In 2019 the Financial Action Task Force (“FATF”) extended its anti-money laundering and counter- financing of terrorism (“AML/CFT”) measures’ oversight to also cover Virtual Assets (“VAs”) and Virtual Assets Service Providers (“VASPs”). The purpose behind this was to prevent the criminal and terrorist misuse of this sector. To strengthen this prevention, on the 30th June 2022 the FATF has issued the report titled ‘Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Assets Service Providers’.
This is not the first update given to the industry. Since 2019, the FATF issued two global reviews relating to the implementation of the FATF Standards on VAs and VASPs. Furthermore, in October of 2021 the FATF also issued an Updated Guidance to help both jurisdictions and VASPs effectively implement these standards and requirements. What the latest targeted update on implementation seeks to achieve is:
- to provide a third targeted review of implementation (focusing on the FATF Travel Rule, which is a requirement for the private sector to obtain/exchange beneficiary and originator information with VA transfers);
- to provide a brief update on the general implementation of FATF’s Recommendation 15 (“15”) and its Interpretative Note (“INR.15”) (the FATF Recommendation 15 relates to New Technologies, complemented by an Interpretative Note on VAs);
- to provide a brief update on the relevant emerging risks and market developments, such as Decentralised Finance (“DeFi”), Non-Fungible Tokens (“NFTs”) and unhosted wallets.
The report finds that out of the 53 jurisdictions assessed by the FATF’s Global Network since June 2021, the majority have not yet fully implemented the requirements set out under R.15/INR.15, and still need to undergo major or moderate improvements, particularly in relation to their money-laundering and financing of terrorism (“ML/FT”) assessment and AML/CTF preventive measures.
The report also finds out that very limited progress has been made with regard to the abovementioned FATF Travel Rule, with few jurisdictions which have passed legislation on the matter and fewer still which have started enforcement. Several other jurisdictions are in the process of passing legislation, whereas others have not yet introduced the Travel Rule at all. The report finds that this gap exposes VAs and VASPs to misuse. However, the report also finds that the private sector has made progress in facilitating Travel Rule implementation, albeit it still needs strengthening to ensure global implementation. The report acknowledges that the private sector has faced challenges in implementing the Travel Rule, especially between those jurisdictions that regulate VAs and VASPs and those that do not (the so-called ‘sunrise issue’). These challenges are also caused by the flexibility under the FATF Standards allowing jurisdictions to take different approaches in implementing the Travel Rule requirements. The report highlights that it is imperative for jurisdictions to continue coordinating on common issues, and for the private sector to advance global technological tools that can accommodate for nuances across jurisdictions.
Lastly, the report also finds that it is imperative for the FATF to monitor the growth of, and the illicit financing risks associated with, DeFi, NFT markets, and unhosted wallets.
To act on the above findings, the report highlights the next steps to be taken, mainly:
- To strengthen and accelerate compliance to R.15/INR.15, focusing with priority on assessing ML/FT risks of VAs and VASPs, and the application of AML/CFT preventive measures, by implementation and enforcement of adequate and effective laws (the report highlights those present technological solutions can support this implementation, albeit the need for further advancements);
- To strengthen the Travel Rule by urging those jurisdictions that, as of yet, fell short in implementing legislation in this regard, to do so, and for the FATF jurisdictions to lead by example by promoting implementation, and by sharing experiences and good practices. The report also highlights the importance for both the FATF and the Virtual Asset Contact Group (“VACG”) to promote cross-border implementation by facilitating discussions across jurisdictions on common implementation and good practice. It is also provided that the FATF and VACG should review the implementation progress by June 2023;
- To comply with the FATF Standards, the private sector should strengthen its efforts to facilitate interoperability across Travel Rule technological solutions, and ensure flexibility to accommodate for nuances in domestic requirements; and
- To continue monitoring by the FATF and the VACG on market trends and material developments, including how FATF Standards apply to DeFi and NFTs and the related risks.
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