Pieter van den Akker is the Managing Partner at International KYC (an anti-money laundering advisory and training firm) and an external partner to CESAM. His blog post looks into financial inclusion – providing regulated financial services to the unbanked and underbanked people around the globe. Many unbanked people lack the ability to comply with regulatory obligations designed to prevent money laundering, such as providing proof of identity. How should the industry deal with this conundrum?
The World Bank estimates that two billion people – almost one third of the global population – are unbanked or underbanked. This group has either no access to financial services or must rely on family or unregulated and unsupervised ‘shadow banking’ alternatives. The United Nations, the World Bank and other public and private development institutions consider giving access to regulated financial services as major Sustainable Development Goal. And as financial inclusion is a key enabler for reducing poverty and boosting prosperity in the world, one can appreciate why.
Not enough money, not enough ID
Unfortunately, the unbanked and underbanked are often not able to comply with basic requirements to access the financial system. Aside from the obvious reason of not having enough money, many cannot provide the proof of identity required to open an account. Consider the plight of hundreds of thousands of asylum seekers in Europe who fled war-torn regions. Despite many having economically viable skills, integration into their new communities is made more difficult without access to local financial services.
Providers of financial services, such as banks, are understandably reluctant to be lenient about establishing prospective clients’ identities. Knowing whom they are dealing with is a core regulatory requirement to combat financial crime. According to the United Nations Office on Drugs and Crime, approximately 70 per cent of the criminal money laundered every year passes through the financial sector, and regulatory authorities are unlikely to ease the pressure to comply. How should the industry deal with this conundrum?
Fortunately, this dilemma is gaining broader recognition and pragmatic solutions are being developed and selectively tested. If we accept that bringing the unbanked and underbanked into the regulated financial arena will contribute to the prevention of financial crime, this also makes sense from a regulator’s perspective. The Financial Action Task Force (FATF) recently published a supplement to their 2013 guidance on AML/CFT measures and financial inclusion. And RSM’s recent symposium on International Security Management resulted in several creative solutions emerging from a workshop on this topic; they referred to overcoming prejudice and stereotypes towards specific sectors and professions.
Sharing the experiences
Products and services provided to people new to banking are often at entry level with limited functionality or restricted use. If these products and services facilitate financial inclusion, proportionate and risk-based Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) controls may be acceptable, depending on the level of these risks. Biometric and other technology-based security measures and enhanced monitoring may also provide comfort, though stringent data protection and privacy measures will be needed to ensure the integrity of data and protection of the individuals’ privacy.
Basic services may thus be provided upon minimum identification, with access to subsequent services requiring additional identification and verification.
Several countries are already experimenting and actively sharing their experiences. Given the importance of financial inclusion for promoting global prosperity, it is encouraging to see the intergovernmental organisation Financial Action Task Force (FATF) taking a leading role to provide clarity and guidance.
This text has previously been published in i-KYC’s Trend Letter.
Photo: Banking by Mike Lawrence on Flickr
If you enjoyed reading this, try another one in our series of blog posts about aspects of safety from the Centre of Excellence in Public Safety Management (CESAM) at Rotterdam School of Management, Erasmus University (RSM). It is intended to act as an introduction to the Centre’s work; to promote and foster the professional development and management of public safety organisations, and to give CESAM members a platform to share their observations and experiences as academics and citizens. Please see our webpage to find out more.