FATF agrees money laundering risks of virtual assets approach

The Financial Action Task Force has released the outcomes of its plenary last week, confirming it will specifically look at how well countries are implementing its global standards to address the money laundering and terrorist financing risks of virtual assets.

What has happened?

The Financial Action Task Force (FATF) has now agreed on how to assess whether countries have taken the right steps to implement the global standards it introduced in June to address the money laundering and terrorist financing risks of virtual assets.

What does this mean?

The international anti-money laundering organisation has released the outcomes of its plenary, which took place over three days last week in Paris and was attended by over 800 delegates from 205 jurisdictions and international organisations.

In two documents released after the plenary, the FATF said that, from now on, as part of its mutual evaluations, it will specifically look at how well countries are implementing its global standards to address the money laundering and terrorist financing risks of virtual assets.

Countries that have already gone through their mutual evaluations will need to report back during their follow-up process on what steps they have taken in this area.

The FATF also singled out stablecoins, listing the money laundering risk attached to them and other emerging assets as one its "major strategic initiatives".

"Emerging assets such as so-called global 'stablecoins', and their proposed global networks and platforms, could potentially cause a shift in the virtual asset ecosystem and have implications for the money laundering and terrorist financing risks. There are two concerns: mass-market adoption of virtual assets and person-to-person transfers, without the need for a regulated intermediary. Together these changes could have serious consequences for our ability to detect and prevent money laundering and terrorist financing," the FATF said in one of the documents.

The FATF also said that it will continue to monitor emerging assets, including stablecoins, and will continue to examine their characteristics and risks, and may even clarify how its standards apply to stablecoins and their service providers.

"The FATF will continue to ensure its standards remain relevant and responsive and it will report to G20 Finance Ministers and Central Bank Governors in 2020 on the risks from global 'stablecoins' and other emerging assets," the FATF said.

In June, the FATF adopted its previous recommendations on virtual currencies and how countries and "obliged entities" must prevent the misuse of virtual assets for money and terrorist financing.

Digital identity

The FATF also identified understanding and leveraging the use of digital identity as another of its strategic initiatives, adding that there has been a significant shift towards digital payments in recent years.

"The number of transactions are growing at over 12% every year. Customer identification is essential to prevent criminals and terrorists from raising and moving funds. However, in the growing digital world, different customer identification methods exist," the FATF said.

The FAFT will therefore release draft guidance on the use of digital identity for public consultation.

This draft guidance analyses the use, reliability and independence of digital identification systems and looks at how digital ID systems could meet the FATF’s customer due diligence requirements.

It aims to help governments, financial institutions and other relevant entities to apply a risk-based approach to using digital ID systems.

"The FATF supports financial innovation that does not create new safe havens for terrorists and criminals to carry out their transactions. Responsible innovation in the form of reliable digital ID systems contributes to the objectives of preventing its misuse for crime and terrorism, and supporting financial inclusion."

Next steps

Please let us know if you have any questions on the FATF's standards or its approach to virtual assets.

Also, if you want to take advantage of blockchain's huge potential and disruptive impact, while keeping track of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

Contacts
Gregory Lisa
Partner
Washington, D.C.

 

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