Identifying how anti-money laundering policies can stifle financial inclusion and growth
Money laundering, terrorism financing and sanctions violations by individuals, banks and other financial entities are serious offenses with significant negative consequences for rich and poor countries alike. Efforts by international organizations, the US, UK, and others to combat money laundering and curb illicit financial flows are a necessary step to increase the safety of the financial system and improve security, both domestically and around the world.
But the policies that have been put in place to counter financial crimes may also have unintentional and costly consequences, in particular for people in poor countries. Those most affected are likely to include the families of migrant workers, small businesses that need to access working capital or trade finance, and recipients of life-saving aid in active-conflict, post-conflict or post-disaster situations. And sometimes, current policies may be self-defeating to the extent that they reduce the transparency of financial flows.
Banks are engaging in “de-risking” by ceasing to engage in types of activities that are seen to be higher risk in a wholesale fashion, rather than judging the risks of clients on a case-by-case basis. Individual banks may be acting rationally in not serving certain types of clients, due to a variety of factors. However, the implementation of AML/CFT appears to have created categories of clients whose business cannot justify the associated compliance costs. The financial exclusion of such clients creates yet another obstacle for poverty alleviation and economic growth, especially in poor countries.