Crypto Travel Rule 101

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

The Financial Action Task Force (FATF) is an intergovernmental policy-making body that sets international standards (better known as FATF Recommendations) as standards to prevent money laundering and terrorist financing. A FATF "recommendation" is not binding. They help authorities go after money tied to illegal drugs, human trafficking, and other crimes. The FATF also works to stop funding for weapons of mass destruction. FATF Recommendations allow the institution to make its views known and suggest a line of action without imposing any legal obligation on those to which it is addressed.

The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity.  

Expanding from their historical focus on fiat, the FATF clarified that its Recommendations applied to virtual assets (VAs) and virtual asset service providers (VASPs) in October 2018. 

The global money laundering and terrorist financing watchdog added “virtual assets” to their key issues and threats to the integrity of the financial system on On June 21, 2019. The same day, the FATF issued a public statement on virtual assets and related providers and published its first guidance for a risk-based approach to VAs and VASPs, recently updated in October 2021 after two-yearly revisions. This 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.

What are the FATF Recommendations?

The FATF publishes Recommendations, or FATF Standards, which ensure a coordinated global response to prevent organized crime, corruption, and terrorism. Since 1990, the FATF has published 40 general recommendations on Money Laundering (issued in 1990), 9 Special Recommendations on Terrorism Funding (issued in 2001) and 30 Interpretive Notes to various Recommendations (periodic updates)

There are currently ~30 interpretive notes that have been issued to complement the FATF Recommendations. 

Specifically for the virtual asset industry, the FATF’s Interpretive Note to Recommendation 15, paragraph 7(b)-R16, the so-called FATF’s “Crypto Travel Rule” caused a seismic shift in how the industry is to be regulated in 2020 and beyond. 

What are the FATF’s Interpretative Notes?

In the world of financial crime and AML/CFT transgressions, changes happen very fast and are often tied to technological advances, such as blockchain and cryptocurrency technology.
Therefore, the FATF needs to periodically review its Recommendations and make necessary changes to close loopholes and protect the integrity of the Standards. FATF Plenary updates - The FATF's decision-making body, the FATF Plenary, meets three times per year. 

The FATF’s Guidance on VAs and VASPs

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 Recommendations, p.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's Updated Guidance [OCT 2021], §15

The international frameworks of anti-money laundering and counter-terrorism financing (AML/CFT) are modeled after the FATF's international standards for combating money laundering and terrorism financing. These standards are set through the FATF Recommendations and their respective Interpretive Notes. Member states of the FATF adopted the latest standards in 2012. 

The emergence of cryptocurrencies 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 then, the FATF has constantly updated its stance and guidance on the AML/CFT standards applicable to the crypto industry to keep up with its fast-paced evolution. 

How many countries commit to FATF standards? 

FATF and FSRB members. (Notabene)

Over 200 jurisdictions worldwide have committed to FATF standards either as FATF members or as members of a FATF-style regional organization (FSRB). These members are expected to adopt the FATF standards to ensure a coordinated global response to prevent organized crime, corruption, and terrorism.

What happens when countries do not comply with FATF recommendations? 

In theory, the FATF only issues guidance and recommendations to countries. In practice, however, governments that don't comply with these rules face serious financial and economical consequences. The FATF manages black and grey lists of countries that fail to implement their recommendations. 

Being on these lists has severe implications for finance and commerce in those countries. Often leading to worse bond ratings and difficulties connecting to the international banking system, making international trade and inbound investment difficult. So for all intents and purposes, these recommendations become implemented sooner rather than later by most countries.

What is the blacklist / gray list?

The Financial Action Task Force (FATF) blacklist (sometimes referred to as the OECD blacklist) lists countries that the intergovernmental organization considers to be uncooperative in the worldwide fight against money laundering and terrorism funding. The FATF expects publishing the list to inspire countries to strengthen their regulatory frameworks to adhere to the common AML/CFT rules and standards.

Additionally, the FATF maintains a grey list in which it identifies countries that have inadequacies in their AML/CFT controls but have committed to rectifying them. Given the regulatory risk associated with nations that do not adhere to international compliance norms, financial institutions should be aware of the FATF's blacklist and grey list countries, as well as the consequences of their classification.

FATF’s Black List

As of January 2022, the following nations were added to the FATF's blacklist:

  • North Korea
  • Iran

Officially referred to as High-Risk Jurisdictions Subject to a Call for Action, the FATF blacklist identifies nations with poor anti-money laundering and counter-terror funding regulatory systems. The list is meant to highlight the serious danger of money laundering and terrorism financing they pose on the global stage. Economic sanctions and other prohibitive actions against blacklisted countries are likely to be imposed by FATF member states and global organizations.

The blacklist is an ongoing document that is published and updated in official FATF publications on a regular basis. Countries are added and removed from the blacklist as their anti-money laundering and counter-terrorism financing regulatory systems are updated to conform to applicable FATF recommendations and requirements. The first FATF blacklist was published in 2000, initially containing 15 countries. Since then, the lists have been published annually and occasionally twice a year as part of official FATF announcements and reports. 

FATF’s Grey List

When the FATF places a jurisdiction under heightened monitoring, it indicates that the government has committed to resolving identified strategic shortcomings expeditiously and within agreed timelines and is therefore subject to greater monitoring. This list is frequently referred to as the "grey list" externally.

Increased-monitoring jurisdictions actively collaborate with the FATF to solve strategic inadequacies in their anti-money laundering, anti-terrorism funding, and anti-proliferation financing regimes.

The FATF and regional bodies modeled after the FATF (FSRBs) continue to work with the jurisdictions listed below as they report on their progress in resolving their strategic weaknesses. The FATF urges these nations to execute their action plans within the specified timelines swiftly. 

Jurisdictions on FATF’s grey list:

  • Albania
  • Barbados
  • Botswana
  • Burkina Faso
  • Cambodia
  • Cayman Islands
  • Haiti
  • Jamaica
  • Malta
  • Mauritius
  • Morocco
  • Myanmar
  • Nicaragua
  • Pakistan
  • Panama  
  • Philippines
  • Senegal
  • South Sudan
  • Syria
  • Uganda
  • Yemen
  • Zimbabwe

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 crypto businesses comply with FATF’s recommendations without hindering user experience. We built a trusted data layer to blockchain transactions for protocol-agnostic communication; now, more than 20 financial institutions and crypto exchanges use our first-to-market FATF Travel Rule solution to identify virtual asset accounts, perform mandated VASP due diligence, and manage regulatory and counterparty risks from one holistic dashboard.

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