In tandem with the public consultation on the draft Guidance on a risk-based approach to virtual assets and virtual asset service providers launched on March 19, 2021, the Financial Action Task Force (FATF) launched a project to study and mitigate the unintended consequences of its Standards. For this project, the FATF requested that key industry stakeholders submit research and documented instances of the misuse or incorrect implementation of its Standards, which may result in unintended consequences such as financial exclusion and de-risking.
Based on years of advocacy for regulators and industry participants alike, XReg Consulting responded to the submission with a proposal on how the unintended consequences of the implementation of FATF Standards may be mitigated by encouraging countries and financial institutions to re-define their approach to decision-making, from a singular assessment of ML/TF risks to a more comprehensive methodology that includes a Regulatory Impact Assessment (RIA).
An RIA is an informative instrument that can support efficient decision-making and resource allocation based on facts and evidence. The Organisation for Economic Cooperation and Development (OECD) advocates its use in policy-making in all countries' legal, administrative, and cultural systems and has published instructive best practice principles for conducting an RIA. The use of an RIA would support effective and proportionate policy-making that balances different policy goals and avoids decision-making biases by incorporating a systematic review of different policy objectives and evaluating options based on both risk prevention, costs, and benefits.
As a result of applying a systematic framework for decision-making, we feel that where benefits such as financial inclusion and innovation may outweigh ML/TF risks, or where risks are assessed as low or can be mitigated, simplified due diligence could be appropriate, and de-risking may be avoided.
Finally, we equally encourage the FATF to conduct and publish comprehensive RIAs to inform its own internal decisions and to increase transparency in policy-making.
For further information, please see our consultation response here. If you have any questions regarding the use of an RIA in policy or operational decision-making or would like additional information on how the unintended consequences of the FATF Standards may be mitigated, please contact Ana James at email@example.com.