with a Risk-Based Approach

Supported by:
Enhancing Financial
Inclusion with a
Risk-Based Approach

ACAMS Mariam Jemila Zahari

Policy Specialist,
Lash Kaur Alliance for Financial Inclusion
VP Global Strategic Simon Zaugg
Communications and DE AML Specialist,
Justine Walker United Nations University Centre
Global Head Sanctions, for Policy Research (UNU-CPR),
Compliance and Risk I Finance Against Slavery and Trafficking

Dr. William Scott Grob

CAMS-FCI, CGSS, FRM, CAIA RUSI
Director – Research and Analysis
Brian Orsak Arzu Abbasova
Communications Manager Project Officer

Nisha Harichandran Busra Alsancak

Senior Communications Specialist Research Fellow

Rose Dahlan Gonzalo Saiz Erausquin

Communications Partner Research Analyst
Eliza Lockhart
Intern
Advisers
Stephen Reimer
Howard R Fields Senior Research Fellow
Executive Vice President, Maria Sofia Reiser
Chief Compliance Officer, Research Analyst
Mastercard
Chandana Seshadri
Ivan Kantardjiski Research Analyst
Advisor for Global Programme ‘Combating
Dr Noemi Tambe
Illicit Financial Flows’,
Independent Financial Crime Consultant
German Agency for International
and Associate Professor
Cooperation (GIZ)
Ino Terzi
Olivier Kraft
Assistant Project Officer
Associate Fellow,
Centre for Financial Crime and Security Kathryn Westmore
Studies (CFCS) Senior Research Fellow
Robin Newnham
Head, Policy Analysis & Guidance,
Alliance for Financial Inclusion
GATES Foundation
Ariadne Plaitakis
Senior Program Officer,
Bill & Melinda Gates Foundation
Contents

Learning Objectives 04

1. Introduction to Financial Inclusion 05

1.1 What is Financial Inclusion and Why is it Important? 05

1.2 Why Do We Need Financial Inclusion? 05

1.3 What is the Difference Between Financial Access and Usage?  07

1.4 Who is at Risk of Financial Exclusion? 08

1.5 Barriers to Financial Inclusion 12

1.6 The Impact of Anti-Financial Crime Regulation on Financial Inclusion 14

1.7 The Importance of Financial Inclusion to Global Efforts to Fight Financial Crime 17

2. International Standards and Financial Inclusion 19

2.1 What is the Risk-Based Approach? 19

2.2 How do FATF Recommendations Allow for the Implementation

of a Risk-Based Approach? 20

2.3 Guidance on Financial Inclusion Issued by FATF and Other Bodies 23

2.4 Examples of International Standards and Financial Inclusion in Practice 26

3. Financially Inclusive Compliance in Practice 30

3.1 Aligning Financial Integrity and Financial Inclusion 30

3.2 Financial Inclusion During Customer Onboarding, Ongoing Due Diligence,

Monitoring, and Exit 31

3.3 Developing Financially Inclusive Products and Services 39

3.4 E
 stablishing Your Financial Inclusion Strategy Within Your Risk
Management Framework 43

4. The Mutual Evaluation Process and Financial Inclusion 46

4.1 What is a Mutual Evaluation? 46

4.2 The Role of the Private Sector in the ME Process 48

Learning Objectives
Enhancing Financial Inclusion with a Risk-Based Approach

Objectives of this course are to:

►  nderstand the importance of financial inclusion for economic growth and for the strength
U
of anti-financial crime objectives.

► Understand how to integrate financial inclusion considerations into anti-financial

crime compliance procedures to promote and protect financial inclusion and how to
communicate this to national regulators and supervisors.

► Debunk common myths about balancing financial crime and financial inclusion objectives.

► Understand the purpose of and how to review a FATF Mutual Evaluation to support financial
inclusion.

4
1. I ntroduction to
Enhancing Financial Inclusion with a Risk-Based Approach

Financial Inclusion

1.1 W
 hat is Financial Inclusion
and Why is it Important?
Worldwide, it is estimated that close to one-third of adults,
1.7 billion people, do not have access to basic financial
products and services.1 While there is no single definition of
financial inclusion, the Financial Action Task Force (FATF)2
defines it as “providing access to an adequate range of
safe, conventional and affordable financial services to
disadvantaged and other vulnerable groups, including
1.7 billion
low income, rural and undocumented persons who have
been underserved or excluded from the formal financial people in the world
sector.” Economies that are financially inclusive provide all
3
are unbanked
consumers with equal access to formal financial products
and services, such as bank accounts, savings accounts, credit
and insurance.4 Financial inclusion is not just about access to financial products and services,
however, it’s about ensuring that they can be used and that they are of sufficient quality.

By helping disadvantaged people access and use financial products and services, financial
inclusion drives down inequality, achieves major societal goals, such as ending poverty, and
bringing us closer to a sustainable economy. Financial inclusion brings more people into the
formal regulated financial markets, thus removing the need for individuals to use informal
financial mechanisms which are hard to trace and can easily hide illicit transactions.

In recent years, the FATF has been paying particular attention to financial inclusion, particularly
as to how implementation of the FATF’s standards to tackle financial crime can facilitate or
hinder financial inclusion.

1.2 Why Do We Need Financial Inclusion?

Financial inclusion has two effects that benefit the economy:

protective effect dynamic effect

1. https://www.worldbank.org/en/topic/financialinclusion/overview
2.  he Financial Action Task Force (FATF) is an inter-governmental body founded in 1989 that sets international standards and drives national legislative and
T
regulatory reforms to address Money Laundering (ML), Terrorist Financing (TF) and Proliferation Financing (PF).
3.  ATF, ‘Anti-Money Laundering and Terrorist Financing Measures and Financial inclusion: With a Supplement on Customer Due Diligence’, November 2017,
F
p. 38. Available online: https://www.fatf-gafi.org/en/publications/Fatfgeneral/Financial-inclusion-cdd-2017.html
4.  hase, I (2020) Doing What is Right: Financial Inclusion Needs Better Incentives.
C
Available online: https://rusi.org/explore-our-research/publications/commentary/doing-what-right-financial-inclusion-needs-better-incentives

5
Enhancing Financial Inclusion with a Risk-Based Approach

Financial inclusion is protective because it allows people to gain a better overview of their
financial situation, control their spending and cut down on cash-use fees, and access
emergency funds in times of crisis. In short: people become more efficient and reliable
economic participants. Financial inclusion also protects the market. People will seek out
other means of conducting transactions if they cannot access the formal financial sector.
This means that transactions that cannot take place in the formal financial sector will take
place in the informal sector, where financial criminals have also been relegated. This means
that criminals will have a broader customer base to transact with and generate profit from
to finance their activities. Thus, by including more people into a regulated system of financial
transactions we extend the reach and effectiveness of anti-financial crime controls, reducing
the risks of Terrorist Financing (TF), Money Laundering (ML), Proliferation Financing (PF) and
other financial crimes,5 thus enhancing financial integrity. The concept of financial integrity is
further discussed in Chapter 3.

The opposite of financial inclusion - financial exclusion - makes people less dynamic. Without
the safety net of access to regulated products and services, people spend less and take fewer
risks. Prices are also higher in the informal economy which impacts the ability of the most
vulnerable to move out of poverty. The is also a greater risk of people losing money through
theft or loss. Financial inclusion restores autonomy and confidence, encouraging people to
improve their living conditions, launch businesses and increase their spending. This has the
benefit of enhancing society more broadly.6

Financial inclusion is shown to have a positive effect on a country’s Gross Domestic Product
(GDP) especially when more people can access credit to save money, repay debt, improve their
living conditions, hire more staff and buy better equipment for their business.7 People who are
excluded from the financial sector are found to be less resilient to economic shocks, which can
leave them vulnerable to criminals, particularly human traffickers.8 The World Bank has identified
financial inclusion as a key enabler of its Sustainable Development Goals – which include driving
education, green growth, improving health and fighting hunger. These serve the Bank’s twin
overarching goals: driving prosperity and ending poverty.9 Many of the hallmarks of a more
developed society – one in which large quantities of high-tech services are exchanged and a
dynamic intellectual ecosystem thrives – stem from a financially included population.

5. Shehu, Abdullahi. ‘Promoting Financial inclusion for Effective Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT)’.
Crime, Law and Social Chang, 2012
6. Donncha Marron, ‘Governing poverty in a neoliberal age: New Labour and the Case of Financial Exclusion’, New Political Economy, 2013
7. E
 ra Dabla-Norris, Yan Ji, Robert Townsend, D. Filiz Unsal, ‘Identifying Constraints to Financial inclusion and Their Impact on GDP and Inequality:
A Structural Framework for Policy’, IMF Working Paper, January 2015. Available online: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/
Identifying-Constraints-to-Financial-Inclusion-and-Their-Impact-on-GDP-and-Inequality-A-42649
8. Laura Gauer Bermudez, Shukri Hussein, Timea Nagy, Bart Robertson, Leona Vaughn, ‘Could Financial Inclusion Reduce Vulnerability to Modern Slavery?’
Delta 8.7, March 2022. Available online: https://gfems.org/uncategorized/could-financial-inclusion-be-the-key-to-reducing-vulnerability-to-modern-
slavery/
9. S
 achin Shah, ‘Fostering Financial inclusion by Enhanced AML/KYC Regimes Using STAR Model’, November 2020. Available online:
https://financelawpolicy.umich.edu/sites/cflp/files/2021-10/shah-fostering-financial-inclusion-by-enhanced-aml-kyc-regimes-using-star-model.pdf

6
Enhancing Financial Inclusion with a Risk-Based Approach

1.3 W
 hat is the Difference Between
Financial Access and Usage?

Access and usage are key elements of financial inclusion.

Access designates whether the infrastructure and regulations
are in place to enable people to access financial services.

Access
Some examples of products and services that facilitate access include:

► The use of mobile identity checks to access the financial system.

► Automated Teller Machines (ATMs) with withdrawal and deposit functions.

► Mobile Apps that allow people to obtain credit.

► The infrastructure which allows people to cash in and out mobile money.

Usage designates when customers choose to engage with the financial

products available to them and use them to develop their economic potential.
Regular usage indicates that financial products and services meet the needs of
disadvantaged and vulnerable people.
Usage
Financial inclusion, therefore, is not just about access to products and services but about
how the products and services are used. Easily accessible financial products that are not
actually used, perhaps because they are unaffordable or because they do not meet people’s
needs, do not drive financial inclusion. The quality of products is also an important element
of financial inclusion. It is important that consumers have a choice of products and that the
cost of products is not prohibitive. Products should also provide an appropriate level of
consumer protection.

Access, usage and quality must be considered

as key elements of financial inclusion.

7
Enhancing Financial Inclusion with a Risk-Based Approach

1.4 Who is at Risk of Financial Exclusion?

There are a number of disadvantaged groups who are at particular risk of financial exclusion.
These include those with a low-income, rural populations, both younger and older people,
displaced persons, persons with disabilities, women and ethnic minorities. It is important to
note that this is not a comprehensive list and anyone – from a foreign exchange student with
difficulty overcoming the language barrier to an aboriginal woman seeking a loan to launch
a business – can face unique circumstances which lead to them being excluded from the
financial system. It is also important to note that there may be multiple factors for financial
exclusion. Financially excluded people may not just have a single, simple problem, especially if
they have been excluded for a long period of time. Money provides and facilitates opportunities
in our society. Financial exclusion means loss of access to convenient sources of money,
and with this, fewer opportunities.

Low-Income People

Due to difficulties in managing their financial situation, which can involve stress, lack of a
fixed residence, uneven bills, and trouble managing debt, financial exclusion is a risk for
low-income people. People without access to a bank account, for instance, may have to pay
fees on cashing in cheques and pay more for utilities because of cash handling fees. To trot out
an adage, ‘it’s expensive to be poor’.

It can be difficult for individuals with a low income to access a bank account for a number
of reasons. Individuals may not have access to the necessary identity documents, such as
a passport, due to the application cost. In some countries, there are minimum deposits
for current accounts, some countries have banks with ‘hard’ minimum deposits, such as in
India, the Czech Republic, Russia, and Argentina, other countries, such as Mexico, Canada,
and Australia, have banks that may impose monthly fees unless a minimum deposit amount
is reached. Lack of access to bank accounts can also make it difficult to receive help from
government assistance programs. Developing countries which receive assistance to help their
community suffer particularly badly when financial exclusion spreads across their territory: it
becomes complicated and expensive for them to distribute support.10

Rural Populations

Rural populations are increasingly at risk of being financially excluded. Many rural areas do
not have physical bank branches and, where there are branches, they are being closed at a
growing pace, often replaced with mobile banking apps. However, rural areas do not always
have access to the reliable mobile network which is needed to support their use. Financial
illiteracy can also be a problem. Rural populations are diverse and spread out across the
world. They can have different sectors of activity, such as working in farming, herding (which
can involve moving from place to place with no fixed address), trading of goods, forestry, or
industries built far from urban areas for reasons of safety or due to environmental concerns.

10.  .S. House Committee on Financial Services, ‘When Banks Leave: The Impacts of De-Risking on the Caribbean and Strategies for Ensuring Financial
U
Access’, 14th of September 2022. Available online: https://www.congress.gov/event/117th-congress/house-event/115101?s=1&r=48

8
Enhancing Financial Inclusion with a Risk-Based Approach

In addition to access to basic financial products, rural populations may also benefit from some
specialized products and services that are adapted to their situations. One example is farming
communities which may seek loans that recognize that reimbursement will only occur once the
harvest is completed.

Younger and Older People

Younger and older people share a similar problem: primarily, the lack of education required
to access and use financial products. Financial literacy is one of the core enablers of financial
inclusion. The ability people have to understand how to create budgets, manage debt, make
use of loans and understand interest, determines in great part whether they will feel confident
using financial products. Making financial products legible is a part of this, such as ensuring that
contracts clearly outline benefits and obligations.

