In July 2018 a FATF (Financial Action Task Force) report was published that highlighted the important issues and recommendations raised by the G20 Finance Ministers and Central Bank Governors regarding Anti-Money Laundering and Counter Terrorist Financing (AML/CFT) especially in relation to new risks such as the growth of virtual currencies and crypto-assets. One of the salient points that was delineated in this report was the commitment to implement FATF standards applicable in other industries, also to virtual currencies and crypto-assets. Increased AML/CFT regulation and supervision was needed in the latter sector to reduce the risks posed by this sector. The FATF encouraged a consistent comprehensive approach to regulation of virtual currencies/crypto-assets across different countries subject to a sufficient level of oversight on these activities. This was done by increasing mitigation measures to address such risks whilst avoiding unnecessary barriers to legitimate trade.
The AML/CFT risks noted by the FATF when analyzing these activities are due to the fact that they have easy online access and global reach allowing them to be used as a facilitating tool for AML/CFT, unless adequately regulated and supervised. Different members of the G20 adopted different regulatory approaches to such activities and these can be divided into 4 different categories. Countries such as China and India focused on the prohibition of virtual currencies/crypto-assets with regards to their use and also prohibited financial institutions from dealing in them. Argentina and South Africa chose to focus on introducing broad-based requirements to report suspicious transactions to also capture virtual currencies and crypto-asset exchangers. A more progressive approach can be seen to be taken by countries such as Australia, Japan and the US whereby the focus was on the regulation of banks and other intermediaries but ultimately the most comprehensive approach taken by G20 members was through the preparation of laws and regulations as took place in South Korea and the EU. The report highlighted the rapid development of regulation in a virtual currency/crypto-assets sphere that can foster regulatory arbitrage, whereby certain companies prefer unregulated safe havens.
The main point that was placed on the agenda following this G20 meeting was to review the 2015 Risk-based Approach Guidance on Virtual Currencies to assist in the implementation of risk-mitigation in the public and private sectors. Another weakness noted was the need to train enforcement authorities to understand how to better investigate virtual currencies and crypto-assets cases and ways to disrupt criminals in this sector. The FATF shall enhance its focus on better information sharing and coordination when dealing with the countering of financing of terrorism, whilst also increasing country accountability for failures to address AML/CFT deficiencies through mutual evaluation, follow-up and International Cooperation Review Group processes.
The need for more transparency and access to information regarding beneficial ownership was emphasized so as to ensure legal persons and arrangements are not abused. The FATF went a step further and through research, delineated the vulnerabilities associated with common misuses of such legal persons and this report also focused on enforcement and supervision of beneficial ownership obligations, including the role of registries of companies, and gatekeeper professions such as lawyers, trusts and CSPs. A coordinated approach to de-risking is needed by focusing on the implementation of more effective risk-based measures by financial institutions and supervisors. The FATF noted that while such institutions are applying such risk-based measures on the basis of the guidance provided by the FATF, the salient issue is that there is the inconsistent application of such measures. The inconsistent application of measures proposed in the guidance notes exposed the need for further clarifications to streamline the approaches and application by national authorities and the private sector.
The pace with which certain industries, such as the FinTech industry, is progressing is too rapid and hence technological advancements are needed to maintain the pace required to provide the necessary support to countries’ AML/CFT frameworks and the involvement RegTech could play in achieving this goal. Understanding technologies relating to digital identification and verification is needed to assist in reducing customer on-boarding and due diligence costs, whilst at the same time mitigating money laundering and terrorist financing risks. The follow up from this report was that the FATF recommendations were updated in October 2018 to come in line with most of the points raised here.