Financial Crime World

Financial Inclusion and Anti-Money Laundering: A Balancing Act

In an effort to promote financial inclusion, many countries are adopting measures to simplify customer due diligence (CDD) requirements for low-risk financial products. However, this approach requires a careful balancing act between promoting financial inclusion and mitigating the risks of money laundering and terrorist financing.

The Need for Balance

According to the Financial Action Task Force (FATF), there are circumstances where the risk of money laundering or terrorist financing may be lower. In such cases, countries can allow their financial institutions to apply simplified CDD measures, provided that an adequate analysis of the risk has been conducted by the country or financial institution.

The World Bank’s Financial Inclusion Product Risk Assessment Module (FIRM)

The World Bank’s FIRM module is a tool designed to assess the money laundering and terrorist financing risks associated with financial products intended to support financial inclusion. The module takes into account three parameters:

  • Product Features: The design and functionality of the product
  • Product-Specific Mitigating Measures: Controls and safeguards built into the product
  • Overall Risk Environment: The broader political, economic, and social context in which the product operates

If the assessment shows a lower level of ML/TF risk, countries can simplify CDD requirements for those products. However, if the assessment indicates medium or high-risk levels, the tool provides guidance on how to reduce the risk by modifying the product’s features, functions, and improving risk mitigation mechanisms.

Incentives for Financial Inclusion

Incentives for financial inclusion must also include appropriate measures to mitigate risks. Some countries have developed entry-level financial products with adequate risk mitigation measures built into their design. For example:

  • Tiered CDD Approaches: Customers provide increasing levels of identification and verification in order to access higher levels of account functionality
  • Risk-Based Account Classification: Accounts are classified based on risk levels, with stricter controls for higher-risk accounts

China’s Approach

China has implemented a similar approach by classifying bank accounts for individuals into three categories based on risk levels:

  • Type 1 Accounts: Full functions and services
  • Type 2 Accounts: Limited services and stricter controls
  • Type 3 Accounts: Very limited services and strictest controls

Conclusion

Promoting financial inclusion requires a careful balancing act between simplicity and risk mitigation. By using tools like the World Bank’s FIRM module and implementing tiered CDD approaches, countries can promote financial inclusion while minimizing the risks of money laundering and terrorist financing.

Key Takeaways

  • Simplified CDD measures can be applied for low-risk financial products
  • Countries must conduct an adequate analysis of the risk before simplifying CDD requirements
  • The World Bank’s FIRM module is a tool designed to assess ML/TF risks associated with financial inclusion products
  • Tiered CDD approaches require customers to provide increasing levels of identification and verification
  • China has implemented a similar approach by classifying bank accounts for individuals into three categories based on risk levels.