A Guide to Anti-Money Laundering for Crypto Firms
FATF June 2021 Plenary: Key initiatives and takeaways
The global anti-money laundering and counter-financing of terrorism (AML/CFT) standard setter, the Financial Action Task Force (FATF), held its latest plenary in June 2021. The plenary brought together the FATF and its members to discuss how to make the fight against illicit financial flows more effective.
In time, this will be implemented at the national level by policy makers, requiring firms, which are subject to supervision by regulators, to comply with changes. At the plenary, the FATF discussed new technologies for AML/CFT, virtual assets, proliferation financing and beneficial ownership standards, which are explored below, among other issues such as environmental crimes and ethnically or racially motivated terrorism financing (EoRMTF). The FATF also added four new jurisdictions – Haiti, Malta, the Philippines and South Sudan – to its ‘grey’ (Jurisdictions under Increased Monitoring) list and removed Ghana.
Firms regulated for AML/CFT should look to FATF plenary meetings and accompanying documentation to assist with horizon planning, to update policies, risk indicators, and procedures as appropriate, and to identify how new initiatives and innovations being brought into their firms could be enhanced by following guidance and reports issued by the FATF.
Opportunities and challenges of new technologies for AML/CFT
The FATF discussed the use of new technologies for AML/CFT and issued two new reports on new technologies and data. These reports recognize that new technologies can yield lower costs, support portability and interoperability across multiple institutions and transactions, and reduce human error while leading to a better customer experience and multiple uses of verified ID.
By adopting a risk-based approach, firms can assess risks in a more comprehensive, timely and accurate manner while also addressing financial inclusion concerns. The report provides an overview of measures that should be in place for technologies to improve “the efficiency and effectiveness of AML/CFT” and obstacles to this. The FATF highlights that the interpretability and explainability of new technology is key, as is the need for a “technology active” supervisor. Safeguards for new AML/CFT solutions should include oversight by humans, respect for data protection, cybersecurity and a commitment to operate in line with international technical standards. The report also provides examples of how new technologies can support AML/CFT effectiveness, including digital identity solutions, natural language processing (NLP), artificial intelligence and machine learning (AI/ML), Application Programming Interfaces (APIs), and Distributed Ledger Technology (DLT). The FATF’s report on data pooling, analytics and protection recognizes the ability of firms to more efficiently identify trends and patterns using big data and calls for the adoption of privacy enhancing technologies.
Firms around the world are at different stages of technological innovation. Any firm that uses a technology solution or is considering introducing innovative technology into their AML/CFT operations should review these documents to ensure that they consider both potential pitfalls and solutions for managing the challenges identified by the FATF. Compliance and financial crime prevention officers should also be aware of and understand the types of technologies that are available for AML/CFT and how they could be used to enhance their own AML/CFT programmes.
Virtual Assets: Second 12-month implementation review
The FATF also reported on the second 12-month implementation review of virtual assets. The review was carried out to look at:
- The implementation of updated FATF standards on virtual assets
- The status of technological development to support Travel Rule requirements, which state that financial transfers must contain originator and beneficiary information
- Whether the adopted definition of virtual asset service providers (VASPs) needed to be updated
To date, only 58 jurisdictions have introduced regulations that implement the revised standards, which could lead to regulatory arbitrage. Six have banned VASPs from operating in their jurisdictions and 15 countries have introduced Travel Rule requirements. The FATF highlighted that different technology solutions are being launched or tested, some of which will be integrated into the systems of VASPs while others could be used by multiple VASPs. The FATF concluded that there is no global framework for Travel Rule compliance and there are inadequate safeguards to prevent VASPs from being exploited by criminals. Potential future actions identified include mitigating risks linked to ransomware-related virtual assets and on-going monitoring of peer-to-peer transactions. For the moment, however, the FATF definition of VASPs will remain as is.
The FATF will issue updated guidance to its Risk-Based Approach to Virtual Assets in November 2021. VASPs/crypto firms and firms looking to work with VASPs/crypto firms should study the guidance to understand risks and controls and update their policies, processes and systems with risk indicators provided by the FATF. VASPs/crypto firms should also look to engage with the FATF’s Virtual Assets Contact Group to ensure that their views are considered as regulation is being developed and refined that could affect how their firms operate.
Guidance on Proliferation Financing
The FATF issued guidance on proliferation financing to identify and manage proliferation financing risks. The guidance specifically highlights that proliferation financing risks are linked to persons and entities sanctioned under the United Nations Security Council Iran and DPRK (North Korea) proliferation sanctions. It lists examples of legal activities that could be exploited to circumvent sanctions, such as trading in dual-use goods and goods or natural resources subject to export controls. Illegal activities that could also support the circumvention of sanctions include the smuggling of high-value goods, gold, cash, drugs, arms and natural resources such as sand. The FATF provides a list of indicators that could indicate potential breach or non-compliance of proliferation financing sanctions as well as sources that a firm should take into consideration as part of a risk assessment.
Firms should review this document to update their business-wide risk assessments to understand proliferation financing risks as required by the updated FATF standards.
Strengthening FATF standards on beneficial ownership
The FATF also highlighted that beneficial ownership was discussed at the G7 Summit where leaders pledged to enhance standards to prevent the abuse of company structures. To address this, it launched a consultation closing on 27 August 2021 to determine how to improve gathering information on beneficial ownership. Areas for consideration include adopting a risk-based approach to determine which foreign legal persons should disclose beneficial ownership information, developing a multi-pronged approach to collecting beneficial ownership beyond registries, for example, beneficial ownership information held by regulated firms, how to maintain adequate, accurate and up-to-date information and how to address bearer share and nominee shareholdings. Firms should remain aware of potential changes and consider engaging in the consultation given the potential impact on requirements around regulated firms maintaining and making available beneficial ownership information. The findings of the consultation will be discussed at the next FATF plenary in October 2021.
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Originally published August 23, 2021, updated May 4, 2022
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
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