Crypto Travel Rule 101

What is the Financial Action Task Force (FATF), and what does it do?

TL;DR:

  • The FATF is an intergovernmental organization that sets money laundering and terrorist financing standards.
  • The FATF Recommendations apply to VAs and VASPs as of 2018.
  • R15 and R16 radically changed the industry's regulatory outlook. R15 requires VASPs to be licensed or registered, regulated for AML/CTF, and subject to effective monitoring or supervision. R16 extended the "Travel Rule" to VAs and VASPs.
  • On June 21, 2019, the FATF released its first Guidance for a Risk-Based Approach to VAs and VASPs
  • In October 2021, the FATF updated the guidance for an RBA to VAs and VASPs, which:
    - expanded the scope of standards and added new sections on stablecoins, decentralized platforms, P2P transactions, self-hosted/unhosted wallets, and the Travel Rule in October 2021.
    - updated Travel Rule data transfer information and de minimis threshold.
    - reaffirmed FATF’s stance on P2P or VASP-to-self-hosted wallet transactions.
  • The FATF has reviewed its guidance implementation several times and found areas for improvement.

The Financial Action Task Force (FATF) is an intergovernmental policymaking body that sets international standards (better known as FATF Recommendations) to prevent money laundering and terrorist financing. FATF Recommendations are not binding in the way a law or contract would be. Rather, authorities have the power to investigate based on the frameworks of their respective jurisdictions, not the FATF Recommendations. This power allows authorities to track down money tied to illegal drugs, human trafficking, and other crimes. The FATF also works to stop funding used to purchase weapons of mass destruction. In publishing Recommendations (FATF 2012), the FATF broadcasts its views and can suggest a line of action without imposing any legal obligation on those it addresses.

The FATF continually reviews money laundering and terrorist financing techniques and strengthens its standards as appropriate to address new risks. One such example was their response to the unregulated space for virtual assets (VAs), which have spread as cryptocurrencies gain popularity. In October 2018, expanding from its historical focus on fiat, the FATF clarified that its Recommendations also apply to VAs and virtual asset service providers (VASPs.) 

On June 21, 2019, the FATF added VAs to their list of key issues and threats to the financial system’s integrity. The same day, the FATF issued a public statement on VAs and related providers (FATF 2019a) and then subsequently published its first Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. (FATF 2019b) This guidance was recently updated in October 2021 (FATF 2021b) after two yearly revisions.

This revised guidance describes “how the Recommendations apply to VAs, VA activities, and VASPs in order to help countries better understand how they should implement the FATF Standards effectively” (FATF 2021b, 10).

Latest FATF updates:


What are the FATF Recommendations?

The FATF publishes standards — or FATF Recommendations — that ensure a coordinated global response to prevent organized crime, corruption, and terrorism. Since 1990, the FATF has published 40 general recommendations on money laundering (all of which were initially issued in 1990), nine special recommendations on terrorism funding (which were issued in 2001), and 30 Interpretive Notes to various Recommendations (which one would consider periodic updates). In 1996, the general recommendations were updated to take into account changes in money laundering trends and to anticipate potential future threats. In 2003, the FATF completed a thorough review and update of the original 40 Recommendations. 

The FATF’s Interpretive Note to R15 clarified the application of the FATF requirements to VAs and VASPs, and R16 extended the “Travel Rule,” to VAs and VASPs. Both caused a seismic shift in the industry’s regulatory outlook from 2020 onward.

(The flow of FATF rules. Notabene)

What are the FATF’s Interpretive Notes?

In financial crime, anti-money laundering (AML), and combating the financing of terrorism (CTF) transgressions, changes happen quickly and are often tied to technological advances, such as blockchain and cryptocurrency.

Therefore, the FATF needs to periodically review its Recommendations and make necessary changes to close loopholes and protect the integrity of its standards. The FATF’s decision-making body, the FATF Plenary, meets three times per year in October, February, and June. During these sessions, the Plenary considers mutual evaluation reports, policy, and governance matters. It produces Plenary updates to close loopholes, set forth strategic initiatives, and finalize work in several important areas.

The FATF’s Guidance on VAs and VASPs

The international AML/CTF frameworks are modeled after the FATF’s global standards for combating money laundering and terrorism financing. These standards are set through the FATF Recommendations and their respective Interpretive Notes.

