India has witnessed a gradual and consistent increase in entities offering services in the field of virtual digital assets (VDAs) for some years now. Until early 2023, these entities were unregulated and did not have to go through any licensing/registration procedure (and simply were required to comply with the requirements under the relevant taxation laws.

The major change in this scenario took place on March 7, 2023, when the Ministry of Finance (“Ministry”) issued a notification dated March 7, 2023 (“March Notification”) wherein virtual digital assets (“VDAs”) were brought under the umbrella of the Prevention of Money Laundering Act, 2002 (“PMLA”). The notification classified the VDA service providers (viz. entities engaged in offering services pertaining to VDAs) as ‘reporting entities’.

Under the PMLA, reporting entities are required to observe certain compliances including complying with the Know Your Customer Directions (“KYC Directions”) as laid down by Reserve Bank of India (“RBI”), transaction related due diligence as well as compliance to the PMLA (Maintenance of Record) Rules, 2005 (“PML Rules”).

Role and function of FIU-IND

FIU-IND was established by the government of India dated November 18, 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions. FIU-IND operates as an independent body reporting directly to the Economic Intelligence Council (EIC) headed by the Ministry. FIU-IND plays the role of coordinating and strengthening efforts of national and international intelligence, investigation, and enforcement agencies in pursuing the global efforts against money laundering and financing of terrorism, thus contributing significantly to safeguard the nation’s economic integrity and security.

The key functions of FIU-IND are as follows:

• Collection of Information: To act as the central reception point for receiving Cash Transaction reports (CTRs), Non-Profit Organisation Transaction Report(NTRs), Cross Border Wire Transfer Reports (CBWTRs), Reports on Purchase or Sale of Immovable Property (IPRs) and Suspicious Transaction Reports (STRs) from various reporting entities.

• Analysis of Information: To analyze information received in order to uncover patterns of transactions suggesting suspicion of money laundering and related crimes.

• Sharing of Information: To share information with national intelligence/law enforcement agencies, national regulatory authorities and foreign Financial Intelligence Units.

• Act as Central Repository: To establish and maintain national data base on the basis of reports received from reporting entities.

• Coordination: To coordinat and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes.

• Research and Analysis: To monitor and identify strategic key areas on money laundering trends, typologies and developments.

Requirement of registration of crypto-businesses with the FIU-IND

The Ministry of Finance, through its notification dated July 4, 2024 (“July Notification”) has mandated that all VDA service providers shall be required to register with the FIU-IND. As per the notification, the VDA service providers are required to comply with various provisions of PMLA, PML Rules and the AML-CFT Guidelines, prior to approaching the FIU-IND for registration.

Rules 7(3) of the PML Rules empowers the Finance Intelligence Unit-India (“FIU-IND”) to issues guidelines as regards any transactions (being conducted by reporting entities) and to keep track of those transactions as laid down under the PML Rules. In pursuance of this provision, the FIU-IND issued the guidelines termed as the ‘AML & CFT Guidelines For Reporting Entities Providing Services Related To Virtual Digital Assets’ (“AML CFT Guidelines”) on March 10, 2023. These guidelines list out the entire detailed scope of compliances for reporting entities engaged in offering services related to VDAs.

The Ministry has further clarified that even offshore VDA service providers (which are engaged in servicing the Indian market) must register with FIU-IND as reporting entities. Reportedly, 31 VDA service providers have been registered as reporting entities with the FIU-IND (till date). It is pertinent to note that such an obligation is activity based and not contingent upon physical presence in India.

Compliances to be observed prior to approaching the FIU-IND for registration

The reporting entities are required to ensure that they’ve complied with the applicable requirements under the PMLA, PML Rules as well as AML-CFT Guidelines prior to approaching the FIU-IND for registration. The registration process with the FIU-IND will, inter alia, involve submission of the following documents to the FIU-IND: 

• Brief note on nature of service provider along with clear explanation as how the activities of service provider is falling under ambit of activities as per Department of Revenue, Government of India notification dated March 07 2023.
• Brief note on corporate structure of the company along with details of significant Beneficial Ownership of the company.
• Copies of Incorporation Documents, Annual Return, Balance Sheet and Profit and Loss Account of the company/LLP as filed in Ministry of Corporate Affairs for last 3 financial years.
• Copies of GST Returns for Last 3 financial years along with copies of GST registrations in all the states where the company is operating clearly establishing the nature of activities being performed by the entity.
• Copies of Income Tax Returns and copies of Form 26Q/26QF/26QE filed with Income Tax Department for TDS on VDA transactions.
• If the entity is in arrangement of any kind with any entity based in India or outside India exchange with respect to any activities as discussed above, then copies of agreement and nature of relationship.
• A self-declaration to the effect that no proceedings have been initiated by/are pending with the Directorate of Enforcement (ED) or any other law enforcement authorities, against the applicant/applicant company/LLP or its directors/partners and no criminal cases are initiated / pending against the applicant/applicant company/LLP or its directors/partners.
• Any other information/document as required and intimated to the reporting entity on timely basis or any other information/document which reporting entity may want to share to ensure completion of registration process.

Process of registration with the FIU-IND

In order to initiate the registration process, entities can sign-up on the specific portal for registering as a reporting entity. It is imperative that the entity only proceeds for registration with the FIU-IND once it has complied with all the requirements under the PMLA, PML Rules as well as the guidelines prescribed by the FIU-IND. Subsequent to filing the application for registration (along with the relevant documentation), the FIU-IND will scrutinize the application and may require further information/documentation to be furnished by the FIU-IND. The FIU-IND, in most cases, ask the relevant officer of the entity to appear before it in an in-person meeting. Once the FIU-IND is satisfied that the entity has fulfilled the relevant compliances, it will grant registration to the relevant entity.

Consequences of non-compliances of registration with the FIU-IND

It is pertinent to note that in case a VDA service provider fails to register with FIU-IND as a reporting entity, such an omission would fall under non-compliance with the provisions of PMLA and could attract action under Section 13(2) of the PMLA. The actions could include the following:

• Issuance of a warning
• Issuance of a direction to a reporting entity to comply with the specific instructions
• Issuance of a direction to a reporting entity to send reports at specified intervals as regards measures being taken to observe compliance.
• Imposition of a monetary penalty on the reporting entity.

In addition to this, the FIU-IND can also direct the Ministry of Electronics and Information Technology (MeitY) to block the URLs and mobile applications of non-compliant reporting entities. In fact, it was reported in the month of January 2024 that show cause notices had been issued to 9 offshore VDA service providers owing to alleged non-compliance with the provisions of the PMLA, PML Rules and guidelines prescribed by the FIU-IND.