Anti-Money Laundering Law and Crypto Exchanges: The One Gray Area

These activities will now be covered within the definition of “person engaged in designated business or profession” under the PMLA.

The Supreme Court’s enabling judgment in the IAMAI case had set aside the Reserve Bank of India’s restrictions on the use of banking channels for the sale and purchase of virtual currencies. It had also affirmed the fundamental right of virtual currency exchanges to trade and do business

Despite this, enforcement authorities, while investigating allegations of money laundering, would typically investigate how fiat currency changed hands into virtual digital assets. This has led to the freezing of assets on the grounds that the proceeds of crime have been parked at these centres.

The recent notification treats these exchanges at par with a banking company, financial institution, intermediary and classifies them as a reporting entity.

There are several burdensome obligations on the reporting units, for example:

• Verification of identity of reporting entity, with Aadhar, passport or other officially valid documents)

• Maintain records to reconstruct individual transactions, their nature and value

• Maintain records of documents explaining the identity of the clients of these exchanges, and beneficial owners, as well as account files and business correspondence relating to the clients.

The law requires the reporting entities to investigate the ownership and financial position, including the source of funds of the customer of these exchanges, to record the purpose behind the execution of the transaction and the intended nature of the relationship between the transaction parties.

The offense of money laundering usually arises in relation to “proceeds of crime”, which contemplates a scenario where the property may be located outside India. Even the definition of property is open and does not specify that it must be within the territorial limits of India. The headmaster who will be appointed to take care of the requirements required as a reporting unit also allows the registration of foreigners.

Therefore, a foreign resident entity providing services covered by the notice and if such services are available to users in India, those entities are likely to be covered as a reporting entity. However, guidance from the Financial Intelligence Unit (FIU) will help bring more clarity.

The industry has always advocated regulation and not a ban on trading in virtual digital assets.

The recent notification is a step in the right direction as it will provide the much needed clarity to ensure that compliance issues are adequately addressed.

The legitimacy of trading offered by these exchanges should also improve customer confidence and help attract institutional capital as the industry matures over time.