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FIG Paper (No. 33 – Series 2): Compulsory Registration of Off-shore Virtual Digital Asset Service Providers with FIU-IND?

Recently, the Financial Intelligence Unit – India (“FIU-Ind”) has issued show-cause notices to several offshore Virtual Digital Asset Service Providers (“VDASP”) for non-compliance with  provisions of the Prevention of Money Laundering Act, 2002 (“PMLA”) and for non-registration with the FIU-Ind, post amendment to PMLA on march 07, 2023, while catering to the Indian customers and operating in the Indian market.

The aforesaid action seems to be on the back of the Indian Government’s stance, in the G20 Summit 2023, which was the need for international co-ordination and co-operation  to govern and regulate crypto assets  and the importance of international collaboration in cyber security to counter new dangers, particularly in light of terror financing via the crypto space. Further, the Indian Government placed strong emphasis on the need to engage with stakeholders, including VDASPs and the general public to build a regulated but a transparent crypto ecosystem.

Background:

  • On March 7, 2023, the Central Government brought VDASPs within the PMLA regime as a ‘reporting entity’ and mandated them to register with FIU-Ind and comply with the provisions of the PMLA and Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PML Rules”), qua reporting obligations, record-keeping, etc.
  • Following the above statutory trend, FIU-Ind issued ‘AML & CFT Guidelines for Reporting Entities providing services related to Virtual Digital Assets’ dated March 10, 2023 (“Guidelines”) relating to Know Your Customer (“KYC”)/ Combating the Financing of Terrorism (“CFT”) for VDASPs.

Coverage of Offshore VDASP:

  • Whilst the above notification and Guidelines in spirit are applicable to all VDASPs operating in India, despite their geographical location, the Ministry of Finance on December 4, 2023, published the names of only 28 VDASPS registered with FIU-Ind.
  • Given the above development, FIU-Ind on December 28, 2023, issued a show-cause notices to offshore VDASP calling out their non-compliance with PMLA read with the PML Rules and non-registration with FIU-Ind. In addition to the issuance of such show-cause notices, FIU-Ind also wrote to the Ministry of Electronics and Information Technology to block the websites/ Apps/ URLs of such offshore VDASPs.

Impact of FIU-Ind registration on offshore VDASPs:

  • The off-shore VDASPs under the PMLA read with the PML Rules would be obligated to: (i) verify the identity of its Indian clients; (ii) designate a Principal Officer and Designated Director who may not necessarily reside in India, but would be preferred from a business standpoint to correspond/ liasion with FIU-Ind for PMLA compliances; (iii) maintain records for periodical reporting to the FIU-Ind; and (iv) flag suspicious transactions in order to curb money laundering and / or criminal activity.
  • Further, as the offshore VDASPs would be required to collect data, including but not limited to personal or transactional data of its clients under the PMLA read with the PML Rules, offshore VDASPs will be obligated to store data related to payments in India. Therefore, the offshore VDASPs may have to modify their modus operandi and tweak their systems and processes to be in compliance with Indian legal and regulatory requirements.
  • In addition to the above, an offshore VDASP operating in India may have to undertake certain additional filings with the Indian tax authorities and may also be required to register themselves to undertake payment of both direct and indirect taxes in India. Further, in line with the Indian laws, a consumer grievance redressal mechanism may also have to be formulated in India.

Impact of Blocking offshore VDASPS:

  • When the Indian Government introduced the new crypto tax regime, it spooked, both retail and institutional, investors and indirectly forced them to move from onshore to offshore VDASP platforms. However, the recent ban/ blocking of offshore VDASPs would result in loss of business to the offshore VDASPs as they will not be able to service the Indian market.   
  • Furthermore, many Indian crypto exchanges had entered into arrangements with various offshore VDASP players to expand their commercial capacities and enhance their share of revenues. Such tie-ups may also suffer in case the said offshore VDASPs are blocked and banned from operating in the Indian territory.    

With the crypto space largely being unregulated in India, FIU-Ind may become the de facto regulator/ supervisor of the space as it appears to register and regularise offshore VDASPs and prescribe contours within which such VDASPs will operate. At present over 100 applications of offshore VDASPs are awaiting evaluation by FIU-Ind. Nevertheless, the organisation is taking several steps to accommodate the offshore VDASPs by granting them necessary relaxations in the registration requirements and processes, in view of their offshore presence and providing them all necessary technical support required for the registration process.

It is clear that the intent is not to block or stop business operations of offshore VDASPs but to provide a level playing field to both Indian and offshore players provided there is due compliance with Indian law and regulations by the players.  Registration with FIU-Ind by the offshore VDASPS will not only provide comfort to the users but will also be useful in curbing the usage of crypto assets for money laundering and terror financing.


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Photo of Anu Tiwari Anu Tiwari

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu…

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu represents both Indian and multinational fintech, banking, broker-dealer, exchange, asset management, speciality finance and information technology companies on transactional, enforcement and regulatory matters.

Anu has been a member of RBI’s Committee on Household Finance, SEBI’s Working Group on Mutual Fund Regulation, Fintech Committee of the Confederation of Indian Industries (CII) and a visiting faculty at the SP Jain School of Global Management.

Mr. Tiwari has been recognised by Chambers & Partners, IFLRMergerMarket and as Lawyer of the Year 2021, India, by Global Law Experts for his work in the M&A, Financial Regulatory and Blockchain/  Cryptocurrency space. He can be reached at anu.tiwari@cyrilshroff.com

Photo of Pallavi Rao Pallavi Rao

Partner in the Financial Institutions Group and the Disputes Resolution Practice at the Delhi NCR office of Cyril Amarchand Mangaldas. Pallavi not only has extensive experience in civil and commercial litigation but has advised a number of global and domestic financial institutions, including…

Partner in the Financial Institutions Group and the Disputes Resolution Practice at the Delhi NCR office of Cyril Amarchand Mangaldas. Pallavi not only has extensive experience in civil and commercial litigation but has advised a number of global and domestic financial institutions, including, securities market intermediaries, banks, non-banking financial companies on a wide range of regulatory matters, including advising on entry – level licensing and ongoing compliance issues, market conduct related issues, etc. She also specialises in advising and representing bank and non-bank clients in relation to enforcement actions by Directorate of Enforcement, Serious Fraud Investigation Office, etc. She is also a registered patent agent and advises on various licensing/ transfer of IP/ Technology in M&A transactions/ investment rounds etc. using her vast experience in intellectual property litigation. She can be reached at pallavi.rao@cyrilshroff.com

Photo of Utkarsh Bhatnagar Utkarsh Bhatnagar

Principal Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Utkarsh has represented various Indian and multinational fintech, information/ emerging technology companies, and also pharmaceutical, and healthcare companies on transactional, enforcement and regulatory matters. His transactional…

Principal Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Utkarsh has represented various Indian and multinational fintech, information/ emerging technology companies, and also pharmaceutical, and healthcare companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, commercial agreements and regulatory matters. He can be reached at utkarsh.bhatnagar@cyrilshroff.com

Photo of Shrish Gautam Shrish Gautam

Associate in the FSRP and Disputes Practice at the Delhi NCR office of Cyril Amarchand Mangaldas. Shrish advises on financial service regulatory matters and has experience in mergers & acquisitions and disputes related to insolvency and bankruptcy matters as well as civil and…

Associate in the FSRP and Disputes Practice at the Delhi NCR office of Cyril Amarchand Mangaldas. Shrish advises on financial service regulatory matters and has experience in mergers & acquisitions and disputes related to insolvency and bankruptcy matters as well as civil and criminal litigations. He can be reached at shrish.gautam@cyrilshroff.com