2024 Travel Rule Compliance Challenges and How to Overcome Them: Sunrise Issue

The Crypto Travel Rule, as mandated by the Financial Action Task Force (FATF), requires Virtual Asset Service Providers (VASPs) to share specific information for transactions over a certain threshold. 

However, the staggered implementation timelines, known as the "Sunrise Period," pose significant compliance challenges across the globe. This blog dives into these challenges and offers strategies for VASPs navigating this difficult time.

Understanding the Sunrise Issue

The Sunrise Period refers to the timeframe during which the Travel Rule is not uniformly implemented across jurisdictions. This period is fraught with challenges as VASPs in different regions are subject to varying compliance timelines. As of the latest FATF updates in June 2023, many jurisdictions have yet to fully implement the Travel Rule, leading to a patchwork of compliance standards worldwide.

Challenges Faced by VASPs During the Sunrise Period

VASPs face significant hurdles during the Sunrise Period due to the practical difficulties encountered in the data transfer process required by the Travel Rule. 

Let's break down these challenges into three main areas:

1. Difficulty Sending a Travel Rule Data Transfer
   Compliance with the Travel Rule necessitates that the originator VASP collects and transmits information about both the originator and the beneficiary to the beneficiary VASP. However, uneven implementation across jurisdictions means that many beneficiary VASPs are not yet equipped to receive and protect this information adequately. 
   
   This gap in compliance capabilities can leave the originating VASP unable to fulfill its core obligations, significantly impacting transaction flows. Recent survey results highlight a shift towards stricter compliance enforcement, with the percentage of VASPs that do not allow withdrawals unless a Travel Rule message can be transmitted to the beneficiary VASP nearly tripling from 8% last year to 23% this year.
   
   
2. Difficulty Receiving a Travel Rule Data Transfer
   The challenges are not only limited to sending information. If the originator VASP has not started transmitting Travel Rule data, the beneficiary VASP faces significant barriers in assessing the information about the originator, which is crucial for completing the transaction in a compliant manner. Depending on the regulatory approach of the country in question, the beneficiary VASP might need to restrict access to these transactions. Such restrictions can have a substantial operational impact on business. 
   
   Furthermore, it's noteworthy that a significant 37% of survey respondents reported that they did not receive any Travel Rule information for a substantial number of transactions, illustrating the scale of this issue.
   
   
3. Difficulty Screening the Transaction’s Counterparty
   The Sunrise Issue also complicates the screening process of the transaction’s counterparty. Typically, an originator VASP would verify the beneficiary's information provided by their customer before attempting to transmit this data. However, without confirmation from the beneficiary VASP that the information is accurate, the originator cannot be sure of its validity. This uncertainty makes the screening results unreliable and the transactions risky. 
   
   Likewise, beneficiary VASPs face challenges when they receive deposits without the required originator information. This scenario makes it easier for illicit actors to exploit the system by using inaccurate counterparty information to bypass VASP screening processes.
   

These challenges underline the intricate difficulties that arise from the staggered implementation of the Travel Rule across different jurisdictions. They not only affect the efficiency of transaction processes but also raise significant compliance and operational risks for VASPs operating internationally.

Regulatory Landscape and Progress

Although the FATF sets the global standards, it does not enforce them directly. Instead, it relies on member countries to implement these standards within their jurisdictions. The FATF continues to issue guidance and monitor progress, but many countries lag behind in their implementation efforts. Specific examples from countries like South Korea, Japan, and the UK illustrate the diverse approaches to implementing the Travel Rule, each with its own set of challenges and solutions.

{{report2="/cta-components"}}

Approaches to Sunrise Issue Challenges 

In this section, we discuss what can be done about the challenges arising from the Sunrise Issue, initiatives that are already in place at various stakeholder levels, and which stakeholders are best positioned to drive solutions to this issue.

