Refusal to Supply [Part 2]: a Discussion of Approaches to Mitigate the Impact of Financial De- Risking on Developing Countries

Refusal to Supply [Part 2]: A Discussion of Approaches to Mitigate the Impact of Financial De- risking On Developing Countries

Michael Wechsler1 and Leon Perlman2

Abstract

This report is the second of a two-part study on the phenomenon of de-risking, or what we believe is more aptly described as ‘refusal to supply services.’ The trend is mostly associated with large banks and other financial institutions exiting product lines and terminating or restricting relationships with clients or classes of clients who are perceived to be ‘high-risk.’

We find that refusal to supply mostly significantly manifests as the withdrawal or curtailing of critical correspondent bank relationships (CBRs), specifically refusals by large international banks to provide these services to smaller financial entities in predominately developing countries.

The key is that world trade and remittances are denominated reserve currencies such as US Dollars (USD), UK Pounds and European Euros, among the most actively traded currencies. The loss of CBRs mean that developing countries are unable to access reserve currencies and thus are cut off from the international financial system. The impact is immediate: business cannot get paid or cannot pay suppliers; remittance flows slow to a trickle; and in many cases, fungible and non-fungible aid provided by aid groups and donors in crises countries is slowed or halted.

The refusals by large international banks have a downstream effect for respondent and domestic banks who feel that taking on or retaining certain categories of clients would jeopardize their CBR. It also serves a signaling function within the international financial system as to products, clients, or jurisdictions that are considered high risk, reducing the ability of those entities to retain financial services even domestically.

Refusals generally has a chilling effect on economies of affected countries, who have to, but often can’t, find workarounds to the blockages. The impact is particularly acute in those developing countries where remittances represent a significant percentage of Gross Domestic Product (GDP). Most affected by this phenomenon are countries in Africa, Latin America, small island developing states in the Pacific Rim, Caribbean and Asia.

Our study determined that reasons for this termination/refusal are complex and the effects profound.

In Part 2 of our study, we systematize and devise a taxonomy that categorizes the most prevalent approaches and ostensible solutions to the issue of refusal to supply. It investigates and analyzes some of the issues emanating from refusal to supply that require solving, including the capacity and will to do so, as well as some potential responses – technical solutions and financial mitigants. Many relate to identifying and verifying customers of financial institutions and of recipients of remittances, recognizing that one of the main reasons – amongst many discussed in Part 1 – for refusal are compliance-related money laundering concerns by global correspondent banks (GCBs) as to the ultimate beneficiary of funds sent through their systems to banks and money transfer organizations (MTOs) in and to what these GCBs consider high-risk regions.

1 Michael Wechsler, Associate Research Scholar, Digital Financial Services Observatory, Columbia Institute for Tele- information (CITI), Columbia University, New York. 2 Leon Perlman, Senior Research Scholar, Digital Financial Services Observatory, Columbia Institute for Tele-information (CITI), Columbia University, New York. 1

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

We outline multi-national approaches and initiatives being tried that are policy-based and technology-based; as well as tactile methods such as carrying large amounts of cash (legally) across borders to recipients in Asia, Africa and the Caribbean.

It is clear though from an analysis of each of the approaches and ostensible solutions, that there are no ‘silver bullets’ to halting refusal to supply and loss of critical cross-border financial services, but rather that strategies are needed at a supra-national, regional, and/or national level, or even affected entity level as the circumstances require it. Without that leadership, the trend of refusal to supply will increase, and increasingly skew international trade and affect the economic growth of developing countries. Affected countries too should step up their compliance regimes while still investigating alternative methods of cross-border transfer of value that allows their economies not just to survive potentially catastrophic effects of refusals on their GDP, but also to grow.

The goal in most cases is to reverse the global decline in CBRs and to break through informational asymmetries that often act as a trigger for CBR terminations or refusal of service. Notably, we find, often what appears to be a ‘stop-gap’ solution acting as band aids to a particular problem of refusal of service in a particular jurisdiction may become the only, and thus permanent solution. ‘Cash Carrying’ is a simple example of the trend.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

Table of Contents

Abstract ...... 1 Abbreviations ...... 6 1 Introduction ...... 10 1.1 Overview of Study ...... 10 1.2 Methodologies and Approaches Used in This Paper ...... 10 2 Nature of the Reasons for Refusal to Supply ...... 11 3 Nature of the Mitigants ...... 13 4 Technology-based Innovation ...... 15 4.1 Overview ...... 15 4.2 Fintech ...... 15 4.3 Regtech ...... 16 4.4 Technologies and Application ...... 17 5 Addressing Customer Identification ...... 19 5.1 Overview ...... 19 5.2 Electronic Identification (eID)...... 19 5.3 National IDs and Country Examples ...... 20 5.4 Legal, Privacy and Data Protection Considerations in eKYC ...... 22 6 Addressing CIV ...... 23 6.1 Overview ...... 23 6.2 The Evolution of KYC Utilities for Customer Identification and Verification ...... 23 6.3 Private Sector Customer Identify and Verification Solutions ...... 24 6.4 National, Multinational and PPP CIV Approaches ...... 25 7 Capacity Building and Technical Assistance ...... 26 8 Central Bank-Linked Approaches ...... 27 8.1 Overview ...... 27 8.2 Central Bank Accounts for NBFIs and/or Refused Entities ...... 27 8.3 Central Bank Accounts at Foreign Commercial Banks ...... 27 8.4 Central Bank Digital Currencies ...... 28 8.5 Direct Linkage of Central Bank National Payment Systems ...... 28 9 Alternative Cross-Border Monetary Flows ...... 30 9.1 Overview ...... 30 9.2 Cash Carrying ...... 30 9.3 Mobile Airtime Transfers ...... 31 9.4 e-Wallets ...... 32 9.5 Transaction/Currency Pairing, Peer to Peer Marketplace ...... 32

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

9.6 Use of Foreign Exchange/Currency Brokers ...... 33 9.7 Nested Transactions ...... 33 9.8 Distributed Ledger Technology and Blockchain ...... 34 9.9 Development Bank Voucher-Based System ...... 35 10 Regional Efforts ...... 37 10.1 Overview ...... 37 10.2 Consolidation of Banks/Correspondent Banks ...... 37 10.3 Regional or Centralized Entity/Transaction Hub ...... 38 10.4 Region-Owned Correspondent Bank, Clearinghouse or Agency in Foreign Country ...... 39 10.5 Centralized KYC Utility Entity ...... 39 11 Multilateral Efforts ...... 39 11.1 Overview ...... 39 11.2 Collaboration, Dialogue and Diplomacy ...... 40 11.2.1 Intergovernmental Interactions/Diplomacy ...... 40 11.2.2 Public-Private Partnership Meetings ...... 40 11.3 International Organizations and Standard Setting Bodies ...... 41 11.3.1 Overview ...... 41 11.3.2 Financial Stability Board (FSB) ...... 42 11.3.3 Financial Action Task Force (FATF) ...... 42 11.3.4 The Basel Committee on Banking Supervision (BCBS) ...... 43 11.3.5 Wolfsberg Group ...... 43 11.3.6 World Bank ...... 43 11.3.7 The International Monetary Fund (IMF) ...... 44 12 Legal Actions and Regulatory Approaches ...... 44 12.1 Overview ...... 44 12.2 Australia ...... 44 12.3 Africa ...... 44 12.4 Caribbean ...... 45 12.5 European Union ...... 45 12.5.1 United Kingdom ...... 46 12.5.2 Spain ...... 46 12.6 Latin America ...... 47 12.6.1 Brazil ...... 47 12.6.2 Chile ...... 48 12.7 New Zealand ...... 48 12.8 United States ...... 48 12.8.1 Federal ...... 48 12.8.2 State ...... 49

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

13 Conclusions ...... 49 14 Recommendations ...... 50 14.1 Knowledge Sharing ...... 50 14.2 Regulatory Approaches ...... 51 14.3 Technology Use ...... 51 14.4 Capacity Building and Technical Assistance ...... 51 14.5 Financial Assistance ...... 52 14.6 Regional Approaches ...... 52 Endnotes ...... 53

Table of Exhibits

Exhibit 1: Issues and Approaches ...... 14 Exhibit 2: The Suptech AML Solution Used by CNBV in Mexico ...... 16 Exhibit 3: Key Technologies Driving Fintech and Regtech Innovation ...... 19 Exhibit 4: Electronic Identficiation (eID) ...... 22 Exhibit 5: Direct Linkage of Central Bank National Payment Systems ...... 29 Exhibit 6: The Importance of Remittances and Cost Reduction Efforts ...... 30 Exhibit 7: General Agency Model of Sending Money from Developed to Developing Countries ...... 31 Exhibit 8: Timeline of SSB Activities Relating to Refusal to Supply ...... 41

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

Abbreviations

ACAMS Association of Certified Anti-Money Laundering Specialists AISP Account Information Service Provider AML Anti-Money Laundering APAC Asia and Pacific AUD Australian Dollars AUSTRAC Australian Transaction Reports and Analysis Centre BASEL III The Third Basel Accord developed by the BCBS BCBS Basel Committee for Banking Supervision BCG Basel Consultative Group BIS Bank for International Settlements BOE Bank of England BOP Bottom of the Pyramid BSA Bank Secrecy Act (US) BVN Bank Verification Number CADE Conselho Administrativo de Defesa Economica (Administrative Council for Economic Defense in Brazil) CARICOM Caribbean Community and Common Market CBCG Correspondent Banking Coordination Group CBR Correspondent Banking Relationship CBS Central Bank of Samoa CCDD Customer’s Customer Due Diligence CDB Caribbean Development Bank CDD Customer Due Diligence CFATF Caribbean Financial Action Task Force CFT Countering the Finance of Terrorism CIBAFI Council for Islamic Banks and Financial Institutions CIV Customer Identification and Verification CJEU Court of Justice of the European Union CPI Corruption Perceptions Index CPMI Committee on Payments and Market Infrastructures CPSS Committee on Payment and Settlement Systems CRD III Capital Requirements Directive III of 2010 (EU) CRD IV Capital Requirements Directive IV of 2013 (EU) CSBS Conference of State Bank Supervisors (US) DFC Digital Fiat Currency DFS Digital Financial Services DFSP Digital Financial Services Provider DLT Distributed Ledger Technology DLCB Domestic, Local & Community Bank DOJ Department of Justice EAC East African Community

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

EBA European Banking Authority EBF European Banking Federation ECCU Eastern Caribbean Currency Union EDD Enhanced Due Diligence EEA European Economic Area eID Electronic Identification eKYC Electronic Know Your Customer EMI Electronic Money Institution EPIF European Payment Institutions Federation EU European Union EUR Euro FATCA Foreign Account Tax Compliance Act (US) FATF Financial Action Task Force FCA Financial Conduct Authority FDIC Federal Deposit Insurance Corporation FIA Financial Intelligence Agency FIC Financial Intelligence Centre FinCEN Financial Crimes Enforcement Network (US) FINRA Financial Industry Regulatory Authority, Inc. (US) Fintech Financial Technology FINTRAC Financial Transactions and Reports Analysis Centre (Canada) FIU Financial Intelligence Unit FOREX Foreign Exchange FRAND Fair, Reasonable and Non-Discriminatory FSB Financial Stability Board FSMA Financial Services and Markets Act of 2000 (UK) FT Financing of Terrorism FOREX Foreign Exchange G7 Group of Seven G20 Group of Eight G20 Group of Twenty GAFI Groupe d'Action Financière (French name of FATF) GAO US Government Accountability Office GBP Great British Pounds (Sterling) GCB Global Correspondent Bank GDP Gross Domestic Product GLEIF Global Legal Entity Identifier Foundation GPFI Global Partnership of Financial Inclusion GSM Global System for Mobile Communications HM Her Majesty's ID Identification IMF International Monetary Fund

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

IRS Internal Revenue Service ISIS Islamic State in Iraq and Syria IVTS Informal Value Transfer Services KYC Know Your Customer KYCC Know Your Customer's Customer KYCU KYC Utilities LATAM Latin America LEI Legal Entity Identifier LMICs Low and Middle Income Countries MFI Micro Finance Institutions ML Money Laundering MMO Mobile Money Operator MNO Mobile Network Operator MSB Money Service Businesses MTO Money Transfer Operator MVTS Money or Value Transfer Services NBFC Non-Bank Financial Corporation NBFI Non-Bank Financial Institution NCC Nigerian Communications Commission NDI National Digital Identity NGO Non-governmental Organization NIC National Identification Card NIDB National Identity Database NIMC Nigerian National Identity Management Commission NYDFS New York State Department of Financial Services OCC Office of the Comptroller of the Currency OECD Organisation for Economic Co-operation and Development OFAC Office of Foreign Assets Control OFSI Office of Financial Sanctions Implementation PAN Permanent Account Number P2P Person to Person PCMLTFA Proceeds of Crime, Money Laundering and Terrorist Financing Act (Canada) PDD Partner Due Diligence PEP Politically Exposed Person PI Payments Institution PISP Payment Initiation Service Provider PPP Private Public Partnership PRA Prudential Regulation Authority (UK) PSD1 Payment Services Directive of 2007 (2007/64/EC) PSD2 Revised Payment Services Directive of 2015 ((EU) 2015/2366) PSP Payment Service Provider

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

PSR Payment Services Regulations (UK) PSU Payment Service User RBA Risk Based Approach RCL Ripple Consensus Ledger Regtech Regulatory Technology RMB Renminbi (China) RMI The Republic of the Marshall Islands RTGS Real-Time Gross Settlement RTS Regulatory Technical Standards (to be issued by the EBA) SAR Suspicious Activity Report SDG Sustainable Development Goals SDN Specially Designated Nationals SEC Securities and Exchange Commission (United States) SEPBLAC Servicio Ejecutivo de la Comisión de Prevención del Blanqueo de Capitales e Infracciones Monetarias (Spain) SIC Smart ID Card SIM Subscriber Identity Module SME Small and Medium Enterprises SMME Small Medium and Micro Enterprise SMP Significant Market Power SP Service Provider SPI Small Payment Institution SSB Standard Setting Body STR Suspicious Transaction Report Suptech Supervisory Technology SWIFT Society for Worldwide Interbank Financial Telecommunication TARGET2 Trans-European Automated Real-time Gross Settlement Express Transfer System TPP Third Party Provider TSP Technical Service Provider UBO Ultimate Beneficial Owner UK United Kingdom UN United Nations US United States USAID United States Agency for International Development USD United States Dollar

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

1 Introduction

1.1 Overview of Study

The term ‘de-risking is currently used to describe the practice of financial institutions exiting products and terminating or restricting relationships with clients, including in classes, who are perceived as presenting a ‘high- risk’ of bringing legal, financial or reputational harm if the relationship continues. In a developing world context, it relates to the termination by large financial institutions of their banking relationships with financial institutions in those countries.

Reflecting the scheme of global money and value flows, this termination is mostly done by what are known as ‘correspondent banks’ and affect ‘respondent banks’ in mainly developing countries.1

The effect of this termination of what is termed correspondent banking relationships (CBRs) is that money cannot flow to these countries, severely handicapping entities and consumers in those countries to be paid, pay for imports, or receive critical remittances from expatriates.

The termination – also known as de-banking, de-marketing, risk-re-evaluation, or refusal - can relate to both external pressure by regulators for an entity to undertake ‘refusal to supply’ or internal decisions. Often the termination is couched in reasons of compliance with local anti-money laundering (AML) conventions, others in more stark profitability terms where cost of compliance in them engaging in a CBR with a respondent bank is seen as too costly.

The impact is particularly acute in those developing countries where remittances represent a significant percentage of Gross Domestic Product. The key to this stark impact is that much of the world’s trade and remittances are denominated reserve currencies such as the United States (US) Dollar (USD), the Great British Pound (GBP) of the United Kingdom (UK), and the European Euro (EUR) of the European Union (EU). These currencies are among the most actively traded. With especially USD, there is a need to touch the US banking system and as such financial entities doing so through a presence in the US are subject to strict US laws on AML.

In Part 1 of the study, we investigated the genesis and ostensible reasons for ‘de-risking’, the actors involved and their roles and reasons, the impact and then the effect thereof on affected countries, entities and individuals.

In this paper, the Part 2 of our two-part2 study, we provide a compendium and taxonomy of approaches being employed to mitigate or even solve these refusals, alongside companion recommendations on which approaches or solutions could or should be employed.

Exhibit 1 indicates the universe of issues driving the refusals and terminations, alongside potential mitigants, approaches and solutions that have been and can be deployed to address the issues.

1.2 Methodologies and Approaches Used in This Paper

Research for this Part 2 of the study - as well as Part 1 – is based on a number of sources of data.

Following an extensive desktop review, we focused our attention on interviewing - by phone, email and at conferences - those undertaking the refusals, those impacted, and those tasked with regulating financial ecosystems. Interviewees included central bank governors, money transmitters and their trade association, state banking examiners, consultants, standard setting bodies, and academics.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

We also hosted a special roundtable on de-risking (as we termed it then) in November 2017 at Columbia University,3 as well as a series of webinars on de-risking in November 20174 and then again in April 2019.5

Although refusals occur in developed countries, the focus in this study is on the effect and impact thereof on primarily developing countries.

Research in this paper is current as of June 30, 2019. All web links cited in this study were tested for currency during the course of April-July 2019.

2 Nature of the Reasons for Refusal to Supply

Part 16 of our study comprehensively surveyed and analyzed the reasons for de-risking, or as we term ‘refusal to supply’ assurmising that motivation and reasoning behind such decisions was not-only risk-related (if at all) but was an ensemble of a complex factors. That is, ‘risk’ is just but one reason which can be incorporated, however, under the general rubric of all-encompassing ‘business reasons.’

By analyzing these ‘business’ and other reasons, we can class these in the following taxonomy of reasons for ‘refusal to supply.’

Compliance Related:

• Regulatory Ambiguity: Over-cautiousness is but one of the main causes of terminations and refusals. While the Financial Action Task Force’s (FATF) approach was loosened somewhat following the introduction by FATF of its principles-based ‘risk-based approach’ (RBA) to AML – and with it that of the US financial intelligence unit (FIU) ‘Financial Crimes Enforcement Network’ (FinCEN) – that approach did not trickle down to the banking sector operating in the US. In particular, with few normative rules baked into a RBA, and with bank examiners looking for instances where institutions have not undertaken internal risk assessments of their policies and client profiles as part of a general institutional risk assessment, institutions have, to a large degree, overcompensated by terminating whole swatches of client classes. • Increased Scrutiny by Regulators: The risk over and above an administrative or judicial finding that it has been in violation is also the regulatory action related to such violations, and the consequential penalties and remediation plans imposed by regulators, law enforcement and political authorities. Enforcement actions may mean losing an entity’s license to operate, or restrictions placed on its ability to undertake certain activities, thereby also impacting its ability to service its customers as well as reputational damage. • Lack of Capacity: An often underestimated and underreported reason for the refusal to supply is the lack of capacity in an institution to conduct proper initial and ongoing risk assessments of its clients. This can be due to changing regulatory environments, regulatory complexity and budgetary constraints, which may include inadequate manpower and/or insufficient professional experience and expertise on hand to perform such activities. These issues affect primarily the smaller institutions and banks, who may be faced with clients who begin to nest or are PEPs. • Presence of ML/FT and PEPs: Often there is copious evidence of money laundering (ML) and financing of terrorism (FT), or ongoing fraud activities by an entity or individual often if that individual is a politically exposed person (PEP) - that justifies termination or refusal. • Insufficient CDD on Downstream Entities: Reliable IDs combined with effective CIV tools for detection of fraud and malfeasance can act to lower the risk of servicing a customer base with a relatively higher risk classification, such as politically exposed persons (PEPs) and non-profit organizations servicing high-risk jurisdictions.7 Efficient onboarding and accurate CIV procedures in developing countries in customer identification and onboarding processes can present lower risks of providing financial services to MTOs who service these jurisdictions.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

