World Bank Regional Workshop “Enhancing the ...siteresources.worldbank.org/INTAML/Resources/Latifah_Me...1 World Bank Regional Workshop “Enhancing the Effectiveness and Integrity

1

World Bank Regional Workshop World Bank Regional Workshop ““Enhancing the Effectiveness and Integrity of Enhancing the Effectiveness and Integrity of

Bilateral Remittance Transfers between Bilateral Remittance Transfers between Malaysia and IndonesiaMalaysia and Indonesia””

June 9June 9--11, 2008 11, 2008 –– Bali, IndonesiaBali, Indonesia

The World Bank Group

Financial Market Integrity Unit (FPDFI)

Latifah Merican CheongProgram DirectorFinancial Market Integrity Unit

2

1.1. CDD: Compliance with International CDD: Compliance with International Standards Standards

2.2. CDD: International Standards and Financial CDD: International Standards and Financial Access: Perceptions and EvidenceAccess: Perceptions and Evidence

3.3. Policy Challenges Policy Challenges andand Responses: Tailoring Responses: Tailoring CDD Regulation to Domestic CircumstancesCDD Regulation to Domestic Circumstances

OutlineOutline

3

1.1. Room for improvement on cRoom for improvement on complianceompliance with CDD with CDD international standards, irrespective of development international standards, irrespective of development statusstatus

2.2. NoNo tradetrade--offoff between CDD compliance and access to between CDD compliance and access to financefinance

3.3. Many options to use Many options to use flexibilityflexibility provided by FATF provided by FATF standards for standards for accessaccess--friendly CDD friendly CDD compliancecompliance

4.4. Important role of consumer education to increase usage Important role of consumer education to increase usage of formal channelsof formal channels

Presentation ObjectivesPresentation Objectives——key messageskey messages

4

0%

20%

40%

60%

80%

100%

R5 R17 R23 R25 R29 R30 R32Cou

ntrie

s La

rgel

y or

Ful

ly C

ompl

iant

R32: Stats

Average= 42%

R17: Sanctions

R23: Regulation & Supervision

R25: Guidelines

R29: Supervisory Authority R30: Resources

R5: Due Diligence

Compliance in Financial Sector: Supervisory Compliance in Financial Sector: Supervisory compliance is generally lower than the average compliance is generally lower than the average of all recommendationsof all recommendations. .

5

% of Countries Largely or Fully compliant

R1

R2R3

R4

R5

R6

R7R8R9

R10

R11

R12

R13

R14

R15

R16

R17

R18

R19

R20

R21R22R23

R24

R25

R26R27

R28

R29

R30

R31

R32R33R34

R35

R36R37

R38

R39R40

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Compliance in Financial Sector: Generally very weak Compliance in Financial Sector: Generally very weak compliance on CDD (R.5) compliance on CDD (R.5)

R.5: 10.4%

6

Still ample room for improvementStill ample room for improvement:

Out of 67 countries assessed under the 2004 FATF methodology, NONE was rated Fully Compliant (C);

The majority of assessed economies - 64% of the sample were rated Partially Compliant (PC);

Recommendation 5 remains among the recommendations with the lowest share of countries enjoying strong compliance ratings.

7

Partially Compliant

(PC)65%

Largely Compliant

(LC)10.4%

Compliant (C)0%

Non Compliant (NC)25%

CDD Compliance: Weak compliance not CDD Compliance: Weak compliance not related to development statusrelated to development status

Compliant Largely Compliant Partially Compliant Non Compliant Total

0 7 43 17 67

Weak compliance Weak compliance cuts across development statuscuts across development status

8

Developed Country IssuesDeveloped Country Issues• Complex financial system

more complicated structures (e.g. trusts), easier to hide beneficial owner [>60% of cases]

• Many types of financial institutions

Beyond banks including: commodities traders, insurance, hedge funds, etc.

