FATF Travel Rule is one of the advanced measures in the anti-money laundering regime to bring transparency around the electronic movement of the funds – whether wire transfer or transfer of virtual digital asset. This rule, FATF’s Recommendation 16, applies to financial institutions and Virtual Digital Asset Service Providers.
It requires the identification of the originator (payer) and beneficiary (payee) involved in the electronic transfer of funds or exchange of virtual digital assets. This data helps the reporting entities understand the parties involved in exchanging funds or virtual digital assets and detect any potential connection with money laundering.
In India, along with financial institutions, the FATF travel rule compliance under the AML framework has been made mandatory for virtual digital asset service providers (VDASPs). Let’s explore the FATF travel rule requirements and their impact on virtual digital asset businesses.
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What is the FATF Travel Rule?
FATF travel rule is the compliance requirement warranting the identification of the person initiating the transfer of funds and the intended recipient. It is similar to the traditional bank wire transfer transaction. While transferring money from one bank account to another, the reporting entities need to identify the account holder transferring the funds and the recipient of such funds. A similar requirement is now being adhered to by the reporting entities providing services related to virtual digital assets as part of travel rule compliance.
The travel rule requires the reporting entity engaged in virtual digital asset-related activities to obtain necessary details about the originator and beneficiary, apply necessary verification measures, and exchange such information with the counterparty VDASP or the recipient service provider.
Here, the one sending the virtual digital assets would be treated as the Originator, and the one receiving them is the Beneficiary.
India’s adoption of the FATF travel rule in AML
Money launderers have exploited all possible financial instruments to commit crimes. With virtual digital assets’ popularity worldwide, they have also found ways to commit crimes through them. In this regard, compliance with the FATF travel rule will imbibe transparency between the VDASPs regarding the parties involved in the virtual digital transfers.
In line with India’s Prevention of Money Laundering Act 2002 (PMLA), the Central Government of India issued a notification on 07th March 2023 to bring the activities related to virtual digital assets under the ambit of the anti-money laundering regime. Pursuant to this inclusion of VDASPs as the reporting entity under PMLA, the authorities issued detailed AML and CFT guidelines for the reporting entities providing services related to the virtual digital assets on 10th March 2023, laying down the directives and compliance obligations of the VDASPs to safeguard the VDA ecosystem from being exploited by the financial criminals.
Collecting the necessary information
Under these guidelines, the VDASPs are mandated to comply with the Travel Rule, which requires the originating VDASPs to collect the required and accurate details about the originator and the beneficiary of the VDA transfer and securely share this information with the beneficiary VDASP along with the transfer request.
The information to be collected by the Originating or Ordering VDASPs and shared with the Beneficiary VDASPs includes:
Originator
- Originator’s Permanent Account Number (PAN) or National Identity Number,
- Complete name of the VDA transfer’s originator,
- Originator’s account number (VDA wallet address) used to process the transaction or from where the VDA transfer has been initiated,
- The originator’s geographical location helps in identifying the originator,
- Date and place of birth of the originator.
Beneficiary
- Name of the beneficiary, i.e., the person named as the recipient of the VDA to be transferred by the originator,
- Wallet address of the beneficiary
Role of VDASPs involved in the transfer
Originating VDASP
The ordering or the originating VDASP must obtain accurate details of the originator and the beneficiary, as mentioned above.
Additionally, the VDASP must verify the originator’s identity and address using reliable information as part of the KYC and Customer Due Diligence process. The ordering VDASP is not required to verify the beneficiary’s identity, but the beneficiary must be screened for sanctions checks and be cautious of ML/FT suspicion.
Once the originating VDASP is satisfied with the accuracy and completeness of the required details, it must share them with the beneficiary VDASP along with the VDA transfer message.
Beneficiary VDASP
Upon receiving the details along with the VDA transfer communication, the beneficiary VDASP must check the details to determine if any necessary details are missing.
The beneficiary VDASP must verify the beneficiary’s identity before concluding the transfer if such a person has not been verified as part of the customer onboarding and CDD process.
Intermediary VDASP
An intermediary VDASP facilitating the transfer of virtual digital assets must ensure that the necessary originator and beneficiary details are adequately transmitted along with the VDA transfer trail while retaining the same information at the intermediary level.