• Credit Risk: Such issues may affect a decision to terminate a relationship, especially if there is a risk that a counterparty (respondent bank) may not have sufficient liquidity to settle trades. •

General Business Reasons:

• Increased AML/CFT Compliance Costs: With increasing amounts of data being generated in the modern era, the constant need to identify and dynamically address changing regulation8 and the specter of substantial fines and sanctions for non-compliant behavior looming overhead, entities have increased their spending on ensuring compliance with anti-money laundering and countering the financing of terrorism (AML/CFT)9 regulations. Often the cost of allocation of compliance and business staff to service CBR corridors with low volume is not profitable. • Increased Capital Requirement Costs: This is related to Basel 3 capital liquidity requirements for banks, which placed additional pressure on affected banks to cut costs.10 • Reputational Risk: This relates to an actual or potential association of a personal and/or entity with unlawful and/or nefarious activities, including significant monetary sanctions, which causes great concern for the reputation of the financial institution. Such activity can have a substantial negative impact upon potential and current clients, partners, investors and the stock market.11 • Profitability: This is a reason frequently cited as a reason for refusal to supply. The conventional wisdom – and many public pronouncements – has been that overall profitability in a business relationship under review may be buffeted by increased regulatory scrutiny, heightened risks associated with doing business with ‘high-risk’ customers, as well as increased costs of compliance. For many banks, paying remittances through their branches is a only a marginal business which may consist of high volumes of low value transactions with limited profitability potential.12

Change in Business Strategy:

• Supply Side: On the supply side, a general trend of global correspondent banks (GCBs)13 is to ‘downsize’ seems to be behind the decision to eliminate or scale back this line of business, particularly if it is not considered a core activity. This may also include changes to the business model and the termination of dormant relationships or industry consolidation. • Demand Side: On the demand side, at least some respondent banks are actively reducing the number of CBRs to reduce their own risk management profiles, to simplify reporting of intraday liquidity, and to concentrate their payment channels and cut costs.

Market Power Related:

• Potential Anti-Competitive Behavior: While banks, financial institutions and other entities generally have a right to make business decisions regarding whom they wish to conduct transactions, there is, however, potential for some institutions to refuse to supply services in potential breach of competition law in a particular jurisdiction. This is particularly so where they may have significant market power (SMP), but which is then abused by that SMP to the detriment of other entities. This may manifest as favoring internal or preferred companies to squeeze out competition and maximize profits.14 In some cases, large commercial entities such as money transfer operators (MTOs) have – for ostensibly competitive reasons – summarily terminated relationships with smaller affiliates to absorb their customer base. This has been found to be prevalent in the London, UK remittance market.15

• Pressure on Smaller Banks and Entities by Larger Banks and Entities: Similar to respondent banks, domestic banks – that is, those requiring the domestic respondent bank for connection to a GCB – are

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

themselves terminating services and/or refusing service to local companies. Often this is at the behest of the local respondent bank (and often in turn from the GCB) or from its own internal risk assessment.

Further details on these reasons can be found in Part 1 of the study.

3 Nature of the Mitigants

As noted earlier, the refusal to supply financial services presents a complicated and challenging problem for the developing world financial ecosystem, as a whole and for its participants. A summary table of issues which drive refusal actions and approaches appears in Exhibit 1. These challenges can impact on banks, financial institutions and digital financial services providers (DFSPs).16

Section 4 Technology-based Innovation provides a brief introduction to financial technology (‘fintech’), regulatory technology (‘regtech’) and supervisory technology (‘suptech’).

Mitigation approaches presented in this paper begin with the examination of onboarding and verification processes for financial products and services in Sections 5 Technology-based Innovation and 6 Addressing Customer Identification Concerns. Topics covered related to customer onboarding, verification and due diligence procedures including Know Your Customer (KYC),17 Customer Identification and Verification (CIV),18 Customer Due Diligence (CDD)19 and mechanisms for detecting activity related to ML and FT; reduction of AML and CFT compliance costs through the use of technological innovation; the use of data repositories and ‘KYC Utilities’ (KYCUs)20 which promise improvements on CIV efficiency and accuracy and can be Public Private Partnerships (PPPs) or owned and governed by the financial ecosystem participants.

After a brief review of the necessity and benefits of investments in capacity building in Section 7 Capacity Building and Technical Assistance, this paper examines central bank related approaches which involve the direct participation of the regulator in Section 8 Central Bank-Linked Approaches. Benefits of this approach include the introduction of risk reduction and models where the central bank can act as a conduit in jurisdictions presenting more challenging circumstances.

Section 9 Alternative Cross-Border Monetary Flows examines innovations relating to the use of correspondent banking relationships and alternatives to facilitate cross-border transactions and money transfer. It reviews some traditional and non-traditional methods in and proposed for use including peer-to-peer (P2P) and currency pairing models; distributed ledger technology (DLT), blockchain and central bank digital currencies (CBDC); and use of mobile airtime value.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

Exhibit 1: The stylized universe of issues driving the refusals and terminations, alongside potential mitigants, approaches and solutions that have been and can be deployed to address the issues. There is not necessarily a direct correlation between each of the issues to a particular mitigant. In some cases, there may be more than one mitigant available per issue.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

Centralized and collaborative efforts are examined in Section 10 Regional Efforts, primarily addressing approaches used for regions significantly impacted by the refusal to supply, such as the Caribbean Islands and Pacific Island small states in Oceania. Section 11 Multilateral Efforts continues the examination of collaborative efforts on a global scale and reviews actions involving multiple regions, international organizations and standard setting bodies (SSBs).

Section 12 Legal Actions and Regulatory Approaches covers governmental, regulatory and legal approaches which address challenges of refusal to supply, including an examination of relevant judicial decisions. Conclusions and Recommendations are proffered in Sections 13 and 14.

4 Technology-based Innovation

4.1 Overview

Among others, two primary factors which impact access to cross-border financial services are (i) limited available cost-effective services options for remittances, which often involve the use of costly CBRs downstream; and (ii) rising AML/CFT costs and compliance requirements. Approaches being taken to directly address such challenges include the use of fintech and regtech innovation.

As noted in Part 1 of our study, the global decline in the number of CBRs – which still dominates money transfers and the remittances industry – has occurred contemporaneous with the increasing exploration and implementation of innovative fintech solutions which offer alternative payment rails promising more efficient and less costly transfer mechanisms. Concerns related to rising AML/CFT compliance costs and vulnerability risks are being addressed by regtech, which makes efforts at identification, verification and compliance more reliable, standardized, efficient and cost effective. Together these technologies have the potential to mitigate and alleviate several of the financial and risk-related issues discussed in this study on de-risking which impact on smaller, less profitable marketplaces and developing countries.

4.2 Fintech

Fintech, in modern parlance, is often associated with innovation proffered by new marketplace competitors who explore alternative approaches to traditional challenges, promising greater efficiencies, lower costs and rapid disruption of the financial services industry. The reach and potential impact of fintech is expansive and some themes most applicable to financial inclusion initiatives21 and digital financial services (DFS)22 which are explored in this paper include:

● Distributed Ledger Technology (DLT) and its blockchain technology, capable of increasing the transparency and security of payment systems, the provision of alternative payment rails and currencies, and providing a secure and tamper evident mechanism to store identification of persons, entities and assets; ● Electronic and biometric identification, capable of improving onboarding procedures and increasing the efficiency and effectiveness of CIV compliance requirements; ● Alternative payment rails and new and improved cross-border remittance services – essential for migrant workers in G20 nations who send money home to family in developing countries – capable of providing faster and more efficient transfers; lower fees and overall costs; better exchange rates; more cash pickup and destination funds transfer options; reducing and/or eliminating reliance on money transfer mechanisms which traditionally rely on the use of costly correspondent banking relationships.

Fintech represents an important catalyst to mitigating and potentially solving cross-border money transfer problems in developing countries. Transfer options have been increasing (such as transaction pairing technology and other

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

approaches examined in Section 9 Alternative Cross-Border Monetary Flows); the mobile user experience has been evolving resulting from the expansion of mobile coverage23 and increased penetration of smartphones and DFS;24 and there has been implementation of widespread digital payment schemes and third party integration mechanisms.25

The growing acceptance and presence of regulatory sandboxes worldwide has also encouraged fintech innovation to solve cross-border transfer challenges.26 In one such example, remittance provider WorldRemit created an online video-based customer identification technology in Malaysia to address KYC compliance requirements which required and resulted in new regulation being implemented.27 Fintech has the potential to make electronic cross- border money transfers safer and more accessible to those at the bottom of the pyramid (BOP).28

4.3 Regtech

Regtech has been defined as an ‘adaptation of current technologies, and the development of new tailored technology solutions to address regulatory and compliance challenges more accurately, uniformly, effectively and efficiently.’29 It is a means to deploy current and emerging technology solutions to reduce increasing corporate compliance costs and to improve internal reporting and supervisory capacity for regulators. Regtech also addresses the growing costs and necessities directly related to the increasing amount of data and information collected and managed in the modern computing era, which is exemplified by KYC and CIV requirements. Innovative technology and artificial intelligence is being used to assist with flagging applicable legal and regulatory changes to timely prepare and process information for review by compliance personnel.30

Exhibit 2: The use of the new suptech AML solution used by Comisión Nacional Bancaria y de Valores (CNBV), Mexico’s banking regulator, for aggregating and standardizing financial data from supervised entities and using AI and pattern matching to ferret out suspicious transactions.

