Regulatory Update

MONEYVAL’s 2023 Report Exposes AML Risks in Virtual Assets

by Mariam Giorgadze, Crystal Regulatory & Compliance Team

80% of assessed members demonstrated only partial or non-compliance 

On 6 July 2023, the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) published a report on money laundering and financing of terrorism risks in the world of virtual assets (VAs) and their service providers in MONEYVAL member states and territories.  

The MONEYVAL report sheds light on the challenges faced by member states in regulating VAs and virtual assets service providers (VASPs) while combating money laundering and terrorism financing.  

Compliance with global standards remains a significant issue, and risk assessments, supervision, and cross-border cooperation require further improvement.  

Enhancing regulatory frameworks, conducting comprehensive risk assessments, and strengthening supervisory capabilities are crucial for mitigating the risks associated with VAs and VASPs effectively 

Collaboration between authorities, financial institutions, and international organizations is essential to address the evolving landscape of virtual assets and combat financial crime effectively.  

Overall, MONEYVAL members employ various approaches to licensing, registration, and supervision of VASPs. However, there is a need for comprehensive risk assessments, adequate resources, and consistent sanctions to ensure effective AML/CFT oversight and mitigate ML/TF risks in the VASP sector. 

In this blog we summarise the key points from the MONEYVAL report. 

The scope of the MONEYVAL 2023 report 

The report examines the level of compliance with Recommendation 15 of the Financial Action Task Force (FATF), which focuses on regulating and supervising VASPs. It also explores the risks posed by criminals who exploit VASPs and VAs for money laundering, including various platforms such as exchanges, aggregators, and cryptocurrency platforms involved in e-gaming, sports betting, and NFTs. 

MONEYVAL is a monitoring body of the Council of Europe which is entrusted with the task of assessing compliance with the main international standards to counter money laundering and the financing of terrorism. It also examines the effectiveness of measures to combat these threats within the member countries. MONEYVAL is currently made up of 35 jurisdictions. The membership mainly includes European states. 

Crypto compliance with FATF standards 

The report assesses the compliance of MONEYVAL member states with the FATF recommendations regarding VAs and VASPs.  

It reveals that approximately 80% of assessed members demonstrated only partial or non-compliance with these requirements.  

Areas requiring improvement include risk assessment, supervision, and the application of preventative measures. Compliance deficiencies varied among jurisdictions, with better results seen when existing anti-money laundering and counter-terrorism financing (AML/CFT) laws aligned with the inclusion of VASPs as reporting entities.  

However, challenges remain in areas such as conducting risk assessments and implementing preventive measures. The identification of unregistered or unlicensed VASPs is a particularly difficult task. Overall, systemic deficiencies and cascading issues hinder compliance with AML/CFT requirements for VAs and VASPs.  

Money laundering and terrorist financing risks associated with VAs and VASPs 

The report underscores the challenges faced by jurisdictions in assessing the risks of money laundering and terrorist financing related to VAs and VASPs.  

Identifying unregistered or unlicensed VASP activity poses difficulties.  

Countries often rely on declarations made by legal persons in the commercial register to identify VASP-related services. However, this approach is less reliable because of potential errors or broad descriptions of activities. A questionnaire is typically sent to registered or potential VASPs for a more in-depth analysis. If no registered businesses are identified, VAs and VASPs may receive less attention, despite the need to assess the use of VAs in the country.  

Risk analysis involves considering factors such as: 

A) The number and nature of registered institutions

B) Client demographics

C) Higher-risk clients

D) Transaction values

E) Supervisory

However, the assessments often rely heavily on international reports and lack uniformity in the risk factors considered.  

Because of the limitations in gathering data, members have a limited understanding of the types of VASPs operating in their jurisdictions. This includes foreign-registered VASPs serving domestic clients or domestic non-registered or licensed VASPs.  

A deeper understanding of the sector is crucial for conducting comprehensive risk assessments. 

Regulatory approaches and challenges: a closer look at VAs and VASPs in MONEYVAL member states 

MONEYVAL members have employed various approaches when defining VAs and VASPs in their legislation.  

The FATF defines VAs as digital representations of value that can be digitally traded or transferred for payment or investment purposes. VASPs are defined as natural or legal persons providing specific activities related to virtual assets.  

However, the scope and coverage of VASPs differs among jurisdictions, with some not including natural persons and others not covering all types of legal persons. 

1. Regulatory framework 

To mitigate risks associated with VASP activities, countries have implemented market entry controls and risk-based supervision for AML/CFT purposes. Most MONEYVAL members have established legal frameworks to regulate VAs and VASPs, with some countries prohibit VA operations altogether. 

  • Licensing or registration regime 

Under FATF Recommendation 15, countries have the option to license or register VASPs. The extent and stringency of these regimes vary, with some countries requiring registration for all VASP activities, while others only register legal persons or specific types of VASP activities. The absence of a licensing mechanism poses challenges, as registration alone may not prove the legitimacy of a business. 

The difference between licensing and registration poses challenges in terms of proving the legitimacy of businesses and managing industry standards. Mere registration may not be sufficient to ensure proper regulation and prevent illicit activities, as less reputable firms can misuse it as a stamp of legitimacy. 

Fit and proper checks are essential in the licensing or registration process to prevent criminals from holding significant interests or management positions in VASPs. However, the level of regulation regarding these checks varies among MONEYVAL members. 

2. AML/CFT supervision : 

  • Designating the supervisory authority 

Supervisory models for VASPs differ among MONEYVAL members, and the authority responsible for licensing or registration may not always conduct AML/CFT supervision. The effectiveness of supervision in minimizing Money Laundering/Terrorist Financing (ML/TF) risks is crucial.

  • Powers of supervisors to adequately monitor the sector and resources 

MONEYVAL members have varied approaches to supervisory obligations. Some jurisdictions apply the same AML/CFT requirements and powers to VASPs as other obligated entities, while others are still in the early stages of implementation. For example, IT staff is increasingly involved in supervisory roles due to the technology-reliant nature of the sector.

  • Applying a risk-based approach to supervision of VASPs 

Comprehensive risk assessments considering the individual risks of VASPs and VA products/services are necessary for effective supervision. However, many members rely on higher-level findings from National Risk Assessments, limiting the application of a thorough risk-based approach.

  • Detecting cross-border flows 

Supervisors should consider the volume and flow of cross-border transactions to assess VASP sector risks. Some members collect data on transactional flows, helping inform their supervisory approach. However, identifying foreign customers of domestic VASPs and verifying data reliability poses challenges.

  • Sanctions 

The availability and scope of sanctions for VASP supervisors differ among members. While pecuniary sanctions are commonly available, other penalties such as license restrictions or suspensions may be absent. Education and cooperation among law enforcement agencies, supervisors, and financial institutions are necessary to detect unregistered VASPs and unauthorized activities effectively. 

The MONEYVAL report illustrates that members employ varying approaches to licensing, registration, and supervision of VASPs.  

It emphasizes the continued need for comprehensive risk assessments, adequate resources, and consistent sanctions to ensure effective AML/CFT oversight and mitigate ML/TF risks in the VASP sector. As the virtual asset landscape continues to evolve, adapting and strengthening AML/CFT measures is imperative. By heeding the insights provided by the MONEYVAL report and taking concerted actions, member states can work towards a more secure and compliant environment for virtual assets and their service providers, ultimately contributing to the global fight against financial crime. 

To learn how Crystal can help your business achieve compliance with evolving regulations, please book in a call with us here.