What is FATF
The Financial Action Task Force (FATF) is undoubtedly an important and highly visible international body that sets standards in the area of combating money laundering and the financing of terrorism. Recently, the crypto world has also come to their attention, and now almost any issue of blockchain regulation is not complete without mentioning this organization. In this article we will tell you what is hidden behind the FATF acronym and what they do.
What is FATF
In 1989, the organization was created at the G7 summit in Paris to combat the growing problem of money laundering. This organization was tasked with analyzing money laundering trends, monitoring activities both nationally and internationally, compiling compliance reports, and developing guidelines and standards to combat the phenomenon.
The main purpose of this organization, known as the FATF, is to establish standards and regulations and promote the effective application of legal and regulatory measures to combat money laundering (AML), terrorist financing and other threats to the international financial system.
It should also be noted that the FATF is an intergovernmental organization and acts as a “global policy-making agency” that aims to create the necessary political will to implement national legislative and regulatory reforms in the area of combating money laundering.
Currently, 40 countries participate in the organization.
It should also be noted that the FATF is an intergovernmental organization and acts as a “global policy-making agency” that aims to create the necessary political will to implement national legislative and regulatory reforms in the area of combating money laundering.
Currently, 40 countries participate in the organization.
40 FATF recommendations
The most significant part of the FATF's work are the so-called "FATF Recommendations". Their history dates back to 1990, when the first 40 anti-money laundering recommendations were first published. These recommendations have been and remain a key policy instrument developed by the FATF. They are recognized throughout the world as a global standard in the fight against money laundering. Many countries have committed to implementing these 40 recommendations. They cover the criminal justice system and law enforcement, international cooperation, and the financial system and its regulation.
Historically, the FATF completely revised these 40 recommendations in 1996 and 2003. Nine specific recommendations were later added.
Historically, the FATF completely revised these 40 recommendations in 1996 and 2003. Nine specific recommendations were later added.
Table of contents of the FATF Recommendations document
9 FATF specific recommendations
In October 2001, in response to the September 11 terrorist attacks in the United States, the FATF issued eight specific recommendations on countering the financing of terrorism. Later another one was added.
Together with the original 40, these nine Special Recommendations set the international standard for measures to combat money laundering and the financing of terrorism and terrorist acts. Both sets of FATF recommendations are intended to be implemented at the national level through legislation and other legally binding measures.
At some point, FATF issued explanatory notes to its recommendations, and eventually, in 2012, codified its recommendations and explanatory notes into one document. According to the FATF themselves, their recommendations are currently followed by more than 200 countries.
At some point, FATF issued explanatory notes to its recommendations, and eventually, in 2012, codified its recommendations and explanatory notes into one document. According to the FATF themselves, their recommendations are currently followed by more than 200 countries.
What else does FATF do?
The FATF also monitors progress in implementing its recommendations through peer reviews of member countries known as mutual evaluations. This is the process by which the FATF evaluates a country's performance based on its assessment methodology, which includes two key elements.
The first element is technical compliance, which assesses the country's compliance with the legal and institutional framework, as well as the powers and procedures of the competent authorities.
The second element is the effectiveness assessment, which determines the extent to which the legal and institutional framework achieves the expected results in combating money laundering and terrorist financing.
Thus, FATF mutual assessments allow assessing both the technical compliance and effectiveness of countries' actions in the field of combating money laundering and terrorist financing.
FATF and blockchain
In 2019, the FATF presented the final version of its guidelines for the cryptocurrency industry. In this published document, the FATF required cryptocurrency exchanges and other cryptocurrency service providers (VASPs) to comply with anti-money laundering (AML) and anti-terrorist financing (CFT) procedures similar to traditional financial companies. Since then, this guide for the crypto industry has been constantly updated and expanded.
At the G20 summit, these recommendations were supported by the participating countries, essentially initiating the process of creating appropriate regulatory requirements.
At the G20 summit, these recommendations were supported by the participating countries, essentially initiating the process of creating appropriate regulatory requirements.
