AML/CFT Regulation: Implications for Financial Service Providers that Serve Low-Income People (Focus Note No. 29)

Publication Date: Jul 2005
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper

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AML/CFT regulations – Are they a cause for worry?

This paper summarizes the implications of the international framework for anti-money laundering (AML) and combating the financing of terrorism (CFT) for financial service providers working with low-income people.

The AML/CFT standards require financial service providers to:

• Enhance their internal controls to cater to AML/CFT risks;
• Undertake customer due diligence measures on all clients;
• Keep transaction records for future verification;
• Report suspicious transactions to national authorities.

Negative implications of AML/CFT standards would be:

• Additional costs of compliance to financial service providers;
• Reduction in the access to formal financial services for low-income people.

To avoid these outcomes, the paper argues in favour of:

• Gradual implementation of new measures;
• Adoption of a risk-based approach to regulation;
• Use of exemptions for low-risk categories of transactions.

The paper also discusses:

• Differences between money laundering and the financing of terrorism;
• Institutions covered by AML/CFT regulations;
• AML/CFT measures required at the national and institutional levels;
• South Africa as an example of how a country’s AML/CFT regulations can be modified to meet the needs of low-income clients.

The paper concludes that there is scope for further exploration of the ways in which institutions serving low-income clients could comply with the new regulations.