Offshore crypto platforms let criminals evade oversight, FATF warns

The Financial Action Task Force has warned that crypto platforms operating offshore are creating blind spots for regulators that allow criminals to exploit gaps in global oversight to move illicit funds and evade sanctions.

In a new report titled Understanding and Mitigating the Risks of Offshore Virtual Asset Service Providers, the global anti-money laundering watchdog said many offshore crypto firms intentionally structure their operations in ways that place them beyond the effective reach of regulators.

According to the FATF, these entities often take advantage of differences in regulatory frameworks between jurisdictions, making it harder for authorities to track activity or enforce Anti Money Laundering and Counter Terrorist Financing rules across borders.

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

Regulatory blind spots

One of the central findings of the report is the uneven pace of regulatory adoption across countries. 

Less than half of the jurisdictions surveyed, about 46%, have implemented an activity-based approach to crypto oversight.

Under such a model, regulators supervise companies based on the services they offer to domestic users rather than where the company is incorporated. 

Without it, authorities often only monitor firms that are physically located within their territory, leaving offshore platforms free to serve local users without licensing or compliance checks.

That regulatory gap, the FATF warned, creates a fertile environment for financial crime.

Investigators have observed how illicit proceeds from scams and fraud operations are routed through offshore crypto platforms before being dispersed across multiple addresses or passed through layers of intermediary wallets. 

Transactions may also move across different blockchains or cross-chain bridges to further obscure the trail.

Another concern involves so-called nested relationships, where unlicensed offshore exchanges access the global financial system indirectly by opening accounts with licensed crypto firms while posing as ordinary retail users. 

Such arrangements allow offshore businesses to move funds through regulated infrastructure while masking their true identity.

Calls for stronger oversight

To close these gaps, the FATF urged governments to strengthen oversight of offshore crypto platforms that serve their residents.

The watchdog recommended that countries require such providers to register or obtain licenses if they offer services within a jurisdiction, regardless of where the company is headquartered. 

Authorities were also encouraged to impose penalties on non-compliant platforms and establish interagency task forces to coordinate investigations and supervision.

Greater cooperation between financial intelligence units and regulators across borders will also be essential, the FATF said, given the speed at which virtual asset transactions move between jurisdictions.

“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," FATF President Elisa de Anda Madrazo said in a statement.

This latest guidance follows a separate FATF report released earlier this month regarding stablecoins and unhosted wallets.

Offshore crypto venues under scrutiny

The FATF’s warning comes as regulators in several jurisdictions are reconsidering how offshore crypto platforms should be supervised.

In the United States, the Commodity Futures Trading Commission said last year that it was exploring whether its long-standing Foreign Boards of Trade framework could be extended to digital asset exchanges operating outside the country.

Under the proposal, US customers could potentially access certain international trading platforms if those venues operate under regulatory standards comparable to American rules.