CONTEXT – Financial Intelligence Unit India (FIU IND) issued show-cause notices to nine offshore virtual digital asset service providers (VDA SPs), including Binance, Kucoin, Huobi, Bitfinex and MEXC Global, among others for “operating illegally” without complying with the provisions of the Prevention of Money Laundering Act, 2002 (PMLA)

WHAT ARE VIRTUAL DIGITAL ASSET SERVICE PROVIDERS?

“Virtual Digital Asset Service Providers” generally refers to entities that offer services related to virtual assets or digital assets, particularly in the context of cryptocurrencies and blockchain technology. These services can include a range of offerings such as cryptocurrency exchanges, wallet providers, payment processors, and other platforms facilitating the management, trading, or use of digital assets

1. Cryptocurrency Exchanges: Platforms that enable users to buy, sell, and trade various cryptocurrencies. Users can exchange one type of cryptocurrency for another or for fiat currency.
2. Crypto Wallet Providers: Services that offer digital wallets for securely storing, sending, and receiving cryptocurrencies. Wallets can be hardware-based, software-based, or web-based.
3. Payment Processors: Companies that facilitate the acceptance of cryptocurrency payments for goods and services. Merchants can integrate these services to accept payments in cryptocurrencies.
4. Blockchain and Crypto Startups: Innovative startups that operate in the blockchain and cryptocurrency space. These companies may provide services related to decentralized finance (DeFi), non-fungible tokens (NFTs), smart contracts, and more.
5. Crypto ATMs Operators: Operators that set up and manage cryptocurrency ATMs, allowing users to buy or sell digital assets using cash or cards.
6. Crypto Advisory and Consulting Services: Firms offering advisory and consulting services related to blockchain technology, cryptocurrency investments, regulatory compliance, and strategic planning.
7. Decentralized Finance (DeFi) Platforms: Platforms providing decentralized financial services, such as lending, borrowing, yield farming, and decentralized exchanges, often facilitated through smart contracts.
8. Non-Fungible Token (NFT) Platforms: Platforms that enable the creation, buying, and selling of non-fungible tokens, which represent ownership or proof of authenticity for unique digital or physical assets.
9. Tokenization Platforms: Services that facilitate the tokenization of real-world assets, converting physical or financial assets into digital tokens on a blockchain.
10. Crypto Custody Services: Companies providing secure storage and management of digital assets on behalf of institutional investors, high-net-worth individuals, and other clients

PREVENTION OF MONEY LAUNDERING ACT, 2002

PMLA 2002 was enacted to prevent and combat money laundering and related offenses

Money laundering involves the process of making illegally obtained proceeds (such as funds from criminal activities) appear legal by passing them through a complex sequence of banking transfers or commercial transactions.

Objectives:

• Combat Money Laundering: The primary objective is to prevent and control money laundering activities.
• Confiscate Proceeds of Crime: The Act provides for the confiscation of proceeds derived from criminal activities.
• Establish Authorities: It establishes authorities for the investigation and enforcement of the provisions of the Act.

Important Definitions:

• Money Laundering: The process of disguising the origins of illegally obtained money, typically by passing it through a complex sequence of banking transfers or commercial transactions.
• Proceeds of Crime: Any property derived or obtained directly or indirectly by any person as a result of criminal activity relating to a scheduled offense.

Key Provisions:

1. Offenses and Penalties:
   • The Act identifies certain offenses, known as “scheduled offenses,” including offenses under the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, and more.
   • Penalties for money laundering can include imprisonment and fines.
2. Attachment and Confiscation: The enforcement authorities have the power to attach and confiscate the proceeds of crime.
3. Designated Authority: The Act establishes a designated authority to investigate and take action against money laundering activities.
4. Obligations of Banking Companies and Financial Institutions: Banks and financial institutions are required to maintain records of transactions, verify identity, and report certain transactions to the authorities to prevent money laundering.
5. Reporting Entities: Various entities, including banks, financial institutions, intermediaries, and professionals like chartered accountants and lawyers, are categorized as “reporting entities” and are required to report transactions that appear suspicious.
6. International Cooperation: The Act enables cooperation with foreign countries in investigating and combating money laundering.

Amendments and Updates: The Prevention of Money Laundering Act has undergone amendments to align with evolving international standards and to address emerging challenges in the realm of money laundering and related offenses.

Regulatory Authorities:

1. Enforcement Directorate (ED): The primary agency responsible for enforcing the provisions of the PMLA.
2. Financial Intelligence Unit-India (FIU-IND): The agency responsible for receiving, processing, analyzing, and disseminating information related to suspicious financial transactions.

Compliance: Entities covered under the Act are required to comply with its provisions, and failure to do so may lead to legal consequences, including penalties and imprisonment

WHAT IS THE PREMISE OF THE NON-COMPLIANCE?

• Virtual Digital Asset Service Providers (VDA SPs) in India were mandated to comply with PMLA 2002, verify the identities of onboarded clients, and maintain records of their financial positions and potentially suspicious transactions
• Applies to all VDA SPs operating in India irrespective of physical presence
• Non-registration made entities non-compliant despite serving Indian users
• Entities were brought under Anti Money Laundering (AML) and Counter Financing of Terrorism Network (CFT) framework
• Currently, 31 VDA SPs have registered with FIU IND

WHAT PURPOSE DOES THE PMLA COMPLIANCE SERVE?

• Reporting obligation enables monitoring and tracking of financial transactions to curb money laundering and terror financing
• Addresses one of the primary concerns of any regulator about the purported anonymity of the crypto assets and their potential use for unlawful purposes
• KYC verifications would ensure lack of anonymity and businesses not encountering multiple hurdle