The UN currently has a youth program focused on the

fact that 15 - 25% of a generation of people in Africa are
growing up with no parents due to the AIDS epidemic.
The UN’s objective has been to provide them with
access to micro-loans and savings accounts, as well as
education on how financial products work and how they
can help individuals.

The same problem of education can exist with older individuals, who might find it more difficult
to learn how to use new technology. Financial products can be complicated to understand,
and when the product design is too complex or there is a need for technology to manage
access or usage of the product, older people can become financially excluded. This is
particularly relevant as branches close, and banks move to online banking. Older populations
may struggle if banking apps are not easy to use for them.11

11.  geUk, ‘Financial inclusion (UK)’, November 2018. Available online:

A
https://www.ageuk.org.uk/globalassets/age-uk/documents/policy-positions/money-matters/financial-inclusion-policy-position-nov-18-clean.pdf

9
Enhancing Financial Inclusion with a Risk-Based Approach

Displaced Persons

Displaced persons might, in some cases, have had sufficient advantages to participate in the
financial market where they come from. However, displacement typically generates several
challenges and difficulties: unrecognized credentials and ID, language, and culture barriers.
The ability of displaced persons to contribute to the economy is recognized by research
which has highlighted the benefits of including them.12 Unfortunately, political difficulties can
arise. Xenophobia has been used as a political tool in a number of countries, resulting in hostile
environments and practices for this category of disadvantaged people.13

Persons with Disabilities

The World Health Organization estimates that 1.3 billion people in the world are living with some
form of disability.14 Persons with disabilities suffer from many forms of health inequity including
discrimination, poverty and exclusion from education and employment. As a result, persons
with disabilities often find themselves unable to obtain formal financial products and services.
A recent study in Malawi was carried out to understand the preparedness and accessibility of
financial services for people with disabilities. It highlighted that ‘a lack of financial literacy and
adaptive technologies, communication barriers, and high rates of unemployment, explained
the reluctance of commercial banks to extend financial services to persons with disabilities.’15

Women

Women make up 50% of the global population and yet are at an increased risk of financial
exclusion compared to men. The gender gap is the ‘difference between women and men as
reflected in social, political, intellectual, cultural, or economic attainments or attitudes.’16
The World Economic Forum estimates that, at the current rate of progress, it will take 151 years
to close the Economic Participation and Opportunity global gender gap.17 The gender gap also
varies considerably by country and region with the gender gap greatest in the Middle East and
North Africa and South Asia.

Women are considered to be at particular risk of financial exclusion because a vast array
of countries have regulations in one form or another that create barriers towards women’s
inclusion in the financial market. Examples include requiring additional documentation,
presuming that women are married, or that a male guardian would be available to supervise
them opening an account, purchasing property, or signing a contract.18

12.  eyla Pazarbasioglu, ‘Financial inclusion for displaced people yields societal and economic benefits for all’, June 2017.
C
Available online: https://blogs.worldbank.org/voices/financial-inclusion-displaced-people-yields-societal-and-economic-benefits-all
13.  zlem Ögtem-Young, ‘Journey to Financial Exclusion and Vulnerability: UK Immigration Policy and the Lives and Livelihoods of Displaced Migrants’, January
Ö
2022
14. World Health Organization, ‘Disability;, Available online: https://www.who.int/health-topics/disability#tab=tab_1
15. J iya, A. N., Opoku, M. P., Nketsia, W., Dogbe, J. A., & Adusei, J. N. (2022). Achieving Financial Inclusion for Persons With Disabilities:
Exploring Preparedness and Accessibility of Financial Services for Persons With Disabilities in Malawi. Journal of Disability Policy Studies, 33(2), 92–102.
https://doi.org/10.1177/10442073211027533
16. World Economic Forum, ‘What is the gender gap (and why is it getting wider)?’, November 2017.
Available online: https://www.weforum.org/agenda/2017/11/the-gender-gap-actually-got-worse-in-2017/
17. World Economic Forum, ‘Global Gender Gap Report 2022, July 2022. Available online: https://www3.weforum.org/docs/WEF_GGGR_2022.pdf
18.  inEquity ‘FinEquity Webinar: Tackling the Root Causes of Women’s Financial Exclusion’, April 2022.
F
Available online: https://www.youtube.com/watch?v=QRskutZuN0Y&ab_channel=FinEquityAdvancingWomen%27sFinancialInclusion

10
Enhancing Financial Inclusion with a Risk-Based Approach

Women are traditionally expected to undertake unpaid labor in the form of family care,
and they often have much less financial literacy training than their male counterparts.

Platform work has provided an interesting case study to demonstrate how women (particularly
low-income women) can perform in areas where gender barriers are reduced. Platforms are
apps which both users and employees can access, allowing users to post jobs, and employees
to sign up to work on these assignments (Uber is an example of a platform service). By its
nature as a piece of software, platform work tends to lower gender bias by limiting human
involvement in the recruitment and contracting process. However, there remain barriers which
prevent women from taking full advantage of the economic opportunities afforded by platform
work. In particular, women struggle to obtain capital for investment in their business from
banks and other sources of credit, often relying on money from friends and family.19 In addition,
professional development requires capital. Again, this is a challenge for financially excluded
women: they can only access such capital through financial inclusion.20

Ethnic Minorities

Evidence shows that ethnic minorities are disproportionately financially excluded, including
in developed economies. For example, the rate at which Hispanic and Black households are
unbanked in the US is over four times the rate of White households.21 The economic disparities
between ethnic minorities often translate into poorer access to financial services, including
higher mortgage rates and an increased chance of being denied credit.22 This may mean that
ethnic minorities are more likely to turn to the informal financial sector, having been excluded
from the formal financial sector.

Box 1.1: U
 nderstanding Vulnerable Customers:
The Case for Human-Centered Development
Human-Centered Development (HCD) is a customer-focused type of product development,
in which a targeted customer group is observed, learned from, and receives a tailored financial
product that addresses their need. Perhaps certain farming communities require a micro-loan
with a repayment plan that recognizes the delays associated with the growth cycle and sale
date of their product. In another case, East Asian Islanders might require bank accounts that
also recognize their situation, by having lower opening balance requirements, more extensive
ATM service including the ability to deposit funds without having to travel extensively.23

19.  isha Singh, Rani Deshpande, Gayatri Murthy, ‘Women in the Platform Economy: Emerging Insights’, May 2022.
N
Available online: https://www.cgap.org/sites/default/files/publications/slidedeck/2022_05_Reading_Deck_Women_Platform_Workers.pdf
20. Hanan Morsy, Hoda Youssef, ‘Access to finance – mind the gender gap’, July 2017
21.  021 FDIC National Survey of Unbanked and Underbanked Households, 14 November 2022.
2
Available online: https://www.fdic.gov/analysis/household-survey/
22. Oana Ifrim, ‘The many faces of financial exclusion in the developed markets & who is at risk’, 15 July 2022. Available online:
https://thepaypers.com/expert-opinion/the-many-faces-of-financial-exclusion-in-the-developed-markets-and-who-is-at-risk--1257545
23. Mastercard, ‘The Next Frontier in Financial inclusion: Moving Beyond Access to Usage’, September 2018, p. 6.
Available online: https://www.mastercardcenter.org/content/dam/public/mc-cig/uploads/The-Next-Frontier-in-Financial-Inclusion-Access-to-Usage-
Final.pdf

11
Enhancing Financial Inclusion with a Risk-Based Approach

1.5 B
 arriers to Financial Exclusion
Financial exclusion exists across every continent and in every country. A condition that
affects so many people across the world, mostly in developing countries but also in rich
economies, cannot be traced to a single root cause. Different issues, including low income,
financial illiteracy, excessive administrative procedures, regulation and displacement,
frequently combine to create numerous barriers to financial inclusion. These barriers can
disproportionately impact vulnerable people, for instance branch closures can impact persons
with disabilities and rural people much more, or they can create new vulnerabilities, for instance
financial exclusion can reduce a person into poverty or render them homeless.

Low–Income

Evidence shows that, worldwide, people with a lower income are less likely to have a bank
account than those with higher incomes. In many developing countries, this gap is particularly
significant. In Kenya, for example, wealthier adults are about 20 percentage points more likely
to have an account than adults with a low–income. The gap is more than 20 percentage points
in a number of countries including Mozambique, Myanmar, Nigeria, Uganda, and Zambia.24
The impact of income on financial exclusion is not just a problem in developing countries.
In the United Kingdom, the House of Lords carried out a review of financial exclusion.
Their 2021 report25 on tackling financial exclusion finds that banking services to the poor and
other vulnerable populations are in decline in terms of access, with free ATMs decreasing in
number, especially in the poorest areas of the UK, whereas fee-charging ATMs are increasing
in number. This example of a ‘poverty premium’ – having to pay more money for a service
because of being disadvantaged – illustrates how there can be a ‘snowball effect’ for
disadvantaged populations: they are poor; therefore, they grow poorer. This is an example of
financial exclusion driving financial exclusion.26

Poverty is a particularly problematic barrier because many of those vulnerable to financial

exclusion will fall into poverty as a result. In some cases, access to financial products and
services at an earlier stage may reduce this risk. For example, displaced people with
qualifications in their origin country, given the resources to get their qualifications recognized
in a new country, might be able to avoid falling into poverty themselves.

Financial Illiteracy and Excessive Administrative and/or

Regulatory Procedures
Poverty also plays a hand in two other barriers: financial literacy, which people with a low
income cannot afford to improve and excessive administrative and/or regulatory procedures.
Often financial literacy is linked to other vulnerabilities as well. For example, it is estimated that
only 30% of women globally are financially literate.27

24. World Bank Group, The Global Findex Database 2021, Available online: https://www.worldbank.org/en/publication/globalfindex/Report
25. House of Lords, ‘Tackling Financial Exclusion: A country that works for everyone? Follow up report’, April 2021.
Available online: https://committees.parliament.uk/publications/5614/documents/55502/default/
26. Ibid., p. 15
27. Klapper, Leora, Annamaria Lusardi, Peter van Oudheusden. 2015. “Financial Literacy Around the World: Insights from the Standard & Poor’s Ratings Services
Global Financial Literacy Survey.” McGraw Hill Financial.

12
Enhancing Financial Inclusion with a Risk-Based Approach

Financial literacy is important, particularly when it comes to how products and services are
used and how people make decisions about their own financial situations. As we saw previously,
usage is a key part of financial inclusion.

Excessive administrative and/or regulatory procedures may also hinder financial inclusion.
For example, there may be a requirement to have full KYC documentation for basic and
low-risk services or to provide additional documentation in order to obtain credit.28 Some
people may not have these kind of identity documents. This is also an issue for migrants.
Frequently, no matter what qualifications or jobs they might have had where they left, they
can be plunged into poverty if they cannot access the requisite documents and tools when
they arrive in their host country. Someone with high academic and professional qualifications,
for instance, would need to pay to have them translated, certified and often verified by extra
examinations in the receiving country. In short: inclusion itself can be expensive to afford, and
this becomes a hindrance to people who cannot afford this. In the UK, the House of Lords
found that bank staff are often unaware or unwilling to share information about basic banking
services, which would require reduced documentation and offer access to simple financial
services and products to drive financial inclusion.29

Box 1.2: P
 rivate Initiatives to Remove Barriers to Financial Inclusion
in the Netherlands
Although the Netherlands has a high rate of financial inclusion, a number of initiatives have
been launched by the private sector, in collaboration with national regulators, to improve
financial literacy and use of more complex products and services to reduce the number of
people struggling financially. Buddy Payment is a debt counseling app which is specifically
built to assist vulnerable people and people in debt. It helps manage budgets by automatically
setting money aside, verifying social schemes to which the user may have access, and offering
advice on what to do to improve one’s situation. It is specifically targeted at people who need
assistance to manage their finances. This service helps those with a low income or a low level
of financial literacy to make better financial choices.30
Another example is Dyme. As we discussed previously, poor people pay a ‘poverty premium’,
on average paying more for simple services as they have neither the time nor the resources
to get the best value possible for their money or are often overcharged due to their lack of
resources. Dyme works towards reducing these poverty premiums, and improves financial
inclusion in this way, by providing savings through a variety of means. This banking application
provides a standard budget overview service, but also provides a convenient ‘zombie
subscription’ cancellation service, as well as contract re-negotiation for car insurance, TV &
Internet, and newspaper/magazine subscriptions, charging users a percentage commission
on their savings only if negotiations are successful. This is an example of a service that can be
invaluable to poorer people because it lessens their financial burdens conveniently without
adding extra costs which they cannot afford.31

28. Oana Ifrim, ‘The many faces of financial exclusion in the developed markets & who is at risk’, The Paypers, July 2022. Available online:
https://thepaypers.com/expert-opinion/the-many-faces-of-financial-exclusion-in-the-developed-markets-and-who-is-at-risk--1257545
29. H
 ouse of Lords, ‘Tackling Financial Exclusion: A country that works for everyone? Follow up report’, April 2021.
Available online: https://committees.parliament.uk/publications/5614/documents/55502/default/
30. Open Banking Expo, ‘Buddy Payment’, 2022. Available online: https://www.openbankingexpo.com/hub/buddy-payment/
31. Dyme, ‘Power tools’, 2022. Available online: https://dyme.app/en/personal-advice/overview

13
Enhancing Financial Inclusion with a Risk-Based Approach

Displacement

Displaced people are possibly some of the more instantly identifiable disadvantaged people
when it comes to financial inclusion. In many cases they have had to abandon their own
resources, social networks, possessions, and identification documents (and if they do have
their identification documents still, there is no guarantee that they are easily recognized
and accepted as valid where they have moved to). Whether classed as voluntary or forced,
displaced people enter an area where they might not know the culture, the language, the laws,
or any people. This means that they are socially excluded, and social exclusion, more broadly,
is a key driver of financial exclusion. In early 2022, the Russian invasion of Ukraine and the war
that unfolded provoked a humanitarian crisis including the displacement of a large number of
people who became financially excluded. In response, the European Banking Authority (EBA)
issued guidance calling for particular attention to the matter and requesting that local financial
authorities and banks make use of flexible European AML/CFT regulations to make financial
services easier to access for refugees.32

Box 1.3: Victims of Human Trafficking and Exploitation

Victims of human trafficking, exploitation and displacement often face additional challenges
to accessing the financial system. These include but are are not limited to homelessness, bad
credit scores, lack of identification and poverty. Financial exclusion is often an opportunity for
traffickers, as their victims are left with no identification, difficult access to their savings (if they
have any) and no way to access social protection systems or obvious transportation away from
their physical situation. When such individuals manage to escape, or survive being trafficked
or exploited, the Global Fund to End Modern Slavery has found that ex-victims are still likely to
be recaptured due to their low financial resilience. Financial resilience – the ability to overcome
economic shocks – is what determines vulnerability to trafficking or exploitation.33

1.6 T
 he Impact of Anti-Financial Crime
Regulation on Financial Inclusion
At a global level, the FATF sets out an international framework for combatting ML, TF and PF
through its Recommendations. FATF member states implement the FATF Recommendations
through their own national laws and guidance. The FATF Recommendations require that
regulated institutions apply a risk-based approach to applying AML, CTF and CPF measures,
including the requirements to carry out customer due diligence, including collecting
appropriate KYC information, and ongoing monitoring of a customer’s account.

