Risks Associated with Remittance Transactions...Risks Associated with Remittance Transactions...

27 Making Remittances Work • http://dx.doi.org/10.1596/978-1-4648-0109-9

Risks Associated with Remittance Transactions

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This chapter provides:

• An overview of the specific vulnerabilities of remittance channels tomoneylaundering/terroristfinancingrisks.

• Adiscussionofregulatoryandsupervisorychallengeswhenmitigatingtheserisks.

• Guidanceonkeymoney laundering/terrorist financing riskmitigationmeasuresforremittances.

Remittances are an important source of income for poor households indevelopingcountries.Atthesametime,however,remittancechannelscanbeasourceofmoneylaunderingandfinancingofterrorism(ML/FT)risks.Asremit-tancevolumesgrow,sodoconcernsaboutpotentialrisks.Therefore,itisimpor-tant for countries to promote accessible, efficient, but also secure remittanceflowsandtomitigatetheserisks.Themosteffectivewaytoachievethis isbyadoptingarisk-basedapproach(RBA)toanti-moneylaundering/combatingthefinancingofterrorism(AML/CFT)regulationandsupervision.Financialinstitu-tionsmustensure that such risk-basedAML/CFTpoliciesandproceduresareproportionatewiththeML/FTrisks,andthattheyarerelevanttothesizeandcomplexityofthe institution,productsoffered,andcustomertypes.Hence,toeffectivelyregulateandsuperviseremittanceserviceproviders(RSPs),itiscriti-caltounderstandthevariousriskspresent intheremittancemarketandtran-sactions.This chapter provides a better understanding of the various types ofML/FT risks faced by RSPs by analyzing different aspects of the remittancebusiness,andprovidesguidanceonkeyriskmitigationmeasures.

C H A P T E R 2

28 Risks Associated with Remittance Transactions

Making Remittances Work • http://dx.doi.org/10.1596/978-1-4648-0109-9

How Vulnerable Are Remittance Channels to ML/FT Risks?

There is a general perception that remittances and wire transfers are morevulnerabletoML/FTrisksthanotherfinancialactivitiessuchasdeposittaking,lending,leasing,andmoneymanagement.Indeed,thereisadedicatedFinancialAction Task Force (FATF) Recommendation to mitigate ML/FT risks arisingfrom wire transfers (which also includes remittances).This is understandablesincefundscanbemovedinstantaneouslytoanothercountry,andgiventhepastevidencethatremittanceshavebeenusedinacriminalcontextforbothmoneylaundering and terrorism financing. Sending funds abroad makes tracing themoneyextremelychallenging,particularlywhentransactionsareconductedbyoperatorsnotsubjecttoorcomplyingwithAML/CFTobligations.Thisisevenmoresobecausereconstructingamoneytrailrequiresinternationalcooperation,whichischallenging,costly,andusuallyslow.

Within various remittance channels, Money or Value Transfer Services(MVTS)1areusuallyperceivedasmorevulnerabletoML/FTrisksthanbanks.GiventhatMVTSisabroadtermusedintheFATFRecommendations,whichincludenotjustmoneytransfersystemsbutalsovaluetransfersystems,thisstudyusesmoneytransferbusinesses(MTBs)as thecollectivetermforcertainnon-bankfinancialinstitutionsprovidingmoneytransferservices(seefigure1.1andtable1.1inchapter1).

Risks Related to Remittance Business ModelsBy the mere existence of recommendations specific to MTBs (FATFRecommendationonMoneyorValueTransferServicesandWireTransfers)andtheexclusionofMTBsfromcertainoptionalexemptions,2theFATFStandardssignalthattheydeservespecialattention,asdocertainotherserviceprovidersortypesofbusinessrelationships.OccasionalorverylimitedactivitycannotbethereasonforexemptingMTBsfrombeingsubjecttoFATFRecommendations.Theotherexemptionclause,toprovethatthereisaprovenlowriskofML/FT,canstillbeapplied.Althoughmeetingthisexemptionclauseiscertainlychallenging,itistheoreticallyfeasible.

Do we have evidentiary data to assert that MTBs are more vulnerable toML/FTriskthanotherfinancialinstitutions?Theshortansweristhattheresultsofthesurveyconductedforthisstudydidnotprovideenoughdatatoallowadefinitiveanswer—either way.Thesurveyattemptedtocollect informationoncasesandtypologieswheremoneytransferservicesareabusedforML/FTpur-poses, inordertogatherfact-basedevidenceofpossibleincreasedexposuretoML/FTrisks.Onlyafewcountrieswereabletoprovidesomeresponsestothesequestions.Where countrieswere able toprovide information, itwas availableonlyinaggregatedformthatdidnotpermitdetailedanalysis.Forexample,atotalnumber of money-laundering cases was provided without a breakdown as towhichfinancialinstitutionswereusedasconduitsinsuchcases.

Basedonthislackofevidentiarysupport,thisstudyreachesthepreliminaryconclusion that a uniform and across-the-board perception of higher ML/FT

Risks Associated with Remittance Transactions 29


risksintheremittancesectorisnotwarranted.Asaconsequence,thevalueandfairness of imposing higherAML/CFT requirements for every single country,everysinglechannel,everysingletransaction,andeverysingleserviceproviderinthesamemannerisquestionable.Rather,country-basedassessmentsofrisksareneeded as a platform upon which to design and implement a genuinely risk-basedAML/CFTregimefortheremittancesectorandtransactions,inlinewiththeRBAenshrinedintheinternationalstandards.

