Is crypto trade within the extent of PMLA? If yes, why so?

On 7th March 2023, the Finance Ministry stated that all virtual digital assets would fall under the extent of the Prevention of Money Laundering Act, 2002 (PMLA) in order to regulate the loosely regulated crypto market.

Understanding the Prevention of Money Laundering Act, 2002 (PMLA)

It was in the year 2002 when the National Democratic Alliance government passed the anti-money laundering legislation. The legislation came into force in the year 2005 on July 1. The Prevention of Money Laundering Act was seen as the country's commitment to the Vienna Convention on dealing with money laundering, countering the financing of terror (CFT), and drug trafficking. The law intended to curb the conversion of illegally earned money into legal cash. Through the act, the Enforcement Directorate (ED) was empowered to control and combat money laundering, thereby also making it entitled to confiscate property and punish money launderers.

Last year in July, in a revert to a query on cases accounted by the ED, Union Minister of State for Finance, Pankaj Chaudhary informed the Lok Sabha that "till March 31, 2022, the ED recorded around 5,422 cases, attached proceeds to the tune of Rs.1,04,702 crore (approx.), filed Prosecution Complaint in 992 cases resulting in the confiscation of Rs.869.31 crore and convicted 23 accused persons under PMLA."

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What changes will the move bring?

The notification by the Finance Ministry intends to bring cryptocurrency transactions within the extent of PMLA. This implies that the Indian crypto exchanges will have to divulge any suspicious activity relating to the purchase or sale of cryptocurrency to the Financial Intelligence Unit- India (FIU-IND).  The Financial Intelligence Unit- India (FIU-IND), as a central agency is conferred with the responsibility of receiving, processing, analyzing, and spreading information regarding suspicious financial transactions to law enforcement agencies. The FIU-IND conducts analysis, and if it discovers anything wrong, it notifies the ED. 

Under Sections 5 and 8(4) of the Act, the ED holds discretionary powers to fetch and seize suspected property sans any judicial permission.

The need of tightening the grip on digital trade

All this while, there have been hardly any regulations on digital assets including cryptocurrencies and non-fungible tokens (NFT). However, in recent years, regulators have opted for an aggressive tone with the use of digital assets going mainstream.  As of January 3, 2023, the value of all existing cryptocurrencies is around $804 billion. This is around twice the GDP of Singapore in the year 2021. Talking about India, around 10 crore Indians have trusted and invested in cryptocurrencies.

Now, as per a report, the illegal use of cryptocurrencies has touched a record of $20.1 billion in the previous year. Transactions linked with sanctioned entities leaped 1,00,000-fold, which makes up around 44% of the previous year's illegal actions.

Can money laundering through crypto transactions be tracked?

Yes, money laundering through crypto transactions can be tracked, however, this would demand novel approaches and new tools. This is because such transfers are heavily different from traditional banking channels. While the FIU may be acquainted with Know Your Customer (KYC) and Customer Due Diligence (CDD) norms, the technological essence of VDAs brings forward a massive challenge in collecting the required data. In such a case, a broadened intelligence framework of the intelligence unit is what is required the most.

As per the recommendation by the Egmont Group, a good analysis of the crypto wallets, the associated addresses, blockchain records, hardware identifiers such as IMEI, IMSI, or SEID numbers, and MAC addresses are a must.

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