India's FIU targets terrorism financing, money laundering in new KYC regime for crypto users

The Financial Intelligence Unit (FIU) of India has announced that crypto exchanges should mandate the use of selfies and the penny drop method when onboarding new users. The new measures were announced as the agency continues to fight money laundering and terrorism financing.

According to reports, the penny drop method requires the recording of geographical coordinates and the verification of bank accounts, while the use of know-your-customer has always been a part of the anti-money laundering KYC protocols put forward by the agency.

The directive also includes limitations placed on Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs), which the agency says are equivalent to IPOs in the stock market carried out by crypto exchanges.

India’s FIU releases new guidelines for onboarding new users

According to the FIU, Indian exchanges are banned from carrying out mixing services, with the agency noting that transactions linked to anonymous tokens should also not be facilitated. The new guidelines released by the FIU, a body that functions under the Union Finance Ministry, have been reviewed by the PTI.

The PTI mentioned that the updated regulations would help India tackle terrorism financing and money laundering using digital assets.

In addition, the agency has also updated reporting guidelines for exchanges. The update comes about three years after the first set of rules was published in March 2023. The FIU acts as the single-point regulator for crypto exchanges (reporting platforms or VDA service providers) operating in India under the provisions of the Prevention of Money Laundering Act (PMLA).

The updated guidelines mean that all crypto exchanges operating within the country must register with the FIU as reporting entities and submit regular reports on transactions that they consider suspicious. They are also charged with maintaining the records of their customers to identify and combat illicit funding and proliferation financing risks associated with crypto assets. This doesn’t mean that digital assets are being recognized as legal tender, but for the payment of taxes.

FIU shares update on crypto industry guidelines

According to the guidelines, exchanges have been mandated to ask their customers to submit the Permanent Account Number (PAN), a selfie with license detections, latitude and longitude coordinates of the onboarding location, with date and timestamp.

In addition, users are required to also submit their IP address as part of what the agency calls the “client due diligence” measures. Exchanges have also been asked to ensure that clients whose credentials were submitted are the ones accessing their accounts at all times.

“The authenticity of such access and personal presence shall be established by capturing a live photograph of the client and employing liveliness detection technology to verify the client’s physical presence,” it said.

Liveness detection is done by a specified software that is being used for several legal purposes in India, such as generating a life certificate for pensioners. The software requires them to blink to establish that they are alive and authentic.

The exchanges have also been asked to collect another identity and address document of the client, which includes a driving license, proof of possession of Aadhaar, passport, voter ID, and driving license. In addition, they are also required to verify their mobile number and email using a one-time password (OTP).

Also, exchanges are mandated to carry out a KYC update for customers that they deem to be high risk every six months, while updating for others after a year.

In terms of ICOs/ITOs, the Indian agency mentioned that the activities present increased and complex money laundering and terrorism financing risks. It noted that they lack a justified economic rationale. The agency also mentioned that anonymous tokens or crypto mixers that are designed to conceal the origin of funds are also prohibited, warning exchanges to ensure that they do not carry out such transactions.

ing-probe/”>complex money laundering and terrorism financing risks. It noted that they lack a justified economic rationale. The agency also mentioned that anonymous tokens or crypto mixers that are designed to conceal the origin of funds are also prohibited, warning exchanges to ensure that they do not carry out such transactions.

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