Needs for and solutions provided by regtech can be divided into two discrete, but clearly interlinked segments:31 supervisory functions for regulators, and compliance for supervised entities. For regulators and supervisors, regtech adoption involves automation of largely manual process, as well as production of analysis to support complex decision-making processes32 and/or improve their ability to supervise their respective industries. When regtech is used by supervisors for oversight and monitoring, it is often also referred to as ‘suptech,’ or supervision technology.33 Exhibit 2 shows the use of a suptech-based solution in use in Mexico for aggregating and standardizing financial data from supervised entities.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

4.4 Technologies and Application

Interest and investment in regtech is substantial and growing. Global spending in the financial services industry on regulatory and governance software has been estimated to reach USD 118.7 billion by 2020.34 One automated regulatory reporting platform for financial institutions was reported to have reduced a bank’s processing efforts between 55 and 85%.35

Benefits to increased compliance efforts were perceived as providing an increased understanding of customers and their suitability for certain types of accounts. They also include the introduction of automated processes that allow for improved data management and risk management purposes to help prevent money laundering and reducing compliance costs.36 Transitioning from older analog processes to modern digital technologies can provide benefits of greater input accuracy, easier sharing of customer information between different entities to provide greater efficiencies (provided standardization exists)37, avoidance of data duplication and recognition of meaningful cost reduction related to compliance efforts, which includes the due diligence process involved in onboarding customers.

Notable areas of current fintech and regtech innovation include artificial intelligence,38 machine learning39 and advanced decision making, predictive coding and pattern identification,40 open platforms and APIs for standardizing data formats and facilitating the ease in data sharing.

The following is a brief summary highlighting application:41

● Party Identification: Enhances the process of identification of parties and counterparties with greater accuracy and efficiency, such as the use of biometric data to fulfill KYC/CDD and other compliance requirements. ● Reporting and Sharing: Can streamline the process of collecting and organizing periodic reporting data distributed both internally and to regulators. Collaborative and cooperative efforts can be undertaken providing the benefits of shared disclosures among industry participants. Regtech can also help manage the high volume and quick pace of regulatory changes, which is listed at the top compliance concerns in several studies. ● Monitoring: Real-time and periodic monitoring of data can improve operational efficiencies such as the identification of unusual or irregular activity through statistical analysis. For example, reports indicating unexpected or unusual transaction velocity and payment amounts could indicate signs of money laundering. ● Big Data Analysis: The storage and analysis of large volumes of data, including real time processing and analysis tools which can reveal behavioral patterns, trends and associations.

Exhibit 3 highlights key technologies driving fintech and regtech innovation along with definitions and an example of impact on regulators/regulatory processes.42

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

Technologies Definition Regtech Impact Examples

Application Protocols and tools that allow different Integration and The Philippines central bank is Program systems to interact with each other. interoperability using APIs for regulatory Interfaces between central bank reporting.44 (APIs)43 supervisory systems and supervised entities.

Artificial Technology that performs tasks that Fraud prevention and The Monetary Association of Intelligence traditionally require human intelligence. detection Singapore (MAS) is developing (AI), Machine Machine Learning is a subcategory of AI machine learning algorithms.46 Learning45 that learns from data and recognizes patterns to change existing algorithms to better fit the nature of the data.

Big Data Extract meaning from large datasets of Support for transaction Mexico's central bank is using Analytics47 diverse data that may include structured and and risk monitoring this for detecting suspicious unstructured data. It is usually based on transactions. machine learning or other technologies.

Cloud Delivery of computing services like storage, Access to innovative Amazon’s AWS cloud service is Computing48 and analytics over the internet. It reduces software, being used worldwide as capital costs, increases speed in processing standardization of data ‘Infrastructure as a Service,’ by provisioning large amounts of computing and establishment of ‘Platform as a Service’ and resources, and provides elastic resources for common processes at ‘Software as a Service.’ scalability among many advantages. lower cost

Distributed Distributed databases that records and Real-time client Kiva is using the Hyperledger Ledger encrypts verified data that can be safely information sharing DLT for identification purposes Technology shared and managed on network in Sierra Leone. (DLT)49

Identification Alphanumeric identifiers for legal entities to Increased transaction The Global Legal Entity for Entities: financial transactions which are being transparency. Identifier Foundation (GLEIF) Legal Entity increasingly mandated by regulation. Identifiers (LEI)

Identification Use of people’s unique physical and Robust ways to verify The Bank Verification Number for Persons: behavioral characteristics to authenticate identity (BVN) in Nigeria is based on Biometrics50 their identity. Biometrics.

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Technologies Definition Regtech Impact Examples

KYC Utilities Central repository that allows involved KYC utilities The SWIFT KYC Registry is a parties in the industry to share data related consolidate CDD data KYCU and a shared platform to financial transactions, such as those and reduce for managing and exchanging required for on-boarding and CDD duplication. KYC data.51

Semantic Technology that converts regulatory text Machine-readable The Financial Conduct technology and into programming language regulations for faster Authority (FCA) plans to data point and low-cost develop machine readable model52 adaptation to changes regulations.53 in regulations

Exhibit 3: Key Technologies driving fintech and regtech innovation along with definitions and an example of impact on regulators/regulatory processes.54

5 Addressing Customer Identification

5.1 Overview

As noted by FATF, one of the main obstacles to providing financial services is the lack of reliable or Issues Addressed standardized ID and poor processes to verify these IDs as part of a CIV processes.55 • AML/CFT compliance costs • Regulatory uncertainty Customer Identification and Verification or ‘CIV’ is the • Sufficiency of CDD information downstream • ‘modern’ catch-all description for identifying, verifying Risks/Presence of ML/FT • and undertaking due diligence on customers. KYC – Business costs and low profitability • High risk classification of customer base often confused as being equivalent – is presently • Overall risk appetite considered to only refer to the identification (ID) input component of a CIV procedure.56

Financial services compliance requirements and costs are significant and rising, resulting from the need to manage increasing amounts of data in the digital age.57 Efforts made to increase efficiency and effectiveness of compliance typically does not represent a single-silo response. Often, but not always, an enterprise and industry-wide solution and strategy is required for CIV (?), including the use of electronic identification (eID) solutions, ubiquitous and real-time access to national ID databases (if available); implementation of eKYC solutions to cross-check identity; access to commercial data repositories that would ventilate the risk status of identified persons; and reassessment of regulations around privacy (and competition) allowing frictionless sharing of data.

5.2 Electronic Identification (eID)

Electronic identification (eID) represents a digital tool that serves as a proof of identity for people and entities and are replacing paper (analog) ID cards and booklets in a growing number of jurisdictions. In some instances, eIDs may also have a biometric component, such as India’s Aadhaar national eID and electronic Know Your Customer (eKYC) solution. In addition to providing for eKYC, eIDs also enable paperless and quicker verification process for new customer identities. Provision of attested forms of state issued ID can prevent incidents of refusal by

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ventilating the identity of those with beneficial ownership of received funds. For users, eIDs can provide secure access to government and private sector products and services, enabling them to engage securely in transactions with other persons and parties.58

The basic procedure for eID acquisition and eKYC use begins with the enrollment process, an in-person capture (as the case may be) at an ‘enrollment center’ of the candidate’s biographical, demographic and in some cases biometric details by an approved authority and/or agency.59

While implementations vary, most eKYC systems pivot around biometrics for customer sign-up and verification procedures and usually involve biometric fingerprint capture and/or an iris scan – or facial recognition in case of Singapore’s National Digital Identity (NDI).60 Few others also use facial recognition, a still-evolving technology.

In most cases, at a minimum the registrant will get an eID which requires just their fingerprint or iris scan for identification, verification and authentication.61 In some cases, the eID will be twinned with a smart ID card (SIC) containing at the very least, biographical data of the person, some or all of their fingerprints, and a compressed version of their headshot. While a picture of the holder and their ID number are printed and stored on the SIC, due to storage size limitations on most SICs, the high-resolution iris image files are not stored.62

Where the entity is a state organ or its agent, captured information may be stored in a national population registry or national ID database (if such exists)63 which financial institutions and MNOs can use to verify the identity of their customers.

FATF has largely endorsed64 the use of eIDs and other emerging electronic identity tools and innovative fintech solutions to support financial inclusion while simultaneously mitigating ML/FT risks and fraud.

5.3 National IDs and Country Examples

National IDs are typically issued by a national agency/authority, usually the Interior Ministry or National Identification Authority.65 Their use, coupled with the ability for the ID to be validated against a government registry (either at point of sale or at point of activation), has a significant bearing on the effectiveness of a registration solution.66 Of note are LEIs, which are used to identify parties to transactions in a growing number of jurisdictions.67 The following represents a selection of national implementations of eID solutions in developing countries which are more prone to facing a refusal to provide financial services.68 Developing countries implementing eID solutions include the following:

Bangladesh: eID and biometric identification is mandated by the Bangladesh Telecommunication Regulatory Commission for Subscriber Identity Module (SIM) card registration and re-registration.69 Accordingly, mobile phone providers require biometric verification devices linked to the National Identity Card (NIC) database of the Election Commission.70 The Bangladesh Bank is also developing an eKYC system for financial services.

Ghana: Ghana’s national identification program has existed since the 1970s and has been augmented with a national eID card – the Ghana Card – which is provided to all citizens and resident non-Ghanaians. The Automated Fingerprint Identification System (AFIS) is the core platform technology for the national identification system (NIS). Ghana Card was recently updated in 201771 to a 128kb smart ID card (SIC) with tactile elements for the blind, iris-capture capabilities and all 10 fingerprints of an applicant. The new SIC provides organizations with data sharing, personal information verification, online identity validation and biometric verification services.72

India: The Aadhaar eKYC system launched by the Indian government in 201073 – seen as the global eID archetype – has over 1.21 billion users who have signed up using biometric identifiers.74 It collects biometric and demographic data of residents (not limited to citizens), which is stored in a centralized database. Each enrollee is provided with a 12-digit unique ‘Aadhaar number.’ The system has faced and survived legal challenges.75

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Jordan: The national eID system in Jordan was introduced in 2016.76 Adult citizens are issued a SIC following a process which captures facial, iris and fingerprint data and takes less than 15 minutes. The SIC stores 18 data fields such as gender; the person’s name in Arabic and English; place of birth; area of residence; and blood type.

