Money Laundering and Crypto implications

Anti-Money Laundering and Crypto Implications

India has put in place Anti-Money Laundering (AML) standards for cryptocurrency and crypto exchanges to make transactions more accountable. The goal is to regulate the growing crypto industry and prevent illegal activities like money laundering and terrorism financing.

The new rules require all crypto transactions to follow India’s AML law. Financial institutions and crypto exchanges must verify customer identities, monitor transactions, and report any suspicious activities. This helps protect India’s financial system from risks related to cryptocurrencies.

In this blog we will cover the below topics

  1. Introduction to Anti-Money Laundering
  2. Compliance for Cryptocurrency
  3. Crypto Transaction under Anti-Money Laundering
  4. Global standards for AML legislation
  5. Steps to Ensure AML Compliance in India
  6. Reporting Obligations for AML/CTF
  7. Authorities Investigating Money Laundering Offences
  8. Penalties for Non-Compliance with AML Requirements
  9. Industry responded to this development

Introduction to Anti-Money Laundering

The Prevention of Money Laundering Act (PMLA), 2002, was enacted in January 2003 and came into effect on July 1, 2005. It defines money laundering as engaging in any process related to crime proceeds to make it appear as clean money, which is considered an offense.

On May 9, 2023, the Indian government expanded the PMLA scope to include individuals assisting in a company’s formation, like directors, secretaries, or proxy nominee directors. This now covers those providing services such as registered offices, business addresses, accommodations, or administrative addresses for companies, LLPs, or trusts.

The government further revised the PMLA on May 3, 2023, extending it to practicing chartered accountants (CA), company secretaries (CS), and cost and works accountants (CWA) conducting financial transactions on behalf of clients. Lawyers and legal professionals are not included in this definition. Now, CA, CS, and CWA professionals must undergo KYC before working for clients. As reporting entities, accountants must conduct due diligence on clients’ finances, ownership, funds, and document transaction purposes.

Compliance for Cryptocurrency and Virtual Digital Asset

  • On March 7, 2023, the federal government issued a gazette notice mandating KYC checks for intermediaries dealing with virtual digital assets (VDA) and crypto exchanges on their customers and platform users.
  • Intermediaries and exchanges are required to report any suspicious activity to the Financial Intelligence Unit India (FIU-IND).
  • This action follows Finance Minister Nirmala Sitharaman’s announcement that India and other G-20 members were discussing the need for standard operating procedures to regulate crypto assets.

Crypto Transaction under Anti-Money Laundering

  • Organizations trading in virtual digital assets are classified as “reporting entities” under PMLA and must maintain transaction records, including cash transactions over INR 1 million, for at least five years.
  • They must also monitor closely related cash transactions exceeding INR 1 million within a month.
  • The following transactions will now fall under PMLA, 2002:
  1. Exchange between VDAs and fiat currencies
  2. Exchange between multiple VDAs
  3. Transfer of VDAs
  4. Safekeeping or administration of VDAs or instruments controlling VDAs
  5. Participation in and provision of financial services related to a VDA issuer’s offer and sale.
  • The Indian government’s approach aligns with global efforts to regulate digital asset platforms with anti-money laundering guidelines similar to those followed by regulated entities like banks and stockbrokers.

Global standards for AML legislation

  • Global AML standards are set by the Financial Action Task Force (FATF).
  • FATF’s cryptocurrency AML guidelines were published in 2014 and have been updated multiple times.
  • Most of FATF’s recommendations have been adopted into law by the European Commission, FinCEN, and other regulatory bodies.
  • According to the guidelines, VASPs include crypto exchanges, stable coin issuers, and certain DeFi protocols and NFT marketplaces.
  • VASP organizations must ensure compliance with AML regulations, necessitating KYC checks and ongoing monitoring for suspicious activity.
  • VASPs are also required to report suspicious activity to appropriate regulators for tracking illegal conduct using tools like blockchain analysis.

