Money Laundering Through Digital Payment Systems And Blockchain

05 Oct 2025 --
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⚖️ I. Understanding Money Laundering in Digital Payment Systems & Blockchain

1. Definition

Money Laundering: Process of converting illegally obtained money into seemingly legitimate funds, often to hide its criminal origin.

Digital Payment Systems & Blockchain: Modern methods for transferring, storing, or transacting money digitally (e.g., UPI, PayPal, cryptocurrencies like Bitcoin, Ethereum). These platforms are increasingly used for concealing illicit funds due to their speed, anonymity, and cross-border capabilities.

2. Key Features

Use of digital wallets, prepaid cards, mobile banking, and cryptocurrencies.

Often involves layering (complex fund transfers) to obscure the source of illicit funds.

Exploits regulatory gaps and lack of transparency in some blockchain transactions.

3. Relevant Indian Laws

Prevention of Money Laundering Act (PMLA), 2002

Section 3: Offense of money laundering

Section 4: Punishment for money laundering

Section 5: Attachment of property involved in money laundering

Foreign Exchange Management Act (FEMA), 1999 – for cross-border digital transactions

Information Technology Act, 2000 – for cyber-related offenses

Companies Act 2013 & SEBI Regulations – if corporate entities are involved

⚖️ II. Landmark Cases

1. Vijay Mallya – Digital Funds Diversion Case (2016–Present)

Facts:
Mallya allegedly diverted bank loans from Kingfisher Airlines into offshore accounts, using digital fund transfers and shell companies.

Held:

Enforcement Directorate (ED) attached assets under PMLA.

Charges included money laundering via electronic transfers, corporate fraud, and defaulting on loans.

Principle:
→ Electronic fund transfers can be used to launder money, and PMLA allows tracing and attachment of such assets.

2. Nirav Modi & Mehul Choksi – PNB Fraud & Money Laundering (2018)

Facts:
Fraudulent Letters of Undertaking (LoUs) were issued to obtain loans abroad. Money was routed through multiple banks and foreign accounts.

Held:

Accused charged under:

IPC Sections 420, 406, 120B

PMLA Sections 3 & 4

ED traced digital fund trails and initiated freezing of foreign assets.

Principle:
→ Cross-border electronic transfers of illegally obtained money = money laundering under PMLA.

3. BTC-e Cryptocurrency Exchange Case (US-Russia, 2017)

Facts:
BTC-e, a cryptocurrency exchange, was used to launder more than $4 billion through cryptocurrencies, including funds from hacks and frauds.

Held:

US authorities charged the operators with money laundering via blockchain.

Highlighted need for KYC (Know Your Customer) compliance in crypto exchanges.

Principle:
→ Blockchain transactions can be exploited for laundering, but transparency and tracking are improving via regulatory oversight.

4. Punjab National Bank Cyber Fraud (2018)

Facts:
Nirav Modi’s shell companies used digital bank transfers to move fraudulent LoU funds through multiple international banks.

Held:

ED and CBI investigated electronic fund transfers as money laundering under PMLA.

Court allowed freezing of accounts, demonstrating digital traceability.

Principle:
→ Digital payment systems facilitate fast movement of illicit funds, requiring strong monitoring under PMLA.

5. OneCoin Cryptocurrency Scam (Global, 2014–2019)

Facts:
OneCoin, promoted as a cryptocurrency, was sold to investors worldwide; proceeds were laundered across countries.

Held:

US prosecutors and other international agencies charged founders with wire fraud and money laundering.

Demonstrated how pseudo-cryptocurrencies can be used to disguise illegal gains.

Principle:
→ Even blockchain-based currencies without proper regulation can be conduits for money laundering.

6. Nithin Babu Digital Payment Fraud Case (India, 2020)

Facts:
Accused used mobile wallets and UPI apps to receive payments from fraud victims, then transferred funds through multiple digital accounts to hide origin.

Held:

Charged under IPC Sections 420 & 406 and PMLA Sections 3 & 4.

Courts emphasized electronic trail of digital transactions as key evidence.

Principle:
→ Layered digital payment transactions can constitute money laundering; authorities can trace via transaction logs.

7. BTC Scam – Indian Cryptocurrency Case (WazirX, 2022)

Facts:
Some users allegedly laundered cryptocurrency earnings from scams via WazirX exchange, converting crypto to INR using UPI and wallets.

Held:

Regulatory scrutiny highlighted obligation of crypto exchanges under PMLA and IT Act.

Transactions were traced to frozen accounts for investigation.

Principle:
→ Integration of crypto with banking/payment systems makes digital laundering detectable but requires proactive monitoring.

⚖️ III. Investigative & Legal Process

Detection – Suspicious transaction reporting, KYC violations, whistleblower complaints.

Attachment of Property – ED can provisionally attach digital wallets, crypto holdings, and bank accounts.

Tracing Digital Trails – Blockchain ledger analysis, UPI logs, international fund transfer tracking.

Filing Case under PMLA – Investigation for sections 3 & 4 (offense and punishment for money laundering).

Trial and Penalty – Conviction may lead to 7–10 years imprisonment, fines, and confiscation of assets.

⚖️ IV. Key Legal Takeaways

Offense	Platform/Method	Law Applied	Case Example	Principle
Laundering bank fraud proceeds	Digital bank transfers	PMLA, IPC 420	Nirav Modi PNB Case	Cross-border electronic transfers = money laundering
Laundering via cryptocurrency	Blockchain	PMLA, IT Act	BTC-e Case	Crypto anonymity exploited for illicit transfers
Mobile wallet laundering	UPI, Paytm	IPC 420 & 406, PMLA	Nithin Babu Case	Layered transactions can hide source of funds
Shell companies & digital transfers	Offshore accounts	PMLA	Vijay Mallya Case	Corporate misuse of digital payments for laundering
Scam token laundering	Fake cryptocurrency	PMLA, Wire Fraud laws	OneCoin Case	Pseudo-cryptos used globally for laundering