Money laundering control and suppression of financing of terrorism. Some thoughts on the impact of customer due diligence measures on financial exclusion
| DOI | https://doi.org/10.1108/13590790610641206 |
| Pages | 26-50 |
| Published date | 01 January 2006 |
| Date | 01 January 2006 |
| Author | Louis de Koker |
| Subject Matter | Accounting & finance |
Money laundering control and
suppression of financing of
terrorism
Some thoughts on the impact of customer due
diligence measures on financial exclusion
Louis de Koker
Centre for the Study of Economic Crime, University of Johannesburg,
Johannesburg, South Africa
Abstract
Purpose – The purpose of this paper is to explore the relationship between anti-money laundering
(“AML”) and combating of financing of terrorism (“CFT”) customer due diligence (“CDD”) measures in
the financial services industry, and exclusion from financial services.
Design/methodology/approach – An introduction to the concept of financial exclusion is provided
as well as an overview of international AML/CFT CDD standards. The paper highlights a softening of
national CDD measures in South Africa and the UK to lessen the impact on financial exclusion.
Findings – Countries should consider the impact that CDD requirements may have on financial
exclusion when they design their AML/CFT systems.
Research limitations/implications – Multi-discilinary research is required to improve the
understanding of the broader interaction between AML/CFT objectives, financial exclusion and
economic development, especially in countries with a large informal economy.
Practical implications – CDD requirements may unnecessarily exacerbate financial exclusion if
they are not formulated with care to reflect the reality of the particular country setting.
Originality/value – The paper offers insights into the international standards resulting to the
identification of clients and the experiences in the UK and South Africa regarding the implementation
of these standards on financial exclusion.
Keywords Money laundering,Terrorism, Disadvantaged groups,United Kingdom, South Africa
Paper type General review
Countries, financial institutions and certain other businesses and professions are
required to implement a set of anti-money laundering (“AML”) and combating of
financing of terrorism (“CFT”) measures[1]. Many African countries are currently in
the process of drafting or implementing AML/CFT laws. These laws must comply with
international standards that were set in this regard[2]. The relevant standards require
financial institutions and certain businesses and professionals to identify and verify
the identities of prospective clients. The main aim with this strategy is to ensure that
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
This paper is based on a paper delivered at the 10th Conference of Africanists: Security for
Africa: internal and external aspects, Moscow, 24-26 May 2005. The paper was completed while
the author was a Commonwealth Fellow and a Visiting Fellow at the Institute of Advanced Legal
Studies of the University of London. The support of the Commonwealth Scholarship
Commission, the Institute and the University of Johannesburg is acknowledged with
appreciation.
JFC
13,1
26
Journal of Financial Crime
Vol. 13 No. 1, 2006
pp. 26-50
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790610641206
these institutions know who they are dealing with and can prevent criminals and
terrorists from abusing their services. These aims are laudable. However, in this paper
the author sounds a note of caution and argues that countries, especially developing
countries, should design their AML/CFT customer due diligence (CDD) systems with
care. If these systems are not designed with circumspection, they can unnecessarily
prevent institutions to extend their services to the marginalized members of society.
This, in turn, affects the economic development of the country and can impact
negatively on crime combating.
The paper considers the international standards relating to the identification of
clients and the experiences in the UK and South Africa regarding the implementation
of these standards on financial exclusion. Both countries have relaxed their normal
CDD standards after appreciating the negative effects that they have had on
marginalized members of society.
1. Financial exclusion
Financial exclusion refers to inadequate access to financial services[3]. Persons who are
financially excluded do not have bank accounts and long- and short-term insurance
products that are normally held by members of society[4]. They are, therefore,
excluded from participation as customers in the financial services industry.
Financial exclusion may be temporary or long-term and may be complete or partial.
It is caused by factors such as geographic isolation, illiteracy, costs of financial
products or simply by restriction on access to such products (Kempson and Whyley,
1999; FSA, 2000; Bester et al., 2003). Those who lack access to financial services are
often socially and financially vulnerable and include groups such as the unemployed,
the homeless and illegal immigrants (FSA, 2000, pp. 21-45).
The financially excluded are disadvantaged by their isolation from the financial
system. They face the financial risks associated with cash, their access to normal
consumer credit is limited and their general inability to save threatens their financial
security. Financial exclusion hampers their social and economic development. It also
impacts on the economic development of the country. Financial exclusion also
undermines AML/CFT strategies. These strategies are predominantly aimed at
activities in the formal economy. It allows for the monitoring of transactions of those
who engage in formal financial transactions. If a substantial number of the citizens do
not engage in formal financial transactions, the efficacy of the AML/CFT system is
limited. Financial exclusion may even undermine the crime combating objectives of the
system if the AML/CFT controls push criminals and others out of the formal sector of
the economy into the unregulated and largely paperless informal sector. It is often far
more difficult to investigate and prosecute offenders who have submerged their
activities in the informal sector than to take action against those who leave paper trails
in the formal economy.
Financial exclusion is more widespread than is often appreciated. It is, for instance,
estimated that two million persons in the UK do not have bank accounts and three
million have to rely on expensive alternative credit facilities[5]. It was estimated that
nearly ten million families in the United States were without cheque or savings
accounts in 1998 (FSA, 2000, p. 63). A 2004 study estimates that only 46 per cent of the
adult population of South Africa is currently banked[6]. The percentage of the
population with bank accounts is obviously much higher in developed that developing
Suppression of
financing of
terrorism
27
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