32. EBA, ‘EBA statement on financial inclusion in the context of the invasion of Ukraine’, April 2022. Available online:
https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Other%20publications/2022/1031627/EBA%20statement%20
on%20financial%20inclusion%20in%20relation%20to%20Ukraine.pdf
33. GFEMS, ‘Could financial inclusion be the key to reducing vulnerability to modern slavery?’, January 2022.
Available online: https://www.gfems.org/uncategorized/could-financial-inclusion-be-the-key-to-reducing-vulnerability-to-modern-slavery/

14
Enhancing Financial Inclusion with a Risk-Based Approach

Box 1.4: FATF’s Mandate

The FATF was formed in 1989 with the understanding that it would run for 30 years to
coordinate efforts to counter ML. In 2019, the FATF adopted a mandate which effectively makes
the Task Force a permanent institution, extending its operations beyond the original 2019 end
date. This mandate lists the FATF’s objectives and the methods it intends to make use of to
achieve those goals. Among them, it discusses improving compliance integrated with the need
to drive financial inclusion, aiming to reduce financial crime through the effective application of
a risk-based approach and the proportionate application of regulation. In recent years,
FATF’s remit has extended to TF and PF as well as ML.34

While anti-financial crime regulation is important in countering the risks of ML, TF and PF, it can
also play a significant part in driving financial exclusion. When anti-financial crime regulation
is too restrictive, poorly worded, or is insufficiently clear, it creates uncertainty for regulated
institutions. The consequence can be for financial institutions to minimize ML, TF and PF risk by
complying excessively with the regulatory standards, or by withdrawing from the market.
This is known as derisking and can have a significant impact on financial exclusion in a particular
sector or in relation to a particular group of customers.

Box 1.5: D
 erisking: An Extreme Case of Financial Exclusion Driven by Regulation
and Commercial Considerations
Derisking, the process by which financial institutions minimize ML, TF and PF risk by ceasing
financial activities in an area rather than managing the risk, is particularly damaging to financial
inclusion. It erodes trust and harms financial access for an unpredictable amount of time.
Derisking contracts the market and plunges former customers into financial uncertainty. It also
provides a free market share to the informal sector. In doing this, it undermines regulation and
creates incentives that are not aligned with global efforts to fight financial crime.35

Unintended consequences of global AML, CTF and CPF regulations are a growing concern
for the FATF and member states. The FATF has issued guidance stating that it is important to
implement the FATF recommendations in a way that is not disproportionate, but sufficient to
mitigate ML, TF and PF risks, and foster financial inclusion. When accessing loans and savings
becomes too expensive or impossible for people, they will instead turn towards informal and
unregulated sources of support.36

34. FATF, ‘Mandate’, April 2019. Available online: https://www.fatf-gafi.org/publications/fatfgeneral/documents/fatf-mandate.html

35. EBA, ‘Opinion of the European Banking Authority on ‘de-risking’, January 2022. Available online:
https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Opinions/2022/Opinion%20on%20de-risking%20%28EBA-
Op-2022-01%29/1025705/EBA%20Opinion%20and%20annexed%20report%20on%20de-risking.pdf
36 FATF, ‘Mitigating the Unintended Consequences of the FATF Standards’, October 2021, available online: https://www.fatf-gafi.org/en/publications
Financialinclusionandnpoissues/Unintended-consequences-project.html

15
Enhancing Financial Inclusion with a Risk-Based Approach

This in turn can result in the creation of an informal financial market, thus achieving the exact
opposite of what the FATF framework is attempting to accomplish.37

Some of the products that people at risk of financial exclusion need the most – bank accounts,
micro-loans, savings accounts – do not carry the same amount of risk as other more complex
products and are therefore liable to be exempted from some AML/CTF/CPF controls.38
This means that, using flexibility clauses in the regulation, lower standards of identity
verification can be applied, which make it more affordable for institutions to provide these
services and easier for the financially excluded to access them.

Box 1.6: T
 he Impact of FATF Recommendation 8 on the NPO Sector
FATF’s Recommendation 8 aims to ensure that Non-Profit Organizations (NPOs) are not
misused for TF. NPOs may be vulnerable to TF because of certain characteristics and behaviors
(unknown benefactors, irregular transfers of large sums of money, dealings with high-risk
jurisdictions, poor understanding of AML and CTF) and they can be targeted by illicit actors
looking to find a new way to move money past borders. To counter this, Recommendation
8 of the FATF used to state that NPOs were at a high risk of becoming vehicles for TF and
recommended that regulators and institutions pay special attention to them. A large number
of institutions decided to debank NPOs creating adverse consequences.39
Since some NPOs help drive financial access, facilitating the spread of mobile money, for
instance, this was detrimental to vulnerable and disadvantaged populations. In 2016, the FATF
revised Recommendation 8 to limit the extent to which NPOs were being affected and to
encourage countries and institutions to implement a risk-based approach to the NPO sector,
rather than simply exiting it.40 This is an example of where financial regulation has had a very
significant adverse impact on financial inclusion.

The FATF’s demands in terms of compliance have evolved over time to encourage flexibility
and to mitigate unintended consequences by creating a system which allows regulations to be
adapted to benefit financial inclusion. A core element of this approach is the risk-based nature
of the FATF’s Recommendations. A risk-based approach allows regulated institutions to assess
the risk of a particular customer, or group of customers, and put in place appropriate and
proportionate controls to mitigate that risk. As we will see in Chapter 3, FATF encourages the
use of a risk-based approach and has made a clear statement that derisking is not a legitimate
strategy for combatting financial crime. FATF also provides guidance on using alternate forms
of identification and assisting jurisdictions seeking to make their regulations more flexible by
providing guidance for situations where Simplified Due Diligence (SDD) could be applied to
make services more accessible.41

37. FATF Guidance, ‘Anti-money Laundering and terrorist financing measures and Financial inclusion’, June 2011
38. Ibid.
39. També, N. (2021) ‘Unintended consequences of AML/CTF regulation: the challenges of banking NPOs’. ‘Available online:
https://ecnl.org/sites/default/files/2022-02/Unintended%20consequences%20of%20AML-CTF%20regulation%20the%20challenges%20of%20
banking%20non-profit%20organisations_0.pdf
40. FATF, ‘High-level synopsis of the stocktake of the Unintended Consequences of the FATF Standards’, October 2021
41. Chase, I. (2020) ‘Doing what is right: Financial inclusion needs better Incentives’.
Available online: https://rusi.org/explore-our-research/publications/commentary/doing-what-right-financial-inclusion-needs-better-incentives.

16
Enhancing Financial Inclusion with a Risk-Based Approach

1.7 T
 he Importance of Financial Inclusion to
Global Efforts to Fight Financial Crime
There are a number of reasons why financial inclusion benefits society as a whole and improves
the fight against financial crime. Populations with access to formal finance are usually better
off, healthier, and more prosperous.42

Financial Exclusion Means that People May be Forced to

Use the Informal Economy
Financial exclusion means that unbanked or underserved individuals and businesses may turn
to the informal financial sector. The unbanked might ask for financial support from family, local
associations, or powerful community figures who might have ties to illicit activities.43 While this
type of finance may be more easily accessible for excluded people, it can also be more costly
as well as increasing the market for criminals.

Box 1.7: Unregulated Products Impact Anti-Financial Crime Efforts

In 2013, the FATF discussed the subject of informal money transfers in a guidance document
entitled ‘The Role of Hawala and other similar service providers in Money Laundering and
Terrorist Financing’. Hawala – and a number of other connected services – are informal
transfer services which are often used by migrant workers who wish to send back low-value
remittances to their families or connections in their home countries. The system works very
informally – in the case of Hawala specifically, it is usually conducted through a pair of brokers
who know each other and pay out the remittances out of their own cash reserves. It is
underpinned by mutual trust in the fact that they will – at some appropriate juncture - settle
their accounts with each other through some formal transfers, an exchange of goods or other
suitable method of repayment.44 These unregulated systems are particularly used where formal
financial services are not available, and there can be a positive view of their ability to provide
services to those who could not otherwise access them. As the FATF states:

“In the majority of the surveyed countries where Hawala and Other Similar Service
Providers (HOSSPS) are legal, they are considered to play an important role in providing
financial services to the unbanked population.”45

These types of services, though in many places traditional and in place for a long time, do
not use ledgers, detailed screening of clients or records. The services are unregulated and
unsupervised. As a result, these types of services can be vulnerable to ML and TF.

42. Laston Petro Maja, Isatou A. Badjie, ‘The Welfare Effects of Formal and Informal Financial Access in the Gambia: A Comparative Assessment’, SAGE Open,
March 2022
43.  ach Nguyen, Nguyen Phuc Canh, ‘Formal and Informal financing decisions of small businesses’ Small Business Economics, 57, 1545-1567, 2021
B
44. Leonides Buencamino, Sergei Gorbunov, ‘Informal Money Transfer Systems: Opportunities and Challenges for Development Finance’,
DESA discussion paper n.26, November 2002
45. FATF, ‘The Role of Hawala and Other Similar Service Providers in Money Laundering and Terrorist Financing’, October 2013.
Available online: https://www.fatf-gafi.org/en/publications/Methodsandtrends/Role-hawalas-in-ml-tf.html#:~:text=Download-,The%20role%20of%20
Hawala%20and%20other%20similar%20service%20providers%20in,a%20long%20period%20of%20time.

17
Enhancing Financial Inclusion with a Risk-Based Approach

Informal Service Providers Weaken AML/CTF/CPF Regimes

Informal service providers, by their very nature, operate mostly outside of electronic
transaction systems and certainly outside of the oversight of institutions that comply with
AML/CTF/CPF regulations. Most often, these informal systems still function using cash.
They are particularly powerful in developing economies where unfamiliar local environments
and concerns of risk tied to illegal activities and poor law enforcement hinder the market
entry of financial institutions. The lack of low-risk financial products, in these areas, results in
cash transactions which are difficult to trace, creating zones that exist outside of AML/CFT/
CPF regimes.46

Increased Financial Inclusion Improves Our Societies

There are numerous examples of initiatives aimed at improving financial inclusion which have
also improved society. In Brazil, Banco Bradesco has made use of the country’s river network
to reach distant customers in an imaginative way without needing to open brick-and-mortar
branches. Outfitting boats with satellite connections, the bank operates a roving banking
service on the river which assists underbanked populations by providing periodic access,
financial education, and relevant products. On the ship’s first voyage alone, it opened 200
new accounts.48 This breaches the barrier of remoteness for populations that live away from
physical banks in the remote regions of Northern Brazil, as well improving financial literacy in
these communities.

One of the most striking examples of inclusive banking is Equity Bank Limited (EBL), a Kenyan
construction company that almost failed in 1993 before turning itself into a bank with the
objective of serving the masses, and particularly lower-income customers. Capturing this
market was effective in restoring financial viability to the organization, enabling it to acquire
and deploy trucks connected by Wi-Fi to reach remote locations. EBL then took to expanding
throughout the region, opening national branches in neighboring countries with a strategy of
directly offering ‘zero-balance accounts’: “These Equity Ordinary Accounts, which are primarily
transactional accounts, are used as a tool to demystify banking for the general population,
demonstrating that anyone can open an account with EBL. Equally important, this element of
the strategy allows banks to immediately build the base of low-cost deposits on which they rely
for their profitability.”49

46. One example of this is outlined in the DRC MER: GABAC, ‘Anti-money laundering and counter-terrorist financing measures: Democratic Republic of Congo’,
April 2021. Available online: https://www.fatf-gafi.org/media/fatf/documents/reports/mer-fsrb/GABAC-MER-DRC-2021.pdf
48. The Wall Street Journal, ‘A Banker Wades into New Markets by Floating Loans from a Boat’, March 2010.
Available online: https://www.wsj.com/articles/SB10001424052748704625004575089731001335118
49. UNCDF, ‘Increasing Financial Inclusion in East Africa: Equity Bank’, October 2017.
Available online: https://uncdf-staging.icentric-dev.com/article/2674/increasing-financial-inclusion-in-east-africa---equity-bank

18
2. International Standards
Enhancing
Financial Inclusion
Financial Inclusion with a Risk-Based Approach

and Financial Inclusion

2.1 What is the Risk-Based Approach?

The risk-based approach (RBA) requires institutions to “analyze and seek to understand how
ML and TF risks they identify affect them; the risk assessment therefore provides the basis for
the risk-sensitive application of AML/CFT measures. The RBA is not a “zero failure” approach;
there may be occasions where an institution has taken all reasonable measures to identify and
mitigate AML/CFT risks, but it is still used for ML or TF purposes.”50

The FATF expects controls and regulations to be proportionate to the risks that are present
across financial system. Not only does this mean that resources can be targeted at areas of
higher risk but it also helps to promote financial inclusion by facilitating the implementation of
lower cost, more flexible compliance methods when ML, TF and PF risks are low. The FATF’s
Recommendation 1 addresses proportionality which is fundamental to financial inclusion and
achieved through the RBA.