Malawi: With donor assistance, Malawi’s National eID project was launched in 2017, registering citizens aged 16 years and above.77 Within a designated 180-day period, 9.1 million citizens out of 16 million were registered with 3.6 million children were registered alongside their parents.78

Mexico: Authorities in Mexico are developing two databases which can enhance the ability of banks to assess risk related to their customers. The cross-border transactions database, which records essential transaction details,79 will be combined with a database generated by a KYC utility containing bank client identification records, which comprises of baseline level information that banks will be required to provide for regulatory compliance. Each client is also categorized by activity levels which can act as an indicator for CDD requirements.

Nigeria: The Central Bank of Nigeria’s Bank Verification Number (BVN)80 is a biometric-based card that is mandatory for all bank account holders. The Nigerian telecom regulator also made biometric registration for all SIM cards compulsory.81 After being met with legal challenges, the BVN has been superseded by and merged82 into the country’s new National Identity Database (NIDB) whose records include a National ID number and biometric information.83 Other biometric databases and identity verification schemes also exist in Nigeria. The Nigerian National Identity Management Commission (NIMC) provides eID cards that combine biometric identification and a prepaid payment card.84

Pakistan: In 2015, the Pakistan telecom regulator mandated verification of all SIM card owners using biometric information – an eID – linked to their national identification card (NIC).85 The use of biometric information provided a more robust method to address KYC requirements. A Pakistani MNO petitioned the central bank to allow SIM registration to satisfy KYC requirements for DFS account set up, paving an easier path for those at the BOP persons to access DFS.86

Regional: There are also some regional efforts to undertake digital IDs and CDD across borders as seen in the East African Community (EAC) - Kenya, Uganda and Rwanda – where the ‘One Area Network’ was launched to develop a uniform policy on SIM card registration.87

It is trite that ‘analogue’ IDs and processes that accept them can easily be gamed by bad actors using physical fake IDs.88 In many cases, a fake ID can be bought cheaply on web sites that specialize in such goods. There are however emerging digital initiatives to systematize and standardize ID issuance, management and use. These innovations which provide greater confidence in the accuracy of identity management – which have assumed the industry-wide moniker of eIDs - may help address and assuage concerns and assessments regarding ID fraud, a driver of refusal.

As noted by FATF,89 one of the main obstacles to providing financial services is the lack of reliable or standardized ID and poor processes to verify these IDs as part of a CIV processes. The issue of standardization for eID is particularly acute in countries where there is no national ID system – that is, where there is no standard, persistent, unified, verifiable ID number attached to a person - and where the process of identification needs to navigate a verifiable identity ‘tower of babel.’ Multiple, disparate authorities may issue their own ID documents that can be used as ID for some, but not all (financial) services.90 These may include interior ministries issuing passports and voter IDs, or transport departments issuing driver’s licenses. It becomes a huge challenge for those – especially smaller DFSPs with limited resources for compliance – required to do CIV to collect and validate identity documents generated by other and multiple government departments.91

Insufficient data to identify and assess the risks of such customers raises costs and risk for providers, making it less profitable, if at all, to try to provide services to the financially excluded. The effect is even more pronounced for those in

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rural areas or who work in informal sectors, as they may not possess any formal proof of ID or other CIV related documents, such as proof of address.92 In essence and in large measure, those without IDs deemed sufficient for onboarding for DFS cannot become customers of DFSPs. Hence, eIDs can potentially play an important role in compliance related endeavors and can act as an effort which can potentially improve onboarding services for DFS and reduce the motivation for refusal actions.

Exhibit 4: Electronic Identification (eID)

5.4 Legal, Privacy and Data Protection Considerations in eKYC

While these are proffered approaches, there may be legal, regulatory and privacy issues surrounding them. Issues of legal certainty surround some employed eKYC solution(s), security of customer data, privacy and data protection considerations, the transition period from analogue (physical) ID documents to eID solutions and the degree and duration of their continued validity.

Embarking on eID and eKYC programs can require harmonization and integration of various identity databases as part of creating a national ID database. This process requires clear legal frameworks and delegation of responsibilities to the contributing authorities or agencies who control part or all of each component database.

Aadhaar in India has been legally challenged, with the project and the enabling legislation under review for constitutional validity by the Supreme Court with regards to aspects of privacy, personal autonomy, and surveillance state.93 A 2018 Supreme Court ruling confirmed the constitutional validity of Aadhaar and emphasized that it does not violate the right to privacy of individuals.94 But while the Court allowed some government-facing uses such as tax filing, it prohibited the mandatory use of Aadhaar for bank CIV and registration for SIM cards.95 Financial and telecommunications providers have now reverted to using the physical Aadhaar card for basic, visual-only identification of the holder since they now do not have the ability to undertake any additional electronic verification. Similarly, in Afghanistan, use of the e-tazkira eID/eKYC system was halted because of controversy over whether to include ethnic identity and opposition from ethnic leaders.96

Ensuring data protection and privacy when dealing with large volumes of eID and eKYC data is a major legal and ethical issue under discussion in many jurisdictions, including in India following a hack of the Aadhaar database.97 Similarly in Mexico in 2012 where the mandatory SIM registration program was marred by concerns on the privacy and security of the database, the program was scrapped.98

Many jurisdictions, especially developing countries, are without comprehensive data protection laws.99 In Asia, 14 nations100 have comprehensive privacy laws and only several other countries such as China and Indonesia have enacted other laws and regulations that have impacted data protection.101 In Africa, only 23 out of 55 countries have passed or drafted personal privacy laws and only 9 of them have specific data protection authorities.102 New technologies like DLT and blockchain technology using zero-knowledge proofs,103 for example, may allow secure encryption, storing, transfer and authentication of national identification data. But regulatory provisions for data protection and privacy are also necessary to safeguard users and address concerns of privacy and data security for eKYC.104 The digital locker concept in India is a reasonably elegant similar solution that empowers users to control the use of their personal data, although there have been concerns about the privacy implications of allowing users to download their Aadhaar use history.105 The concern is that the data may fall into the wrong hands given that Aadhaar has been compromised a number of times.106

In Nigeria where use of the central bank–mandated biometric BVN has been marked by legal challenges. The NIMC contested the right of the central bank to register citizens using biometric information and to issue the BVN. 107 The NIMC claimed sole rights to undertake biometric registrations and verifications. An agreement was reached,108 however, to harmonize the BVN database with that of the new NIDB. The government stated that, from January 1, 2019, the use of the new National ID number – and not the BVN – will be mandatory. Furthermore, up to December

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1, 2018,109 only qualified databases with biometric eKYC will be eligible for harmonization. The NIMC has said that only data captured by banks through BVN registration have met the standard required for use with the new NID.110 New data will be required to conform to the NIMC biometric standards for the NID.

6 Addressing CIV

6.1 Overview

CIV represents the collective process for identifying, Issues Addressed verifying and undertaking due diligence on customers. It includes and extends beyond KYC, the initial • AML/CFT compliance costs identification input component, examined in the previous • Regulatory uncertainty section. FinCEN identifies CIV as one of four elements • Sufficiency of CDD information downstream defining CDD.111 The other three are beneficial • Risks/Presence of ML/FT ownership identification and verification; understanding • Business costs and low profitability • the nature and purpose of customer relationships to High risk classification of customer base • develop a customer risk profile; and ongoing monitoring Overall risk appetite for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information.

Effective CDD is dependent on access to reliable and timely customer data, especially for CIV purposes. This may include the ability to verify identity documents, awareness of any red flags for certain customers or classes of customers and checking for incidences of ‘smurfing’112 and other suspicious behaviors.113 A strong CIV system can provide greater transaction transparency and superior analysis and detection tools which, in turn, can act to reduce risks associated with servicing customers with a high risk classification such as PEPs and non-profit organizations.

As with customer identification and KYC, efforts relating to CIV made to increase efficiency, effectiveness of compliance measures and cost reduction through a centralized and shared approach do not represent a single-silo response – they are often the product of enterprise and industry-wide collaboration and co-operation. Standardization is key to the success of sharing and centralization of information and the effectiveness of implementation of eKYC solutions which cross-check identity;114 commercial data repositories that would ventilate the risk status of identified persons; and reassessment of regulations around privacy (and competition) allowing frictionless sharing of data. Where CIV is performed efficiently and effectively, compliance costs and transaction risks are reduced and provide less justification to refuse to provide financial services and make management or risk, instead of avoidance of risk, potentially more appealing.

6.2 The Evolution of KYC Utilities for Customer Identification and Verification

When CIV is coupled with other CDD processes, implemented as sanctions screening,115 transaction limit checks116 and velocity checks,117 eKYC can also contribute to the development of KYCUs.118 These KYCUs are usually centralized repositories and facilities, owned by industry or government (or in partnership) which allow service providers and regulators to obtain and verify customer information – in real-time – to monitor for fraudulent activities and to aggregate customer information for ML detection purposes. They can also accelerate compliance requests for information and help avoid restarting the process when additional service and/or information is needed.119

In the context of financial accounts, KYCUs provide benefits of centralized information repositories which can be regularly maintained and updated by respondent banks and facilitates correspondent banks, with whom respondents choose to share access, to more easily and effectively perform due diligence requirements. The benefits of

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centralization include the reduction of costs; potentially greater overall accuracy and avoidance of duplication of efforts; information can be updated and added by multiple members in a standard and seamless manner; with synergies and efficiencies are thus realized.

