FATF: Incomplete crypto rules open gaps for illicit finance

The Financial Action Task Force published its 7th Targeted Update on virtual assets and virtual asset service providers on Thursday, saying gaps in regulation and oversight leave openings for criminals to move illicit funds across borders.

The report found 83% of surveyed jurisdictions have advanced work to apply FATF Recommendation 15 and the Travel Rule, while 11 jurisdictions are still working to meet those standards. FATF called for more licensing, registration and supervision of virtual asset service providers to address remaining weaknesses.

Recommendation 15 requires countries to regulate VASPs and apply anti-money laundering and counter-terrorist financing measures to virtual asset activity. The Travel Rule requires VASPs to transmit originator and beneficiary information with transactions to maintain traceability.

The update highlighted offshore VASPs as a persistent enforcement challenge. FATF defined these as providers registered in jurisdictions with weak or underdeveloped rules that offer services to customers in other markets, creating cross-border supervisory gaps.

FATF also reported a case in which a Cambodia-based money laundering node issued a stablecoin marketed as resistant to asset freezing. The task force noted that regulated centralized stablecoins can be subject to freeze actions and that products marketed to avoid freezes can be used for laundering, sanctions evasion and fraud.

The agency warned that criminals exploit weak links in the global system and the borderless nature of virtual assets to move proceeds quickly between jurisdictions. The update urged stronger cross-border cooperation and faster information sharing between regulators and firms.

Giles Thomson, president of the FATF, warned: “Implementation of FATF standards can no longer be delayed, as criminal networks continue to abuse virtual assets for illicit purposes and exploit their borderless nature to commit fraud and scams, evade sanctions and launder the proceeds of crime. Governments and the private sector must work together to strengthen preventive measures and close regulatory gaps, bolster cross-border co-operation and deny criminals the opportunity to exploit weak links in the global system.”

The report recommends clearer rules for licensing and registration, stronger supervision of entities offering services across borders and more consistent enforcement of the Travel Rule. It also stressed the need for private sector compliance and timely sharing of customer and transaction data to make these measures effective.

The FATF is an intergovernmental body that sets international standards to combat money laundering and terrorist financing. The update is intended to guide countries on closing gaps that allow illicit finance to flow through emerging crypto products and providers operating from jurisdictions with weak oversight.