Finance Ministry Brings Crypto Asset Under Prevention of Money Laundering Act (PMLA): What are the Implications?

Minakshi Bindhani

01 Apr, 2023

In India, the Finance Ministry has brought cryptocurrency assets under the Prevention of Money Laundering Act 2002. The move comes from concerns about the potential use of cryptocurrencies for illegal activities, such as money laundering and terrorist financing. This article will explore the implications of this move and what it means for the cryptocurrency industry in India.
The PMLA is a legal framework introduced in India in 2002 to combat money laundering and other financial crimes. The Act aims to prevent and control money laundering, terrorist financing, and other illicit activities by providing for the confiscation and seizure of properties derived from such activities. The Act also requires banks, financial institutions, and other intermediaries to maintain records of transactions and report suspicious transactions to the authorities.

Objectives of the Prevention of Money Laundering Act

The Money Laundering Act of 2002 seeks to combat money laundering in India; the objectives are as follows;

• To control and prevent money laundering;
• To seize and confiscate the property derived from, or involved in, money laundering.
• To provide punishment for the offence of money laundering.
• To appoint the concerned authority and Appellate Tribunal to deal with the matter relevant to money laundering.
• To put obligations on financial institutions, banking companies, and intermediaries to maintain records and data.
• To deal with any other issue relevant to money laundering in India.

Salient features of the Prevention of Money Laundering Act

• Continuing Nature of Offence: The person will be considered involved in money laundering until the time that person is getting the fruits of activities related to money laundering, as this offence continues.

• Punishment for money-laundering: The Prevention of Money Laundering Act provides that any person found guilty of money laundering shall be punished with rigorous imprisonment for three to seven years. Where the proceeds of crime are related to any offences under the Narcotic Drugs and Psychotropic Substance Act, 1985, the maximum punishment may extend to 10 years instead of 7 years.
• Powers of attachment of tainted property: The Director or officer above the rank of Deputy Director is authorized to attach the property, believed to be “proceeds of crime”, for 180 days. The order is required to be confirmed by an adjudicating authority.
• Adjudicating Authority: The central government appoints the adjudicating authority through notification to exercise jurisdiction, powers and authority conferred under the Prevention of Money Laundering Act. It decides whether any property attached or seized is involved in money laundering. The adjudicating authority is not regulated by the procedure laid down by the Code of Civil Procedure, 1908. Still, it shall be guided by the principle of natural justice. The adjudicating authority has all powers to regulate its procedure.
• The presumption in inter-connected transactions: Where money laundering involves two or more transactions, and if one of such transactions is proved to be involved, then for adjudication or confiscation, it is presumed that the remaining transactions form part of such inter-connected transactions.
• Burden of proof: A person, who is denied of having committed the offence of money laundering, has to prove that the alleged proceeds of crime are lawful property.
• Appellate Tribunal: An Appellate Tribunal is the body appointed by Central Gov. It has been given the power of appeals, and orders of the tribunal can be appealed before the High Court and to the Supreme Court.
• Special Court: Section 43 of the Prevention of Money Laundering Act, 2002 (PMLA) says that the Central Government, in consultation with the Chief Justice of the High Court, shall, for the trial of an offence punishable under Section 4, designate one or more Courts of Session as a Special Court.
• FIU-IND: Financial Intelligence Unit – the Government of India set India (FIU-IND) on November 18 2004, as the central national agency responsible for receiving, processing, disseminating and analyzing information relating to suspect financial transactions. FIU-IND coordinates and strengthens national and international intelligence, investigation and enforcement agencies against money laundering and other related crimes. FIU-IND is an independent body, directly reporting to the Economic Intelligence Council (EIC^[1]), headed by the Finance Minister.