AML/CFT regime don’t always cover all these diverse entities. [almost 33% of cases]

Developing Country IssuesDeveloping Country Issues• Forgery

financial institutions have weak capacity to detect

• Multiple IDs accepted

vulnerability due to poor guidance from regulators

• Informal pooling systems still prevalent (e.g. African community funds pooling “tontine”)

identifying beneficiary is difficult

1. CDD :Factors behind weak compliance1. CDD :Factors behind weak compliance

9

CDD: Examples of solutions to weak CDD: Examples of solutions to weak compliancecompliance

Developed Country Issues• Legal Persons prevalent, easy to

hide beneficial owner

• Many types of financial institutions, CDD responsibilities unclear to some

Effective Solutions• Disclosure requirements: beneficiaries,

partners and anyone having executive authority so FI can see structure.(Singapore)

• Clear guidance by supervisory authorities for each type of FI (Belgium)

Developing Country Issues• Fake IDs

• Alternative IDs accepted

• Informal Pooling of funds

• Alternatives to verification (South Africa)

• Issue a list of acceptable alternative identity forms (The Philippines)

• System for executor to identify all contributors

In some cases, these solutions also successfully address In some cases, these solutions also successfully address access to financeaccess to financeissues (see section 3)issues (see section 3)

10

i.i. AccessAccess bringsbrings saverssavers and and investors togetherinvestors together::• Allows mobilization and efficient allocation of capital• Fundamental for faster growth at macro (country) level

ii.ii. AccessAccess contributescontributes to poverty reductionto poverty reduction::• Incomes of the poor growing faster than avg. per capita GDP • Income inequality falls more rapidly• Poverty rates decrease at faster rates

iii.iii. AccessAccess enablesenables the the switch from informalswitch from informal to formal to formal channelschannels::

• Promoting integrity and reliability of financial transfers• Confidence through AML/CFT measures reinforce access to

finance

2. Poverty 2. Poverty andand Access to Finance: The case Access to Finance: The case for financial inclusionfor financial inclusion

11

2. Access to Finance2. Access to Finance Reduces Reduces Poverty LevelsPoverty Levels

Beck, Thorsten, Asli Demirgüç-Kunt and Ross Levine, 2004, “Finance, Inequality and Poverty: Cross-Country Evidence”, World Bank Policy Research Working Paper Series 3338.

• Bank account usage as low as 10% of adult population• Bank account access as low as 15%

12

CDD requirements often cited as a factor in barriers to access;

Benefits from enhanced integrity are often overlooked;

Within the context of remittance transfers, this argument might appear particularly compelling:

• High cost due to limited identification infrastructure• Limited capacity/knowledge led to implementation of

harsh CDD measures• Cash-intensive businesses (including MTOs) regarded

as high-risk entities;• Foreign workers regarded as high-risk customers;• Implementing AML/CFT blamed for poor CDD

compliance access to finance

2. CDD 2. CDD andand Access to Finance: Access to Finance: The PerceptionThe Perception

13

2. CDD 2. CDD andand Access: The EvidenceAccess: The EvidenceN o T rade-o ff B etween C D D C o mpliance and A ccess to F inance

36.753.4

68.0

0

20

40

60

80

Non compliant (NC) Partially Compliant (PC) Largely Compliant (LC)

FATF R5 Compliance Status (Dec 2007)

% w

ith A

cces

s

Note: a 55-country sample was considered for this analysis

Growing evidence of no trade-off between CDD compliance and access to finance;On average, countries Largely Compliant with FATF R.5 show a higher share of population

enjoying access to financial accounts; Similarly, Partially Compliant economies still show on average greater access than Non-

Compliant countries;

14

Improving CDD leads to positive impact on poverty Improving CDD leads to positive impact on poverty reduction policies and targetsreduction policies and targets

Relevant issue is effective implementation of Relevant issue is effective implementation of standards and not standard itself standards and not standard itself

WellWell--tailored tailored CDD CDD regulation to local conditionsregulation to local conditionsachieves:

Compliance with international standardsEnhances access opportunities

NonNon--tailored CDDtailored CDD regulationregulation impacts access through 3 barriers: • Physical access • Affordability• Eligibility

2. CDD 2. CDD andand Access: The EvidenceAccess: The Evidence

15

Essential criterion 5.3Essential criterion 5.3• Identification and verification of identity must be based on reliable and independent

sources;• Meeting these minimum requirements, any locally available document/source can be

employed.

Essential criterion 5.9Essential criterion 5.9•• Simplified/reduced CDD Simplified/reduced CDD allowed when specific conditions apply;allowed when specific conditions apply;•• Conditions include Conditions include low ML/CF risklow ML/CF risk, , publicly available informationpublicly available information on on

customer/benef. owner ID, customer/benef. owner ID, controls in place elsewherecontrols in place elsewhere in national system.in national system.

