FATF Report Reveals 75 Percent of Countries Lack Virtual Asset AML Regulations

In a report released on June 27, 2023, the Financial Action Task Force (FATF) revealed massive anti-money laundering and countering of terrorist financing (AML/CFT) regulatory shortcomings for the virtual asset sector in most surveyed countries worldwide. The report aggregated data from 98 mutual evaluation reports (MERs) and follow-ups over the four years since the watchdog released Recommendation 15, which outlines regulatory standards for virtual assets (VAs) and virtual asset service providers (VASPs).

Key Sector Shortcomings

According to the document, three-quarters of jurisdictions are either not compliant or only partially compliant with FATF virtual asset requirements. Deficiencies fell into several key areas, including:

• Risk assessments – Nearly three-quarters (73 percent) of jurisdictions do not conduct adequate risk assessments, with more than one-third not conducting any. Nearly a third haven’t determined how – or whether – they will regulate the sector, and around 10 percent have elected an outright ban.
• Travel Rule compliance – Despite its importance in preventing financial crime, more than 50 percent of the surveyed countries failed to implement the rule, resulting in loopholes that must be addressed. Given that 54 jurisdictions did not respond to the survey, the watchdog estimates the actual percentage to be even higher. Even for countries implementing the rule, enforcement remains low at only 21 percent.
• Weapons proliferation risks – These deficiencies were noted as particularly serious in light of recent evidence that VAs are being used to support North Korean weapons proliferation. Countries that do not regulate the VA sector or perform adequate risk assessments remain vulnerable to these risks.
• Decentralized finance (DeFi) and unhosted wallet risks – the FATF noted the risks DeFi and related transaction platforms bear for an array of serious financial crimes, including money laundering, terrorist financing, and sanctions evasion. Indeed, crypto’s near-anonymity can facilitate activity criminals want to keep hidden, and mitigating these risks depends on thorough risk assessments and risk management at both the regulatory and private levels. 

The FATF urged jurisdictions to take rapid action to close the resulting risk gaps in response to these shortcomings. These include:

• Performing thorough risk assessments and implementing effective risk mitigation in line with FATF guidance.
• Ensure VASP activity is monitored and existing regulations enforced.
• Introduce, implement, and/or enforce legislation that complies with the Travel Rule.

Planned FATF Initiatives

During the plenary press conference, FATF President T. Raja Kumar elaborated on the importance of increased regulation in the sector – and what the FATF is doing to encourage it:

We see the risks posed by virtual assets continuing to increase. Four years after the FATF strengthened its standards to address virtual assets and virtual asset service providers, the global implementation remains relatively poor. Based on our FATF Mutual Evaluation and follow-up reports, almost three-quarters of jurisdictions are only partially or not compliant with the FATF’s requirements. …This lack of regulation creates significant loopholes for criminals to exploit…Closing the gaps in global regulation of virtual assets is an urgent priority. And so we are calling on countries to apply the AML/CFT rules to virtual assets without further delay. …We are also working with a global network in the private sector on this front to monitor the risk, share approaches, and also identify challenges.

Raja Kumar, FATF President

Kumar also noted that the plenary had previously agreed on a roadmap for improving virtual asset regulation. In support of this initiative, in early 2024, the FATF plans to publicly identify which jurisdictions have or have not implemented regulations in the sector, including publishing a table detailing steps taken by key member jurisdictions.

Key Takeaways

As the FATF works to improve virtual asset sector regulation and strengthen travel rule compliance, it also encourages firms in the virtual assets private sector to take their own initiatives. Recommendations include:

• Assessing existing risk management measures to ensure they are appropriate.
• Taking an ecosystem-wide approach to risks to include DeFi, unhosted wallets and P2P transactions.
• Maintaining a dialogue with regulators to ensure a common understanding of risk.

Proactive risk management is key to the most effective AML/CFT compliance programs. Firms should seek to stay ahead of the regulatory curve, responding holistically to financial crime risk and staying abreast of key trends. Although compliance with regulatory guidance is a must, firms that go beyond mere compliance to proactively identify and manage new risks will remain more resilient in the face of a shifting global landscape.