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Money laundering through Cryptocurrency is the new entrant in funding the underground economy by white collar crimes. In, 2021, a report by chain analysis revealed that Cybercriminals laundered USD 8.6 billion using a variety of methods.

Crypto cases  in India till 2021:

RBI in a circular dated 6 April, 2018 had prohibited banks and other entities regulated by it from dealing in virtual currencies. The Hon’ble Supreme Court of India in Internet and Mobile Association of India v Reserve Bank of India (2020 SCC Online SC 275), struck down a Reserve Bank of India (RBI) Circular that had imposed a ban on virtual currency (VC) trading in India. Therefore cryptocurrency and crypto trading enjoyed a vague status in India.

Crypto Tax in India and Virtual assets:

The Union Budget has proposed a 30% tax on virtual digital assets bringing cryptocurrency under tax ambit.  For this purpose, the definition of virtual digital asset will be inserted as section 2(47A) in the Income Tax Act (and shall be enhanced). Losses from transactions in virtual digital assets cannot be offset against other income. For cryptocurrencies given as gifts, the tax will be incurred by the recipient. A 1% TDS (tax dedicated at source) will apply to all digital asset transactions

Crypto assets will see manifold increase but what the Nation needs is a Crypto Bill. The dark web is where cyber crime of money laundering happens.

Financial Action Task Force, Virtual assets and Money laundering

Financial Action Task Force (FATF) an inter-governmental policy making body which aims at combating money laundering and financing terrorism had defined virtual assets as a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.

The 2019 guidance of FATF  recognizes that a jurisdiction has the discretion to prohibit VA activities and Virtual asset service provider (VASPs) in order to support other policy goals. But it also suggested that countries which prohibit VA activities or VASPs should also assess the effect that such prohibition may have on their money laundering and terrorist financing risks. FATF suggested that due to global nature of virtual assets, it was essential for countries to implement regulations to supervise virtual assets.

India is a member of FATF since 2010. It is no surprise that eventually India had to recognize and allow virtual digital assets.

FATF has amended its global Standards to place anti-money laundering and counter-terrorism financing (AML/CFT) requirements on virtual assets and virtual asset service providers (VASPs)  because lack of regulation or lack of enforcement of regulation in various jurisdictions is allowing for jurisdictional arbitrage and the raising of ML/TF risks.

Crypto money laundering in India

Enforcement Directorate (ED) has reported crypto money laundering worth Rs 4000 Crore via crypto exchanges. 

Last year ED had issued notice to a leading exchange after the agency failed to track the real beneficiary who had laundered Rs 2800 crores using crypto currency. In this case the criminals converted proceeds of crime from Indian Rupees to crypto currency and it was transferred to a crypto wallet service in Cayman Island where the illegal money was converted into Dollars, and then again put back into legal banking system using shell companies. However this is the amount laundered out of Indian banking system, denting the economy of India.

FATF has observed that the Money Laundering / Terror Funding (ML/TF ) trends for virtual assets have continued to grow, there has been a large increase in the use of virtual assets to collect ransomware payments and to commit and launder the proceeds of fraud, and the pace, sophistication, and costs of ransomware attacks is likely to grow

Can existing laws govern cases related to cryptocurrency in India?

In Hitesh Bhatia v. Kumar Vivekananda (2021), the judiciary has stated that mala fide opportunistic activities, which try to exploit the absence of legislation on cryptocurrency in India, do not have any route for legal or regulatory escape. The judiciary has stated that transactions in cryptocurrency will still have to comply with the general law in force in India until a special legislation is passed.

PMLA and Crypto

PMLA will need to broaden it’s a scope to include money laundering crimes done via crypto transactions and virtual digital assets. Transactions in cryptocurrency have to comply with the general law in force in India including PMLA, IPC, FEMA, NDPS Act, Tax laws, and with the RBI regulations regarding KYC (know your customer), CFT (Combating of funding of terrorism) and AML (Anti-money laundering requirements).

Crypto Exchange Rregulation

In India, there is a strong need for Crypto exchanges to be regulated like Stock Exchanges to avoid money laundering

Monitoring of Virtual Assets as per FATF

Strict Travel Rules:
Travel Rules means providers of virtual assets need to obtain, hold and share customer data for transactions including originator and  beneficiary to monitor crypto crime and suspicious activities.
This is like Know-your-customer(KYC) requirement and not different that the existing rules of banking and financial sector.

FATF suggests that it’s member Nations should implement the travel rule into their domestic legislation as soon as possible, including consideration of a staged approach to implementation as appropriate

Monitor Peer-to-peer transaction
A peer-to-peer (P2P) transaction is a virtual asset transaction that does not involve a VASP or other AML/CFT-obliged entity. A significant amount of certain virtual assets is transferred on a P2P basis. The share of illicit transactions also appears higher for P2P compared with transactions with VASPs, at least in terms of direct transactions.

The challenges that India faces with Crypto crime.

Last week the Supreme Court observed that “money laundering is a crime worse than murder, akin to terrorism as it destabilises the Nation’s financial system”

Money laundering is not a victimless crime and ramifications include terror funding, drugs, human trafficking among others.

India needs to clarify virtual digital assets because the definition remains vague. Also, focus is only on tax and that does not prevent the crime of money laundering.

 

Sources:

https://www.coindesk.com/layer2/2022/01/12/crypto-firms-cant-outrun-the-travel-rule/

http://timesofindia.indiatimes.com/articleshow/87939180.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

https://www.fatf-gafi.org/

www.scconline.com

 

[The views expressed are personal. The Author is an Advocate at the Supreme Court of India]