FATF Highlights India’s Actions Against Offshore VASPs

• 30 Mar 2026

Source: TH 

Why in News? 

The March 2026 FATF report on ‘Understanding and Mitigating the Risks of Off-shore Virtual Asset Service Providers’ underscores India’s robust regulatory and enforcement actions against Offshore Virtual Asset Service Providers (oVASPs) to mitigate money laundering and terror financing risks. 

What are the Key FATF Highlights on India’s Crackdown on oVASPs? 

• Virtual Asset Lab: India is establishing a dedicated facility to perform automated web surveillance, open-source intelligence, and analytics to detect unregistered and high-risk crypto platforms. 
• Regulatory Perimeter & FIU Mandates: The Financial Intelligence Unit-India (FIU-IND) has made it mandatory for Principal Officers (POs) of VASPs to be physically based in India, ensuring legal accountability for Prevention of Money Laundering Act, 2002 (PMLA, 2002) compliance. 
• Action Against "Scam Compounds": Indian agencies (NIA, CBI, and ED) are probing cybercrime hubs along the Myanmar-Thailand border, Cambodia, and Laos, where trafficked citizens were forced into crypto-related scams. 
• Blocking Non-Compliant Entities: Leveraging the Sahyog Portal (launched by the Union Home Ministry to enhance collaboration between government agencies and social media intermediaries), authorities have directed the takedown of 85 URLs belonging to unregistered and non-compliant offshore platforms. 
• Inter-Agency Coordination: A Virtual Assets Contact Sub-Group, established under the Department of Revenue in 2023, facilitates intelligence sharing between law enforcement and regulators to identify emerging typologies of crypto-crimes. 
• Addressing Regulatory Arbitrage: The report notes that while the 2022 virtual assets tax regime caused a shift in trading volume to offshore entities, India is countering this by requiring oVASPs serving domestic users to register locally regardless of their physical presence. 
• Red Flag Indicators: The FIU has formed a Working Group including banks and payment gateways to develop strategies for identifying suspicious deposit patterns from offshore wallets. 

What are Offshore Virtual Asset Service Providers (oVASPs)? 

• About: oVASPs are entities that provide services related to virtual digital assets (such as cryptocurrencies, stablecoins, or Non-Fungible Tokens) but are headquartered or operated from a jurisdiction outside the country where their users are located. 
• Core Functions: These platforms typically perform the following roles for their users: 
  • Exchange: Facilitating the trade between virtual assets (e.g., Bitcoin to Ethereum) or between fiat currency and virtual assets (e.g., INR to USDT). 
  • Transfer: Moving virtual assets from one address or account to another. 
  • Safekeeping/Administration: Providing digital wallet services to store and manage private keys. 
  • Financial Services: Participating in or providing financial services related to an issuer’s offer or sale of a virtual asset. 
• Associated Challenges: The primary reason these entities are highlighted by regulators like the Financial Action Task Force (FATF) and India's Financial Intelligence Unit (FIU) is due to "Regulatory Arbitrage." This occurs when: 
  • Jurisdictional Gaps: Platforms operate from countries with lenient Anti-Money Laundering (AML) or Counter-Terrorism Financing (CFT) laws. 
  • Lack of Accountability: Since they lack a physical office in the user's country, they may bypass local tax laws (like India's 2022 Virtual Assets Tax Regime) and reporting requirements. 
  • Anonymity: They often offer higher levels of anonymity, which can be exploited by "scam compounds" or for moving illicit proceeds across borders. 
• Modus Operandi: Illicit proceeds are converted into virtual assets via oVASPs and later routed through compliant Indian VASPs into domestic financial systems. E.g. a Caribbean-based online gambling platform exploited anti-money laundering (AML) blind spots to move funds across borders and was subsequently blocked in India. 
• Regulatory Requirements in India: Under the PMLA, 2002 and recent FIU mandates, even if a VASP is "offshore," it must comply with the following if it serves Indian users: 
  • Mandatory Registration: They must register as a reporting entity with the FIU-IND. 
  • Principal Officer (PO): They are required to appoint a Principal Officer based in India to serve as a liaison for legal and transaction monitoring. 
  • KYC Compliance: They must perform "Know Your Customer" checks and report Suspicious Transaction Reports (STRs) to authorities. 

Virtual Asset 

• About: A Virtual Asset (VA) is a digital representation of value that can be digitally traded, transferred, or used for payment or investment purposes. They are distinct digital assets that rely on cryptography and distributed ledger technology (blockchain). 
  • Virtual assets do not include digital representations of "fiat" currencies (like a digital version of the Indian Rupee (e-Rupee) or US Dollar held in a bank app). 
• Common Examples: 
  • Cryptocurrencies: Digital currencies used as a medium of exchange (e.g., Bitcoin, Ethereum). 
  • Stablecoins: Virtual assets pegged to the value of another asset, like the US Dollar or Gold, to reduce price volatility (e.g., USDT, USDC). 
  • Non-Fungible Tokens (NFTs): Unique digital assets representing ownership of a specific item, such as digital art or music. 
  • Governance Tokens: Assets that give holders the right to vote on the future of a specific blockchain project or protocol. 
• VDA in India: In India, the government uses the term Virtual Digital Asset (VDA) under the Finance Act, 2022.  
  • Taxation: India imposes a 30% tax on income from the transfer of any VDA. 
  • TDS: A 1% Tax Deducted at Source (TDS) is applicable on payments made for the transfer of VDAs to track the trail of transactions. 
  • PMLA Coverage: As of 2023, VDA transactions are covered under the PMLA, 2002. This means crypto exchanges must follow "Know Your Customer" (KYC) norms and report suspicious activities to the FIU-IND. 

Frequently Asked Questions (FAQs) 

1. What is the 'Virtual Asset Lab' mentioned in the FATF 2026 report? 
It is a specialized Indian facility using AI, open-source intelligence, and automated surveillance to detect unregistered and high-risk offshore virtual asset platforms. 

2. What is the residency requirement for Principal Officers (POs) of VASPs in India? 
The FIU mandates that POs must be based in India to ensure direct legal accountability for transaction monitoring and PMLA compliance. 

3. How does the 'Sahyog Portal' assist in regulating digital content? 
Launched by the MHA, it streamlines the process of sending takedown notices to intermediaries for unlawful content; it has already been used to block 85 non-compliant oVASP URLs. 

4. What distinguishes a Virtual Asset from a Central Bank Digital Currency (CBDC)? 
Virtual Assets are private, decentralized digital representations of value (e.g., Bitcoin), whereas CBDCs like the e-Rupee are sovereign legal tender issued by the RBI. 

UPSC Civil Services Examination, Previous Year Question (PYQ)   

Q. With reference to “Blockchain Technology”, consider the following statements: (2020)

1. It is a public ledger that everyone can inspect, but which no single user controls.   
2. The structure and design of blockchain is such that all the data in it are about cryptocurrency only.   
3. Applications that depend on basic features of blockchain can be developed without anybody’s permission.   

Which of the statements given above is/are correct?   

(a) 1 only   

(b) 1 and 2 only   

(c) 2 only   

(d) 1 and 3 only   

Ans: (d)

Q. Consider the following pairs: (2018)

Terms sometimes seen in news              Context/Topic 

1. Belle II experiment            —       Artificial Intelligence  
2. Blockchain technology      —      Digital/ Cryptocurrency  
3. CRISPR – Cas9                —      Particle Physics  

Which of the pairs given above is/are correctly matched?   

(a) 1 and 3 only   

(b) 2 only   

(c) 2 and 3 only   

(d) 1, 2 and 3   

Ans: (b)