Financial Inclusion and Financial Crime: An Avoidable Tension?

As a leading global financial centre, it seems anomalous that nearly two million adults in the UK do not have a bank account and are excluded from the financial system. The drive for greater ‘financial inclusion’ and the benefits this offers individuals are rising up the UK government’s agenda, as is evident in the recent announcement of a new fee-free bank account offered by a number of high-street providers to those currently outside the formal financial system. Such positive initiatives are to be welcomed from a social-policy perspective, but they may be of limited success if they do not align with policies in other areas.

One example of potentially conflicting objectives is the relationship with the anti-money laundering (AML) and counter-terrorist-financing (CTF) regime. Indeed, it is this AML/CTF agenda that has often been highlighted by social-policy bodies, such as the Financial Inclusion Commission, as one of the root causes of financial exclusion: stringent customer due-diligence requirements can inadvertently debar many of those on the margins of the economy from formal engagement.

However, it is not necessarily the case that the two agendas are mutually exclusive and conflicting. Financial inclusion initiatives which increase the use of the formal financial sector also increase the reach of AML/CFT controls. Indeed, the global AML/CTF standard-setter, the Financial Action Task Force (FATF), notes that ‘the promotion of formal financial systems and services is central to any effective AML/CFT regime’. Its 2013 report on the issue highlights ways in which perceived AML/CTF barriers to financial inclusion can be mitigated.

Yet it is an unavoidable truth, conceded by FATF, that over-zealous or over-cautious implementation of AML/CTF measures, particularly customer due diligence, can have unintended consequences for many of those individuals currently outside or on the margins of the formal financial system – particularly those on low incomes who often lack government-issued identification documents, such as passports and driving licences, that are required by many banks to enter the formal system. For example, this over-zealous implementation was evident in recent de-banking examples relating to migrant remittances to Somalia.

It is here, where the government’s efforts to introduce these new-style accounts, and other financial-inclusion measures, must marry up with AML/CTF efforts. The government and regulators have an opportunity to work with and support the private sector to ensure that the regulatory environment accepts a more flexible approach to customer due diligence, where appropriate to do so, to ensure the fullest possible take-up of the measures.

The focus of the FATF since the 2012 revisions of its standards on taking a risk-based approach – in contrast to risk avoidance – offers the potential to open up the financial system to the largest possible number of participants. This new emphasis, which promotes a more flexible approach in a number of areas, including customer due diligence, could be a key facilitator of financial inclusion. For example, in its guidance on financial inclusion, the FATF notes that its customer-due-diligence parameters allow for the acceptance of a wide range of identification documents and that the risk-based approach offers the possibility of flexibility in the on-boarding process for low-risk customers.

However, the benefit of this new global standard will only be felt in terms of financial inclusion if fully put into practice by banks themselves. The comfort blanket of ‘over compliance’ can only be removed if banks and financial institutions are supported by government and regulators. Regulators must work closely with the banks to create a safe operating space in which, as long as decisions are reasoned and defensible, they will not fear sanction.

Nevertheless, it is not the case that banks, and indeed social policy-makers, can simply assume that those currently excluded from the financial system, and the products designed to increase their participation, are automatically low risk in AML/CFT terms. This would be at best naive, and at worst negligent.

It may be that these new products are used by those seeking to subvert the financial system, or that the newly banked are inadvertently used by third parties to channel funds for nefarious ends. This places the banks in a precarious position between the financial-inclusion and financial-crime agendas. However, this should not stop greater inclusion: it can be managed by a process of risk assessment and review.

Whilst the two agendas have historically been seen as diametrically opposed, this gap is now being bridged through the shared common aim of increasing the proportion of people within the formal system. It is now time for the regulators to understand the AML/CTF risks of excluding such a large share of the UK population from the financial system, and for social policy-makers to design financial-inclusion interventions that support the integrity of the UK financial system. The success of both agendas is interlinked, and the government has a role to play in ensuring that financial inclusion and AML/CTF objectives mutually reinforce one another, including through better implementation of the risk-based approach.