The following two questions are analyzed to further elaborate on ourarguments.Question 1: Do MTBs face higher ML/FT risk than banks?TotheextentthatcountriesassesstheML/FTrisksinMTBs,takeappropriatemeasurestomitigatetherisks,regulatetheindustrybyenactinglawsandregula-tions,andenforcelawsandregulations,MTBsshouldposenogreaterriskthanbanks. Inotherwords,MTBsdonotnecessarily face inherently higherML/FTrisksthanbanksthroughremittanceservices,nordotheyposeinherently higherML/FTthreatsthanbanks.Therisksandthreatsarelargelyinfluencedbytheriskmitigationmeasures,namelyeffectiverisk-basedregulationsandsupervision.Forexample,ifMTBsareunregulated,theriskofillicitflowsthroughtheseMTBsincreasesnotbecauseof anaspectof risk that is inherent to remittances.Theincreaseinriskoccursbecauseofasimpleconsequenceofthelackofregulationandsupervisionand,therefore,lackofinternalcontrolandduediligencemea-suresbyserviceproviders.TheriskisnotrelatedtothetypesoftransactionsbuttotheweaknessinthesupervisoryregimesandsupervisionapplicabletoMTBs.Thosewishingtohideillicitfinancialflowsarelikelytoseekunsupervisedenti-tiestoreducetheirchanceofdetection.

Therefore,theanswerineachcountrygreatlydependsontheexactbusinessmodelframework,relevantnationalregulations,andothercountrycircumstancesand conditions, which combined define the country and sector ML/FT riskprofile.

Before2001, itwasuncommontoregulateandsuperviseMTBsinmostofthecountriesaroundtheworld.ThisinformalityofserviceproviderscertainlyledtohigherML/FTrisk.NowthatmostcountriesregulateMTBsoronalimitedbasis, ban MTB operations, the perceived risk generalization no longer seemsjustified—and, based on the available data, is not backed by a compellingtypology.While26countriesweresurveyed,only23haveMTBsthatprovideremittanceservices.Ofthose23,17countries,ornearly74percent, indicatedtheyhaddistinctlaws,regulations,ordirectivesregulatingMTBs(seetableB.9inappendix B).3 Moreover, AML/CFT obligations applicable to MTBs in thesecountries appear to cover all key areas—customer due diligence (CDD),Suspicious Transaction Reports (STRs), currency transactions reports, recordkeeping,training,andinternalcontrol(seetableB.13inappendixB).

The surveyedcountriesprovideddataon thenumberofSTRs filedby thevarioustypesofRSPs.ThemajorityofsendingcountrieswereabletoproduceSTR statistics with a breakdown by sector or type of financial institution.However,only20–30percentof the receivingcountrieswereable toprovide



equivalentdata.Thisrevealstheneedforanimprovementinthewaystatisticsaregathered;datasegregationbysector iscritical toasoundandcomparativeanalysis,andtounderpinriskanalysisandrisk-basedsupervision.

AnalyzingSTRsisonlyonemethodofriskanalysis.BasedonavailableSTRdata,insomecountries(suchasJamaica),MTBsfilethemajorityofSTRsrelatedto suspicious activity. This might indicate potentially higher ML/FT risks inMTBs,oritmightsimplyrepresentdefensiveSTRfilingbyMTBs,whichwouldnotindicatehigherrisks.

MTBinvolvementinML/FTcasesprovidesanadditionalperspective.Somesurveyed countries provided the number of ML/FT cases involving financialinstitutions.However,onlyafewwereabletopointtothespecificinvolvementofMTBs.Othersdidnotprovidedisaggregatedinformationpointingtothetypesoffinancialinstitutionsinvolvedintheschemesorusedasavehicletolaundermoney.Thisisanareawherecountriesneedtocaptureandmakepublicmoredetailedinformation.

NationalregulationsmayalsoplayaroleindeterminingtheoverallML/FTriskperception of banks compared to MTBs in a country. For example, regulatoryrequirements for CDD, Currency Transactions Reports, thresholds, and otherrequirementscandifferbetweenbanksandMTBs,evenifbothtypesofinstitutionsareconductingsimilarfundstransfer/remittancetransactions.Whileinsomecases,thisisimportantandwarranted,inothercases,itisnot.Forexample,ifbanksdonotentertainwalk-incustomers4orthetypeofcustomersisverydifferentfromthoseofMTBs,5thenhavingdifferentCDDandotherpreventivemeasuresmaymakesense.However,iftheremittancemarketisverycompetitiveandcustomerscaneasilygotobanksorMTBsforservices,thenapplyingthesameCDDandotherregulatoryrequirementstoremittancesbetweenbanksandMTBsisnatural.

