FINANCIAL INTELLIGENCE UNIT (FIU)

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Context: The Financial Intelligence Unit (FIU) has issued show cause notices to several cryptocurrency exchanges, including Binance, for allegedly operating illegally in India through offshore entities.

Key Highlights

• Notice Recipients: Binance, along with other cryptocurrency exchanges such as Kucoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex, received show-cause notices.
• Alleged Illegal Operation: The FIU claims that these exchanges were operating illegally in India through offshore entities. Notices were sent to Binance's entities in Seychelles, the Cayman Islands, and Switzerland.
• Legal Framework and Compliance: Virtual Digital Assets Service Providers (cryptocurrency services) were brought under the Anti Money Laundering/Counter Financing of Terrorism (AML-CFT) framework in March 2023. The notices were issued under Section 13 of the Prevention of Money Laundering Act, 2002.
• Reporting Obligations: Cryptocurrency firms are required to comply with reporting obligations to the government, similar to traditional banking institutions. The FIU alleges that these companies failed to fulfill their reporting obligations, despite serving a substantial part of Indian users.
• Compliance by Some Firms: While 31 cryptocurrency firms have complied with the AML-CFT framework, several offshore entities catering to a significant portion of Indian users have allegedly not registered and reported suspicious activities.
• FIU's Action: The FIU, which operates under the Finance Ministry's Department of Revenue, has also written to the Ministry of Electronics and Information Technology (MEITY), requesting the blocking of websites associated with these cryptocurrency services.
• Importance of Compliance: Compliance with Indian law is stated to be not contingent on physical presence in India, but the FIU emphasizes the importance of fulfilling reporting obligations to the government.

Financial Intelligence Unit – India (FIU-IND)

• FIU-IND was established by the Government of India in 2004 as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.
• It collects data from various sources, such as banks, financial institutions, intermediaries, regulators and law enforcement agencies. It then analyzes the data to identify patterns, trends and anomalies that indicate possible money laundering or terrorist financing activities.
• It shares the relevant information with domestic and foreign agencies that are involved in intelligence, investigation and enforcement functions.

FIU-IND performs various functions

• Receiving and maintaining a database of Cash Transaction Reports (CTRs), Suspicious Transaction Reports (STRs), Cross Border Wire Transfer Reports (CBWTRs) and Non-Profit Organization Transaction Reports (NTRs) from various reporting entities.
• Analyzing the reports and other information to generate financial intelligence products such as alerts, reports, profiles, studies and feedback.
• Disseminating the financial intelligence products to the relevant agencies for further action or investigation.
• Providing assistance and guidance to the reporting entities on compliance with the anti-money laundering and counter-terrorist financing (AML/CFT) laws and regulations.
• Conducting outreach and awareness programs for the reporting entities, regulators, law enforcement agencies and the general public on AML/CFT issues.
• Developing and maintaining a robust information technology infrastructure for data collection, storage, analysis and dissemination.
• Collaborating and cooperating with domestic and international counterparts on AML/CFT matters through bilateral and multilateral arrangements.
• Participating in various forums and initiatives related to AML/CFT at the national, regional and global levels.

Conclusion

• The development indicates increased regulatory scrutiny on cryptocurrency exchanges in India, with a focus on ensuring compliance with anti-money laundering and counter-financing terrorism regulations. The show cause notices and the request for website blocking underscore the government's efforts to bring the cryptocurrency sector under regulatory frameworks.

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