Crypto Traders & Money Laundering India

Money Laundering has been defined under the (Indian) Prevention of Money-Laundering Act, 2002 (PMLA) as the offence of ‘directly or indirectly attempting to indulge, or knowingly assisting, or knowingly being a party or being actually involved in any process or activity connected with the proceeds of crime, including its concealment, possession, acquisition or use and projecting or claiming it as untainted property’. Proceeds of crime means ‘any property derived or obtained directly or indirectly, by any person as a result of a criminal activity relating to an offence specified in the schedule to the PMLA, including the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad’. A cryptocurrency trader who buys or sells cryptocurrency to an unknown entity (read P2P trade) can be held liable for indirectly attempting to indulge in illegal activity. 

The primary offence of money laundering covers knowing involvement in any process or activity connected with the proceeds of crime, including its concealment, possession, acquisition or use and projecting or claiming it as untainted property. So as mentioned above Cryptocurrency Traders need to very careful while dealing with unknown P2P entities. 

The primary enforcement authority under the PMLA is the Enforcement Directorate of India, which also serves as the enforcement agency in connection with contraventions of exchange control laws.

Other anti-money laundering regulators in India include the following:

• (i) Securities and Exchange Board of India (SEBI): SEBI has prescribed various know your customer (KYC) norms and requirements for financial intermediaries and investors in the securities market to combat money laundering.
• (ii) Reserve Bank of India (RBI): RBI has laid down anti-money laundering guidelines for banks and other financial institutions to adhere to.
• (iii) Insurance Regulatory & Development Authority of India (IRDAI): IRDAI has issued anti-money laundering and anti-terrorism financing guidelines applicable to certain categories of insurers.
• (iv) Central Bureau of Investigation (CBI) – Economics Offences Wing: CBI is a special police establishment which has been constituted to investigate into certain specific types of offences.
• (v) Income Tax Department: The Income Tax Department, Government of India under the Income Tax Act, 1961 is also authorised to take steps to prevent the offence of money laundering by imposing tax on undisclosed foreign income and assets on Indian residents. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 has further enhanced the powers of the Income Tax Department.
• (vi) Registrar of Companies: Following the recommendations of the Financial Action Task Force (FATF) and consistent with the changes made in jurisdictions such as the Russian Union and the UK, a new requirement has been introduced under the Companies Act, 2013, requiring every Indian company to file with the Registrar of Companies a return of significant beneficial owners in the company. In March 2021, the ministry of corporate affairs (MCA) has asked all companies in the India to mandatorily disclose any dealings in cryptocurrency or virtual currency in their balance sheets. This was a major step towards regulating crypto assets in India and is expected to bring in a lot of transparency in reporting or filing of crypto investments. The companies have to disclose profit or loss on transactions involving cryptocurrency or virtual currency, the amount of holding, and details of deposits or advances from any person for the purpose of trading or investing in cryptocurrency or virtual currency, according to the latest amendments to the Schedule III of the Companies Act, 2013. This will be applicable from the upcoming financial year, MCA said in a notification on Wednesday.

Which Laws exists regarding Anti-Money Laundering?

The anti-money laundering legislations are of general applicability and applies to every citizen of India whether residing in India or abroad. An overview of the anti-money laundering laws is provided below:

• (i) PMLA and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005

   

  The PMLA is the primary legislation in India with general applicability to tackle money laundering. It aims to prevent money laundering and restrict use of the proceeds of crime in India. It prescribes strict penalties for breach of its provisions, including imprisonment of up to ten years and the seizure or confiscation of tainted property. Also, under the PMLA, “reporting entities” comprising of banking companies, financial institutions, intermediaries, and persons carrying on certain specified businesses or professions are required to conduct client due diligence (which includes determination of beneficial ownership as part of KYC checks) and also maintain records of all transactions with their clients for a period of ten years.

• (ii) The Black Money (Undisclosed Foreign Income and Assets) and imposition of Tax Act, 2015.
  
  This statute was enacted to tackle black money existing in the form of undisclosed foreign income and assets. It sets out the procedure for dealing with such income and assets and to provide for imposition of tax on any undisclosed foreign income and asset held outside India. It empowers the authorities to impose tax on undisclosed foreign income and assets at a rate of 30%. Non-disclosure of foreign income and assets is penalised more heavily at the rate of 100% of such tax, in addition to the 30% tax.

   

• (iii) Foreign Exchange Management Act, 1999
  
  This statute prescribes checks and limitations on various foreign exchange remittances.

   

• (iv) Benami Transactions (Prohibition) Act, 1988 as amended by Benami Transactions (Prohibition) Amendment Act, 2016
  
  This statute prohibits transactions in which property is transferred to one person for consideration paid or provided by another person. The amendment has expanded the definition of ‘benami transactions.

   

• (v) Narcotics, Drugs and Psychotropic Substances Act, 1985
  
  This statute independently provides for an offence of laundering proceeds of crime resulting from offences under the statute.

   

• (vi) SEBI’s Guidelines for Anti-Money Laundering Measures, 2006 and other KYC requirements
  
  SEBI has published guidelines for capital market intermediaries for anti-money laundering and anti-terrorist financing activities in India. The guidelines also set out the steps that a registered intermediary and any of its representatives should implement to discourage and identify any money laundering or terrorist financing activities. In addition, certain intermediaries regulated by SEBI (e.g., foreign portfolio investors) are required to comply with various KYC requirements, including in relation to identification of beneficial owners as per the PMLA regime.

