article FATF GAFI

Travel Rule: the FATF travels to the heart of the VASPs

Last Updated on February 2, 2021 by Talium

Created in 1989, the FATF establishes international recommendations to combat money laundering and terrorist financing. In 2019, the “travel rule” includes the VASPs in the recommendations.

From FATF to the Travel Rule

Creation and ambitions of the FATF

The FATF (Financial Action Task Force) is an international grouping whose aim is to fight against Money Laundering and Terrorist Financing (AML/CFT). At the time of writing, there are 37 member countries, 2 regional organizations and 9 FATF-like bodies that bring together more than 190 jurisdictions worldwide and all pursue the same goal.

Together, they set standards, assess and monitor compliance with established norms, conduct studies on new AML/CFT trends and new threats.

This fight is based on three main criteria:

  • Preventing criminals from operating anonymously or under false identities by accurately establishing the identity of customers and linking legitimate business activities to criminal activities;
  • to keep customer/user identification and records of transactions so that they can be released to any competent authority;
  • report suspicious activities for analysis and possible dissemination to agencies for enforcement.

Although these are only recommendations, members are expected to have laws that effectively combat AML/CFT. These recommendations are used to establish country-specific standards for a collective fight. A country that does not comply with the recommendations would be excluded from the group.

Figure 1: In green, FATF member countries, February 2020, FATF map

The ‘Travel Rule’ from 1996 to the present day

The first concept of a “travel rule” was introduced in May 1996 by FinCEN (Financial Crimes Enforcement Network), an office of the U.S. Treasury Department. Created in 1990, its purpose is the same as that of the FATF. It concerned transactions equal to or greater than $3000 (or equivalent in other countries). Initially, it did not cover electronic transfers, but this quickly evolved.

In 2019, the “travel rule” became known as the crypto-sphere rule after the V20 summit (regrouping VASPs that we define below) that took place at the same time and place as the G20 in Japan. The purpose of the V20 is to apply the FATF rules to the world of virtual assets.

From Travel Rule to VASPs

About the VASPs

VASPs (Virtual Asset Service Providers) are defined in the guide provided by the FATF and include virtual asset service providers.

It is any natural or legal person not already covered elsewhere by the FATF Recommendations and which, as a business, performs one or more of the following activities or operations for or on behalf of another natural or legal person :

  • exchange between virtual assets and fiat currencies;
  • exchange between one or more kinds of virtual assets;
  • transfer of virtual assets;
  • custody and/or administration of virtual assets or instruments to control them;
  • participation in financial services related to the offer and/or sale of a virtual asset by an issuer and the provision of such services.

The original FATF document states:

“Virtual asset” as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations”.

Figure 3: How KYC sharing and transactions among VASPs work

Recommendations applied to VASPs

The FATF issued a public statement on February 22, 2019 on how the Recommendations apply to VASPs, in line with Recommendation 15 and for implementation as early as June 2020.

We summarize those that we believe are most relevant:

  • VASPs should be licensed or registered. At least in the jurisdiction in which they are created (or place of business) or sold. Authorities have the responsibility to prevent criminals or associates from owning or having control over a VASP and to apply sanctions;
  • VASPs must be subject to effective systems for monitoring and enforcing compliance with national AML/CFT requirements. The authority must be able to conduct inspections;
  • sanctions must be effective, proportionate and dissuasive and be applicable to VASPs, their managers and executives;
  • the application of FATF measures 10 to 21 if the transaction is greater than $1,000 or Euros. The originator and beneficiary VASPs must obtain and retain information on originators and beneficiaries, but also make such information available to the authorities upon request. Measures 10 to 21 include, inter alia:
    • not allowing anonymous or pseudonymous accounts. The provider must have a duty of care;
    • the service provider must keep the “necessary documents relating to national and international transactions” for 5 years from the end of the business relationship or the date of the transaction;
    • take into consideration the PEP (Politically Exposed Person) status of the user/consumer, which implies precise rules;
    • the protection by law of managers and employees in case of disclosure of identity following a suspicion of illegal activity (only to the FIU, the Financial Intelligence Unit).
  • Finally, international cooperation is important. It is a matter of allowing the exchange of information between the different VASP supervisory authorities in different countries. This must be done quickly, constructively, and regardless of the nature or status of the authorities, or nomenclature, or status of the VASPs.

The application of these recommendations to VASPs has led to the emergence of the IVMS101 standard by InterVASP, which greatly improves the work of providers by providing a standard language for exchanging this information.

Figure 2: InterVASP IVMS101 Standard White Paper Cover Sheet

Debates raised

The extension of the recommendations to VASPs is only the logical extension of the application of recommendation 15, which deals with new technologies.

This recommendation has made a lot of noise in the world of cryptocurrency, which sees it as an abolition of our private lives.

However, it must be remembered that these rules apply to VASPs (as defined above) in FATF member countries. This does not concern exchanges between individuals.

Therefore, it is requested that this information be transmitted upon request of the authorities, it should not accompany the transaction and will obviously not be present on the blockchain. It is up to the service provider to hold this information and to transmit it to the competent authorities upon request.

An interesting debate took place at the Consensus panel on May 13, 2020 about the “travel rule”. It is a question of a grey market, which would group together assets transferred from regulated and non-regulated regions. Enough to fuel the discussions around the AML-CFT legislation.

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