Essential criterion 5.17Essential criterion 5.17• CDD requirements should be applied to existing customers based on risk and

materiality;• Due diligence on existing relationships should be conducted at appropriate times.

FATF Requirements on Cover PaymentsFATF Requirements on Cover Payments• Originator information along the payment chain

3. CDD & Access: Improving compliance 3. CDD & Access: Improving compliance through exploiting flexibility of FATF Rec.5through exploiting flexibility of FATF Rec.5

16

Indirectly Indirectly impacting access through market mechanisms;

Overregulation/overimplementa-tion can hurt relationshipshurt relationshipsbetween financial institutions;

Uneven regulationUneven regulation can thwart competition/entry and impact variety of supply (linked to physical access) and price (linked to affordability);

DirectlyDirectly involving the user, who must meet the requirements;

Compliance capacity capacity can vary vary across incomeacross income categories

Physical AccessPhysical AccessThe service is not within physical reach of the user

e.g. No. of branches per person/km2

AffordabilityAffordabilityThe service price is not affordable relative to potential user’s incomee.g. Minimum amount required to open account, annual fees.

EligibilityEligibilitye.g. No./type of documents required to open account. Requirement for bank accountsto access mobile financial services

3. CDD & Policy Challenges 3. CDD & Policy Challenges –– addressing CDD addressing CDD limitations to accesslimitations to access

17

Responses: Responses: a)a) Introduce/redefine simplified CDDIntroduce/redefine simplified CDD

New thresholdNew threshold for exemption from address verificationBased on market researchmarket research and inputs from inputs from regulated entitiesregulated entitiesAllows launch of products targeting lowtargeting low--incomeincome clients

((South Africa)South Africa)b)b) Allow alternative verification optionsAllow alternative verification options

Verification required for address ORdate/place of birth for wire transfers/remittances

(Malaysia)(Malaysia)

c)c) Improve national identification systemImprove national identification systemNew efforts to modernizemodernize system Include addressaddress information on ID cardID cardSatisfy twotwo verification requirements with a single ID piecesingle ID pieceTo compensate shortcomings of ID system, additional profiling info is required, but not verified

(Indonesia)(Indonesia)

CDD & Policy: responses to eligibilityCDD & Policy: responses to eligibility

I.I. Tailor CDD requirements Tailor CDD requirements to local capacity to local capacity

Large share of population Large share of population unable to meet address unable to meet address verification requirementsverification requirements

(South Africa, Kenya, Haiti)(South Africa, Kenya, Haiti)

Reliance on low reliability/low Reliance on low reliability/low integrity identification systemsintegrity identification systems

(Haiti, Indonesia)(Haiti, Indonesia)

Issue:Issue:

18

Responses:Responses:

d)d) Allow for alternative ID verification options Allow for alternative ID verification options through guidancethrough guidance

Minimum requirementsMinimum requirements set for valid set for valid documents, allowing acceptance of documents, allowing acceptance of any any compliant ID at entitiescompliant ID at entities’’ discretion. discretion. Several States and entities accepting Several States and entities accepting Consular Consular IDsIDs from migrants. from migrants.

(US)(US)OrOr

Issue broad list of Issue broad list of specificspecific acceptable acceptable alternative IDs and alternative IDs and set conditionsset conditions for for use of use of eacheach. . Clarification on what is acceptable and Clarification on what is acceptable and what notwhat not

((The Philippines)The Philippines)e)e) Promote riskPromote risk--based practices based practices

Mandate introduction of riskMandate introduction of risk--based based approachapproachExplicit statementExplicit statement by authorities that by authorities that enforcement actions unlikely if enforcement actions unlikely if ““reasonable measuresreasonable measures”” are consistent are consistent with guidance.with guidance.Provide Provide guidanceguidance for risk profiling. for risk profiling.

