Gaps in the international oversight of offshore virtual-asset firms have made it possible for criminals to commit large-scale fraud, money laundering, and terrorism financing beyond the reach of most supervisory bodies, according to a new report published Wednesday by the Financial Action Task Force (FATF). 

The report warns that Virtual Asset Service Providers (VASPs) operating in offshore jurisdictions with weak oversight and licensing enforcement are still able to serve clients around the world, increasing the likelihood that the companies will be used to hide illicit proceeds or fund terrorism and the sale of weapons of mass destruction. 

Offshore VASPs can be exploited to disperse ill-gotten gains across multiple wallets, route transactions through layered intermediary addresses, and move assets across different blockchains to obscure the trail for law enforcement, according to FATF. 

The intergovernmental group cited case studies from India and Nigeria showing offshore platforms being used to facilitate illicit money flows and cash-out points beyond the reach of impacted domestic regulators, and said that such VASPs have been separately identified in terrorism-financing schemes. 

FATF urged jurisdictions to factor offshore VASP activity into risk assessments even where firms have no physical presence, and called for stronger cross-border cooperation among supervisors to address the problem. 

The Paris-based body also said banks and crypto firms should assess and manage their exposure to offshore providers, detect nested activity, and alert supervisors whenever they identify firms that appear to be operating without a license or registration. Financial institutions should avoid establishing or maintaining business relationships with such unregistered or unlicensed providers, FATF said. 

Read the full FATF report here