While implementing a national KYCU infrastructure will share costs across all participants, it may be a costly and time-consuming effort to implement and perfect.120 Data protection and privacy considerations also affect its efficacy and related laws can be difficult to harmonize across jurisdictions. Reaching a standard between all KYCU members may be a challenging process.

The roll out of eID and the subsequent eKYC for DFS requires regulatory coordination within a country. In some countries, CIV procedures for DFS are different for MNOs and financial institutions because SIM card registration is usually under the mandate of the telecommunications regulator121 and any DFS registration is under the AML/CFT mandate and rules of the central bank122 and/or a financial intelligence unit (FIU.)123 Because fiat money – rather than airtime value124 – is involved in the DFS wallet,125 ML/FT concerns relating back to FATF AML/CFT requirements are applicable, and ‘Tier limits’126 as part of a risk-based approach (RBA) are often set by the central bank and/or FIU. In some cases, registrations have been largely successful, although there may be huge capital investments necessary to create a national database and remove duplicate identities to develop a single identification, such as is seen in Nigeria.127

The core of an eKYC CIV process is to be able to undertake real-time verification from a central database of a person. This requires persistent connection to the central server of the attestation body, be that a national ID authority or a central bank. Fallback mechanisms are necessary for when the central database is unavailable, such as when there is a lack of network connectivity or the database if offline.

6.3 Private Sector Customer Identify and Verification Solutions

Commercial data repositories typically represent efforts to centralize data shared between multiple entities which can reduce data duplication (such as KYC/CDD intake information) and increase accuracy and efficiency. In turn, these benefits reduce concerns related to and drivers of refusal.

SWIFT: The Society for Worldwide Interbank Financial Telecommunication (SWIFT)128 has created a shared platform129 for managing and exchanging standardized KYC data. It consists of a ‘centralised repository that maintains a standardized set of information about financial institutions required for KYC compliance.’130 It is designed to be a simple, secure and cost-effective method of exchanging standardized KYC data with correspondents.131 In November 2016, SWIFT announced that it exceeded 3,000 members for financial institutions signed up to use the Registry.132 As of June 2019, it reportedly services over 11,000 financial institutions around the world.133

The SWIFT Compliance Analytics product aims to improve transparency among correspondent banks through the analysis of the data generated by the SWIFT messaging system. The tool can enhance a bank’s existing controls via monitoring applications and being able to identify trends, patterns and behavior which might warrant investigation.134 For example, analysis of data spanning several banking entities could potentially reveal activities indicating the access of clearing services through intermediating institutions or ‘nested accounts,’ which can be an indicator of high-risk activity135

IHS Markit KYC Services: Provides a ‘publicly sourced and client-provided’ database of entity data using industry standard KYC policies and includes the use of legal entity identifiers.136

Org ID by Thomson Reuters/Refinitiv: Org ID is a commercial, managed KYC solution which streamlines onboarding, assists with Ultimate Beneficial Ownership (UBO) requirements,137 provides ongoing monitoring and the ability to share KYC securely share identity documentation with other financial institutions.138

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Entity Exchange by Bloomberg: Entity Exchange is a commercial KYC solution which streamlines the onboarding process and provides ‘a centralized, secure platform to enable trading counterparties to manage and share client data and documents with confidence.’139

6.4 National, Multinational and PPP CIV Approaches

Efforts to create and enhance CIV solutions have occurred on national and multi-jurisdictional levels as well as public and private sector partnerships (PPPs). Of note are LEIs which are used to identify parties to transactions in a growing number of jurisdictions.140 The following supplements the list of eID/eKYC implementations found in Section 5.3 National IDs and Country Examples and provides some additional insight into the creation and challenges in creating collaborative CIV solutions.141

Australia: The Australian Transaction Reports and Analysis Centre’s (AUSTRAC) Fintel Alliance is an international PPP with 25 government and private sector members who collaborate and share expertise and resources with goals of creating a financial intelligence center to combat criminal activity.142

India: Using the eKYC service, residents can authorize service providers to access their demographic data and photograph from the database using biometrics or password, in addition to seeing usage information of the resident’s data.143 While a 2018 court ruling that banned its (mandatory) use in a swathe of activities,144 the Supreme Court confirmed the constitutional validity of Aadhaar and emphasized that it does not violate the right to privacy of individuals.145 While Aadhaar is still allowed to be mandatory for filing income tax and obtaining a Permanent Account Number (PAN),146 the Court banned Aadhaar use for bank CIV processes and for registering for a SIM card.147

Jordan: In addition to the basic biometric data captured, Jordan’s national eID data also captures information on drivers’ licenses and health insurance, with ‘keys’ for an individual’s electronic signature (e-signature) reserved for later implementation. In January 2018, the Telecommunication Regulatory Commission also mandated the gathering of biometric data for SIM card registration.148

Mexico: The initiative described earlier (in Section 5.3 National IDs and Country Examples} to create two databases is intended to enhance information provided to and improve transaction flows with foreign correspondent banks. The simple data-sharing protocol between domestic and foreign banks, uses a centralized repository of AML/CFT related data populated by banks providing CDD and related information concerning all cross-border transactions.149 Client activity levels are placed into tiers, which can act as an indicator for CDD requirements. The database is available to domestic authorities and participating financial institutions, such as correspondent banks.

Nigeria: The Central Bank of Nigeria BVNs, used for conducting banking transactions, are added to a watch-list if customer is involved in confirmed fraudulent activities. With regard to DFS, the NCC made biometric registration for all SIM cards compulsory. Based on the SIM card registration data, customers can fulfill different tiers of KYC for a DFS account which can provide higher limited transaction limits.

Singapore: The Association of Banks in Singapore KYC Utility Project is a collaborative international effort which proposed a cross-border KYCU capable of creating greater efficiencies, reducing duplication and sharing of information between financial institutions.150 Ultimately the project stalled due to substantial expected costs and the complexity of harmonizing interjurisdictional banking and data privacy laws, regulations and requirements.151 This illustrates the challenges associated with the creation and maintenance of such CIV solutions.

South Africa: The Automated Biometric Identification System project was launched in 2018, designed to integrate all systems, inside and outside the government, to offer a single source for biometric authentication for citizens.152

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Banks, for example, will be able to verify client identification faster and police services will be able to match fingerprints.153 The new system will add multi-modal components to allow iris and palm-print capabilities.

European Union: The EU’s Anti-Money Laundering Directive 5 (AMLD5)154 which came into effect in 2018 includes the creation of central registers containing the UBOs of corporate and legal entities, trusts and others and populated by ‘obliged entities’ (such as banks and financial institutions.) It also requires the application of CDD and Enhanced Due Diligence (EDD) under certain circumstances, places more stringent requirements upon prepaid instruments, covers virtual currency exchange platforms and aids in the identification of users who trade in virtual currencies.155 Access to information such as UBO is available to FIUs, competent authorities and obliged entities carrying out the performance of their CDD obligations.

7 Capacity Building and Technical Assistance

A consistent theme in financial inclusion research and within our own conversations with industry experts has Issues Addressed been the critical need for capacity building regarding AML/CFT compliance in developing and high-risk • AML/CFT compliance requirements & jurisdictions, especially in Somalia, Nepal, Malawi and costs Uganda. An investment in people, institutions and • Insufficient CDD information downstream practices which serves to strengthen skills, knowledge • Regulatory uncertainty and expertise, on individual and organizational levels, would significantly lower risk levels related to • Risks/Presence of ML/FT compliance concerns, an important factor in correspondent bank decisions to limit or refuse financial services.

Substantial assistance is needed in developing countries – financial and industry expertise – to improve comprehension and proficiency through education, training, implementation and performance of AML/CFT-related compliance measures across the transaction chain. This need for capacity building extends on multiple levels through government legislators; regulators; corporate executives and employees; external providers; and especially human agents that are popular and the end of the chain for on-boarding and ‘cash in cash out’156 transactions.157 Capacity building must also take place within banks and financial institutions to ensure that personnel are experienced at branch and regional levels and can appreciate a diversity of client activity.158

An assessment of each jurisdiction should be undertaken to determine what capacity exists and to identify areas of strengths and weaknesses so that a tailored plan for improvement can be formulated. The investment in capacity building will likely need to be a joint effort. This would include investments from the vendors themselves, national and international industry associations, global development organizations,159 impact investors160 and industry experts and consultants.161

Many of the technology-based approaches examined in this paper require dramatic reengineering of not only the technology capabilities of those thinking of deploying them but also retraining of current staff to be data analysts rather than pure compliance officers. Much of this training and funding thereto may come –as it has traditionally been - from technical assistance programs from the International Monetary Fund (IMF), World Bank, and sympathetic Western and Asian governments. The World Bank has been regularly engaging in assistance, providing technical and financial assistance with capacity building in fragile jurisdictions impacted by refusal of financial services activity.162 The Federal Government of Somalia, in receipt of technical assistance from the World Bank and other global partners, has undertaken steps to reform its policies and strengthen its regulatory framework for its

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MTO sector.163 It has also been working with a ‘trusted agent’ (Abyrint), procured by the World Bank in 2016, which formally supervises and assists local MTOs.164

8 Central Bank-Linked Approaches

8.1 Overview

To address the significant impact of refusal to provide financial services, central banks in affected Issues Addressed jurisdictions have taken an active role to address problems. Dealing directly with the regulator within • Risks/Presence of ML/FT developing countries – who are typically most familiar • Overall risk appetite with the nature and composition of local market • AML/CFT compliance requirements & participants – can act to assuage some concerns of costs banks and financial institutions relating to conducting • Insufficient CDD information downstream business in jurisdictions which have higher risk • Regulatory uncertainty profiles. • Business costs and low profitability The intervention of central banks in providing possible • Reputational risk solutions is not limited to national boundaries and may • Anti-competitive action extend to operations in foreign jurisdictions. In the latter case, central banks are still required to comply with local legal and regulatory requirements. This section will explore both options and discuss the possibility of using digital currency issued and/or sanctioned by the central bank as legal tender in its national boundaries.

