FATF warns offshore crypto firms create money laundering and sanctions gaps

A new FATF report says crypto exchanges operating offshore can create gaps in AML enforcement, making it harder for regulators to track illicit activity.

A new report from the Financial Action Task Force (FATF) warns that crypto service providers operating offshore pose risks of money laundering, sanctions evasion and other illicit financial activity.

In the report, titled “Understanding and Mitigating the Risks of Offshore Virtual Asset Service Providers (oVASPs),” the FATF said some offshore firms exploit gaps and differences in regulatory and supervisory coverage, making it harder for authorities to monitor activity and enforce Anti-Money Laundering (AML) and Counter-Terrorist Financing rules.

“As a result, effective international co-operation may not be possible, including with the relevant oVASP supervisor, thereby limiting the effectiveness of domestic risk-mitigation measures,” the report said.

The watchdog said the issue is particularly challenging because many offshore crypto firms operate across multiple jurisdictions. A company may be incorporated in one country, host infrastructure in another and serve customers worldwide through online platforms, leaving regulators uncertain about which authority has responsibility.

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The FATF also said some countries struggle to identify offshore platforms providing services to local users. Without a local legal presence, authorities may have limited visibility into these businesses or the transactions they process.

To address the problem, FATF urged countries to strengthen oversight of crypto firms serving their markets, even if those companies are based abroad.

The organization recommended that governments require offshore VASPs to register or obtain licenses when offering services to domestic users. It also called for stronger cooperation between regulators and law enforcement agencies across borders.

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The warning follows a separate FATF report last week on stablecoins and unhosted wallets, which said peer-to-peer transfers can weaken AML oversight when transactions occur without regulated intermediaries such as exchanges or custodians.

The FATF said this structure creates gaps in AML oversight as stablecoins expand into payments and cross-border transfers. The watchdog urged countries to assess the risks and introduce safeguards.

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Source: CoinTelegraph