FINANCIAL INCLUSION AS A MONEY-LAUNDERING PREVENTION MECHANISM

PREVENTING MONEY LAUNDERING THROUGH INCLUSION

 

Financial inclusion means access to an adequate range of financial products and services that are safe, convenient and accessible to disadvantaged and other vulnerable groups, including low-income groups, those living in rural areas, the undocumented, immigrants in an irregular situation and those who were neglected or excluded from the formal financial system. This involves creating a broader range of financial products and services available to individuals who currently or only have a very limited access to basic financial products and services or do not have any access at all.

Thus, financial inclusion can be understood as the access to financial products and services at an affordable cost, in a fair and transparent way.

For the purpose of preventing money laundering, it is essential that these financial products and services are provided through financial institutions subject to appropriate regulation and in accordance with the FATF recommendations and national legislation, whether these institutions are integrated into existing models or are born of the needs of the inclusion process.

The problem of financial exclusion is greater if the focus is on poor people living on less than $ 2 a day*, because their income is not only low but also irregular and therefore more vulnerable to external shocks and uncertainties of their income. Among those who live with that daily amount, only 23% have access to a formal account. However, many people with very low incomes in developing countries have developed sophisticated financial lives, transacting through transfer systems outside the formal banking sector, creating complex "financial portfolios", mainly using informal tools.

These disadvantaged or excluded groups are those who currently have access to some financial services, but to a very limited extent. For example, someone may have access to a money transfer services provider but does not have all the necessary elements for opening a bank account. However, it should be borne in mind that these clients represent a very heterogeneous category with very different risk profiles and therefore cannot be automatically classified as low risk clients because they are financially excluded. An appropriate risk management system is needed to address this diversity.

There are many reasons why individuals or groups may not get the most out of more conventional financial services and products. The most cited reason for not having an account is the lack of enough money to open it. Other reasons are that Banking Institutions are very expensive (minimum value for account opening beyond the client's financial capacity and account management commissions) and another family member already has access to an account (a response that identifies the existence of indirect users of the regulated financial system). In addition to these, there is a lack of adequate documentation, lack of confidence in banks, religious reasons and the inconvenient location of agencies of financial institutions.

In regard to the lack of adequate documentation, it should be noted that strict requirements for opening an account may exclude workers who are active in rural areas or in the informal economy and are less likely to have formal documentation proving their place of residence or even their identity.

One approach that has proved successful in some realities is the development of alternative distribution channels (which are often applied to government payments such as salaries, pensions, social and medical benefits), although these may differ depending of the target clientele.

Unfortunately, measures to prevent money laundering are not only positive. As a consequence of some measures of this nature, there are now new financially excluded groups as a result of the introduction of Anti-Money Laundering (AML) requirements, which do not take into account the potential negative impact that results from them. In some cases, new AML requirements mean that services for existing clients, which could not provide the necessary documents, should be terminated. 

Financial inclusion is, therefore, a multidimensional challenge where AML measures play an important role, being only one among many other factors to be considered during the process of developing financial inclusion mechanisms.

Initiatives aimed at financial inclusion translate into greater ease of access to financial services by financially excluded groups through new approaches, whether by the private sector or the state.

INNOVATING TO INCLUDE

It is vital to seek to innovate to better include and innovative financial inclusion translates into access to financial services and products by financially excluded groups through new approaches that are safe and operational. And to develop policies and regulatory mechanisms that enable the creation of innovative models of financial inclusion, it is necessary to cultivate a broader accountability attitude on the part of governments in the fight against poverty, to implement policies that promote competition and to provide market incentives that foster the development and distribution of various financial products and services that facilitate access to the formal financial system.

This is to promote technological and institutional innovations as a means of expanding access to and use of the financial system, including identifying and addressing weaknesses in the system; to encourage a comprehensive approach to consumer financial protection that recognizes the roles played by government, service providers and consumers; to promote financial literacy in order to develop the financial capacities of the population at large; to create an institutional environment with clear rules regarding accountability and coordination in government structures; to encourage partnerships and direct consultations with governments, financial institutions and other stakeholders; to use improved information to create evidence-based policies, to measure levels of progress, and to consider a "test and learning" approach acceptable to both supervisory authorities and supervised entities; build a regulatory framework that is commensurate with the risks and benefits identified in innovative financial products and services and is based on knowledge of the gaps and barriers of the existing structure.

These are some of the prerequisites for stimulating innovation in the methods of financial inclusion while protecting financial stability and consumers. However, it is not a rigid set of requirements, but rather designed approaches to help guide policy-makers in the decision-making process and are flexible enough that they can be adapted to the different contexts of the country whose informal sector presents a challenge to the existence of a truly functional money laundering prevention system.

* In the angolan case, according to the Global Financial Inclusion Data Base (World Bank) and the 2016 UN Human Development Report, only 29% of the adult population has a bank account and among the 40% of the poorer population, only 13% has a bank account.

Elaborated by: Elvis Barros

 

BIBLIOGRAPHY

BARROS, Elvis Pontífice Cunha De - O Sistema Angolano de Prevenção de Branqueamento de Capitais, Luanda, LexData, 1ª ed., 2018.