The Coin Laundry | New crypto adds many blindfolds to old hawala

Agencies recorded more than Rs 1,000 crore of cyber fraud proceeds exiting India through crypto wallets this year alone.

These are all hawala deals but now riding on virtual assets through digital routes. When it comes to dirty money flows, old hawala has embraced the new crypto. Key to this are two factors: technology and crypto’s grey zone of regulation.

This grey zone cutting across bor­ders has brought anonymity and ramped up efficiency to hawala’s trust-based network of faceless individuals operating outside the formal banking system.

After tax havens, dirty money finds a new home: Cryptocurrency

The I4C analysed at least 144 cases over the past three years and came across a murky trail through which cryptocurrency is used to funnel money stolen through cyber crimes to transnational syndicates.

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“The blindfold is now multi-layered,” said a senior compliance officer with a leading Indian crypto platform. “A traditional hawala deal is usually between two jurisdictions and does not involve more than four layers (between the sender and the receiver). With crypto in the play, one can add potentially infinite layers and jurisdictions to fund flow which in any case is protected by the inherent pseudonymity of blockchain transactions.”

The emergent hybrid system of crypto-hawala is attracting covert financial transactions that regulators are scrambling to crack.

“This has particularly caught on in sectors such as real estate, betting — both cricket and non-cricket, gold, and forex trading. It is also used for general remittance. While terror or narcotics funding and fintech frauds are key red flags, the rest is about black money and FEMA violations,” said a private recovery consultant who helps retrieve funds in an “informal capacity” when such a deal goes wrong.

Off the books and hidden by design, money flows through hawala to and from India are hard to estimate.

During 2023-24, the RBI reported $118.7 billion as the total remittance to India and an outflow of $31.73 billion under the Liberalised Remittance Scheme (LRS). Various assessments have put funds moving through hawala between 20-40 per cent of India’s total remittance.

A substantial chunk of these informal transactions, sources said, is now taking the crypto route through a bewildering combination of shell bank accounts, Over-The-Counter (OTC) or Peer-To-Peer (P2P) transfers, self-custody wallets and non-compliant/rogue exchanges.

Unlike going through a formal platform compliant with anti-money laundering rules, an OTC or P2P transaction typically involves only two individuals and stays under the enforcement radar.

Self-custody wallets are not hosted by any crypto exchange. The owners control such a wallet themselves with a private key. This ensures anonymity as long as the wallet does not deal with a regular crypto platform where any transaction with a self-custody wallet invites enhanced KYC diligence.

To further obscure the maze, there are specialised products called “tumbler” or “mixer” wallets used to pool and mix crypto coins from multiple users before moving equivalent amounts to new wallets to further obscure sources of funds. Often, “bridge” and “swap” methods are used to switch assets between different blockchains, say, Bitcoin and Solana, to obfuscate funds trails.

All this translates into multiple options to conduct crypto-hawala transactions. In its simplest form, the process requires remitters to organise their funds, say in India, usually in multiple dummy accounts, and transfer to a shell bank account belonging to an unknown person.
Apparently, quick response (QR) codes on Unified Payments Interface (UPI) is the most popular mode.

According to a bank official who has assisted multiple investigative agencies in probing money laundering, such mule accounts are often maintained for a short period because banks are increasingly vigilant about structured transfers — smurfing — under Rs 50,000, frequent pooling of funds, or repeated deposits followed by immediate digital transfer outward.

Next, the remitters receive USDT or stablecoin at a pre-negotiated rate in their crypto wallets abroad — say, in Dubai. Once in the wallet, USDTs can be exchanged immediately in Dirhams to a bank account through any crypto ATM in Dubai or in cash at an obliging OTC desk.

The cash withdrawal option is better suited for non-custody wallet users dealing in smaller remittances. At this stage, the hawaladars (brokers) settle their margins in local cash to complete the transaction cycle.

The hawala money trail does not have to stop at Dubai, or wherever it is delivered as USDT to a wallet. “It can keep travelling virtually anywhere, through one or more rogue, non-compliant crypto platforms, to be encashed at a preferred time and location. Many exchanges available to Indian users are not registered with the FIU (Financial Intelligence Unit),” said the compliance officer.

Only last month, FIU-India issued notices to 25 offshore Virtual Digital Asset (VDA) service providers for violating provisions of the Prevention of Money Laundering Act (PMLA), 2002. The list includes platforms such as Huione (Cambodia), BC.game (Curacao), LBank, BingX (both British virgin Islands), BitMex, Probit Global (both Seychelles), PrimeXBT (St Lucia), LCX (Liechtenstein) and BTSE (Lithuania).

“While a few foreign exchanges, such as (Seychelles-registered) OKX, have exited the Indian market and others (Binance and Coinbase) have registered with the FIU, users still have multiple secrecy options available,” said the compliance officer.
However, deals can go wrong, leaving the victims with few options other than relying on private experts for techno-legal help. Such victims, said the recovery consultant, are typically high-net-worth individuals who avoid approaching law enforcement agencies for “obvious reasons” and rely on private negotiators for techno-legal help.

“Hawala is based on trust and new players can be dodgy. One broker melted into thin air after receiving rupee deposits. In another case, USDTs vanished from the wallet before realisation. But going to the cops would attract charges under the PMLA,” the recovery consultant said.

Sources in the Enforcement Directorate said that they have cracked quite a few hawala cases involving crypto. The agency obtained information from the UAE through FIU-IND via Ottawa-based EGMONT Group of FIUs, besides relying on the Common Reporting Standard system that allows countries to automatically exchange financial and tax information.