The Financial Action Task Force (FATF), the global anti-money laundering watchdog, has issued a stark warning in a new report titled “Understanding and Mitigating the Risks of Offshore Virtual Asset Service Providers (oVASPs).” The report concludes that crypto service providers operating offshore are exploiting gaps in international regulatory and supervisory coverage, creating significant risks for money laundering, sanctions evasion, and other illicit financial activities.
The FATF identified that many offshore firms intentionally structure their operations across multiple jurisdictions—incorporating in one country, hosting infrastructure in another, and serving customers worldwide online. This complexity leaves regulators uncertain about which authority holds responsibility, severely hampering effective international cooperation and the enforcement of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) rules. The report states, “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.”
A key finding is the uneven regulatory adoption globally. The FATF's survey found that while 83% of jurisdictions require licensed or registered crypto service providers, only about 46% have implemented an activity-based regulatory approach. This model supervises companies based on the services offered to domestic users, not their physical location. Without it, authorities often only monitor local firms, allowing offshore platforms to serve users without licensing or compliance checks.
The report details how these gaps are exploited: illicit proceeds from scams are routed through offshore platforms, dispersed across addresses, and moved across different blockchains or cross-chain bridges to obscure trails. Another concern is “nested relationships,” where unlicensed offshore exchanges access the global financial system by opening accounts with licensed firms while posing as ordinary users.
To address these issues, the FATF urged countries to strengthen oversight, recommending that governments require offshore VASPs to register or obtain licenses when offering services to domestic users, regardless of where the company is headquartered. It also called for stronger cross-border cooperation between regulators and law enforcement, the imposition of penalties on non-compliant platforms, and the establishment of interagency task forces.
FATF President Elisa de Anda Madrazo emphasized the urgency: “I urge all countries and the private sector to act on the good practice we have identified – as virtual assets move across borders in seconds, strong compliance, supervision and international cooperation are essential to address these risks.”
This warning follows a separate FATF report from earlier in March focusing on risks from peer-to-peer stablecoin transfers and unhosted wallets, which it said could weaken AML oversight. The guidance comes as regulators, including the U.S. Commodity Futures Trading Commission (CFTC), explore extending oversight frameworks to international digital asset exchanges.
