Sustaining the Growth of Mobile Money Services in Developing Nations: Lessons from Overregulation in the United States.

• Author: Kernan, Amanda Block

TABLE OF CONTENTS I. INTRODUCTION 1111 II. MOBILE MONEY SERVICES 1113 A. Mobile Money Transactions 1114 B. The Benefits of Mobile Money 1116 1. Financial Inclusion 1119 2. Financial Integrity 1119 III. INTERNATIONAL REGULATION OF MOBILE MONEY 1121 A. The Financial Action Task Force (FATF) 1121 B. FATF Recommendations Relevant to Mobile Money 1123 IV. LESSONS FROM THE UNITED STATES: THE IMPACT OF 1126 RESTRICTIVE ANTI-MONEY LAUNDERING REGULATIONS AND ENFORCEMENT ON MONEY SERVICE BUSINESSES ... A. The United States' Anti-Money Laundering Regime 1127 B. History of Enforcement & Result 1130 C. Conservative Approach to Mobile Money Anti-Money 1136 Laundering Regulations Already Being Felt Around the World V. ENTER THE GATEKEEPERS: A PROPOSAL TO PREVENT 1138 ANTI- MONEY LAUNDERING POLICIES FROM HINDERING THE SUCCESSFUL GROWTH OF MOBILE MONEY PROGRAMS A. What Went Wrong? 1138 1. Gatekeeper Theory 1138 2. Financial Institutions Treated as 1141 B. Solutions Based on Gatekeeper Theory 1144 1. Implement an Optimal Liability Regime 1144 2. Offer Financial Institutions Incentives 1147 3. Build Reputational Capital 1147 VI. CONCLUSION 1148 I. INTRODUCTION

In Bangladesh, Sabina Begum works long hours as a seamstress and provides the only financial support for her parents and daughter, who live in a village three hundred kilometers away. (1) She does not have time to go to a bank and her only day off is during the weekend, when the bank is closed. In the past, she had to use a transport to send money to her family. She explained, "I used to give the money to bus drivers headed that way. Sometimes the money got lost or arrived late." (2) Now, Sabina goes to a local grocer every month, pays a small fee, and the grocer transfers money via a mobile phone to a tea shop in her family's village, where her father picks up the money. (3)

In Malawi, where thousands of people are suffering from hunger due to a drought, the Malawi Red Cross Society is utilizing mobile payments to feed ten thousand hunger victims in the country. (4) The organization provides mobile phones to its beneficiaries and sends families a monthly cash transfer of approximately USD$43. This cash allows families to purchase, over a five-month period, a fifty-kilogram bag of maize, five kilograms of beans, and two liters of cooking oil. (5)

In Liberia, teachers in remote locations often travel long distances to receive their salaries and are further burdened by administrative failures, logistical challenges related to the transport of cash, and corruption, which all tend to prevent teachers from receiving payment in full and on time. These breakdowns are devastating to education systems and the surrounding communities. In response, the Liberian government and the United States Agency for International Development (USAID) launched a program to pay rural teachers' salaries directly through mobile money platforms. (6) This pilot program aims to guarantee teachers their full salaries and prevent teachers from abandoning their classrooms for days at a time in order to withdraw their salaries from formal financial institutions.

These stories are becoming commonplace throughout the developing world. Mobile money platforms are providing populations that have been excluded from the formal financial sector for generations--including poor migrants, women, and foreign aid recipients--with access to safe and secure financial services for the first time. By sending, receiving, and storing money on mobile phones, users are able to develop financial autonomy and avoid the risks associated with transacting in cash. Although mobile money programs are revolutionizing financial inclusion in the developing world, fears that these programs will be used to launder money and finance terrorism have led the international community to develop and implement restrictive anti-money laundering policies that will likely impede the growth and accessibility of these programs.

