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FATF 12 Month Review on Virtual Assets and Virtual Asset Service Providers

The Financial Action Task Force (FATF), known as the pioneering intergovernmental organisation for the development of global Anti Money Laundering and Terrorism Financing (AML/CFT) standards, released its second 12-month review of virtual assets in July of this year.


The report provides historical market performance research on key trends in virtual asset trading based on blockchain analysis and provides detailed and updated recommendations for Virtual Asset Service Providers (VASP) on how to treat Virtual Assets under a diligent compliance framework. The following is a summary of the three key points of our FATF survey.


  1. Blockchain analysis shows that there is currently no need to change the FATF standard to cover peer-to-peer (P2P) transactions.


VASPs need to understand the risks associated with P2P transmission, asFATF seeks to know whether it should fundamentally change its standards to take into account the specific characteristics of virtual assets.


The FATF suggested that it may need to change its standards to allow direct supervision of P2P virtual asset transactions. In its new report, FATF asked whether it should now make such a fundamental revision of its standards.


FATF commissioned a market performance study to assess the extent of P2P activities in virtual assets and the risks involved. The research looks at five-year transactions of Bitcoin, Ethereum and Tether (the three largest virtual assets).


The FATF’s scientific conclusions are clear: There is currently insufficient evidence to show that FATF needs to modify its standards to directly address P2P transactions. VASP is still an important part of the virtual asset ecosystem, which shows that supervisory intermediary is still the best method currently.


Moreover, there is no clear evidence that criminals rely more on P2P transactions than the blockchain analysis data used in the research, which indicates that the proportion of citizens involved in complete P2P transactions is slightly higher than that of transactions using VASP. There is no evidence that this situation is getting worse.


Some personal data indicate that even if criminals use unofficial intermediate wallets, they still spend more than 80% of their time collecting illegal Bitcoin proceeds through VASP. Therefore, the policy for P2P transactions is not appropriate, because VASP may submit suspicious activity reports on funds processed by them through intermediary wallets.


  1. Many countries have not implemented FATF standards for virtual assets, which continuously impacts the l AML/CFT and compliance landscape globally. Thereby, there is an urgent need for high risk countries to implement the necessary regulations and protocols to ensure compliance with FATF standards.


The FATF study found that the number of countries implementing virtual asset standards has doubled in the past year (58 today, compared to 33 countries in July 2020), and the number of countries opposing actions against companies that violate this standard (currently 18 compared with 8 countries/regions in July 2020).


According to the FATF survey, 70 of the 128 countries surveyed have not yet implemented AML/CFT requirements in the field of virtual assets.


The FATF reports highlights that “the revised FATF standard has not yet been fully implemented and cannot enable the global AML/CFT system for virtual assets and VASP”. This gap in the international context provides opportunities for criminals.


As pointed out in the report, “Some VASPs are using this to conduct business in jurisdictions that do not have effective supervision on financial crimes on a larger sphere, or expand to multiple jurisdictions and provide extremely weak or no AML/CFT regulations. Rogue actors use weak CDD and detection processes in these VASPs for ML/TF purposes. Other research supports these results.


As FATF further pointed out, this is of great significance to the international AML/CFT standards: “VASPs with weak or non-existent AML/CFT plans are still one of the main virtual asset risks. The speed at which VASP establishes or migrates businesses around the world.”


This means that jurisdictions that do not take action may become “safe havens” for unregulated VASPs. Bridging this gap will be the FATF’s top priority next year and intends to issue updated guidelines by November 2021 so that countries can speed up implementation Standards.


At the same time, regulated VASPs and financial institutions (FIs) need to be vigilant against major risks. In jurisdictions without virtual asset regulation, you may face unregulated VASPs.


  1. The private sector continues to promote travel rules, but needs to speed up implementation and decision-making.


The FATF report highlights another crucial development: the private sector has made significant progress in implementing travel regulations. Successfully developing technical solutions to ensure compliance with travel regulations.


According to the report, “since July 2020, travel rules technology seems to have made more progress”.


Despite the above,, the FATF review pointed to a major problem: the private sector’s compliance with travel policies remains fragmented and inconsistent, precisely because many governments around the world have not yet enforced it.


Accordingly, not all governments apply travel rules at the same time, which means that not all VASPs have implemented available solutions. According to the FATF: “Two years after the FATF revised its standards, most jurisdictions’ travel regulations have not yet been implemented.”


This prevents the private sector from obtaining the technical solutions and compliance infrastructure required to comply with travel regulations. In the guidelines formulated for November 2021, FATF intends to help countries implement travel rules more urgently.


Although governments around the world clearly need to adopt travel regulations more widely, VASP should not delay the implementation of the solution. VASPs in some countries, such as Singapore and the United States, are already facing travel regulations as it is now required for them  to comply with these regulations.


In addition the FATF report points out that virtual assets will remain the main international AML/CFT priority for some time to come, and the implementation of its standards should continue and improve.


The updated FATF guidelines will be released in November, as it now becomes a diligent duty for VASPs to take immediate actions to ensure meeting the global standards required in fighting financial crimes.

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