Banks Must Balance Risk-Based Approach with Financial Inclusion
In the effort to combat money laundering and terrorist financing, banks are being urged to adopt a risk-based approach (RBA) that takes into account the unique circumstances of each institution. However, this approach must be balanced with financial inclusion policies that ensure access to banking services for all individuals and businesses.
The Need for Balance
According to experts, competent authorities and supervisors must issue guidance to banks on how they expect them to meet their anti-money laundering and combating the financing of terrorism (AML/CFT) obligations in a risk-sensitive way. Banks must also understand that a flexible RBA does not exempt them from applying effective AML/CFT controls.
- A risk-based approach aims to develop prevention or mitigation measures that are commensurate with the ML/TF risks identified, rather than imposing one-size-fits-all solutions.
- Supervisors must allocate their resources accordingly and discharge their functions in a way that is conducive to the application of a risk-based approach by banks.
Financial Inclusion Cannot be Compromised
However, financial inclusion cannot be compromised in the name of AML/CFT compliance. Banks should not apply simplified due diligence measures or exemptions solely based on the fact that a customer is financially excluded. Instead, institutions must conduct a holistic assessment of each individual’s or business’ ML/TF risk.
- A RBA may actually help foster financial inclusion, especially for low-income individuals who experience difficulties in accessing the regulated financial system.
- Countries can establish specific cases for exemptions in the application of FATF Recommendations based on proven low risks or allow financial institutions to be more flexible in their application of CDD measures.
Supervisory Priorities
Supervisors must also prioritize effective supervision of all entities covered by AML/CFT requirements, ensuring a level playing field between all banking service providers and preventing higher-risk activities from shifting to institutions with insufficient or inadequate supervision.
Experts Weigh In
- “Financial exclusion is not necessarily synonymous with low ML/TF risk,” said [expert name]. “Institutions must conduct a comprehensive assessment of each individual’s or business’ ML/TF risk, rather than relying on simplified due diligence measures.”
- “A risk-based approach to AML/CFT supervision requires supervisors to allocate their resources effectively and discharge their functions in a way that is conducive to the application of a risk-based approach by banks,” added [expert name].
Resources
- Report by the European Supervisory Authorities: “Preliminary report on anti-money laundering and counter financing of terrorism risk-based supervision”
- BCBS Guidelines: “Sound management of risks related to money laundering and financing of terrorism”
By adopting a balanced RBA that takes into account both AML/CFT compliance and financial inclusion, banks can play a critical role in preventing the misuse of the financial system while also promoting greater transparency and traceability of financial flows.