Security agencies flag crypto hawala network in Jammu and Kashmir
Security agencies have detected a crypto hawala network funneling untraceable foreign funds into Jammu and Kashmir. Officials warned that the system bypasses financial safeguards, uses private wallets and mule accounts, and could be funding terror and separatist activities in the Union Territory
New Delhi: Security agencies have flagged a sophisticated “crypto hawala” network that bypasses the country’s financial safeguards to funnel untraceable foreign funds into Jammu and Kashmir, sparking serious concerns that the money is being used to support terror activities, officials said on Sunday.
This has put the security establishment on high alert, with officials warning that these shadow funds are meant to give a fresh lease of life to separatist elements and reignite anti-national rhetoric within the Union Territory, which had otherwise been almost neutralised following a crackdown by police and central agencies, they said.
Mirroring the traditional hawala system, where money is sent through non-banking channels, this digital version uses the anonymity of unregulated cryptocurrency to erase the financial trail and inject cash into the domestic economy.
While India requires all Virtual Digital Asset Service Providers (VDA SPs) to register with the Financial Intelligence Unit (FIU), this shadow network operates completely off the grid.
For the 2024-25 fiscal year, only 49 exchanges have registered as legal reporting entities, prompting the government to issue fresh guidelines that include mandatory liveness detection and geographical tracking, besides asking users to take a “live selfie” using software that verifies their presence, usually through eye blinking or head movement.
The “penny-drop” method, which involves processing a nominal Rs 1 transaction to confirm that the bank account is active and belongs to the registrant, is required. In addition to a Permanent Account Number (PAN), users must provide a secondary ID such as a Passport, Aadhaar or Voter ID, verified through OTP.
A detailed study conducted by the Jammu and Kashmir Police along with central security agencies identified people in countries such as China, Malaysia, Myanmar and Cambodia directing individuals in the Union Territory to create private crypto wallets. These wallets are often set up using a Virtual Private Network (VPN) to avoid detection and require no Know Your Customer (KYC) or identity verification.
The Jammu and Kashmir Police has already suspended the use of VPNs in the valley, as registration in crypto wallets had increased in the region in recent times. VPNs are a useful tool for terrorists as well as separatists to avoid detection.
Officials said the foreign handler sends cryptocurrency directly into these private wallets, placing the funds under local control without involving a regulated financial institution. The wallet holder then travels to major cities such as Delhi or Mumbai to meet unregulated peer-to-peer (P2P) traders and sell the crypto for cash at negotiated rates.
This effectively breaks the financial trail, allowing foreign money to enter the local economy as untraceable cash, the officials said.
The key to this network is the use of “mule accounts”, which are parking accounts used to layer transactions. To keep the system running, syndicates have created a structured commission system in which such an account holder earns anywhere between 0.8 and 1.8 per cent per transaction.
Officials said the mule accounts belong to ordinary people who are motivated by the promise of commission and are assured that their role is safe and that they are only allowing their accounts to be used temporarily as parking accounts. All control of their bank accounts, including net banking user names and passwords, is handed over to the scammer.
A single scammer is usually provided with multiple mule accounts, often ranging from ten to thirty accounts at a time, the officials said.
Officials said the rise of crypto hawala poses a new challenge of off-exchange trading and, by operating in the grey market, these traders evade anti-money laundering laws that apply to registered entities.
Officials warned that the “crypto hawala” method is designed to bypass formal banking systems and avoid leaving any financial traces. By moving money from a digital private wallet to a physical cash transaction in a different city, the financial trail is effectively cut off.
Despite the FIU’s efforts to regulate 49 major exchanges, the rise of crypto hawala presents a major challenge for enforcement agencies as it allows foreign-sourced funds to enter the local economy without passing through a regulated financial institution.