(UK)(UK)

CDD & Policy: responses to eligibilityCDD & Policy: responses to eligibility

II.II. Avoid more severe Avoid more severe implementation by entities implementation by entities than required by regulationthan required by regulationVerification of legal status of Verification of legal status of

residence required by internal residence required by internal policies, undocumented migrants policies, undocumented migrants excluded from banking servicesexcluded from banking services

(Italy, Malaysia)(Italy, Malaysia)

Overly restrictive interpretation Overly restrictive interpretation of CDD requirements of CDD requirements mandated by law, irrespective mandated by law, irrespective of actual risk profile of actual risk profile Potential distorted impact on Potential distorted impact on lowlow--risk personal customers risk personal customers entering relationships for entering relationships for limited productslimited products

(UK)(UK)

Issue:Issue:

19

f)f) Actively facilitate entitiesActively facilitate entities’’ efforts:efforts:Access provided to centralized database Access provided to centralized database (NADRA) for re(NADRA) for re--identification purposesidentification purposesNonNon--faceface--toto--face reface re--identificationidentificationallowedallowedThird party, centralized, reliableThird party, centralized, reliable source source provided to entities. provided to entities.

(Pakistan)(Pakistan)

g)g) Apply riskApply risk--based approach to existing based approach to existing customerscustomers’’ CDD:CDD:

Guidelines issued requiring to Guidelines issued requiring to prioritizeprioritizerere--identification based on identification based on risk profilerisk profileCategorization of existing customers Categorization of existing customers conducted according to conducted according to each entityeach entity’’s s criteriacriteriaNew deadline for reNew deadline for re--identification expired identification expired with most account cleared. with most account cleared.

(South Africa)(South Africa)

CDD & Policy: responses to eligibilityCDD & Policy: responses to eligibility

III.III. Avoid distortions when Avoid distortions when implementing CDD on implementing CDD on existing clientsexisting clients

ReRe--identification of existing clients identification of existing clients difficult in rural areas difficult in rural areas (Pakistan)(Pakistan)

Difficult reDifficult re--identification led to riskidentification led to riskof freezing for 80% of existing of freezing for 80% of existing banking accountsbanking accountsFinancial exclusion and systemic riskFinancial exclusion and systemic risk(South Africa)(South Africa)

ReRe--identification difficult due to identification difficult due to prohibition to access the national prohibition to access the national votersvoters’’ identity database as a 3identity database as a 3rdrd

party sourceparty source(Mexico)(Mexico)

ResponsesResponses::Issue:Issue:

20

Responses:Responses:

a)a) Tailor requirements to risk Tailor requirements to risk and capacity: and capacity:

Identify entities mostly engaged in low-value transactions with low-income clients (Centros cambiarios, Banco Azteca)Provide exemptions to CDD requirements for low-value transactions/accounts

(Mexico)(Mexico)

b)b) Promptly engage entities to Promptly engage entities to minimize disruptions:minimize disruptions:

Guidance issued allowing classification of MSBs account based on riskLocal FIU openly clarifies to entities that high risk does not necessarily require relationship termination

(US)

CDD & Policy: responses to affordability and CDD & Policy: responses to affordability and physical accessphysical access

I.I. Ensure CDD compliance Ensure CDD compliance at minimal cost for entitiesat minimal cost for entities

II.II. Avoid distorted IntraAvoid distorted Intra--market dynamics market dynamics ---- equalize equalize bank/nonbank/non--bank corporate bank corporate cultureculture

Heavy burden for smaller, lowHeavy burden for smaller, low--income market entities (mostly nonincome market entities (mostly non--bank)bank)LowLow--value transactions become value transactions become unprofitable without significant raise unprofitable without significant raise in price of servicesin price of services(South Africa, Mexico)(South Africa, Mexico)

Severance of business relationships Severance of business relationships between cashbetween cash--intensive businesses intensive businesses (MSBs, MTO agents) and banks based (MSBs, MTO agents) and banks based on fear of enforcement actionson fear of enforcement actionsLoss of link to formal payment Loss of link to formal payment

system system (UK, US, Canada)(UK, US, Canada)

Issue:Issue:

21

Responses:Responses:

c)c) Let the user decide:Let the user decide:Business model allowed, Business model allowed, limitlimit imposed on imposed on ffunctionalityunctionality on a prudential basis.on a prudential basis.NonNon--faceface--toto--face registration permitted, but face registration permitted, but triggers a triggers a 130 US$ limit130 US$ limit on daily transactionson daily transactionsTo escape the limit, user must undergo faceTo escape the limit, user must undergo face--toto--face CDD.face CDD.

(South Africa)

d)d) Work closely with providers of new Work closely with providers of new technologytechnology--based service:based service:

DevelopedDeveloped AML/CFT controls on two new AML/CFT controls on two new mobile payment systems in mobile payment systems in close cooperationclose cooperationwith respective developers.with respective developers.Transaction limits and CDD requirements Transaction limits and CDD requirements designed to minimize the impactdesigned to minimize the impact on the on the business model.business model.

