FATF Recommendation 16: four possible implications and data considerations on the revision

2024 has seen a lot of focus on one of the Financial Action Task Force (FATF)’s consultation processes in relation to proposed revisions of its Recommendation 16, commonly known as the "Travel Rule."

FATF's Recommendation 16 requires that providers of cross-border payment services (PSPs) include complete originator and beneficiary information in wire transfers. This is necessary to permit detection of the use of wire transfers by criminals or terrorists moving money.

The timely revision aims to address new challenges posed by evolving payment technologies that have emerged in the last decade and the changing global financial environment as a result. It strives to contribute to the G20 roadmap and the objective of making cross-border payments faster, cheaper, more transparent and more inclusive, while maintaining their safety and security.

These changes are likely to have significant implications for PSPs worldwide and the broader fight against money laundering and terrorist financing. The revision is material as the existing recommendation doesn't account for newer payment methods and offers an opportunity to consider the impact of bundled payments, for example on existing payment transparency control and monitoring frameworks.

The initial 1996 Travel Rule has been a key component of FATF's efforts to enhance transparency and traceability in cross-border financial transactions. However, the rapid evolution of payment technologies and the increasing complexity of the global financial system have resulted in a review of this long-standing recommendation.

The Travel Rule now explicitly applies to virtual assets and VASPs, requiring them to collect and transmit specific customer information during virtual asset transfers. It also seeks to clarify obligations for intermediary PSPs. This is an extension of previous regulations that primarily focused on traditional financial institutions.

In April 2024, the Wolfsberg Group, which represents 12 major global banks, submitted a response to the recommendations. The Group's feedback included potential operational challenges for PSPs, data privacy and security implications, and the need for a phased approach to implementation. The Wolfsberg Group also suggested a definition for what constituted a cross-border third-party payment to apply rules consistently, regardless of the type of organization engaged in the activity.

The proposed revisions to Recommendation 16 reflect FATF's ongoing efforts to adapt global anti-money laundering standards to an increasingly digital and interconnected financial ecosystem. These changes, aimed at strengthening the integrity of the global financial system, will no doubt be carefully considered to accommodate and account for all types of payments and operations.

In September 2024, after the closure of the consultation period in May 2024, Bill Mendenhall, BankCheck, Alan Ketley, Wolfsberg group, and Francis Marinier, Moody's, participated in a webinar to review implications and consequences of the latest recommendation.

There will be operational implications to consider in relation to the proposed changes, which it may be useful for PSPs to consider preparing for:

1. Budgeting for changing compliance costs
   In its current form the recommendation may lead to significant changes in monitoring systems. The FATF acknowledges the emergence of various technological tools designed to facilitate compliance with the Travel Rule but emphasizes these tools often do not meet all requirements. There is a call for improved interoperability among solutions to ensure comprehensive compliance across jurisdictions. Having compliance solutions that are flexible and that can be altered to meet changing regulatory requirements is a benefit. This is illustrated by the change requested by the Payments Market Practice Group (PMPG), accepted in May 2024, to be implemented from November 2025, by Swift and leading Payment Market Infrastructures (PMIs). In this urgent development, a hybrid address data format will allow simultaneous usage of structured and unstructured data fields. The question for services is - is your infrastructure ready for this hybrid processing?
   
   
2. Enhanced internal controls
   PSPs will need to consider changing internal controls to ensure data accuracy throughout the transactions taking place that leverage their products and services. Challenges remain in 2024 to evidence that the screening requirements on Originator's Information [Name, account number, physical address or national identity number, and date/place of birth] and Beneficiary's Information [Name and account number] can be effectively executed on a risk-based approach in keeping with existing AML-CFT control frameworks.
   
   
3. Preparing for supervisory changes
   While many jurisdictions have begun implementing the Travel Rule, enforcement remains inconsistent. According to a FATF report: “Only 21% of jurisdictions (13 of 6220 respondents) indicated that they had issued supervisory findings or directives or taken enforcement actions or other supervisory actions against VASPs focused on Travel Rule compliance.” The revisions, in part, aim to address this finding. Requirements for increased transparency relating to customers and transactions can be satisfied with the right technology and reporting suite.
   
   
4. Unintended consequences
   The requirement that all necessary information must travel with cross-border payments has been emphasized. This aims to prevent fragmentation of information across different jurisdictions, ensuring law enforcement can trace transactions effectively. In the implementation of the enhanced Travel Rule, PSPs will need to remain alert to identify possible types of unintended consequences. For instance, could migrant workers accessing funds in their home countries face new hurdles, required to open accounts with local banks for ID&V purposes, in direct conflict with the objectives of creating greater financial inclusion?

FATF is expected to review all submitted comments and release a final version of the revised Recommendation 16 later in 2024. As the global financial landscape continues to evolve, it is crucial for all stakeholders to continue engaging in the conversation, which can help ensure the final revisions achieve their aim of enhancing financial crime prevention and fostering innovation in payments.

Francis Marinier at Moody's emphasizes the importance of adapting to new technologies and market entrants, saying: “The revised Recommendation 16 needs to enhance payment transparency, while also helping to ensure it doesn’t create barriers for individuals with low-incomes who rely on remittances and other financial services. The balance between integrity and inclusion is delicate.”

Alan Ketley at Wolfsberg mentioned the high impact of the recommendation on bundled payments: “The impact of FATF Recommendation 16 on bundled payments underscores the need for enhanced transparency in financial transactions while navigating the complexities introduced by modern payment systems. As PSPs work towards compliance, there must be consideration of potential unintended consequences on users – for example, if intermediaries have to unbundle payments, then there will be cost implications for users along with potential delays.”

FATF’s proposed revisions to Recommendation 16 reflect its commitment to adapting global anti-money laundering standards in today's financial landscape. These changes aim to address new ways payments are being made in the global financial environment.

While there may be operational implications for PSPs to consider, such as budgeting for compliance costs and enhancing internal controls, it is essential for stakeholders to engage in the conversation and help ensure the final revisions achieve the goal of enhancing financial crime prevention while supporting innovation.

PSPs will be closely monitoring the development of these revisions to assess potential impacts and adaptations necessary to operations, technology infrastructure, and compliance frameworks, as well as look-back to KYC for enhanced due diligence data points.

Moody’s is transforming compliance and third-party risk management. Integrating data, workflow automation, and AI-driven solutions, we are helping to create a world where risk is better understood so decisions can be made with confidence.

With flexible, innovative technology and industry specialists, Moody’s can help automate perpetual monitoring of counterparty risk across global networks in near real-time. We work with customers to support their anti-financial crime, risk, and compliance programs around their risk appetite, operational needs, and strategic goals.

By using machine learning and artificial intelligence, Moody’s solutions can also help reduce false positives in screening, allowing compliance teams to focus on material risks more efficiently.

Moody’s solutions can also help enrich and standardize information required under FATF recommendation 16, such as originator and beneficiary details. This standardization can facilitate better identification of the parties involved throughout the customer lifecycle.

For more information, please get in touch with the Moody’s team any time, we would love to hear from you.