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”).
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 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.
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:
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.
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:
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.
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