The Target Update was published on 27 June 2023 by the Financial Action Task Force (FATF) to report on country compliance with FATF’s Recommendation 15 (R.15) and its Interpretative Note, including the Travel Rule, and updates on emerging risks and market developments, including on Decentralized Finance (DeFi), Peer-to-Peer transactions (P2P), and Non-Fungible Tokens (NFTs), unhosted wallets, and stablecoins.
The Report finds that jurisdictions are making limited progress implementing the FATF’s requirements on Virtual Assets (VAs) and Virtual Assets Service Providers (VASPs). The Reports further indicate that countries continue to struggle with several fundamental requirements such as conducting a risk assessment, developing a regime for VASPs (i.e., registering/licensing or prohibiting VASPs) and implementing the Travel Rule. Jurisdictions also face challenges assessing and mitigating the ML/TF risks emerging from VAs and VASPs.
Jurisdictions have made limited progress implementing and enforcing the FATF’s Travel Rule, key AML/CFT measure that enables VASPs and financial institutions to prevent terrorists, money launderers, and other criminals from accessing wire transfers to move their funds, and to detect such misuse when it occurs. The Travel Rule applies the FATF’s wire transfer requirements and requires VASPs and financial institutions to obtain, hold, and transmit specific originator and beneficiary information immediately and securely when transferring VAs. As the effectiveness of this rule depends on consistent, global implementation and enforcement. “The FATF urges jurisdictions to make immediate progress to enact and enforce legislation implementing the Travel Rule”.
The FATF has also observed an increase in the use of VAs, including anonymity enhanced coins/cryptocurrencies (AECs), for terrorist financing.
NFTs continue to pose risks for ML/TF, although some jurisdictions have seen a decrease in risk level in this area. Jurisdictions that have implemented the Travel Rule are regulating NFTs as VAs where appropriate (e.g., where NFTs are used for payment or investment purposes).
Traditional financial institutions and institutional investors are increasingly participating in the VAs market.
Key recommendations for the private sector
FATF recommends that VASPs and Travel Rule compliance tool providers should:
Review the Travel Rule compliance tools to ensure that they fully comply with the FATF requirements as well as rapidly address any shortcomings.
Implement appropriate risk identification and mitigation measures in line with R.15 as well as other risk-based measures (e.g., cyber security measures).
Continue to monitor and assess the risks across the VA ecosystem, including those related to DeFi and unhosted wallets, including P2P transactions, and take steps to mitigate these risks.
The FATF and its Virtual Assets Contact Group will continue to conduct outreach and provide assistance to low-capacity jurisdictions to encourage compliance with R.15 and share findings, experiences and challenges.