The Financial Action Task Force (FATF), the global standard setter for anti-money laundering (AML) and combatting of terrorist financing (CTF) rules and regulations, continues to issued guidance on how to tackle AML/TF risks associated with virtual or digital assets.
FATF has issued a draft interpretive note to Recommendation 15 to a public consultation on 22 February 2019. It is scheduled to be adopted as part of the FATF Standards in June 2019. FATF Recommendation 15, adopted in October 2018, stipulates that countries and financial institutions should identify and assess the ML/TF risks that may arise in respect of new products or business practices as well the use of new or developing technologies. Also, new definitions of “virtual assets” and “virtual asset service providers” have been added to the FATF Glossary.
The FATF Glossary defines virtual asset as a “digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes.” This very broad definition applies not only to cryptocurrencies and payment tokens, but also and in particular to securities tokens. It does not apply to mere utility tokens. The definition of Virtual Asset Service Providers (VASP) covers any natural or legal person not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets from one virtual asset address or account to another;
- safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
The interpretive note now submitted helps FATF member jurisdictions to apply the FATF Recommendations to virtual assets and VASPs. The interpretive note will be crucially important for translating the highly abstract obligations imposed under Recommendation 15 into the real-life context of virtual assets. The interpretive note includes the following key elements:
- In accordance with FATF Recommendation 1, countries should identify, assess, and understand the money laundering and terrorist financing risks emerging from virtual asset activities and the activities or operations of VASPs. VASPs should be required to be licensed or registered, but a member jurisdiction needs to impose a separate licensing or registration system with respect to VASPs already licensed or registered as financial institutions.
- The interpretive note furthermore makes it clear hat countries should ensure that VASPs are subject to adequate regulation and supervision or monitoring for AML/CFT and are effectively implementing the relevant FATF Recommendations. VASPs should be supervised or monitored by a competent authority which must not be a self-regulatory body – a potentially contentious point for Switzerland.
- Another importation qualification is provided in note 7 of the interpretive note, which clarifies that Recommendations 10 to 21 apply to VASPs. The occasional transactions designated threshold in accordance with Recommendation 10, above which VASPs are required to conduct customer due diligence, is set at USD/EUR 1’000.
- Interpretive note 7(b) explains how Recommendation 16 shall be applied to VASPS. Recommendation 16 specifies the need for financial institutions to provide information not just about the originator of a payment, but also the beneficiary. Interpretive note 7(b) now clarifies that this implies that originating VASPs obtain and hold accurate originator an beneficiary information on virtual asset transfers, submit the above information to beneficiary VASPs and counterparts (if any), and make it available on request to authorities. Unlike in the cross-border wire transfer context, it is not necessary for this information to be attached directly to virtual asset transfers. However, countries must ensure that beneficiary VASPs obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to authorities. Other requirements of Recommendation 16, (including monitoring of the availability of information, and taking freezing action and prohibiting transactions with designated persons and entities, apply on the same basis to VASPs as to traditional financial institutions.
The adoption of Recommendation 15 and the interpretive note are important steps in the emerging global standards for AML/CFT rules and regulations for virtual assets and VASPs. These standards adopt the logical view that VASPs should be subject to the same obligations as other financial institutions. It also converges with policies already adopted by Swiss authorities. Indeed, the Swiss Financial Market Supervisory Authority (FINMA) AML Ordinance had already clarified in 2015 that exchange activities in relation to VCs, such as money transmitting are subject to AML rules. As such, Switzerland was a precursor in the implementation of this rule, which has now become standard.