Everything VASPs Need to Know about the FATF Travel Rule
The Financial Action Task Force's (FATF's) Travel Rule, also known as Recommendation 16, has actually been around for many years, and most people working in compliance are familiar with it.
We have all seen it in “traditional” bank transfers (wire transfers). For bank transfers, a form of personal identification must be included in the transfer process. Without it, the banks involved will not consider the transfer process. This usually is the name, address, and account number of the account holder and matching information for the transfer recipient. We are so familiar with this process that we don't even bat an eyelid when providing this information.
This is an example of the Travel Rule in the traditional banking setting.
However, times are changing, and we are entering a new age of virtual asset transactions; the way we express value is changing. These changes are exciting but at the same time can open up additional risks. With this in mind the FATF proposed that the pre-existing Travel Rule be extended to include the transfer of virtual assets.
Very simply put, in the crypto context the Travel Rule relates to the exchange of information when there is an exchange of virtual assets between financial intermediaries, as per the FATF's Recommendation 16, as we mentioned with “normal” banking transactions.
The tricky part is that different juridictions have different requirements of how much information is shared and when that information should be shared.
The general rule of thumb is USD 1000, but there are exceptions to this amount for example in Switzerland, where the threshold is 0. For any transaction that surpasses this amount, information will need to be exchanged between the Originator – the person sending the virtual assets and the Beneficiary - the person receiving the virtual assets. Moreover this information has to be transmitted immediately and securely.
Information That Needs to be Exchanged
The FATF conceived the Travel Rule to help law enforcement agencies keep track of persons sending and receiving funds through official funds transfer systems. This vigilance prevents, detects, investigates and prosecutes money laundering, sanction breaches and other financial crimes.
With this in mind, the following information is to be verified by the Originator VASP before transacting,
- Originator's name,
- Originator's account number,
- Originator's physical address OR
- Originator's national identity number, or customer identification, or date and place of birth.
With the below information to be verified by the Beneficiary VASP before transacting,
- Beneficiary's name,
- Beneficiary's account number.
The verification process is only a piece of the Travel Rule's core. To implement the Travel Rule successfully this information is to be transmitted to the beneficiary VASP and stored. The information provided above is a guidance, please note this can vary from country to country. Before transacting, verify what information is required in the jurisdiction you will be transacting in.
In 2019, the FATF recommended that the Travel Rule is to apply to virtual asset service providers ( VASPs ), for both fiat and virtual asset transactions. It was determined that the Travel Rule is to be implemented if
- the transactions involve a traditional wire transfer, or
- a virtual asset transfer between a VASP and another obliged entity, or
- a virtual asset transfer between a VASP and a self-hosted wallet.
Recently, the latter two points were included in the 2021 Financial Action Task Force (FATF)'s revised guidance on a Risk-Based Approach: Virtual Assets and Virtual Asset Service Providers.
VASPs are also required to undertake due diligence on their counterparties before transferring any information, as well as trust the counterparty with their customers' data.
Development of the FATF and Its Recommendations
For a comprehensive history, click here.
What Is the FATF?
The Financial Action Task Force ( FATF ) is an inter-governmental body with the objectives of setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
The FATF has developed a series of Recommendations that are recognised as the international standard for combating money laundering and the financing of terrorism and proliferation of weapons of mass destruction. Virtual asset service providers ( VASPs ) are in scope and thus should comply with those recommendations.
The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally.