In 2012, one of the world’s largest banks, HSBC, was fined by US Federal regulators for $1.9 billion after being accused of laundering money for Mexican drug cartels and violating US sanctions by conducting transactions for clients in countries such as Iran, Sudan, and Cuba.

An investigation revealed that HSBC’s lax internal controls allowed for billions of dollars to be laundered through its accounts. The European bank, HSBC, admitted that it had not maintained adequate anti-money laundering (AML) measures. 

According to the statement of facts on the case by the US Department of Justice, “HSBC Bank USA ignored the money laundering risks associated with doing business with certain Mexican customers and failed to implement a BSA/AML program that was adequate to monitor suspicious transactions from Mexico.” as a result of this fiasco, “at least $881 million in drug trafficking proceeds, including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia, were laundered through HSBC Bank USA without being detected.”, according to the US Department of Justice. Besides the fine, HSBC had to enter a five-year deferred prosecution agreement, during which it was closely monitored by US authorities to ensure compliance.

The FATF Travel seeks to prevent scandals such as this.  The FATF Travel came as a much-needed intervention and regulation for actors of the global economy as cross-border transactions increased. The regulation also increases scrutiny for cross-border transactions that cross a certain limit,

The FATF Travel rule seeks to protect the global ecosystem economy from fraudulent cross-border transactions or financial crime and to checkmate the increasing cross-border transactions across the world. 

This article offers a brief and yet detailed overview of the FATF Travel rule.

What Is The FATF Travel Rule?

The FATF (Financial Action Task Force) Travel Rule is a regulatory rule or guideline with the aim of preventing money laundering and the financing of terrorism through cross-border financial transactions.

As the name implies, the rule was enacted by the Financial Action Task Force. This intergovernmental organization was established in 1989 with the primary objective of developing and promoting policies to combat money laundering, terrorism financing, and other threats to the integrity of the global financial system. The Financial Action Task Force makes international standards and provides recommendations to its member countries to help them strengthen their legal, regulatory, and operational frameworks against financial crimes.

FATF's Travel Rule was enacted in 2019, and it mandates that financial institutions share certain identifying information about the sender and recipient and makes sure that involving virtual assets, like cryptocurrencies, exceeds a set limit. The rule makes sure that financial service providers operate with transparency when facilitating international transactions and enables or empowers authorities to track illicit activities across borders.

Recommended: Cross-Border Payment Compliance

What Is The Importance Of The FATF Travel Rule?

The FATF Travel Rule plays a key role in maintaining the integrity of the global financial system.  As earlier mentioned, it is a much-needed regulatory measure or rule that needs to be enforced, albeit reasonably. The importance of the FATF Travel Rule includes:

1. The FATF Travel Rule Helps Prevent Financial Crime

This is because it enables businesses and authorities to track and share transaction details; therefore, it deters criminals from using transactions as a means to launder money or fund terrorism.

2. The FATF Travel Rule Improves Regulatory Compliance

Before the enactment of the Travel Rule, cross-border transactions were pretty much a tricky field for regulation. It wasn’t clear to most jurisdictions and their oversight bodies to perform checks or screenings. It was a gray area. Even if a transaction was suspicious, financial institutions were not obligated or mandated to check or screen. Customers may even claim a violation if a check or screen is considered or proposed.

However, the enactment of this rule allowed financial institutions to perform cross-border screening. With the Travel Rule, most financial institutions in most jurisdictions have to align with international regulations, and it allows for a level playing field globally.

3. The FATF Travel Improves Transparency In The Global Financial Ecosystem

The regulation improves trust in the financial ecosystem by making sure that each transaction can be traced to a responsible individual or entity, reducing the chances of fraudulent activities.  

4. The FATF Facilitates Greater Global Collaboration Against Financial Crime Across Borders 

The FATF Travel Rule promotes global collaboration among oversight or regulatory bodies, financial institutions, and law enforcement agencies. Countries are charged to cooperate in enforcing the rule, leading to stronger international partnerships in combating financial crime. This collaborative approach fosters a safer global financial ecosystem. 

Recommended: Implementing AML Compliance in Cross-Borders Mergers and Acquisitions

How Financial Institutions Can Comply With The Travel Rule 

Financial institutions and virtual asset service providers (VASPs) can comply with the FATF Travel Rule by:

1. By Collecting And Sharing Information

Financial institutions and virtual asset service providers (VASPs) should make sure that they collect accurate data on the sender as well as the receiver. These details should include names, account numbers, and physical addresses. After collection, these details should be shared with the appropriate oversight bodies.

2. By Implementing Secure Systems

For Financial institutions and virtual asset service providers (VASPs) to comply with the FATF Travel, they should develop or use technological solutions that can safely communicate this information while still protecting user privacy. 

3. By Staying Updated on Jurisdictional Regulations, Legislations or Rules

Different countries may have unique compliance requirements, and financial institutions must be aware of these legislations or regulations when dealing with cross-border transactions.

4. By Using Cross Border Payment Solutions By Youverify 

Youverify’s   Transaction screening tool is an effective yet seamless cross-border payment solution. With this software tool, Financial institutions and virtual asset service providers (VASPs) are able to perform satisfactory screening, aligning with the FATF Travel Rule.

The intelligent cross-border payment solution by Youverify screens the receiver and the sender against third-party government-backed data sources, high jurisdiction checks, and other conditions that can be pre-set by the business for AML screening. After the screening, the transaction is frozen if it checks certain boxes of the conditions set, and the transaction is sent for manual AML review. If it does not meet the condition, it is passed. If it is frozen, the sender will be alerted about this as well as the next steps for both parties (the financial institution or the sender)

This way, businesses can make informed decisions concerning cross-border transactions or payments,  complying with the FATF Travel Rule, avoiding sanctions, and combating financial crime.

Recommended: Mitigating AML Risk in Cross-Border Transactions

Bottom Line 

By promoting transparency and regulatory compliance, The FATF Travel Rule serves as a safeguard for the global financial system, ensuring that cross-border transactions are monitored and controlled for potential illicit activities.

Youverify’s  Transaction Screening provides a seamless and effective system for making informed decisions about cross-border payments, collecting necessary mandated details, and performing AML screening. Gain early access to an intelligent, top-notch cross-border payment solution here.