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FATF Travel Rule for VASPs has many challenges, including risk information gets lost in transactions – conference is told

By Vish Gain for AMLi

The FATF Travel Rule – while useful – poses many challenges as payment systems get modernised, Banking and AML expert Stuart Davis says.

“Unless the systems are all aligned, there’s a risk that information can be lost in the transaction, especially in the case of foreign transactions — and this has implications for AML,” Davis concluded.

The FATF Travel Rule requires Virtual Asset Service Providers (VASPs) ranging from cryptocurrency exchanges, digital wallet providers and financial institutions including banks dealing with crypto assets, to share specific customer data between counterparties.

“There are now more than 370 MSBs registered as virtual currency actors in Canada, and each of them will have to think how they will meet travel rule compliance,” he told the ACAMS Canada virtual conference.

“Even Paypal is now accepting payments in cryptocurrency. This tells you it’s a growing and important space,” said Rick McDonell, former Executive Secretary of the FATF and moderator of the session.

“The challenge with virtual currency just like it is with payment card transactions such as Visa Mastercard is that none of the information can travel with the data set that is contained within those specific transactions so other external systems are needed as ancillary benefits to be able to move the travel rule required information. It’s quite a bit of work,” said Davis.

Addressing some of the challenges to AML, Michael Donovan, senior VP and Chief AML Officer at CIBC, said that the main challenge is being able to comply with AML regulations in Canada that come into force on 1st June 2021.

“We need to understand how these new rules are going to impact the ways we serve our clients and ensure customer experience while still being compliant,” he said.

John Shoemaker, VP and Chief AML Officer at Great-West Lifeco Inc. said that the pace of change in the industry has been a challenge, especially at a time when expense management has been confined during the pandemic. 

“The guidance schedule that FINTRAC has released is incredibly ambitious and I fear that they may fall behind on it,” he said.

“It’s difficult to review since there’s no rationale for changes and no feedback to know why feedback wasn’t accepted. I’d like to see detailed guidance approved and ready to go with extensive consultation before-hand”.

Speaking of the banking sector’s response to cryptocurrency, Davis said, “Banks are generally still cautious towards this market. They generally don’t want to be participating where there’s scope for fraud or where rules and regulations are not being thoroughly and thoughtfully followed by the participants”.

“The encouraging news is many of the players in this space are taking compliance very seriously and aligning their compliance programs with regulations. Globally there’s been a lot of action in this space with state actors — such as ‘sand dollars’ in the Bahamas and China’s piloting of Central Banking digital currency,” he said.

Echoing some of the criticisms of FINTRAC, Donovan, who used to work there and helped write guidance, said that the organisation has underestimated some of the challenges of the schedule.

“From an implementation and delivery perspective, the biggest challenge is hitting that June 1st timeline. Without clear guidance to the regulatory changes and specification to the new reporting, all the project planning has to evolve in an agile way,” he said.

“When you’re dealing with legacy systems across multiple lines of business, this becomes quite a complex task”.

When asked about compliance with PEPs, Davis said that banking institutions have had robust systems in place for years because of their access to required technology and good KYC programs on the front end.

“I’m sympathetic to the challenges MSBs face in terms of PEP determination because of the very nature of the MSB business — you don’t have an account. Technology is key to successful PEP programs and it is important to know your lists both from the country of origin and country of destination”.

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