Box 2.1: E
 xtracts from Recommendation 1:
Assessing Risks and Applying a Risk-Based approach
“Based on [their National Risk Assessment], countries should apply a risk-based
approach (RBA) to ensure that measures to prevent or mitigate money laundering and
terrorist financing are commensurate with the risks identified.”

“Where countries identify higher risks, they should ensure that their AML/CFT regime
adequately addresses such risks. Where countries identify lower risks, they may
decide to allow simplified measures for some of the FATF Recommendations under
certain conditions.”

“Where countries identify lower risks, they should ensure that the measures applied
are commensurate with the level of proliferation financing risk, while still ensuring full
implementation of the targeted financial sanctions as required in Recommendation 7.”51

Recommendation 1 requires countries assess the level of ML, TF and PF risk present within
their financial systems. It expects jurisdictions to set up systems and controls to mitigate
risks and customize their AML/CFT/CPF frameworks based on their assessment of the risk.

50.  ATF, ‘Guidance for a Risk Based Approach: The banking sector’, October 2014, p. 6.
F
Available online: https://www.fatf-gafi.org/media/fatf/documents/reports/Risk-Based-Approach-Banking-Sector.pdf
51. FATF, ‘The FATF recommendations’, March 2022, p. 10.
Available online: https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html#:~:text=As%20amended%20
February%202023

19
Enhancing Financial Inclusion with a Risk-Based Approach

Recommendation 1 specifically allows countries to decide to implement ‘simplified measures’

in certain circumstances where lower ML/TF/PF risks are identified. Recommendation 1 also
requires countries to ensure financial institutions and specific businesses (regulated entities)
measure their own exposure and vulnerability to financial crime.

The purpose of the RBA is to vary the level of compliance and due diligence based on the
ML/TF and PF risks encountered. The RBA allows countries to be more flexible when developing
regulatory frameworks, provided the risks are identified appropriately. The FATF official
guidance on the RBA states:

“There are no universally accepted methodologies that prescribe the nature and extent
of a risk-based approach. However, an effective risk-based approach does involve
identifying and categorizing money laundering risks and establishing reasonable controls
based on risks identified.”52

The RBA is therefore a tool which enables an institution to assess the risks that it faces.
Once the risk of a specific customer or group/segment of customers is assessed, products
can be designed to mitigate any associated risks. Where the risk is assessed as low, products
with simplified, flexible compliance mechanisms can be offered. For higher risk customers,
products may have restrictions to mitigate the risk, such as accounts with low transaction
limits, or micro-credit.

2.2 H
 ow Do FATF Recommendations Allow for the
Implementation of a Risk-Based Approach?
While Recommendation 1 advocates for the RBA, it does not provide explicit guidance
to supervisors and regulated entities as to when and how SDD should be implemented.
Recommendation 10, however, discusses Customer Due Diligence (CDD) and highlights that
the level of CDD should change based on the risk assessments that have been conducted.
Where there is assessed to be a lower risk of ML/TF/PF, it might be appropriate to conduct
a simplified form of CDD where less information is collected about the customer. In high risk
situations, enhanced CDD may be required.

Examples of simplified CDD for lower risk situations include:

► Delaying verification of the customer’s identity until after the business relationship has
been established.

► Reducing the frequency of review of a customer’s KYC information.

► A reduced degree of ongoing monitoring of the account.

► Inferring the purpose and intended nature of the business relationship from the
information collected.

52. FATF, ‘Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing: High Level Principles and Procedures’, 2007, p.2.

20
Enhancing Financial Inclusion with a Risk-Based Approach

Examples of enhanced CDD for higher risk situations include:

► Obtaining and/or verifying additional information about the customer, their source of
funds and source of wealth and their intended usage of the account.

► Obtaining the approval of senior management to open or continue the

business relationship.

► Conducting enhanced monitoring to the account.

Box 2.2: Extracts from Recommendation 10: Customer Due Diligence

“Financial institutions should be required to apply each of the CDD measures [above in the
recommendation] but should determine the extent of such measures using a risk-based
approach (RBA) in accordance with the Interpretive Notes to this Recommendation and to
Recommendation 1.”
“Countries may permit financial institutions to complete the verification as soon as
reasonably practicable following the establishment of the relationship, where the money
laundering and terrorist financing risks are effectively managed and where this is essential
not to interrupt the normal conduct of business.”54

Recommendation 10 requires customers to prove their identity when opening an account

but provides for certain modifications in case of low ML, TF and PF risks. For instance, the last
paragraph mentions the possibility of delaying verification provided risks are managed. As
an illustration of this in practice, the EBA guidance discussed in Chapter 1 allows for the use
of SDD for Ukrainian refugees. To facilitate the inclusion of the recently displaced population,
lowered identity check requirements were introduced for the opening of basic payment
accounts. This included allowing banks to verify identity based on any documentation proving
the customer was from Ukraine – not necessarily a passport.55 It also allowed institutions to
postpone customer identification measures to a later date, provided key AML/CTF obligations
were met – mainly through the provision of low-risk products. This illustrates how flexibility
clauses in the FATF’s recommendations can be transposed into local regulations and be used
to benefit financial inclusion.

The interpretive notes on Recommendation 10 document lists examples of low-risk situations

where SDD can be applied, such as when the customers are regulated financial actors, are
publicly listed, or when the sums involved are low. In addition, SDD is accepted when financial
products “provide appropriately defined and limited services to certain types of customers, to
increase access for financial inclusion purposes.”56

54.  ATF, ‘the FATF recommendations’, March 2022, p. 14.

F
Available online: https://www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html#:~:text=As%20amended%20
February%202023
55. EBA, ‘EBA statement on financial inclusion in the context of the invasion of Ukraine’, April 2022.
Available online: https://fiaumalta.org/news/eba-statement-on-financial-inclusion-in-the-context-of-the-invasion-of-ukraine/?utm_source=rss&utm_
medium=rss&utm_campaign=eba-statement-on-financial-inclusion-in-the-context-of-the-invasion-of-ukraine
56. Ibid., page 70

21
Enhancing Financial Inclusion with a Risk-Based Approach

Overall, the FATF seeks to establish a flexible regulatory system which enables institutions to
implement risk-based processes and controls, with the aim of managing and mitigating ML/TF
and PF risks while also promoting financial inclusion.

In practice, the rules established by the FATF are not always perfectly implemented into local
legislations. Tanzania, for instance, established a system of digital national identification to drive
the expansion of mobile money services. Although this could have been used to drive financial
inclusion in rural areas, instead it mostly profited urban populations due to a lack of mobile
network expansion. In fact, rules that accompanied the mobile money initiative prioritized the
digital identification document as a means of proving identity, reducing confidence in informal
means of identification which were previously used.57 This is not in line with the purpose of FATF
Recommendations, which state that a variety of documents can be used to prove identity, a
point which the FATF reiterates in its guidance document on digital and remote identification.58

The interpretive notes to the FATF’s 40 recommendations give practical guidance for
implementing the Recommendations. In terms of financial inclusion, Recommendation 16’s
interpretive note states that minimal transaction thresholds can be established. Under those,
a simplified form of identification can be provided, such as a non-verified name of originator,
destination, and account number – which do not need to be verified by the payment institution
unless there is something suspicious about the transaction. In this way, financial regulation can
be flexible, to allow for financial inclusion while managing financial crime risks.

Box 2.3: Extracts from Recommendation 16 and its Interpretive Note:

Wire Transfers
“Countries should ensure that financial institutions include required and accurate originator
information, and required beneficiary information, on wire transfers and related messages,
and that the information remains with the wire transfer or related message chain
throughout the payment.”
Quote from the Interpretive note to Recommendation 16:
“Countries may adopt a de minimis threshold for cross-border wire transfers
(no higher than USD/EUR 1,000), below which the following requirements should apply:
Countries should ensure that financial institutions include with such transfers:
(i) the name of the originator;
(ii) the name of the beneficiary; and
(iii) an account number for each, or a unique transaction reference number.
Such information need not be verified for accuracy, unless there is a suspicion of
money laundering or terrorist financing, in which case, the financial institution should
verify the information pertaining to its customer.”

57. Isabella Chase and Tom Keatinge, Walk the Talk: How the Financial Action Task Force Can Prioritise Financial Inclusion, June 2021.
Available online: https://static.rusi.org/268_pb_gates_financial_inclusion_web_0.pdf
58. FATF, ‘Guidance on Digital ID’, 2020.
Available online: https://www.fatf-gafi.org/en/publications/Financialinclusionandnpoissues/Digital-identity-guidance.html

22
Enhancing Financial Inclusion with a Risk-Based Approach

2.3 G
 uidance on Financial Inclusion Issued
by FATF and Other Bodies
The FATF’s recommendations are expected to be interpreted by local regulators and
implemented in line with national requirements and/or cultural or legal specificities. To provide
additional support, the FATF regularly publishes guidance documents which anticipate potential
issues and provide members and regulated institutions with concrete examples of challenges
or best practice. These guidance documents aim to overcome uncertainty about the FATF
standards and provide assurance in relation to implementing less stringent regulation. For
example, the 2013 guidance on ‘Anti-Money Laundering and Terrorist Financing Measures and
Financial Inclusion’, was updated in 2017 with a supplement on Customer Due Diligence.

Box 2.4: Extracts from the FATF 2017 CDD Guide to Support Financial Inclusion
In 2017, the FATF issued guidance on how to support financial inclusion in the CDD process.
This guidance acknowledges that CDD is one of the more onerous requirements and provides
examples of SDD. One of the problems the guidance seeks to tackle is that of customer identity
verification. They note for instance that:
“Some countries do not prescribe specific identification sources or include a broad list
of valid documentation and data for purposes of proving identity and/or alternative or
new means of identity verification. This approach is used to facilitate access to regulated
financial services, including for foreign resident/people.”59
The FATF provides several examples, including the US’ Customer Identification Program which
allows the address of next of kin to be used if the prospective customer does not have one.
The FATF also refers to other examples such as Canada’s provision for retail banks to open
low-risk deposit accounts with minimal documentation. In another case of good practice,
Fiji has implemented rules which allow for citizens to prove their identity with a birth certificate
and a letter from a referee (complete with an exhaustive list of different types of people
who can be considered referees, such as village chiefs, head teachers, etc.). Following the
devastation of the 2013 Haiyan typhoon, the Philippines also adapted its regulation to tackle the
emergency, allowing ID checks to be bypassed with a ‘written certification from clients that
they had lost their IDs due to Haiyan’ – this was completed with various security thresholds and
checks to keep risk low.60

59.  ATF, ‘Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion’, November 2017, p. 11.
F
Available online: https://www.fatf-gafi.org/en/publications/Fatfgeneral/Financial-inclusion-cdd-2017.html
60. Ibid, page 13

23
Enhancing Financial Inclusion with a Risk-Based Approach

The FATF also works on studying new technologies and how they can address financial
inclusion. For instance, in 2020, the FATF published a guidance document on digital identity
verification and remote verification.61 The FATF’s objective was to accompany the development
of new online banking trends by helping institutions to meld new technology and pre-existing
regulations. The guidance clarifies wording, from semantic problems – for instance highlighting
that the use of the phrase ‘face-to-face’ implies a required physical presence – to technical
analysis, discussing what characteristics make a digital identification software reliable.

Box 2.5: Extracts from the FATF’s Guidance on Digital ID

The digital ID guidance clarifies several situations, such as remote identification. The objective
is to remove uncertainty and give a clear set of definitions around which regulators and
institutions can rally to define reliability. In Appendix A, for example, the guidance delves into
the specific requirements of a digital identity system that make it reliable. It divides digital
identification into identity proofing, and authentication. In the first section, it provides details on
how to prove the identity of a customer – collecting from a reliable source information on who
the applicant claims to be, ensuring that this information has not been tampered with, and then
verifying that the applicant conforms to this information:
“For example, the IDSP (Identity Service Provider) could ask the applicant to take and
send a mobile phone video or photo with other liveness checks; compare the applicant’s
submitted photo to the photos on the passport identity evidence or the photo on file in
the government’s passport or license database; and determine if they match to a given
level of certainty. To tie this identity evidence to the actual real-person applicant, the IDSP
could then send an enrolment code to the applicant’s validated phone number which is
tied to the identity; require the applicant to provide the enrolment code to the IDSP; and
confirm the submitted enrolment code matches the code the IDSP sent, verifying that the
applicant is a real person, in possession and control of the validated phone number. At this
point, the applicant has been identity proofed.”62

This guidance is designed to provide clarity, both for governments on how to establish such
systems in a way that conforms with the regulations, and for regulated institutions to identify
systems which they can rely upon to perform their CDD without concern. The FATF is creating
pathways for countries to create frameworks and systems that can lower risk and is issuing
guidance to regulated institutions that can be used as quick-reference sheets to understand
what processes can lower risk. That way, the FATF aims to facilitate the leveraging of flexibility
clauses that can promote and support financial inclusion.