This Article argues that the anti-money laundering policies being promoted throughout the developing world will ultimately cause financial institutions to terminate relationships with mobile money providers, resulting in less-secure mobile money transactions and more transactions taking place through the informal economy. This conclusion is based, in part, on the history of money-service businesses in the United States, which lost access to financial services over the past decade due to overzealous regulators and excessive financial penalties related to financial institutions' anti-money laundering functions. The same policies that caused money-service businesses, which provide financial services for unbanked and underbanked communities in the United States, to go out of business are now being implemented in developing countries with respect to mobile money transactions.

In order to prevent financial institutions from refusing to participate in mobile money programs due to these restrictive anti-money laundering policies, this Article proposes that the international community look to gatekeeper theory to create a regime that incentivizes financial institutions to remain in the industry. The gatekeeper theory of liability imposes liability on professionals, or gatekeepers, for wrongs committed by their clients. Financial institutions providing services to money-service businesses in the United States were given gatekeeper-like responsibilities without the incentives required for a successful model, and international anti-money laundering policies are poised to cause the same result for financial institutions participating in mobile money transactions. A successful gatekeeper model requires, among other things, that the aggregate costs of wrongdoing exceed the aggregate costs of precaution, but this may not be the case when it comes to the current anti-money laundering regime. By applying gatekeeper theory, the international community will be able to encourage financial institutions to remain in the industry while compelling them to dedicate the proper amount of resources toward identifying and preventing money laundering and terrorist financing.

Part III of this Article sets forth the elements involved in a mobile money transaction and explores the implications of mobile money programs on financial inclusion and financial integrity. Part III also discusses the regulation of mobile money across the world, particularly focusing on the Financial Action Task Force and its anti-money laundering Recommendations that are applicable to mobile money transactions.

Part IV provides an overview of the US anti-money laundering laws applicable to money-service businesses and explains how enforcement of those laws caused financial institutions to terminate their relationships with money-service businesses. This Part also demonstrates the similarities between US anti-money laundering laws and those being promoted in the international community.

Last, Part V proposes a solution to prevent international financial institutions from terminating their relationships with mobile money programs in the same way that US institutions terminated their relationships with money-service businesses. Because financial institutions are given gatekeeper-like responsibilities when it comes to preventing money laundering and terrorist financing, this Article argues that gatekeeper theory can be applied to create a functioning regime. In particular, it argues that the current policies will not lead to an optimal liability regime and discusses some of the ways in which an optimal liability regime can be achieved; that governments should increase the incentives for financial institutions to become and remain involved in mobile money transactions, including by offering corporate subsidies and rewards for identifying money launderers and terrorists; and that international governments should enable financial institutions to build reputational capital in the mobile money industry.

2. MOBILE MONEY SERVICES

   Approximately 2.5 billion adults around the world lack access to a bank account. This unbanked population uses inefficient and unsafe methods to store money (often by hiding cash in their homes) and transfer money (often in person), and they are forced to pay exorbitant interest rates when borrowing money. While banks have not found it profitable to serve this population in the past, the Gates Foundation predicts that mobile phones will transform the lives of two billion poor people over the next fifteen years by providing them with access to bank accounts and financial services. (7) By allowing people to store and transfer money on their mobile phones, companies are serving poor customers in remote areas while profiting through small commissions on millions of transactions. This Part describes the technical aspects of a mobile money transaction, and then sets forth the financial inclusion benefits along with the financial integrity risks associated with mobile money programs.

   1. Mobile Money Transactions

      Mobile money is, essentially, a form of electronic money that requires neither a computer nor an internet connection. While most of the world lacks access to formal financial services, approximately 63 percent of the world's population owns a mobile device and most of the world is covered by mobile networks. (8) Through mobile money services, customers can convert cash into electronic money and vice versa through a nearby retail shop; store electronic value in the form of an account; and engage in electronic transactions, including sending remittances to family members in different locations and paying for goods and services. (9) The service consists of a financial service and a telecom service, and the provider of the financial service is required to comply with certain anti-money laundering requirements.

      The Brookings Institution found that in 2014, sixteen markets had more mobile money accounts than bank accounts, and there were nearly three hundred...