Experts in the region, then and now, differ in their assessments of such regulation. Proponents of regulation argue that this is a necessary measure and should have been implemented much earlier. According to them, cryptocurrencies have long been in need of integration into the global financial system. But still, for most of the crypto world, this news came as a shock.
What's wrong with FATF regulation of the crypto world?
The FATF recommendations on cryptocurrencies include somewhat controversial definitions of virtual assets and service providers in this area. They also mandate compliance with Guideline 16, known as the “Travel Rule”, requiring the inclusion of sender and recipient information in non-cash transactions over $1,000 or €1,000. These requirements have been criticized due to the difficulty of complying with them in the blockchain industry, but have been approved by G20 countries.
What's wrong with FATF regulation of the crypto world?
The FATF recommendations on cryptocurrencies include somewhat controversial definitions of virtual assets and service providers in this area. They also mandate compliance with Guideline 16, known as the “Travel Rule”, requiring the inclusion of sender and recipient information in non-cash transactions over $1,000 or €1,000. These requirements have been criticized due to the difficulty of complying with them in the blockchain industry, but have been approved by G20 countries.
What do regulators say?
Regulators believe that FATF standards help legitimize cryptocurrencies, improve transaction security, and reduce their use for illicit purposes. FATF recommendations are not formally binding, but countries that do not implement them may be blacklisted with subsequent sanctions, such as restrictions on foreign investment.
What do representatives of the crypto world say?
Representatives of the cryptocurrency industry are critical of the FATF recommendations. They believe that their implementation is difficult and leads to negative consequences for the industry, especially for virtual service providers (VASPs). Some experts believe that such rules lead to a decrease in market transparency and the transition of many transactions to the black market. The technical incompatibility of the blockchain architecture with the FATF requirements makes the situation worse, and some believe that these requirements cannot be met. Ultimately, many believe that the FATF rules lead to a significant portion of transactions moving into a “gray area”, which will complicate the work of law enforcement agencies, financial intelligence and investigations of crypto incidents.
Regulators believe that FATF standards help legitimize cryptocurrencies, improve transaction security, and reduce their use for illicit purposes. FATF recommendations are not formally binding, but countries that do not implement them may be blacklisted with subsequent sanctions, such as restrictions on foreign investment.
What do representatives of the crypto world say?
Representatives of the cryptocurrency industry are critical of the FATF recommendations. They believe that their implementation is difficult and leads to negative consequences for the industry, especially for virtual service providers (VASPs). Some experts believe that such rules lead to a decrease in market transparency and the transition of many transactions to the black market. The technical incompatibility of the blockchain architecture with the FATF requirements makes the situation worse, and some believe that these requirements cannot be met. Ultimately, many believe that the FATF rules lead to a significant portion of transactions moving into a “gray area”, which will complicate the work of law enforcement agencies, financial intelligence and investigations of crypto incidents.
Conclusion
We at AML Crypto do not consider the issue of regulation to be straightforward. It is likely that the creation of an institution such as the FATF can pursue good goals and actually provide significant counteraction to the laundering of funds from illegal activities and terrorist activities.
But, on the other hand, it is important to take into account the interests of crypto users, their right to anonymity and compliance with the key principles of blockchain. Legislators in general and the FATF in particular need to dive deeper into the issue and study the technical side of the functioning of cryptocurrencies. Measures from classical finance cannot always work as effectively here.
We, in turn, also contribute to the activities declared by the FATF. Our service Btrace is an AML verification of your counterparty's address in a matter of seconds. Free AML check for every new user.
But, on the other hand, it is important to take into account the interests of crypto users, their right to anonymity and compliance with the key principles of blockchain. Legislators in general and the FATF in particular need to dive deeper into the issue and study the technical side of the functioning of cryptocurrencies. Measures from classical finance cannot always work as effectively here.
We, in turn, also contribute to the activities declared by the FATF. Our service Btrace is an AML verification of your counterparty's address in a matter of seconds. Free AML check for every new user.
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