Regulatory Guidance Issued by FATF: What Comes Next?
In a significant move to combat money laundering in the digital age, the Financial Action Task Force (FATF) has published guidance on regulating virtual asset markets for its 200+ member and observer states. This guidance aims to provide a framework for countries to develop or augment their own regulations for virtual asset service providers (VASPs) and financial institutions (FIs) within their jurisdictions.
The FATF's guidance emphasizes the importance of automated transaction monitoring and customer risk scoring as essential components of an effective Anti-Money Laundering (AML) program. VASPs and FIs are advised to develop risk-based programs, implement Know Your Customer (KYC) and enhanced due diligence processes, transaction monitoring solutions, sanctions compliance systems, clear communication with customers, and file detailed Suspicious Transaction Reports (STRs) where possible.
One of the key aspects of the FATF's guidance is the requirement for VASPs to send originator and beneficiary information to other VASPs or FIs party to transactions exceeding 1000 EUR/USD. This measure aims to help financial intelligence units (FIUs) modernize their Suspicious Transaction Report (STR) forms and investigate the flow of funds in cryptocurrencies more effectively.
The guidance also highlights the importance of international information sharing in mitigating the risk of money laundering. Countries are encouraged to coordinate and ensure that recommendations are compatible with national data protection and privacy rules, while also working towards speeding up information sharing on suspicious activity.
Not all Decentralized Exchanges (DEXs) and Decentralized Applications (DApps) are equal, and the FATF's guidance leaves room for truly decentralized exchanges and applications with no natural person connected to them to be excluded. Anonymity-enhancing cryptocurrencies (AECs) were also highlighted for higher AML risk, and VASPs that cannot mitigate the risk for AECs should not list them.
The FATF will conduct peer reviews of each member's implementation of FATF Recommendations, starting with Japan in October. In countries where cryptocurrency regulation has not been formally rolled out, such as South Africa and Chile, new regulations may be issued before the FATF conducts its mutual evaluations of those countries in the coming months.
In jurisdictions where regulations are already well established, like the United States, stricter enforcement is expected. FIs must not de-risk VASPs or customers active in virtual asset (VA) activities, but should instead apply the risk-based approach and find ways to mitigate risks associated with VA activities.
Our website, KYT, provides automated transaction monitoring and real-time identification of VASP counterparties to assist in implementing Recommendation 16 for cryptocurrencies. It also helps FIs build risk mitigation strategies with respect to virtual assets and investigate the flow of funds in cryptocurrencies. Importantly, our website does not collect personally identifiable information (PII); exchanges are responsible for providing this information.
The FATF's guidance is technically non-binding, but G-20 members have stated they will apply it directly. Secretary Mnuchin of the US Treasury stated that the guidance is 'binding to all countries.' International coordination efforts to reduce regulatory arbitrage are necessary to ensure consistent AML compliance across jurisdictions.
In conclusion, the FATF's guidance on regulating virtual asset markets is a significant step towards combating money laundering in the digital age. We invite comments and ideas from customers in compliance about how technology vendors might help solve the problem of complying with Recommendation 16.
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