U.S. Is Almost Compliant With FATF Recommendations on Crypto

News and Analysis

The Financial Action Task Force (FATF) issued a report on the level of compliance with its recommendations in the U.S. It turned out, the country isn’t following the crypto-related recommendations exactly to the letter.

In this piece, we explain the FATF Recommendations in general and the one that addresses crypto, as well as look at how well the U.S. is following them and what to make of it.

FATF Recommendations

The FATF Recommendations is a list of universally applicable measures meant to counter money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction. Adopted by 180 countries, the Recommendations set the international standard of AML/CFT.

The Recommendations are also not legally binding. Countries are encouraged to adopt them but the biggest direct consequence of neglect is the expulsion from the FATF members list, which is a thing only for the 38 member jurisdictions. Another potential consequence is getting on the list of “Non-Cooperative Countries or Territories,” which basically flags certain jurisdictions as being shady.

There is also a defined methodology for evaluating the level of compliance with the Recommendations of a given jurisdiction. FATF evaluates the countries’ performance in terms of technical compliance and general effectiveness.

Effectiveness assessment represents how well do the country’s laws and procedures work for achieving the expected results. These expected results are boiled down to a total of 11 “immediate outcomes” representing the main goals of “an effective AML/CFT system.” The immediate outcomes include terrorists not getting funding, financial criminals are being caught and prosecuted, and authorities exchange information to help fight crime across the globe. For each of the 11 outcomes, a country gets one of four marks for its level of effectiveness: low (LE), medium (ME), substantial (SE), or high (HE).

Technical compliance has to do with the laws and procedures implemented and the extent to which they reflect the Recommendations. A technical compliance rating is given per each Recommendation individually and has four possible levels: compliant (C), largely compliant (LC), partially compliant (PC), and non-compliant (NC).

Thanks to the evaluation, the respective countries’ authorities can see what areas need improvement and the FATF can come up with additional recommendations as to how to achieve full compliance. The full list of ratings by country is available on the watchdog’s website.

Recommendation 15: New Technologies

When it comes to crypto, the most interesting one is Recommendation 15, which was amended in June 2019 to address the potential misuse of virtual assets.

“The threat of criminal and terrorist misuse of virtual assets is serious and urgent, and the FATF expects all countries to take prompt action to implement the FATF Recommendations in the context of virtual asset activities and service providers,” the financial watchdog said in a press release.

In simple terms, Recommendation 15 requires countries to introduce mandatory licensing or registration for virtual asset service providers (VASPs), monitor their activities, and have a punishment for AML/CFT violations. It also requires respective local authorities to share information with their foreign counterparts. The service providers themselves, such as crypto-exchanges, are required to collect and keep transaction records available to authorities on-demand.

The U.S. Being Largely Compliant

According to the latest report by the FATF, the U.S. has minor deficiencies to work on in order to fully comply with Recommendation 15.

In particular, the FATF noted that money services businesses (MSBs) are required to do customer due diligence for transactions upwards of $3,000, whereas it should be $1,000.

“The CDD threshold for occasional transactions for MSBs is USD 3 000 (as opposed to USD 1 000 required in the FATF Standards) and this higher threshold is not clearly supported by low ML/TF risks,” reads the report. 

Another deficiency pointed out in the report is that the U.S. legislation doesn’t explicitly include VASPs that are incorporated in the U.S. but don’t perform “any activity relating to U.S. persons, or a U.S.’ nexus.” This is something for lawmakers to consider before it becomes a loophole and a problem.

The FATF also noted that the U.S. is inspecting cryptocurrency providers without specifically identifying “higher risk VASPs” but trying to process them all one by one, which isn’t effective in terms of AML/CFT.

“It is not entirely clear whether the current approach is sufficiently risk-focused, especially since only 30% of all registered CVC providers have been inspected since 2014.”

Given that the other aspects of compliance are apparently on point, the FATF concluded that the U.S. is “Largely Compliant.” Almost there, except for these minor kinks. Considering the nature of the deficiencies pointed out by the FATF, the U.S. authorities seem to be rather cooperative.

When it comes to building a framework for the new type of assets that tends to defy national borders, cooperation on the international level is definitely a nice thing to have. Although, whether the internationally adopted surveillance-heavy approach to regulation will benefit the mass adoption of crypto is up to debate.

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