New guidance from FATF on AML/CFT and financial inclusion
Posted: August 4th, 2011 | viewed: (1,430) | Comments: ( 0 ) | Topic: Blog Post, Regulation | Region: Global
Last month the Financial Action Task Force (FATF) released a guidance paper on anti-money laundering and terrorist financing measures (AML/CFT) and financial inclusion. This is good news for mobile money because it offers national financial services regulators, who establish the know-your-customer (KYC) rules that mobile money providers must comply with, guidance on the ways in which a risk-based approach can be adopted to simplify customer due diligence (CDD) procedures—improving the ability of service providers to advance financial inclusion.
The Financial Action Task Force was established to develop and promote policies that combat money laundering and terrorist financing. As part of this mandate, it has developed a set of measures that financial institutions must adopt to prevent money laundering and terrorist financing. It is important that national financial regulators ensure that their national regulations are in line with these standards. But if they interpret and apply these standards conservatively, they can make it hard for the financially excluded to access services like mobile money.
This paper was written to highlight the flexibility that the FATF standards permit under a risk-based approach and to illustrate how this flexibility can create more enabling environments for financial inclusion.
Some of the important messages in the paper include:
- “AML/CFT measures can negatively affect access to, and use of, financial services if those measures are not carefully designed.”
- “Financial exclusion works against effective AML/CFT policies. Indeed, the prevalence of a large informal, unregulated and undocumented economy negatively affects AML/CFT efforts and the integrity of the financial system. Informal, unregulated and undocumented financial services and a pervasive cash economy can generate significant money laundering and terrorist financing risks and negatively affect AML/CFT preventive, detection and public investigation/prosecution efforts.”
- “Financial inclusion and an effective AML/CFT regime can and should be complementary national policy objectives with mutually supportive policy goals. Accordingly, international AML/CFT Standards have flexibility, enabling jurisdictions to craft effective and appropriate controls taking into account the relevance of expanding access to financial services as well as the diverse levels and types of risks posed by different products and supply channels.”
- “In line with the FATF Standards, a country may decide to exempt a specific type of financial institution or activity (as listed in the Glossary of the FATF Recommendations) from certain or all of the AML/CFT obligations… The current FATF Standards allow for simplified CDD measures in cases where there is a low risk of money laundering or terrorist financing. In relation to wire transfers for instance, countries may consider applying the so called “progressive or “tiered” KYC/CDD approach” whereby the transaction/payment limits vary based on the CDD; the better the CDD process, the higher the limits.”
- “Relying on a broader range of acceptable IDs: The customer identity verification stage is, in all instances, described by the industry as the most difficult and burdensome to achieve and as being a strong disincentive from a financial inclusion perspective. In order to address these challenges, the list of acceptable IDs in the verification process has been extended in some countries to include a broader range of documentation such as expired foreign IDs, consular documents or other records that undocumented people can typically acquire in the host country (bills, tax certificate, healthcare document, etc.). Usually, local authorities allow such an approach in pre-defined types of business relationships and below account balance limits i.e., using a risk-based approach.”
- “Identification in non-face to face scenarios: While face-to-face interaction is still relevant in certain types of banking activities (e.g., private banking), it is not essential to many banking and non-bank relationships. Non face-to-face financial operations that may serve the undocumented and financially excluded population require specific verification processes which should not necessarily include submission of a conventional government-issued form of identification with photograph. The process of reliance on third parties with respect to CDD is permitted under the FATF Standards.”
- “Record-keeping of CDD data and transactions: The information on the identification document(s) does not always require the retention of a photocopy and electronic storage is acceptable, which is particularly useful in the context of mobile phone banking.”
In situations where mobile operators believe that overly stringent customer due diligence procedures are constraining adoption of mobile money services, this paper can be a useful catalyst for dialogue with regulators about the possibility of a more enabling, risk-based approach.
A supplement to this new guidance paper from FATF is its Report on Money Laundering Using New Payment Methods, which was published last year. For a comprehensive analysis of the nexus between the FATF Standards, AML/CFT policy, and mobile money, see the World Bank’s recent report Protecting Mobile Money against Financial Crimes: Global Policy Challenges and Solutions.
