A Guide to the FATF Travel Rule
The Financial Action Task Force (FATF) is an independent inter-governmental body that helps to develop and promote Anti-Money Laundering (AML) and Know Your Customer (KYC). In light of the rise of the cryptocurrency industry, the FATF published guidance on how its 37 members should regulate cryptocurrency exchanges whereby the FATF’s 2019 amendment to Recommendation 16 had brought about the current FATF Travel Rule. The update intends to tackle AML/CFT challenges caused by the increasing global use of cryptocurrency.
What is the Travel Rule?
The FATF Travel Rule requires member countries to ensure that their Virtual Asset Service Providers (VASP) such as crypto exchanges and crypto wallet providers, collect and exchange beneficiary and originator information with VASP counterparties during any transmittal exceeding USD1,000.
Prior to the Travel Rule, companies that conducted wire transfer of conventional funds had to issue a range of reciprocal information. The Travel Rule thus expands on these obligations to cryptocurrency exchanges.
With the Travel Rule, audit trails will be enhanced when virtual assets are being transferred between entities such as exchanges and wallets, helping with AML/CFT efforts. The new information collection rules ensures that financial authorities can better detect and prevent any money laundering activities involving cryptocurrency.
What information is required by the Travel Rule?
Under the FATF Recommendation 16, originators of virtual asset transfers have to submit the following to beneficiaries:
- Originator name
- Originator Account number (where the account is being used to process the transaction)
- Originator physical (geographical) address
- National identity number or customer identification number
- Date and place of birth
Beneficiaries have to submit the following to originators:
- Beneficiary name
- Beneficiary account number (where the account is being used to process the transaction)
How to comply with the Travel Rule?
In order to comply with the Travel Rule, the solution has to satisfy the regulatory obligations without disruption in terms of customer service needs. The FATF has since suggested a range of characteristics that a Travel Rule solution should feature to meet the requirements of Recommendation 16. Some of these characteristics being:
- The solution should minimise both regulatory impact and barriers to adoption and should be easy to integrate with an existing AML/CFT program
- It should help contribute to a global regulatory standard of virtual asset transfers and should be flexible enough to accommodate to future innovations and advances in technology
- It should also complement the efforts of law enforcement agencies to prosecute money launderers and terrorists by proactively detecting suspicious activities
Some technology that can be leveraged in implementing the Travel Rule solution would be the use of public and private keys. These keys are usually created in pairs for each entity involved in a digital transmission and the keys encrypt and decrypt information only for originators and beneficiaries. API technology will also help to provide routines and protocols for software applications, specifying how the different applications should interact with each other. By weaving in different technologies in the solution, it helps VASPs to remain compliant with the Travel Rule.
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