This week’s ComplyAnalysis will focus on the outcomes of last week’s FATF Plenary. The Plenary, which was prefaced with the long-awaited announcement of FATF’s position on virtual assets made headway on a number of key compliance issues.
The cryptocurrency community waited with bated breath for FATF’s position on how to apply AML/CFT regulations to their sector. A negative position, with labor-intensive rules, would have placed a heavy burden on the agile industry. The announcement then on Friday, that compliance should be performed in line with standard FATF recommendations surrounding a risk-based approach, will likely have been positively received.
FATF’s position – which can be read in full here – although not groundbreaking is interesting for a number of reasons. Firstly, they make it clear that virtual assets are not evil. They recognize their potential for good and make clear that it is the surrounding infrastructure which should be regulated and not the assets themselves. FATF has defined a new class of entity, a Virtual Asset Service Provider (VASP), to which the 40 recommendations can be applied. Much like the EU’s Fifth Money Laundering Directive (5MLD), we now see customer due diligence, ongoing monitoring, recordkeeping, and reporting requirements becoming necessary for VASPs. Unlike the EU’s directive, however, FATF has widened the definition of who is subject to these requirements with the recognition that virtual-to-virtual currency exchanges and services should also be included within this bracket. The inclusion of these service providers will make the FATF’s position stand out as this is widely considered to be a loophole in 5MLD.
The press release by FATF is a placeholder for full guidance which will be released in June 2019. Until then, for firms wishing to show the spirit of compliance they should familiarize themselves with FATF’s 2015 paper on virtual currencies and guidance on applying a proper risk-based approach.
Iran has been given a further year to comply with FATF’s Action Plan. It continues to drag its feet on significant recommendations such as criminalizing terrorist financing, freezing assets in line with UN declarations and enforcing a due diligence regime. It could be questioned why FATF is being so lenient with Iran. It is rumored that compliance with the 40 FATF recommendations is a pre-requisite for the EU maintaining the JCPOA. With European voices influential round the FATF table, and time needed to iron out the logistics of the “alternative financing channel” it is not that surprising this extension has been granted.
Although not strictly discussed at the Plenary, but discussed last week by FATF’s sister organization, the Asia Pacific Group, Pakistan was also presented with a final chance. It has been given a six-month extension to comply with requirements for its high-risk non-financial sectors or face remaining on FATF’s grey list indefinitely. FATF should tread carefully with repeated extensions, as it may send the message that it is becoming easier to cross red lines.
There was some fear that the UK would not do well in its FATF mutual evaluation performed earlier this year. However, leaked information from the report suggests that FATF has found the UK to be compliant or largely compliant with 38/40 recommendations, an increase from 27 in 2007. The full evaluation will be made public in December and will reveal the remaining areas that require work. Could a perfect 40 be within the UK’s grasp?
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