Inmanysendingcountries,itisobservedthatbanksviewtheMTBsandtheiragentsashigherriskandevende-bankthoseclientrelationships.Thisde-bankinghasbecomeanextremelypressingissueforregulatorsinthosecountries.OneoftherationalesputforwardforsuchmovesbybanksisthatbanksareconcernedaboutenforcementactionsbyregulatorsforservingcustomerswhoseAML/CFTstandardsarenotcompatiblewithorstringentenoughtomatchbanks’internalcontrols.6Fromthisperspective,itmayhelpbanksifAML/CFTrequirementsforremittances are the same for banks and MTBs and this is indeed enforced.However, regulators need to carefully consider whether this move is feasible,practical,andsuitableintheirmarketandwhetheritwillmeettheoverallobjec-tivesofenhancingintegritywithoutpushingremittancetransactionstotheinfor-malmarket.Remittancetransactionsareusuallyofsmallervalue,withanaverageof a fewhundreddollars. Inaddition, somecountries imposeaceilingon thepermissibletransactionvalue,usuallyaroundseveralthousanddollars.Thesmallremittancevalueshouldbeoflessmoney-launderingconcern,althoughthereisstilladebateabouttheriskrelatedtoterroristfinancing.Thisdebateiscomplexbut, thus far, given the recent typology on terrorism financing, evidence ofterrorist financing suggests that other channels such as banks are also ofteninvolvedalongwithremittancechannels.



Question 2: Do local MTOs generally face higher ML/FT risks than interna-tional MTOs when engaged in international remittances?Mostregulatorslargelyconsiderinternationalmoneytransferoperators(MTOs),withtheirglobalizedoperations,significantresources,andgloballywell-knownnames, to have established well-recognized regulatory compliance programsthatmitigateML/FTrisksarisingthroughtheirsystem.LocalMTOswithsmallerscale operations, fewer resources, and a lack of globally well-known names,areviewedasnothaving resources todevelopeffectivecomplianceprograms.Thisview,ofcourse,presumesthattheinternalcontrolsofinternationalMTOsare reviewed for compliance and effectiveness by their home regulators andsupervisors.

Thatsaid,thesheernumberoftransactionsconductedbyinternationalMTOsdwarfsthoseoflocalMTOs.InternationalMTOsalsooperateinawiderrangeoflocationsandcountries,includinginconflictzonesandhighML/FTriskcoun-tries.ThepointhereisnottofavorlocalMTOsoverinternationalMTOsorviceversa,buttotrytoputthingsincontext.Again,however,thesurveyprovidesnoclearevidenceonwhichtocomparetheriskprofilesoflocalandinternationalMTOs.

Theroleofagents inremittances isalsoanimportantfactor inML/FTriskassessment.Asexplainedinchapter1,agentsmaycomeinverydifferentforms,ranging from established financial institutions such as banks, to nonfinancialinstitutionssuchas“momandpopshops,”grocerystores,andgasstations.ThatlocalMTOsaremorelikelytoenterintoprincipal-agentrelationshipswithsucharangeofactorsisandshouldbepartoftheriskassessment,andofthedesignoftheregulatory/supervisoryrequirementstomitigaterisks.

Suchasurveyandresearchcannotprovideadefinitiveansweronthecom-parativelevelofML/FTrisks intheremittancesector.Thatsaid,andasnotedabove,thecurrentlackofevidencecallsforML/FTriskassessmentstobeunder-takenineachcountry,asabasisforundertakingagenuineRBA.Dataareobvi-ously needed in order to conduct an objective and accurate risk assessment;however,evenwiththelimiteddataavailable,riskassessmentcanbeundertaken,andthiswouldbebetterthanpolicyactionsbasedonmereperception.

Risks Associated with New Remittance Products7

ManyMTBsareincreasinglydevelopingvariousinnovativeproductsandservicesfor remittance transfers, expanding their distribution network, and improvingtheirmarketingandpromotional strategies.8SuchdevelopmentshaveallowedMTBstocompetemoreeffectively,reducetransfercosts,andimprovefinancialaccessibility and convenience for migrant workers and their families. SurveyresultsshowthatnearlyhalfofthesampledcountrieshaveMTBsthatprovideremittance transfers and applications through technological channels (seetable2.1).Themostpopularapplicationobservedinthesurveyedcountriesismobile phones, followed by Internet-based remittance services, use of debitor preloaded cards, and withdrawal from automated teller machines (ATMs)by the recipient.9The use of credit cards is more prevalent in sending than



receivingcountries.Table2.1showsthatsendingcountriesarefarmoreadvancedthanreceivingcountriesintermsoftheuseofvarioustechnologies,exceptwithrespecttotheuseofmobilephones,whichismorewidespreadforremittancesamongreceivingcountriesthansendingcountries.

Understanding the risks related to eachof theseproducts and services andappropriately regulating them is extremely important to ensure that ML/FTrisksaremitigated,whilenotsuppressingthegrowthandsustainabilityoftheseproductsandservicesinanincreasinglycompetitivemarketplace.

Mobile MoneyMobile money (M-Money) is often the first noncash service that clients indevelopingcountriesareabletoaccess.WhileM-MoneyisnotwithoutML/FTrisk,itstillposeslessriskthancash.Thetransactionsarerecordedandaretrace-able,especiallyifclientsareidentified.Evenwhenclientsarenotpre-identified,if law enforcement wishes to identify a particular unidentified client, theM-Moneyframeworkgenerallyprovidesthemwitharichsourceofidentifyingdetails, such as voice recordings, patterns of communication, and patterns oftransactions.Inaddition,amobilephoneactsasatrackingdevicethatcanleadinvestigatorstotheactualperson.Individuallyandcollectively,thesefactscanrenderM-Moneyunattractiveforabuse,therebyreducingthelikelihoodoftheriskmaterializing.

