Virtual currencies are turning into a preferred method of money laundering for many bad actors. Transactions in cryptocurrency can be done almost instantaneously with complete anonymity, making the new currency a challenge for both AML compliance professionals and regulatory bodies. This has led to the introduction of crypto-specific regulations, such as the new ‘Travel Rule for Crypto.’ This article will discuss what AML professionals need to know to ensure crypto compliance.
What is the ‘Travel Rule for Crypto’
The Financial Action Task Force’s (FATF) Recommendation #16, also known as the Travel Rule for crypto, states that all crypto companies must screen, record and communicate the information of both sender and recipient for crypto transactions that exceed $1,000, or a certain amount designated by FATF member states.
The amount can differ by country, for the United States, the crypto travel rule is required for any crypto transaction that exceeds $3,000.
Crypto Travel Rule Reporting Requirements
The FATF recommends taking a risk-based approach to crypto. The crypto travel rule mandates that once the transaction threshold is reached, the virtual asset service provider (VASP) of the sender of the funds must send over personally identifiable information (PII) to the VASP of the recipient. Likewise, the VASP of the recipient must send over the PII of the recipient to the VASP of the sender.
The FATF Risk-Based Approach to Crypto
The FATF has stated that a risk-based approach must be applied to virtual currencies by both Virtual Assets (VAs) and VASPs. For more information view our webinar on FinCEN cryptocurrency compliance.
Virtual Assets Defined:
VAs are defined by the FATF as “digital representations of value that can be digitally traded, or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.” 1
VASPs are defined by the FATF as:
any natural or legal person who is not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets;
- safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset. 2
Personally Identifiable Information (PII) Defined
While this may vary by country, the FATF recommends that the following information be sent:
- Legal name of sender/recipient
- Address of sender/recipient
- Account number of sender/recipient
Sender reporting requirements:
Recipient Reporting Requirements
How is the Crypto Travel Rule Different Than the Original FinCEN Travel Rule?
The FinCEN Travel Rule is a well-known compliance rule introduced with the Bank Secrecy Act (BSA) in 1996. The rule requires financial institutions to transmit certain information on certain funds transfers and transmittals to other financial institutions participating in the transfer or transmittal 31 CFR 1010.410(f).
The underlying objective of this rule was to prevent and detect instances of money laundering through more traditional forms of fund transfers such as wire transfers.
This objective remains the same for the ‘travel rule for crypto’, however new guidelines and clarification was needed due to the new complications that come with a relatively new currency like crypto.
Why Crypto Makes Compliance Challenging
As discussed in a previous blog discussing Know Your Customer (KYC) crypto compliance, virtual currencies are prime channels for money laundering. Since cryptocurrency transactions are digital, it allows for many transactions to take place in a short period of time. Additionally, it is possible to conduct crypto transactions anonymously.
Crypto Compliance Solutions
Being prepared for compliance with new regulations and currencies requires a modern compliance program with modern solutions. The frequency and difficulty in screening crypto transactions means that your compliance team needs effective transaction monitoring and screening solutions and sanctions screening solutions.
Get a free demo today to learn more about how Alessa’s AML compliance solution can assist with compliance with the crypto travel rule and more.