Handling Non-Compliant Deposits in the Era of the Travel Rule: A Path Forward

By: Lana Schwartzman (Notabene)

The Challenge of Non-Compliant Deposits

With the implementation of the Travel Rule, non-compliant deposits have become an unavoidable challenge. These situations can arise from various scenarios, all of which beneficiary CASPs must be prepared to handle, such as:

• Deposits originating from non-approved CASPs
• Deposits from approved CASPs lacking sufficient Travel Rule data
• Deposits from approved CASPs with inconsistent beneficiary information
• Deposits where the originator is not an eligible entity

Without a clear policy or well-defined workflow, these issues can lead to significant operational disruptions, degrade user experience, and even result in asset loss. Each scenario demands a strategic approach and well-structured workflow to ensure compliance while minimizing user impact.

Non-Compliance Under the EU’s TFR (Regulation 1113/2023)

In the European Union, the Travel Rule under TFR (Regulation 1113/2023) imposes significant obligations on beneficiary CASPs. Articles 14, 16, and 17 of the regulation mandate that all transactions must include accurate originator and beneficiary information. The challenge is that beneficiary CASPs cannot preemptively block incoming deposits and must rely on originating CASPs to meet compliance standards. This creates a complex balance between maintaining regulatory compliance and ensuring customer satisfaction.

Despite having less control over incoming deposits, beneficiary CASPs are still required to enforce compliance through methods like post-monitoring or suspending suspicious transactions. In some cases, regulators may even require the submission of suspicious activity reports.

Under Article 17, CASPs must implement risk-based procedures to decide whether to execute, reject, return, or suspend transactions lacking the necessary information. Each non-compliant deposit must be thoroughly reviewed, with responses ranging from requesting missing details to returning assets to the sender.

However, these processes are far from simple. For example, a deposit may originate from a wallet no longer owned by the sender, or the originator may not have an account with an approved CASP. How should funds be returned in such cases? The answers are often unclear, and the TFR allows for a risk-based approach to address these complex scenarios…

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