8.2 Central Bank Accounts for NBFIs and/or Refused Entities

In an effort to stimulate competition in the banking and payments industry and to deal with the issue of refusal actions by banks and financial institutions, some governments and regulators have considered allowing qualified Non-Bank Financial Institutions (NBFIs) to have limited accounts with central banks and commercial banks.

In June 2019, the Bank of England (BOE) announced its intention to allow approved NBFIs to have accounts at the BOE – the same as specific commercial banks – as a method of increasing competition in payment systems and to ideally provide multiple benefits to consumers such as reduced costs.165

The Central Bank of El Salvador has allowed a private entity called MoMo to open up a master account in the bank with which other entities can transact via this master account. MoMo indicates that they are seeking a bank license from the US OCC to allow them to undertake correspondent banking in USD with entities in El Salvador, who may not necessarily be able to undertake USD-based transactions because of refusal considerations.166

8.3 Central Bank Accounts at Foreign Commercial Banks

One creative response to the banking industry’s refusal to supply has been the provision of bank accounts to NBFIs, such as MTOs, at the respective country’s central bank. As a result of refusal activities by banks in the Oceania region impacting banks in Samoa in 2016, the Central Bank of Samoa (CBS) sought to open bank accounts in several other jurisdictions to facilitate transactions acting in the guise of a commercial or retail bank.167 Remittances from foreign money service businesses (MSBs) were to be paid into the central bank’s foreign bank account with the CBS issuing the equivalent amount to MSBs in Samoa in its local currency.168 The CBS was not successful in opening accounts in commercial banks in Australia and ultimately this solution was not implemented there.169

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8.4 Central Bank Digital Currencies

The use of digital currencies has been proposed as a means of stemming the tide of refusal, more specifically through the issuance and use of a central bank digital currency (CBDC)170 – also known as a digital fiat currency (DFC).171 This approach could be especially useful for cross-border remittances.172

While there are a number of variations,173 value issued as a DFCs: exist exclusively in an electronic format and not within a tangible physical medium;174 is central bank issued; and is considered legal tender.175 It may be distributed using a secure digital technology, such as a distributed ledger system, a blockchain or another secure method such as those proposed by eCurrency Mint, which uses cryptographic security protocols.176

Proponents of CBDCs assert that there are significant benefits which CBDCs have over traditional crypto- currencies, especially the fact that it is fiat currency. Theoretically there is less price volatility with CBDCs than is typical with crypto-currencies, even among the most popular crypto-currencies such as Bitcoin.177

Early efforts to investigate national implementation of crypto-currencies and CBDCs occurred in 2015. The Commonwealth178 central bank governors met to entertain the use of Bitcoin and other crypto-currencies for purposes of protection of remittances flows, in danger of being snuffed out by AML/CFT regulations and related refusal activities. Reception was cooler towards solutions labeled as unconventional, with a preference for the alternative using a government created digital currency.179

The use of CBDCs in the context of refusal, though, is to provide some means of traceability of transactions and money flows beyond currently available while linking the use to identifications of users. As an exemplar of this ideal, in 2017, Caribbean-based fintech company Bitt announced that it was undertaking a pilot with to launch the Barbadian Digital Dollar – a CBDC on the Bitcoin180 blockchain181 – in an effort to improve financial inclusion in the region and to address problems of refusal to supply.182 The CBDC would have eKYC built in to satisfy correspondent bank concerns about UBO. This effort has the support of the Barbados government and may potentially present a solution for the Caribbean region183 but is, to date, not yet commercially available.

CBDCs are not nirvana for all jurisdictions though. For example, in 2018 the Republic of the Marshall Islands (RMI) – which uses USD – enacted law to launch the ‘SOV’ digital token,184 a type of decentralized currency185 to be run by a private entity and acting as a second legal tender in the jurisdiction.186 The International Monetary Fund (IMF) and the US Treasury have been vehemently opposed the idea, resulting in the remaining banks providing CBRs to RMI banks threatening to withdraw CBRs.187 While KYC requirements have yet to be finalized, implementation of the SOV is anticipated to require identity registration which precludes anonymous and pseudo- anonymous use which are characteristics of other crypto-currencies.188

8.5 Direct Linkage of Central Bank National Payment Systems

An approach suggested by the World Bank as a substitute for traditional CBRs is to create a direct link between central banks and their respective national payments systems.189 This alternative scheme is outlined in Exhibit 5.

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Exhibit 5: Current and alternative settlement flows, and direct linkage of central bank national payment systems.

Solid arrows = settlement flows for current method of making cross-border payments via correspondent banking relationship. Broken arrows are settlement flows for the payment system’s direct link alternative. The solid arrows depict the process using a direct link between the national payment systems and therefore circumventing Bank A’s correspondent bank. 190

But as the World Bank also notes, this solution comes with several current barriers to implementation which have not yet been fully explored. These include the need for: standardization of message formats; exchange rate agreements; proper settlement arrangements; harmonization of conflicting laws and regulations; multilateral collaboration and involvement from a variety of industry participants from both countries, including regulators and payments system operators.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

9 Alternative Cross-Border Monetary Flows

9.1 Overview

Remittances flows from developed to developing countries are of paramount importance to the Issues Addressed underserved in developing countries. They are expected • AML/CFT compliance requirements & costs to reach USD 529 billion in 2018, far exceeding foreign • Insufficient CDD information downstream direct investment and representing a 9.6% increase over • Regulatory uncertainty 191 2017 annually. Trade finance is also of equal • Declining risk appetite importance in many of the same jurisdictions, especially where there is a strong reliance on tourism and inflow of foreign visitors such as is the case in the Caribbean,192 Seychelles, the Pacific Islands small states in Oceania and other similar jurisdictions impacted by refusal activities.

Many remittances services have traditionally used banking channels and rely upon CBRs to send money across borders. Loss of remittance income from refusal actions can affect digital liquidity in DFS and damage financial inclusion efforts. In this section we examine alternative models for cross-border transactions whose operations may reduce reliance on costly CBRs, lower transmission costs and potentially lower the impact of refusal. Exhibit 6 highlights importance to developing countries of increased efficiencies and fintech innovation to reduce remittance costs. Exhibit 7 highlights the general agency model and one of the most popular methods of sending money from developed to developing countries.

MTOs have been steadily lowering costs, optimizing transport mechanisms and simplifying the user interface for sending modest sums of money across borders. Relevant to financial inclusion goals, remittances costs have moved towards accomplishing the United Nations’ Sustainable Development Goals (SDGs)193 and Group of Twenty (G20) initiative of reducing the costs of remittances to under 5% -- better known as the ‘5X5 Objective.’194

The World Bank report for Remittance Prices Worldwide indicates that the global average percentage cost to send money across borders decreased in Q2 2017 from 7.45% to 7.32%195 but it has stagnated over the past several quarters. Perspective on cost changes when analyzing quarters, with Africa clearly above the global average, may be attributable to exclusivity agreements and other reasons which inflate costs several points higher. While some have predicted that remittance costs have or will rise as a result of refusal activity, it may not be adequately reflected in indexes as cost reductions have diminished the impact which are primarily due to the volume of remittances. And while costs and efficiency vary, all the following models are currently implemented and working as cross-border remittances options.196

Optimized financial models which leverage technological innovation have been effective in the removal of some systemic inefficiencies. In some cases, MTO models have also been able to reduce the reliance on correspondent banks. They have also begun to show some signs of competing with the market leader in remittances and usually the highest priced option, Western Union, which uses a traditional method of money transfer which often involves the transfer and receipt of physical cash at company approved locations.

Exhibit 6: The importance to developing countries of increased efficiencies and fintech innovation to reduce remittance costs.

9.2 Cash Carrying

In many jurisdictions, such as in the EU and the US, carrying cash across borders - such as on airplanes197 - is not necessarily illegal, although value certain values – be they in fiat notes or equivalent mercantile objects - must be

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declared and consent obtained to carry the value.198 A traditional practice of informal cash transfer without movement of physical money is known as ‘hawala’, a method of value transfer originating in South Asia.199

The transport of physical cash has remained a strong option for international remittances during a period where a growing number of banks have exited from relationships with MTOs, as is exemplified in the case of Somalia200 and MTO Dahabshiil.201 A method of cash carrying into Somalia, described by a Somalian minister of telecommunications, is the transport of cash from the US to Dubai and into Djibouti, where it would be used to purchase tires to be converted into cash in Somalia after the merchandise crossed the border.202

MTO facing ‘blanket refusal’ in New Zealand203 resorted to trying unusual methods of cross-border money transfers to avoid being effectively shut down. Kiwibank was cleared of wrongdoing in its termination of one of its few remaining MTO clients,204 claiming that the big four banks in Australia and New Zealand - ANZ, ASB, BNZ and Westpac - were wholesale cutting loose of clients dealing in remittances.205 As a result of the wave of MTO refusal in Australia and New Zealand impacting MTO KlickEx,206 the company announced their investment in effort to invest in a speedboat and oil-tanker refueler-based solution to physically transport cash to the Pacific Islands small states in Oceania.207

While it is a regularly used method, cash carrying is often impractical given the significant inherent costs involved in transport, such as substantial security requirements and need for expedient methods of transferring physical funds between distant locations. It can also meet with unexpected resistance. Cash carrying by MTOs from Florida in the US to the Caribbean has reportedly resulted in confiscation of the cash by security personnel at the US airports, at times, despite the MTOs having FinCEN approval to take more than USD 10,000 in cash outside the US.

