FATF Report on India’s Action on Virtual Asset Service Providers (VASPs)

Context: A FATF report on “Understanding and Mitigating the Risks of Offshore Virtual Asset Service Providers (oVASPs)” highlighted India’s l measures to curb money laundering and terror financing.

About Offshore Virtual Asset Service Providers (oVASPs)

These are digital asset entities providing exchange, custody, or transfer services to users while based in jurisdictions with weak or no Anti-Money Laundering (AML) regulations.

• Services: Enable buying, selling, transferring and storing cryptocurrencies and other virtual assets.
• Regulatory Gap: Many operate without local registration, bypassing domestic AML/CFT regulations.

How oVASPs Enable Money Laundering

• Conversion of Illicit Funds: Criminal proceeds are converted into digital assets through offshore platforms.
• Layering of Transactions: Funds are routed through multiple crypto wallets and exchanges to hide origin.
• Re-Entry into Economy: Crypto assets are converted back to fiat currency via domestic platforms or bank accounts.
• Evasion Techniques: Platforms promote VPN use, anonymous wallets and shell companies to bypass regulations.

India’s Action Against Money Laundering

• Principal Officer: Indian VASPs must appoint a Principal Officer in India responsible for AML compliance and transaction monitoring.
• Crypto Tax Regime: 30% tax on virtual assets (2022) brought crypto transactions into the formal regulatory framework.
• Virtual Asset Lab: India is setting up a Virtual Asset Lab using analytics, open-source intelligence and web surveillance to detect illegal platforms.
• Scam Compounds: Investigations uncovered cybercrime centres in Myanmar, Cambodia and Laos where trafficked Indians were forced to run crypto scams.
• Suspicious Transaction Reports(STRs: Domestic crypto exchanges file STRs with FIU-IND to detect unusual crypto deposits.
• Gambling Cover: An offshore platform operating under the cover of online gambling was blocked for moving illicit funds across borders.

Key Findings of FATF Report on India

The FATF’s report highlighted several areas where India has made progress, but also flagged critical areas which need improvement:

• Prosecution and Convictions: There is a need to strengthen prosecution efforts in Money Laundering (ML) and Terror Financing (TF) cases.
  • Between 2018 and 2023, only 28 convictions were secured by the Enforcement Directorate (ED) for money laundering.
• Non-Profit Sector Protection: The report emphasised the importance of safeguarding non-profit organisations from being misused for terrorist financing.
• Preventive Measures Implementation: There are calls for enhanced supervision and implementation of preventive measures across various sectors.

About Financial Action Task Force (FATF)

• FATF is an intergovernmental body that has developed standards to prevent and combat money laundering and terror financing.
• Headquarters: Paris, France.
• Background: It was established in 1989 during the G7 Summit in Paris to develop policies against money laundering.
• Objective:
  • To establish international standards and to develop and promote policies, both at national and international levels, for combating money laundering and terror financing.
• Members: 40 (38 Countries + 2 Organisations – European Union and Gulf Cooperation Council)
  • Major countries: US, India, China, Saudi Arabia, UK, Germany, and France.
  • India became a member of FATF in 2010.

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