61.  ATF, ‘Guidance on Digital ID’, 2020.

F
Available online: https://www.fatf-gafi.org/en/publications/Financialinclusionandnpoissues/Digital-identity-guidance.html
62. Ibid., p. 60

24
Enhancing Financial Inclusion with a Risk-Based Approach

Regional Guidance on Financial Inclusion

Certain regions possess FATF-style Regional Bodies (FSRBs), which provide a localized version
of the FATF’s service: they gather information on the conditions of financial operations in the
region, provide guidance on how to comply with regulation, and highlight local best practice.
They can be used to gather information on the state of regulation in regions, and where efforts
are currently being deployed.

The Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) is
the FSRB for West Africa. It seeks to bridge the gap between local jurisdictions and the FATF.
It also aims to provide an overview of challenges, best practices and resources relevant to the
local economy63 while advising countries and the private sector as to the best way to drive
financial inclusion. In 2018, it issued a document on the state of KYC and CDD requirements
in the region, and the state of financial inclusion in relation to the implementation of these
measures.64 This document identifies several areas of weakness, particularly the lack of
understanding of the RBA on the part of member countries and the private sector. When
discussing best practices and areas to improve for the private sector, GIABA considered the
survey responses it collected from financial institutions in relation to concrete examples of RBA
application as well as customer identification practices. GIABA noted that many responses
to the former were vague, and most responses to the latter simply listed their procedure for
verifying customer identification. GIABA explains the best practice for both cases: first, for
RBAs to be subject to independent evaluation, and to adequately document how respondents
have identified different risk levels among their customers. Secondly, these RBAs could then be
used to apply varying degrees of rigor when verifying customer identity, with lower risk clients
and operations subject to lighter procedures.65 GIABA presents these examples to promote
potential benefits for the private sector, such as cheaper compliance through the RBA, and for
governments through improvements in the financial inclusion of their populations.

In addition, GIABA discusses the role of mobile money and the partnership between Ecobank
and Orange Money as a driver of financial inclusion.66 GIABA also encourages micro-finance
schemes and casts a light on Ghana’s micro-insurance products.

In Europe, MONEYVAL performs the same task. In 2014 it published a report on the state of
financial inclusion in the EU. One example of best practice which they highlight is the provision
of basic financial products. Page 13 of the report describes how Slovenia, France, North
Macedonia and Poland approach basic banking service laws – the use of law to require banks
to offer certain banking services for free, in an attempt to solve financial inclusion. France’s
law, for example, provides citizens with the right to ask the Banque de France to designate an
institution in a given location that must provide the citizen with an account and some means
to access the account. There are also private initiatives which MONEYVAL seeks to signpost:
the Polish Bank Association, for instance, launched an initiative in 2007 to develop electronic
payments across the country.

63. GIABA, ‘Know your Customer/Customer Due Diligence Measures and Financial Inclusion in West Africa: An assessment report’, June 2018.
Available online: https://www.giaba.org/media/f/1062_FInal%20KYC-CDD%20Assessment%20Report%20Published.pdf
64.  IABA, ‘Know your Customer/Customer Due Diligence Measures and Financial Inclusion in West Africa: An assessment report’, June 2018.
G
Available online: https://www.giaba.org/media/f/1062_FInal%20KYC-CDD%20Assessment%20Report%20Published.pdf
65. Ibid., p. 28
66. This service enables individuals to use their mobile phone to make payments, view their statements, and transfer money between their bank accounts
and Orange e-wallets. Benefits of Mobile Money services are discussed in more detail in Chapter 3.

25
Enhancing Financial Inclusion with a Risk-Based Approach

This is important, since electronic payments are easier to regulate than cash transactions,
and a stronger electronic payment infrastructure throughout the country can help alleviate
problems tied to a low number of physical bank branches. This is further explored in Chapter 3.

The report also documents the implementation of lighter AML/CTF controls for low-risk
customers such as the case of France and Austria that adopted rules for mobile money
accounts and allowed for the application of SDD provided certain exposure to ML/TF risk is
limited.67 MONEYVAL’s guidance to countries seeking to make a National Risk Assessment
specifically states that financial exclusion should be considered a risk. It highlights to its
members that the FATF recommendations have flexibility clauses, and that their use would help
improve financial inclusion as discussed in Chapter 1.

Finally, CFATF – the Caribbean Financial Action Task Force is dedicated to financial inclusion.
It is a particularly relevant topic in the Caribbean due to the ongoing loss of correspondent
banking relationships. The Caribbean’s reliance on tourism, imports, and government transfers
to sustain their economies makes the derisking of the region a severe concern. CFATF is heavily
invested in removing its members from the FATF’s grey list by supporting the development
of their anti-financial crime regimes and their compliance with international standards. It also
actively promotes several local initiatives, particularly new digital currencies. The Eastern
Caribbean Central Bank, for instance, is noted by CFTAF as having recently launched a digital
coin to drive financial inclusion. The advantages of this currency are the speed of transfers,
lack of fees, and traceability. In short, this initiative offers a payment system which is more
accessible for disadvantaged populations, and lower in risk – thereby eligible for local SDD
measures.68 CFATF also draws attention to the Bank of Jamaica’s Fintech Sandbox. The
objective of this initiative is to collaborate with the Fintech industry to allow them to test
products in a live market environment and collaborate closely with the Bank of Jamaica itself:
improving regulator-institution communication and developing new products drives better
financial inclusion.69

2.4 E
 xamples of International Standards
and Financial Inclusion in Practice
As we have seen, an effective use of the RBA can improve financial inclusion. Application of
the RBA can, however, be hampered by the interpretation, transposition and application of the
FATF’s rules in local jurisdictions and by the private sector.

Gold-Plating and Defensive Compliance

‘Gold plating’ refers to the practice of going above and beyond what is required to be
compliance with regulations. The objective can be to demonstrate a higher level of compliance

67. MONEYVAL, ‘Strengthening Financial Integrity Through Financial Inclusion’, 2014.

Available online: https://rm.coe.int/strengthening-financial-integrity-through-financial-inclusion-and-the-/16807150ea
68. CFATF, ‘The Eastern Caribbean Central Bank (ECCB) launches pilot of digital currency’, May 2021, retrieved at:
https://www.cfatf-gafic.org/home/what-s-happening/712-the-eastern-caribbean-central-bank-eccb-launches-pilot-of-digital-currency?highlight=WyJ
maW5hbmNpYWwiLCJmaW5hbmNpIiwiaW5jbHVzaW9uIiwiaW5jbHVzIiwiaW5jbHVzaXZpdHkiLCJmaW5hbmNpYWwgaW5jbHVzaW9uIl0=
69.  ank of Jamaica, ‘Fintech Regulatory Sandbox Guidelines’, March 2020.
B
Available online: https://boj.org.jm/wp-content/uploads/2021/07/Bank-of-Jamaica-FinTech-Regulatory-Sandbox-Guidelines-14-July-2021.pdf

26
Enhancing Financial Inclusion with a Risk-Based Approach

or advertise oneself as competitively ‘more compliant’ than other institutions or jurisdictions.

International bodies already tend to consider recommendations by the private sector when
developing guidance and recommendations. This means that the FATF Recommendations,
for example, are already a balance between what favors business and financial integration on
the one hand, and what restricts ML, TF and PF on the other hand. Gold-plating upsets this
balance by increasing the stringency of these recommendations. It exists in countries that seek
to avoid being under increased monitoring by the FATF (often referred to as being ‘grey listed’)
by means of applying far more stringent requirements than necessary. This phenomenon
has been observed in West Africa, as GIABA notes, where countries seek to demonstrate
uncompromising compliance to avoid any chance of being placed on a grey list.70 Gold-plating
demonstrates a failure to use the RBA. It hinders financial inclusion and may inadvertently
create incentives to use the informal financial system, reducing the effectiveness of AML/CTF/
CPF regulations.

Flexibility Clauses and Conservative Compliance

The role that FSRBs play – particularly their re-iteration of the importance of the RBA,
and the implementation of flexibility clauses – is crucial. Many jurisdictions continue to display
conservative attitudes towards compliance, avoiding a truly RBA and the use of flexibility
clauses. Many of those that do are wealthier countries, where financial exclusion problems also
exist, but those jurisdictions have the resources to address them. In poorer countries, these
policies simply compound previous difficulties.

The 2021 World Bank report71 on the impact of FATF recommendations on financial inclusion
discusses the reticence of certain countries to adopt any flexibility clauses. The adoption of
the simplifications and exemptions which the FATF provides for are specifically aimed to lower
capacity jurisdictions, yet because of their lower capacities, supervisors tend to struggle.
This is unfortunate as the World Bank’s study of the impact of the FATF on financial inclusion
confirms that jurisdictions with flexibility clauses do better than others in terms of financial
inclusion and performance.

Over-Delivery of Compliance

One reason that the private sector may decide not to leverage flexibility rules and instead
deliver excessive compliance, is lack of information. It may be a lack of information on the
existence of the rules themselves (awareness), on the regulator’s expectations and incentives
(certainty), or on how to implement these rules (training).

70. GIABA, ‘Know your Customer/Customer Due Diligence Measures and Financial Inclusion in West Africa: An assessment report’, June 2018.
Available online: https://www.giaba.org/media/f/1106_pkbat_ENG%20-%202018%20ANNUAL%20REPORT%20-%20ABJ%20(6).pdf
71. Kuntay, C., 2021, ‘Impact of the FATF Recommendations and their implementation on Financial Inclusion’.
Available online: https://openknowledge.worldbank.org/handle/10986/36659

27
Enhancing Financial Inclusion with a Risk-Based Approach

Lack of awareness is an issue which FSRBs are increasingly conscious of, and their drive to
inform institutions through increased consultation, publication of guidance and involvement
in their efforts is a part of that. Training packages that highlight and repeat the importance
of the RBA are also designed to encourage institutions to seek out these exceptions and
simplifications and make full use of them.

Despite this, a rise in awareness cannot compensate for situations where there might be
regulatory uncertainty. In Pakistan, rapidly changing rules to remove the country from the grey
list created considerable uncertainty in the private sector.72 This includes uncertainty about
how the regulator will apply specific rules, or lack of clarity about how to interpret the rules.
Indeed, uncertainty about what is meant by the language of the law can cause institutions
to err on the side of caution. Rules that include specific examples of what is intended – for
instance, Fiji’s exhaustive list of what constitutes a ‘referee’ for the purpose of proving identity –
are usually more effective than rules that are open to interpretation.

Box 2.3: The FATF’s Unintended Consequences

In 2021, the FATF began work on the unintended consequences of the implementation of its
standards and identified financial exclusion as one of them. In particular, the FATF “identifies
two main factors which contribute to financial exclusion. First, implementation issues at the
country or private sector level, which leads to the misapplication of the FATF Standards, and in
particular, the failure to use the proportionality that is central to the risk-based approach.
For example, the risk-based tools within the Standards (such as exemptions and simplifications)
are underutilized by the countries needing them the most to expand financial inclusion.
Secondly, the FATF’s Standards, evaluation processes and other activities do not adequately
encourage authorities, the private sector and assessment teams to understand the impact of
financial exclusion on ML/TF risks.”73
In addition, the FATF is particularly concerned that its message of proportionality –
fundamental to the RBA – is misunderstood by both the private and public sector. The FATF
also acknowledges its own standards and evaluations as being disproportionately focused on
discussing high risk situations, creating a focus on greater compliance rather than proportional
compliance. The FATF can be expected to react to this, placing greater effort on discussing low
risk situations and SDD encouraging FSRBs to pass this message with even greater insistence.

72. Isabella Chase and Tom Keatinge, Walk the Talk: How the Financial Action Task Force Can Prioritise Financial Inclusion, June 2021, p. 27.
Available online: https://static.rusi.org/268_pb_gates_financial_inclusion_web_0.pdf
73. Ibid., p. 3-4.

28
Enhancing Financial Inclusion with a Risk-Based Approach

Supporting the Private Sector

Three elements are coming together to support the private sector in the implementation of a
robust RBA and the adoption of flexibility clauses: first, the example of countries with flexible
AML/CTF/CPF regimes being more successful will drive others to adopt these practices.
Second, the FATF’s ongoing unintended consequences project will build more data illustrating
how conservative practices are harming financial inclusion and economies more broadly and
what local regulators can do to support financial inclusion. Third, FSRBs will be able to combine
these two sets of data to present increasingly strong cases to their members in favor of the use
of the FATF’s SDD.

In summary, a system of AML/CTF/CPF compliance based on everyone implementing the

same level of controls and following the same processes is obsolete, as cookie-cutter rulesets
have been demonstrated to hinder financial inclusion. The highest standard of compliance
now consists in having the ability to demonstrate a thorough understanding of the risks and of
the mitigating measures and demonstrating that the specific compliance measures that are
implemented are proportionate to those risks.

29
3. Financially Inclusive
Enhancing Financial Inclusion with a Risk-Based Approach

Compliance in Practice

3.1 A
 ligning Financial Integrity and
Financial Inclusion
Financial inclusion is a collective responsibility. We discussed in Chapters 1 and 2 how the FATF
and national regulators should ensure that the right framework and environment is in place to
support financial inclusion. However, the private sector also has a role to play. The private sector
has a role in understanding and adapting to customer needs while harnessing innovation and
technology to achieve greater financial inclusion. However, the private sector is also expected
to manage ML, TF and PF risks. We discussed in Chapter 2 that the FATF requires institutions to
implement a RBA to ML, TF and PF risk. This means understanding the different types of risks
that the institution is exposed to and putting in place measures to mitigate those risks to a level
within an institution’s risk tolerance.

