How can firms comply with the Travel Rule?

25 Aug 2023, 24 mins ago

The Financial Conduct Authority (“FCA”) has issued guidance on the Travel Rule, which sets out its expectations for UK cryptoasset businesses (“CBs”) to comply with the change in money laundering legislation. From 1 September 2023, CBs in the UK will be required to collect, verify and share information about cryptoasset transfers.

Does the Travel Rule apply to UK AML crypto regulation?

On 18 May 2023, Gherson’s business crime, investigations and regulatory team wrote a blog about  whether the Travel Rule was applicable in UK AML crypto regulation.

What is the Travel Rule?

In a nutshell, the Travel Rule requires the private sector to obtain and exchange beneficiary and originator information when dealing with virtual asset transfers over a certain threshold. Thus, making it a requirement to obtain information (e.g., name and address) about both parties to a financial transaction. This is a concept derived from the USA where banks have been required to obtain and store customer information relating to transactions of a certain level for a long time.

The international Financial Action Task Force (“FATF”) is driving the impetus for the implementation of the Travel Rule for crypto transactions. This is done by way of the FATF Travel Rule (Recommendation 16). The most recent update came in a FATF publication from June 2022 entitled “Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers”.

The Publication begins explaining how it had been three years since the FATF extended its anti-money laundering (“AML”) and counter-terrorism financing (“CTF”) standards to financial activities, including Virtual Assets and Virtual Asset Services Providers (“VASPs”).  Following two previous FATF guidance updates, this third guidance now focuses on the FATF’s Travel Rule.

According to the FATF, this is a key AML/CTF measure that enables VASPs and financial institutions to both detect suspicious transactions and to carry out effective sanctions screening.

Background: AML/CFT regime changes

UK

On 22 July 2022, HM Treasury launched a consultation entitled “Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022.”

The consultation covered various topics, including the expansion of requirements to strengthen the regime and information sharing and gathering procedures. Turning to aspects regarding crypto, one of the more controversial parts of the consultation concerns the implementation of the so-called Travel Rule.

The Travel Rule comes into force from 1 September 2023.

EU

On 16 May 2023, the European Union (“EU”) imposed new rules requiring cryptoasset service providers to collect certain information about the sender and beneficiary of the transfer of cryptoassets they operate, and to make these details accessible. This requirement applies irrespective of the amount of cryptoassets being transferred.

What guidance has the FCA provided?

The FCA guidance explains that, from 1 September 2023, CBs in the UK will be required to collect, verify and share information about cryptoasset transfers.

The FCA’s expectations for firms include:

  • Taking all reasonable steps and exercising all due diligence to comply with the Travel Rule.
  • Remaining responsible even when using third-party suppliers.
  • Ensuring compliance with the Travel Rule when sending or receiving cryptoassets from a firm in the UK or a firm in a country where the Travel Rule applies.
  • Regularly reviewing the implementation status of the Travel Rule in other jurisdictions.

When sending a cryptoasset transfer to a jurisdiction without the Travel Rule:

  • Firms must take all reasonable steps to establish whether the firm can receive the required information.
  • If the firm cannot receive the information, the UK CB must still collect and verify the information as required by the Money Laundering Regulations and should store that information before making the cryptoasset transfer.

When receiving a cryptoasset transfer from a jurisdiction without the Travel Rule:

  • If the cryptoasset has missing information, the firm must consider the countries in which the firm operates and the status of the Travel Rule in those countries.
  • The firm must take these factors into account when making a risk-based assessment of whether or not to make the cryptoasset available to the beneficiary.

Regulation and compliance

In these constantly changing times, firms that deal with cryptoassets, or have exposure to firms involved in cryptoasset transactions, will need to carefully consider all their systems and controls to ensure that they are able to comply with the relevant AML and sanctions regulations. Gherson’s white-collar crime and regulatory team are able to provide advice and assistance with AML and sanctions compliance, including in situations involving cryptoassets

For further information, please see the following articles written by our team:

For those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.

Criminal investigations and litigation

Gherson’s solicitors in the criminal litigation, regulatory and investigatory team combine an expert knowledge of criminal and regulatory law underpinned by a firm understanding of digital assets and blockchain technology. As such, the team is able to provide expert strategic advice to anyone facing investigation in relation to any allegation of criminality involving cryptoassets.

If you have any questions arising from this blog, please do not hesitate to contact us for advice, send us an e-mail, or, alternatively, follow us on TwitterFacebook, Instagram, or LinkedIn to stay-up-to-date.

The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.

©Gherson 2023