The FATF

The FATF’s mandate is to set recommendations that are, themselves, not legally binding. The FATF relies on member jurisdictions to incorporate these recommendations and enforce the Travel Rule for VASPs within the jurisdiction’s regulatory ambit. Thus, the FATF is not in a position to resolve the Sunrise Issue challenges. 

Nonetheless, the FATF uses a number of methods to encourage national regulators and the private sector to action:

1. The FATF has issued a number of guidance documents aimed at helping regulators and VASPs navigate a path toward Travel Rule adoption and tackle some of the more challenging aspects thereof. We’ve highlighted some of these guidance instruments in Chapter 1, which can serve as a very useful tool for stakeholders at all levels. The FATF has also formed the Virtual Assets Contact Group (VACG), which will continue to conduct outreach and provide assistance to low-capacity jurisdictions to encourage their compliance with the Travel Rule.
   
   
2. The FATF has continued to monitor and report progress of Travel Rule adoption. In the FATF’s June 2023 Targeted Update, the FATF reiterated that jurisdictions have made insufficient progress and thus calls on regulators to urgently implement the Travel Rule. [1]
   
   
3. Perhaps the most effective method is the FATF-maintained call-to-action and increased monitoring lists, where it identifies jurisdictions with weak measures to combat AML/CTF. These lists are publicly available and are updated three times a year following the FATF’s review and mutual assessments of jurisdictions. 

   
   For counties on the call-to-action list, the FATF calls on jurisdictions to apply enhanced due diligence (EDD), and in the most serious cases, to apply countermeasures to protect the international financial system from the ongoing money laundering, terrorist financing, and proliferation of financing risks that emanate from the flagged countries. 
   
   The increased monitoring list includes countries that are actively working with the FATF to address money laundering/ terrorist financing deficiencies. Alignment with the FATF’s guidelines on VAs and VASPs, including enforcement of the Travel Rule, is expected to become increasingly relevant for the assessment of a country’s regimes to counter money laundering, terrorist financing, and proliferation of financing risks.

Regulators

The most effective way to resolve the Sunrise Issue challenges is with a swift implementation of the FATF’s requirements.

When implementing the Travel Rule, national regulators are the ones to determine how their Travel Rule framework will address the Sunrise Issue. According to data that the FATF shared in its June 2023 Targeted Update, 11 of 62 jurisdictions that have implemented the Travel Rule or are in the process of doing so have allowed a grace period for Travel Rule compliance, during which there are exemptions or flexibility in how VASPs are expected to comply in order to mitigate the effects of the Sunrise Issue [2]. 

Additionally, some jurisdictions expressly qualify how domestic VASPs can interact with foreign counterparts. 

For example:

• Regulators in South Korea acknowledge that overseas VASPs may not yet be required or prepared to comply with the Travel Rule. To deal with this, the South Korean framework allows Korean VASPs to facilitate transactions with overseas VASPs only when the Korean VASP is able to confirm that the customer is sending funds to an account held in their own name and that the money laundering/terrorism financing risks are low. (Financial Services Commission, 2022).
• In Japan, if the transaction counterparty is located in a region without Travel Rule enforcement, Japanese VASPs have no obligation to share PII. In these cases, Japanese VASPs are still required to collect and retain information about the counterparty and assess money laundering/terrorist financing risks. 
• In the U.K., an FCA statement establishes that when a beneficiary VASP is located in a jurisdiction non-compliant with the Travel Rule, the originator U.K. VASP is still required to collect and retain information about the counterparty and assess money laundering/
  terrorist financing risks but may proceed with the transaction without transmitting the information. Additionally, when a U.K. VASP receives a transaction without the required Travel Rule information, the U.K. framework allows the VASP to make a risk-based determination on whether to make the VA available to the beneficiary, taking into account the status of Travel Rule regulations in the jurisdiction where the originator VASP operates. 
  
  Learn more about the Japanese and British regulatory frameworks in Chapter 2 of the 2024 State of Crypto Travel Rule Compliance Report.

