Four policies to promote inclusive financial integrity in 2021

By Robin Newnham, Head of Policy Analysis, AFI and Mariam Zahari, Policy Specialist, AFI

Inclusive financial integrity is the successful alignment of complementary financial inclusion policy goals with effective anti-money laundering and countering the financing of terrorism (AML-CFT). Financial inclusion supports AML-CFT objectives by bringing financial flows and transactions into the formal sector where they can be monitored.

At the same time, persistent financial exclusion can create an environment in which illicit financial flows thrive. This makes the implementation of global AML-CFT standards, set by the Financial Action Task Force (FATF), vital in supporting trust and confidence in the financial sector, a key driver of greater financial inclusion.

However, achieving inclusive financial integrity has not been without challenges. FATF recommends a risk-based approach to ensure that AML-CFT standards do not unduly impede national progress in financial inclusion. Based on the principle of proportionality, countries and financial institutions are required to apply enhanced customer due diligence (CDD) in cases of assessed higher money laundering and terrorist financing (ML-TF) risk, and to apply simplified CDD in instances of assessed low or lower risk. For example, accepting non-standard documentation for customer identity and verification for basic bank or mobile money accounts with transaction limits.

The transition from a rule-based to a risk-based AML-CFT regime is an important underpinning for inclusive financial integrity, but it has not been effectively advanced at the country level. The unpredictable impacts of COVID-19 have additionally threatened to reverse the gains made in recent years for both financial inclusion and financial integrity. Moving forward, it is critical that financial policymakers and regulators create a shared vision at the country level, put people at the center of efforts, leverage technology-based solutions and enhance coordination. These would promote inclusive financial integrity and ensure safe formal financial systems that leave no one behind.

In 2020, AFI members and Cenfri developed the Inclusive Financial Integrity Toolkit, to support policymakers align financial inclusion and AML-CFT goals at each stage of the policy cycle. Based on the toolkit and experiences of AFI members in its implementation, policymakers can consider four key policies to advance inclusive financial integrity within their own jurisdictions:

1. A national-level shared vision in aligning financial inclusion and AML-CFT

Financial inclusion and AML-CFT stakeholders must collectively define and measure progress towards a shared a vision of success for inclusive financial integrity. This cascades down to the alignment of financial inclusion and AML-CFT in national risk assessments, during the formulation of national financial inclusion strategies and in the subsequent development of regulatory frameworks.

At the country level, stakeholders often report difficulties in harmonizing the timetables of AML-CFT and financial inclusion processes so that they can inform each other for effective policymaking. Furthermore, there is the challenge of aligning incentives. Typically, policymakers and financial institutions are incentivized to focus on risk mitigation in high-risk scenarios to avoid negative assessment ratings or financial penalties, respectively. Incentives to implement proportionate AML-CFT measures in lower-risk instances are limited, despite permission in the standards to do so.

Having a common vision enables policy coherence and collaborative actions to effectively achieve inclusive financial integrity, as well as to align incentives towards the twin policy goals of inclusion and integrity. For example, in Mongolia, the Cooperation Council was established in 2006 to articulate a shared vision and ensure the implementation of laws and regulations pertaining to AML-CFT through inter-agency collaboration. The council works alongside the financial intelligence unit, and consists of the Ministry of Foreign Affairs or Foreign Relations, Ministry of Finance, Ministry of Justice and Internal Affairs, Prosecutors Office, Bank of Mongolia, Financial Regulatory Commission, General Police Department, General Intelligence Agency, General Tax Department and General Customs Department.

2. Put people at the center of efforts, particularly most disadvantaged segments

AFI is committed to the 2030 Agenda for Sustainable Development. In our efforts to achieve full financial inclusion we aspire to leave no woman, man, youth, forcibly displaced person or a person with disabilities behind. This is demonstrated by unanimous of endorsement of the Kigali Statement by AFI membership at the 2019 AFI Global Policy Forum in Rwanda.

AFI research has highlighted that women are disproportionately impacted by standard documentation requirements, contributing to an average gender gap of nine percent in financial access across developing countries. It is critical that these most disadvantaged segments of our populations are appropriately targeted when progressing towards sustainable development.

