FATF Puts Financial Inclusion on its Agenda

In early June, Finance Ministers and Central Bank Governors of the G20 called on international standard- setting bodies to consider how they can further contribute to encouraging financial inclusion, consistent with their respective mandates. One key standard-setter is well on its way to heeding the G20’s call.

Under the 2009-2010 Dutch Presidency of Paul Vlaanderen, the Financial Action Task Force (FATF) – the international standard-setting body committed to preventing money laundering and terrorist financing – made significant progress in putting financial inclusion on its agenda.

At the recent FATF plenary meeting in Amsterdam, in-coming FATF President Luis Corral of Mexico committed FATF to continue assisting financial inclusion initiatives by putting it among the key priorities of his Mexican Presidency. He stressed the complementary nature of financial inclusion and financial integrity: “financial inclusion should be of particular interest to FATF as financial inclusion’s main effect is to capture sectors of the informal economy” that are outside money laundering and terrorist financing controls.

Many regulators, concerned by the prospect of a negative money laundering and terrorist financing evaluation, have been very conservative in using the flexibility of FATF’s recommendations which, when appropriately used, could include those currently excluded from financial services. One such recommendation requires that financial service providers verify a customer’s identity “using reliable, independent source documents, data or information.”

Read in a rigid way, such requirement would exclude many poor and low-income customers as they simply do not have such documentation, and would be denied access to financial services as a result. However, FATF does permit “risk-based” approaches to implementing its standards. One benefit of such risk-based approaches is to bring unbanked people into the formal economy – thereby serving the dual goals of (i) fighting terrorist financing and money laundering and (ii) promoting financial inclusion.

This win-win scenario was further highlighted by the plenary’s keynote speaker – Netherlands Crown Princess Máxima, a long-time advocate of financial inclusion for the poor and the UNSG’s special advocate for inclusive finance for development. “Bringing people and businesses into the formal financial system helps communities thrive,” the Princess declared. “It helps regulators and supervisors monitor and trace the movement and sources of money. It helps law enforcement by diminishing the anonymity of informal transactions. In short, financial inclusion contributes to financial integrity. “The challenge now is to build on FATF’s commitment to financial inclusion, and to develop “best practices” and improved guidance to jurisdictions, regulators, and supervisors to translate FATF’s commitment into real progress on the ground. The World Bank and CGAP will continue to coordinate efforts towards this end.