-Tanya Sara George
Introduction
As per a 2024 FATF report, most domestic money laundering operations are conducted through open sources and social media networks. Initially designed as neutral forums for communication under Section 2(w) of the IT Act of 2000, these platforms have evolved into dual-purpose entities, facilitating not just digital interactions but financial transactions. With various elusive social media platforms rising on the annual top-grossing charts on the App Store and Google Play, this trend is alarming.
Relying on common law jurisprudence, intermediaries were initially assumed not to exercise a significant amount of control over the services availed through their platform and categorized as mere second publishers of content and, therefore, granted certain immunities through their neutrality. The 21st century however, has found different. Yet, the existing regulatory framework continues to classify intermediaries as passive conduits, ignoring their role in enabling illicit financial flows. This legal blind spot allows these platforms to exploit the “safe harbour” provisions under Section 79 of the IT Act, evade accountability, and obscure suspicious transactions. Evasive tactics such as secret chats and encryption further cause hindrances, often at the expense of financial non-regulation.
Through this article, the author establishes a significant gap in financial regulation within social media platforms in India. The author first analyses the widespread financial transactions that occur within these intermediaries and the evasive strategies utilized by these platforms to obscure such transactions. The author further observes the inadequacies of the domestic framework on money laundering and financial regulation in acting to prevent such financial dealings concomitant to social media intermediaries. Lastly, the author proposes a restructuring of the present framework on financial regulation to encompass adequate intermediary liability within its ambit.
Increasing Financial Crime
India has witnessed a recent surge in downloads of social media platforms that work on a fee-based model. Content creators hold a platform on the app and sell their content for a set fee, which is paid by the catered audience.
These platforms are increasingly used for human trafficking, child sexual abuse material and drug trafficking. The nature of adult content, combined with the anonymity provided by online platforms, makes it hard to determine whether uploaded content is consensual or coerced, allowing traffickers to exploit individuals under the guise of legitimate work. A UN report has found that this coerced content, including explicit material, often generates significant revenue for criminal syndicates, creating a disturbing link between digital platforms and organised crime. In parallel, Suspicious Activity Reports filed by banks have revealed troubling connections between intermediary platform operations and earnings from sexual activities involving minors, further deepening concerns around illicit finance.
The anonymity offered by these platforms, combined with features such as encryption and secret messaging, makes them ideal for laundering illicit proceeds. For instance, police investigations in Uttar Pradesh uncovered teenage rings trafficking Child Sexual Abuse Material, leveraging platforms like Telegram to evade detection. Additionally, evidence indicates that such platforms act as a means for individuals to publicly offer services for money laundering, cheque fraud, and the sale of various illegal substances, with no legal repercussions.
Similarly, stock market manipulation schemes have emerged, with encrypted chats used to inflate stock prices fraudulently. SEBI investigations found that these messaging platforms have also engaged in stock price manipulation and increased the stock price by 100% within a few months. Although individuals were later penalized, this grossly fails to address the root cause of such issues and the liability of the intermediaries in promoting and facilitating such illegality.
These platforms not only facilitate crime but also actively hinder investigations by refusing to cooperate with law enforcement. Their design and operations prioritize user anonymity over regulatory compliance, creating a system outside of the state’s financial regulation that shields criminals from scrutiny.
Modern Regulatory Lacuna
As recently noted by the Ministry of Home Affairs, the presence of payment gateways, digital wallets, and the increasing dependence on online financial platforms in India creates an environment ripe for exploitation through money laundering schemes. However, the sheer volume of illicit activities on legitimate platforms, such as Instagram, which runs alongside legal corporate advertisements, makes it increasingly difficult for the state to regulate financial activity.
Lax state regulation allows individuals to launder illicit funds via social media platforms, through a process of layering them with legitimate proceeds for reintegration into society. In countries where the process is not recognized as legitimate, i.e., if obtaining proceeds from a certain platform is banned, individuals can just as easily transfer received money into a foreign account in a country where the platform is legally recognized and then back into domestic accounts thereby integrating their money into society without creating doubt. Due to the volume of money flowing through the platform simultaneously, banks are also facing increasing difficulties in regulating and flagging suspicious activity.
Further, while the FATF was made to ensure financial regulation and the lack of monetary funds for terrorism purposes, data shows that these social media platforms often elude their regulatory scope. For example, Telegram has the most downloads in India, and it has been observed that its secret chat features and encryption are deliberately utilized to obscure illicit financial transactions of terrorist groups and to send funds to terror groups. However, the platform continues to function without any hitches.