Another important mitigating factor is that usually M-Money providersimposelimitsonthebalanceandfrequencyofM-Moneytransactions.Itwouldrequire a significant andcostly levelof smurfing to launderproceeds throughsuchchannels.

Evidenceontheimpactoftheavailabilityofelectronicchannelsontheuseofcashisemerging.Japan’scentralbank,theBankofJapan,hasalreadyobservedacorrelationbetweentheincreaseduseofelectronicchannels,includingM-Money,andanaggregatereductioninthelevelofphysicalcash(thus,theoveralllevelofML/FTriskinvolvedwithhavingphysicalcashinJapanmayalsohavedeclined).TheadvanceofelectronicmoneysystemsinJapanhaslargelybeentheresultofthe ability to carry an electronic purse on a near field communication (NFC)-enabled10 mobile phone. A report published by the Bank of Japan has docu-mentedthistrend,showingthattherehasbeenaslowingoftherateofincreaseintheamountoflargecoinsincirculation(¥500and¥100)andadecreaseintheamountofsmallercoinsincirculation(¥50,¥10,¥5,and¥1)(seefigure2.1).

Table 2.1 Number of Countries in which MTBs Offer Remittance Services through Technological Devices

Internet Mobile phone ATM Credit card Debit/preloaded

Sending countries 6 5 6 4 5Receiving countries 4 6 2 1 4Total 10 11 8 5 9

Source: Based on the survey; see table B.4 in appendix B.



M-MoneycanthereforebeusedstrategicallytolowernationalML/FTriskbyfacilitating the move away from “higher risk” cash transactions to relatively“lowerrisk”M-Moneytransactions(Chatainet al.2011).

Prepaid CardsDuringthelastdecade,prepaidcardshaveevolvedrapidlyandtheirfunctional-itieshaveexpanded,sothatsomeprepaidcardscannowbeusedtosendandreceivefundsandtowithdrawcashfromATMs.

The twomain typesofprepaid cards areopen-loop and closed-loop cards.Prepaidcardsgainedpopularitybecausetheyenablestoringandcarryingofvalueandsubstituteforcarryingcash.Becauseclosed-loopprepaidcardshavelimiteduse,open-loopprepaidcardsaremuchmorepopular.11Open-loopprepaidcardscanbeusedtoquicklymovefundsaroundtheworldbyusingtheATMnetworktowithdraw funds,bypurchasinggoods and services,orby transferring fundsto another card. No face-to-face transaction is required, which makes themattractiveforML/FTpurposes.PrepaidcardsarealsoparticularlyvulnerabletoML/FTthreatsbecausetheycouldbeloadedwithhighmonetaryvaluesandareeasier to transport undetected than transporting equal cash value using cashcouriers.

Theriskposedbyanonymityornotidentifyingthecardholderwhenacardispurchased, registered, loaded, or reloaded, is relative to the card’s scope ofusewith respect to fundingorpurchasing limits, accessing cash, andwhetherthecardcanbeusedoutsidethecountryofissue.Prepaidcardscanbefundedinvariousways—throughbanks, the Internet, small retail shops,orATMs—thus,

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 2.1 Volume of Coins in Circulation and Their Percentage Growth Rates, Japan, 2000–08Year-on-year percentage change

Source: “Recent Developments in Electronic Money in Japan,” Payment and Settlement Systems Department, Bank of Japan, http://www.boj.or.jp/en/research/brp/ron_2009/data/ron0908b.pdf.



involving different degrees of CDD.While funding prepaid cards via a bankaccountorthroughtheInternetnormallystartsfromanaccountorapaymentinstrumentwhoseholderhasbeenidentified,cashfundingcanbetotallyanony-mous(FATF2013b).

TheML/FTriskposedbyprepaidcardshas increased inthe lastdecadeasprepaid cards have evolved to allow unlimited reloading and access to fundsthroughtheinternationalATMnetwork.Inaddition,prepaidcardscaneasilybepassedontothirdparties,whichisofparticularconcernwhenthecardisanony-mous.Therisksaremagnifiedwhentheprepaidcardhasadual-usercapabilityfeaturethatallowsthesecondcardtobepassedontothirdpartiestoallowforremittancewithdrawals.

The global outreach of prepaid cards for making payments or transferringfundsisanimportantfactortoconsiderwhendeterminingthelevelofrisk.Thatis, the larger the number and wider the geographic location of the potentialcounterparties, thehigher theML/FT risk. In fact, regulatory and supervisoryagenciesinmanyjurisdictionsworldwidehavebeenhesitanttopermittheuseofprepaidcardsbecausetheirvulnerabilitytoML/FTabuseisgreaterthanthatoftraditionalfinancialofferings.

Therefore, although prepaid cards are very useful, it is essential to haveadequateAML/CFTpolicies,internalchecksembeddedintheproductitself,androbustinternalcontrolsandmonitoringmechanismsfortransactionsbyserviceproviderstoensurethecardsarenotusedforillicitpurposes.