Retaining the obtained information
The originating VDASPs must retain the information acquired about the originator and the beneficiary for five (5) years from the date of transfer. Similarly, the beneficiary VDASPs must accurately maintain the originator and beneficiary information obtained from the originating VDASP for a minimum five (5) year’s period.
When information about the originator or beneficiary is not available
In cases where the VDASPs cannot obtain the required information about the originator or beneficiary or where such information cannot be adequately verified, then the VDASP must not execute the virtual digital asset transfer transaction. Further, if required under the circumstances, the VDASP must consider reporting the suspicion to the Financial Intelligence Unit, India, by submitting the Suspicious Transaction Report.
Counterparty Due Diligence
As part of travel rule compliance, the originating VDASP must apply necessary due diligence measures on the counterparty VDASP, involved in transferring virtual digital assets, adopting a risk-based approach. Further, the originating VDASP must ensure that such counterparty due diligence is satisfactorily concluded before transmitting the information about the originator and beneficiary to avoid any engagement with criminals or aiding the illicit movement of funds.
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Challenges of FATF travel rule compliance and solutions
FATF travel rule compliance is an excellent method to prevent money laundering in virtual digital asset transactions. With timely collection and exchange of originator and beneficiary details between the VDASPs involved in the transfer, the detection and reporting of money laundering activity become easy.
The travel rule in AML checks virtual asset transactions’ transparency and traceability. It also enables collaboration between VDASPs to better the sector, which could lead to a trustworthy and credible virtual digital asset ecosystem
Challenges
Despite the merits of the FATF travel rule, it also has many challenges, such as:
- Difficulties in obtaining accurate details about the beneficiary, given the anonymity involved and frequent reference to the wallet address of the beneficiaries.
- Delay in exchange of information from the originating VDASP to the recipient VDASP without proper tools and solutions at both ends.
- Non-maintenance of the originator and beneficiary details for the required time period.
- There is no standardised mechanism worldwide for consistently implementing the travel rule across cross-border VDA transfers. Many countries have mandated compliance with the travel rule, while some are still considering adopting it, making it challenging to exchange information when a transaction occurs between two counterparties in different jurisdictions.
Solutions for challenges
One possible solution to fight these challenges is innovative technology. The VDASPs can have a technological solution to collect, verify and store data. Also, the data-sharing feature is essential for exchanging information with the counterparty securely and on a timely basis, accompanying the VDA transfer instruction. The onus is on VDASPs to find an appropriate solution to fulfil these needs and promote industry growth.
The solution must be in a universal language understood across countries. Real-time customer identification and verification can be an advanced feature of such a tool. The aim must be to ensure smooth data collection and exchange between counterparties.
Further, the VDASP must make it a policy not to accept the transfer request unless the originator and beneficiary of the VDA transfer are adequately identified.
AML India – your trustworthy AML compliance consultant
AML India has been leading from the front in AML compliance. We help clients understand the requirements of AML regulations and comply with them. Together with you, we aim to prevent money laundering and terrorism financing threats to your business. So, we take a customised approach to make you AML compliant and protect you from financial crimes.
You can hire us for any or all of the following AML compliance services:
- Conducting the Enterprise-Wide Risk Assessment to assess the ML/Ft exposure to your VDA activities
- Developing and implementing an AML program for managing the ML/FT risks
- Appointing an AML Principal Officer and assisting in setting up an AML compliance department
- Creating transaction monitoring rules to detect suspicious VDA transfers timely
Thus, you can find all kinds of support related to AML compliance at AML India.
About the Author
Jyoti Maheshwari
CAMS, ACA
Jyoti is a Chartered Accountant and Certified Anti-Money Laundering Specialist (CAMS) with over 7 years of experience in regulatory compliance, policymaking, risk management, RegTech solution consultancy, and implementation. With an understanding of the different jurisdictional AML regulations, including PMLA, 2002 and IFSCA (AML, CFT, and KYC) Guidelines, has been closely working with clients to implement Anti-Money Laundering measures, including conducting Enterprise-Wide Risk Assessments, imparting AML training, etc.