Joint Industry Initiatives

Joint industry initiates also play a role in resolving the Sunrise Issue.
Many industry working groups that operate on a national level, like the CryptoUK Travel Rule Working Group, have successfully engaged with national regulators to encourage the implementation of proportionate measures to mitigate the negative effects of the Sunrise Issue.
Groups like these should continue engaging with VASPs and regulators to encourage rapid implementation. 

Travel Rule Solutions

Similar to joint industry initiatives, Travel Rule solutions like Notabene’s SafeTransact can play a role in resolving the Sunrise Issue by increasing policymakers’ awareness of the problems and proposing creative solutions that facilitate VASPs’ operations during this period.

With these challenges in mind, Notabene launched the SAFE Implementation phases. This step-by-step onboarding program is designed to help our clients navigate the intricacies of Travel Rule compliance efficiently, particularly throughout the Sunrise Period. Throughout their journey using the SAFE Implementation phases, VASPs can gather valuable analytics that they can use to create a clear roadmap toward achieving full compliance. 

Additionally, Notabene offers a free SafeTransact-Rise plan tailored for VASPs that are not yet required to comply with the Travel Rule but wish to avoid being cut off from compliant transaction flows. The SafeTransact-Rise plan allows VASPs to receive and respond to Travel Rule
transfers, with no technical integration effort required.

VASPs

When trying to mitigate the challenges identified above, VASPs tend to take a variety of approaches. These approaches depend largely on what national mandates require or, when these frameworks are silent, what risk-based practices begin to emerge to compensate. 

We uncovered some of these practices in this year’s survey, which are listed below by order of popularity:

In withdrawals:

• 40% of the VASPs surveyed report taking a risk-based approach to determine whether or not to allow a transaction when they are unable to send Travel Rule information to the beneficiary VASP.
• 23% percent of the VASPs surveyed currently do not permit transactions unless they are able to send Travel Rule information.
• 19% of the VASPs surveyed allow their customers to transact, irrespective of whether they are able to send Travel Rule information.
• Only 3% of the surveyed VASPs only proceed with the withdrawal provided that the information can be sent to the beneficiary VASP and a response is received.

In deposits:

• 30% take a risk-based approach to determine whether or not to make a deposit available to the end customer in cases when the required Travel Rule message is not received from the originator VASP.
• Upon detecting a deposit without information/with missing information, some respondents send a request to provide missing information to the originator VASP. In the case the information is not provided, 21% return the funds and 10% opt to collect the information from their end customer.
• Of respondents, 19% allow customers to receive deposits regardless of whether the required Travel Rule information was received.
• 20% of respondents report taking other approaches. By way of example, one respondent reported allowing their customers a grace period before enforcing blockers. Others report only allowing first-party deposits and requiring their customer to demonstrate they control the source wallet.
  

These results indicate that a majority of VASPs currently adopt a risk-based approach to compliance limitations. However, stricter approaches are gaining popularity, possibly because of growing regulatory pressure. Notably, 23% of the surveyed VASPs currently prohibit transactions unless they can send Travel Rule information, and a similar percentage (21%) returns funds unless the required Travel Rule information is received.

2024 Status Check 

At present, some solutions are available to mitigate some of the friction caused by the Sunrise Issue, but its negative impact continues to severely affect VASPs in jurisdictions with Travel Rule obligations. While there is work that can be done by stakeholders at all levels, the power to solve
the Sunrise Issue ultimately lies with national regulators and policymakers in jurisdictions that have not yet introduced Travel Rule legislation/regulation. These regulators need to urgently implement
and operationalize the Travel Rule through effective supervision and enforcement action, using the available FATF resources and in consultation with the industry.

Conclusion

The Sunrise Issue remains a formidable challenge in the path to global Travel Rule compliance. By understanding the complexities involved, staying engaged with regulatory developments, and employing flexible technological solutions, VASPs can navigate this evolving landscape more effectively. As the industry continues to mature, collaborative efforts and adaptive strategies will be key to overcoming these hurdles.