Hot off the Presses: AML/CFT Regulation and Financial Services for the Poor

The World Bank Financial Integrity Unit and the Consultative Group to Assist the Poor (CGAP) are pleased to announce the publication of "AML/CFT Regulation: Implications for Financial Service Providers that Serve Low-Income People."

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:

a) enhance their internal controls to cater specifically for AML/CFT risks;
b) undertake customer due-diligence procedures on all new and existing clients;
c) introduce heightened surveillance of suspicious transactions and keep transaction records for future verification; and
d) report suspicious transactions to national authorities.

Although the framework applies to all financial institutions, the risk of money laundering or financing of terrorism varies with the country context, the institutional 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 the authors suggest the need to balance regulations for financial stability and security with access to finance for low income people. This paper recommends

(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.

We welcome your comments and questions on the paper, which can be addressed to Jennifer Isern at CGAP at jisern@worldbank.org and/or Raul Hernandez-Coss at rhernandezcoss@worldbank.org