The law regulates Virtual Asset Service Providers (VASPs) in Vanuatu, requiring them to obtain licenses from the Vanuatu Financial Services Commission (VFSC). It mandates compliance with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) protocols, ensures proper reporting and transparency of financial activities, and sets penalties for non-compliance. VASPs must maintain adequate capital, and the VFSC has the authority to suspend or revoke licenses for violations. The law also allows for the creation of further regulations to address emerging risks in the virtual asset sector, aiming to protect the financial system from misuse and fraud.

Here’s a breakdown of weak points and potential improvements to better protect the financial system:

1. Implementation and Enforcement Mechanisms

• Weakness: While the law outlines regulatory measures, it does not emphasize the practical implementation or enforcement strategies in enough detail. For example, while the Financial Intelligence Unit (FIU) is tasked with monitoring transactions, the actual process of identifying and preventing fraud is unclear. The lack of clarity around enforcement mechanisms could result in loopholes.
• Improvement:
  • Create a dedicated fraud detection task force within the FIU that focuses specifically on spotting fraudulent activity in crypto and offshore banking sectors.
  • Enforce automated monitoring systems using machine learning tools that flag suspicious activity, like patterns of fraudulent transactions or fake ICOs, in real-time.
  • Strengthen cooperation with international fraud watchdogs (e.g., FATF, Interpol) and implement cross-border collaboration with other nations’ fraud detection systems to track illicit activities.

2. Comprehensive Oversight on Offshore Transactions

• Weakness: While the law seeks to regulate crypto firms and offshore banks, it doesn’t provide a specific, strong mechanism for monitoring the cross-border movement of assets or the involvement of foreign entities that could be used for fraudulent purposes.
• Improvement:
  • Create stricter controls on offshore transactions by requiring not just KYC/AML for firms but also stringent due diligence on the source of funds and a traceability requirement for transactions leaving or entering Vanuatu.
  • Require periodic external audits for international firms operating in or through Vanuatu to ensure they comply with Vanuatu’s laws and international standards for anti-fraud measures.
  • Establish a fraud alert system linked with major international financial institutions, where suspicious cross-border transactions involving Vanuatu-registered entities would trigger real-time reviews.

3. Enforcement of Fit-and-Proper Tests for Bank Acquisitions

• Weakness: While the law requires “fit-and-proper” tests for new owners in the event of bank acquisitions, there are no specifics on how to test for fraudulent histories or connections to previous financial crimes.
• Improvement:
  • Extend the fit-and-proper test to include a detailed background check on individuals or entities acquiring financial institutions, specifically focusing on previous financial misconduct or criminal involvement in financial fraud, both locally and internationally.
  • Ensure that tests for source of funds are rigorous, and if any connection to illicit activities (like money laundering or fraud) is found, the acquisition should be blocked.
  • Require a declaration of ownership links, not just for new acquisitions but for existing entities too, to ensure complete transparency in the financial sector.

4. Transparency of Ownership and Control

• Weakness: While the law proposes beneficial ownership disclosure, this still leaves a gap. In cases like Bankera, fraudulent or illicit actors can still use complex ownership structures to mask control, even with disclosure.
• Improvement:
  • Mandate deeper transparency, where not only ownership but also the ultimate controlling parties (e.g., beneficial owners in offshore jurisdictions) are revealed. This could prevent shell companies or fraudulent parties from hiding behind layers of complex ownership.
  • Introduce a publicly accessible register of financial entities with full details of owners, decision-makers, and anyone with more than a certain threshold of control (e.g., 10-20% stake).
  • Use blockchain technology or other secure platforms to create transparent, unchangeable records that the public and regulators can access easily, ensuring accountability.

5. Criminal Penalties and Rapid License Revocation

• Weakness: While penalties for breaches are mentioned, there’s no clarity on the speed of enforcement. In cases like Bankera, delays in identifying fraud led to greater losses.
• Improvement:
  • Establish a fast-track process for investigating and responding to potential fraud in the crypto and financial sectors. This would include immediate suspension or revocation of licenses if fraudulent activity is suspected.
  • Introduce provisional fines or temporary asset freezes pending investigation for entities under suspicion of fraud or misconduct to prevent ongoing damage.
  • Create a fraud task force that is authorized to act swiftly in cases where large sums of money or significant amounts of assets are involved, ensuring that fraudsters can’t quickly liquidate or move assets.

6. Consumer Protections

• Weakness: The law does not specifically address consumer protections in crypto transactions. If fraudulent activities occur, consumers or investors may have limited recourse.
• Improvement:
  • Introduce consumer protection clauses for individuals investing in digital assets or crypto by requiring clear disclosure of risks and providing mechanisms for recourse in the event of fraud (e.g., restitution or compensation).
  • Create an investor protection fund that could help compensate individuals or entities that lose money due to fraudulent crypto schemes or banking misconduct, similar to deposit insurance in traditional banks.
  • Require crypto firms to have a clear dispute resolution mechanism for investors to report fraud or misconduct and ensure that there is an independent body to address complaints.

7. Strengthening International Cooperation

• Weakness: While international cooperation is mentioned, it’s unclear how it will be operationalized in real-world situations, especially when fraud or financial crimes cross borders, like in the Bankera case.
• Improvement:
  • Develop multilateral agreements or special task forces with neighboring countries or regions to investigate and act on cross-border fraud that may involve Vanuatu-registered financial institutions or crypto firms.
  • Expand Mutual Legal Assistance Treaties (MLATs) with more jurisdictions, particularly with countries where the risk of financial crime is higher, to ensure Vanuatu can request and offer assistance in cases of fraud or financial misconduct involving international parties.
  • Participate in global financial crime forums to stay updated on trends and practices in preventing fraud and digital asset-related crimes, ensuring Vanuatu’s laws remain aligned with global anti-fraud standards.

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Conclusion:

To effectively address fraud risks like the Bankera case and ensure Vanuatu’s financial sector is secure and transparent, the law needs to be bolstered in areas like rapid enforcement, transparency in ownership, and consumer protections. Additionally, strengthening cross-border collaboration and improving due diligence in financial transactions will help prevent future misuse and fraud.