Myth and realities
As to market entry, often the problem seems to be associated with foreign exchange or other laws and regulations. Many countries have foreign exchange regulations that do not allow remittance companies to operate outside banks. This is confirmed by our surveys conducted for an upcoming paper. On the other hand, I have seen no case where remittance companies are not allowed to operate independently from banks because of AML/CFT requirements.
But when it comes to remittance services provided through mobile phone, AML/CFT concerns seem to play a role. Why? One driver is a presumption that remittance by mobile phone is a high ML/TF risk. So regulators and supervisors in many countries took a cautious approach and they have required mobile operators to partner with banks. In this model, banks are usually the one who interact directly with clients and responsible for implementing AML/CFT requirements.
A study by my colleagues indicates that mobile remittances are not necessarily a higher risk than other channels. See the publication on Integrity in Mobile Financial Services. No one would argue that remittance through mobile phone can be exploited by criminals to send dirty money or fund terrorists as could be the case for other channels. But transactions through mobile phones bring a huge benefit – they offer full traceability. In addition, usually, countries impose a threshold limit on the amount that can be sent through mobile phone, which reduces the potential ML/TF risk.
Do banks always need to get involved? Not necessarily. The key is to require non-bank mobile financial service providers also to comply with AML/CFT requirements. From a policy standpoint, the Financial Action Task Force (FATF) does not take any position with regards to who can provide remittances.
Now let's look at customer due diligence requirement and how it may affect the use of formal channels for remittances. This is one of the serious issues some countries have faced. Why? Because AML/CFT regulations in their countries require customers to provide identification documents which unbanked customers such as undocumented migrant workers do not have. So, these migrant workers have to find a way to send money home through other means than the official channels.
What is the rationale for such identification requirements? Anonymity is a critical risk from an AML/CFT perspective. There is no effective AML/CFT regime without “know your customer”. FATF and AML/CFT experts recognize that the identification requirement must be proportionate and commensurate to risks. This is a complex balancing act, and indeed, it can be hard to achieve.
The World Bank has been helping countries to understand the flexibility accorded in the FATF requirements. The goal is to address both integrity concern and financial inclusion.