TRM Talks: FATF Travel Rule Implementation

TRM Insights
TRM Talks: FATF Travel Rule Implementation

TRM Talks: FATF Travel Rule Implementation 

At the end of June, the Financial Action Task Force released its fourth “Targeted Update on Implementation of FATF’s Standards on VAs and VASPs.” The report surveyed 151 jurisdictions to find out what they have done to comply with the FATF Recommendations on virtual assets. With the results now in, we see that many are not doing enough. According to FATF, 75% of jurisdictions that have made changes to their regimes have only done so to a partially or non-compliant extent, while only half of countries have brought in changes to accommodate the Travel Rule. 

To pull out the key learnings from the report, TRM sat down with Lana Schwartzman, Head of Regulatory and Compliance and Catarina Veloso Senior Associate for regulatory compliance at Notabene.

What do you need to know from the report?

The report covers all aspects of FATF Recommendation 15 implementation by countries and the private sector. According to Ms. Schwartzman, the report provided some important clarifications on the Travel Rule, such as:

  • Counterparty VASP due diligence must be carried out independently. This means VASPs have to verify the information they get from other VASPs and not just rely on a third party 
  • Domestic VASPs must only transact with Travel Rule-compliant VASPs or use other mitigating measures 
  • The Travel Rule is a pre-transactional requirement 

The report also highlighted the difficulties faced by countries in assessing risk, creating effective licensing and supervisory structures and dealing with new and emerging risks such as DeFi, peer-to-peer transactions and unhosted wallets. For TRM Senior Policy Advisor for the UK and EMEA Isabella Chase two of the most important takeaways were first, the finding that total prohibitions on crypto assets don’t effectively prevent risk and second, that countries struggle to assess the risks of the sector despite the quantity of public data being available on transactions. 

Overwhelmingly, however, the report covered FATF’s frustration with the slow implementation of the Travel Rule.

Why has Travel Rule implementation been so slow?

 According to Ms. Veloso from Notabene there are myriad factors beginning with the classic issue of “no one wants to be first.” As she explained, if jurisdiction A implements the travel Rule but its counterparty VASPs are based in other jurisdictions that haven’t yet implemented, then none of the VASPs in jurisdiction A can be considered Travel Rule-compliant. Effectively, jurisdiction A’s sole means of ensuring compliance is by only transacting with domestic counterparties. “We get stuck in a vicious cycle. No one wants to move first because moving first is more complicated.” 

Another big blocker to implementation is operational for VASPs. Issues might include identification of entity type or returning funds when Travel Rule information is incomplete.

How can the prominent challenges of implementation, interoperability and counterparty VASP due diligence be overcome? 

First, the FATF report provides a set of questions that entities should ask themselves before starting off on their compliance journey and selecting a Travel Rule solution. Ms. Schwartzman highlighted, it’s important to see the Travel Rule as an opportunity, rather than a check-the-box exercise.

 “For the first time ever, we in the crypto industry have the opportunity to do something pre-transaction before it occurs on the blockchain to reduce overall risk exposure.”
The discussion also covered other prominent challenges highlighted by the FATF report, such as varying requirements between jurisdictions, interoperability and counterparty VASP due diligence. 

On differences in rules, according to Ms. Schwartzman, Notabene’s solution embeds jurisdictional differences, doing the work for compliance officers in understanding where rules require different levels of information. On interoperability, Notabene offers a gateway for VASPs to transfer information, with 86% of Notabene users being able to “reach” their counterparty. And lastly, on counterparty VASP due diligence, TRM’s Know Your VASP tool should supply users with the information needed to be confident that they know who they are exchanging information with. 

What’s next from FATF? 

One of the big announcements in FATF’s report was that in the first half of 2024 the standard setter will publish a table of FATF members and other countries with significant virtual asset sectors. The table will provide information on what each country has done to comply with FATF standards on virtual assets. This list will be useful for both countries and entities trying to implement the Travel Rule.

More broadly FATF will be working hard to ensure that implementation of its standards accelerates over the next 12-months. We asked Notabene where they thought implementation would be in 12 months’ time. The general feeling was positive, with major crypto-hubs such as the UK, Singapore and Hong Kong having rules fully implemented and the EU not far behind with their rules coming in December 2024. With these countries we will perhaps finally get to a critical mass of jurisdictions to overcome the first mover anxiety that has prohibited wider implementation to date. 

For more on travel rule compliance and illicit finance risks check out Notabene’s report here and TRM’s Illicit Finance Ecosystem Report here.

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