Internet-Based Remittance TransfersThe rapiddevelopment andgrowthof Internet-basedpayment serviceshascreatedopportunitiesforconsumersandchallengesforcountriesandprivatesec-torinstitutionsinensuringthattheseproductsandservicesarenotmisusedforML/FTpurposes.ManyInternet-basedpaymentserviceshaveemergedgloballyusingavarietyofbusinessmodels.

Forlarge-valueremittances,lackofverificationoftheusersposesthegreat-est risks in terms of Internet-based remittance transfers. Fund transfers viacreditcardorbankaccountposetheleastriskofML/FT;however,thislimitsaccessonlytothosewithabankingrelationship.Nonbankwiretransferscanfund online accounts via another Internet-basedpayment service that doesnot verify customer identification (ID), or by third-party funding. SomeInternet-basedserviceproviderspartnerwithprepaidcard issuersandoffercashaccesstopaymentrecipientsviaATMs.Whileservicesthatofferacashoption forboth fundingandpayoutcanboostaccessamongtheunbanked,thismayincreasethepotentialthreatofML/FTrisksbyeliminatingapapertrail on the source and use of funds transferred if no due diligence isconducted.

Not having physical contact, which is inherent to Internet-based transfers(accessofserviceorinreloading)canleadtoweakercustomerverification,result-inginhigherML/FTrisks.SuchriskswouldvarywithboththefunctionalityoftheproductandthestrengthandenforcementofAML/CFTmeasuresgoverning



these transactions.This poses challenges to the authorities to allow for widerfinancialinclusionopportunitiestobegainedthroughtheseinnovativeproductswhileidentifyingandmitigatingpotentialML/FTriskfactors.

TosuccessfullymitigatethepotentialML/FTrisksrelatedtoInternet-basedremittance transfers, the risk assessment should include various risk factors.Overall,Internet-basedpaymentserviceprovidersthathandleallaspectsofthecustomer relationship (that is, registration, cash-in/cash-out, and transactions)thataresubjecttoAML/CFTrequirementsaremost likelytomanageML/FTrisks better than decentralized service providers.The Internet-based providerscanmanagetheserisksbetterbecausetheyhavemorecomprehensiveinforma-tion to monitor customers and their transactions and to enable better riskanalysis.

Risks Related to the Informal Remittance MarketWhethertheremittancemarketisregulatedandsupervisedornotisoneofthekeyfactorsindeterminingthevulnerabilityoftheremittancesectortoML/FTrisks.Whilemanycountieshavemoved to formalize the remittancemarket,theinformalmarketstillexistsinmanycountries,albeitperhapsonasmallerscale.Informalplayersarecommonlyusedbybothillegalmigrantswhowanttosendremittancestotheirhomecountryforlegitimateneedsandbycrimi-nalstomoveillicitmoney(suchasproceedsfromdrugs,taxevasion,orothertypes of illegal activities) across borders. Informal channels can be used byundocumentedmigrantsbecausetheyareusuallycheaper,arefaster,needlessdocumentationthanrequiredbylegalchannels,andaretheculturallypreferredwayoftransferringfunds.CriminalsuseinformalchannelsbecausetheylackCDDprocedures,whichfacilitatesthemovementofcriminalmoneywithoutapapertrail.

Informalchannelsposeparticularchallengesnotonlybecause theymaybeusedmorefrequentlybycriminals,buttheinformalchannelsmayalsobefacili-tatorsofmoneylaunderingandmayevenbecontrolledbycriminalorganizationsandenterprises.Thereisnooversightoftheseinformalserviceproviders;inaddi-tion,paper trailsmaynotbe readily sharedby these serviceproviders, or thepapertrailsmightnotbeeasilyunderstandablebylawenforcementauthorities.

While there appears tobe an increasing trend toward formalizationof theremittancemarket,manyremittancecorridorscontinuetoremain less formal-ized(seemap4.1inchapter4).

Regulatory and Supervisory Challenges

Effective regulation and supervision are central to risk mitigation.This studyemphasizestheneedforrisk-basedregulationandsupervision.However,inprac-tice,itcanbedifficulttodesignthemosteffectiveRBA,butitshouldreflecteachcountry’s specific circumstance. Recognizing that an ill-designed regulatoryframeworkandpoorsupervisioncanincreaseML/FTrisks,thissectionprovidesguidanceonhowbesttodesigneffectiverisk-basedregulationandsupervision.



Detaileddiscussionsonregulationandsupervisionareprovided insubsequentchapters.

Avoiding Overregulation of the Remittance MarketInanefforttomitigaterisksassociatedwithremittances,somecountrieshaveinfactoverregulatedthesectortotheextentthatcompetitionhasbeenhinderedby not allowing a variety of remittance business models to operate.Whereasbanksaretheentitymostfrequentlypermittedtoconductremittanceservicesinthecountriessurveyed,enablingofamorediverserangeofentitiesisadvisablein countrieswith large informal sectorswheremostpopulation segments stillcannotaccessbasic financial transfer services.This isparticularlysobecause itwillhelpformalizethesector,whichinturnassistsML/TFprevention.

Theestablishmentofaregulatoryframeworkshouldnotcreateaccesshurdles(such as too stringent CDD regulation that requires a number of documentsevenforasmalltransaction,irrespectiveofrisks)andexcessivelypushcostsupbyadoptingeitheronerousone-size-fits-all,rules-basedregulationsorrisk-basedrequirementsbasedonaninaccurate(toohigh)analysisofrisks.

Strengthening Supervision MechanismsIn general, on-site supervision in most of the receiving countries surveyed isweak.Only18percentofthereceivingcountriesexaminedalltheMTBsatleastonce,while55percentofcountriesmanagedtoconducton-siteexaminationonsomeMTBs.Another27percentofcountrieshavenotyetstartedexaminations.Thoughoff-siteexaminationofMTBsismorecommon,amajorityofthecoun-tries have adopted neither risk-based supervision nor ongoing monitoring ofregulatedentitiesinordertodetecttheredflagsandtaketargetedactionswhereappropriate.

Although the supervising authorities in many countries have appropriatesanctioningpowers,suchasrevocationandsuspensionoflicenseorregistration,inpracticethenumberofsuspensionsandrevocationsisverysmall.Inthesur-veyedcountries,onlyonereceivingandonesendingcountryhadmorethanfiverevocationorsuspensioncasesinthelastfiveyears.Itisimperativeforcountriesto strengthen enforcement action because lack of enforcement of regulationsincreasesvulnerabilitiestoML/FTrisks.

Risk Mitigation Measures for Remittance Markets

This section summarizes guidance on risk mitigation measures that can behelpfulinaddressingML/FTrisksinremittancemarkets.

1. Assess and understand ML/FT risks in remittance transfers. Assessingandunder-standingriskisaprerequisiteindesigningrisk-basedregulationandsupervision.Ifacountryalreadyhasarisk-basedregulatoryandsupervisoryframework,riskassessmentcanbeusedtoevaluatewhetherthecurrentframeworkneedstoberevised.Asriskassessmentbecomesevenmoreimportant,thecollection



ofstatisticsinamannerthatwouldassistbetterriskassessmentwillbecritical.It is important to explore and analyze thedetectedmoney laundering andterroristfinancingcases,recordtheavailableinformation,andbreakdowntheinformation on various sectors, classify the cases, identify typologies thatinvolvetheuseofMTBs,andanalyzetheinherentrisksposedbyRSPs,deliv-erychannels,products,clients,andothersinvolvedintheremittancemarket.Theexistenceofinherentriskis,initself,notnecessarilyanegativefactor.Theimportantquestioniswhetherthoseinherentriskscanbemitigated.Effectiveriskmitigation,however,doesnotnecessarilymeanthecompleteeliminationofrisk.AnexampleoftheML/FTriskassessmenttoolforfinancialinclusionproductincludingremittancescanbefoundinappendixC.12

In conducting risk assessment, all the relevant stakeholders need to beinvolved. Among those stakeholders are the financial sector regulator andsupervisor,theFinancialIntelligenceUnit(FIU),andlawenforcementauthori-ties (police, prosecutors, and tax authorities, among others), depending onwhethertheassessmentisnationalorsectoral.Privatesector(industryrepre-sentatives)participationisoftenusefultogaininsightsontheproductsandservicesbeingofferedandtoreflectonML/FTriskconcernsthesectorfaces.Atthesametime,theprivatesectorisrequiredtoundertakeitsownML/FTriskassessmentof its services,products,customers,andmore.13Theprivatesectorisalsorequiredtoconductariskassessmentbeforethelaunchofnewproductsorbusinesspracticesortheuseofnewordevelopingtechnologies.14FATFissuedaguidancepaperonriskassessmentinFebruary201315thatpro-vides information for countries to consider when undertaking the riskassessment.

2. Allow innovative mechanisms for customer identification and verification.CDDthroughcustomerIDandverificationisakeyML/FTriskmitigationmeasure.IDisessentiallyaskingbasicinformationaboutthecustomer.Verificationisconfirmingwhether the informationprovided is correct.At theverificationstage, reliable, independent source documents, data, or information arerequired.TheverificationofcustomerIDmaybedifficult incountriesthathave no reliable national identity card scheme due to an underdeveloped,insecure,orinadequatenationalIDinfrastructure,orlackofotherappropriatealternativeformsofID.Insuchcircumstances,alternativeverificationmethodsshould be considered. International standards and practices illustrate thatsignificantflexibilityandcreativitycanbeappliedinthatrespect.Examplesofrisk-basedverificationinclude16:

• IntroductionofathresholdbelowwhichcustomerIDisdonebutdoesnotrequireverificationofcustomer’sidentity.

• Verificationofcustomer’sidentityattheirhomeandintheircommunityintheabsenceofaformalID.

• Requiringtheloadingortransferoffundsfromabankaccountorcreditcard.



• UsingbiometricIDandverification• Corroboratinginformationreceivedfromthecustomerwithinformationin

third-partydatabasesorotherreliablesources.

3. Set limits on loading value and use.Placinglimitsonthemaximumvaluethatcanbeheldor transferredthroughremittanceproductscanbeaneffectivemechanismtomitigateML/FTrisk.TocountertheheightenedML/FTriskofopen-loopprepaidcards,manyprepaidcardprogramshaveintroducedload-ing,withdrawal,anddurationlimits.Ifprepaidcardsareusedforperson-to-personfundstransfers,limitsimposedonpossibletransferscanbeaneffectivemeasuretomitigatetheML/FTrisk.Thiscanbeenhancedthroughcombiningtransferlimitswithloadingorwithdrawallimits.Suchlimitsmayreducetheincentive forcriminals touseprepaidcards forML/FTpurposes.However,threshold limits should be determined for each product on a risk-sensitivebasis,anddependingontheexistenceofotherAML/CFTmeasures.

4. Ensure adequate monitoring and other internal controls of MTBs.Serviceprovid-erscanusetheiroperatingsystemstofacilitateeffectiveinternalcontrolsbyincorporatingmonitoringmechanisms.InstallingautomatedcontrolsintheirinformationtechnologysystemscanbeaneffectiveAML/CFTriskmitigationmeasure,becausetransactionpatternscanbemoreeasilyanalyzed.Forexam-ple,automatedcontrolscanquicklyscanname,dateofbirth,andotherrele-vant ID information and compare the data with various United Nationsterrorismlistsandotherrelevantdata.Effectivemonitoringsystemscanbeparticularlyusefulwhereadequateup-frontCDDmeasurescannotbeunder-taken.WhentheoperationofcertainMTBsislimitedandsmallinsize,theymaynotbeabletoinstallautomatedcontrols.Inthatcase,softwaresuchasExcelcanbeused,whichisstillmoreeffectivethanpaper-basedmonitoring.SomesmallMTBsorcertainagentsmaynothavethecapacityforanycom-puter-basedmonitoringtool,however.

5. Strengthen supervision/licensing/registration of remittance service providers.National authorities shouldensure that allMTBs (naturalor legalpersons)thatprovideremittanceservicesarelicensedorregistered.Aswillbeexplainedinchapter4,thereareprosandconsofchoosingalicensingversusaregistra-tionregime.AllMTBsshouldbesubjecttoeffectivemonitoringsystemsthatareinlinewithFATFRecommendations.CountriesshouldidentifyinformalMTBsthatprovidetheseserviceswithoutalicenseorregistration,andofferappropriateincentivestotheinformalserviceproviderstojointheformalsys-tem.ItisimportanttobuildawarenessamongtheinformalMTBsaboutthemerits of joining the formal system.At the same time, authorities shouldunderstand incentives thatdrive serviceproviders tobe formal rather thaninformal.AddressingtheseincentiveswillmostlikelyrequiretoolsbeyondtheAML/CFTrealmbecausesuchactioncouldpertaintotaxissues,mistrustofgovernment agencies, and, therefore, avoidance of government scrutiny or



oversight.TheAML/CFTsupervisoryandregulatoryrequirementsandthresh-oldsshouldalsobecarefullyreviewed.

Afteralltheseefforts,thosewhodonotjoinbutcontinuetobeinformalplayersshouldbeidentifiedandsanctioned.Targetedrisk-basedenforcementactionisapowerfultoolauthoritiescanuse.InformalagentsshouldalsobelegalizedthroughlicensingorregistrationorbymakingtheprincipalMTBsmaintainalistofagents.Asexplainedinchapter4,whilethereareprosandconsoftherespectiveapproaches,thelistingapproachseemstoprovidethemost effective method to bring agents under regulatory mechanisms andensurebettercompliance.Countriesshouldtakemeasurestoensurethatpro-vidersthatuseagentsincludethemintheirAML/CFTprogramsandmonitorthemforcompliance.

Inprinciple,everycountryshouldstrivetoachieveabalancebetweenfinan-cialinclusionandfinancialintegrityobjectiveswithrespecttoremittancemar-ketsthroughanRBAtoregulationandsupervision.Chapters3,4,and5discussthe regulatory and supervisory framework followed in the surveyedcountries,andincludeareviewofregulatingmarketentryandsuggesthowtobestdesigntherisk-basedregulatoryandsupervisoryframework.

Notes

1.The FATF Recommendations define MVTS as follows: “MVTS refers to financialservicesthatinvolvetheacceptanceofcash,checks,othermonetaryinstrumentsorotherstoresofvalueandthepaymentofacorrespondingsumincashorotherformtoabeneficiarybymeansofacommunication,message,transfer,orthroughaclearingnetworktowhichtheMVTSproviderbelongs.Transactionsperformedbysuchser-vicescaninvolveoneormoreintermediariesandafinalpaymenttoathirdparty,andmayincludeanynewpaymentmethods.Sometimestheseserviceshavetiestopar-ticulargeographicregionsandaredescribedusingavarietyofspecificterms,includinghawala,hundi,andfei-chen.”TheconceptofMTBusedinthispaperissimilartotheconceptof MVTSusedintheFATFRecommendations,butisslightlynarrowerthanMVTS in that MTB does not include the concept of “value” transfer servicesas opposed to “money” transfers. And the type of money transfer is limited to“person-to-personremittances.”

2.SeetheInterpretativeNotetoFATFRecommendation1(AssessingrisksandapplyinganRBA).Recommendation1providesanexemptionsclausestatingthat“countriesmay decide not to apply some of the FATF Recommendations requiring financialinstitutions or DNFBPs [Designated Non-Financial Businesses and Professions] totakecertainactions,provided:(a)thereisaprovenlowriskofmoneylaunderingandterrorist financing; thisoccurs in strictly limitedand justifiedcircumstances; and itrelatestoaparticulartypeoffinancialinstitutionoractivity,orDNFBP;or(b)afinan-cialactivity(otherthanthetransferringofmoneyorvalue)iscarriedoutbyanaturalorlegalpersononanoccasionalorverylimitedbasis(havingregardtoquantitativeandabsolutecriteria),suchthatthereislowriskofmoneylaunderingandterroristfinancing.” However, the latter provision does not apply to MTBs, while all otherfinancial activities are eligible for exemption if the criterion is met under thisprovision.



3.Nigeriahasabank-onlymodelandtheRepublicofKoreaandSerbiahavebankandpostofficemodels.

4.AlthoughMTBcustomersareusuallyconsideredwalk-incustomersinthemajorityofthecountriessurveyed,MTBshavemanyrepeatcustomers.InJamaica,forexample,ifacustomerisarepeatcustomerwhotransfersatleastonceeverythreemonths,thiscustomerwillnotbeeligibleforlowerduediligence.Seesection“ThresholdfortheCDDRequirements”inchapter3.

5.Whereasbankstendtohavemoresubstantialbusinessrelationswithmostof theircustomers,MTBcustomersareusuallywalk-incustomerstransferringcashoneway.Becauseofdifferent levelsofbusiness relationships,banksnecessarily tend tohavemore information about their customers, sources of the customer’s funds, andexpectedtransactionprofile.Thisinformationprovidesamoresolidbaseonwhichto“knowyourcustomer.”

6.Reasonsforde-bankingmayalsoarisesimplyduetomarketcompetition,includingbecause banks are interested in starting their own remittance business or service(beyondSWIFTtransfers).Underthisscenario,AML/CFTcanbeusedasanexcusetode-bankMTBs.

7.SeveralstudieshaveanalyzedrisksofM-Moneyandothernewpaymentservicesandproducts.See,forexample,Chatainet al.2011.TheFATFhasissuedtwotypologiespapersonnewpaymentmethods(FATF2006,2010,2013b).

8.SeeappendixD formore informationonprivate sectoradaptationsundertaken tocompeteinanincreasinglycompetitiveremittancemarket.

9.SeeappendixCforadetaileddescriptionofnewremittanceproducts.

10.Nearfieldcommunication(NFC)-enabledmobilephonesenableuserstomakepay-mentsandpurchasesthroughamobilephoneasifitwasacreditordebitcard,aslongasparticipatingmerchantshaveNFCcapability.

11.Closed-loopcardsaremerchant-specific,sotheycanbeusedfortransactionsexclu-sivelywithaparticularmerchant.Open-loopcardsareassociatedwithandbearthelogoofanelectronicpaymentnetwork,suchasVisa(2009),andtheyarehonoredwhereverthesenetworksareaccepted(http://usa.visa.com/microsites/goresponsibly/pdf/pms_guide_prepaid_card.pdf).

12.Thefinancialinclusionriskassessmenttoolwasdevelopedunderabroaderprojecttodevelopanationalriskassessmentmethodologyanditstool.EmikoTodoroki,theleadauthorofthisstudy,wastheproject leaderoftheriskassessmenttool,andKuntayCelik and Wameek Noor were members of the project team sponsored by theFinancialMarketIntegrityServiceLineoftheWorldBank.Whereasnotallremittanceproductsmayfallunderthenotionof“financialinclusion”product,giventhefocusofthisstudyonhowtobalancethefinancialintegrityandfinancialinclusion,appendixCfocusesontheriskassessmentoffinancialinclusionproduct.

13.SeeFATFRecommendation1(2012).

14.SeeFATFRecommendation15(2012).

15.SeeFATF2013a.The leadauthorof this studywas amemberof thisproject andcontributedtothedraftingofthisguidancepaper.

16.StandardCDDmeasureswouldincludeidentifyingthecustomer(client)andverify-ing his or her identity; and identifying the ultimate beneficial owner (who wouldreceivethemoney),whererelevant,andverifyinghisorheridentity.



References

Chatain,Pierre-Laurent,AndrewZerzan,WameekNoor,NajahDannaoui,andLouisdeKoker.2011.Protecting Mobile Money against Financial Crime: Global Policy Challenges and Solutions.Washington,DC:WorldBank.

FATF (FinancialActionTask Force). 2006. Report on New Payment Methods. FinancialAction Task Force, Paris, October. http://www.fatf-gafi.org/media/fatf/documents/reports/Report%20on%20New%20Payment%20Methods.pdf.

———. 2010. Money Laundering Using New Payment Methods. Financial Action TaskForce,Paris,October.http://www.fatf-gafi.org/media/fatf/documents/reports/ML%20using%20New%20Payment%20Methods.pdf.

———.2012.International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: The FATF Recommendations.FinancialActionTaskForce,Paris, February. http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf.

———.2013a.FATF Guidance: National Money Laundering and Terrorist Financing Risk Assessment. Financial Action Task Force, Paris, February. http://www.fatf-gafi.org/media/fatf/content/images/National_ML_TF_Risk_Assessment.pdf.

———.2013b.Guidance for a Risk-Based Approach: Prepaid Cards, Mobile Payments and Internet-Based Payment Services.”FinancialActionTaskForce,Paris,June.http://www.fatf-gafi.org/media/fatf/documents/recommendations/Guidance-RBA-NPPS.pdf.

Visa.2009.Practical Money Guides—Prepaid Card Basics: What You Should Know about Using Prepaid Cards.PracticalMoneySkills–Canada,Visa,Toronto.

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