Recent Amendments in PMLA

• Clarification about the Position of Proceeds of Crime: Proceeds of the Crime include not only the property derived from the scheduled offence but any other property derived or obtained from indulging in any criminal activity related to the scheduled offence.
• Money Laundering Redefined: Money Laundering was not independent but depended on another crime, the predicate or scheduled offence.
• The amendment seeks to treat money laundering as a stand-alone crime.
• Under Section 3 of the Prevention of Money Laundering Act, the person shall be accused of money laundering if, in any manner, that person is directly or indirectly involved in the proceeds of the crime.
• Concealment
• Possession
• Acquisition
• Use or projecting as untainted property
• Claiming as untainted property

Implication on the Crypto asset under the PMLA

By bringing cryptocurrency assets under the Prevention of Money Laundering Act, the Finance Ministry has effectively subjected them to the same regulations and oversight as traditional financial assets. Cryptocurrency entities must comply with the same Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations as banks and other financial institutions. They will also be required to maintain records of transactions and report suspicious transactions to the authorities.

One of the most significant implications of this move is that it will likely lead to greater scrutiny of cryptocurrency exchanges and other entities dealing in cryptocurrencies. The Prevention of Money Laundering Act provides the authorities with significant powers to investigate and seize assets in suspected money laundering or other financial crimes. It means that cryptocurrency exchanges and other entities dealing in cryptocurrencies must ensure that their operations are fully compliant with the PMLA to avoid facing legal action.

The Finance Ministry’s decision to bring crypto assets under the Prevention of Money Laundering Act (PMLA) is a significant step towards regulating the cryptocurrency market in India. This move is expected to have several implications, some of which are:

• Increased regulatory oversight: With crypto assets now falling under the PMLA, entities dealing in cryptocurrencies will have to comply with the KYC norms and reporting requirements. This move will help prevent money laundering, terrorist financing and other illicit activities.
• Impact on crypto exchanges: Crypto exchanges in India must now register themselves with the Financial Intelligence Unit (FIU) and comply with the reporting requirements. It could result in increased compliance costs for the exchanges.
• Clarity on taxation: With the inclusion of crypto assets under the PMLA, there is expected to be more clarity on the taxation of crypto transactions. It could lead to a more standardized approach to taxation and boost the crypto industry.
• Increased investor confidence: The move to bring crypto assets under the Prevention of Money Laundering Act is expected to increase investor confidence in the crypto market, providing a more regulated and transparent environment.

Overall, including crypto assets under the PMLA is a positive step towards regulating the cryptocurrency market in India and is expected to have several long-term implications.

Another implication of this move is that it may lead to greater adoption of cryptocurrencies in India. By subjecting them to the same regulations as traditional financial assets, the Finance Ministry has effectively given them a stamp of approval. It could lead to greater acceptance of cryptocurrencies by businesses and consumers in India, as they are now subject to the same legal protections as traditional financial assets.

However, the Indian government has not yet provided clear guidance on regulating cryptocurrencies under the Prevention of Money Laundering Act. It has led to uncertainty among cryptocurrency businesses and investors as they still need to determine what specific regulations they must comply with. The government must provide clear guidelines on regulating cryptocurrencies under the PMLA to ensure that the industry can operate effectively and confidently.

Another potential implication of this move is that it may lead to greater use of privacy-focused cryptocurrencies such as Monero and Zcash. These cryptocurrencies are designed to provide greater anonymity and privacy than Bitcoin and other more transparent cryptocurrencies. However, the PMLA requires entities dealing in cryptocurrencies to maintain records of transactions and report suspicious transactions to the authorities. It may be easier for individuals and businesses to use privacy-focused cryptocurrencies if they break the law.

Conclusion

In conclusion, the Finance Ministry’s decision to bring cryptocurrency assets under the PMLA is a significant development for the cryptocurrency industry in India. It will likely lead to greater scrutiny of cryptocurrency exchanges and other entities dealing in cryptocurrencies and greater adoption by businesses and consumers in India. However, the government must provide clear guidance on regulating cryptocurrencies under the PMLA to ensure that the industry can operate effectively and confidently.

Also Read:
Money Laundering – Retrospective Amendment
Money Laundering and Terrorist Financing for NBFCs
Tracing the Developments in the Prevention of Money Laundering Act, 2002