20 March 2023

Money laundering provisions to apply to Cryptocurrency sector

Based on the recommendations of the Financial Action Task Force (‘FATF’), the Finance Ministry, vide Notification dated 7 March 2023 has brought cryptocurrency exchanges within the ambit of the Prevention of Money Laundering Act, 2002 (‘PMLA’ or ‘Act’) by including them within the definition of ‘reporting entity’.

The definition of ‘reporting entity’ has been laid down in the PMLA as a banking company, financial institution, intermediary or a person carrying on a designated business or profession. By virtue of this notification, the government seeks to include persons dealing in the following activities as persons carrying on a designated business or profession

  • exchange between VDAs and fiat currencies;
  • exchange between one or more forms of VDAs;
  • transfer of VDAs;
  • safekeeping or administration of VDAs or instruments enabling control over VDAs; and
  • participation in and provision of financial services related to an issuer’s offer and sale of a VDA.

In other words, cryptocurrency exchanges will now be covered under the definition of ‘reporting entity’ under the PMLA and will therefore be required to maintain such records and undertake such reporting obligations as laid down under the Act and the rules made thereunder.

The notification also states that the definition of ‘virtual digital assets’ will be the same as provided in Section 2(47A) of the Income-tax Act, 1961.

Added compliance burden on cryptocurrency exchanges

The cryptocurrency exchanges will now be subject to the provisions of Chapter IV of the PMLA which lay down the obligations of banking companies, financial institutions, and intermediaries. Such entities are required to, inter alia, verify the identity of the customers and beneficial owners and maintain records of the identification documents, maintain a record of all transactions in such a manner to enable it to reconstruct the individual transactions, and furnish information relating to the transactions to the government.  The PMLA requires that these records be maintained for a period of five years after the transaction is completed / business relationship has ended / the account is closed, as the case may be.

Such entities will also be required to conduct enhanced due diligence in respect of certain specified transactions in terms of Section 12AA of the PMLA which includes verification of the person, examination of ownership of funds and financial position, recording the purpose of transaction, greater scrutiny when transaction appears to be suspicious, etc.

Further, this amendment empowers the government to access the information maintained by cryptocurrency exchanges at any time and impose fine in case of non-compliance.

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