FATF issues guidance for virtual currencies

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fatf

The Financial Action Task Force (FATF) issued a “Guidance for a Risk-Based Approach for Virtual Currencies (VCs)” on the 26th June. FATF is an intergovernmental organisation that mainly issues policy recommendations in the areas of anti money-laundering (AML) and counter-terrorism-financing (CTF). As such, it has now released how the risk-based approach (RBA) should now be applied to AML/CTF in the context of VCs.

The guidance laid out stem from the original FATF Recommendations on the International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (the Recommendations). From these, 8 individual Recommendations applicable to countries and competent authorities were singled out in relation to virtual currencies. Moreover, the FATF further singled out 7 Recommendations applicable to covered entities for virtual currencies.

 

Recommendation No. Application of FATF Standards to countries and competent authorities
Recommendation 1
  • AML/CTF should have enhanced requirements for high-risk activities such as the conversion of VCs to fiat currency.
  • This is due to the relative anonymity of users
  • As a result, VC exchanges should be subject to AML/CTF regulation
Recommendation 2
  • Governments and institutions should be cooperating to establish effective AML/CTF policies
  • At the same time, the FATF also stated that short-term and long-term policies should be devised for non-AML/CTF aspect such as “consumer protection, safety and soundness, insurance, network security, tax compliance”.
  • The main suggestion is that there should a harmonisation of AML/CTF policies and non-AML/CTF policies between countries.
Recommendation 14
  • The FATF stated that countries should “register or license natural or legal persons that provide MVTS in the country” and that this should apply to Virtual Currency Providers of products and Services (VCPPS)
  • At the same time, they should comply with all AML/CTF regulation even those enhanced for VCs
Recommendation 15
  • New technologies and business models should be assessed in terms of their ML/TF risks.
  • The assessment should be carried out by payment institutions and should be done before they implement either new products or business practices
Recommendation 16
  • Wire transfers require (a) originator and (b) beneficiary information.
  • The de minimis threshold for this is to be no higher than USD/EUR 1,000
Recommendation 26
  • VC exchanges “which act as nodes where convertible VC activities intersect with the regulated fiat currency financial system”
  • This means that they should be subject to both regulation and supervision in their local jurisdictions
  • In regulating and supervising VC exchangers, countries should also take a formal approach by amending current legal frameworks aimed at enhancing the effectiveness of AML/CTF practices of decentralised VC payment mechanisms
Recommendation 35
  • Sanctions (i.e. criminal, civil and administrative) should be applied for those companies and individuals who do not comply with AML/CTF regulations
  • Because of identity verification issues that the blockchain and transactions have, countries should therefore implement:
  1. Licensing or registration of VC-exchangers
  2. Application of customer identification/verification
  3. Recordkeeping
Recommendation 40
  • Countries should engage in cross-border cooperation in the following instances and cases:
  1. Mutual legal assistance
  2. Help identifying, freezing, seizing and confiscating proceeds and instrumentalities of crime that may take the form of VC
  3. effective extradition assistance in the context of virtual currency related crimes

 

 

Recommendation No. Application of FATF Standards to covered entities
Recommendation 1
  • Financial Institutions and Designated non-financial businesses and professions (DNFBP) should “identify, assess, and take effective action to mitigate their ML/TF risks” (e.g. identify and verify customers).
  • DNFBP’s should also assess the ML/TF risks posed by VC activities and apply a RBA
Recommendation 10
  • Customer Due Diligence (CDD) to be implemented by VC exchangers in specific circumstances (e.g. one off fiat-to-VC or vice versa transaction of more than USD/EUR 15,000 or occasional transactions made via wire transfer) such as:
  1. Corroborate customer identity information (e.g. national ID number)
  2. Track customer IP address
  3. Perform a Web search to verify consistency of information
Recommendation 11-20-22
  • Record Keeping and Suspicious Activity Reporting (SAR) should be carried out for VC transactions, thus including:
  1. Information to identify the parties
  2. Public keys, addresses or accounts involved
  3. Nature and date of the transaction, and
  4. Amount transferred.
  • The information available through the blockchain can be used as a starting point to identify customers
  • These requirements are applicable to both Financial Institutions and DNFBPs
Recommendation 14
  • The FATF stated that countries should “register or license natural or legal persons that provide MVTS in the country” and that this should apply to Virtual Currency Providers of products and Services (VCPPS)
  • At the same time, they should comply with all AML/CTF regulation even those enhanced for VCs
Recommendation 15-22
  • New technologies and business models should be assessed in terms of their ML/TF risks.
  • The assessment should be carried out by payment institutions and should be done before they implement either new products or business practices