Cryptocurrency facilitates greater anonymity than mainstream non-cash payment methods which makes them vulnerable to money laundering and use in terrorist financing activities. For example – cryptocurrencies such as Monero, Zcash, DASH, Verge and Horizen provide their users maximum privacy which results in difficulty to trace the parties involved in the transactions.[1] The Financial Action Task Force (“FATF”) in its report had previously acknowledged that cryptocurrency can assist criminals to manipulate their proceeds or finance their illicit activities.[2]
In 2018, a circular was issued by the RBI[3] stating that all financial institutions like commercial and co-operative banks, small financial institutions, payment banks, and NBFCs must limit themselves from dealing in cryptocurrency and must shun working with any organization that deals in such virtual currencies. Later, the above-stated RBI circular was challenged before the Hon’ble Supreme Court of India in the Internet and Mobile Association of India versus RBI.[4] The Apex Court held that such a ban by RBI is untenable in law and goes against the spirit of Article 19(1)(g) of the Constitution of India.
The PMLA Paradigm
The PMLA is applicable to the offenses enshrined under the Schedule in the PMLA 2002 attached to the legislation. The Schedule has 3 parts viz Part A, B and C.
Part A categorizes offenses under the Indian Penal Code, Narcotics Drugs and Psychotropic Substances Act, Prevention of Corruption Act, Antiquities and Art Treasures Act, Copyright Act, Trademark Act, Wildlife Protection Act, and Information Technology Act. Part B lists out offenses under Part A with a valuation of Rs. 1 crore or more and Part C exclusively deals with trans-border crimes.
Recently, the Enforcement Directorate (“ED”) claims to attach proceeds of crimes (“PoC”) worth Rs. 135 crores in 7 cases. The investigation by the ED is of the notion that the accused have committed the act of money laundering and gained the proceeds of crime through virtual currency.[5]
“Proceeds of Crime” has been defined under Section 2(u) of the PMLA 2002 as any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offense or the value of any such property, or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.
“Proceeds of Crime” include property not only derived or obtained from a scheduled offense but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity related to the scheduled offense. Adding to the definition already provided under the PMLA 2002, the Supreme Court in its recent judgment in Vijay Madanlal Case has expanded the scope of any proceeds or gain to be considered as proceeds of crime and has significantly widened the powers of ED to investigate the same.
In lieu of the powers given, the ED had already started to conduct searches upon the premises of various established Crypto exchange platforms. In a recent search procedure, ED reached out to one such Crypto exchange platform CoinSwitch Kuber in connection to money laundering activities. The primary opinion in the search claims that large amounts of funds were diverted to purchase crypto assets on exchanges and then indulge in money laundering them.[6] However, the Crypto exchange platform Coin Switch Kuber in a statement released by them stated that “Our approach has always been that of transparency. Crypto is an early stage industry with a lot of potentials and we continuously engage with all stakeholders.”
Further, the ED also conducted similar search operations on one of the directors of Zanmai Lab Private Ltd, which owns the crypto-currency exchange WazirX. The raid ended with ED claiming that it has freezed the bank balance of around Rs 64.67 crore of the concerned director under PMLA, 2002.[7]
The story of search and seizure by the ED does not end here. IED claims that it has seized assets worth Rs 370 crore from the Flipvolt crypto exchange which is the Indian arm of Singapore crypto platform Vauld.[8]
The ED has been exclusively authorized to conduct such search operations or seize assets through Sections 16 & 17 under the PMLA 2002. Section 16 of PMLA deals with the Power of Survey. An officer under PMLA has the power to enter and survey a property or premises if such an officer believes that the survey will allow him the opportunity to inspect necessary records which might be available on the premises in question, help verify proceeds of a crime or any transactions related to proceeds which might be found on the premises, or might assist them with any other proceedings being conducted under the Act. The officer is under an obligation to record the reasons for choosing to survey the premises as well as the findings.
Section 17 of PMLA deals with the power of search and seizure by the authority. A Director or any person authorized by the Director has reasons to believe on the basis of information provided to him or already in his possession, which needs to be put in writing, that a person has indulged in money laundering or is in possession of any proceeds of crime, and such records evidencing such a crime, or is in possession of property related to the crime, in such a case he will be within his powers to authorize an officer to enter and search any building or place where he has reason to suspect that such records or proceeds of crime are kept and seize any record or property found as a result of such search.
With the Supreme Court affirming the constitutional validity of Section 17 in the Vijay Madanlal judgment, it would be interesting to observe the pattern of search and seizure by the ED that lies in the future.
Conclusion
Cryptocurrency remains uncharted territory for the regulatory authorities and without such regulation, the PMLA remains insufficient to tackle money laundering and other unethical financial activities through cryptocurrencies.
The ED is on an active look out for possible money laundering activity through the means of virtual currencies. Thus, crypto firms, in order to protect themselves from the wrath of ED, must ensure the traceability of the money used in the trading of cryptocurrencies. In addition to this, the Crypto exchanges need to conduct due diligence and raise Suspicious Transaction Reports (“STRs”) in accordance with the RBI Circular dated July 01, 2015.[9] In order for a smooth establishment and development process in India, the crypto firms must ensure to adhere to the ISO/IEC 27001:2013 which specifies the requirements for establishing, implementing, maintaining and continually improving an information security management system within the context of the organization. Crypto firms must also ensure to conduct regular IT Audits of their firms in accordance with the CERT-IN guidelines to ensure transparency at all stages.
It would not be an understatement that the Indian regulators and authorities will need to keep pace with global developments and introduce appropriate measures and policies to effectively monitor and regulate cryptocurrencies without interrupting the smooth development of the digital economy in India.
[1] Shobhit Seth, “The 6 Most Private Cryptocurrencies” (Investopedia, 5-1-2021), The 6 Most Private Cryptocurrencies.
[2] Virtual Assets, FATF focus on virtual assets
[3] RBI/2017-18/154 DBR.No.BP.BC.104 /08.13.102/2017-18, Reserve Bank of India, April 06, 2018.
[4] Internet and mobile association of India v. RBI, 2020 SCC online SC 275.
[6]ED searches offices of CoinSwitch Kuber, exchange downplays it – The Hindu BusinessLine.
[7] Ed Raids Crypto Exchange Wazir Director, Freezes Rs 64.7-Cr Bank Assets
[8] India seizes $46 million from crypto exchange Vauld in money-laundering probe | TechCrunch
[9] RBI/2015-16/42 DBR.AML.BC.No.15/14.01.001/2015-16, Reserve Bank of India, July 1, 2015.
