AML/CFT Regulation

Anti-money-laundering (AML) laws and Know Your Customer (KYC) play an important role in financial institutions' operations. Implementing these has an effect on financial institutions' provision of services. Here you will understand how these affect financial institutions. What are some of the measures financial institutions take to combat money laundering?

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
This work is licensed under a Creative Commons Attribution 3.0 IGO License.