For example, AML-CFT policies, regulations and laws are not gender-neutral. The in-country implementation of global standards may have unintended consequences for both women and men due to prevailing socio-cultural and gender norms.

Being aware of this possibility can be the first step in identifying whether women and men are affected differently by the implementation of AML-CFT standards and addressing potential or real impacts through inclusive financial integrity policy and regulatory responses. In Bangladesh, as part of its national drive for empowerment of low-income women, women are only required to present their national identity card or birth certificate as well as their Livelihood Security Cards issued by the Department of Women Affairs Bangladesh.

3. Leverage technology-based solutions

The complexity of the global AML-CFT regime has risen over time with the onset of additional sanctions and stricter national level enforcement, which have contributed to more risk-averse behavior by global banks. This, in turn, drives the phenomenon known as ‘de-risking’, or wholesale exiting from certain customer segments, sectors or even jurisdictions in order to avoid rather than manage risk.

AFI members are increasingly deploying innovative, technology-based solutions to promote both financial integrity and financial inclusion. Regional Know-Your-Customer (KYC) utilities that leverage on collaboration between the public and the private sectors are being adopted in regions such as Africa and the South Pacific, where de-risking is prominent. MANSA in Africa, a regional KYC utility comprised of many AFI member institutions, operates as a repository platform that provides a single source of primary data required for the sound conduct of KYC and CDD on African financial institutions, corporates, and SMEs. In the Pacific, AFI members are also contributing to the development of a KYC utility to provide a similar platform for easier identification and verification that envisions lower transaction costs over time.

The COVID-19 pandemic has had a further catalytic effect in driving the adoption of digital identities and e-KYC regulations, which have the potential to greatly reduce frictions in customer onboarding and monitoring, as well as regulatory and supervisory technologies that can facilitate a more effective allocation of resources to risks. FATF has signaled its support for the use of such technologies to achieve AML-CFT goals, calling on countries to explore digital identity to manage ML-TF risks posed by the crisis, and announcing the “digital transformation of AML-CFT” as a priority thematic focus for the current FATF presidency of Germany.

4. Enhance multi-stakeholder and regulatory coordination for effective risk assessment

Simplified CDD can be introduced only based on sound risk assessments to define low or lower risk contexts and products. This requires adequate capacity for national and sectoral risk assessment at country-level, but also effective stakeholder coordination to ensure that key data and information from across a wide range of agencies can feed into the risk assessment process. Without these, there is a tendency towards a blanket application of CDD.

Fulfilling the vision for inclusive financial integrity requires an interdisciplinary, cross-sectoral way of working together. Central banks, financial intelligence units, law enforcement, the criminal justice system, non–profit organizations, the private sector and others need to be part of defining this vision and implementing it. Interagency collaboration is also critical to ensure effective data sharing and analysis to inform effective risk assessment, a vital underpinning for inclusive financial integrity policies.

In the Pacific region, AFI members have developed a four-pillar de-risking action plan that serves to overcome the challenge of coordination as part of an overall strategy for inclusive financial integrity. Representatives from seven AFI member jurisdictions – Fiji, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste, Tonga and Vanuatu – are among the stakeholders in the region that have endorsed the development of the plan, which sets out a shared goal for overcoming the de-risking challenges in the region. It also lists explicit action points to be taken forward: inter-regulator and stakeholder coordination; diagnostics and monitoring frameworks to track implementation progress; compliance with AML-CFT standards and risk assessment; and technology-based solutions. A regional regulatory sandbox has also been established to create opportunities for regulators and the private sector to interface and collaborate with each other to devise solutions.

Inclusive financial integrity may present implementation challenges but these policies can help overcome them to achieve the twin policy goals in tandem. Financial policymakers can seize the opportunity arising from COVID-19 to develop and implement a vision for inclusive financial integrity as part of recovery strategies, and ensure that the pursuit of financial regulatory goals serves to bolster sustainable development in a post-COVID world.