CGAP April 2006

May 2006

SUPPORTING COMMUNITYAML/CFT
-MANAGEDRLEGULATIONS
OAN FUNDS:
BALANCING SECURITY WITH ACCESS

Across the world, new measures are being l enhance their internal controls and staff training
introduced to combat money laundering and to deal specifically with AML/CFT risks;
the financing of terrorism. Once the concern l undertake customer due diligence procedures
primarily of banks, governments have expanded on all new and existing clients;
regulations and requirements for compliance since l introduce heightened surveillance of
the late 1990s. Now all financial service suspicious transactions and keep transaction
providers, including those working with low- records for future verification; and
income communities, are—or will—be affected.1
l report suspicious transactions to national
As a result, the new international framework and
authorities.
national measures for anti-money laundering
(AML) and combating the financing of terrorism What is the concern?
(CFT) could have far-reaching effects.
The introduction of new or tightened AML/CFT
What are the regulations? regulations may have the unintended consequence
of reducing the access of low-income people to
The Financial Action Task Force (FATF) is an
formal financial services. Besides the additional
international body that recommends standards for
costs of compliance to financial service providers,
national regulation on AML/CFT.2 Currently, there
standard customer due diligence rules may be
are 40 FATF recommendations on anti-money
difficult to apply for typical microfinance clients,
laundering and 9 special recommendations on
especially in countries that have weak national
combating the financing of terrorism.3 While each
identification systems. For example, it may be
country may adapt the international AML/CFT
impossible to verify the physical addresses of
standards developed by FATF in designing its
clients who share living quarters or have no utility
national regulation, in general, financial service
bill, land title, rental agreement, or other legal proof
providers are required to do the following:
of residence. Serving such clients may become too
_______________________
1
burdensome for many financial service providers.
Today, financial service providers that serve low-income
clients go well beyond the traditional nonprofit organization
model that dominated the early days of modern microcredit or How to balance access and security?
microfinance. In some countries, some of the original nonprofit
institutions have expanded their services to become regulated Regulators and financial service providers
financial institutions, such as banks. Likewise, some conventional serving low-income clients need to work together
banks provide microfinance services to low-income clients. to strike a careful balance between meeting law
2
FATF and so-called FATF-style regional bodies perform
evaluations of countries’ AML/CFT regulatory regimes and
enforcement objectives of AML/CFT regulation
enforcement activities to assess their level of consistency with and serving client needs.
FATF’s recommendations. An unfavorable assessment can
have a serious adverse impact on a country’s reputation within Gradually implement regulations. Country
the global financial system. regulators should tailor AML/CFT regulations to
3
FATF 40 Recommendations on AML can be found at their country context and gradually implement the
www.fatf-gafi.org/dataoecd/38/47/34030579.PDF and 9
Special Recommendations on CFT can be found at
new regulations to give institutions time to adapt
www.fatf-gafi.org/document/9/0,2340,en_32250379_ their internal procedures and minimize disruptions
32236920_34032073_1_1_1_1,00.html for their clients.
Take a risk-based approach for appropriate In the UK, the Financial Services Authority
exemptions. AML/CFT risks of financial service (FSA), banks, law enforcement, and consumer
providers vary by country, institutional type, groups studied the issue and agreed to accept only
and financial services provided. In certain one proof of a customer’s address from a wider
circumstances, where there are low risks, range of documents. Further, FSA and bank
countries may decide that financial institutions associations provide guidance on compliance to
can apply reduced or simplified measures. institutions subject to AML/CFT regulation, to
reduce the likelihood that financial service
l Product or institutional exemptions: Credit
providers might spurn low-income clients out of
and insurance services may be less vulnerable
uncertainty as to their regulatory obligations.
to abuse, while international money transfers
and deposits may carry relatively higher risk. Conclusions
For example, countries could exempt non-
In the post September 11 world, AML/CFT
depository institutions that offer low-risk
regulation cannot be ignored. This area of
financial products and have no direct link to
regulation is a young but rapidly developing field,
the payments system.
and there is scope for further work to explore the
l Minimum transaction thresholds: Small- particular challenges facing institutions serving
balance transactions may also carry lower low-income clients in complying with the new
risk. FATF recommendations recognize regulations. However, measures that drive low-
governments’ discretion to exempt low-value income people back to informal providers of
transactions that fall below a certain threshold savings, loans, and money transfer services will
from AML/CFT requirements. be counter-productive and make it harder to
South Africa and the United Kingdom provide secure the integrity of the financial system. It is
good examples of how a country’s AML/CFT therefore in everyone’s interests—regulators and
regulations can be modified to take into account financial institutions alike—to grapple with these
better the situation of low-income clients. issues and develop solutions that accommodate
low-income clients.
In South Africa, low-income clients often have
n n n
no tax registration number and cannot produce
References
third-party address verification. South African
Financial Action Task Force. 2003. The Forty
authorities have now adopted a more flexible
Recommendations. Paris: FATF/GAPI, www.fatf-gafi.org/
approach to client identification and verification dataoecd/38/47/34030579.PDF.
and introduced a compliance exemption that
———. 2001. “Nine Special Recommendation on
relaxes requirements for “mass banking clients”— Terrorist Financing.” Paris: FATF/GAP, October,
those clients with small balances and small size www.fatf-gafi.org/dataoecd/55/16/34266142.pdf.
transactions. After this exemption, the four largest Isern, J., D. Porteous, R. Hernandez-Coss, and C.
banks and the South African post office launched Egwuagu. 2005. “AML/CFT Regulation: Implications
the so-called Mzansi account in late 2004. for Financial Service Providers That Serve Low-Income
Impossible to offer before the exemptions, the People.” CGAP Focus Note 29. Washington, D.C.: The
Mzansi account has proven very successful, with World Bank, www.cgap.org/docs/FocusNote_29.pdf.
more than 1.6 million previously unserved clients Author: Jennifer Isern
opening a basic transaction account. A uniform
threshold exemption established in their country’s For more information on anti-money laundering and
AML/CFT regulation frees financial institutions combating the financing of terrorism …
from having to make the judgment call them- Visit www.cgap.org to access relevant material,
including “AML/CFT Regulation: Implications for
selves, and as the South African experience
Financial Service Providers That Serve Low-Income
shows, this can reduce real and perceived People,” by Jennifer Isern, et al. Focus Note 29, 2005.
obstacles to serving low-income clients.

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