Does FATF get tough on crypto-companies?

26 February 2019

In October 2018, the Financial Action Task Force (FATF) provided a definition of “virtual assets” and promised the issue of guidance in June 2019 on how to treat them.

Last week, at their February Plenary in Paris, FATF drafted an “Interpretive Note” to FATF Recommendation 15, which gives a strong indication of what such guidance will look like.

“Recognising the need to adequately mitigate the money laundering and terrorist financing risks associated with virtual asset activities, the FATF is setting out more detailed implementation requirements for effective regulation and supervision/monitoring of virtual asset service providers.”

The Interpretive Note introduces eight new provisions which will impact both on relevant authorities and obliged entities.

Identifying risk

Countries must identify the risks associated with virtual assets and their service providers (“VASPs”.) For this purpose, a risk-based approach to combating identified AML/CFT risks must apply.

Monitoring & supervision

Countries must ensure that VASPs are appropriately regulated and supervised in line with the current recommendations.

Further, supervisors and monitors should have the power to impose sanctions if they find VASPs breaching compliance standards. Analogously, directors and the senior management of said VASPs must be subject to such punitive measures.

Sharing of information

FATF urges all competent authorities to have provisions in place for the rapid exchange of information between authorities on VASPs. This request is not subject to the various statuses and nomenclatures applied to VASPs in different jurisdictions.

What does it mean for crypto-businesses?

The number of countries in which crypto-businesses are regulated will raise in the next future, and the success of the licensing process will depend, among other things, on the applicant’s compliance with national AML/CTF requirements (e.g. PEP screening, identification of high-risk third countries or high-risk sectors, reporting suspicious activity, ….)

In the case of transactions over EUR/USD 1,000, the “Interpretative Note” introduces an obligation to obtain and hold detailed information on both the sender and the beneficiary of a transaction.

Shortly, FATF aims to remove anonymity and lack of supervision from the crypto-sphere. In any case, FATF will consult on these points in May. If lawmakers transpose the “Interpretative Note” into domestic legislation, many crypto-businesses will likely find themselves as regulated as a traditional bank.

What else happened at the FATF Plenary?

  • FATF added Cambodia to its grey-list of countries with “strategic deficiencies” in AML/CTF controls. At present, Cambodian entities (both legal and natural persons) must be considered at high-risk, and Enhanced Due Diligence measure should be applied to them.
  • Despite its efforts to be removed, Pakistan remained on the FATF grey-list.
  • FATF gave a six-month extension to Iran on its action plan. The Irani government has not addressed six points of it and, upon the expiry of the moratorium, severe further countermeasures can be taken against the country.
  • In April, FATF will release full Mutual Evaluation Reports for China and Finland.

This article should not be construed as a recommendation, endorsement, opinion or approval of any kind. It has been written for information only and should not be relied on for legal purposes. Professional advice should always be sought before taking action based on the information provided.

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