What is Anti-Money Laundering (AML) in Crypto?

Key Takeaways

• Key Components of AML Policy in Crypto: Comprehensive AML policies in the crypto industry include customer due diligence, transaction monitoring, risk assessment, record-keeping, reporting suspicious activities, employee training, sanctions screening, technological solutions, and compliance with regulatory standards.
• Establishing Money Laundering Offenses in India: Money laundering offenses under PMLA are linked to specified offenses and proceeds of crime. Registration of a predicate offense is generally required, but a Supreme Court decision clarified it’s not mandatory for provisional attachment of properties.
• Government Entities for Money Laundering Crimes: The primary federal entity investigating money laundering is the Directorate of Enforcement (ED). Other entities include the Financial Intelligence Unit – India (FIU-IND), SEBI, RBI, IRDAI, CBI, Income Tax Department, and Registrar of Companies.
• Recent Amendments to PMLA, 2002: Amendments introduce new definitions for “Politically Exposed Persons,” lower thresholds for beneficial ownership, expanded definitions of non-profit organizations, due diligence and documentation requirements, and bring crypto and virtual digital assets under anti-money laundering laws.

What is an AML Policy in Crypto?

An Anti-Money Laundering (AML) policy in the context of crypto refers to a set of rules, procedures, and guidelines established by crypto exchanges, financial institutions, and other entities involved in the crypto industry. The primary goal of an AML policy is to prevent and detect activities related to money laundering or any other financial crimes within the crypto space.

Key Components of an AML Policy in Crypto:

1. Customer Due Diligence (CDD): A robust AML policy involves thorough customer due diligence. This includes verifying the identity of users through various means such as government-issued identification, proof of address, and, in some cases, biometric information.
2. Transaction Monitoring: Continuous monitoring of transactions is essential to identify and flag suspicious activities. Unusual patterns, large transactions, or transactions to high-risk jurisdictions may trigger further investigation.
3. Risk Assessment: Entities in the crypto industry should conduct risk assessments to evaluate and classify the risks associated with different customers, transactions, and counterparties. This helps in prioritizing resources and attention where the risk is deemed higher.
4. Record Keeping: AML policies require the maintenance of detailed records of customer information, transactions, and the results of risk assessments. This documentation is crucial for regulatory compliance and audits.
5. Reporting Suspicious Activities: If any unusual or suspicious transactions are identified, entities must report these to the relevant regulatory authorities. This facilitates cooperation with law enforcement agencies in investigating potential money laundering or other illicit activities.
6. Employee Training: Ensuring employees are well informed and trained on AML policies is crucial. This helps the organization and ensures that all staff members are vigilant in detecting and reporting suspicious activities.
7. Sanctions Screening: AML policies often include measures to screen transactions against lists of sanctioned individuals, organizations, or countries. This helps prevent the involvement of crypto entities in transactions with entities subject to international sanctions.
8. Technological Solutions: Leveraging technology, including blockchain analytics and transaction monitoring tools, can enhance the effectiveness of AML policies. These tools help automate identifying suspicious activities and improve overall compliance.
9. Compliance with Regulatory Standards: AML policies in the crypto industry must align with national and international regulatory standards. Many jurisdictions require crypto exchanges and other crypto-related entities to register with regulatory authorities and comply with specific AML regulations.
10. Periodic Review and Updates: The crypto landscape is dynamic, and AML policies should be regularly reviewed and updated as per the changing regulatory requirements.

By implementing a comprehensive AML policy, crypto entities aim to contribute to the broader efforts of the global financial system in preventing and combating money laundering and other financial crimes. This helps meet regulatory obligations and fosters trust and credibility within the crypto community and the broader financial ecosystem.

Additional Read: Crypto Tax Guide in India

What Establishes Money Laundering Ooffenses in the Government of India?

According to the PMLA, money laundering is linked to offenses specified in the PMLA schedule and the resulting proceeds of crime. This includes activities like concealment, possession, acquisition, use, and presenting proceeds as untainted property, constituting money laundering offenses.

If a property is derived from a criminal activity listed in the PMLA schedule, its equivalent value held within or outside the country qualifies as proceeds of crime, falling under money laundering. Section 4 of the PMLA criminalizes such offenses.

To take legal action against a person accused under the PMLA, registration of a predicate offense (the basis for generating proceeds) is generally required with the jurisdictional police or a competent forum. However, the Supreme Court, in Vijay Madanlal Choudhary and Others v. Union of India and Ors. (2022 SCC Online SC 929), clarified that the registration of the predicate offense is not mandatory for initiating action for the provisional attachment of properties.

Which Government Entities are Tasked with Investigating and Prosecuting Money Laundering Crimes?

The Directorate of Enforcement (ED) is the primary federal entity responsible for investigating and prosecuting money laundering offenses under the PMLA. Operating within the Department of Revenue under the Ministry of Finance, the ED has the authority to initiate property seizure proceedings and present cases in designated Special Courts for money laundering crimes.

