Service providers must also refrain from alerting or 'reporting' customers of potential suspicious transactions (which are reported to a government agency under the recently amended law), and treat certain VDA flows as 'cross-border' transactions or 'transfers'. electronics'. ' of fiat money.
This has all been outlined in a note recently shared by India's Financial Intelligence Unit with some of the local service providers, two industry people familiar with the proposed guidelines told ET.
In addition, entities involved in the issuance, book-building, underwriting, and placement or sale of initial coin (or token) offerings (ICOs), similar to IPOs, would have to follow the strict reporting rules of ICO service providers. VDA.
The draft of the note, which establishes measures to detect and stop money laundering, financing of terrorism and financing of proliferation, continues to March 7, 2023 notification from the ministry of finance bringing transactions related to VDA under the Prevention of Money Laundering Act (PMLA).
The memo states that service providers must โexamine, to the extent reasonably possible, the background and purpose of all complex and unusually large transactions, and all unusual patterns of transactions, that do not serve an economic or legal purpose. apparent".
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However, the transposition of the PMLA regulations that are linked to fiat money and conventional capital assets to frame similar rules for VDAs may need some clarification in the statutes and regulations. โThe PMLA and the rules under it provide for the reporting of cross-border transfers above a certain threshold. In the context of VDA, what amounts to a cross-border transfer is ambiguous. Also, in the absence of clarity under FEMA (Foreign Currency Management Act), platforms face uncertainty in classifying VDA transactions as cross-border,โ said Jaideep Reddy, Attorney, Trilegal. For example, the memo suggests that the transfer of VDAs to or from a service provider, involving a chain of transfers, may be treated as qualified cross-border transfers. Would it then mean additional reporting for service providers and violations under FEMA by customers who break the rules?
Beneficial owners, in the context of VDAs, are the ultimate natural persons controlling a customer of a cryptocurrency exchange or service provider. They may be significant shareholders of a company, beneficiaries of a trust, or a senior management officer. Enhanced due diligence, which is prescribed for ministers, politicians, senior bureaucrats, and other politically exposed individuals, would mean frequent review of client profiles and dealings, assessing their source of funds, gathering insights from publicly available information, and conducting independent investigations. on the details provided. for the client.
Attention to non-hosted wallets, P2P agreements
In the absence of rules, crypto platforms have allegedly been used by, among others, entities linked to unauthorized lending apps, backed by Chinese nationals, to transfer funds out of India after converting money recovered from predatory lending schemes into cryptocurrencies. Transactions that proved useful were cryptocurrency transfers to a private wallet owned by the same people or a third party, or to a wallet of a person connected on an exchange abroad. Such crypto withdrawals from wallets hosted on a local exchange to a "non-hosted wallet" beyond the jurisdiction of national law enforcement agencies has been a challenge for the Directorate of Enforcement (ED).
With a non-hosted wallet, also known as cold storage or self-custody in crypto parlance, a person can hold cryptocurrency off of an exchange. In this context, it has been suggested that additional limitations or controls may be placed on such transfers with non-hosted wallets.
In addition, 'suspicious transaction reporting' must involve multiple parties to peer-to-peer (P2P) deals that are the direct buying and selling of VDAs without intermediaries.
All transactions related to the transfer, the exchange of VDA for VDA or fiat currencies would be interpreted as wire transfers, the note says. Therefore, the compliance charge on an electronic funds transfer would also apply at VDA for VDA, as well as at VDA for cash transactions.
According to the draft framework, crypto platforms and other intermediaries (while carrying out the usual KYC procedures) must take care that wallets are not opened under anonymous, pseudonymous or fictitious names; have adequate selection procedures for hiring employees; and report information regarding a suspicious transaction within 7 days.
In addition, they have to disclose the details of the bank accounts in which they have funds for their own and customer transactions; and appoint a 'designated director' and a 'principal officer' (not below the rank of chief audit or compliance officer) to ensure implementation and overall compliance with PMLA rules.
For receipts above the threshold amount, the service provider will need to register the NGO's account/portfolio details on the NITI Aayog DARPAN Portal. Service providers must retain all records for five years.
All clients, according to the framework, must be classified as high risk or low risk, with the perception of risk shared by the location of the client, the nature of the business, the volume of operations and the way of making payments for the transactions. .
