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AML/CFT in Cash Economies: Informal is the New Formal

Fintelekt Advisory Services hosted an exclusive webinar on “AML/CFT in Cash Economies: Informal is the New Formal” on October 30, 2019 along with Expert Speaker Liat Shetret, International Strategic Advisor for Financial Integrity and Inclusion. Arpita Bedekar, Director – Marketing, Fintelekt Advisory Services moderated the webinar.

Liat has more than 15 years of experience leading global capacity-building and technical assistance programs on AML, CFT, financial inclusion, and countering violent extremism.

In June 2019, she published a paper along with the European Union on “Striking the Balance: Practical AML/CFT Risk Mitigation in Cash-Based Economies in the Horn of Africa”. The webinar focused on the key takeaways from her research and on highlighting shared lessons for other developing economies and regions across the world.

Liat began by explaining the dichotomy that exists between the financial system and the cash based economy. 

As per the World Bank classification of countries by income, over 100 countries are classified as developing (low & middle income) countries, which are predominantly cash economies. In these countries, cash is the formal mechanism and it is here to stay.

Cash economies are often perceived to be associated with a higher money laundering and terrorism financing risk. Money laundering and terrorism financing trends and typologies in cash economies revolve around porous borders, cash couriers, innovations in mobile payments technology, hawala transactions, etc.

Barriers to financial inclusion in cash economies include a high cost of banking accounts, lack of necessary documentation, low literacy and limited trust in financial institutions. For the banking system, the lack of adequate infrastructure and governance structures and high overhead costs form the barriers to greater financial inclusion.

Liat described how a large “unbanked” population presents significant challenges for the developing economies and, in turn, the global financial system. Improved access to financial services can assist a developing country manage cash flows, build assets, and expand lending, savings, and investment practices for small and medium-sized businesses, supporting a growing class of entrepreneurs that helps alleviate high levels of poverty and spur economic growth.

Furthermore, expanded financial access presents an opportunity to enhance AML/CFT regimes, with more transactions passing through the formal financial system and subject to AML/CFT monitoring and reporting requirements.

Liat’s research suggests that specific tools are required for AML/CFT in cash economies such as:
– having a financial inclusion strategy
– gathering data more systematically,
– updating national risk assessment tools that includes assessment modules focused on cash or specific risk sectors
– reviewing sanctions regimes
– emphasizing digital innovation
– paying attention to the future of financial flows.

Governments and regulators in developing economies can provide the practical conditions needed for an entrepreneurial ecosystem to flourish and encourage innovation in the area of AML/CFT. It is also important to strengthen the linkages between the formal and informal structures.

For compliance officers within banks and financial institutions, Liat pointed out that being at the frontline of the AML/CFT system, they should become a strategic part of risk mitigation measures when new policies or products are introduced by their financial institutions.

Data and information collected by compliance through on-boarding, KYC and due diligence can be practically used to share insights with the business teams and allow the institution to go to market with marketable value and insights. This will also propagate compliance officers as business promoters and help them move away from their negative image within the organisation.

Suggested reading: Download Liat Shetret’s paper on “Striking the Balance: Practical AML/CFT Risk Mitigation in Cash-Based Economies in the Horn of Africa”.