Offshore virtual asset service providers targeted as India builds FIU virtual asset lab, FATF says

India is building tools to spot and act against unregistered, high-risk offshore virtual asset service providers, or oVASPs. A new Financial Action Task Force (FATF) report said India is developing an indigenous Virtual Asset Lab. The lab is expected to use analytics and web surveillance. The goal is steady detection of oVASPs operating outside required oversight.

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The FATF report, titled Understanding and mitigating the risks of offshore virtual asset service providers, presented case studies from India and other countries. It described how oVASPs can be used for money laundering. It also outlined how national authorities supervise and disrupt such activity. The report noted that several jurisdictions work with online platforms to curb unauthorised services.

FATF report on offshore virtual asset service providers and India action

In its India case study, the FATF said FIU-India and the Home Ministry directed intermediaries to remove content. The directions covered social media platforms, web hosts, and internet service providers. The report said 85 URLs linked to unregistered and non-compliant oVASPs were taken down. It added that some countries coordinate with app-store operators too.

The report said FIU-India begins supervision when a virtual asset service provider shows multiple warning signs. FIU-India then directs entities to comply or stop operating. It said notices are issued under relevant money laundering rules. The FATF described this as part of India’s wider supervision steps in virtual assets markets.

FATF report on offshore virtual asset service providers and tax impact

The FATF linked part of the offshore shift to India’s tax changes in 2022. India introduced a tax regime on income from transfers. It also set a 1 per cent tax on VA transfers to be deducted at source. The report said much trading traffic then moved from onshore VASPs to offshore, unregistered oVASPs.

As a result, the report said some Indian clients moved away from regulated entities. The clients shifted to offshore platforms outside Indian money laundering rules. The report also said these offshore entities were not subject to counter-terror financing requirements. It added they did not meet Indian requirements on KYC, travel rule duties, and tax laws.

FATF report on offshore virtual asset service providers and how oVASPs work

The FATF explained that oVASPs are set up under the laws of one jurisdiction. Such firms may or may not have a physical presence there. They still offer services to clients outside that jurisdiction. The report said oVASPs are required to register in India. It added that these structures can complicate supervision across borders.

FIU India said oVASPs often take on Indian customers with limited KYC checks. FIU India said many accept deposits through domestic payment routes. These include Unified Payments Interface UPI and card networks. FIU India added that withdrawals can reach Indian bank accounts or wallets. Payouts may route through locally-registered VASPs or compliant intermediaries.

FIU India said these patterns show offshore firms still serve customers in India. FIU India said this happens while sidestepping India’s regulatory perimeter in practice. The FATF report said India is building detection capabilities against such unregistered oVASPs. It added that work on the indigenous Virtual Asset Lab is ongoing to support continuous identification.

FATF report on offshore virtual asset service providers and multi-agency coordination

On coordination, the FATF said the Department of Revenue set up a Virtual Assets Contact Sub-Group in July 2023. It described the forum as a multi-agency platform for VASP risk work. The group includes law enforcement, intelligence bodies, and regulators. The report said it meets regularly to track risks and plan strategies.

The FATF said the platform also supports sharing of trends and typologies. It said the group exchanges case studies and builds joint work across agencies. Separately, it said FIU India formed a dedicated working group. The group includes local VASPs and obliged entities like banks, payment aggregators, and gateways. It works to develop the Red Flag Indicator RFI.

The report said FIU-IND is the designated money laundering regulator for Virtual Digital Asset Service Providers in India. It also said India is tightening oversight while improving detection of offshore risks. The measures described include takedowns, supervisory notices, and joint coordination. The FATF said the planned Virtual Asset Lab is meant to support ongoing monitoring of unregistered oVASPs.

With inputs from PTI