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FATF calls for better implementation of its digital asset guidance to combat financial crimes

The Financial Action Task Force (FATF), an intergovernmental anti-money laundering (AML) and counter-terrorist financing (CTF) organization, lamented a poor uptake of its digital asset guidance and appealed to nations around the world to comply with a range of measures, including money transfer rules, regulatory recommendations, and enhanced AML/CTF checks.

The FATF, also known as Groupe d’action financière, is an intergovernmental organization founded in 1989 on the initiative of the G7 to develop policies to combat money laundering. In 2001, its mandate was expanded to include terrorism financing. It has 38 member states, including the U.S., U.K., and China, and according to the organization, over 200 jurisdictions around the world have committed to its recommendations.

After a recent series of meetings in Paris, the FATF published a report titled “Outcomes FATF Plenary, 21-23 June 2023,” outlining the progress and lack thereof on its global AML and CTF efforts over the past year.

Based on “mutual evaluation and follow-up reports,” the FATF concluded that its AML/CTF rules and recommendations related to virtual assets and virtual asset service providers (VASPs) were largely not being followed.

“Almost three quarters of jurisdictions are only partially compliant or not compliant with the FATF’s requirements,” the report said. “Many jurisdictions have not yet implemented fundamental requirements, and more than half of survey respondents have not taken any steps towards implementing the Travel Rule, a key FATF requirement to prevent funds being transferred to sanctioned individuals or entities.”

The so-called “travel rule,” also known as Recommendation 16, specifically targets issues around fund transfers, including information sharing. A 2019 update to the FATF guidelines was extended to include virtual assets and VASPs to address the anonymity associated with illicit digital asset transactions.

The 2019 update also saw ‘Recommendation 15,’ which deals with AML and CTF requirements for new payment methods, extended to virtual assets and VASPs. Amongst the notable obligation of Recommendation 15 are:

– Conducting comprehensive customer due diligence measures.
– Maintaining accurate and up-to-date records of transactions.
– Reporting suspicious transactions or activities related to money laundering or
   terrorist financing to the relevant authorities.

Outside of these obligations, the 2019 update encouraged cooperation and information exchange between nations and recommended that countries regulate and license virtual assets and VASPs to ensure compliance.

In October 2021, the FATF further updated its 2019 guidance, focusing on several key areas, including clarification of digital asset definitions, directions on stablecoins, and additional guidance for the public and private sectors on implementing the “travel rule.”

Despite this extra guidance, it appears that FATF standards are, by and large, still not being met. In its report published Friday, the organization referenced a March 2022 survey, the results of which showed that only 29 out of 98 jurisdictions evaluated had met the necessary criteria outlined in the travel rules. The FATF also lamented the dearth of comprehensive digital asset regulation globally.

“This lack of regulation creates significant loopholes for criminals to exploit. Closing the gaps in global regulation of virtual assets is an urgent priority,” it said.

To this end, the organization said it would publish a report on June 27 urging countries to swiftly implement the FATF’s recommendations on digital currency and VASPs, including the travel rule, and it further committed to publishing a table in the first half of 2024 showing what steps FATF member jurisdictions have taken towards implementing Recommendation 15.

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