Financial Institutions Face Risks When Funds are Transferred to Another Centre

The transfer of funds to another centre has raised concerns among financial institutions, posing risks of money laundering and terrorist financing (ML/TF). This shift not only threatens the stability of the financial system but also impacts local businesses, currencies, interest rates, and reputations.

Local Businesses at Risk

• The transfer of funds may lead to a surge in competition among front companies that offer services at lower rates.
• This could put local businesses at a disadvantage, making it challenging for them to compete with the new entrants.

Currencies and Interest Rates Distorted

• Money launderers’ investment practices can distort currencies and interest rates, causing economic instability.
• This could lead to a loss of confidence in the financial system, resulting in a decline in investments and economic growth.

Reputation Damage

• Countries linked to ML/TF will suffer from reputation damage, making it challenging for them to attract legitimate investors.
• De-risking and international sanctions may also be imposed, further exacerbating the situation.

Loss of Tax Revenue

• The transfer of funds can result in a loss of tax revenue for governments.
• This could lead to higher taxes on honest taxpayers, as governments struggle to make up for the lost revenue.

Reserve Bank of Malawi Guidelines

In an effort to mitigate these risks, the Reserve Bank of Malawi has issued guidelines on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) for financial institutions. The guidelines emphasize the importance of conducting a thorough risk assessment process to identify inherent ML/TF risks.

Risk Assessment Process

• Financial institutions must understand the threats they may be exposed to and consider relevant inherent and residual risk factors at country, sectoral, FI, and business relationship levels.
• They must also develop a thorough understanding of the ML/TF risks present in their customer base, products, delivery channels, and services offered.

Products and Services Risk

• Financial institutions must identify specific products and services that pose a high ML/TF risk to them. These may include:
  • Electronic funds payment services
  • Deposit products
  • Foreign exchange
  • Other financial instruments

Customers Risk

• The guidelines emphasize the importance of assessing customer risk by considering factors such as:
  • Geographical location
  • Nature of business
  • Occupation
  • Anticipated transaction activity

Conclusion

The transfer of funds to another centre poses significant risks to financial institutions, local businesses, currencies, interest rates, and reputations. It is essential for financial institutions to conduct thorough risk assessments and implement effective measures to mitigate these risks and maintain a stable and secure financial system.