Practical Implementation of FATF Recommendation 15 for VASP: Leveraging On-Chain Analysis for Cryptocurrency Compliance

Compliance officers are essential in the implementation of anti-money laundering (AML) and anti-terrorist financing (CFT) measures, especially in the ever-evolving digital asset landscape. The Recommendation 15 of the Financial Action Task Force (FATF). focuses on AML/CFT measures necessary to manage the risks of new technologies, including compliance with digital assets. Although Recommendation 15 forms the cornerstone of global efforts to address financial crime risks in the crypto space, implementation has been flagged as a challenge. There is much more that cryptocurrency compliance professionals need to know.

As the global standard setter for AML/CFT, the FATF sets guidelines that countries must adhere to in creating their regulatory frameworks. These guidelines then trickle down to the compliance teams at virtual asset service providers (VASPs), who must design AML/CFT controls that meet those requirements. On-chain analytics can help crypto businesses by offering robust data and insights to strengthen compliance and compliance frameworks. This article examines critical considerations for compliance officers and the role of blockchain analytics in meeting key AML/CFT expectations as regulators around the world seek to implement FATF Recommendation 15.

Understanding FATF Recommendation 15: Caution, it is not self-contained

FATF Recommendation 15 on new technologies deals with the regulation and supervision of virtual asset service providers (VASPs). It mandates that countries establish regulatory frameworks to mitigate the risks associated with money laundering and terrorist financing activities that enable VASP. It highlights the importance of robust customer due diligence (CDD), transaction tracking, record keeping and reporting obligations within the digital asset sector.

Compliance officers must adapt traditional AML/CFT measures in the digital asset space to address the unique challenges of cryptocurrency and blockchain technology. The pseudonymous nature of transactions, cross-border nature and decentralized infrastructure require innovative compliance strategies and careful application of many TradFi-based practices.

Although Recommendation 15 is a guideline for VASP, emphasizing the need for robust practices, it is interdependent with other non-crypto-specific recommendations. Therefore, it should not be interpreted or implemented in isolation from the other 39 FATF recommendations.

What does this mean and what are the significant intersections?

Recommendations 15 and 10 onwards Client Due Diligence (CDD) emphasize the importance of robust CDD measures for VASP. This alignment reflects the provisions of Recommendation 10 on financial institutions to support diligent CDD practices with their clientele, emphasizing the need for thorough due diligence in financial transactions. The two recommendations have similar requirements.

FATF Recommendation 15 corresponds to Recommendation 11 Record keeping and storage, emphasizing the imperative for VASPs to carefully maintain accurate records of transactions and customer interactions. This guidance highlights the need for VASPs to align their record keeping practices with AML/CFT requirements, reiterating the compliance standards of Recommendation 11 for financial institutions to maintain comprehensive records for regulatory oversight and control.

Interconnection of Recommendation 15 with Recommendation 20 onwards Reporting suspicious transactions also comes into sharp focus. In line with the guidelines of Recommendation 20, Recommendation 15 mandates that countries must require VASPs to immediately report suspicious transactions to designated authorities, emphasizing the urgency of establishing robust procedures for reporting suspicious activity, thus increasing vigilance in the fight against financial crime.

In the global fight against illicit financial activities, FATF Recommendation 15 emphasizes a vital role international cooperation, essentially Recommendation 29 on the importance of cooperation in the fight against money laundering and terrorist financing. Recommendation 15 emphasizes the need for coordinated efforts among countries, mirroring Recommendation 29’s emphasis on fostering cooperation through information sharing and mutual legal assistance protocols.

the so-called ‘Rule of Travel’ detailed in FATF Recommendation 16 aims to improve transparency and accountability within virtual asset transactions. Under Recommendation 16, VASPs are mandated to transmit payer and beneficiary information with virtual funds transfers, aligning with traditional wire transfer obligations – also an essential element of Recommendation 15 implementation.

Blockchain Analytics: Helping VASPs Succeed

So, as regulators work globally to orchestrate meaningful and effective implementation of Recommendation 15, how can VASPs ensure compliance with operational requirements such as CDD, transaction monitoring, record keeping and reporting obligations?

Blockchain analytics can help. Elliptical indexes publicly available blockchain information and offers digestible data and insights to support the implementation of Recommendation 15 and beyond:

• Transaction tracking: Elliptical tools enable continuous monitoring of transactions across multiple blocks, flagging suspicious activity such as indicators of money laundering behavior, mixing of services and peer-to-peer transactions. On-chain analytics allow VASPs to monitor transactions taking place on the networks in real-time. By monitoring the movement of virtual assets and analyzing transaction patterns, VASPs can identify suspicious behaviors and activities, including transactions with high-risk parties. Through continuous transaction monitoring, VASPs can immediately detect and investigate potential cases of money laundering or terrorist financing, ensuring compliance with regulatory requirements.
• Address grouping: Through address clustering techniques, blockchain analytics can link multiple addresses to a single entity, revealing complex money laundering schemes and illegal activities. Address grouping is a powerful on-chain analytics feature that allows VASPs to identify addresses that are likely controlled by the same entity or wallet. By identifying the relationship between addresses and entities, VASPs can assess the risk associated with specific addresses based on their history of transactions and associations. Address grouping helps VASPs identify and mitigate risks related to illegal activities, such as funds originating from darknet markets or known money laundering schemes.
• Data Insights: By analyzing transaction data, blockchain analytics can create risk profiles for VASP clients, identifying high-risk entities for improved analysis and monitoring. Elliptic offers a robust dataset that displays data that helps compliance teams make risk-based decisions and assess the risk level of transactions or entities based on factors such as transaction size, frequency, counterparties involved, and historical behavior. These risk profiles allow VASPs to prioritize compliance efforts and focus on high-risk transactions or clients.
• Sanctions check: On-chain analysis tools integrate with sanctions lists and databases to verify transactions and addresses against known individuals, entities or jurisdictions subject to sanctions or regulatory restrictions. These insights enable VASPs to identify and block transactions involving sanctioned parties, ensuring compliance with regulatory requirements. Sanctions screening is a critical component of AML/CFT compliance, and Elliptic provides VASPs with the necessary tools to effectively enforce sanctions.
• Compliance Reporting: Blockchain analytics facilitate the generation of comprehensive reports on VASP compliance with AML/CFT requirements, aiding regulatory oversight and demonstrating compliance. Elliptic enables VASPs to derive insights, including SAR-relevant insights, in support of regulatory discovery. This information may facilitate communication with regulatory authorities. VASPs can demonstrate their commitment to regulatory compliance and transparency by using analytics on the compliance reporting chain, fostering trust and confidence among regulators and stakeholders.

Compliance officers are instrumental in the implementation of FATF Recommendation 15 in the digital asset sector and contribute to a safer and more transparent financial ecosystem in the digital age by embracing innovative technology solutions, encouraging collaboration and adhering to best practices.

Self-assessment of your preparedness

Is your VASP compliant with the obligations set out in Recommendation 15? Use our ‘VASP Self-Assessment Tool’ to determine how prepared your organization is. This assessment is designed for your internal organizational use.

Instructions:

• Review each question carefully and answer in the manner that best reflects your organization’s practices.
• Skip the question if it does not apply to your organization
• Consider providing additional comments or explanations where necessary to clarify the answer.

Client Due Diligence (CDD)

1. Does your organization have written customer due diligence (CDD) policies and procedures?
2. Does your organization verify the identity of customers before providing services?
3. Does your organization assess and document the risk associated with each customer and transaction?

Transaction tracking

1. Does your organization have automated transaction tracking systems?
2. Does your organization conduct continuous monitoring of customer transactions for suspicious activity?
3. Does your organization have procedures for identifying and reporting suspicious transactions to the relevant authorities?

Records

1. Does your organization maintain comprehensive records of customer transactions and interactions?
2. Are your organization’s record keeping practices compliant with regulatory requirements?
3. Does your organization have procedures for securely storing and retrieving transaction records?

Reporting obligations

1. Does your organization have procedures for reporting suspicious transactions to the authorities?
2. Are your organization’s reporting procedures aligned with regulatory requirements?
3. Does your organization provide staff training on identifying and reporting suspicious transactions?

Self-Assessment Conclusion:

After completing the self-assessment, review the responses to identify areas where improvements are needed to comply with FATF Recommendation 15. Develop an action plan to address deficiencies or deficiencies, prioritize actions based on risk, and implement necessary measures to strengthen the fight against money laundering in your organization/ CFT Compliance Framework. Review the assessment regularly to monitor progress and ensure compliance with regulatory requirements.

Contact us to learn how Elliptic can help VASPs integrate insightful compliance tools and leverage blockchain analytics to improve AML/CFT measures and protect the integrity of the financial system.