Shearman & Sterling LLP | FinReg | Financial Action Task Force Publishes 12-Month Review on Revised FATF Standards for Virtual Assets
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  • Financial Action Task Force Publishes 12-Month Review on Revised FATF Standards for Virtual Assets

    The FATF has published the results of its 12-month review into the revised FATF standards published in June 2019, designed to help tackle money laundering and terrorist financing risks connected with virtual assets and virtual asset service providers. The FATF's revised standards introduced a new Interpretive Note to Recommendation 15 on New Technologies, which clarified how countries should apply the FATF standards to virtual assets and VASPs, as well as updated guidance on a risk-based approach for virtual assets and VASPs. When the revisions were published, the FATF undertook to conduct a 12-month review of the changes.
    The review has unearthed some new emerging money laundering/terrorist financing risks, including some actors taking advantage of VASPs in jurisdictions with lower AML/CTF requirements, ongoing use of tools to increase the anonymity of transactions and an increase in the use of virtual assets to conceal funds during COVID-19. The prospect of mass adoption of stablecoins has been a preoccupation for many jurisdictions, and the FATF has published a separate report on stablecoins alongside its 12-month review.
    The review finds that, in the public sector, 35 of the 54 reporting jurisdictions have implemented the revised standards, with many reporting that they have subjected VASPs to their existing AML/CTF regimes. In the private sector, VASPs are generally in the early stages of implementing their new AML/CTF obligations, although those jurisdictions that have been imposing AML/CTF regimes upon VASPs for a longer period of time report improvements in compliance.
    The FATF has identified certain issues with its revised standards and guidance, including: (i) the definition of "virtual asset" and "virtual asset service provider", which could benefit from greater clarity; (ii) the absence of rules governing peer-to-peer transactions and private or non-custodial wallets; (iii) the potential for additional guidance on stablecoins; (iv) the need for further guidance on identifying which VASPs should be captured by AML/CTF regimes; and (v) the implementation of the "travel rule". The travel rule requires VASPs to obtain and exchange information about the originators and beneficiaries of virtual asset transfers. Difficulties with the travel rule include the need for VASPs to identify when they are transacting with another VASP and whether that VASP is regulated, a lack of clarity on the approach to be taken when VASPs transact with private or unhosted wallets and the inter-operability of the different global systems being used to implement the travel rule.
    The FATF intends to release updated guidance on the issues identified in the 12-month review. It does not intend to amend the revised standards, but will conduct a second 12-month review of the standards by June 2021.
    View the FATF's 12-month review of the revised FATF standards for virtual assets.
    View details of the FATF's report on stablecoins.
    View details of the FATF's June 2019 revisions to the FATF standards.
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