PMLA Financial News

Financial Intelligence Unit has slapped a penalty of Rs 18.82 crore on one of the world's largest crypto exchange Binance for alleged contravention of the country's anti-money laundering law. The federal agency issued an order Thursday charging the exchange with «dereliction of duty» as a reporting entity, with its operations that of a Virtual Digital Asset Service Provider, under the Prevention of Money Laundering Act (PMLA). The summary order accessed by PTI said Binance was first issued a notice in December last year since it operated in India and provided services to Indian clients.

cryptocurrencies has disrupted the global financial landscape, creating both opportunities and risks for investors. With the entry of new and credible players in the crypto space and the possibilities of blockchain technology, cryptocurrencies have become significant growth drivers. However, the rising number of scams in the crypto space has become a concern for investors, with reports indicating that illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022 alone. As the crypto industry continues to grow, it is imperative for businesses to prioritise security and regulatory compliance of their operations to prevent any potentially questionable transactions. The Finance Ministry's recent announcement of including crypto businesses under the Prevention of Money-laundering Act, 2002 highlights the increasing importance of regulatory compliance in the crypto space. Any exchange involving virtual digital assets and fiat currencies, exchange between multiple forms of virtual digital assets, and transfer of digital assets will now be subject to the same anti-money laundering standards as other regulated entities. These developments are not unique to India, as other regions such as the EU, US, and Singapore have also implemented similar laws and regulations, such as the Markets in Crypto-Assets (MiCA) provisional agreement, the Framework for International Engagement on Digital Assets, and guidelines by the Monetary Authority of Singapore's Payment Service Act.

There are two reasons for this. First, private crypto assets or currencies are not issued and governed by financial institutions but are typically issued via a decentralized blockchain, which makes them extremely difficult to regulate. A blockchain cannot be subjected to KYC norms or requirements linked to reporting of suspicious transactions. Second, the crypto ecosystem is not confined to geographical boundaries. A person in India could transfer a crypto asset for value to a person in any part of the world, without using any formal banking channel or fiat currency and without having to complete any identity verification. Given that transactions on a blockchain are anonymous, transaction tracing and implementing foreign exchange controls become extremely difficult. There are two regulatory touch points within a crypto ecosystem that can be leveraged to enforce and implement regulation — at the time a crypto asset is converted to fiat currency and the functioning of intermediaries.

The Indian government introduced a significant notification on March 7, 2023 bringing into coverage various crypto intermediaries within the purview of the Prevention of Money Laundering Act, 2002 (PMLA). The move comes at a time when many crypto intermediaries are already facing investigations from the Enforcement Directive (ED), the enforcing agency of the PMLA. News reports suggest that over Rs 9 billion has already been attached as proceeds of crime in connection with crypto frauds.

Last year, the Union government amended the Income Tax Act to impose a 30 percent tax on the transfer of virtual digital assets (VDAs), with a 1 percent TDS requirement. This was hailed as a major step towards legitimising digital assets in India. On March 7, 2023, the Department of Revenue in the Ministry of Finance issued a landmark notification under the Prevention of Money Laundering Act, 2002 (PMLA) bringing VDAs within the purview of the Act. The PMLA gives the government the authority to notify/identify categories of individuals engaged in a ‘designated business or profession’, who would qualify as a ‘reporting entity’ (RE). This notification is significant since being a RE - which includes banks, financial institutions, intermediaries or a ‘person carrying on a designated business or profession’ - is the trigger for consequences and compliances under the Act. So far, beyond the financial services licensed players, the PMLA umbrella was extended to only casinos, the real estate sector, jewellers, and now the VDA players.