ANTI-MONEY LAUNDERING: FOR A REGULATORY FRAMEWORK THAT CONTEMPLATES FINTECH

THE NEED TO ACCOMMODATE A DISRUPTIVE ENVIRONMENT

Financial technologies (FinTech), in what some (informally) call the “era of disruption”, have caused changes in the global financial system, impacting the way the industry operates and the behavior of financial consumers. In the case of the African continent, mobile money stands out, increasingly present in various African realities, where it is mainly used as a mechanism for financial inclusion, and Angola is no exception.

This technological disruption entails many regulatory challenges, particularly in what concerns ​​money laundering. As experience shows, money launderers tend to adapt to new technologies much faster than Regulators, a picture that needs to be reversed and fortunately, efforts are already being made in some realities. Ideally, on this last point, Angola should be no exception either.

To this end, in designing regulatory frameworks for the prevention of money laundering, the Supervisory Authorities (and supervised institutions) can adopt some approaches, as we will see below.

Risk Based and Technologically Neutral Regulation

Being in an age of technological innovation, where financial institutions (no longer exclusively) offer new payment services, means that regulation must be tailored to the type of service, not the type of provider. Similarly, the applicable Anti-Money Laundering (AML) rules should be the same for all those offering the same service, varying only according to the risk represented (same risk - same regulation). The risk assessment methodology should therefore apply to all entities (banks, mobile operators, third party providers) offering mobile financial services (and to any other payment service).

Technological innovations have been happening at a very rapid pace and regulation must remain effective even with this change. To this end, it must be designed considering a diversity of risks (technological, systemic and operational), without being limited to specific technologies. If regulation focuses on the real risks posed by a particular service, it is more likely to remain effective despite the provider and the technology. Identifying and mitigating the risk of a particular service should be at the heart of Anti-Money Laundering regulation.

Domino Effect and Complementarity

Since the purpose of these services (some) is to foster financial inclusion by moving customers from the informal market to the regulated financial system, by developing trust in mobile services, customers will require more traditional financial products and services, such as savings accounts.

These services, therefore, have the important function of placing disadvantaged and financially excluded groups in the formal financial system. On a large scale (and in the longer term) this will result in the full formalization of the financial system and a reduction in the overall risk of money laundering.

Mobile financial services promote, especially in developing countries, access to financial services, as access to financial services and the prevention of money laundering are complementary rather than incompatible policies.

Without an adequate degree of financial inclusion, a country's AML system will only be able to safeguard the integrity of only part of its financial system - the formally registered part - leaving the informal and unregistered components vulnerable to even greater abuse than the one to which the formal system is subject. Therefore, measures that promote greater financial inclusion contribute to a more effective and comprehensive AML system.

Exclusivity and Cooperation

Service providers should be regulated by the service they provide in accordance with the FATF functional definition of "Financial Institution".

There are a range of regulatory tools in place for mobile money services. At one end of the spectrum is a traditional financial regulation whereby a mobile operator must partner with a financial institution (usually a bank) in order to offer mobile money services. The financial institution in such a partnership will be responsible for compliance with AML regulatory standards. At the other end of the regulatory spectrum, mobile operators may also have the opportunity to apply for a payment system operator license to the regulator, thus becoming a regulated financial services provider that must comply with the appropriate AML rules.

This demonstrates that mobile money services are part of the formal financial system and that AML obligations should be applied to them, falling within the remit of the relevant sector Supervisory Authority, regardless of the type of provider.

Empirically, there have been few identified cases of money laundering through mobile money services to date in countries where such services have proliferated. While no payment system can be 100% free from abuse, it is important to recognize the attractiveness they may have for those intending to launder money. Therefore, close vigilance is required to detect new emerging risks, which can only be done through close monitoring by providers of this service category, supervisory authorities and the FIU (Financial Intelligence Unit).

We, therefore, hope that a close cooperative relationship between regulators and service providers will result in efficient regulation, involving a 'testing and learning' approach, to assess initial risks and create risk mitigation rules proportionate with any risks that may be identified.

As we have seen in recent years, new types and models of financial services have emerged, based on innovative technologies and financial regulators (often) are unfamiliar with the risks posed by these new services. Regulators must be cautious in applying the AML standards so that they are not disproportionate to the risks identified, which would undermine not only the adoption of these new services by financial consumers, but also the AML program itself.

Originally published in 27/07/2018 on Jornal Mercado.

Elaborated by: Elvis Barros