On July 5, 2021, the Financial Action Task Force (FATF) completed its second 12-month review of the implementation of its revised Standards on virtual assets and virtual asset service providers. This review looks at how jurisdictions and the private sector have implemented the revised Standards since the FATF’s first 12-month review.
The FATF’s first 12-month review report found that, overall, both the public and private sectors had made progress in implementing the revised FATF Standards, however, substantial work remained for the revised FATF Standards to be effectively implemented globally. As such, this second 12-month review focuses on the continued implementation of the FATF Standards.
While the second 12-month review reveals progress has been made in the implementation of the Revised FATF Standards, after two years many jurisdictions still do not have the basic regulatory framework for VASPs. The FATF covers more than 200 countries and jurisdictions, however, less than half (45%) of the 128 reporting jurisdictions reported that they have passed the necessary laws/regulations to permit or prohibit VASPs.
The number of jurisdictions whose AML/CFT regime for VASPs is actually operational is even lower. Most jurisdictions and most VASPs are not complying with the travel rule with only 10 jurisdictions reporting that they have implemented and are enforcing Travel Rule requirements for VASPs.
It is assumed that the majority of jurisdictions that did not provide a response to the FATF in this report have made even less progress in the implementation of the Revised FATF Standards.
FATF Travel Rule Takes Center Stage
The Travel Rule is the most focused on issue in terms of VASPs’ compliance with the revised FATF Standards. Yet only 10 jurisdictions reported that they are actively enforcing Travel Rule requirements for VASPs. An additional 14 jurisdictions reported that they have introduced Travel Rule regulations but were not yet enforced the requirements. No jurisdictions reported being aware of any What is a Virtual Asset Service Provider (VASP)? A Virtual A... More that fully complied with all elements of the Travel Rule.
There are various technologies and tools available that enable VASPs to comply with the Travel Rule, yet compliance with the Travel Rule continues to be reported as challenging due to “the lack of one unified technology to support it,” according to the FATF report.
Since FATF’s first 12-Month Review, there has been significant progress in Travel Rule technology development. Several standards and protocols—such as the Travel Rule Information Sharing Architecture (TRISA)—can now help enable interoperability between solutions and, when enhanced by blockchain analysis tools such as in CipherTrace Traveler, can also safely identify VASPs to exchange Travel Rule data.
The lack of Travel Rule implementation globally is a major obstacle to effective global AML/CFT mitigation and undermines the effectiveness and impact of the revised FATF Standards. For this, the FATF has indicated that one of its major next steps will be to accelerate the implementation of the Travel Rule globally.
How Jurisdictions Have Implemented the Revised FATF Standards
The report finds that many jurisdictions have continued to make progress in implementing the revised FATF Standards. Out of the 128 reporting jurisdictions that responded to the FATF’s questionnaire—triple the number that responded to the first 12-month review—52 jurisdictions claimed to now regulate VASPs, 6 jurisdictions prohibit the operation of VASPs, and the other 70 jurisdictions have not yet implemented the revised Standards in their national law. These gaps in implementation mean that there is not yet a global regime to prevent the misuse of virtual assets and VASPs for money laundering or terrorist financing.
For context, in the last 12-month review, 32 jurisdictions reported having existing regulations for Virtual Asset Service Providers, 13 jurisdictions reported having regulations in development, and 5 jurisdictions indicated the prohibition or potential near future prohibition of VASPs. The increase in jurisdictions that now regulate VASPs suggests that significant progress has been made, however global implementation still has very large gaps that need to be addressed.
Only 35 of the 58 jurisdictions that claimed to now regulate or prohibit VASPs reported that their regime was currently operational.
For jurisdictions that have yet to prohibit or regulate VASPs, 26 jurisdictions reported that they were in the process of passing the necessary legislation in order to regulate or prohibit VASPs;
12 jurisdictions reported that they had already decided which approach they intended to take on VASPs but had not yet commenced the necessary legislative/regulatory process; and 32 jurisdictions reported that they had not yet decided what approach to take for VASPs.
Of the 52 jurisdictions that reported that they have established regulatory regimes permitting VASPs, only 36 of these jurisdictions advised that they have commenced licensing and registering of VASPs. Only 32 reported jurisdictions have extended their regime to included VASPs incorporated overseas but which offer products/services to customers in their jurisdiction. In total, these jurisdictions have reported that they have so far licensed or registered 2,374 VASPs—more than double the reported number of registered/licensed VASPs recorded in the first 12-month review.
Non-Compliance with FATF Standards
The FATF calculates implementation of FATF Standards through a self-assessment by participating jurisdictions and is not an official assessment of the level of actual compliance with the FATF Standards. By assessing jurisdictions through the Mutual Evaluation and Follow-Up Report (MER/FUR) process, the FATF found that no jurisdictions with published reports have received a compliant (C) rating. Most jurisdictions have received a partially compliant (PC) rating or above. Two jurisdictions have been assessed as having a non-compliant (NC) rating.
According to the FATF, the main barrier to compliance appears to be a lack of action by jurisdictions. A third of jurisdictions with FURs/MERs assessing Recommendation 15 have taken no or minimal action to implement the requirements. The other two thirds of jurisdictions have taken action, but have not implemented the requirements fully—such as omitting Travel Rule regulations.
Suspicious Transaction Reporting (STR)/Suspicious Activity Reporting (SAR) and VASPs
In the FATF Report, 36 jurisdictions provided A Suspicious Transaction Report (STR) is a document that fin... More data from VASPs. According to these 36 jurisdictions, VASPs had filed 146,704 STRs between 2019 and 2020. Some jurisdictions noted that they had noted an increasing number of STRs in 2020 as more VASPs entered the market, knowledge of AML/CFT grew in the sector, and VASPs developed their reporting systems. Of the 146,704 STRs reported, 55,118 were from 2019 and 91,586 were from 2020.
Market Metrics on Peer-to-Peer Transactions
Data collected by the FATF from several A blockchain—the technology underlying bitcoin and other c... More analysis companies, including CipherTrace, indicates the share of illicit transactions appears higher for peer-to-peer transactions than in transactions with VASPs. There were substantial differences in the data provided by the different blockchain analytic companies resulting in the FATF being unable to assess with certainty the size of the peer-to-peer sector and its associated ML/TF risk. The report therefore does not find clear evidence of a shift towards peer-to-peer transactions.
The inconsistency of results from blockchain analytics companies is indicative of inconsistent definitions, double counting and data quality issues.
FATF Next Steps for Crypto AML/CFT Compliance
All jurisdictions need to implement the revised FATF Standards, including Travel Rule requirements, as quickly as possible. The FATF will undertake the following actions focused on virtual assets and VASPs. According to the Second 12-Month Review, the FATF’s next steps will be to:
- accelerate the implementation of the Travel Rule;
- finalizing the revised FATF Guidance on virtual assets and VASPs by November 2021; and
- monitor the virtual asset and VASP sector, but not further revise the FATF Standards at this point in time (except to make a technical amendment regarding proliferation financing).
FATF’s full report can be accessed here: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/second-12-month-review-virtual-assets-vasps.html