   

• (vii) RBI’s Know Your Customer Direction, 2016 (RBI-KYC Direction) and RBI Master Circular – Know Your Customer norms / Anti-Money Laundering standards/Combating Financing of Terrorism /Obligation of banks and financial institutions under PMLA, 2002 (RBI Master Circular)
  
  RBI has prescribed various KYC and anti-money laundering norms for banks, financial institutions, non-banking financial companies and money changers to adhere to. The guidelines have been made in the context of recommendations made by the FATF on anti-money laundering standards and combating financing of terrorism.

   

• (viii) Anti-Money Laundering/Counter Financing of Terrorism – Guidelines for Insurers.
  
  IRDAI has issued various anti-money laundering guidelines applicable to both life and general insurers. Establishment of anti-money laundering programs by financial institutions is one of the central recommendations of the FATF and also forms part of the insurance core principles of the International Association of Insurance Supervisors.

   

• (ix) Fugitive Economic Offenders Act, 2018
  
  This act applies to fugitive economic offenders i.e. individuals against whom a warrant for arrest in relation to certain offences, including offences under the PMLA, has been issued by any court in India, and who has left India so as to avoid criminal prosecution or being abroad, refuses to return to India to face criminal prosecution. The act empowers authorities to attach any property for which there is a reason to believe that the property is a proceeds of crime, or is a property or benami property owned by an individual who is a fugitive economic offender, and which is being or is likely to be dealt with in a manner which may result in the property being unavailable for confiscation.

The reporting obligations under PMLA primarily apply to banking companies, financial institutions, other intermediaries (including capital market intermediaries and non-banking financial companies) and persons carrying on certain specified businesses and professions (including gaming businesses, dealers in precious metals, cryptocurrency exchanges, bitcoin traders, cryptocurrency traders, precious stones and other high value goods, and persons engaged in safekeeping and administration of cash and liquid securities on behalf of other persons).

Client Due Diligence (CDD) requirements have been prescribed under the PMLA for certain other persons. In such cases, CDD is required to be undertaken by every ‘reporting entity’ (i) at the time of commencement of an account based relationship with the client; (ii) while carrying out a transaction of an amount equal to or exceeding rupees fifty thousand, whether conducted as a single transaction or several transactions that appear to be connected; or (iii) while carrying out any international money transfer operations. (cryptocurrency traders should take special note of this point). The reporting entities are also required to conduct on-going diligence of the client, closely examine the transactions in order to ensure that they are consistent with their knowledge of the client, their business and risk profile and where necessary, the source of funds.

In addition to this, SEBI and RBI have laid down separate procedures for the respective entities supervised by them to undertake CDD in relation to their clients.

Under the Code of Criminal Procedure, 1973, every person who is aware of the commission of, or the intention of any other person to commit, certain offences under the Indian Penal Code, 1860, including the offence of criminal breach of trust by a banker, merchant or attorney, is required to report such matter to the nearest Magistrate or Police Officer.

Are there on-going monitoring requirements for existing clients?

There are various on-going monitoring requirements under the general anti-money laundering laws. For example, the PMLA requires every reporting entity to exercise on-going due diligence with respect to the business relationship with every client and closely examine the transactions in order to ensure that they are consistent with their knowledge of the client, their business and risk profile and where necessary, the source of funds. The relevant RBI Master Circular requires banks and financial institutions to closely examine the transactions to ensure that they are consistent with the customer’s profile and source of funds as per extant instructions. Further, it also provides that banks should conduct on-going monitoring of accounts of politically exposed persons, including family members or close relatives of politically exposed persons.

What documents can be used to verify a private individual client?

Generally the following documents are required to verify a private individual client:

• (i) the Aadhaar number where he is desirous of receiving any benefit or subsidy under any scheme notified under section 7 of the Aadhaar (Targeted Delivery of Financial and Other subsidies, Benefits and Services) Act, 2016, or a copy of any other officially valid document in other cases containing details of his identity and address, and one recent photograph; and
• (ii) the permanent account number or Form No. 60 as defined in Income-tax Rules, 1962, and such other documents including in respect of the nature of business and financial status of the client as may be required by the reporting entity.

Generally the following documents are required to verify a company client:

• (i) Certificate of incorporation of the company;
• (ii) Memorandum and articles of association of the company;
• (iii) Permanent Account Number of the company;
• (iv) A resolution from the board of directors of the company and the power of attorney granted to its managers, officers or employees to transact on its behalf;
• (v) One copy of an officially valid document containing details of identity and address, one recent photograph and Permanent account numbers or Form 60 of the managers, officers or employees holding an attorney to transact on the company's behalf.

Have anyone been implicated in money laundering, including any type of complaint, arrest or prosecution?

Yes, there have been a couple of recent instances where people have been arrested for money laundering. In the first case, Mr. Rohit Tandon was arrested for money laundering when a huge amount of cash was found in his possession (https://www.indiatoday.in/india/story/delhi-lawyer-rohit-tandon-arrested-money-laundering-case-360079-2016-12-29).

In another recent case, Mr. Gautam Khaitan was also arrested on charges of money laundering (https://timesofindia.indiatimes.com/india/ed-arrests-vvip-chopper-scam-accused-gautam-khaitan-in-fresh-money-laundering-case/articleshow/67700624.cms).

In another case, the Central Bureau of Investigation filed a first information report against ‘Lawyers Collective’, a non-governmental organization led by two lawyers, Indira Jaising and Anand Grover, for allegedly violating the PMLA (https://scroll.in/article/927800/the-daily-fix-cbi-action-against-lawyers-collective-smacks-of-vendetta-it-must-prove-why-it-isnt).

Conclusion on Crypto Traders & Money Laundering India: