On 21 June 2019 the Financial Action Task Force (FATF) adopted its 2019 Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (the Guidance). The Guidance updates the 2015 version of the guidance and accompanies the FATF’s June 2019 Interpretive Note to Recommendation 15 on New Technologies (INR 15) that clarifies how the FATF recommendations should apply to virtual assets (VAs) and virtual asset services providers (VASPs).
The following provides a short overview of key points to note in respect of the Guidance and the INR 15:
- The INR 15
The INR 15 sets out recommendations to national regulators in respect of the application of a risk-based approach (RBA) to VAs’ activities or operations and VASPs for the purposes of anti-money laundering and combating terrorist financing (AML/CTF). It follows the October 2018 amended FATF Recommendation 15 that defined VAs and VASPs, and required VASPs to be regulated for AML/CTF purposes, licensed or registered, and subject to effective systems for monitoring or supervision. The INR 15 further specifies that VASPs shall be “subject to adequate regulation and supervision or monitoring for AML/CTF” and that they should be “supervised or monitored by a competent authority”. A controversial paragraph 7(b) of the INR 15 amends FATF Recommendation 16 in so far as it applies to wire transfers by VASPs, and sets out extensive obligations for the latter in respect of obtaining, holding and submitting certain transfer-related information.
- Objectives of the Guidance
The Guidance is “intended to help national authorities in understanding and developing regulatory responses to covered VA activities and VASPs, including by amending national laws (…)” and to “help private sector entities seeking to engage in VA activities or operations, as defined in the FATF Glossary, to better understand their AML/CTF obligations and how they can effectively comply with the FATF requirements”. The Guidance provides an explanation of how the FATF Recommendations should apply to VA activities and VASPs.
- Scope of the Guidance
The Guidance focuses on VAs that “are convertible for other funds or value, including both VAs that are convertible to another VA and VAs that are convertible to fiat or that intersect with the fiat financial system”. As such, it focuses on AML/CTF issues and it does not address other regulatory matters potentially relevant to VAs and VASPs (eg. prudential regulation, anti-market manipulation and abuse, IT security standards, financial stability, etc).
- Structure of the Guidance
The Guidance is divided into four substantive sections covering the following:
- Section II: this section provides an explanation of how VA activities and VASPs fall within the scope of the FATF Recommendations. It includes, inter alia, the list of elements that countries and VASPs should consider when identifying, assessing and determining how best to mitigate the risks associated with covered VA activities and the provision of VASP products or services. It also provides guidance on how to determine whether a specific activity or entity falls within the scope of the FATF definitions and is as such subject to regulation.
- Section III: this section includes a description of the application of the FATF Recommendations to countries and competent authorities, and as such covers the whole spectrum of the relevant requirements (i.e. treatment of VAs, licensing or registration, supervision or monitoring, preventive measures, transparency and beneficial ownership of legal persons and arrangements, operational and law enforcement, international cooperation). This section also reviews the application of the RBA by supervisors of VASPs.
- Section IV: this section includes an explanation of the application of the FATF Recommendations to VASPs and other obliged entities that engage in or provide VA-covered activities, including financial institutions. As such, it focuses on Recommendation 10 (Customer due diligence), Recommendation 12 (Politically exposed persons), Recommendation 16 (Wire transfers), Recommendation 18 (Internal controls and foreign branches and subsidiaries) and Recommendation 20 (Reporting of suspicious transactions).
- Section V: this section provides examples of jurisdictional approaches to regulating, supervising and enforcing covered VA activities and VASPs, and other obliged entities, for AML/CTF. It includes summaries of measures applicable in Italy, Norway, Sweden, Finland, Mexico, Japan and the US.
- Next steps
The FATF will monitor the implementation of the new requirements applicable to VA activities and to VASPs by countries and private entities over the next 12 months. It intends to publish an implementation report in June 2020.