Internal Security (Money Laundering: Threat to National Security) by Viraj C. Rane

Model Answer

Question #1. Crypto currency has emerged as a “new haven for money laundering”. Discuss the relevance and effectiveness of Prevention of Money Laundering Act, 2002 in the context of virtual assets. Suggest measures to be taken to combat the challenges arising from such virtual assets. 10 marks (150 words)

Approach

1. Question deals on the central theme of crypto currency and challenges caused due to virtual assets.
2. Introduce the topic by writing about how crypto currency has emerged as a new heaven for money laundering and its impact and prevention.
3. Write how crypto currency has emerged as a "new heaven for money laundering"
4. Discuss the relevance and effectiveness of prevention of money laundering act 2002 in context of virtual assets and Suggest measures to be taken to combat the challenges arising from such virtual assets.
5. Conclude by writing the gist of the topic

Hints:

 A crypto currency is a digital currency, which is an alternative form of payment created using encryption algorithms. Crypto currencies are more prone to criminal activity and money laundering since they provide greater anonymity of payment method turning into a new heaven for money laundering.

 In order to combat the menace created from crypto currency and other virtual assets, Ministry of Finance has extended the Anti-money Laundering provisions to Virtual Digital Assets (VDA) businesses and service providers.

Crypto currency has emerged as a new heaven for money laundering:

1) Difficult to track transactions: As the accounts are opened online with digital currency exchanges, one of the prominent reasons for being a new heaven is accepting fiat currency from traditional bank accounts. Then, they start a ‘cleansing’ process (mixing and layering), i.e., moving money into the crypto currency system by using mixers, tumblers, and chain hopping (also called crosscurrency). Hence, tracking becomes tough.

2) A mean for theft and gambling: According to the “Crypto currency Anti-Money Laundering Report,” criminals also use theft and gambling to launder crypto currencies.

3) Cybercrime: Creation of Dark Web or Dark Market which cause it to exploit users through hacking, thus creating a heaven for money laundering.

Relevance of Prevention of Money Laundering Act, 2002 in the context of virtual assets:

1) In the Union Budget, though the government brought in a tax for crypto currencies, it did not proceed with framing regulations.

 2) Recently, Finance Ministry has notified that crypto or virtual asset businesses will now be in the ambit of the Prevention of Money Laundering Act, 2002 (PMLA).

3) It laid out the nature of transactions to be covered under PMLA which are as follows:

1. Exchange between virtual digital assets and fiat currencies,
2. exchange between one or more forms of virtual digital assets,
3. transfer of virtual digital assets,
4. safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets,
5. participation in and provision of financial services related to an issuer’s offer and
6. Sale of a virtual digital asset.

4) The circular also requires Indian crypto exchanges to report any suspicious activity to the Financial Intelligence Unit-India (FIU-IND).

5) It also mandates that crypto exchanges and intermediaries dealing with virtual digital assets (VDAs) must have proper KYC documentation for all customers they on-board.

Effectiveness of Prevention of Money Laundering Act, 2002 in the context of virtual assets:

1) As per the international standards: This provision is as per the global trend of requiring digitalasset platforms to follow anti-money laundering standards applicable to banks, financial institutions and certain intermediaries in the securities and real estate markets.

2) Filling the policy regulations: As there was a lack of regulatory framework regarding crypto currency, this policy could also be the basis for India to reconsider its tax treatment of virtual digital assets.

Measures to be taken to combat the challenges arising from such virtual assets:

1) The circular must offer entities time frame to adhere to the fresh norms.

2) There should be a central regulator entities, so that crypto entities could not end up dealing directly with enforcement agencies like the ED.

India has no regulatory framework on crypto currency yet, the government has introduced a new tax regime, taxing crypto income at 30% and a 1% tax deducted at source (TDS) on crypto transactions. Hence, a progressive regulatory framework and proper implementation of the Prevention of Money Laundering Act, 2002 in context of virtual assets will help to reduce the menace of money laundering in India.

Question #2. What do you understand by the term “parallel economy”? Discuss the security threats posed by the parallel economy in India and suggest measures. 15 marks (250 words)

Approach

1. Introduce with the extent of parallel economy in India.
2. Discuss the Internal Security threats due to the parallel economy.
3. Discuss the measures taken by government in this regard.
4. Conclude with the suggestion

Hints:

 Parallel economy is the functioning of an unsanctioned sector in the economy whose objectives run in opposite to the objectives of official, sanctioned or legitimate sector. The parallel economy has political, commercial, legal, industrial, social and ethical aspects. Prevalence of black money gives rise to parallel economy. The term parallel economy is also referred as black economy, unaccounted economy, illegal economy, subterranean economy or unsanctioned economy. Based on a Report by McKinsey and Co. India’s parallel or shadow economy is as large as 26 percent of the country’s gross domestic product. This implies that almost one fourth of the Indian economy goes untaxed and unaccounted

Internal Security threats due to the parallel economy

• Parallel economy means Mafia network is “virtually running a parallel government, pushing the State apparatus into irrelevance.
• Economic terrorism: The country has to contend with Economic terrorism. Pakistan has been flooding the country with counterfeit currency with a view to subverting its economy and funding terrorist activities in different parts of the country.

-It is estimated that Pakistan pumped in 16 billion worth of FICN into India in 2010, a figure that rose to 20 billion in 2011 and 25 billion in 2012.

• Organised crime: Organised crimes in India especially in metro cities such as Mumbai and Delhi are rising due to flourishing parallel economy. Such organised criminals also fund for radicalisation of youth and terrorist attacks.
• Religious or ideological extremism: Parallel economy is greatest source of financial help to extremists. Financial incentives lure unemployed youth towards antinational activities in the name of particular religion or ideology.
• Cybercrime: Crypto-currency and unrecorded cash transaction in e-commerce are also emerging means to supply resources to hostile elements in the country.
• Armed violence: Armed violence which was hitherto legacy of Maoists or insurgencies is now taking a new form throughout India especially in the form of right wing extremism. Recently there have been reports of seizure of illegal weapons and public firing by individuals. Black money is easy source of illegal arms trade in India.

Measures taken by Government to contain parallel economy

• Voluntary income declaration schemes, such as Vivad se Vishwas scheme
• Demonetisation: With objectives of the note ban like checking black money, terror financing, promoting digital transaction and weeding out fake currency notes.
• Financial Action Task force; for international cooperation in case of terror funding
• Tax reforms; GST
• The Benami Transactions (Prohibition) Act
• Prevention of Money Laundering Act
• Reviewing of Double Taxation Avoidance Agreements
• Formalisation of economy
• Banking reforms
• Promotion of cash less economy: Digitisation of economy

Conclusion: Though we have taken many measures to contain the parallel economy but success is far below the potential. Political will to curb corruption and organised crime, and poverty alleviation along with social will to remove the cancer of black economy from society can only lead to elimination of parallel economy and subsequently control over internal security of the country.