A Guide to FATF’s Travel Rule

A Guide to FATF’s Travel Rule

#TravelRule #FATF #AML #CTF

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AUG 30, 2022
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4 Minutes

A recent Australian government study reveals that  53% of companies do not have improved policies to manage personally identifiable information.  

Financial companies should be aware of the Financial Action Task Force (FATF) Travel Rule. In summary, it mandates that you gather and exchange the personal information of the parties involved in certain financial transactions.

Keep reading for a more comprehensive guide to the FATF’s Travel Rule.

Who Must Follow FATF Recommendations?

FATF Recommendations apply to two primary business categories. The first category is financial institutions such as credit card companies and banks. The second category is crypto companies or Virtual Asset Service Providers (VASPs). VASPs include any company that provides cryptocurrency services. However, the rule only applies to VASPs that support the transfer of funds between users. The regulation applies to companies based in FATF-member countries including the US, Singapore, Switzerland, and other regions.

What Is the Travel Rule?

Officially, the Travel Rule is FATF Recommendation No. 16. It is the FATF’s regulation to combat money laundering in member countries. The rule applies to financial institutions and cryptocurrency companies.  

It originally applied to international and domestic wire transfers and obliged financial organisations (mostly banks, but also other wire transmitters) to communicate information about a transfer's source and recipient. The travel rule ensures that crypto businesses adhere to sanctions and AML/CTF regulations. The rule applies to any transaction that exceeds $1,000.

The Importance of FATF Regulations

The Travel Rule obligates financial parties to communicate information to combat fraudulent activities. It also helps stop payments to sanctioned countries, entities, and  individuals on the FATF blacklist. The Travel Rule also empowers law enforcement to subpoena transaction details.  In addition, the regulation facilitates the reporting of suspicious activities and helps to prevent the use of cryptocurrency for money laundering.

Challenges of FATF Compliance

Virtual Asset Service Providers (VASPs) face several strategic and operational risks because of the Travel Rule. One challenge is a sunrise issue involving staggered enforcement of cryptocurrency AML regulations. Another challenge is how to use blockchain analytic tools for Travel Rule compliance.

VASPs struggle with identifying whether counterparty VASPs are registered providers.  VASPs must grapple with figuring out how to perform VASP counterparty due diligence. All the while, they must also contend with addressing cybersecurity, data protection, and privacy.

Ensuring FATF Compliance

To guarantee compliance with the Travel Rule, it is beneficial to concentrate on its primary requirement. Participants in a transaction must gather and share information to regulatory bodies. You must provide two solutions to fulfil this requirement. You will need one solution for data collection and another for data exchange.

You can manage these processes efficiently with the right Know Your Customer (KYC) compliance partner.

More Compliance Recommendations

It is important for VASPs to manage their Know Your Customer processes efficiently. Many fintech companies partner with a trusted KYC and crypto monitoring provider for this reason.  

A compliance partner can help you save time on data gathering. They can also help you solve compliance challenges. These challenges might include AML compliance or overcoming transaction risk assessment challenges.

Data Sharing for Security

Banks and VASPs must share personal financial information. It includes data about transaction senders and recipients. This is a new rule for the crypto industry.

Already, several crypto networks support encrypted data transfers. These networks include:

  • OpenVASP
  • Shyft Network
  • Trisa.io

These are only a few technologies that support encrypted data transfers using a crypto wallet, for instance. These technologies integrate into businesses’ systems. It enables them to send data securely to other platforms. They also help fintech firms verify other counterparty platforms.

The Added Risks of FATF Compliance

The current financial paradigm is expanding. Firms are required to exchange sensitive transaction and customer data with unknown or untrusted VASPs. This situation raises various privacy concerns.

There have been several successful attacks on crypto exchanges, and only few VASPs are well prepared to defend against a dedicated attacker. Some VASPs have poor security for their crypto assets. Others may have poor security for their stored user data.

Financial service providers must deal with many threats. For example, they must remain wary of fake VASPs that pose as legitimate service providers.

Firms must also remain wary of companies that illegally data mine and sell users’ confidential information. Furthermore, today’s companies must contend with other threats such as potential DDOS attacks and market manipulation.

Getting Help

The Travel Rule intends to prevents money laundering and other malicious activities. In theory, it is an innovative idea, but complying with the travel rule is sometimes easier said than done.

A company can consume a considerable number of resources complying with the Travel Rule. These compliance efforts can take away from you’re their core focus.

As a result, many financial firms now partner with a trusted risk management service provider. The right partnership can help you remain in compliance with much less effort and cost than what you would expend if you were to manage these tasks in-house.

A Trusted KYC Partner

You now know more about the FATF’s Travel Rule. MemberCheck can help you with your KYC requirements and help manage your ML/TF risks. MemberCheck specialises in AML compliance and Risk Management. We are also experts in Politically Exposed Person (PEP), sanctions and Adverse Media screening.  

Since 2008, we have helped companies meet their AML/CTF requirements. We provide our clients with a range of compliance solutions to help them meet their compliance obligations. Our services extend to  VASPs who do not currently have a Travel Rule solution in place.

Feel free to learn more about our services and contact us for more information.  

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