(The Philippines)

CDD & Policy: responses to affordability and CDD & Policy: responses to affordability and physical accessphysical access

III. Promote innovationIII. Promote innovation--friendly friendly CDDCDD

NonNon--FaceFace--ToTo--Face client Face client origination forbiddenorigination forbiddenMobileMobile--based financial services based financial services prevented from entry into market prevented from entry into market CDD rules undermine launch of CDD rules undermine launch of new technologies with high new technologies with high potential for lowpotential for low--income marketsincome markets

(Pakistan, Indonesia, Kenya, South Africa)

Issue:Issue:

22

3. Challenges 3. Challenges andand Responses: SummaryResponses: Summary

c. Let the user decide

d. Work closely with developersPromote innovationPromote innovation--friendly CDDfriendly CDD

b. Promptly engage entities to minimize intra-market disruptionsAvoid distorted intraAvoid distorted intra--market dynamicsmarket dynamics

a. Tailor requirements to risk and capacity Ensure CDD compliance Ensure CDD compliance at minimal cost for entitiesat minimal cost for entities

Affordability&PhysicalAccess

f. Proactively facilitate entities' efforts

g. Allow risk-based CDD on existing clientsAvoid distortions when implementing Avoid distortions when implementing CDD on existing clientsCDD on existing clients

d. Effectively introduce risk-based approach

e. Allow alternative identification optionsAvoid more severe implementation by Avoid more severe implementation by entities than required by regulationentities than required by regulation

a. Introduce/redefine simplified CDD

b. Improve national identification system

c. Allow alternative identification optionsTailor CDD requirements to local Tailor CDD requirements to local capacity capacity

Eligibility

ResponseResponseIssueIssueDimensionDimension

23

3. CDD & Policy Challenges: technology 3. CDD & Policy Challenges: technology facilitates compliancefacilitates compliance

Innovation has enormous potential for Innovation has enormous potential for bothbothCDD compliance and access:CDD compliance and access:

DigitalizationDigitalization >>>>>>>> creation ofcreation of centralized databasescentralized databasesA.A. Examples could include Examples could include registrarsregistrars and and credit bureauscredit bureausB.B. Allow Allow nonnon--faceface--toto--faceface ID verificationID verificationC.C. Reduce costReduce cost of compliance for FIsof compliance for FIsD.D. UseUse of existing structures allows economies of of existing structures allows economies of scalescale

MobileMobile technology technology >>New Business Models arising from New New Business Models arising from New TechnologiesTechnologies

–– Bring greater reach (lower physical access barriers)Bring greater reach (lower physical access barriers)–– Allow potentially lower costs (lower affordability barriers)Allow potentially lower costs (lower affordability barriers)–– Introduce greater transaction Introduce greater transaction speedspeed

24

1.1. ComplianceCompliance with CDD international standards with CDD international standards remains low, remains low, regardless of development statusregardless of development status

i.i. Weak compliance cuts across income and development categoriesWeak compliance cuts across income and development categoriesii.ii. Need to enhance efforts on a fundamental AML/CFT componentNeed to enhance efforts on a fundamental AML/CFT component

2.2. Evidence shows Evidence shows no tradeno trade--offoff between CDD compliance and between CDD compliance and access to financeaccess to finance

i.i. Access on average greater in compliant regimesAccess on average greater in compliant regimesii.ii. ““BoxBox--tickingticking”” mindset leads to distorted impact of CDD on accessmindset leads to distorted impact of CDD on access

3.3. Opportunities to use flexibilityOpportunities to use flexibility provided by FATF standards for provided by FATF standards for accessaccess--friendly compliancefriendly compliance

i.i. From From ““oneone--fitsfits--all regulationall regulation”” to to ““tailored regulationtailored regulation””ii.ii. Consumer education on value of CDD to facilitate sending money hConsumer education on value of CDD to facilitate sending money homeome

4.4. Balanced AML/CFT Balanced AML/CFT regulations to new technologies that offer regulations to new technologies that offer innovative solutions to CDD complianceinnovative solutions to CDD compliance

i.i. Leverage on innovation to lower cost of CDD and improve access tLeverage on innovation to lower cost of CDD and improve access to o financefinance

ConclusionsConclusions——Takeaway PointsTakeaway Points