The Financial Action Task Force (FATF) published its High-Level Synopsis of the Stocktake of the Unintended Consequences of the FATF Standards. WOCCU commented on this consultation urging focus on the link between proportionality and financial inclusion and further commenting on the issue of De-Risking as they relate to national-level implementation of AML/CFT requirements which are often costly and burdensome for smaller community-based financial institutions such as credit unions.
In their synopsis and recommendations, FATF included the following language:
In general, the misapplication of the FATF Standards, and in particular the failure to use the proportionality that is central to the risk-based approach, can lead to or compound financial exclusion.
WOCCU applauds the acknowledgment and focus on proportionality as it relates to AML/CFT requirements. WOCCU noted in its comment letter a failure by national-level regulators to apply a risk-based and proportional approach to regulation, especially when given instruction to do so, threatens the ability of financial institutions such as credit unions who provide necessary services to underserved communities.
FATF noted in its synopsis that the failure to properly apply the FATF Standards, and in particular, the failure to use the proportionality that is central to the risk-based approach can lead to financial inclusion. For example, the risk-based tools within the Standards (such as exemptions and simplifications) are underutilised by the countries needing them the most to expand financial inclusion. Secondly, the FATF’s Standards, evaluation and other activities do not adequately encourage authorities, the private sector and assessment teams to understand the impact of financial exclusion on ML/TF risks.
FATF also noted the problem of De-risking which is “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach.” De-risking can result in increased costs of payments and concentration for correspondent banking and remittance services and prevent credit unions from having access to affordable and necessary financial services.
FATF reiterated its commitment to continue to work on what more can be done to mitigate these unintended consequences. This may entail additional guidance, best practices, training, and possible revisions to the FATF’s Methodology, Procedures and Standards, as well as continuing engagement on the FATF’s work with key external stakeholders.
A copy of the Synopsis can be viewed here.