Hundreds of millions of people globally remain excluded from formal financial services to meet their needs in an affordable way. According to Findex (2017), 17% of adults in sub-Saharan Africa report not having a financial account because they cannot produce identity documents that banks are requesting as part of their anti-money laundering obligations.
A major reason for this has been the ineffective implementation of the global Financial Action Task Force (FATF) standards on anti-money laundering and countering the financing of terrorism (AML-CFT). The result of this has been the exclusion of the most vulnerable – those living in rural areas, informal settlements, and women – from formal financial services. Ironically, these individuals pose the least risk to money laundering due to their limited access to formal financial services.
The Financial Action Task Force requires countries and institutions to use a risk-based approach when implementing AML-CFT controls. Practically, this means aligning the amount of resources applied with the level of money laundering risk. Doing this is supposed to enhance the financial system's ability to combat financial crime and reduce the amount of "red-tape" for lower-risk individuals. The Financial Action Task Force recognizes financial exclusion as a key money laundering risk and encourages countries to consider financial inclusion as an ally in achieving financial integrity.
However, many countries are not using an effective risk-based approach and do not consider financial inclusion as a complimentary objective to financial integrity. The result is that many individuals are being excluded from the formal financial system, including individuals that pose very little material money laundering risk. This is also affecting the ability of developing countries to participate in international financial markets and is raising their risk profile in the global financial system.
Furthermore, evidence suggests that AML-CFT measures are having limited impact in countering money laundering and terrorism financing in developing countries. Recent results from the Financial Action Task Force's evaluation process show that AML-CFT frameworks in the bulk of African countries achieve a "low effectiveness" score. Clearly, intention is not matching reality. The effects of these frameworks are going against the grain of the intention of the FATF recommendations.
The global standards are supposed to drive reduction of financial crime and improve economic development for countries by improving governance and accountability. The absence of financial integrity strategies and policies at the country level is translating to insufficient direction and accountability in the way the standards are being implemented. This lack of direction is coinciding with a shortage of the necessary skills, resources and tools to implement effective inclusive risk-based approaches.
COVID-19 has upped the ante to implement effective frameworks for a rapid transition towards effective risk-based approaches that are inclusive as institutions need to find ways to undertake their obligations remotely. Doing so is easier said than done, though, as institutions with increasingly obsolete methodologies are caught in the headlights. Without clear direction, the necessary tools, and proper implementation, AML-CFT will continue to present a key barrier to inclusive economic growth.
However, there are some initiatives helping to break down this barrier. For example, in July 2020, the Alliance for Financial Inclusion and Cenfri, in partnership with FSD Africa, launched an Inclusive Integrity Toolkit as a practical tool to navigate the transition to effective risk-based approaches with a priority on supporting financial inclusion. Supported by the Financial Action Task Force (FATF), Eastern and Southern Africa Anti-Money Laundering Group, the Asia/ Pacific Group on Money Laundering, and the Financial Action Group of Latin America (GAFILAT), the toolkit provides guidance to countries while considering each part of the AML-CFT ecosystem.
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Specifically, the toolkit highlights key challenges, options and best practices for countries to align financial integrity, financial inclusion and development. It also leverages specific country experiences to provide practical examples of how such challenges have been addressed and how they align with risk-based approaches and how they support financial inclusion. Guidance is provided by Cenfri and the toolkit is hosted by Alliance for Financial Inclusion and FSD Africa. Countries can refer to the toolkit as they look to navigate the implementation of inclusive financial integrity frameworks and reach out to Cenfri if they need further guidance.
The requirement to implement a risk-based approach to AML-CFT has been in place since 2010, and the need to consider financial inclusion as a complimentary objective is well documented. it's time for the global community to step up, embrace it and implement it in the right way.
Matthew Ferreira is Senior Associate and Christine Hougaard is Technical Director at cenfri - Centre for Financial Regulation and Inclusion)