Inadequate Domestic Framework
In the e-commerce industry, Indian courts have taken a progressive approach and utilized the “active participant” approach in holding intermediaries liable, as established in Christian Louboutin SAS v. Nakul Bajaj and Ors. In the recent Ola case, the court looked into the level of supervision and control exerted by the intermediary in ascertaining liability, observing the complicit roles intermediaries play in today’s digital world. However, when it comes to social media intermediaries, as shown by cases such as Shreya Singhal v Union of India and My Space Inc. vs Super Cassettes Industries Ltd., Indian courts are more inclined to protect the immunities granted to intermediaries. This becomes alarming as the lines between both types of intermediaries become increasingly blurry. Today, social media intermediaries host a wide array of transactions, which evade purview and allow for financial crimes.
Firstly, the negative definition given to these platforms under section 2(w) restricts them to only a ‘neutral 3rd-party’ and does not account for their active role in domestic financial crime. This classification wilfully ignores the modern functions of these platforms, such as the platforms’ facilitation of financial transactions and their wilful blindness to illicit activities.
Additionally, emphasized in Shreya Singhal and My Space Inc., section 79(3)gives intermediaries a safe harbour from such dealings unless they do not comply with government requests. However, the fundamental flaw herein is that the sheer multiplicity of platforms with similar models for similar gains severely diminishes the ability of the government to regulate each platform. This, in turn, means that most of these platforms would be eligible to meet the criterion under §79 and avail safe harbour, absolving themselves of any liability.
Secondly, while the PMLA under Section 1(wa) places an obligation to report on certain persons, i.e., ‘reporting entities’, this obligation is placed solely on financial intermediaries, banking companies and persons carrying a designated business defined under Section 1(sa), indicating that social media intermediaries are kept out of this ambit. This effectively allows these intermediaries to evade the mandated obligation under Section 12 to file suspicious transaction reports. Similarly, this also allows them to incur no penalties on non-reporting suspicious transactions as they do not fall under the ambit of a ‘reporting entity’, contrary to the intent of Section 13.
A Case for Redefining Liability
The argument for reform is clear: social media platforms are no longer passive intermediaries but active participants in financial ecosystems. Drawing a parallel to the Australian digital law, this law places the onus on the intermediary to hold inside checks of its framework rather than making this a part of the state’s regulatory burden as envisaged under Section 79(3). The Australian model can be termed as a model of ‘actual knowledge’ where civil liability is imposed on these intermediaries if they have actual knowledge of the illegal activity. This has a dual purpose of firstly, ensuring that the intermediary plays an active role in minimizing illegal content, and secondly, ensuring that the state can place adequate liability on the intermediary.
The UK’s Online Safety Act, also based on the ‘actual knowledge’ model, goes a step further and places criminal liability on platforms that fail to act in line with their obligations. To facilitate a safe digital network, their obligations, inter alia, include assessing possible harms, publishing risk assessments, the immediate removal of illegal content, and so on. Applying these obligations to the financial sphere would allow both the platform and the government to immediately flag suspicious activity and thereby ensure that social media intermediaries are financially regulated. Further, this model ensures that in cases of non-compliance, liability can be placed on both the individuals and the intermediary without allowing them to escape through regulatory loopholes. The Act’s Impact Assessment has further analysed data to establish that the act would provide sufficient compensatory and penalizing recourse for financial crime.
This shift in liability has led to Australian suits like that against Entain Ltd. for its systemic non-compliance with anti-money laundering obligations. The suit argues that the platform did not adequately regulate content and advertising and allowed anonymous individuals to exploit the platform for illicit financial activities. Similarly, UK’s FCA has penalized Coinbase, a cryptocurrency platform, for facilitating transactions despite money laundering risks. The FCA also held influencers liable for their roles in promoting illicit financial activities on social media, highlighting the stance toward holding platforms accountable for such crimes.
India can adapt these models to its context by redefining intermediary liability under the IT Act. This shift would align with global best practices, ensuring that platforms are accountable for their role in enabling financial crimes.
Domestic Changes
In the past, the Ministry of Finance has expanded the scope of reporting entities to ensure financial compliance when needed. Now that online intermediaries are evidencing dangerous tendencies, the country must adapt the legislation to meet modern demands.
The PMLA should be amended to include social media platforms that host a massive amount of suspicious transactions within the ambit of “reporting entities” under §1(wa) to include the obligations stated under §12 and §13. This would impose obligations such as filing Suspicious Transaction Reports, conducting KYC checks, and cooperating with law enforcement. These measures would thereby effectively place liability on online intermediaries that are implicit in disseminating illegal proceeds and enable regulators to identify and address illicit financial activities effectively.
Conclusion
The rise of financial crimes facilitated through social media intermediaries highlights a critical gap in India’s regulatory framework. By categorizing these platforms as neutral entities, the existing laws fail to address their active role in enabling money laundering, trafficking, and other illicit activities. Expanding intermediary definitions, revising safe harbour provisions, and integrating social media intermediaries into the PMLA regime are essential steps toward closing existing loopholes. In an era of increasing digital dependence, aligning regulatory frameworks with contemporary challenges is imperative.
The author is a 3rd-year B.A.LL.B. (Hons.) student at MNLU, Mumbai.
[ad_1]
Source link