Executive Summary
Across the world, new measures are being introduced to combat money laundering
and the financing of terrorism. All financial service providers, including those working with low-income communities, are - or will - be affected by these measures. This
paper summarizes the implications of the international framework for anti-money
laundering (AML) and combating the financing of terrorism (CFT) for financial service providers working with low-income people.
While each country may adapt the international AML/CFT standards developed
by the Financial Action Task Force (FATF), in general financial service providers are
required to:
- enhance their internal controls to cater specifically for AML/CFT risks;
- undertake customer due diligence procedures on all new and existing clients;
- introduce heightened surveillance of suspicious transactions and keep transaction
records for future verification; and
- report suspicious transactions to national authorities.
These measures could bring additional costs of compliance to financial service
providers; and customer due diligence rules may restrict formal financial services
from reaching lower-income people. Although the framework applies to all financial
institutions, the risk of money laundering or financing of terrorism varies with the
country context, the institution's legal form, and the type of financial service. The
introduction of new or tightened AML/CFT regulations may have the unintended
and undesirable consequence of reducing the access of low-income people to formal
financial services. As a means to avoid this outcome, this paper argues in favor of (1)
gradual implementation of new measures; (2) the adoption of a risk-based approach
to regulation; and (3) the use of exemptions for low-risk categories of transactions.
South Africa provides one example of how a country's AML/CFT regulations can
be modified to take into account better the needs of low-income clients. Customer
due diligence regulations which require an income tax number and proof of residential address for clients proved too stringent to allow many low-income people to open
bank accounts. Often low-income clients have no tax number and are unable
to produce third-party verification of address. The South African authorities have
now adopted a more flexible approach to client identification and verification
and introduced a compliance exemption that relaxes requirements for a category
of clients known as "mass banking clients": those clients with small balances and small
size transactions.
This area of regulation is a young and rapidly
developing field, and there is scope for further
work to explore the particular challenges facing
institutions serving low-income clients in complying
with the new regulations.
Source: Jennifer Isern, David Porteous, Raul Hernandez-Coss, and Chinyere Egwuagu, https://openknowledge.worldbank.org/bitstream/handle/10986/12495/689230BRI0P1160ome0People0July02005.pdf?sequence=1&isAllowed=y
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