The private sector faces an increasingly complex ecosystem of threats and vulnerabilities,
leading to many different types of risks to financial integrity which it is expected to manage
and mitigate. Box 3.1 sets out some of the risks that impact financial integrity. Inevitably, these
risks vary across financial institutions, depending on the institution’s customer base, products,
delivery channels, geographic factors and risk appetite.

Box 3.1: Taxonomy of Risks that Impact Financial Integrity

ML RISK
The risk that a country, financial institution or business unit could be used for ML.
TF RISK
The risk that a country, financial institution or business unit could be used for TF.
While in many respects this is like ML risk, TF risk has features that may be different.
COMPLIANCE RISK
This is a risk that arises due to nonadherence to regulatory requirements, breaching of laws,
guidelines, industry standards, internal policies and procedures including best practices.
This can lead to fines and penalties for financial service providers as well as reputational
damage. Compliance risk can be a major reason for de-risking in the financial services sector,
however this may vary with regions. Additionally, there are jurisdictions that comply with their
regulatory requirements but are still being de-risked.
RISK OF FINANCIAL EXCLUSION
The risk of excluding customers due to lack of robust AML/CFT information is that people can
be deprived of financial services and this can lead to large unregulated informal sectors.
This is a vulnerability that can be exploited for ML and illicit financial flows.

30
Enhancing Financial Inclusion with a Risk-Based Approach

ILLICIT FINANCIAL FLOWS RISK

Illicit financial flows are defined as the illegal cross-border movement of funds and resources.
They have a significant impact on development outcomes by reducing tax revenue to
governments (Cooper et al., 2018).
Source: Alliance for Financial Inclusion (2020)75

But institutions cannot focus on financial integrity risks in isolation. Focusing too much on
financial integrity without consideration of the risk of financial exclusion may result into the
limited provision of financial products and services. But exclusively focusing on financial inclusion
without consideration of any of the financial integrity risks may result in the introduction of new
products which might be more accessible, but which may also be exploited by criminals.

Although financial inclusion is a complex issue that results in part from a jurisdiction’s cultural or
historical legacy and/or structural framework, there are several factors that account for it. As
we explored in Chapters 1 and 2, rural isolation/ limited availability of physical branches, stringent
regulation, lack of financial education as well as regulatory uncertainty are all barriers to financial
inclusion. This Chapter aims to provide practical guidance to private sector institutions as to how
financial inclusion should be considered throughout the customer lifecycle:

► At customer onboarding, when carrying out customer risk assessments ongoing due
diligence, monitoring, and exit;

► When developing products and services; and

► When carrying out business-wide risk assessments.

3.2 F
 inancial Inclusion During Customer
Onboarding, Ongoing Due Diligence,
Monitoring, and Exit
At every stage of the customer journey, there is an opportunity to positively impact the financial
inclusion of customers that are traditionally excluded from mainstream financial services
and products. This starts from the moment that a customer is onboarded through ongoing
monitoring and due diligence and, finally, exiting the customer relationship.

Throughout the customer journey, it is important to be able to identify:

► any potential exclusion from financial services and/or,

► any impact on customers that are already excluded from financial services.

75. ‘Inclusive Financial integrity: A toolkit for policymakers’, p.4

Available online: https://www.afi-global.org/sites/default/files/publications/2020-07/AFI_CENFRI_toolkit_AW_digital.pdf

31
Enhancing Financial Inclusion with a Risk-Based Approach

3.2.1 C
 ustomer Onboarding
The FATF’s Recommendation 10 requires that institutions identify their customer and verify
that customer’s identity using reliable, independent source documents, data or information.
Identification and verification of customers is a key control and a central part of carrying
out customer due diligence as well as allowing the institution to determine the ML, TF or PF
risk associated with the customer. In addition to identifying and verifying the customer, the
FATF also requires that an institution understands the purpose and intended nature of the
relationship with the customer and how its customer will be using the institution’s product or
service. Institutions usually need to be able to answer the following types of questions when
evaluating the risk associated with a new customer:

► What is the maximum volume of monthly transactions expected on the account?

► What customer information do I need to mitigate the risks associated with the maximum
volume of monthly transactions expected on the account?

► Will the customer be making any cross-border transactions?

► Do I need a hard copy of customer information?

► Do I need to meet the customer face to face?

► How will the customer access the funds on the account?

Chapter 1 explored how stringent account opening processes can act as a barrier to financial
inclusion. Customer identification and due diligence procedures are expensive; onboarding
procedures are lengthy and identity authentication can be challenging. As a result, sometimes
the policies and procedures that an institution puts in place at account opening have the
impact of excluding individuals from accessing products and services. This is particularly
the case in countries where a high proportion of the population has no accepted form of
identification (either physical or digital). It is estimated that 640 million adults worldwide lack
an accepted form of identification.76 Individuals without government issued identification
document or with no fixed address may not be eligible to open an account and, therefore, will
have no access to basic accounts. In order to overcome this issue, some jurisdictions such
as Nigeria77 have developed a nationwide biometric database which issues a unique identity
number to users.

In addition, it is worth noting that “[in] low-income countries men have formal IDs at a
prevalence that is 50% higher than women”78 thus risking further exclusion of women from
the financial system.

76. Glenbrook Partners (2020) ‘Emergency disbursements during COVID-19: regulatory tools for rapid account opening and oversight, p. 4.
Available online: https://www.findevgateway.org/sites/default/files/publications/submissions/72016/Emergency%20Disbursements%20during%20
COVID-19_20200718.pdf
77. Alliance for Financial Inclusion (2020) “Inclusive Financial integrity: A toolkit for policymakers”.
Available at: https://www.afi-global.org/sites/default/files/publications/2020-07/AFI_CENFRI_toolkit_AW_digital.pdf
78. Ibid. p. 5

32
Enhancing Financial Inclusion with a Risk-Based Approach

Myth Busting: Everyone is an adult, so everyone

has identification!
False. Women and young adults are more likely
to not have adequate identification documents
and are therefore more likely to be financially
excluded. They are increasingly trying to access
financial services but might not have the
appropriate identification or proof of address.

Box 3.2: Addressing Women’s Financial Inclusion Challenges in Egypt

In Egypt, the Central Bank of Egypt has launched a national identification card initiative.
Mobile registration points were set up across the country targeting particularly rural and
marginalised locations. In addition, public awareness campaigns were rolled out to promote
the benefits of identification cards. The identification card registration requires women to
simply submit their birth certificates and removes the need to provide proof of address.
This initiative alongside the Central Bank of Egypt (CBE)’s simplified mobile accounts, has
enhanced women’s ability to access financial services.

Simplified Due Diligence (SDD)

One solution to the problem of balancing financial inclusion and stringent AML/CTF/CPF
controls is to introduce a simplified account opening process and to carry out SDD where
appropriate. There are several examples of private sector initiatives, supported by their local
regulators, that facilitate access to banking facilities. In Nigeria for example, a tiered Know Your
Customer (KYC) process enables account opening by adjusting CDD requirements for products
with limited functionality which are, therefore, a lower ML/TF/PF risk.

Table 3.1 provides guidance on how an institution might develop a similar tiered process
with respect to its retail offerings. It illustrates how placing restrictions on certain accounts
mitigates ML, TF and PF risks that may arise due to gathering less information on customers
thus facilitating the onboarding of traditionally unbanked populations.

33
Enhancing Financial Inclusion with a Risk-Based Approach

As documented in Table 3.1, those restrictions may relate to:

► the type of accounts the customer may be eligible to open

► the number of transactions permitted on the account

► the value of each transaction permitted on the account

► the type of transactions

(domestic and/or international transfers, deposits, and/or withdrawals)

► transactions allowed to and from countries with low ML, TF or PF risks.

Restrictions may also be placed on the types of devices (e.g., mobile phones) or delivery
channels customers can use.

34
Enhancing Financial Inclusion with a Risk-Based Approach

Account Thresholds and CDD and KYC

Product features
Category restrictions requirements

Savings account exclusively.

Any type of photo
Can be opened in branches identification that
or through banking agents. can reliably identify
the customer.
No minimum Limited to a maximum
deposit required for single deposit amount, Name, date and birthplace,
account opening. maximum cumulative residential address,
Level 1 phone number.
Deposits and withdrawals balance at any point in
can be made by account time and maximum Sent electronically or
holder and third party. account balance. submitted onsite or
collected by agent.
Operation is valid at national
level only. Verification of information
submitted is not required.
ATM transactions allowed.

Savings account exclusively.

Can be opened face to

face in branches or through
banking agents.
Same as Level 1.
No minimum
Verification of information
deposit required for Limited to a maximum submitted can be
account opening. single deposit amount, performed against official
maximum cumulative databases such as National
Level 2 Operation is valid at national
balance at any point in time ID; Voter ID; Driver’s License;
level only.
and maximum account NHIS (National Health
ATM transactions allowed. balance higher than Level 1. Insurance Scheme) ID;
Social Security and National
Transfer of funds allowed at
Insurance Trust ID; Passport.
national level only.

Accounts can be opened

online and need to be linked
to a phone number.

Identity and verification is

Savings and
No limit on either minimum required in line with national
current account.
Level 3 deposit. Nor cumulative AML/CFT regulation.
Account opened physically balance. Documentation is retained
at the branch by customer.
as per national regulation

Table 3.1: Tiered KYC and Customer Due Diligence79

79. Adapted from GSMA Mobile Money, ‘Overcoming the Know Your Customer hurdle: Innovative solutions for the mobile money sector’ (2019).
Available Online: https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/02/Overcoming-the-KYC-hurdle-Innovative-solutions-for-
the-mobile-money-sector.pdf

35
Enhancing Financial Inclusion with a Risk-Based Approach

Box 3.3 Tiered KYC in Mexico

In 2009, Mexico launched a four-tiered KYC system with increasing requirements based on the
account functionality. Level 1 accounts act as a limited use account and provide an on-ramp to
the broader financial system. Level 1 accounts do not require any KYC documentation and can
be opened in any branch or online/over the telephone.80 Level 1 accounts have a low monthly
deposit limit and low maximum balance level to reduce the risk of the accounts being used
in connection with criminal activity. Level 2 accounts have some KYC requirements and, as a
result, have a higher monthly deposit limit and no maximum balance level. In the first two years
after the introduction of the tiered KYC system, 6.6 million Level 1 and Level 2 accounts were
opened. As of December 2019, there were 21 million Level 2 accounts. Level 3 and 4 accounts
have progressively more KYC requirements and, along with that, increased functionality.81

The FATF’s Approach to SDD

The FATF standards recognize that there is tension between facilitating access to financial
services and the need to implement the FATF’s recommendations, particularly in relation to
identification and verification. As a consequence, FATF guidance states that countries can
allow their financial and non-financial institutions to apply SDD in low risk situations.83
Although the FATF does not provide detailed guidance to regulators on the issue of SDD,
review of recent Mutual Evaluation Reports (MERs) and follow-up reports of SDD frameworks
of Mexico, India, Peru84 for instance, indicate that no remediation was required in relation to
accounts that are categorized as lower tiered (i.e., with greater restrictions). In addition,
New Zealand’s MER discusses how simplified CDD is allowed for a range of lower risk customers,
such as government owned businesses and publicly listed companies.85 Similarly, Chile’s MER
details the high rates of financial inclusion and how the regulation sets forth that, when ML/TF
risks are determined to be low, simplified CDD measures may be applied.86 This signals that the
FATF recognizes the utility and importance of SDD with regards to financial inclusion.

80. James Thomas and Emmanuel Ioannides, Opinion: Financial Inclusion,

Available online: https://www.afi-global.org/wp-content/uploads/publications/incompliance_financial_inclusion_article.pdf
81.  lenbrook Partners (2020) ‘Emergency disbursements during COVID-19: regulatory tools for rapid account opening and oversight, p. 8-9.
G
Available online: https://www.findevgateway.org/sites/default/files/publications/submissions/72016/Emergency%20Disbursements%20during%20
COVID-19_20200718.pdf
83.  ATF, INTERNATIONAL STANDARDS ON COMBATING MONEY LAUNDERING AND THE FINANCING OF TERRORISM & PROLIFERATION 2012, paragraph 17.
F
Available online: https://www.fatf-gafi.org/content/dam/fatf-gafi/recommendations/FATF%20Recommendations%202012.pdf.coredownload.inline.pdf
84. Those jurisdictions have implemented SDD frameworks. For more information refer to Glenbrook Partners (2020) ‘Emergency disbursements during
COVID-19: regulatory tools for rapid account opening and oversight, p. 8-12. Available online: https://www.findevgateway.org/sites/default/files/
publications/submissions/72016/Emergency%20Disbursements%20during%20COVID-19_20200718.pdf
85. New Zealand Mutual Evaluation Report (2021),
Available online: https://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-new-zealand-2021.html
86. Chile Mutual Evaluation Report (2021), Available online: https://www.fatf-gafi.org/publications/mutualevaluations/documents/mer-chile-2021.html

36
Enhancing Financial Inclusion with a Risk-Based Approach

The Use of Technology to Improve Financial Inclusion

The increased digitization of financial services can be a powerful tool for bringing unbanked
and underbanked people into the formal financial sector. Technological advances such as
biometrics can also help customers without access to official identity documents to access
accounts including through the use of videos or ‘selfies’ to support the account opening
process.87 Not only can digitization simplify KYC and CDD processes, it can also leverage mobile
services and mobile money (which involves using mobile phones to transfer money and make
payments to the underserved) to reduce compliance and transaction costs for the private
sector thus making it easier and more profitable to provide financial products and services.

3.2.2 C
 ustomer Risk Assessment
The FATF Recommendations require that institutions take appropriate steps to identify and
assess their ML/TF and PF risks, and have policies, controls and procedures to manage and
mitigate the risks. A customer risk assessment should be performed at the start of every
customer relationship to identify any potential risks. That customer risk assessment should be
kept up to date and reviewed at periodic intervals.

