Does the Financial Action Task Force (FATF) Help or Hinder Financial Inclusion? A Study of FATF Mutual Evaluation Reports Mike Pisa July 9, 2019 June 13, 2018 | CGDev.org

Background The Financial Action Task Force (FATF) is responsible for setting international standards on anti-money laundering and countering the financing of terrorism (AML/CFT) The organization was established in 1989, composed of mostly OECD countries but broadened its focus to low- and middle-income countries (LMICs) in the late 1990s Most LMICs are represented by the FATF-Style Regional Bodies LMICs presented FATF with two new challenges: Greater reliance on informal financial channels Lower supervisory capacity Led to fundamental rethink of FATF Standards Culminated in revised Recommendations (2012) that set the Risk-Based Approach (RBA) as the “essential foundation” of a country’s AML/CFT framework July 9, 2019 | CGDev.org

The Mutual Evaluation (ME) Process Peer Review FATF assesses most high-income countries Other countries assessed by staff from FATF-Style Regional Bodies, often in collaboration w/ experts from WB and IMF Each evaluation takes about 14 months Carried out according to strict guidelines… …But very country specific July 9, 2019 | CGDev.org

Goal of the Paper Examine the 33 most recent developing country mutual evaluation reports (MERs) to determine: (1) How and to what extent they take financial inclusion into consideration in assessing the effectiveness of a country’s AML/CFT regime and what recommendations these considerations lead to; and (2) How assessors evaluate countries’ simplified due diligence (SDD) measures (or their absence) and what this reveals about the flexibility the FATF gives to countries July 9, 2019 | CGDev.org

Limitations of the Approach Goal is not to judge whether the teams that carry out evaluations were correct or not in their assessments and recommendation The former is not possible because: Much of the information used by evaluators is not publicly available Mutual evaluations are context-specific and intended to focus on “high-priority” risks only Upshot: We can report patterns but only speculate about causation July 9, 2019 | CGDev.org

Findings Nearly all reports include some discussion of financial inclusion but there was a large variation in the depth of coverage 6 out of the 33 reports had at least one priority action related to expanding financial access or better understanding the risks of the informal sector The degree to which assessors paid attention to financial inclusion was strongly correlated with the degree to which they saw financial exclusion as a risk But…there was less consistency around the identification of financial exclusion risk itself. The goal of the paper is to examine, in the most data-driven way possible, whether FATF mutual evaluations have been conducted in a way that supports financial inclusion. July 9, 2019 | CGDev.org

Recommendations Develop a structured framework for measuring and understanding financial exclusion risk. Per the GPFI’s 2016 recommendation, the FATF should develop a structured framework that would help assessors and policymakers better understand the drivers and risks associated with financial exclusion Strengthen assessor training and expand staffing to take financial exclusion risks into account more consistently. The FATF should ensure that its assessors understand the issue well by highlighting the issue in its assessor training materials and classes, and by requiring each assessment team to include a financial inclusion expert. Require assessors to encourage the use of SDD measures unless there is good reason not to. The FATF should require its assessors to examine whether SDD measures would be appropriate in countries where the approach is not established, and in cases where there is low risk. July 9, 2019 | CGDev.org

Treatment of NPOs Among the reports reviewed, the NPO sector was the one that assessors most frequently determined was being hindered by overly strict AML/CFT policies or compliance practices. 12 reports (roughly 1/3) identified inappropriate or overly-broad regulations that unduly burdened the domestic NPO sector and recommended that governments refine their approach. In some reports, assessors found that the authorities did not understand the NPO sector’s risk profile, which prevented them from applying a targeted approach. This was the case in Armenia, Botswana, Mauritius, Zimbabwe. In others, assessors found that the relevant laws and regulations were excessively restrictive or were inappropriately applied to all NPOs. This was the case in Albania, Bangladesh, Cambodia, Ethiopia, Indonesia, and Uganda. In one report (Ukraine), assessors found that banks were overly conservative in their compliance practices, in that they applied EDD indiscriminately or else refused to serve NPOs at all. Every evaluation team that raised concerns about treatment of the NPO sector also included a recommendation to rectify the situation (except Cambodia). Most of the reports that raised this issue were published after the revision of Recommendation 8 and the accompanying methodological update. July 9, 2019 | CGDev.org