On September 4-5, 2018, China hosted the Financial Action Task Force’s (FATF) 3rd Fintech and Regtech Forum. Meanwhile, on July 1, 2018, Marshall Billingslea of the United States assumed the position of President of the FATF and has announced the FATF’s priorities under the U.S. Presidency.
- FATF/EAG FinTech RegTech Forum, China, September 2018
The forum was held in Hangzhou, China. The Vice-President of the FATF, Mr. Xiangmin Liu and the Eurasia Group (EAG) Chairperson, Ms. Jinghua Hao, both from China, jointly chaired the meeting.
Over 140 participants from the FinTech and RegTech sectors, financial institutions, and FATF members, associate members and observers attended the event.
Since 2016, the FATF has engaged in a continuing dialogue with FinTech and RegTech sectors, in order to support innovation in financial services, while responding to the regulatory and supervisory challenges posed by emerging technologies.
As part of this ongoing dialogue, governments and private sector experts discussed important issues such as digital ID, distributed ledger technology, and virtual currency. They also discussed how technologies such as artificial intelligence can contribute to anti-money laundering and counter terrorist financing (AML/CFT) compliance, risk assessment and management.
Concerning crypto assets, the participants discussed the diverse regulatory approaches to virtual currency/crypto assets, and the risks associated with their use. Participants explored possible ways to clarify how the FATF standards apply to virtual currency providers and related businesses, a priority of the FATF Presidency.
With respect to digital identification, participants discussed the challenges that both jurisdictions and the private sector experience when digital iIdentifications product and services are used to conduct customer due diligence as part of the on-boarding process. They discussed the approaches that different jurisdictions have taken to use digital ID products and services. The potential need for clarification of and/or change in the FATF Recommendations was considered.
With respect to distributed ledger technology participants examined different DLT identity and information solutions. They discussed their potential utility and their risks in the context of AML/CFT obligations. They also examined the technical and regulatory challenges associated with their adoption and use.
In 2015, FATF issued Guidance on Virtual Currency, which is part of a staged approach taken by the FATF. The focus of this Guidance is on the points of intersection that provide gateways to the regulated financial system, in particular convertible virtual currency exchangers. The FATF will continue to monitor developments in virtual current payment products and services (VCPPS) and emerging risks and mitigating factors. As we learn more about the technology and use of VCPPS, the Guidance may be updated, to include, where appropriate, emerging best practices to address regulatory issues arising in respect of ML/TF risks associated with VCPPS. Issues related to e.g. transfers within decentralized convertible VC networks that do not involve exchange activities, such as person-to-person transfers involving hosted wallet providers, and large value VC payments, which are not addressed by this Guidance may be considered in the longer term.
- FATF President’s Priorities
Under U.S. leadership, the FATF will strengthen its work on preventing the financing of the proliferation of weapons of mass destruction (WMD) and maintain emphasis on combating terrorist financing. The FATF will also take further action regarding virtual currencies given their expansion and attractiveness as a payment method for illicit actors. Under the US Presidency, the FATF will also continue to focus on financial and regulatory technologies, private sector outreach, and capacity-building at FATF-style regional bodies.
With respect to counter-proliferation finance measures, the paper observes that the FATF has worked to incorporate counter-proliferation finance measures into its standards, but these measures lag significantly behind those directed at countering money laundering and terrorist financing. The U.S. Presidency will prioritize work to close this gap. The public and private sectors must ensure that they are appropriately focused on the risks associated with WMD proliferation financing and have appropriate policies and controls in place to address those risks. Additional work is also needed to strengthen the reporting and receiving of financial intelligence related to WMD proliferation financing. Furthermore, the FATF should explore applying the same criminalization standard to proliferation financing as it does with money laundering and terrorist financing and should also consider new ways to address the full range of illicit proliferation-related activity that is only partially addressed by the current targeted financial sanctions regime.
Countering the Financing of Terrorism (CFT) will continue to be a top priority for the FATF. The US Presidency will ask FATF to take measures to foster more effective information sharing and coordination among competent authorities and explore how practical tools, such as operational task forces, can be implemented more broadly. The FATF will continue to prioritize adequate criminalization of terrorist financing and will work with countries to improve their capacity to prosecute terrorist financing cases. The U.S. Presidency will have FATF consider holding a global workshop on improving effectiveness to specifically address the common challenges and best practices in prosecuting terrorist financing cases identified under the previous FATF President.
The U.S. Presidency will prioritize clarifying how the FATF standards apply to virtual currency providers and related businesses. Virtual currencies are increasingly being used to launder the proceeds of crime, but are not explicitly acknowledged in the FATF Recommendations. Most countries still do not regulate and supervise virtual currency providers for anti-money laundering/counter-financing of terrorism (AML/CFT). An urgent need exists to explain how the FATF standards apply to virtual currency providers and related businesses, including for customer due diligence, funds transfers, supervision, and enforcement. The U.S. Presidency will have the FATF also start a new project, focusing on investigative best practices on virtual currency to support law enforcement. The project will identify relevant tools to support criminal investigations involving virtual currency payment products and services, as well as identify technological or other limitations that hinder effective investigations.
During the U.S. Presidency, FATF will also continue its work on financial and regulatory technologies (FinTech and RegTech) and how they can help combat illicit finance, increase financial inclusion, and potentially reduce compliance and supervisory costs. In that regard, the FATF will prepare draft guidance clarifying how the FATF standards apply in the context of digital identity, an initiative that the US Presidency will strongly support. Under the U.S. Presidency, the FATF will also explore how to enhance the body’s engagement with the private sector, support work to strengthen the capacity of the FATF-style regional bodies, and explore the role of the FATF in technical assistance.
The U.S. has proposed hosting a Ministerial meeting on the margins of the Spring 2019 International Monetary Fund/World Bank meetings in Washington, DC. Ministers could discuss the following: efforts to address gaps in national AML/CFT regimes; updates on sanctions and other counter-illicit finance actions countries have taken; emerging threats and steps countries are taking to address them; and actions taken to hold countries accountable for the failure to address strategic AML/CFT deficiencies.
The effort to properly integrate Fintech and Regtech into FATF illustrates one of the basic challenges facing governments and international organizations in managing financial services and globalization.
Using FATF to combat counter-terrorism finance and weapons of mass destruction proliferation have been U.S. priorities during its membership in FATF.
One of the governance issues of FATF has been the need to engage better with the private sector, especially since the private sector must implement the standards. At present the private sector’s input is largely limited to collaborating with FATF in designing guidance for the implementation of the standards once FATF elaborates them. The Fintech and Regtech Forum illustrate an example of consulting the private sector on the front end.
 FATF and EAG, Fintech and Regtech Forum, Sept. 2018 http://www.fatf-gafi.org/fintech-regtech/fatfonfintechregtech/?hf=10&b=0&s=desc(fatf_releasedate)
 FATF, Guidance for a Risk-Based Approach to Virtual Currencies (2015) http://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf
 FATF, Objectives for FATF – XXX (2018-2019) Paper by the Incoming President
United States Presidency Priorities for the Financial Action Task Force (FATF) http://www.fatf-gafi.org/media/fatf/content/images/Objectives-FATF-XXX-(2018-2019).pdf.