The use of digital currencies as an investment option has gained significant popularity in India, offering users secure transactions through blockchain technology while providing a degree of anonymity. However, the absence of regulation has created opportunities for unscrupulous actors to engage in illicit activities within the cryptocurrency market while maintaining anonymity. This lack of oversight has made it challenging to trace cryptocurrency transactions both within and outside the country, raising concerns about money laundering in India’s cryptocurrency ecosystem.
To address these growing concerns, the Ministry of Finance issued a gazette notification on March 7, 2023. This notification brings cryptocurrency trading and other digital assets under the purview of the Prevention of Money Laundering Act, 2002 (PMLA). This move signifies the government’s commitment to implementing domestic anti-money laundering standards in the cryptocurrency sector. It aligns with broader efforts to regulate virtual and digital assets, including the introduction of a 30% income tax on trading income in such assets in April 2022 and the 1% tax deducted at source (TDS) mandated since July 2022.
What the Notification Entails
The notification broadens the scope of transactions falling under the PMLA to include virtual digital assets (VDA), which encompass cryptocurrencies and non-fungible tokens (NFTs). The following types of transactions are now subject to PMLA regulations:
- Exchange between VDAs and fiat currencies.
- Exchange between different VDAs.
- Transfer of VDAs.
- Safekeeping or administration of VDAs or instruments enabling control over VDAs.
- Participation in and provision of financial services related to an issuer’s offer and sale of a VDA.
Entities engaging in these transactions are categorized as “reporting entities” under the PMLA, joining the ranks of established reporting entities such as banking companies and financial institutions.
Overview of the PMLA and Powers of the Directorate of Enforcement
The PMLA serves as the legal framework for prosecuting money laundering offenses in India. The primary authority responsible for investigating and prosecuting such offenses nationally is the Directorate of Enforcement (ED), an organization under the Department of Revenue, Ministry of Finance. The ED holds the authority to initiate proceedings for the seizure and attachment of property and to prosecute under the PMLA.
Key aspects of the PMLA include:
- Money laundering offenses can stem from a range of underlying offenses listed in the PMLA schedule, including those under the Indian Penal Code, Information Technology Act, and Customs Act, among others.
- Penalties for money laundering include rigorous imprisonment ranging from 3 to 7 years and fines.
- The PMLA provides extraterritorial jurisdiction to the authorities constituted under it.
- Money laundering is considered a continuous offense, with no specific limitation period.
Under the PMLA, the ED can confiscate or attach properties derived from criminal activities related to PMLA offenses. The law also grants the ED the power of pre-trial attachment or confiscation of properties.
Implications of the New Regulation
PMLA Requirements for Reporting Entities
As reporting entities, cryptocurrency exchanges, intermediaries, and other VDA service providers are now subject to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules). They must comply with rules requiring them to conduct Know Your Customer (KYC) verifications and adhere to reporting standards similar to other regulated entities. This designation grants the ED increased powers for search and seizure during investigations of potential PMLA violations, which could result in penalties and property attachment.
Mandatory Compliance Obligations
Reporting entities dealing with VDAs must fulfill several obligations outlined in the PMLA and PMLA Rules, including:
- Maintaining records of transactions, particularly cash transactions exceeding INR 10 lakhs (~USD 12,000), and records of interconnected cash transactions below INR 10 lakhs that exceed INR 10 lakhs monthly.
- Reporting suspicious transactions to the Financial Intelligence Unit-India (FIU-IND).
- Conducting enhanced due diligence on clients and users, including identity verification, financial position examination, and transaction record keeping.
Non-compliance with the PMLA Rules may result in monetary penalties ranging from INR 10,000 to INR 1,00,000, in addition to other actions under the PMLA.
IndusLaw’s Perspective
While the primary aim of the notification is to enhance regulatory oversight in the cryptocurrency sector, the move has been largely welcomed by India’s cryptocurrency community. It is seen as a step towards legitimizing the industry and aligning with global best practices for combating money laundering in digital assets. India’s regulatory actions in this context are being closely monitored by the global economy, as the nation takes steps toward comprehensive cryptocurrency regulation on the international stage.
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