FATF Member states adopted the latest standards in 2012:

The FATF Recommendations set out a comprehensive and consistent framework of measures that countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. (FATF 2012, 7)
The primary focus of the Guidance is to describe how the Recommendations apply to VAs, VA activities, and VASPs in order to help countries better understand how they should implement the FATF Standards effectively. (FATF 2021b, p. 10, para. 15)

The emergence of cryptocurrencies has posed a new challenge to combating money laundering and the financing of terrorism. The FATF has been observing this space since 2014, intending to set standards that address these novel risks. 

Since publishing its first Recommendations for VAs and VASPs in 2019, the FATF has updated its stance and guidance on AML/CTF requirements applicable to the crypto industry to keep up with its fast-paced evolution.

Source: Notabene

How many countries commit to FATF standards? 

Over 200 jurisdictions worldwide have committed to FATF standards either as FATF members or members of a FATF-style regional body (FSRB). The FATF expects its members to adopt its standards to ensure coordinated global response to prevent organized crime, corruption, and terrorism.

FATF and FSRB members | Notabene
FATF and FSRB members. (Notabene)

What happens when countries do not comply with FATF recommendations? 

 In theory, the FATF only issues guidance and official Recommendations. In practice, however, governments that don’t comply with these rules face severe financial and economic consequences. 

The FATF manages a “blacklist” and “greylist”’ featuring countries that don't follow their recommendations. As countries update their AML/CTF regulatory systems to meet FATF Recommendations and requirements, they are added to or taken off of these lists. Given the regulatory risk associated with nations that do not adhere to international compliance norms, financial institutions (FIs) should be aware of the countries the FATF has blacklisted and greylisted and of the consequences of such classification.

The financial and commerce systems of the countries included on these lists experience [or could experience] severe ramifications. Inclusion often leads to lower bond ratings and greater difficulties connecting to the international banking system, which makes international trade and inbound investment difficult. As a result, most countries implement these Recommendations sooner rather than later.

What is the FATF grey list?

Also referred to as “Jurisdictions under Increased Monitoring,” FATF’s greylist identifies countries with inadequacies in their AML/CTF controls but have committed to rectifying them. Jurisdictions under increased monitoring actively collaborate with the FATF to solve strategic inadequacies in their AML, anti-terrorism funding, and anti-proliferation financing regimes.

As of June 2022, the following nations were added to the jurisdictions on FATF’s greylist:

  • Albania
  • Barbados
  • Burkina Faso
  • Cambodia
  • The Cayman Islands
  • Gibraltar
  • Haiti
  • Jamaica
  • Jordan
  • Mali
  • Morocco
  • Myanmar
  • Nicaragua
  • Pakistan
  • Panama  
  • The Philippines
  • Senegal
  • South Sudan
  • Syria
  • Turkey
  • Uganda
  • The United Arab Emirates
  • Yemen
  • Zimbabwe

What is the FATF blacklist?

The FATF blacklist identifies nations with poor AML/CTF regulatory systems, intending to highlight the severe danger of money laundering and terrorism financing they pose on the global stage. Officially referred to as “High-Risk Jurisdictions Subject to a Call for Action,” countries on this list are considered uncooperative in the worldwide fight against money laundering and terrorism funding.

In publishing such a list, the FATF hopes to inspire countries to strengthen their regulatory frameworks to adhere to the common AML/CTF rules and standards. FATF member states and international organizations will likely impose economic sanctions and other prohibitive actions on blacklisted countries. 

The first FATF blacklist was published in 2000, initially containing 15 countries. Since then, the lists have been published annually — occasionally twice yearly — and have become official FATF publications. As of June 2022, the FATF added the following nations to its blacklist: North Korea and Iran.

References

  • FATF (Financial Action Task Force). 2012 | International Standards on Combatting Money Laundering and the Financing of Terrorism & Profileration. 
  • FATF. 2019a | Public Statement on Virtual Assets and Related Providers. Paris: FATF. 
  • FATF. 2019b | Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers. 
  • FATF. 2021b | Updated Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers.

How can Notabene help crypto companies comply with FATF's Recommendations?

Notabene was founded just two years after FATF recommendation 16 was applied to virtual assets (VAs) and virtual asset service providers (VASPs.) Notabene's software, tools, and comprehensive data help institutions comply with FATF’s recommendations without hindering user experience. We built a trusted data layer for blockchain transactions for protocol-agnostic communication; now, market-leading financial institutions and crypto exchanges use our end-to-end FATF Travel Rule solution to identify virtual asset accounts, perform mandated VASP due diligence, and manage regulatory and counterparty risks from one holistic dashboard.

Learn which organizations the FATF considers VASPs, and are obliged to comply with the crypto Travel Rule.

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