Criminal activity around the world is at an all-time high. Criminal enterprises bring in billions of dollars in revenue each year. Monetary incentives are needed to keep criminals motivated and illegal activities going. Therefore, preventing the flow of crime-related funds and identifying the actors behind the funds are necessary to put an end to criminal organizations wreaking havoc. International organizations like the Financial Action Task Force (FATF) have been helping countries fight against menacing entities by hitting them where it hurts – their cash flow.
As cryptocurrency becomes an alternate financial system, criminal organizations are turning to it to establish ways to legitimize and transfer their funds. The FATF is, therefore, creating legislation and regulations for jurisdictions to implement, preventing criminals from using virtual currencies to fund their activities. As we eventually look at how the FATF is combating criminal organizations, let us begin with what the FATF is.
What Is The FATF?
The Financial Action Task Force, abbreviated as FATF, is an international watchdog organization working towards detecting and preventing crime-related financing. It recommends policies and legislations for countries and jurisdictions to adopt. The recommendations aim to end the flow of money motivated by corruption, terrorism, drug, human trafficking, and every other criminal activity.
Countries like the USA and the UK are watchdog members, abiding by the various regulations they recommend and enforcing them upon financial institutions operating within their jurisdictions. Currently, 39 entities exist – jurisdictions and organizations – as members of the FATF, while several other countries endorse and implement their recommendations regardless. The FATF was formed in 1989 as the combined action of the G7 nations to create frameworks to prevent criminal entities from laundering their money.
The FATF has worked to encourage many countries to adopt sound Anti-Money Laundering and Counter-Terrorist Financing measures. Their adoption has made it possible for financial institutions in the jurisdictions to operate with cleaner money and help authorities reduce and prevent ongoing criminal activity.
The rise of cryptocurrency brought about newer financial operations like crypto exchanges, wallet services, custodians, and more collectively referred to as Virtual Assets Service Providers (VASPs) by the FATF. Cryptocurrency characteristics like decentralization, cross-border transferability, and heightened privacy attract criminals to launder money and finance their operations. Moreover, the lack of regulations over cryptocurrency platforms has made it easy for them to create channels through exchanges and other VASPs to wash and transact illegal funds without authorities getting to them.
Taking note of crypto usage by criminals, the FATF issued recommendations in 2019 for jurisdictions to enforce on VASPs to prevent money laundering and terrorist financing efforts and is known as the Crypto Travel Rule.
The FATF Crypto Travel Rule
The crypto Travel Rule issued by the FATF in its Recommendation 16 prevents VASPs from facilitating illicit activity. The crypto Travel Rule is a revamped version of the Travel Rule enforced by jurisdictions on banks and financial institutions. Upon noticing how criminal entities leveraged cryptocurrency, the FATF customized the Travel Rule for crypto service providers.
The crypto Travel Rule mandates VASPs to set up AML and CFT policies to prevent all illegal activity on their platforms. VASPs are legally responsible for trading identification and personal details with each other and relevant authorities when prompted if the value of the transaction exceeds 1000 USD or EUR. The sender’s VASP and the beneficiary’s VASP are required to record and exchange their party’s data.
Assuming the transaction threshold is exceeded, VASPs communicate customer information like customer name, account number, and residential address. While the FATF recommends these parameters broadly, jurisdictions interpret them with slight variations. Certain countries are known to provide leeway until the value of transactions exceed higher amounts than 1000 USD or EUR. Some are relaxed with the customer information they mandate VASPs to share. Since the crypto Travel Rule is not hard and fast, it leads to the “sunrise problem”. Not all jurisdictions view the recommendation the same, leading to VASPs from stricter jurisdictions receiving less information than needed when transactions occur with users in other jurisdictions.
The Importance Of The Crypto Travel Rule
Despite the challenges, the crypto Travel Rule is the only legislation related to crypto witnessing adoption around the globe. This massive implementation is making it certain that cryptocurrency is highly relevant and will continue to grow in relevancy as more users are getting on board. Crypto platforms are now relieved of their constant worries about sanctions and other legal issues as definite legal frameworks now exist. The regulation will allow more crypto platforms to set up their operation, driving up innovation. Legal authorities can simultaneously access the needed information from VASPs, sanctioning fraudulent wallet addresses, identifying criminals, and ending criminal operations.
The FATF crypto Travel Rule has been a crucial turning point for cryptocurrency. It stops criminals from using VASPs, transacting illicitly obtained funds, and financing illegal operations with cryptocurrency. The consequent implementation of AML frameworks by VASPs further prevents cryptocurrency users from getting hacked and scammed by bad actors. As a result, the dangers associated with the crypto industry are beginning to fade, and users feel more confident about cryptocurrency investment and use. As many jurisdictions strongly enforce the crypto Travel Rule and more VASPs become compliant, cryptocurrency adoption is becoming mainstream.