Implementation of FATF’s Travel Rule

In late June, the fourth report on the implementation status of the FATF’s (Financial Action Task Force) recommendations related to virtual assets, titled “Updated Status of Implementation of FATF Standards for Virtual Asset Service Providers (VASPs),” was published. This report surveyed 151 jurisdictions on the measures they have taken to comply with the FATF’s recommendations on virtual assets. The results showed that many countries are not taking sufficient action. According to the FATF, 75% of jurisdictions that have amended their regimes have done so only partially or at a non-compliant level, and only half have amended their regimes to accommodate the Travel Rule.
TRM spoke with Rana Schwartzman, Head of Regulatory and Compliance, and Katarina Beloso, Senior Compliance Associate at Notabene, to understand the key points of this report.
This report covers all aspects of the implementation of FATF Recommendation 15 by countries and the private sector. According to Attorney Schwartzman, the report provided several important clarifications regarding the Travel Rule:

The report also highlighted the difficulties countries face in risk assessment, establishing effective licensing and supervision structures, and addressing new emerging risks such as DeFi, P2P transactions, and non-custodial wallets. Isabella Chase, Senior Policy Advisor at TRM for the UK and Europe/Middle East/Africa region, pointed out two of the most important implications: first, that a blanket ban on virtual assets does not effectively prevent risks, and second, that despite the large amount of public data on transactions, countries are struggling to assess the risks in this area.
However, the report overwhelmingly addressed the FATF’s dissatisfaction with the slow implementation of the Travel Rule.

Mr. Beloso of Notabene says there are numerous factors, starting with the classic problem of “no one wants to be first.” According to Attorney Beloso’s explanation, if Jurisdiction A implements the Travel Rule but the counterparty VASP is based in another jurisdiction that has not yet implemented it, then no VASP in Jurisdiction A can be considered compliant with the Travel Rule. In effect, the only way to ensure compliance in Jurisdiction A is to transact only with domestic counterparties.

Another major obstacle hindering implementation is the operation of VASPs. Issues such as identifying the type of legal entity or returning funds can arise when Travel Rule information is incomplete.

First, the FATF report presents a series of questions that companies should ask themselves before starting their compliance journey and choosing a Travel Rule solution. Schwartzman emphasized the importance of viewing the Travel Rule not as a checkbox but as an opportunity.

This discussion also covered other key challenges highlighted in the FATF report, such as varying requirements across jurisdictions, interoperability, and counterparty VASP due diligence.
Regarding regulatory differences, Schwartzman explained that Notabene’s solution reflects jurisdictional differences, performing the work for compliance officers to identify parts of regulations that require different levels of information. In terms of interoperability, Notabene provides a gateway for VASPs to access transaction information, with 86% of Notabene users able to ‘reach’ their counterparties. Finally, regarding counterparty VASP due diligence, TRM’s VASP identification tool should provide the information needed for users to be confident about who they are exchanging information with.

One of the key announcements from the FATF’s report is that in the first half of 2024, the FATF plans to publish a scorecard for its member countries and other key countries in the virtual asset sector. This scorecard is expected to provide information on what measures each country has taken to comply with the FATF’s standards on virtual assets. This list will be useful for both countries and organizations seeking to implement the Travel Rule.
The FATF will work to accelerate the implementation of standards over the next 12 months. We asked Notabene where they think implementation will be in 12 months. They responded generally positively, noting that in major virtual asset countries like the UK, Singapore, and Hong Kong, regulations are fully in force, and the European Union (EU) is also scheduled to have regulations in force by December 2024. Through these countries, we may reach a threshold that overcomes the first-mover anxiety that has prevented broader implementation so far.

For more details on Travel Rule compliance and illicit finance risks, see Notabene’s report (click here) and TRM’s Illicit Finance Ecosystem report (click here).