FATF Travel Rule

What is FATF Travel Rule? 

The Financial Action Task Force (FATF) released Recommendation 16 also known as the “Travel Rule”. The FATF is an organization that develops policies to prevent money laundering and block terrorist financing. 

The Travel Rule requires financial institutions and cryptocurrency companies, otherwise known as Virtual Asset Service Providers (VASPs), to collect personal data on participants exceeding 1,000 USD/EUR in transaction value. It also recommends countries to ensure that VASPS share information of the originator and the beneficiary to their counterparties.  

Who are subject to FATF Travel Rule? 

Currently, this FATF Recommendation only covers VASP-to-VASP transfers, while VASP-to-private wallets are not yet part of this rule. But who are VASPs? 

Virtual Asset Service Providers or more commonly known as VASPs are businesses or companies that facilitate the exchange of virtual assets. It broadly constitutes crypto exchanges, digital wallet providers, and those who participate in the provision of financial services relating to an issuer’s offer or sale of virtual assets. Decentralized Exchanges (DEX) and Decentralized Finance (DeFi) platforms are also considered to be VASPs. 

Why is it important? 

Since the intention of the FATF Travel Rule is to share information between VASPS, its aim is that it becomes easier for these entities to easily: 

  • Identify and prevent payments to sanctioned individuals, entities, countries, and wallet addresses 
  • Block terrorist financing especially with the use of VASP services 
  • Detect suspicious users 
  • Prevent money laundering and avoid fraud 

Recent updates for Travel Rule 

The FATF published outcomes of its plenary meeting that happened from 14 to 17 June 2022. In the recent discussions, FATF has updates on the implementation of the FATF standards to prevent misuse of virtual assets and VASPs for financial crime. It has also been mentioned that a report will be published at the end of June that will focus on Travel Rule implementation, stressing the urgent need to enforce it. 

While FATF has recently published its plenary summary discussions, the EU has made public the proposal for the Transfer of Funds Regulation (TFR) which aims to become the legislative package that will require crypto asset service providers (CASPs) to support each transfer of funds with the originators’ and beneficiaries’ information (the final text hasn’t been published). Peer-to-peer transactions are still out of scope, however with the recent updates, the previously proposed threshold of 1,000 EUR for CASPs transactions have been removed. Traceability is now required for all transactions regardless of amount!  Further, when conducting transactions with unhosted wallets, CASPs are required to verify the identity of the respective beneficial owner, and CASPs are obliged to report incoming transactions from unhosted wallets above 1,000 EUR to competent authorities. This updated TFR will be applied 18 months after being entered into force most likely by end of 2022 or early 2023. 

CASP Due Diligence, CASPs will need to assess the risk of their CASP counterparties, both EU and non-EU based entities, and won’t be able to do any business with another CASP mentioned on a, to be published, EU CASP list. 

Regarding unhosted wallets, CASPs must assess the financial crime risks in all transactions with unhosted wallets by identifying the source of funds and determining appropriate due diligence measures. CASPs will be required to take steps to ensure the unhosted wallet is controlled by their customer for transactions over EUR 1,000.00 

As EU has updates on TFR, UK’s Her Majesty’s Treasury (HMT) also published their response to this topic. From the initially suggested threshold of 1,000 GBP it has been updated to be measured in euros and has been therefore set at 1,000 EUR in line with FATF’s standard. For transfers below 1,000 EUR, only names and accounts (of both parties) are required by the HMT while for transfers where all service providers are within the UK, only the accounts of the parties are needed. Meanwhile, for unhosted (or cold) wallets, such information only need be collected for high-risk transfers. A 12-month grace period from 1 September 2022 to 1 September 2023 has been given by UK HMT to implement this Travel Rule. 

VAF Compliance & Travel Rule 

VASPs & CASPs are struggling to understand on how to fully comply with the FATF Travel Rule even with the help of available blockchain analytic tools as of now. These tools are continuously being improved to ensure that it will be able to handle the requirements of the VASPs and CASPs. 

At VAF Compliance, we analyze and summarize the currently available information from these various blockchain analytic tools. Our reports include certain data which can be used to fulfill your institutions travel rule requirements. 

To know more about our products and services, please reach out to us by email or contact us directly on linkedin.

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