Context: The Financial Intelligence Unit India (FIU IND) recently issued show-cause notices to 9 offshore virtual digital asset service providers (VDA SPs) for “operating illegally” without complying with PMLA act, 2002.

About Financial Intelligence Unit India (FIU IND)

• It is a national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions.

• FIU-IND is an independent body that reports directly to the Economic Intelligence Council (EIC) headed by the Finance Minister.

• It is a multi-disciplinary body that was set up in 2004 with a sanctioned strength of 75 personnel.

These 75 personnel are inducted from various organisations that include:

• Central Board of Direct Taxes (CBDT),

• Central Board of Excise and Customs (CBEC),

• Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI),

• Department of Legal Affairs and Intelligence agencies.

• Main function – Is to receive cash/suspicious transaction reports, analyse them and disseminate valuable financial information to intelligence/enforcement agencies and regulatory authorities.

Other functions include

• Collection of Information

• Analysis of Information

• Sharing of Information

• Act as Central Repository

• Coordination

• Research and Analysis

FINnet 2.0 Mission

• It is an initiative of FIU IND to provide quality financial intelligence for safeguarding the financial system from the abuses of money laundering, terrorism financing and other economic offenses.

Why did FIU IND act against virtual asset providers?

• The compliance notices were issued for operating illegally without complying with the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). 

• This action is part of an initiative to bring  Virtual Digital Asset Service Providers (VDA SP) under Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT) framework.

• Financial Intelligence Unit India (FIU IND) instructed the Secretary, Ministry of Electronics and Information Technology to block URLs of the mentioned entities. 

• FIU IND is the central agency that processes information relating to suspect financial transactions to enforcement agencies and foreign FIUs.

Premise of Non-Compliance

• In March 2023, the VDA SP in India were mandated to comply with the PMLA 2002, verify client identities, and record financial positions.

• Entities failing to register and comply, despite serving Indian users, face regulatory action, leading to show-cause notices and blocking of URLs.

PMLA Compliance Purpose

• PMLA compliance aims to monitor and track financial transactions, combating money laundering and terrorism financing.

• It ensures accountability, transparency, and addresses concerns about the potential misuse of crypto assets.

Global Regulatory Approaches

• Dubai's Virtual Assets Regulatory Authority (VARA): It fosters consumer protection and prevents illicit finance and calls for mandatory licences and compliance with AMT-CLF laws.

• European Union's Markets in Crypto-Assets Regulation (MiCA): Significant service providers must disclose energy consumption, contributing to a reduction in carbon footprint.

• United States Regulation: The U.S. lacks a comprehensive nationwide regulatory framework, but covers some aspects under Bank Secrecy Act and Anti-Money Laundering Act.

Considerations for Regulating VDAs

• The Bureau for International Settlements (BIS) suggests three high-level policy options: outright ban, containment, and regulation.

• Outright bans may lack enforceability, leading to loss of market visibility.

• Containment may not address inherent vulnerabilities and pose financial stability risks.

• Regulation requires careful consideration of benefits outweighing costs, particularly defining authority, scope, and addressing data gaps.

What are Virtual Digital Asset Service Providers (VDA SP)?

• VDA SP are entities involved in activities like exchanging virtual digital assets and fiat currencies, transferring virtual digital assets, and safekeeping or administering VDAs.

• These services may include virtual asset exchange, transfer, safekeeping, etc.

• VDA SPs play a role in the virtual asset ecosystem by providing platforms for buying, selling, and managing digital assets.

• They are subject to regulatory frameworks and compliance measures to ensure transparency, security, and adherence to anti-money laundering and counter-financing of terrorism regulations.

About Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT)

• This framework is a set of policies and measures that aim to prevent and combat crimes like Money Laundering and Terror Financing.

• Money Laundering is the processing of assets from criminal activity to obscure their illegal origins.

• Terrorism Financing involves the raising and processing of funds to supply terrorists with resources.

• Its goal is to protect the stability and integrity of the global financial system and financial markets.

• The AML/CFT Policies and Procedures manual is a formal document that outlines the policies, controls, and procedures for implementation and related regulations.

Key elements of an effective AML/CFT compliance program

• Risk assessment

• Training of AML/CFT experts

• Employing qualified compliance professionals

• Customer due diligence (CDD)

• Transaction monitoring

• Verifiability and compliance

• Reporting and record-keeping