Today’s anti-money laundering and countering the financing of terrorism (AML/CFT) efforts are constrained due to inadequate information and analytical tools. Banks and other reporting entities (financial service providers or FSPs) lack both the tools and the data to identify many cases of money laundering (ML) and terrorist financing (TF). This challenge is exacerbated when working in low-income countries, where identity infrastructure and regulatory capacity often are constrained.
This inability to effectively identify ML/TF is harming financial integrity. Suspicious transaction reports (STRs) and other data related to potential ML/TF activity are reported by individual FSPs to financial authorities, who often have limited capacity and unsuitable tools to conduct AML/CFT supervision and detect industry-wide patterns that could indicate ML/TF. For their part, FSPs typically are prohibited from sharing data with other FSPs as part of their AML/CFT efforts. As a result, ML/TF activity often goes undetected.
Weaknesses in AML/CFT processes are also impacting financial inclusion. In recent years, many Western banks have terminated correspondent banking relationships in developing countries due to concerns about regulatory capacity and fear of penalties for AML/CFT non-compliance. As noted in a report by the Center for Global Development (CGD), there was a 10% decline in the volume of correspondent banking transactions involving the world’s poorest countries over the past ten years. In addition, there was a decline in the number of correspondent banking relationships (CBRs) in both low-income and middle-income countries, which negatively impacts competition and can drive up costs for cross-border transactions. Moreover, the risk-based approach in AML/CTF compliance and supervision is essential to the design of proportional customer due diligence (CDD) requirements that allow the implementation of tiered approaches for lower-risk accounts and transactions.
To combat AML/CFT-related challenges, FSPs are experimenting with technology-enabled AML/CFT approaches. In 2017, five U.S.-headquartered banks obtained approval to conduct a pilot AML/CFT study using pooled data. Applying artificial intelligence (AI) technology to the pooled data, the banks were able to identify a human trafficking network operating between Southeast Asia and Europe.
Financial authorities are also experimenting with regulatory technology (RegTech) and supervisory technology (SupTech) enabled approaches to AML/CFT supervision. For example, with R2A, Mexico’s Comisión Nacional Bancaria y de Valores (CNBV) developed and tested a prototype modern data infrastructure for AML supervision.
To promote further adoption of AML/CFT-focused RegTech/SupTech solutions by financial authorities in emerging and frontier markets, R2A has established a Working Group to identify, develop, and test “Solutions to Strengthen Financial Integrity and Combat Financial Crime.” Participants include financial authorities responsible for AML/CFT regulation and supervision from a variety of high-income, middle-income, and low-income countries.
LOUIS DE KOKER
Professor, La Trobe Law School
His research focuses on financial profiling data and on managing the relationship between financial inclusion and anti-money laundering and counter-terrorist financing (AML/CTF) objectives. He has undertaken research engagements with the World Bank, USAID, CGAP, and AFI financial integrity working group.
SIMONE DI CASTRI
Managing Director, R2A
Simone di Castri is an expert in policy development for financial and digital inclusion, with a focus on emerging markets. He has worked with global standard setters, senior policymakers, regulators, and private sector executives from 40+ countries, designing and implementing new policies to improve the efficiency of the financial sector and the digital ecosystem. He leads the Policy and Ecosystem Development practice at BFA, and is teaching a course on “Digital Approaches to Development: ICT4D and Digital Citizenship” at the Fletcher School, Tufts University. Prior to joining BFA, Simone was the Advocacy and Regulatory Director for the Mobile Money programme at the GSM Association. In this role he worked with decision makers to address the policy and regulatory barriers that were preventing mobile financial services providers from scaling and serving the low-income customers, and with the industry to improve risk mitigation and compliance policies, launching and implementing of the Code of Conduct for Mobile Money Providers. Simone has also worked for the Alliance for Financial Inclusion (AFI) where he managed AFI grant portfolios in Latin America and Francophone Africa, and conceived and coordinated the working group on financial consumer empowerment and market conduct. He has also worked as a Policy Analyst at the World Bank (CGAP), and a microfinance Junior Project Manager and Research Coordinator at the International Development Law Organization (IDLO). He is a lawyer, holds a Ph.D. in Law and Economics, and speaks English, French, Italian, and Spanish.
Senior Fellow, Center for Global Development
Vijaya Ramachandran is a senior fellow at the Center for Global Development. She works on the impact of the business environment on the productivity of firms in developing countries, and is the coauthor of an essay titled "Development as Diffusion: Manufacturing Productivity and Africa's Missing Middle,” published in the Oxford Handbook on Economics and Africa. Vijaya is also studying the unintended consequences of rich countries’ anti-money laundering policies on financial inclusion in poor countries. She has published her research in journals such as World Development, Development Policy Review, Governance, Prism, and AIDS and is the author of a CGD book, Africa’s Private Sector: What’s Wrong with the Business Environment and What to Do About It. Prior to joining CGD, Vijaya worked at the World Bank and in the Executive Office of the Secretary-General of the United Nations. She also served on the faculties of Georgetown University and Duke University. Her work has appeared in several media outlets including the Economist, Financial Times, Guardian, Washington Post, New York Times, National Public Radio, and Vox.
If you are interested in joining this invitation-only Working Group, please contact us at R2A@bfaglobal.com.