FATF February 2024 Meeting: Leveraging Digital Transformation to Tackle AML/CFT Risks in Virtual Assets

Recommendation15 and its Interpretive Note

In October 2018, the Financial Action Task Force (FATF) made revisions to its Recommendations, explicitly stating their applicability to financial activities involving virtual assets. Two new definitions, "virtual asset" (VA) and "virtual asset service provider" (VASP), were added to the Glossary. The updated FATF Recommendation 15 mandates the regulation of VASPs for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes. It requires VASPs to be licensed or registered and subject to effective monitoring or supervision.

FATF introduced an Interpretive Note to Recommendation 15 (INR. 15) in June 2019, providing further clarity on how its requirements should be applied to VAs and VASPs. This encompasses the risk-based approach to VA activities, supervision of VASPs for AML/CFT purposes, licensing or registration, preventive measures such as customer due diligence, recordkeeping, suspicious transaction reporting, sanctions, enforcement measures, and international cooperation.

INR. 15 establishes binding measures for countries and virtual asset service providers to create a level playing field in the virtual asset ecosystem. Obligations include assessing and mitigating risks associated with virtual asset activities, licensing or registering service providers, subjecting them to supervision by national authorities, implementing sanctions for non-compliance with AML/CFT obligations, and emphasizing international cooperation.

Some countries may choose to prohibit virtual asset activities based on their risk assessment or policy goals. INR. 15 also mandates that service providers assess and mitigate money laundering and terrorist financing risks, implementing AML/CFT preventive measures in line with FATF Recommendations, and ensuring compatibility with Data Protection and Privacy rules.

Current Status of FATF R.15 Implementation

Implementation progress of FATF's requirements on VAs and VASPs (R.15 and INR.15) remains limited. As of April 2023, FATF and its FATF Style Regional Bodies (FSRBs) assessed compliance in 98 jurisdictions. A majority (75%) show partial or no compliance. Jurisdictions continue to struggle with fundamental requirements, with over one-third of respondents in a March 2023 survey (52 of 151) not conducting a risk assessment.

As of February 2024, the Travel Rule implementation remains uneven globally. While some jurisdictions have made progress, many still face significant challenges. FATF urges jurisdictions to accelerate implementation and encourages collaboration to overcome technical hurdles and address concerns.

R.15 Implementation Roadmap: Upcoming Actions

Aligned with the Roadmap for R.15 implementation improvement, FATF and Virtual Assets Contact Group (VACG) will persist in outreach and assistance to low-capacity jurisdictions. Actions include using FATF's online platforms for material sharing, providing technical assistance in challenging areas, organizing forums, workshops, or webinars, and collaborating with international partners.

In the first half of 2024, FATF plans to publish a progress table and produce a Targeted Update report on jurisdictions' R.15 implementation. Monitoring the virtual asset ecosystem and engaging with the private sector will continue, with a focus on emerging risks like DeFi and P2P transactions.

To ensure relevance amidst rapid changes, FATF and VACG will monitor market developments, including activities by sanctioned actors. Findings, experiences, challenges, and leading practices will be shared among VACG members and the broader FATF global network.

The February 2024 FATF Plenary underscored the importance of leveraging digital transformation to tackle AML/CFT risks in virtual assets. The primary objectives of R.15 and INR.15 are to establish binding measures for countries and VASPs, create a level playing field across the virtual asset ecosystem, and enhance transparency. However, challenges remain, including jurisdictional differences, the implementation of the Travel Rule, and uneven global implementation. To address these challenges, FATF continues to urge jurisdictions to accelerate implementation and enhance cooperation in the fight against financial crime and terrorism financing.