PMLA will now apply to exchanges that allow for the trade of digital assets in the form of virtual assets. But what about companies with overseas addresses?

In the current state, virtual assets such as cryptocurrency are covered by anti-money laundering regulations. According to a recent government notification, the Prevention of Money Laundering Act, 2005 now covers transactions involving INR and cryptocurrency as well as transfers of virtual digital assets and the extension of financial services to the sale and offer of virtual digital assets.

These actions now fall under the PMLA’s definition of “person carrying on a defined business or profession.”

As a result, under the PMLA, the exchanges that facilitate the trade of virtual digital assets will henceforth be regarded as reporting entities. This is a constructive move in the direction of reinforcing the legitimacy of commerce made possible by these exchanges.

The Reserve Bank of India’s prohibitions against using banking channels for the selling and purchase of virtual currencies had been overturned by the Supreme Court’s enabling decision in the IAMAI case. Additionally, it had upheld the fundamental freedom of trade and enterprise of virtual currency exchanges.

Despite this, the enforcement authorities usually look into the transfer of fiat money to digital assets when they are looking into charges of money laundering.

Due to the fact that the proceeds of crime were parked on these exchanges, this resulted in the freezing of assets.

According to information provided by the government, the Directorate of Enforcement has frozen Rs 953 crores under the PMLA up until March 13, 2023.

The most recent notification recognises these exchanges as reporting entities and considers them on a par with banks, financial institutions, and intermediaries.

The Grey Area

  • Identity verification by reporting entity using Aadhar, a passport, or another document that is legally valid.
  • keeping records to recreate specific transactions, their nature, and their values.
  • keeping track of records proving the clients’ and beneficial owners’ identities, as well as their account records and interactions with businesses.

In order to record the reason for performing the transaction and the intended nature of the relationship between the transaction parties, the reporting entities are required by law to evaluate the ownership and financial situation, including the source of funds of the client of these exchanges.

But, it's unclear whether a foreign-domiciled corporation will be considered a reporting entity for the purposes of the notification, particularly if it is providing the services mentioned by the notification on an exchange platform that is available to customers in India.

Money laundering is a crime that often involves the “proceeds of crime,” which might include property that is located outside of India.

Even the concept of property is vague and does not require that it be located within Indian territory. As a reporting entity, the Principal Officer must be chosen to handle the necessary compliances.

As a result, a foreign-domiciled entity that provides services subject to the notification and makes them available to users in India is probably covered as a reporting entity. But, greater clarification will be provided by advice from the Financial Intelligence Unit (FIU).

The sector has consistently argued in favour of regulation rather than outright opposition to trade in virtual digital assets.

The new notification is a positive step because it will bring about the much-needed clarity to guarantee that compliance-related issues are properly addressed.

The bad actors will be concerned that their transactions would be reported to the authorities by the reporting businesses, which will further aid in bringing transparency to the process.

As the market develops over time, the validity of the trades offered by these exchanges ought to increase consumer confidence and aid in luring institutional investment.

At Nishith Desai Associates’ International Dispute Resolution Practice, Alipak Banerjee is the director and Vyapak Desai is the head.

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