Many institutions use a customer risk assessment methodology to categorize customers as

high, medium or low risk based on risk factors associated with the customer, the product
or service, the jurisdiction and the delivery channel. This will drive the level of due diligence
applied to the customer account both at onboarding and on an ongoing basis.

When developing a customer risk assessment methodology, care should be taken to ensure
that the methodology does not have an adverse impact on financial inclusion, for example,
if a risk assessment automatically assigns a high risk score to customers with particular
characteristics, such as where the customer is located, and there is no flexibility as to how
the requirements for enhanced due diligence are met, it might lead to those customers being
financially excluded.

When carrying out a customer risk assessment, there are some important considerations from
a financial inclusion perspective:

► Are there characteristics that automatically class customers as high or low risk?
If so, is this proportionate?

► Are there clear guidelines in place in relation to implementing SDD?

If so, is this adequately fed into the existing methodology?

► If you provide financially Inclusive products and services, do you risk assess those the same
way as conventional products and services?

► Do you allow financially inclusive products to be used like other conventional products
bearing in mind the simplified level of CDD and KYC requirements? If so, what controls and
mitigation strategies are in place to prevent ML, TF and PF risks from materializing?

87. Brad Goddall, Why technology has a vital role in financial inclusion in a post-pandemic world, 3 August 2022.
Available online: https://www.finextra.com/blogposting/22698/why-technology-has-a-vital-role-in-financial-inclusion-in-a-post-pandemic-world

37
Enhancing Financial Inclusion with a Risk-Based Approach

► Are there delivery channels that are automatically assigned a high risk score?
If so, is this balanced against financial inclusion strategies?

► Are there jurisdictions that are automatically assigned a high risk score?
If so, is this balanced against financial inclusion strategies?

3.2.3 O
 ngoing Monitoring
The FATF’s Recommendation 10 also requires that institutions carry out ongoing due diligence
of a business relationship and scrutinize transactions to ensure that they are in line with the
institution’s knowledge of the customer and the customer’s risk profile. Ongoing monitoring,
whether manual or automated, may be particularly important for customers where there is
limited CDD information collected at onboarding as it may help to mitigate and manage ML,
TF and PF risks associated with the customer.

Many institutions have implemented automated transaction monitoring systems to help them
carry out ongoing monitoring of customer accounts. Automated transaction monitoring
systems will generate alerts based on pre-defined rules that may be indicative of unusual
and/or suspicious behavior. While automated transaction monitoring systems have many
advantages, it is important to note that the underlying rules may be calibrated in a way that
may impact disadvantaged customer segments and consequently limit their financial inclusion.
It is important, therefore, that a system’s rules and the underlying data are regularly reviewed
to ensure that they are free from bias and do not disproportionately impact any groups of
disadvantaged customers. For example, a transaction monitoring rule might be calibrated
so that transactions associated with or made by customers from a particular disadvantaged
group might be subject to excessive scrutiny. This may prevent those customers from being
able to fully use their accounts.

The development of financially inclusive products may also pose a challenge to effective
transaction monitoring. Ongoing monitoring of customer accounts where limited KYC has been
carried out may also be challenging due to the lack of information that the institution holds
about a customer. The institution is therefore less able to understand what might be indications
of unusual and/or suspicious behavior. In addition, where limited KYC has been carried out,
products may include some restrictions on their usage and the transaction monitoring tool
should be calibrated to identify any unusual or unpermitted usage, for example:

► Exceeding the agreed threshold on the product (value, transaction number, volume, etc.)

► Anonymous use of product

► Cross-border use

► Transfers to a high-risk country

If the customer requires a product with less restrictions, it may become necessary to review
the customer’s KYC and ensure that the level CDD performed is sufficient to mitigate the risks
associated with such a product.

38
Enhancing Financial Inclusion with a Risk-Based Approach

3.2.4 C
 ustomer Exit
At some point, there might be a decision made to exit the customer relationship. This could
be for a number of reasons, for example suspicious of money laundering or terrorist financing.
If the customer is recognized as being vulnerable or disadvantaged and thus, unlikely to be
banked with another financial institution, it is important that the impact on financial inclusion is
considered prior to the exit. This may also include consideration of whether there is anything
that can be done to mitigate the risks which may be driving the exit decision:

► Is the customer being exited because of insufficient KYC and CDD diligence? If so, are
there other products and services that could be offered that would limit risks associated
with limited KYC and CDD? This may include even “simpler” bank accounts that have
caps on overall value, frequency of use, and size of transactions as a means of extending
financial inclusion while balancing money laundering and terrorist financing risk.

► Can the institution mitigate the risk of insufficient KYC and CDD by implementing
enhanced transaction monitoring processes?

► Will exiting the customer impact the institution’s reputation and/or social responsibility
commitments in relation to providing financial services to underserved communities and
individuals? If so, who should this issue be escalated to?

► Is the customer being exited because he/she falls into a high risk category? If so, can risk
subcategories be formulated that are not disproportionately entrenched in broader risk
categories such as “jurisdiction” or “nationality”?

Any decisions about customer exits should be made in line with the institution’s risk appetite
and, where appropriate, with senior management approval.

3.3 D
 eveloping Financially Inclusive Products
and Services
While it is important that financial inclusion is encouraged at a national level, the private sector
has a role to play in being proactive in promoting and financial inclusion and be innovative in
developing financial inclusive products and services.

In this section, we will look at some examples of how different institutions are addressing
financial inclusion through the products and services that they are offering.

Building Financial Literacy and Trust

Educating unbanked and underbanked individuals on financial services supports them in using
higher-quality products and making better financial decisions. Financial education can support
disadvantaged individuals to understand basic financial products and recognize abusive
practices such as costly fees, thus avoiding mistakes.

39
Enhancing Financial Inclusion with a Risk-Based Approach

Myth Busting: “People just want basic bank accounts!”

This is not true. People want to progress to more
sophisticated products. Products should promote
financial usage, access and maturity into more
advanced products.

Box 3.8: Barclays’ Life Skills Initiative

In the United Kingdom, Barclays Bank has created an education program that provides
financial information, tips and tools for young people. The objective of this initiative is to
ensure that such individuals have the knowledge and confidence to tackle their finances
and develop money skills. Barclays Lifeskills program88 is free and has been used by 13 million
people. It provides tips and tools to calculate pay and balance spending and saving. In addition,
it provides awareness programs to avoid online fraud and build digital confidence. Such an
initiative is a way to ensure that individuals that are vulnerable because of a lack of adequate
education or support for instance, are provided a strong framework and adequate skills to
avoid becoming financially excluded.

Meeting the Financial Needs of Disadvantaged Populations

Financial inclusion goes beyond just opening a basic bank account. As shown in Figure 3.1,
there are a number of financial needs which an institution’s products and services should seek
to meet. Individuals and/or households need to be able to make and receive payments through
an affordable account. They need to deposit and access monthly paychecks without paying
a monthly fee. In addition, they need to be able to save money for the future as well as have
access to affordable loans. Furthermore, they need access to insurance products that protect
them against future risks and uncertainty. Finally, they need to be able to build future wealth
through adequate savings products.

The ability to save, invest, and insure against risks, translates income into wealth. This is the end
goal of financial inclusion and the reason why institutions need to provide adequate products
and services throughout the customer’s journey with that institution and ensure that their
customers do not just have access to financial products and services but are able to fully
use them.

88. https://www.barclays.co.uk/digital-confidence/lifeskills/

40
Enhancing Financial Inclusion with a Risk-Based Approach

Accumulating
long-term wealth Holding
insurance against
key risks

Planning
ahead for
big goals Making
everyday
transactions

Accessing
credit

Figure 3.1: Financial needs of disadvantaged populations89

Box 3.9: MiCash “If You’ve Got a Mobile You’ve Got a Bank!”
Papua New Guineans are one of the most financially excluded population worldwide.
According to Women’s World Banking, in 2013, 85% of the population did not have access to
formal financial services90 but 70% of the population is estimated to have a mobile phone.
In 2012, Nationwide Microbank in partnership with Digicel, introduced MiCash with the objective
to target the unbanked. Initially marketed as a savings product, it also allowed registered mobile
phone users to transfer money, check their balance, pay their loans, and make payments.
It is believed that the anonymity and privacy offered by the product has resulted in a
particularly high uptake among women who represented in 2014, 38% of MiCash users.91
Such a figure is particularly positive because “Research has shown that income earned by
women results in different expenditure patterns compared to men – women tend to reinvest
up to 90% of their earnings in the family well-being, compared to 30-40% of men.”92 Thus,
since Nationwide Microbank reports that 80% of MiCash clients were previously financially
excluded, the high uptake of women is particularly positive because of the multiplier effect of
women being banked.93

89.  cKinsey Institute for Black Economic Mobility (2020) ‘The case for accelerating financial inclusion in black communities’. Available online:
M
https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-case-for-accelerating-financial-inclusion-in-black-communities
90. Mobile banking: An answer to the unfriendly geography for women’s financial inclusion in the Pacific.
Available online: https://www.womensworldbanking.org/insights-and-impact/mobile-banking-answer-geography-womens-financial-inclusion-pacific/
91.  SMA (2014) ‘Reaching half of the market: women and mobile money- The example of Nationwide microbank in PNG.
G
Available online: https://www.gsma.com/mobilefordevelopment/region/east-asia-and-pacific/reaching-half-of-the-market-women-and-mobile-
money-the-example-of-nationwide-microbank-in-png/
92. Ibid.
93.  esearch indicates that women who are empowered have a strong impact on the wider community, developing local economic development. This is
R
called the multiplier effect. For more information refer to http://corporate-citizenship.com/wp-content/uploads/Women-Mean-Business_0312.pdf

41
 Enhancing Financial Inclusion with a Risk-Based Approach

Figure 3.2, below, sets out the types of products and services that a customer may need as their usage
becomes more sophisticated. It is key to remember that products designed to enable financial inclusion
need to have safeguards in place to prevent abuse. Such safeguards concern ML/TF and PF risks but also
relate to credit or regulatory risk for instance. Increased usage of financial products may, however, be
beneficial when it comes to managing ML, TF and PF risks. As a customer increase their usage of financial
products, the ability of the institution to get a better understanding of their behavior, and therefore identify
red flags when there is unusual and/or suspicious behavior, is improved.

Loans can be taken out; The ability to access insurance

the loan may be linked to the savings balance and at a reasonable cost to
increase based on a client’s credit history. protect against future events.

Savings Credit Payments and

Insurance
Product Products Transfers

The ability to save money in an The ability to make domestic and/or international transfers,
account that provides principal security mobile payments and bill and merchant payments.
and, in some cases, an interest rate. The ability to access ATMs outside bank branch ATMs.

Technology and Mobile Money

One area where significant advancements have been made to bring unbanked and
underbanked individuals into the formal financial sector is the development Digital Financial
Services. A basic mobile wallet can store value and then evolve into more advanced mobile
products that enable a variety of transactions such as peer to peer transfers, international
transfers, airtime top-up, or bills and payments. In the mid 2000’s, Mobile Network Operators
(MNOs) had the vision to enable men and women who typically used cash to start using their
mobile phones for financial transactions. Safaricom’s M-Pesa launched a program demonstrating
that the private sector can play a leading role in the empowerment of financially excluded
populations. It is, however, important to note that not all individuals either have access or are able
to use technology and take advantage of Digital Financial Services and other developments.

Myth Busting: “Everyone is technology literate and can

cope with digital onboarding!”
False, firms should have alternative verification
channels for individuals who are unable to use with
digital onboarding and should also launch educational
material and initiatives to support customer segments
that are likely to struggle with technology and digital
banking. Without this, there is a risk that certain
disadvantaged groups will continue to be excluded.

42
Enhancing Financial Inclusion with a Risk-Based Approach

Box 3.7: M-Pesa

In 2002, Kenyan phone companies noticed that users were using their pre-paid airtime
(phone data or minutes) as savings accounts. They would keep their airtime to resell it later
to either friends or relatives. Purchasing and reselling airtime was better than cash as it was
not only safer but also more practical as airtime distributors were easily accessible unlike bank
branches. The local provider, Safaricom, enabled a network of agents to let customers convert
cash into electronic units of money to load onto their mobile SIM card and vice versa. In sum,
the product M-Pesa is an SMS based tool that allows users to deposit, send and withdraw funds
through their mobile phones. A bank account is not required.
As M-Pesa gained popularity, “more commercial banks started negotiations with Safaricom
in order to link their services to M-Pesa. They began offering savings accounts and attracting
more individual customers with interest rates on deposits. Thus, M-Pesa evolved from using a
common trust account for all users to providing a connection with individual savings accounts.
The innovation attracted a large number of target savers, who lock-in their savings for a defined
period. The growing depositor base allowed Kenya’s commercial and microfinance banks to
grow and strengthen their balance sheets.”94
The evolution of M-Pesa from mere payment service to access point for a wide range of
formal financial services has been essential in increasing financial inclusion. Today, Kenyans
are able to access their bank accounts, save money, buy insurance, and take out credit using
their mobile phones. In addition, when the Central Bank of Kenya issued regulation to enable
M-Pesa to connect with commercial banks, a growth in bank customers using M-Pesa was
noted. A case study by Professor N’dungu indicates that this has resulted in Kenyan household
having increased their utilization of financial services across a range of providers. In particular,
a greater share of the Kenyan adult population now uses banks, mobile money providers, and
insurance products.”95

3.4 E
 stablishing Your Financial Inclusion Strategy
Within Your Risk Management Framework
3.4.1 S
 etting an Appropriate Risk Appetite
Establishing an institution’s risk appetite and its tolerance to risk is an essential part of the risk
management processes and implementing an effective RBA. Risk appetite is an institution’s
willingness to accept risk within the context of its overall business and commercial strategy.
Institutions need to have a clear understanding of what their risk appetite, the limits that
it is prepared to tolerate and the way in which the Board and Senior Management will
monitor performance.

