In Does the FATF Help or Hinder Financial Inclusion? Mike Pisa of the Center for Global Development examines whether the Financial Action Task Force’s (FATF) Risk Based Assessment (RBA) approach helps developing countries implement its anti-money laundering (AML) and countering the financing of terrorism (CFT) standards without increasing financial exclusion. The report includes nonprofit organizations (NPOs) among entities facing challenges with access to the financial system. It finds that in some instances, both countries and financial institutions have adopted measures that exceed FATF requirements and that this over-compliance may contribute to the financial exclusion of NPOs, small banks, money service businesses (MSBs) and low-income individuals. In a dozen cases “AML/CFT policies towards non-profits in some way hindered their legitimate activity.”
The study examined “33 developing country mutual evaluation reports published to date in the current (4th) round of mutual evaluations.” It found that, overall, evaluations supported financial inclusion goals, but showed inconsistencies in treatment of financial exclusion risks and associated recommendations. For instance, only two evaluations expressed concern about over-compliance by financial institutions, “except in relation to the non-profit sector,” where this problem was cited more frequently.
The report found that “12 reports in our sample identified inappropriate or overly-broad regulations that unduly burdened the domestic NPO sector and recommended that government authorities refine their approach. In some reports, assessors found that the authorities did not understand the NPO sector’s risk profile, which prevented them from applying a targeted approach. . . In others, assessors found that the relevant laws and regulations were excessively restrictive or inappropriately applied to all NPOs.” (Box 3, page 18)
FATF’s RBA is intended to avoid over-compliance and focus action on higher risks. It was adopted in 2012, a year after FATF published guidance on financial inclusion that recognized the AML/CFT risks associated with exclusion from the financial system. It allows financial institutions the flexibility to use simplified customer due diligence (SDD), which are “measures for customers that present a lower risk profile, which reduces the cost of bringing them into the formal financial sector.”
However, experts interviewed for the study reported that “national supervisors in developing countries continue to implement laws that are not risk-based and impose more stringent account opening requirements for low-income and low-risk persons or products than those required by the global standards, due to uncertainty over how to implement the RBA and fear of being publicly identified for shortcomings in their AML/CFT framework.”
While noting that “FATF deserves credit for the steps it has taken to support financial inclusion,” the report recommends that it: