How can financial inclusion and financial integrity policies complement each other? That question was addressed in a report recently released looking at the state of Ethiopia’s anti-money laundering/combating the financing of terrorism (AML/CFT) framework.
The assessment was conducted by a World Bank Group team of experts and published by the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). This is the first assessment of a developing country to be published that uses the revised 2012 Financial Action Task Force (FATF) standards.
Ethiopia’s compliance with the international standards on AML/CFT had never been assessed before, and this report sheds light on the functioning of a unique and vibrant economy in Africa. In addition, this is the first AML/CFT assessment to highlight the connection between financial inclusion and financial integrity policies.
As noted in an earlier blog post, entitled "The Royal Stamp of Inclusion," the FATF has confirmed that financial inclusion and financial integrity are mutually reinforcing public-policy objectives. The revised FATF standards have a more explicit focus on the risk-based approach in implementing an AML/CFT framework. This approach allows for the identification of lower risk scenarios and the application of simplified AML/CFT measures in certain areas (primarily customer due diligence, or CDD).
The Ethiopia assessment notes that only about 28 percent of the population is served by the formal financial system – leaving 72 percent of the population dependent on cash or informal financial service providers. The Ethiopian government has identified the expansion of formal financial services as a national priority, through its “Growth and Transformation Plan” and the “Ethiopian Financial Inclusion Project.”
The assessment makes suggestions as to how the Ethiopian authorities can “link up” the policies of inclusion and integrity – for example, by allowing for simplified customer due diligence processes, and by providing guidance to financial institutions on the issue.
A key recommendation of the assessment is that “the efforts of the national government to promote financial inclusion should be coordinated closely with AML/CFT authorities to ensure that [AML/CFT] risks are considered and managed in this context.”
Since the FATF standards have been revised, only four other assessments have been published to date: for Australia, Belgium, Norway and Spain. Assessments of countries in the developing world have only begun in recent months, and the Ethiopia report is the first to be made public.
The issue of financial exclusion as a risk for money laundering and terrorism financing was not addressed in the first four reports. However, given the AML/CTF risks and the level of financial exclusion in Ethiopia, the issue of financial access features prominently in this new report. The publication should serve as an example for how future assessments of countries in the developing world can address this issue.
The report also demonstrates how far Ethiopia has come in a short time. Just five years ago, the country was identified by the FATF on their “gray list” as having strategic deficiencies related to AML/CFT. At that time, Ethiopia was not a member of a FATF-style regional body and had never been assessed against the international standard. As this new report notes, Ethiopia has made significant strides in passing laws and regulations that bring the country into technical compliance with the majority of FATF recommendations. Now its ratings in this area outpace some of the developed world’s compliance with the same standards.
But the real test of an AML/CFT system is how it is applied in practice. Given the relative youth of Ethiopia’s framework – it was enacted within the past four years – it has been difficult to draw firm conclusions on the extent to which the system is actually delivering results.
The report on Ethiopia underscores the idea that financial inclusion and financial integrity policies should reinforce each other. This example should help governments elsewhere establish and enact policies that put this into practice to ensure inclusive and sound financial access for more people in the developing world.
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