Among the global anti-money laundering (AML) watchdog’s recommendations, the FATF Travel Rule received a wider attention ever since it became applicable to the cryptocurrency sector. The Travel Rule requires businesses to collect and share the personal data of participants in transactions such as cross-border and domestic wire transfers.
Initially, the Travel Rule or the FATF Recommendation 16 was applicable only to banks. In 2019, the FATF amended the recommendation and brought in crypto companies under its purview. As of now, a small number of jurisdictions have started to incorporate the Travel Rule into their local AML laws. However, many FATF member countries are yet to adopt the recommendation.
It is important for virtual asset service providers (VASPs) and other regulated entities to understand the Travel Rule and the AML compliance obligations involved in it. This article looks to clarify the Travel Rule requirements and suggest how businesses can ensure AML compliance with modern technology solutions.
The FATF Recommendation No. 16 on combating money laundering is commonly referred to as the Travel Rule. The rule requires both financial institutions and VASPs to collect personal data, such as names and account numbers, on participants in transactions exceeding US$/€1,000. As such, these firms need to collect personal information of both senders and recipients in a transaction.
The data to be gathered under the rule are physical address, unique ID number, customer identification number, or date and place of birth. In addition, the rule requires firms to share the collected data on senders and recipients among each other while conducting transactions. Since the data of parties travels along with the transfers, this recommendation by the FATF came to be known as the Travel Rule.
As per the Travel Rule, originators of cryptocurrency transfers must submit the following information to beneficiaries:
Meanwhile, the beneficiaries in a transaction must submit the following information to originators:
In June 2019, the FATF recommended crypto firms to follow the Travel Rule in an effort to curb the increasing abuse of crypto platforms for money laundering. As such, all VASPs including cryptocurrency exchanges, digital wallet providers, and financial institutions that exchange, hold, safe keep, convert and sell virtual assets would need to disclose specific customer data when transacting cryptoassets over a particular threshold.
While the transfer of personal data has been a standard practice for banks and credit unions, it is a new and challenging requirement for crypto companies. The challenge is to build a new communication network that connects various crypto platforms.
The FATF noted that it takes a “technology-neutral approach” and did not suggest a particular technology or software approach that providers should deploy to comply with the rule. “Any technology or software solution is acceptable, so long as it enables the ordering and beneficiary institution (where present in the transaction) to comply with its AML/CFT obligations”, it says in its updated guidance issued in October 2021.
While the Travel Rule will help in enhancing the audit trail for transfers within the crypto industry, reducing the anonymity, the implementation of the rule faces many legal and technological challenges. They include:
In its second 12-month review of the implementation of revised Standards on virtual assets and VASPs, released in June 2021, the FATF noted that most countries have not implemented the Travel Rule. The findings of the review are:
There is no doubt about the use of cryptocurrencies to facilitate money laundering and other financial crimes. The Travel Rule, by removing the obscurity in crypto transactions, looks to reduce financial crimes through the crypto industry.
Crypto firms that are not currently meeting the Travel Rule requirements will be required to do so in the near future. By complying with these rules, the cryptocurrency industry will transition to a new AML/CFT regime which will increase the goodwill for the industry in front of regulators and customers.
If you are a crypto business that is looking to set up an AML compliance programme, reach out to one of our experts.