These activities will now be covered within the definition of “person carrying on 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 use of banking channels for the sale and purchase of virtual currencies. It had also affirmed virtual currency exchanges’ fundamental right to trade and do business
In spite of this, the enforcement authorities, while investigating into allegations of money laundering, typically would investigate how fiat currency changed hands to virtual digital assets. This has led to freezing of assets on grounds that proceeds of crime have been parked on these exchanges.
The recent notification treats these exchanges on a par with a banking company, financial institution, intermediary, and classifies them as a reporting entity.
There are several onerous obligations on the reporting entities, such as:
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Verification of identity by reporting entity, with Aadhar, passport, or other officially valid documents)
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Maintaining records to reconstruct individual transactions, its nature and value
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Maintaining record of documents explaining the identity of 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 examine the ownership and financial position, including source of funds of the client of these exchanges, to record the purpose behind conducting the transaction and the intended nature of the relationship between the transaction parties.
The offence of money laundering typically arises in relation to ‘proceeds of crime’, which contemplates a scenario where the property can be situated outside India. Even the definition of property is open ended and does not specify that it needs to be within the territorial limits of India. The Principal Officer to be designated to cater to the compliances required as a reporting entity also allows registration of foreigners.
Therefore, a foreign domiciled entity which is offering services covered under the notification, and if such services are accessible to users in India, these entities are likely to be covered as a reporting entity. However, a guidance from the Financial Intelligence Unit (FIU) will assist in bringing more clarity.
The industry has always advocated for 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 trade offered by these exchanges should also improve the customers’ trust and help in attracting institutional capital as the industry matures with time.
