Reporting of Suspicious Activity by Mobile Money Service Providers in Accordance With International Standards: How Does it Impact on Financial Inclusion?

• Citation: Vol. 8 No. 3
• Publication year: 2013

Washington Journal of Law, Technology and Arts Volume 8, Issue 3 Mobile Money Symposium 2013

Reporting of Suspicious Activity by Mobile Money Service Providers in Accordance with International Standards: How Does it Impact on Financial Inclusion?

Miriam Goldby(fn*)© Miriam Goldby

ABSTRACT

Among the obligations which countries are required to impose upon their financial institutions under the Financial Action Task Force's (FATF) 40 Recommendations is the obligation to report suspicions of money laundering. This Article discusses the impact that a reporting regime such as that set up in the United Kingdom in response to FATF requirements is likely to have should it be set up in developing countries seeking to regulate mobile money services. This Article argues that certain features of the U.K. suspicious activity reporting regime make it unsuitable for wholesale adoption into such a context. A one-size-fits-all approach by the FATF in establishing suspicious activity reporting obligations is likely to reduce the accessibility, affordability and attractiveness of mobile money services, thus impacting negatively upon the goal of financial inclusion.

TABLE OF CONTENTS

Introduction..................................................................................402

I. Financial Integrity Requirements Applicable to Financial Institutions............................................................................404

II. Some Features of the AML Reporting Regime in the

United Kingdom...................................................................408

III. Problems with Implementing a U.K.-Style SAR Regime in a Developing Country.......................................................413

Conclusion...................................................................................415

INTRODUCTION

This Article seeks to draw upon the author's research on the United Kingdom's Suspicious Activity Reporting (SAR) Regime in order to establish some preliminary points of discussion regarding the impact that a similar regime is likely to have in developing countries upon mobile money services which have to comply with similar reporting requirements under the international standards issued by the Financial Action Task Force (FATF).(fn1) SAR regimes are set up in compliance with FATF Recommendation 20, which provides:If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, by law, to report promptly its suspicions to the financial intelligence unit (FIU).(fn2)

Mobile money services have made financial services accessible to millions of people in the developing world who are not able to make use of banking services. Generally the service consists of value being loaded onto and stored in a mobile phone account, the owner of which can then use it to carry out every day transactions, such as grocery shopping and paying utility bills.(fn3) The service thus consists broadly of a financial service (the maintenance of an account) and a telecoms service (the transmission of transaction messages to move value to and from accounts).(fn4) The provider of the financial service (whether or not it is the same person as is providing the telecoms service) will be liable to comply with certain AML requirements, including customer due diligence, suspicious activity reporting and record-keeping in accordance with the FATF Recommendations.(fn5) In countries where large swathes of the population do not have access to a bank branch, these types of services have revolutionized the way that people manage their finances. Accessibility and affordability of the services are key to the success of the service and to financial inclusion, a major development goal for these countries.

I. FINANCIAL INTEGRITY REQUIREMENTS APPLICABLE TO FINANCIAL INSTITUTIONS

Under the FATF Recommendations financial institutions are required to comply with certain requirements as to customer due diligence (CDD, which includes identifying the customer and monitoring account activity), record-keeping, and reporting of suspicious activities in order to protect financial integrity when performing transactions for customers. The expression "financial institution" includes any natural or legal person who accepts deposits and other repayable funds from the public by way of business and/or provides money or value transfer services to its customers, by way of business,(fn6) but does not include "any natural or legal person that provides financial institutions solely with message or other support systems for transmitting funds."(fn7) It therefore includes mobile money service providers who provide customers with both the financial and the telecommunications services,(fn8) but not those that simply provide the telecommunications service (the sending or receiving of messages for effecting money transfers over accounts held with others). This means that in countries where bank accounts are ubiquitous and the mobile service is simply used to send messages instructing the financial institution to effect transactions over these accounts, the mobile communications service provider can avoid being designated a financial institution by simply acting as a conduit for the bank to provide the service.(fn9) on the other hand the mobile money service provider may itself want to provide the account over which the transactions take place, usually because it is profitable to provide the service in view of high demand. This is particularly true in countries where large swathes of the population do not have access to a bank account. In this case, the mobile money service provider will be subject to anti-money laundering (AML) and counter financing of terrorism (CFT) rules applicable to financial institutions. Because the financial service would be provided on a regular basis, the developing country in question would not be able to exempt these businesses from the FATF requirements applicable to financial institutions.(fn10)

Ensuring accessibility and affordability of mobile money services while at the same time protecting financial integrity in line with international standards may involve far greater difficulties in developing countries than doing so in the world's advanced economies. The table below gives a brief overview of factors that are taken for granted in advanced economies that may, depending on the service in question, constitute obstacles in the developing world.

Accessibility	AE(fn11)	DC(fn12)
Register through existing bank account with local bank Proof of address Proof of identity
smartphone technology stable internet connection
Affordability	AE	DC
Regulation: * Does not preclude market-entry by new providers * Does not make service prohibitively expensive

Aware of the obstacles that are likely to arise in the implementation of financial integrity measures, the FATF published a report on the issue in June 2011.(fn13) This report discusses instances of simplified due diligence which may be applied where there is difficulty in obtaining regular proof of identity and address by establishing alternative methods of verification. It also discusses the potential to apply the general risk exemption,(fn14) under which financial institutions may be exempted from complying with full CDD requirements in respect of certain low-risk products. It gives illustrations of different ways in which proof of identity and address may be obtained in places where people may not be living at a formal registered address and may not be able to provide formal proof of identity. For instance in India for the opening of a certain maximum-balance and maximum annual credits accounts, introduction and certification by an existing account holder or any other evidence as to the identity and address that is to the satisfaction of the bank, can suffice for the purposes of customer identification.(fn15) special provision is also made for customers without any acceptable form of identity, such as migrant laborers, opening what are called "small accounts."(fn16) In the Philippines would-be...