually it is not required to register the identity of a SIM card buyer. Prepaid mobile payments accounts operate in the same manner as a prepaid card or an electronic purse. 7) Digital Precious Metals (DPM): The ground for using Digital Precious Metals services is to facilitate on-line transactions without regard for underlying currencies or access to foreign exchange. Those transactions have immediate finality since they are conducted as a book-entry transaction between the dealer’s accounts.

It involves the exchange of options or the right to purchase an amount of precious metals at a specific price. These derivatives can be exchanged, like any other traditional commodity or securities derivatives, between account holders. Consumers purchase a quantity of virtual precious metal holdings based on the current price of the metal on the world commodity exchanges. Once a purchaser has acquired a quantity of the virtual precious metal, those holdings or a portion of them can be transferred either to another individual or a merchant in exchange for goods and services.

The dealer’s internal regulations usually differentiate between themselves. There might be some restrictions or limits on value of DPM, method of funding or usage of account . Sometimes they allow anonymous accounts. The access to account only via the Internet hinders dealer’s efforts to verify customers’ true identity. It shifts the money laundering risk to a new level. 8) Virtual Money Laundering: There is a relatively new method of laundering money and is called virtual money laundering. Criminals can make use of the growing in popularity of the massive multiplayer on-line role praying games or web based social services, e. . Second Life, Entropia Universe. What is so interesting in it as far as money laundering is concerned? Some of them allow purchasing virtual currency using “old-fashion” real money at a fixed exchange rate. Then the player (user) can earn more in virtual world, exchange it with other users, buy and sell virtual items. It works in both directions – the virtual coins can be converted into real money and transferred to desired account before withdrawing it from ATMs worldwide. Sometimes players are given a re-loadable debit card with which they can withdraw money directly from ATM.

Although it is difficult to provide an all encompassing definition of a cyber payment, it is possible to make some generalizations. It means all of the systems which intend to allow their users to move funds electronically (in the Internet). They may serve as a cause (a legal title) to perform transaction (transfer of funds) or tool to perform transaction (transfer of funds) . The latter needs a few words of explanation. Banks allow their account holders to send funds from one account to another one.

However it is possible to establish a bank account with false ID or hire someone to do it for us for a commission. Therefore one person can have an access to different bank accounts and enter them as a different person simultaneously via the Internet. If the accounts are located in one bank there is one more vital advantage. There transfer is almost instantaneous which allows for fast moving funds and multiple withdrawing them in cash at the end using ATM. • New payment technologies depend on applications of high-speed communication and information analysis that is part and parcel of the use of computer based information processing.

The system bases on fast ways of communications and computing data using networks. Cyber laundering was believed to be the latest technique in money laundering typology. So far, the process has been depending on a physical transportation of cash to conceal the existence of illegal source or blending licit company’s incomes with illicit ones. As the physical moment of cash has become more risky and the electronic means of communication have emerged, the launderers have changed their modus operandi.

The wire transfer system have been allowing organized crime, as well as legitimate businesses and individual banking customers to enjoy a swift passage for moving money between jurisdictions. • Although there are no or just few criminal cases connected purely with Internet (it depends on jurisdiction), it does not mean that there is no cyber laundering activity going on and all of this is just a hype provided by law enforcement agencies in order to get more power. Maybe we look not thoroughly enough or our instruments aren’t good enough to detect this phenomenon?

However, using Internet based financial services is possible on all stages of money laundering process. 1) The Placement Stage The first step in money laundering is the physical disposal of cash. Traditionally, placement might be accomplished by: proceeds derived from criminal activity in domestic banks or other types of financial institutions, With cyber laundering, cash might be: However in case of cyber crimes, there is no need to go through this stage, since the money (or other values) already has an electronic form and “exists” in cyberspace.

Internet frauds, identity thefts, false investments opportunities may serve as examples. 2) The Layering Stage The second stage of money laundering process benefits the most from the on-line services. The layering involves creating complex layers of financial transactions to distance the ill-gotten gains from their source and break the audit trail. There are plenty of traditional techniques, such as the wire transfer, the conversion of deposited cash into other financial instruments or goods, and investment in legitimate businesses, using shell companies.

The most important issues for launderers are: the speed, the distance and the anonymity. All of them can be provided by on-line financial services. It includes: 3) The Integration Stage The last stage has an aim to make the wealth derived from criminal activities appear legitimate. There are also many traditional techniques such as: using front companies, “lending” money back to the owner, transfer pricing, false invoicing, winning ticket, etc. The most effective way is probably to establish an on-line service company.

Offering services (true or fake) provide incomes which appear legitimate. Funds end up on safe corporate account after the second stage somewhere in off-shore jurisdiction. It could deal with gambling, betting, etc. However the service would never be delivered – there would be no (net) winnings paid back to the account. The payment would appear as profit in the books of the Internet service company. Thus the owner would appear to be legitimate – a profit of her/his own Internet Company. Payment for services may come from different parts of the world; there are no geographical restrictions.

Since there are just a few criminal cases we could describe as cyber laundering, presented below specific techniques can be describe as potential money laundering modus operandi. EFFECTS OF CYBER MONEY LAUNDERING • Some of the effects of the menace of cyber money laundering are as follows: 1) Terrorism – Terrorism is an evil which affects each and everybody. Now and then we can find terrorist attacks being made by terrorists. These attacks definitely cannot be done without the help of money. Money Laundering serves as an important mode of terrorism financing.

Terrorists have shown adaptability and opportunism in meeting their funding requirements. Terrorist organizations raise funding from legitimate sources, including the abuse of charitable entities or legitimate businesses or self financing by the terrorists themselves. Terrorists also derive funding from a variety of criminal activities ranging in scale and sophistication from low-level crime to organized fraud or narcotics smuggling, or from state sponsors and activities in failed states and other safe havens.

Terrorists use a wide variety of methods to move money within and between organizations, including the financial sector, the physical movement of cash by couriers, and the movement of goods through the trade system. Charities and alternative remittance systems have also been used to disguise terrorist movement of funds. 2) Threat to Banking System – Across the world, banks have become a major target of Money Laundering operations and financial crime because they provide a variety of services and instruments that can be used to conceal the source of money.

With their polished, articulate and disarming behaviour, Money Launderers attempt to make bankers lower their guard so as to achieve their objective. Though norms for record keeping, reporting, account opening and transaction monitoring are being introduced by central banks across the globe for checking the incidence of Money Laundering and the employees of banks are also being trained to recognize suspicious transactions, the transactions representing legitimate business and banking activity from the irregular / suspicious transactions.

Launderers generally use this channel in two stages to disguise the origin of the funds first, when they place their ill gotten money into financial system to legitimize the funds and introduce these funds in the financial system and second, once these funds have entered the banking system, through a series of transactions, they distance the funds from illegal source.

The banks and financial institutions through whom the ‘dirt money’ is laundered become unwitting victims of this crime. 3) Threat to Economic and Political Stability – the infiltration and sometimes saturation of dirty money into legitimate financial sectors and national accounts can threaten economic and political stability.

An IMF working paper concludes that money laundering impacts financial behaviour and macro-economic performance in a variety of ways including policy mistakes due to measurement errors in national account statistics; volatility in exchange and interest rates due to unanticipated cross border transfer of funds; the threat of monetary instability due to unsound asset structures; effects on tax collection and public expenditure allocation due to misreporting of income.

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