New Delhi, March 11 India is working to create a domestic Virtual Asset Lab to detect unregistered, high-risk offshore virtual asset service providers (oVASPs) by using analytics and web surveillance tools.
A Financial Action Task Force (FATF) report, titled 'Understanding and mitigating the risks of offshore virtual asset service providers', provided case studies of India and other countries on how oVASPs are being used for money laundering, and the supervision being done by these nations.
According to the FATF report, some jurisdictions have established structured cooperation with internet service providers, app-store operators, and online platforms to disrupt unauthorized oVASPs activity.
Giving a case study from India, the FATF report said that FIU-India, along with the Home Ministry, has directed intermediaries (social media platforms, web hosts, internet service providers) to remove website content.
"So far, 85 URLs pertaining to unregistered, non-compliant oVASPs have been removed," it said.
Giving insights into how India handles trading in virtual assets, the report said that when a VASP raises multiple red flags, FIU-India (Financial Intelligence Units-India) initiates supervisory actions and directs the entities to comply or cease operations. Notices are issued to these entities under the relevant money laundering regulations.
India is developing indigenous detection capabilities of unregistered oVASPs.
"Efforts are underway to create a domestic Virtual Asset Lab to enable continuous detection of unregistered oVASPs," the FATF said while highlighting efforts by India in imposing supervision.
In 2022, India introduced a virtual asset tax regime on income from transfers, as well as a 1 per cent tax for VA transfers to be deducted at source. Since then, a significant proportion of virtual asset trading traffic has moved from Indian onshore VASPs to various offshore unregistered VASPs.
As a consequence, a number of Indian clients have moved from a regulated entity to become offshore platforms that are not subject to Indian money laundering or counter-terror financing rules. By remaining offshore, these entities do not comply with Indian rules and other requirements (including KYC and travel rule obligations and Indian tax laws).
Offshore VASPs (oVASPs) refer to virtual asset service providers created under the laws of one jurisdiction (home jurisdiction) with or without a physical presence and provide services to clients residing outside the jurisdiction. oVASPs are required to register in India.
"oVASPs commonly onboard Indian customers with little or no KYC, accept deposits through domestic payment channels such as Unified Payments Interface (UPI) or card networks, and enable withdrawals to Indian bank accounts or wallets by routing payouts through locally-registered VASPs or compliant intermediaries," according to FIU India.
These models showcase how oVASPs are actively providing services in India despite de facto circumventing India's regulatory perimeter, it added.
In the area of multi-agency coordination, the FATF report said that the Department of Revenue has established a Virtual Assets Contact Sub-Group in July 2023 as a multi-agency platform to coordinate India's approach to VASP-related risks.
The platform, comprising law enforcement agencies, intelligence agencies and regulators, holds meetings regularly to identify emerging risks and formulate strategies. It also supports the sharing of trends, typologies and case studies, and promotes synergies across agencies.
Besides, FIU India has set up a dedicated working group with the local VASP and other obliged entities (e.g., banks, payment aggregators and gateways) to formulate the Red Flag Indicator (RFI).
Currently, FIU-IND is designated as the money laundering regulator for Virtual Digital Asset Service Providers in India.