Money was squeezed and siphoned out of every purchase/sale the UPA government made. The government still struggles to bring these riches back home.



Narendra Modi came to New Delhi promising to root out corruption and to bring back the trillions salted away in tax havens. The euphoria lasted for all of three months before the new government realised that the damage done by the 10-year rule of the UPA had dealt a body blow to the financial infrastructure of the country. Money was squeezed and siphoned out of every purchase/sale the UPA government made. Worse, new, creative ways of salting the ill-gotten proceeds were uncovered every day. Tax evasion, benami assets, money laundering, you name it, the alphabet soup of financial instruments used to move money into tax havens was employed by the rich and the prosperous and to this day, the government struggles to get a grip on bringing these riches back home. After all the dust settles, these proceeds belong to the people of India.

To tackle the menace of money laundering, the American regulator FINRA (Financial Industry Regulatory Authority) has come up with a detailed set of guidelines for all companies and businesses to follow. A similar approach is being adopted by every country and the means for tracking this by the government can be daunting if the process is not automated.

Today, there are technologies that allow this to be embedded seamlessly into the process of banking. Distributed Ledger Technology (DLT) enables secure, real-time, peer-to-peer, end-to-end value exchange and payment services across borders. With integral compliance and Know Your Client (KYC) processes, it is possible to track all transactions and this article describes how to design a financial system that is Anti Money Laundering (AML) compliant.

To understand DLT, the reader is encouraged to read the previous article in this series by the author, titled The future of cash is Blockchain, published in The Sunday Guardian on 17 November 2018.


Global Financial Integrity defines money laundering as “the process of disguising the proceeds of crime or ill-gotten money and integrating it into the legitimate financial system. Before proceeds of crime or ill-gotten monies are laundered, it is problematic for criminals to use the illicit money because they cannot explain where it came from and it is easier to trace it back to the crime. After being laundered, it becomes difficult to distinguish money from legitimate financial resources, and the funds can be used by criminals without detection.”


There are many ways to launder money. But all of them can be broken down into three steps:

  1. Placement: Initial entry into the financial system.
  2. Layering: Breaking it down into smaller parts to escape detection.
  3. Integration: Putting it back together and returning it to the source.


Assume individual Z wants to launder €10,000 (ten thousand euros) from EU to say India. Z enlists 10 individuals A0…A9 and gives them €1,000 each and asks them to transfer it to their families back home in India (figure 1).

Figure 2: Layering step


The money is split into 10 lots of €1,000 (A0…A9). Then it is transferred to India, to their families, which we shall call B0…B9 (figure 2). Since a thousand euros is a small amount, no questions are asked at the receiving bank. The money will be converted into the local currency, rupees and deposited in the accounts of B0…B9.

Figure 3: Integrating step


Z has a collector Y, who will go to B0…B9 and collect the converted rupees. Now, in India, Z has the original amount of €10,000 in rupees. Assuming an exchange rate of 100 rupees to a euro, B0…B9 each will have Rs 100,000 (one lakh). Y will have a total of Rs 1 million, which he can send it back to Z via the hawala (a method of transferring money without money actually moving) route or keep it for other purposes.

To legitimise the payment from B0…B9, several methods are used (figure 3)buy a painting for Rs 100,000 to a rickety car—anything to make it look legitimate. But the money has entered the system and it is a fait accompli (figure 3).


When the amounts are small, it is near impossible for the government agencies to smell the fact that this is a money laundering operation. Some automated checks are performed for a fee by independent software companies to verify that Z’s wealth is legitimate, but this imposes an overhead on the transaction cost. Therefore, it is desirable to come up with a methodology that is at once inexpensive and efficient.

Figure 4: Liquineq solution with built-in AML


AML is designed in to the Liquineq solution. Here is how the same scenario plays out, using Liquineq’s multi-tier Secure iDLT (immutable Distributed Ledger Technology) (figure 4).

  1. When Z transfers €1,000 each to A0…A9, the KYC certificate of Z is embedded in the blockchain of the sending bank.
  2. When the sending back disburses the amounts to A0…A9, each of them will have a copy of Z’s KYC certificate. Now as the case may be, A0…A9 KYC certificate also gets attached.
  3. When A0’s €1,000 goes across to India, The KYC of Z and A0 is updated in the DLT. When it arrives at India and gets distributed to B0…B9, the KYC certificates of Z and A0…A9 are still present. If a further division takes place in India to obfuscate the issue, the chain would continue to maintain the fact that it originated from Z. The trail in terms of certificates is embedded in the chain. This is compliant with Eurozone’s General Data Protection Regulation (GDPR) or similar laws in other countries.

Disclosure: Sree M. Iyer is part of Team Liquineq and is its Chief Solutions Officer.