94. Ndung’u, N. (2017), p. 4 ‘M-Pesa- a success story of digital financial inclusion’. Available online: https://www.geg.ox.ac.uk/sites/default/files/M-Pesa%20
-%20a%20success%20story%20of%20digital%20financial%20inclusion%20-%20Njuguna%20Ndung’u.pdf
95. Ibid. p. 7.

43
Enhancing Financial Inclusion with a Risk-Based Approach

It is important to ensure that an institution’s risk appetite is aligned to its financial inclusion
strategy. This is particularly important because it allows an institution to demonstrate to its
supervisor why they have made certain decisions around financial inclusion, such as providing
limited use products with reduced KYC requirements. It is also important in the context of
derisking and an institution should ensure that its risk appetite does not adversely impact on
financial inclusion, for example by positioning certain disadvantaged groups as outside the
institution’s risk appetite. The risk appetite needs to be thoroughly documented along with the
existing controls and mitigation strategies in place within the institution.

In addition, it may be beneficial to set out in a risk appetite statement whether the institution
offers financial inclusion products and if not, whether this is due to:

► The business model and strategy

► Products being too high risk/not in line with overall risk appetite

► Difficulties in reaching out to potential customers

► Challenges related to performing KYC/CDD

► Any other reasons

An institution’s risk appetite must be aligned to the institution’s risk profile and tackle the
impacts of risks associated with financial inclusion. This is traditionally performed through
quantitative and qualitative risk indicators. Monitoring whether risks including risks associated
with the provision of financial inclusion products are in line with the bank’s risk appetite must be
done periodically.

3.4.2 Communicating With Your Supervisor

A supervisor will expect to see that an institution has implemented a RBA to its AML/CTF and
CPF obligations. Being able to demonstrate that an institution understands the risks associated
with its customers and the products and services that it offers and that the systems and
controls in place are sufficient to mitigate those risks is imperative. Being able to articulate
how risk-based decisions have been made in the context of financial inclusion is, therefore,
important in ensuring that a supervisor is comfortable with an institution’s approach.

Traditionally, one would expect financial inclusion to sit within an institution’s environmental,
social and governance risk management framework. You should note that this is not
prescriptive and financial inclusion could sit within a different framework. What is important,
however, is that through this process, the institution ensures that risks associated with financial
inclusion initiatives are adequately identified, analyzed, mitigated, managed, monitored and
reported. The framework should be reviewed and signed off by the bank’s most senior risk
assessment body in line with your jurisdiction’s regulatory framework.

44
Enhancing Financial Inclusion with a Risk-Based Approach

Box 3.10: ABN AMRO’s Financial Inclusion Strategy and Sustainability Risk Policy
In 2021, ABN AMRO published its Sustainability Risk Policy96 which maps out the environmental,
social and governance risks that may affect the bank’s business model while also providing
business and growth opportunities. The policy “sets rules for the management of
sustainability risks within ABN AMRO in line with the bank’s risk appetite and enterprise risk
management framework.”97
The policy focuses on three areas: Climate change, circularity and social impact.
Progress in relation to each area is measured, monitored and reported through the bank’s risk
management framework. This is also communicated to the regulator.
Financial inclusion sits under the theme ‘Social impact’ and is delivered through a number of
initiatives launched by ABN AMRO such as the development of the Inclusive Banking team.
The aim of this initiative is to provide banking to disadvantaged groups or customers such
as women, Non-Profit Organisations, the elderly or individuals with limited digital literacy for
instance. In addition, ABN AMRO has launched a program to raise its employees’ awareness of
unconscious biases to enable them to better tailor internal processes as well as products and
services to the needs of traditionally disadvantaged groups. Its first online roundtable “Breaking
barriers: Women and enterprise” was held in October 2022 to discuss ways to remove barriers
that hold back female businesswomen.

96.  ttps://assets.ctfassets.net/1u811bvgvthc/56WtWTq3DSzFFOZESnGaNi/7a5b45bbb84e28ab4775f2fee65b6c9f/ABN_AMRO_Summary_Sustainability_
h
Risk_Policy.pdf
97. Ibid. p. 1

45
4. T
 he Mutual Evaluation
Process and Financial
Enhancing
Financial Inclusion
Financial Inclusion with a Risk-Based Approach

Inclusion

4.1 What is a Mutual Evaluation?

The Mutual Evaluation (ME) is

“a cornerstone of the international framework to combat financial crime. It is a multi-

year, peer-review process where the robustness of a jurisdiction’s anti-financial crime
framework is analyzed for both its technical compliance with the FATF Standards and its
overall effectiveness at combating financial crime. The product of the ME is the mutual
evaluation report (MER), a highly influential document that sets out the findings of the
assessment team.”98

A jurisdiction going through the ME process will receive training on what to expect.
Once an assessment team is selected, it conducts a technical review of the laws and
regulations in the jurisdiction to assess compliance with the technical standards of the FATF’s
40 Recommendations. This is followed by the onsite visit where the assessment team meets
relevant stakeholders across the public and the private sector to assess the effectiveness of
the jurisdiction’s implementation of the Recommendations through the Immediate Outcomes.
A Mutual Evaluation Report (MER) is then drafted and shared with the jurisdiction for feedback
and comments with the output discussed at the FATF’s plenary. Once the content is agreed on,
the MER is adopted and published along with a follow-up plan for remediation. More specifically,
the MER documents the measures that need to be adopted and implemented to strengthen
the country’s effectiveness in preventing and combating ML, TF and PF.

A poor outcome of the ME indicates that the jurisdiction concerned is mismanaging financial
crime risks. A poor ME can have a detrimental impact on the country’s reputation and economy,
affecting foreign direct investment for instance. Some countries may be added to the FATF’s
list of Jurisdictions Under Increased Monitoring (the so-called ‘grey list’) if they have strategic
deficiencies in their regimes to counter ML, TF and PF.

In essence, the FATF aims to ensure that “financial systems and the broader economy are
protected from the threats of money laundering and the financing of terrorism and proliferation,
thereby strengthening financial sector integrity and contributing to safety and security.”99

In general, the analysis shows that the coverage of the use of cash, informal economy, and
financial exclusion as an ML/TF/PF risk or concern increases with the financial exclusion levels of
the countries. The higher the financial exclusion level, the higher the possibility of an MER citing
the informal economy, the use of cash, or financial exclusion as an ML/TF/PF risk or a concern.100

Figure 4.1, provides a visual illustration of the ME process:

98. Chase, I. and Reiser, M. S. ‘Lessons learned from the fourth round of mutual evaluations’, p. 2.
Available online: https://static.rusi.org/317_PB_FATF_Mutual_Evaluation.pdf
99.  inancial Action Task Force. 2013. Assessing Technical Compliance with The FAFT Recommendations and the Effectiveness of AML/CFT Systems.
F
Available at: https://www.fatf-gafi.org/en/publications/Mutualevaluations/Fatf-methodology.html
100. C
 elik, K. (2021) ‘Impact of the FATF recommendations and implementation on financial inclusion’.
Available online: https://openknowledge.worldbank.org/handle/10986/36659

46
 Enhancing Financial Inclusion with a Risk-Based Approach

The Mutual Evaluation Process

Getting Started
Technical Review
Selection of the experts
The country provides all who will form the
relevant laws and regulations assessment team.
to prevent criminal abuse of
the financial system.

On-Site Visit
4 months Scoping Note
The assessors travel to
Assessors analyze The assessors identify 1 month the country. During the two
the laws and areas of focus specific to weeks they meet with the
regulations, The country can
the country’s context for comment on the public and private sector to
primarily looking
the on-site visit. scoping note. see how the laws work in
at the technical
requirements of practice and look for
the FATF Standards. evidence that they
are effective.
Draft Mutual
Evaluation Report 2 months
Which covers both Assessors draft their findings on how well
technical compliance the country has implemented the FATF
and effectiveness. Standards, and whether their efforts
deliver the right results.

5 months FATF Plenary Adoption

The draft report The FATF Plenary discusses 2 months
goes through various the findings, including the
The members of the FATF Global
cycles of discussion ratings and recommended
and review: by the Network, representing 198
actions, and adopts the final countries, review the report for
assessed country,
report for publication. technical quality and consistency.
and independent
reviewers.

Publication
The final report: in-depth analysis &
recommendations for the country to
strengthen its measures to prevent criminal
abuse of the financial system.

A mutual evaluation report is not the end of the

process. It is a starting point for the country
to further strengthen its measures to tackle
money laundering and the financing of
terrorism and proliferation.

Figure 4.1: Mutual Evaluation process101

101. FATF (2020) ‘Mutual Evaluation’. Available at:

https://www.fatf-gafi.org/en/publications/Mutualevaluations/More-about-mutual-evaluations.html

47
Enhancing Financial Inclusion with a Risk-Based Approach

Box 4.1: How do Immediate Outcomes 3 and 4 Support Financial Inclusion

The FATF states “a country must demonstrate that, in the context of the risks it is exposed to,
it has an effective framework to protect the financial system from abuse.”102 To evaluate this,
the assessment team considers 11 Immediate Outcomes (IOs) of which IOs 3 and 4 are
particularly relevant to financial inclusion.
Immediate Outcome 3: Supervisors appropriately supervise, monitor and regulate financial
institutions, Designated Non-Financial Business and Professions (DNFBPs) and Virtual Asset
Service Providers (VASPs) for compliance with AML/CFT/CPF requirements commensurate
with their risks.103
Immediate Outcome 4: Financial institutions, DNFBPs and VASPs adequately apply AML/CFT/
CPF preventive measures commensurate with their risks, and report suspicious transactions.104
“Given the formal recognition of financial exclusion as a money laundering and terrorist
financing risk in the approval by FATF Ministers of the organization’s 2012–2020 mandate,
the stage is set for assessors to evaluate negatively the effectiveness of AML/CFT regimes
that poorly take advantage of the flexibility afforded by the FATF Recommendations to
bring excluded populations into the world of traceable formal finance.”105
Assessors may request to see data relating to the size, composition, and structure of the
country’s formal and informal financial sector. If a substantial level of activity is identified
as being outside the regulated financial sector, this may indicate that the regulatory and
supervisory approach is ineffective in relation to IO 3.
In addition, IO 4 tackles the private sector’s ability to implement the risk-based approach.
A regulatory and supervisory approach that is not risk-based may trigger defensive compliance
resulting into AML, CFT and CPF controls and processes that are disproportionate to the risks of
serving unbanked customers thus perpetuating financial exclusion.

4.2 T
 he Role of the Private Sector in the
ME Process
During the onsite visit, the private sector is able to engage with the assessment team. However,
traditionally, relatively few stakeholders from the private sector are involved in this process. This
is regrettable as this is an opportunity for the private sector to share information with assessors
on how proportionally the FATF recommendations are being implemented in their country.

There are many advantages to being actively involved in the ME process. The ME process
galvanizes activity in a country and gives the private sector the opportunity to discuss and
challenge certain aspects of the AML/CTF/CPF framework.

102. F
 ATF, press release (2013) ‘FATF issues new Mechanism to Strengthen Money Laundering and Terrorist Financing Compliance’, 22 February 2013.
Available online: https://www.fatf-gafi.org/publications/mutualevaluations/documents/fatf-methodology.html.
103. F
 ATF (2013) ‘Methodology for assessing compliance with the FATF recommendations and the effectiveness of AML/CFT systems.
Available online: https://www.fatf-gafi.org/media/fatf/documents/methodology/FATF%20Methodology%2022%20Feb%202013.pdf, p. 102.
104. Ibid. p. 106.
105. CGAP (2014) ‘AML/CFT and Financial Inclusion: New Opportunities Emerge from Recent FATF Action’.
Available online: https://www.cgap.org/sites/default/files/Focus-Note-AMLCFT-and-Financial-Inclusion-Sept-2014_0.pdf, p. 8.

48
Enhancing Financial Inclusion with a Risk-Based Approach

On the other hand, a negative MER and the threat of being added to the grey list may trigger
the government and supervisor to react strongly. They may take increased measures,
concerned that inclusion on the grey list might generate reputational risk and result into a fall
in the country’s foreign direct investment, correspondent banking relationships or credit rating
for example. These measures may have the effect of increasing financial exclusion or, at the
very least, having a negative impact on financial inclusion.

There are a number of ways in which the private sector can engage with the ME,
notwithstanding the fact that assessments happen infrequently. For example:

► Requesting training from national regulators in relation to the process or,

► Engaging in working groups or in public-private partnerships or

► Submitting information to assessors ahead of the onsite visit or requesting a consultation

during the assessors’ onsite visit.

Communication and engagement with assessors on the topic of financial inclusion is really
important, especially if is not being accommodated sufficiently within the national AML/CFT/
CPF framework.

It is important to highlight that studies of MERs indicate that “the likelihood that a report
includes recommendations about expanding financial access was much higher in countries
where the assessment team saw financial exclusion as a significant risk.”106

MERs of other countries can also be useful sources of information about other initiative and ways
to promote financial inclusion. This can be used by the private sector as a guide as to how to
engage with the government and supervisor. For example, MERs will document instances where
the use of SDD is inadequate thus supporting your institution in better defining your internal
processes relating to the adoption of SDD and ensuring adequate implementation of the RBA.

106. Pisa, M. (2019) ‘Does the FATF help or hinder financial inclusion? A study of FATF mutual evaluation reports, CGD Policy Paper 13.
Available online: https://www.cgdev.org/publication/does-financial-action-task-force-fatf-help-or-hinder-financial-inclusion-study-fatf, p. 21.

49