Second 12-Month Review of Revised FATF Standards

On the 5th of July 2021, The FATF conducted a 12-month investigation to assess how different countries' jurisdictions and the private sector have adopted the updated requirements, as well as to track whether the market structure of Virtual Assets and VASPs has changed.


The review was primarily concerned with assessing the following three areas:


  1. Money laundering concerns and rising market trends
  2. The public sector's implementation and execution of the updated standards
  3. Private-sector advances and the implementation of a Travel Rule compliance mechanism 

The assessment notes that at a worldwide level, the implementation of anti-money laundering and counter-terrorist funding requirements and laws is still in its early stages. There are two significant challenges:


  1. The technologies of the virtual asset business model find it harder to adhere to AML/CTF standards.
  2. Because AML/CTF regulations are unknown in the sector, virtual asset service providers have substantial problems in executing certain requirements.

The FATF notes in its report that both the public and private sectors have made progress in implementing updated FATF requirements. The new requirements have been applied in 35 of the 54 reporting jurisdictions. VASPs are regulated in 32 of these countries, with three of them outright banning their operation. The other 19 nations have made no steps to incorporate the updated standards into their legal systems.

 

FATF Travel Rule is the Main Focus  

 In terms of VASPs' compliance with the new FATF Standards, the Travel Rule is the most focused on the subject in the paper. Despite this, just ten jurisdictions reported regularly implementing the Travel Rule obligations for VASPs. A total of 14 jurisdictions indicated that they had enacted Travel Rule rules but had not yet implemented them. No countries reported knowing of a VASP that met all of the Travel Rule's requirements. Even though numerous technologies and solutions exist to help VASPs comply with the Travel Rule, compliance remains a challenge owing to the lack of one cohesive technology to deliver it, according to the study.


The lack of worldwide application of the Travel Rule is a key impediment to effective global AML/CFT mitigation, and the updated FATF Standards' efficacy and impact are harmed. For this reason, the FATF has said that one of its main next actions would be to speed up the global adoption of the Travel Rule.



Non-Compliance with FATF Standards

The FATF estimates FATF Standard implementation by a self-evaluation by participating governments; it is not a formal assessment of actual conformity with the FATF Standards. The FATF concluded that no jurisdictions with published reports got a compliant grade after analyzing them using the Mutual Evaluation and Follow-Up Report (MER/FUR) procedure. The majority of jurisdictions earned a partly compliant or higher rating. A non-compliant grade has been assigned to two countries.


The biggest impediment to compliance, according to the FATF, appears to be a lack of action on the part of governments. A third of jurisdictions with FURs/MERs evaluating Recommendation 15 have done nothing or very little to execute the requirements. The remaining two-thirds of jurisdictions have acted but have not completely implemented the rules, such as omitting Travel Rule restrictions.

 

STR, SAR, and VASPs

Thirty-six jurisdictions gave suspicious Transaction Report (STR) data from VASPs in the FATF Report. VASPs submitted 146,704 STRs in 2019 and 2020, according to these 36 jurisdictions. As more VASPs joined the market, understanding of AML/CFT expanded in the sector, and VASPs strengthened their reporting systems, certain jurisdictions noticed an increase in the number of STRs in 2020. A total of 146,704 STRs were recorded, with 55,118 from 2019 and 91,586 from 2020.

 

Market Metrics Transactions

According to data obtained by the FATF from numerous blockchain analysis businesses, the percentage of illegal transactions in peer-to-peer transactions appears to be greater than in VASP transactions. Because of significant variations in the data given by different blockchain analytic firms, the FATF was unable to determine the size of the peer-to-peer sector and its related ML/TF risk with confidence. As a result, there is no obvious indication of a shift toward peer-to-peer transactions, according to the paper.

 

FATF Next Steps

The new FATF Standards, including the Travel Rule requirements, must be implemented as soon as feasible by all countries. The FATF will take the following steps in relation to virtual assets and virtual asset service providers (VASPs). According to the FATF's Second 12-Month Review, the following steps should be performed as a result of the review:


  1. The updated FATF Standards on Virtual Assets and VASPs are being carried through all legal systems.
  2. By June 2021, the FATF will conduct a second assessment and determine if changes to the new standards are required.
  3. The FATF will offer public and national authorities advice on the money laundering and terrorist financing risks associated with virtual assets and VASPs.
  4. The worldwide framework for VASP supervisors will be strengthened, allowing them to collaborate and improve their positions.
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