Reports & Analysis

What is the Travel Rule?


In 1995, the Federal Reserve Board and the Financial Crimes Network (FinCEN) passed a law requiring banks and financial institutions to record information about the transfer of their clients’ funds. The Recordkeeping Rule and the Travel Rule were the two main parts of this banking law.

The law on records required financial institutions to record and maintain transaction information. On the other hand, according to the law on the transfer of information, financial institutions had to transfer their information along with the transfer of funds. The main question is what does this information include?

The Travel Rule came into force in May 1996. This law has been developed and implemented as a supplement to the laws related to the field of records. One of the main goals of the information transfer law is to combat money laundering.

Under the Data Transfer Act, financial institutions are only required to provide records of transactions valued at more than $ 3,000. It should not be forgotten that the type of currency used in the transactions does not matter and only their dollar value matters.

The requirements of the law of transfer of information for the source include the following:

  • Transmitter name
  • Transferr account number
  • Transmitter address
  • Identity information
  • Amount transferred
  • Transfer date

The entity that is designated as the destination of the transaction should also include the following in its report:

  • Recipient name
  • Recipient address
  • Recipient account number
  • Any specific identity information of the recipient

Contrary to the Financial Action Task Force (FATF) guidelines, the US Financial Crimes Network requires institutions to record and maintain destination-related data in addition to transmitting information. Other differences between the rules of the Financial Action Task Force and the Financial Crimes Network in relation to the law on the transfer of information include the value of transfers; According to the Financial Action Task Force, this range includes transactions in excess of $ 1,000, and in the case of the Financial Crimes Network, this range is over $ 3,000.

According to the Financial Crimes Network guidelines, there is no need to comply with reporting requirements if the source and destination of the transaction is an individual or the recipient financial institution and the origin of the transaction is a domestic bank or domestic securities broker. There are other exceptions to this rule that have nothing to do with digital currencies.

According to this law, financial institutions are required to maintain the financial information and records of their customers for 5 years. It should not be forgotten that both banks and non-bank financial institutions are covered by this law.

Recent changes in the law on information transfer

In October 2020, the Federal Reserve Governing Council and the Financial Crimes Network reduced the reporting range from $ 3,000 to $ 250 in joint statements. This applies only to transactions that have a origin or destination outside the United States.

In late 2020, the Financial Crimes Network required banks, digital currency exchanges, and financial service providers to receive and record transfers of more than $ 3,000 worth of customers through announcements. According to the agency, any transfer from or to private wallets is covered by this law. According to the announcement, banks and financial service providers were required to record, collect, maintain and report additional information related to digital currency transactions with unsecured wallets.

Businesses that do not comply with the rules of the Financial Action Task Force may face domestic and international sanctions. FATA members are also required to accept the Data Transfer Act. There is also a fine for infringing businesses; Violating companies may be fined up to $ 40,000.

Now that we have learned the generalities of these rules, the question arises as to what are the challenges of enforcing these rules in the field of the Blockchain?

Blockchain Information Transfer Rules

Digital currencies, like bitcoins, have certain features that make it difficult to perform travel rolls. The lack of third party information in the China bloc is one of these challenges.

According to the Data Transfer Act, financial institutions and virtual asset service providers (VASPs) must transfer the recorded information to other entities.

However, these providers record limited information, and this information cannot be used to determine which transactions are subject to data transfer rules and which are not. In digital currency transactions, only the recipient and sender addresses are recorded, and this will present challenges.

Exchanges have tried to facilitate the implementation of restrictions and rules of the Financial Action Task Force in the field of data transfer law by tightening the conditions for authentication and using the tools of Blockchain analysis companies such as CipherTrace.

Conclusion

The Data Transfer Law is a legal requirement that aims to combat anonymous interbank transactions and digital currency transactions that are used to launder money and finance terrorism. Banking transfer companies, such as digital currency exchanges, seek to adapt their business to the terms announced by the FATF using authentication mechanisms.

Legal information transfer is doubly important for citizens of sanctioned countries such as Iran; Because with the full implementation of this law, the accounts of Iranians in foreign exchange offices that have accepted the FATF rules will be endangered.

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