Here's why India's money laundering law is looking closely at crypto players

While we await regulations specifically applicable to virtual digital assets (VDAs), there have been peripheral changes in the regulatory environment. First, there was a new regime to levy tax on income from VDAs; then came reporting requirements under the Companies Act; and now, VDAs have been brought under the ambit of the Prevention of Money Laundering Act (PMLA).

PMLA permits the government to prescribe measures to prevent money laundering. It provides for stringent measures including confiscation of property. The enforcement directorate (ED) frequently takes action under PMLA, including related to virtual asset service providers (VASPs).

The Ministry of Finance has issued a Notification No. 1072 (E) dated March 7, 2023, which prescribes various requirements including carrying out of due diligence, maintenance of records, etc. on VASPs that are now notified as Persons Carrying on Designated Business or Profession and are therefore under the ambit of a Reporting Entity (RE). VASPs typically include NFT platforms, cryptocurrency exchanges, crypto payment gateways, etc. Where VASPs carry on activities for or on behalf of another person, it shall be regarded as RE under PMLA. The activities covered under PMLA are: (i) exchange between VDAs and fiat currency; (ii) exchange between one or more forms of VDAs; (iii) transfer of VDAs; (iv) safekeeping or administration of VDAs or instruments enabling control over VDAs; and (v) participation in and provision of financial services related to an issuer’s offer and sale of a VDA.

REs are subject to numerous obligations under PMLA, including carrying out due diligence and maintenance of records. Such requirements arise both at the time of acceptance of a client (KYC) and where a client carries out transactions beyond specified limits or carries on international money transfer operations. The KYC records are required to be filed with a central KYC registry within 10 days of accepting a client.

Where transactions are carried on beyond prescribed limits or involve foreign exchange, etc., or where the transactions pose a high risk of money laundering or terrorist financing, there are enhanced due diligence requirements imposed on REs prior to carrying on such transactions.

The requirements for maintaining the records need REs to ensure that individual transactions can be reconstructed. Such records need to be maintained for a period of five years from the date of transaction. The REs are also required to develop internal mechanisms such that high-risk transactions can be detected in advance. All suspicious transactions need to be reported periodically. Penal consequences are prescribed for breach of compliance with the provisions of PMLA.

Clearly, the government wants visibility and line of sight on persons engaged in VDA transactions. VASPs are now treated like financial institutions and a mechanism is sought to be put in place to ensure reporting of transactions that are suspicious and elimination of undesirable players.

Like VDAs, another set of people who have come under increasing scrutiny are charities. Non-profit/charitable institutions have been subjected to heightened scrutiny in the recent past. They have been under the lens of the taxman and on the radar of agencies entrusted with regulating allied laws.

Actions against renowned politicians and persons affiliated with large political parties have also led to increased scrutiny of high-ranking officials.

Thus, multiple amendments have been notified to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLMR Rules’). Some of the key changes are:

(i) Obligations of ‘group entities’: The term ‘group’ has been defined to have the same meaning as per the Income-tax Act to include a parent and all entities where due to ownership/control, a consolidated financial statement is required to be maintained.

It is further provided that ‘groups’ are required to implement group-wide policies for the purpose of discharging obligations under the PMLMR Rules. These include verification of identity by reporting entities and maintenance of records amongst other procedures and compliances under Chapter IV of the PMLA.

(ii) Non-profit organisations: The term ‘non-profit organisation’ (NPO) has been amended to mean an entity or organisation constituted for religious or charitable purposes under section 2 (15) of the Income-tax Act, which is registered as a trust or a society under the Societies Registration Act, 1860, or any similar legislation or a company registered under section 8 of the Companies Act, 2013.

Accordingly, reporting entities will have to maintain records of transactions involving receipts by NPOs (including religious or charitable institutions) of more than `10 lakh or its equivalent foreign currency.

Further, banks/ financial institutions/ intermediaries are required to register details of their NPO clients on the DARPAN portal of NITI Aayog and maintain such registration for five years from the end of business relationship with the client or account closure, whichever is later.

(iii) Reduction in threshold for identifying beneficial owner (BO): The threshold for identifying BOs in companies and trusts was 25 per cent and 10 per cent, respectively. This has been brought down uniformly to 10 per cent for both categories.

While this will impact all companies and trusts, an immediate impact would be on foreign portfolio investors (FPIs) who would probably have to wait in the queue slightly longer for grant of registration due to increased due diligence and KYC norms.

(iv) Inclusion of Politically Exposed Persons: ‘Politically Exposed Persons’ (PEP) have now been defined under the PMLMR Rules as individuals who have been entrusted with prominent public functions by a foreign country, including the heads of states or governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials.

This is to bring uniformity with the definition of PEP under the extant foreign exchange rules, which are in line with the recommendations of the Financial Action Task Force.

Moves to regulate both VDAs and charities are welcome. It would be in the fitness of things that the government now comes up with a comprehensive legislation to govern VDAs.

The writer is CEO of Dhruva Advisors LLP. Views are personal