Introduction

Since September 11, 2001, the introduction of measures to combat money laundering and the financing of terrorism has taken on new urgency for international agencies, governments, and financial service providers. Implementing these new regulations can present particular challenges for financial institutions serving low-income clients.

As recent fines and sanctions levied on banks in the United States have shown, the economic and financial impact on institutions that fail to comply with the requirements of the law can be devastating. Even the perception of having inadequate controls to prevent money laundering can damage an institution's reputation. Hence, it is important for financial institutions to develop internal controls to protect themselves from exposure to money laundering and the financing of terrorism and to comply with regulations. The Financial Action Task Force on money laundering (see box 1) has developed international standards on AML/CFT. Within this comprehensive, general framework, individual countries are responsible for introducing local legislative and regulatory regimes.

AML/CFT regulations can have serious implications for financial institutions that serve low-income clients, especially in developing countries. The additional costs of compliance and tighter restrictions may have the unintended consequence of driving low-income clients from the formal financial sector. The challenge is to strike a balance that promotes prudential practices at a reasonable cost for financial service providers that want to offer services to less well-off clients. AML/CFT regulations should be implemented in a flexible way to ensure that they do not restrict access to formal financial services for low-income people.

All financial service providers dealing with financial transactions, including those working with low-income clients are required to comply with AML/CFT regulations. The universe of financial service providers that serve low-income clients includes specialized microfinance institutions, commercial banks, financial cooperatives and credit unions, low-capital rural and/or local banks, state development and agricultural banks, and postal savings banks and other postal financial sevice providers. These institutions can be classified as more or less risky based on the financial services they offer.

Box 1  Financial Action Task Force and FATF-Style Regional Bodies

Financial Action Task Force (FATF) is an international grouping of nations that fights money laundering and terrorist financing. FATF currently has 33 country members, more than 15 international organization members, and some 20 observers, among them the International Monetary Fund and the World Bank. FATF has a secretariat headquartered in Paris, and numerous documents are available on their web site (www.fatf-gafi.org), including the Forty Recommendations on Money Laundering and the Special Recommendations on Financing of Terrorism.

FATF-Style Regional Bodies (FSRBs) have also been established. These FATF-Style Regional Bodies are crucial to the promotion and implementation of AML/CFT standards within their respective regions. As part of this process, the countries undertake peer reviews of their AML/CFT regimes, known as "mutual evaluations," and develop technical assistance programs to facilitate implementation in coordination with international donors. The following organizations have been formed to date:

  • GAFISUD: Financial Action Task Force on Money Laundering in South America
  • APG: Asia/Pacific Group on Money Laundering
  • ESAAMLG: Eastern and Southern Africa Anti-Money Laundering Group
  • CFATF: Caribbean Financial Action Task Force
  • MENAFATF: Middle East and North Africa Financial Action Task Force
  • EAG: Eurasian Group 
  • GIABA*: Intergovernmental Group of Action against Money Laundering in West Africa
  • MONEYVAL: Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures
 * GIABA is in the process of becoming an FSRB