Vitual Assets and Terror Financing

Posted 21 May 2024

4 min read

Why in the news?

The Financial Action Task Force (FATF) has recognized deficiencies in enforcing its standards regarding virtual assets (VAs) and virtual asset service providers (VASPs).

Virtual assets and virtual asset service providers (VASPs)

Virtual assets refer to any digital representation of value that can be digitally traded, transferred or used for payment.
- Example are Bitcoin, Litecoin, Ethereum or Dogecoin. It does not include digital representation of fiat currencies (government-issued currency).
VASPs refers to any natural or legal person conducting one or more of the following transactions on behalf of another natural or legal person as a business:
- Providing exchanges between virtual assets or fiat currencies.
- Transferring between virtual assets.
VASPs encompass entities such as cryptocurrency exchanges, ATM operators, wallet custodians, and hedge funds.

Reasons for use of Virtual Assets Used in Terror Financing

Anonymity: Virtual Assets are considered high risk due to anonymity and decentralization of peer-to-peer online transactions, which also enable criminals to use VPNs to obfuscate location and the origin/destination of transactions.
Absence of global standard regulations: VASPs located in one jurisdiction may offer their products and services to customers located in another jurisdiction where they may be subject to different Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) obligations and oversight.
- Lack of a clear regulatory framework, as highlighted by International Monetary Fund (IMF), for virtual assets creates significant risks for investors and potential financial stability implications.
Crowdfunding with Virtual Assets: Terrorist groups leverage crowdfunding platforms and social media to solicit funds globally, using virtual assets for anonymous and borderless transactions.

How do the FATF Standards apply to virtual assets?

Countries need to:	Virtual Assets service providers need to:
Understand the money laundering and terrorist financing risks the sector faces Licence or register virtual asset service providers Supervise the sector, in the same way it supervises other financial institutions	Implement the same preventive measures as financial institutions, including customer due diligence, record keeping and reporting of suspicious transactions Obtain, hold and security transmit originator and beneficiary information when making transfers

Regulation of Virtual Assets and VASPs in India

PMLA Compliance: In March 2023, India subjected Virtual Digital Assets Service Providers (VDASPs) to the AML-CFT regulations of the Prevention of Money Laundering Act (PMLA) 2002.
Register with Financial Intelligence Unit India (FIU IND): VDASPs are required to register with FIU IND and fulfill reporting and record-keeping duties.
Permanent secretariat: India has proposed a permanent secretariat to coordinate bid to fight terror funding.
- ‘Beyond-Border Cooperation” is the basis for countering terror funding in the global level.
‘Travel rule’ for VASPs: India has enacted the ‘travel rule’ for VASPs which requires securely collecting and transmitting originator and beneficiary information.

Way Forward

Effective global implementation of FATF standards: It will create a level playing field and prevent criminals from exploiting weakly supervised jurisdictions.
- In 2018, G20 member countries committed to the implementation of these FATF standards on AML/CFT for VDAs at the Finance Ministers and Central Bank Governors’
Preventive measures by financial institutions: such as customer due diligence (CDD), record keeping and suspicious transaction reporting (STR) to ensure transparency of virtual asset transactions.
Strengthening Financial Intelligence: Accurate and well-linked financial intelligence (including from private sector) can reveal the structure of terrorist groups and also the activities of individual terrorists.
International Cooperation: Cooperation between law enforcement authorities and involvement of the Financial and Banking sector are essential for combating such cross-border challenges.
Technological upgradation: Evolving money laundering threats from emerging technologies require advanced countermeasures like big data and artificial intelligence.