Steps to Ensure AML Compliance in India

As a designated service provider, the business must ensure a strong anti-money laundering/counter-terrorism funding policy that includes:

  • Policies, procedures, and controls for combating money laundering and terrorist financing.
  • Verification of customers’ identities and profiling based on risk categorization, with regular reviews.
  • Transaction monitoring, especially for high-risk accounts.
  • A well-managed AML/CTF program with proper systems, controls, role divisions, and training.
  • Internal audits to ensure compliance with AML and CTF policies.
  • Appointment of a qualified compliance officer to oversee the anti-money laundering program.

Reporting Obligations for AML

As a designated service provider, a company must notify FIU-IND(Financial Intelligence Unit) about certain purchases and suspicious activity.

  • Ongoing reporting responsibilities include: Submitting a Suspicious Transaction Report (STR) within seven days of identifying a suspicious transaction or related series of transactions, whether cash or non-cash.
  • Reporting cash transactions to FIU-IND by the 15th of the following month if the total value exceeds INR 1,000,000 (or its equivalent in foreign currency).
  • Promptly contacting FIU-IND and the relevant Indian police department in case of counterfeit currency use.
  • Non-profit transaction reports (NTR) for non-profit organizations receiving more than one lakh rupees (INR 10,00,000) or the equivalent in foreign currency.
  • Records must be maintained for a minimum of ten years after the transaction or commercial connection concludes.

Authorities Investigating Money Laundering Offences

  • The ED (Enforcement Directorate) is the primary authority responsible for investigating and prosecuting money laundering. It operates under the Department of Revenue, Ministry of Finance, and can initiate attachment of property and proceedings in the Special Court for money laundering offences.
  • The FIU (Financial Intelligence Unit) under the Department of Revenue, Ministry of Finance, is the central agency receiving, processing, and disseminating information related to suspect financial transactions to enforcement agencies and foreign FIUs.
  • SEBI (Securities and Exchange Board of India): Prescribes KYC norms for financial intermediaries and investors in the securities market.
  • RBI (Reserve Bank of India): Prescribes KYC and AML guidelines for banks and other regulated financial institutions.
  • IRDAI (Insurance Regulatory and Development Authority of India): Prescribes AML guidelines for certain categories of insurers and recently released Draft Master Guidelines on AML/CFT.
  • CBI (Central Bureau of Investigation) – Specialized police establishment for investigating economic offences and crimes with inter-state/all-India ramifications.
  • Income Tax Department: Empowered to prevent money laundering by imposing tax on undisclosed foreign income and assets of Indian residents.
  • RoC (Registrar of Companies): Indian companies are mandated to file records of significant beneficial owners with RoC as per the Companies Act 2013.

Penalties for Non-Compliance with AML Requirements

The Director of the FIU can impose monetary penalties of up to INR 100,000 for each failure on a Reporting Entity or its designated director or employees, following an inquiry into their obligations.

Penalty provisions apply to specific failures, such as not promptly reporting suspicious transactions, failing to conduct customer due diligence, not maintaining proper records, neglecting to report cash transactions over a specified threshold, and non-compliance with KYC guidelines and AML regulations.

Industry responded to this development

  • The crypto industry has praised the notification’s release, considering it a positive step towards recognizing the sector’s legitimacy.
  • Ashish Singhal, co-founder of Coinswitch, expressed support for the move.
  • WazirX founder Nischal Shetty tweeted that it marks a positive start towards regulating the cryptocurrency business in India, emphasizing the need for KYC and transaction monitoring.
  • According to Chainalysis data, global cryptocurrency laundering increased significantly, reaching US$23.8 billion in 2022, compared to US$14.2 billion in 2021 and US$8.5 billion in 2020.
  • DeFi protocols received a substantial amount of illicit funds, with a 1,964 percent increase in cryptocurrency laundering through DeFi, totalling approximately US$900 million in laundered money.

In conclusion, Anti-Money Laundering (AML) compliance is crucial for the cryptocurrency industry, with global standards shaping AML legislation. Ensuring AML compliance in India involves understanding reporting obligations and the authorities responsible for investigating money laundering offences. Non-compliance with AML requirements can lead to penalties, prompting the industry to adopt robust measures and respond positively to regulatory developments. Emphasizing AML compliance is essential for fostering a secure and transparent environment in the cryptocurrency sector.

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