Additionally, the Financial Intelligence Unit – India (FIU-IND), a component of the Department of Revenue and Ministry of Finance, serves as the national body responsible for collecting, processing, assessing, and disseminating information on suspicious financial transactions to law enforcement and foreign Financial Intelligence Units. Some of the other sectors are as follows:

• SEBI (Securities & Exchange Board of India): SEBI has issued comprehensive Know Your Customer (KYC) standards and guidelines applicable to financial intermediaries and investors within the securities sector.
• RBI (Reserve Bank of India): The central bank, RBI, has established KYC and Anti-Money Laundering (AML) requirements for banks and various other financial institutions, governing them under its regulation.
• IRDAI (Insurance Regulatory & Development Authority of India): IRDAI has implemented specific and mandatory AML regulations targeting certain categories of insurers, with the primary aim of combating the financing of terrorism.
• Economic Offences Wing, Central Bureau of Investigation (CBI): The CBI, functioning as a specialized police organization, is tasked with investigating specific types of crimes. This includes offenses involving public officials engaged in corruption, significant economic offenses, fraud, and crimes with implications for the country or multiple states.
• Income Tax Department: The Income Tax Department possesses the authority to impose taxes on undisclosed foreign income and assets held by Indian residents, thereby acting as a preventive measure against the crime of money laundering.
• Registrar of Companies (RoC): Under the new requirement introduced by the Companies Act 2013, every Indian company, irrespective of being private or public, is obligated to submit to the Registrar of Companies (RoC) a record detailing the significant beneficial owners of the company, using eForm MGT-6.

What are the Recent Amendments to PMLA, 2002?

The amended rules introduce a new definition for “Politically Exposed Persons” (PEPs), categorizing individuals entrusted with prominent public functions by a foreign country. This includes heads of state or governments, senior politicians, government, judicial, or military officers, senior executives of state-owned corporations, and important political party officials.

Beneficial Ownership:

• The threshold for identifying beneficial owners has been lowered from 25 percent to 10 percent, aligning with provisions in The Income-Tax Act, 1961, and The Companies Act. Reporting entities, including banks, financial institutions, and real estate and jewelry businesses, are now required to collect data on individuals or organizations with a 10 percent ownership stake in their clients.

Non-profit Organization:

• The definition of “non-profit organization” has expanded to include entities constituted for religious or charitable purposes, registered as a trust or society under relevant legislation, or a company registered under Section 8 of the Companies Act, 2013. Reporting entities dealing with non-profit organizations must register client information on the NITI Aayog’s DARPAN portal.

Due Diligence and Documentation:

• Beyond fundamental KYCs, reporting entities must now submit information on top management, partners, beneficiaries, trustees, settlors, and writers, depending on the firm’s legal structure. Additionally, clients must provide details about their registered office and primary place of business to financial institutions, banks, or intermediaries.

Crypto and Virtual Digital Assets (VDAs):

• The amended rules bring crypto and VDAs under anti-money laundering laws, designating entities dealing in VDAs as “reporting entities” under the PMLA.
• Intermediaries in the crypto ecosystem, including exchanges and wallets, are mandated to implement PMLA measures, including KYC checks, data retention, monitoring of suspicious transactions, and transaction tracking policies.
• Covered transactions now include converting VDAs into fiat currencies and vice versa, exchanging various forms of VDAs, transferring VDAs, securely storing or managing VDAs, and providing financial services related to the sale of VDAs by an issuer.

FIU and its Functions

The FIU plays a central role in receiving and analyzing Suspicious Activity Reports (SARs) submitted by financial institutions and other reporting organizations. These reports are filed when a financial institution identifies potential money laundering or terrorist financing risks in a customer’s transaction. Subsequently, the FIU assesses the SAR to determine the need for further investigation and may collaborate with law enforcement agencies to take appropriate action.

Beyond the examination of SARs, the FIU is involved in various tasks, such as delaying transactions, verifying the compliance of reporting organizations with AML/CTF obligations, offering training and guidance to authorized organizations on AML/CTF regulations, and providing regular updates and guidance on trends and best practices related to financial crime.

How to Comply with Anti-Money Laundering Regulations in India?

AML compliance is crucial in the crypto industry, aligning with practices followed by both crypto firms and traditional financial services companies. A risk-based approach, starting with a comprehensive risk assessment and regular re-evaluations, remains central due to the swift pace of regulatory changes.

Crypto enterprises face challenges, including the risk of money laundering and various money laundering typologies. Criminals utilize strategies like off-chain transactions to conceal activities, particularly concerning smaller crypto companies with limited resources. Wage expectations of experienced compliance specialists often surpass what these smaller firms can accommodate.

The significance of AML compliance for crypto exchanges is highlighted by increasing global regulations. Varied approaches, from strict restrictions in China and South Korea to more permissive environments in Japan and Switzerland, shape the landscape. The Financial Action Task Force (FATF) plays a pivotal role in influencing AML regulations, contributing to a safer environment, and shaping perceptions.

Crypto companies are on the brink of transformation as governments globally outline regulatory frameworks. Staying informed about AML compliance, anticipating its evolution, and taking proactive measures position firms to earn trust amid this shift. Horizon scanning becomes essential for monitoring and allocating resources, ensuring compliance budgets and personnel align with new requirements. Understanding the implications of new AML standards specific to the crypto industry involves gradual adjustments to laws and regulations, fostering a commitment to compliance and sustainable growth.

