How Will FATF’s Methodology for Crypto Companies Change?

In early February, the FATF presented a revised Methodology for the next round of mutual evaluations. This will commence once all members have been assessed under the current Methodology adopted in 2013.

At present, the document is not in force and is for review purposes. ForkLog examined the provisions affecting virtual asset service providers (VASPs).

What does the document propose?

The new round of mutual evaluations will focus on the effectiveness of implementing AML/CFT measures.

When assessing money laundering and terrorism financing risks, experts are required to consider the significance of various VASPs and certain designated non-financial businesses and professions (DNFBPs).

The following factors are considered:

• their integration and structure;
• the importance of specific financial products;
• the type of client base and business volume (domestic or international);
• the extent to which they rely on cash or electronic money;
• the size of the shadow economy.

Countries, in complying with FATF recommendations, must adopt an adequate risk-based approach that does not disrupt or hinder the activities of NGOs.

For FATF purposes, in each jurisdiction, the term “virtual assets” should be defined as “property,” “income,” “funds,” “funds or other assets,” or other “relevant value.”

Cryptocurrency companies may operate only with a license or registration. For legal entities, this is in the jurisdiction where they are established; for individuals, in the jurisdiction where they operate. Lawbreakers and their accomplices are not allowed to own or manage VASPs.

Unrestricted exchange of information on the beneficial ownership of cryptocurrency companies with competent authorities and the provision of financial data for investigating money laundering and terrorism financing cases are also envisaged.

The development of guidelines for VASPs is assigned to local supervisory authorities.

Countries must implement criminal, civil, or administrative penalties for non-compliance with AML/CFT requirements. These should apply not only to the platform but also to its directors and senior management.

Additionally, there is a need to ensure compliance with targeted financial sanctions and a wide range of international cooperation with supervisory bodies on money laundering and counter-terrorism issues.

Preventive measures for VASPs include:

• conducting comprehensive customer checks for cryptocurrency transactions exceeding $1000/€1000;
• storing information about the sender and beneficiary of the transaction with the possibility of further transfer upon request by authorities (the rule applies to both recipient and sender exchanges);
• the ability to block funds and prohibit transactions for designated individuals and entities;
• the same obligations when sending or receiving virtual asset transfers on behalf of a client.

As supervision and monitoring are carried out, the level of compliance with AML/CFT requirements should increase. FATF expects this to reduce money laundering and terrorism financing activities, particularly using cryptocurrencies.

The next round of mutual evaluation will apply for six years from the date of entry into force. Previous rounds lasted an average of 10 years.

What FATF recommendations for the crypto market are currently in effect?

FATF introduced its first version of guidelines for the crypto industry in 2019, suggesting that virtual asset service providers implement AML/CFT measures similar to traditional financial companies.

In June 2021, the organization updated its recommendations, urging the acceleration of user data exchange within the industry to monitor transactions. However, it noted the challenges of implementing compliance and advised supervisory authorities to be flexible during the initial phase of requirement implementation.

This document also sets standards for the DeFi and NFT sectors. ForkLog has detailed the risks of the latter in a separate article.

Is compliance with FATF standards mandatory?

FATF recommendations are not legally binding. However, there are non-legal consequences of non-compliance that can significantly impact a country’s financial structure, explains Andrey Tugarin, founder of the law firm GMT Legal.

“FATF standards are designed to assist legislators in combating the illegal circulation of funds. Compliance with these recommendations is crucial for establishing coordinated measures to prevent organized crime, corruption, and terrorism,” he stated.

Currently, over 200 countries have committed to implementing FATF standards.

Non-compliance affects the reputation of financial institutions in a country.

“Consequences may include economic isolation, enhanced compliance control, and restrictions on settlements with international partners. Recently, Turkey, the UAE, Bulgaria, and Croatia have faced such measures,” Tugarin said.

Dmitry Machikhin, founder and CEO of BitOK, also mentions increased delivery times, higher transaction costs, and reduced investment attractiveness as consequences.

And, of course, there is the risk of being placed on FATF’s grey or black lists.

Is Russia at risk of being listed?

Since February 24, 2023, FATF has suspended Russia’s membership due to the full-scale war in Ukraine.

Specifically, Russia can no longer perform any leadership or advisory roles, participate in decision-making on standard setting, expert evaluation processes, governance, and membership issues. It also cannot provide assessors, reviewers, or other experts for FATF.

A year later, the suspension was extended. At that time, FATF downgraded Russia’s rating due to inadequate bitcoin market regulation. Among other things, the lack of definition for providers of cryptocurrency-related services was mentioned—it’s unclear who can operate crypto exchanges and exchangers in Russia.

According to Dmitry Machikhin, Russia is exemplary in complying with FATF standards. However, much remains to be implemented regarding cryptocurrencies.

So far, FATF has not announced plans to include Russia in the grey or black lists, which are updated several times a year.

The grey list includes countries actively working to address regulatory deficiencies.

“When FATF places a jurisdiction on this list, it means the country has committed to quickly addressing identified strategic deficiencies within agreed timelines and is subject to increased monitoring,” Tugarin explained.

The black list identifies jurisdictions that fail to address money laundering, terrorism financing, and proliferation of weapons of mass destruction issues.

“Being on such a list will severely impact foreign trade and investment attracted to the country. Few counterparties will want to ‘dirty’ their money in a jurisdiction on the black list,” the lawyer added.

According to Tugarin, for high-risk countries, FATF recommends stricter checks and, in some cases, countermeasures.

“If Russia is placed on the black list, it will face serious restrictions not only from unfriendly countries but also from other FATF members, such as Turkey and the UAE. Restrictions will manifest as economic isolation, enhanced control, loss of reputation, and additional sanctions that may be imposed in extreme cases,” the lawyer noted.

Dmitry Machikhin offers more restrained forecasts.

“Possible inclusion in the black list will slightly worsen Russia’s already difficult situation due to sanctions. But even if this happens, it will likely be for political rather than factual reasons. It will be like with WADA,” he believes.

In late March, Binance joined the Global Travel Rule Alliance, which provides infrastructure for complying with FATF recommendations. Specifically, it verifies sender and recipient data and transmits it in a cryptographically secure manner.