Know-Your-Customer measures : mitigating money-laundering risks in mobile banking transactions
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The backbone of a modern, developed, strong economy and a stable, transparent financial market is the ability to effect payments securely, efficiently and unambiguously through sound payment systems. Conversely, the reality we face is that banks do not find it economically viable to establish banking infrastructure in economically disadvantaged communities.1 This approach contributes to and exaggerates the disparities of those individuals living in low-income areas and as such this business model requires transformation. The emergence of new financial ecosystems known as mobile network operators (hereinafter MNOs),2 with products such as mobile money, has the ability to fuel economic growth and yield major social benefits by improving financial inclusion for the poor; however, at the same time such innovations create numerous opportunities for criminals who have identified weaknesses within the financial system. This dissertation seeks to highlight the growth and financial inclusion potential of mobile money, whilst examining whether this presumably low-risk product and the exemption provided to low-income individuals, in the spirit of financial inclusion, still appropriately mitigates potential money laundering and terrorist financing risks. South Africa’s anti-money laundering and countering the financing of terrorism approach, which is found in the Financial Intelligence Centre Act 38 of 2001, has forced banks to assess and understand who their clients are, to reshape their value proposition to risks and to engender a compliance culture. The ultimate purpose of the application of client due diligence (i.e. know-your-client principles) is to provide a foundation for banks to understand their clients’ potential exposure to money laundering and terrorist financing risks. The application of an effective anti-money laundering and countering the financing of terrorism compliance culture is not without challenges. It may be noted that the regulatory framework is not entirely conducive to the principle of financial inclusion for low-income individuals, who are often not able to produce verifiable residential address documentation. This has forced central banks globally to review their regulatory and supervisory policy responses to the evolution of new payment technologies and the application of a risk-based approach. The application of a risk-based approach to products, client and/or transactions permit banks to focus their time and resources on the areas which requires more attention, due to the perceived money laundering and terrorist financing risks it poses to the business.3 The redrafted Exemption 17 Financial Intelligence Centre Act 38 of 2001 and Bank Act 94 of 1990 Circular 6 of 2008 (hereinafter the Banks Act Circular) was specifically designed to overcome the obstacles of producing verifiable residential address documentation by applying simplified due diligence procedures to confirmed low-risk products or clients. Although electronic or e-banking has reduced the inherent risks of a cash-based system, the elusiveness, anonymity, low risk rating, high marketability, global access to bank networks and poor supervision are all vulnerabilities which money launderers will use to their advantage.4 Within this space launderers benefit the most from having various juridical personalities, non-face-to-face business relationships, creating a network of artificial trading, false identities and the absence of credit risks due to the prepaid system.5 Mobile banking transactions are perceived to be low risk based on the low transactional threshold limit and the type of client target market. In pursuit of financial inclusion and a cashless environment, payment transfer via mobile banking has risk elements of elusiveness, anonymity, high marketability, global access to bank networks, low risk rating and poor supervision. Although low risk products, clients and/or transaction are crucial to the increase of financial inclusion, it is often disregarded for ML/TF risks, as more attention are allocated to high risk money laundering and terrorist financing risk areas.6 It is within this space that launderers and terrorist financiers identify the gaps and opportunities of possible abuse.
- Law