Money laundering in India: Digitization is enabling financial fraud; here’s how to prevent it

he confluence of forward-thinking regulations and ground-breaking technology has given rise to a blossoming financial ecosystem.(Image/Reuters)

– By Krupesh Bhat

India’s Growing Digital Ecosystem

It’s never been easier to access financial services and make online transactions in India. The confluence of forward-thinking regulations and ground-breaking technology has given rise to a blossoming financial ecosystem. Here are some indicators to gauge the health of the new “Digital India“: UPI payments are higher than ever, ballooning to 103 billion in FY 22–23. Nearly half of all adults in India have used Aadhaar eKYC to open a bank account. Finally, almost 80% of the adult working population has access to bank accounts. At the same time, banks recorded the highest number of fraudulent transactions stemming from digital payments in 2023, and trade-based money laundering soared to 5% of the nation’s GDP (around $159 billion).

Digitization, therefore, has been a double-edged sword. Section heading: A brief overview of India’s digital voyage India’s Digital Public Infrastructure (DPI) is the primary driver of digitization in India. India Stack has grown consistently since the 2009 introduction of Aadhaar, with DigiLocker added in 2015, UPI in 2016, GSTN in 2017, and the recent Account Aggregator facility in 2021. This technology has enabled financial service providers to innovate new financial instruments, credit pathways, and offerings for customers that increase convenience and enhance the overall experience. Easy access to debit and credit cards, UPI integrations across platforms, the expansion of online banking facilities, and the ease of opening low- value bank accounts are the results of these innovations. However, this digital diversification in finance is also one of the reasons for the current rise in money laundering.

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Uncovering the basics of new-age money laundering

Money laundering involves the processing of criminal and fraudulent funds to disguise their illegal origins. The money laundering cycle is typically broken into three stages. The placement stage is the first step, which involves introducing criminal proceeds or black money into the financial system. This is usually the hardest part of money laundering, but with digitization, it’s easier than ever. Online banking allows for the opening of several bank accounts with minimal oversight, and subsequent facilities such as the issuance of credit and debit cards, the usage of ATMs, check scanning, and online payments can all be accessed on a presenceless basis. This undoubtedly increases convenience but also allows for criminal misuse.

The next stage of money laundering is the layering stage, where funds are disguised within the system by hiding them in a web of complex transactions. Again, this step is made easier with digital banking and mobile payments. The sheer volume of transactions that currently happen online makes the detection of suspicious transactions a herculean task for regulators.

The final stage is integration. Here, the funds are made available to criminals once again, albeit now as “clean money.” With the proliferation of easy-to-access card services and, recently, even UPI ATMs, this step has also been made easier. In essence, with the rise of digitization, criminals can launder money without ever having to make contact with any financial institution in person. Additionally, the volume of online transactions acts as an effective cover, enabling criminals to operate with a free hand. It’s no surprise, then, that out of 3497 money laundering cases filed from 2018 to early 2023, only 32 accused have been convicted.

How technology can combat money laundering in 2024

The question now is how money laundering can be prevented going forward. While digitization isn’t blameless for worsening this problem, the solution can also be found within the digital realm. Risk assessment and transaction monitoring are two key weapons in combating the new face of money laundering. Dealing with fraud risks during key touchpoints such as account opening, ReKYC, loan disbursal, and before providing access to financial services can deal a significant blow to criminals. This can be done by incorporating robust KYC mechanisms. AI-powered digital KYC with fraud filters, video capabilities, PEP detection, and facial recognition is among the stronger tools for mitigating money laundering. By leveraging digital KYC, financial institutions can proactively comply with due diligence regimes while putting cutting-edge technology to work in rooting out financial fraud. Identity management platforms, along with Customer Due Diligence (CDD) protocols, can help shore up banking defenses against money laundering in the long run.

Additionally, making use of RegTech for smart analytics helps boost transaction monitoring capacity and optimizes pattern recognition to zero in on suspicious accounts. Leveraging AI for data analytics can help solve the transaction volume problem and scale up AML (anti-money laundering) capabilities to meet current challenges. Analytics also play a major role in assessing risks. Smart APIs can now scan billions of records, news articles, profiles, and other bits of information online to build risk profiles for customers. These can then be used for risk mitigation, thus nipping fraud in the bud. In essence, we need to keep powering the digitization trend in the right ways. The convenience and ease of banking enabled by this trend are too useful to forego, and the antidote to the inevitable resulting problems comes down to a clever and deliberate application of technology.

Conclusion

Digitization in finance is a trend that cannot be reversed. Despite leading to an uptick in fraud and, consequently, money laundering, digitization also offers tools and solutions to these problems. While technologies such as analytics-based risk monitoring and AI-powered KYC are indeed powerful tools to combat money laundering, the appropriate regulatory posture is equally important. Regulators such as the RBI and SEBI must help bolster innovation while balancing customer protection for a comprehensive defense against the ills of digitization. The recent PMLA amendments are a good example of such regulations. With digitization trends going strong, we require technological innovation and the right regulations to come together to fully realize the dream of a digital India.

(Krupesh Bhat is the founder of SignDesk.)

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