Procedure for AML Compliance

• Implement a risk-based approach: Conduct thorough risk assessments to identify and prioritize potential risks associated with money laundering and other financial crimes. Regularly reassess these risks to stay current with the evolving regulatory landscape.
• Employ AML screening procedures: Utilize tools such as Know Your Customer (KYC) processes, Customer Due Diligence (CDD) checks, and screening services for sanctions, politically exposed persons (PEPs), and adverse media. These measures help verify user identities and detect suspicious activities.
• Stay informed about regulatory changes: Keep abreast of the latest regulatory developments in the crypto industry. Engage in horizon scanning to anticipate upcoming changes and allocate necessary resources and personnel to ensure compliance.
• Seek compliance expertise: Consider hiring compliance specialists with experience in banking, regulatory, and FinTech backgrounds. These professionals can navigate the complex regulatory landscape and ensure adherence to compliance requirements.
• Monitor and adapt to jurisdiction-specific regulations: Stay informed about the specific nuances and considerations applicable to your operations in different regions. Different jurisdictions may have varying perspectives on crypto regulations.
• Embrace technological solutions: Leverage technological advancements, such as AI-supported compliance tools like Sanction Scanner, to streamline compliance processes and enhance effectiveness in detecting and preventing financial crimes.
• Demonstrate commitment to compliance: Proactively position your company to earn the trust of regulators and potential clients. Show commitment to compliance by adhering to regulatory standards, implementing best practices, and maintaining transparency in your operations.
• Prepare for regulatory frameworks: Anticipate imminent shifts in regulatory frameworks by monitoring and allocating resources for upcoming changes. Gradually modify existing laws and regulations or establish new programs to align with the evolving regulatory landscape.

Important Guidelines and Resources

• SEBI Guidelines
• The PMLA and PML Rules
• The RBI MD (updated as of May 10, 2021)

What Maximum Penalties Apply for Money Laundering?

India has set strict regulations to block individuals and organizations from participating in money laundering. The Prevention of Money Laundering Act, 2002 (PMLA) outlines the consequences of engaging in this illicit activity.

Consequences for money laundering in India include:

• Imprisonment (ranging from 3 to 7 years, extendable to 10 years).
• Fines (calculated as a percentage of the laundered funds).
• Confiscation of proceeds.
• Attachment of properties.
• Forfeiture of assets.
• Enhanced penalties for repeat offenders.

Limitations for Money Laundering Crimes

The Prevention of Money Laundering Act (PMLA) does not explicitly establish a limitation period for the offenses it covers. In the absence of such provisions, the Code of Criminal Procedure, 1973 (CrPC) regulations are applicable. Notably, Section 468 of the CrPC does not prescribe a limitation period for offenses carrying imprisonment of more than three years.

In the case of Hari Narayan Rai v. Union Of India, 2010 (94) AIC 908, the Jharkhand High Court noted that offenses under Sections 3 and 4 of the PMLA persist as long as the accused holds the proceeds of crime and remains involved in activities related to those proceeds, projecting them as untainted property.

Moreover, amendments introduced to the PMLA via the Finance Act, 2019 provide clarification to Section 3. These amendments emphasize that interpreting money laundering as a one-time, instantaneous offense is incorrect. The act of money laundering is deemed continuous, extending beyond the concealment, possession, acquisition, use, or projection of the proceeds of crime as untainted property. A person can be prosecuted for money laundering as long as they are enjoying the “proceeds of crime,” establishing the offense as continuous. As a result, there appears to be no specific limitation period for offenses punishable under the PMLA.

CoinDCX and FIU

As a pioneering force in the Virtual Digital Asset (VDA) sector since 2018, CoinDCX is dedicated to simplifying public access to VDAs. Prioritizing innovation, regulatory compliance, and public education on VDAs and blockchain technology, CoinDCX stands out.

Notably, CoinDCX led as the first exchange to disclose its Proof of Reserves, showcasing a swift response to the FIU-Registered Reporting Entity mandate and a steadfast commitment to compliance and regulatory transparency.

CoinDCX upholds its dedication to KYC norms, legal requirements, customer information collection, meticulous transaction recording, prompt reporting of suspicious activities to the FIU, and appointing a compliance officer to align with regulatory stipulations in the Prevention of Money Laundering Act (PMLA).

Remaining committed, CoinDCX has proudly become the first FIU-Registered exchange, ensuring users a seamless trading experience while adhering to government regulations on VDAs.

Read More: CoinDCX is Now FIU Registered

Conclusion

In essence, AML policies are pivotal in the crypto industry, ensuring protection against illicit activities by encompassing due diligence, monitoring, risk assessment, and regulatory adherence. The comprehensive overview includes insights into money laundering offenses in India, the roles of government entities, recent PMLA amendments, and crypto industry compliance procedures.

Amid global regulatory shifts, crypto companies are at a transformative juncture. Proactive measures, including staying informed, seeking compliance expertise, and demonstrating commitment to standards, position these firms to build trust in the evolving regulatory landscape.