PRESS RELEASE: CGAP Releases Focus Note: AML/CFT: Strengthening Financial Inclusion and Integrity

Source: CGAP.

Original press release available online.

WASHINGTON, September 14 – Fighting money laundering and the financing of terrorism (ML/FT) doesn’t have to mean excluding poor people from the formal financial sector. In fact, banishing the unserved majority to the informal world of cash misses the point—and a critical opportunity for regulators and law enforcement to trace the movement of money. A new CGAP Focus Note, “AML/CFT: Strengthening Financial Inclusion and Integrity,” argues that financial inclusion and an effective financial integrity regime can—and should—be complementary national policy objectives.

Balancing AML/CFT controls and financial inclusion
The recommendations of the Financial Action Task Force (FATF) are the international standard for anti-money laundering and combating the financing of terrorism (AML/CFT) regulation. FATF advises countries and financial institutions to enhance their internal controls to address AML/CFT risks; perform due diligence on all new and existing clients; conduct heightened surveillance of suspicious transactions; and report suspect activity to national authorities.
But what effect do these measures have on access to financial services for the poor?

Inadvertently excluding the poor?
Building on earlier studies, including a CGAP analysis , the FIRST Initiative funded a five-country study to analyze the effects of AML/CFT regulation on access to finance in Indonesia, Kenya, Mexico, Pakistan, and South Africa. It concluded that AML/CFT measures can negatively affect access to, and use of, financial services if the measures are not properly designed.

Designing controls around real risks
According to the study, access-friendly AML/CFT controls should be tailored to the specific domestic environment and risks, should be “proportionate” or only as tight as the country context requires, and should realistically match the capacity of local institutions to carry them out.

While FATF envisions controls that are uniform enough worldwide to prevent displacing ML/FT from one area to another, “it also encourages countries and institutions to focus on people and activities that pose a high risk,” says lead author Jennifer Isern. “This means that, in some situations, countries might be able to exclude various financial services for low-income people from AML/CFT regulation.”

Country success stories
“Several countries have already successfully designed their AML/CFT laws to minimize adverse effects on financial inclusion as well as promote financial integrity,” says Isern. The three countries included in the FIRST survey that had enacted comprehensive AML/CFT regimes—Indonesia, Mexico and South Africa—as well as Pakistan were able to amend their AML/CFT controls according to real risks once initial rules were found to discourage the use and provision of financial services to poor clients.

AML/CFT controls as opportunity
While inappropriate AML/CFT controls can certainly have a negative effect on the services and client base of these providers, well-designed AML/CFT controls can actually provide them with protection and opportunities. AML/CFT controls can help institutions understand their customers better—allowing them to design and market better products and provide better customer service. Financial services providers also find it easier to engage with other institutions (investors, creditors, etc.) if they manage their AML/CFT controls. AML/CFT controls can also help strengthen an institution’s overall anti-fraud controls.

Ultimately, when low-income clients are excluded from formal financial services, the goals of the AML/CFT policy cannot be achieved. “While it’s challenging to both increase access to financial services and fight ML/FT, customizing AML/CFT policies to the local context and implementing them sensitively are well worth it in the end,” says Isern.

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