AML/CFT Regulation: Implications for Financial Service Providers that Serve Low-Income People
Since September 11th 2001, the introduction of measures to combat money laundering and the financing of terrorism have taken on new urgency. Consequently, it is becoming increasingly important for all financial service providers to develop internal controls to protect themselves from exposure to such activities and to comply with regulations. This useful paper focuses on summarising the key 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 groups.
In general financial service providers are required to:
- enhance their 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.
This paper recognises that such measures, developed by the Financial Action Task Force (FATF), could bring additional costs of compliance to financial service providers and customer due diligence rules that may reduce the access of low income groups to formal financial services. As such 3 proposals are recommended by this paper:
- gradual implementation of new measure
- the adoption of a risk-based approach to regulation
- the use of exemptions for low-risk categories of transactions
The challenge set out by the authors, therefore, is the need 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.
The paper includes two interesting case studies. The first looks at AML/CFT implementation in Mexico by two different financial service providers. The second notes that South African authorities have adopted a more flexible approach to client identification and verification and have 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.
The final annex to the paper neatly sets out some suggested actions financial service providers can take to move towards AML/CFL compliance regardless of the status of their country’s compliance with the international guidelines.