The Financial Action Task Force (FATF) was established in 1989 by the G7 nations to create policies to fight money laundering. In 2001, its purpose was extended to include preventing terrorist financing. The organization is also known as the Groupe d’action financière in French. Its mission is to protect the international financial system and preserve certain interests.
The Travel Rule
The ‘Travel Rule’ is a term used to designate FATF Recommendation 16, which was created to combat money laundering and terrorism financing (ML/TF). This recommendation requires Virtual Asset Service Providers (VASPs) which are engaged in virtual asset transfers as well as crypto companies, to acquire and accurately store originator and beneficiary information, and to share it with counterpart VASPs or financial institutions prior to or during the transaction.
This amendment to the ‘Travel Rule’ was first applied only to financial institutions in 2019, but has since been extended to include VASPs, or platforms that provide services related to cryptocurrencies.
Following this rule reduces the risk of fraudulent activity by helping to pinpoint suspicious customers. Additionally, it safeguards a good standing and helps to avoid any penalties that may be imposed by governing bodies.
Further, the FATF has made it a recommendation that financial institutions should acquire information on the originators and beneficiaries involved in specific cryptocurrency transactions. This is all part of their ‘Travel Rule’ measure.
Just recently, the ‘Task Force’ has reported that its delegates have come to an agreement on an action plan “to drive timely implementation” of global standards on cryptocurrencies.
A Roadmap to Bolster Execution of FATF Standards
On February 24, the FATF – made up of delegates from over 200 jurisdictions – held a plenary session in Paris and reached agreement on a roadmap to bolster the execution of its Standards related to virtual assets and virtual asset service providers (VASPs). The task force has declared that in 2024, it will report on the progress countries have made in regard to the implementation of these crypto standards, including the regulation and oversight of VASPs. “The lack of regulation of virtual assets in many countries creates opportunities that criminals and terrorist financiers exploit,” says the report.
Part of FATF’s ‘Travel Rule’ includes recommendations that VASPs, financial institutions and regulated entities in member jurisdictions obtain information on the originators and beneficiaries of certain digital currency transactions.
By March 2022, nearly 30 out of the 98 jurisdictions surveyed had passed ‘Travel Rule’ laws, with only 11 having begun enforcing and overseeing them.
Countries like Japan, South Korea and Singapore appear to be embracing regulations set forth by the Travel Rule; conversely, nations such as Iran and North Korea have drawn the scrutiny of the FATF, and have been placed on the “grey list” to closely monitor any suspicious financial activity.
In the UK, Regulation 5 (on crypto asset transfers) of the Money Laundering and Terrorist Financing Regulations will come into effect on September 1, 2023 with Lithuania expected to follow suit in 2025.
KYC Processes Required for Companies Under New ‘Travel Rule’
Companies will now be required to undergo a Know Your Customer (KYC) process in order to comply with the new ‘Travel Rule’ including verifying the identity of clients by collecting and assessing certain documents and data. Doing so helps organizations ensure that they meet their compliance obligations and prevent money laundering and other financial crimes. As part of such a process, companies must collect additional data from customers, such as their customer identification number, date and place of birth.
Customers must further provide the name and account number of the individual they wish to send money to; and the most efficient way to manage these processes is to employ a KYC and crypto transaction monitoring tool which ensures comprehensive AML compliance, verifies that a client’s assets are not derived from illegal sources, and complies with data protection laws. This will help to reduce costs and the possibility of human error, while keeping the company’s data up-to-date and compliant. Finally, companies must ensure secure data transfer to other financial institutions or crypto businesses.
Key Takes
The FATF ‘Travel Rule’ for crypto assets is a critical regulation to abide by for all businesses involved in virtual asset transactions in order to help prevent money laundering. Complying with this rule can help businesses to identify suspicious activities, protect their reputation, and avoid costly fines from regulators. It’s essential to remember that:
1. Businesses must capture and store the identity details of both the sender and recipient.
2. Institutions must keep a record of the transaction details.
3. This information needs to be shared with the other financial institution in the transfer.
4. It must be exchanged within a reasonable time frame before or after the transfer.
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