Afghanistan’s Banking Sector Lacks Effective Anti-Money Laundering Measures

Kabul - Despite efforts to expand its financial sector, Afghanistan’s banking industry remains plagued by inadequate anti-money laundering (AML) measures, according to a recent report.

AML/CFT Framework Weaknesses

The country’s banking sector, which has expanded significantly in recent years, still relies heavily on money service providers (MSPs), also known as hawaladars, for financial transactions. While these MSPs have enabled financial intermediation despite security challenges and the lack of banks in rural areas, their operations are often not subject to proper regulation.

• The report highlights several weaknesses in Afghanistan’s AML/CFT framework, including:
  • Lack of requirements to determine whether customers are acting on behalf of others
  • No enhanced due diligence for higher-risk transactions
  • No verification of identity for individuals purporting to act on behalf of natural persons
  • No ongoing due diligence on business relationships

Correspondent Banking Relationships

Correspondent banking relationships, which connect Afghanistan’s financial institutions with those in other countries, also lack sufficient regulation. There are:

• No requirements to gather information on respondent institutions to understand their business and reputation
• Leaving room for potential money laundering and terrorist financing risks

Wire Transfer Rules and Suspicious Transaction Reporting

The report also criticizes the country’s wire transfer rules, which:

• Lack clarity
• Have a high threshold for verifying originator information
• Few financial institutions have reported suspicious transactions (STRs) in practice, despite being required by law to do so

Internal Policies and Procedures

The assessment team found that internal policies and procedures for preventing money laundering are also inadequate, with varying levels of depth and coverage among financial institutions. Market entry conditions and AML/CFT supervision fall short of international standards, due to:

• Lack of resources
• Expertise
• Vested interests hindering effective implementation

Recommendations and Response from the Afghan Government

The report concludes that Afghanistan’s banking sector needs significant improvements to prevent the misuse of its financial system for money laundering and terrorist financing. The government must:

• Strengthen its AML/CFT framework
• Enhance correspondent banking relationships
• Improve wire transfer rules
• Increase reporting of suspicious transactions

In response to these findings, the Afghan government has announced plans to revamp its AML/CFT regime and implement stricter regulations on financial institutions. However, much work remains to be done to ensure that Afghanistan’s banking sector is fully compliant with international standards and effectively prevents money laundering and terrorist financing.