In order to thwart illicit transactions, anti-money laundering (AML) regulations and Combating the Financing of Terrorism (CFT) strategies have become increasingly common. Unfortunately, these measures can exclude legitimate businesses and individuals from the formal financial system, unintentionally hurting the unbanked and underbanked. Ironically, without access to reliable and affordable financial services, the underbanked may have to resort to high-cost and high-risk financial instruments - playing right into the hands of individuals involved with financial crime.
It should be remembered that financial inclusion delivers benefits for individuals and financial institutions alike. For businesses, it is profitable to include customers that your competitors are neglecting, and previously underbanked individuals are likely to prove highly loyal customers. Given that the financial landscape is no longer bound by national borders, this means that there are potentially a huge number of customers to secure - think big, think global. Putting it simply, a third of world’s adults are left out of the financial system. In terms of benefits, the upside is very clear.
The United Nations Secretary General’s report indicates that a third of the world’s adults struggle to get by without the financial tools they need to escape poverty. Furthermore, the Council of Europe that a significant impact by the global AML/CTF framework is the concept of de-risking. This affects low income, rural, and undocumented persons who have been underserved or excluded from the financial sector. The most important piece of work from MONEYVAL 2014 report concluded that financial inclusive policies and AML/CTF measures are not mutually inclusive, but rather are complementary.
Although the impact of overly stringent AML regulations on financial inclusion may not receive as much attention as it deserves, it has not gone completely unnoticed. The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, has spoken out on this matter for several years.
“In 2013, the FATF published the Guidance on AML/CFT Measures and Financial Inclusion, which provided support for designing AML/CFT measures that meet the goal of financial inclusion, without compromising their effectiveness in combating crime,” a 2017 publication on the FATF website reads. “The guidance explained how to apply the risk-based approach, reinforced in the 2012 Recommendations, in a financial inclusion context.”
The MONEYVAL 2014 report that the barriers to financial inclusion are; financial illiteracy, lack of experience, complexity of financial products, lack of confidence, and credit ratings. These components sometimes can be critical components of an AML/CTF framework.
It is clear that a balance must be struck. Transaction monitoring systems must be robust enough to reduce instances of financial crime, without hindering legitimate customers from accessing the financial system. Businesses may want to adopt a pragmatic approach that analyses the ethical and social impact of their AML and CFT policies. When incorporating a transaction monitoring methodology, an exercise in reviewing every data needs to occur, starting with source of data. Once the source of data has been properly identified as being reliable, the next step involves carefully reviewing the personal details of the customers to ensure that the data points are being reviewed in an ethical and unbiased manner. For example, customers in the age category of 60 and above are sometimes considered to be at high risk of falling prey to fraudulent schemes. Though some anecdotal data does suggest that, monitoring for transactions of customers aged 60 and over is likely to only produce a biased monitoring output. This methodical review needs to then continue for all other data points.
Many unbanked individuals, including low-income citizens and displaced persons, do not possess the reliable identity documentation that is typically required to meet AML thresholds. As such, it is often difficult to carry out the due diligence checks that most financial institutions require for customers to access essential services. Around the world, nearly 2 billion people remain unbanked - and overly stringent AML rules are not helping to bring this number down.
So that organisations have their AML transaction monitoring thresholds set appropriately, it is wise for them to take a risk-based approach that allows for a certain amount of flexibility.
Another reason why AML transaction monitoring rules prevent legitimate individuals from accessing financial services is that RegTech tools produce a high number of false positives. This is where a customer is erroneously believed to be taking part in criminal activity. Here are a few ways businesses can reduce their false positive rate:
The promise of fintech has always been around doing things differently. Where traditional banks may have used financial inclusion as a marketing tagline, fintechs can hold it as part of their core mission. As a fintech that is devoted to offering the most innovative services to your customers, considering an innovative transaction monitoring that is at the heart of your organization is key to unlocking the value of providing financial services to the underserved one third of the world’s population.
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