9.3 Mobile Airtime Transfers

An innovative remittance solution popular in Africa is to use mobile network operator (MNO) prepaid mobile airtime value as a value transfer mechanism. The technique relies on the use of the same interchangeable airtime value platforms of large MNOs operating in multiple countries.208 Mobile airtime vouchers bought in Country A are sent to a recipient in Country B. The airtime is sold to a mobile airtime agent/vendor in cash, but at a discount to the face value of the voucher. The agent then resells the airtime at a profit (at face value) to his customers. The recipient/sender thus loses a portion of the face value but ‘saves’ on a remittance costs as well as having to undertake KYC in both countries.

Traditionally, MTOs have used correspondent banks and SWIFT to send money across borders. Western Union and Moneygram have been the most dominant providers although they may not be the most efficient and cost-effective solutions. Remittance branches are owned by agents, which are private franchisees who accept and disburse cash at high traffic locations using a recognizable remittance service brand and platform for money transfers. Money can be sent without a bank account by bringing physical cash into a local agent location, which makes this method one of the most popular in developing countries. Agents maintain cash on hand at respective service locations to disburse money to transfer recipients.

On the back end, a minimum balance is also maintained by agents in a Western Union bank account which is used for end of day net settlement between agents. The movement of money across borders and between accounts involves the use of the banking system, including correspondent banks. Fees charged to senders and receivers of remittances depend upon the sending and receiving agent, both of whom may charge fees. Online transfers more recently provided as another option using online financial accounts.

Exhibit 7: General Agency Model. The most popular method of sending money from developed to developing countries.

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9.4 e-Wallets

e-Wallets, such as made popular by Paypal and other ‘digital wallet’ based systems, manage a ‘user wallet’ or account as an internal subdivision of a service provider’s wallet with a bank. The wallet software provides a platform and an overlay indicating users details and transactions of their wallet. Transferring money between the user’s e- Wallet account and the user’s bank account may be free, allowing for users to easily fund and withdraw money from their wallet.

Costs for personal domestic transfers using the same currency and within the wallet system (such as Paypal) may be free. Additional fees can apply if a bank account, credit or debit card is used as the sending source rather than the user’s funded wallet.209 As such, basic bank-based e-Wallet solutions such as Paypal’s offering appear far more suited for transactional convenience than they are for use as a remittances option for those in the bottom of the pyramid.

Digital currency brokers such as Azimo brand themselves conspicuously as cashless, intending to remove agents from the equation and requiring all transfers to be initiated using an online device such as a mobile phone or connected computing device and funded digitally.210 This model came into existence at a time when remittance giants like Western Union and MoneyGram were in early stages of providing online money transfers.211 Other notable examples include Regalii, Remitly and Veem, among a flurry of new remittances competitors entering a competitive marketplace. The effectiveness of these systems in developing countries is primarily dependent upon the method of distribution, which must be readily available and feasible to those at the BOP.

While many e-Wallets more readily focus on serving developed marketplaces, companies such as Xoom (founded in 2001) emerged, remitting funds which could be delivered across borders to destinations beyond e-Wallets and include cash pickup and cash courier delivery. Other providers such as WorldRemit, Remitly and Azimo212 opened destination options in the marketplace to include deliveries of funds available beyond cash pickup and delivery, but also in DFS and airtime top-up.213

9.5 Transaction/Currency Pairing, Peer to Peer Marketplace

Service providers facilitate transaction or currency pairing of users on its network who wish to move money across borders in opposite directions. As a result, cross border transactions never actually (or minimally) require crossing borders. The movement of funds occurs locally in each country, from local senders to local recipients, such as debits and credits on the accounts of the parties.214 Remittances thus avoid the formal clearing system typically involved in interbank transfers215 and the need for CBRs that are part of traditional remittance services. Eliminating or minimizing the need to transmit money across borders also reduces remittance costs, for example by avoiding currency conversion fees.216

Remittances service providers such as TransferWise and CurrencyFair, among others, have aimed to improve upon traditional exchange service models by removing or reducing dependence upon foreign exchange services and CBRs. In real world practice there is rarely a perfect pairing. TransferWise holds accounts in all of the countries it serves and accepts and disburses money locally, including in DFS.217 A money sender deposits GBP into TransferWise’s London account and the receiver will obtain the foreign exchange interbank spot rate from the company’s bank account in Germany and receive Euros. The process uses an algorithm to match flows in both directions in the aggregate, which leaves a minimal amount for TransferWise to make up for the actual money transfer.218

CurrencyFair works in a similar fashion, providing a currency exchange marketplace and remittance service with bank accounts in all of its destination jurisdictions. First a user moves money from a digital source (such as a bank

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account) to CurrencyFair’s local bank account (usually a free transfer) which appears as a wallet in the CurrencyFair ecosystem. Users place the amounts and denominations of currency they wish to exchange and the desired rates. CurrencyFair attempts to match buyers and sellers of currency directly rather than using forex brokers to perform the exchanges. After the transaction, users can withdraw the proceeds of a transaction from the CurrencyFair ecosystem to a designated destination for fee, such as to a foreign destination which is transferred from a local CurrencyFair bank account in the destination country.219

9.6 Use of Foreign Exchange/Currency Brokers

Foreign exchange currency brokers (retail services) can also provide remittance services to facilitate cross-border money transfers which can limit dependence on correspondent banking relationships. The proceeds of a currency conversion or forex transaction can be deposited into a third-party account designated by a client. Accordingly, countries such as the United States, place providers of money transfers and those involved in currency exchange/dealing under the same non-bank financial institution classification as a MSB. As such, both businesses are subject to the same US Bank Secrecy Act220 (BSA)/regulatory requirements.221

Costs for currency conversion can be competitive, especially in comparison to banks and wire transfers. Providers which have accounts in financial institutions located in the client’s originating and destination country may only charge a currency conversion fee to move money, similar to the manner in which TransferWise conducts business.222 In some instances transfer floors may be in effect and may make forex brokers a questionable choice for lower income clients, which may require minimum amounts that are above levels affordable by those at the bottom of the pyramid.

The process of setting up an account to engage in foreign exchange may also more detailed, has more identification requirements to set up an account, and the need to fund the account and some sophistication in account management. Hence, while these services can present a reasonable cross-border remittance option and may provide better rates than banks, it is likely not well suited for those in developing countries who may not have the capacity, resources or access to necessary prerequisites to engage in such transactions. Forex brokers may be the best option for those sending large sums of money.223

Investments in innovative back-end services solutions for cross-border remittances are being made, such as in CurrencyCloud,224 a B2B engine that provides the backbone foreign exchange component for companies like WorldRemit, Azimo, etc. It is a foreign exchange (‘forex’) payments automation platform, to use by way of an API to enable remittances and money exchanges across borders.

9.7 Nested Transactions

The Association of Certified Anti-Money Laundering Specialists (ACAMS) defines ‘nested transactions’ as those where ‘a respondent bank provides downstream correspondent services to other financial institutions and processes these transactions through its own correspondent account.’225 Accordingly, a respondent bank may be acting as a correspondent to another bank downstream. In this situation the correspondent bank has not conducted due diligence on the respondent bank’s customers’ customers, that is, account holders of the second respondent bank downstream.226

As a solution, nested transactions have been described as ‘tested and workable’ by the Caribbean Development Bank, which has also noted implementation challenges.227 Nesting has a more complicated structure and presents greater potential for abuse. The ability to concealing characteristics of individual transactions in singular pools

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makes it considered high-risk. For example, MTOs have reportedly paid non-bank intermediaries to act as conduits for transferring money through a downstream correspondent banking pipeline.228

Accordingly, nested transactions require certain disclosures of information and transparency regarding the existence and details of the nested relationships that exist.229 A correspondent bank is generally required to understand the framework and procedures that respondents have in place to detect undisclosed nesting relationships. In the event that ‘pass-through’ or ‘payable-through’230 accounts are provided, enhanced due diligence (EDD)231 is generally required to ensure that appropriate and adequate downstream due diligence measures have been undertaken and adequate controls and monitoring systems are in place.232 Nesting can also be a beacon for regulator attention, which may place additional burdens on correspondent banks.

Seychelles, a popular island tourist destination hard hit by termination of CBRs, has been using nested solutions to mitigate the phenomenon. To allow hotels on the island to obtain trade finance, receive booking fees from international booking agents, as well as being able to import goods and services, USD-based income is first sent from the US to European banks and converted into Euros, and the Euros then converted into Chinese Renminbi (RMB). The Chinese RMB is then converted into USD or local currency.233

9.8 Distributed Ledger Technology and Blockchain

DLT -which includes blockchain technology, a type of distributed ledger - is a new type of secure database or ledger that is replicated across multiple sites, countries, or institutions with no centralized controller. In essence, this is a new way of keeping track of who owns a financial, physical, or electronic asset and, in newer iterations, automating these interactions. The core motif of DLT is that of ‘decentralization’ where there is no single controller of the DLT.

DLTs are often touted as having the potential to change the nature of the financial marketplace. It can provide a myriad of benefits such as removing the need/cost of a trusted third party, greater traceability and transparency of transactions, virtually immutable and tamper evident operation, quicker settlement and cost savings. These qualities promise greater accountability and, theoretically, should provide upstream providers with greater and more reliable knowledge about activities occurring downstream, reducing the presence of decision drivers to withdraw access to financial products and services.

DLTs offer some transformational changes, not just of their utilitarian function in making data transfer and storage more efficient, but notably also in their potential to democratize access to financial products and services, a change not seen the dawn of the commercial Internet in the 1990s. In particular, the introduction of new financial products and trading techniques through the production and use of new ‘crypto-assets’ that feature at their core malleable crypto ‘tokens’ used as ‘programmable money.’234

Overall, there is currently a bifurcation of interest in DLTs, between retail (individual consumers) and enterprise users. The former are more engaged in trading of crypto-assets such as crypto-currencies. Indeed, there are few live mass consumer applications of DLT other than this type of direct trading. The focus by the latter is mostly on the utilitarian aspects of DLTs, as reliable, traceable and secure data processes and access. A number of DLTs are being developed by sector consortia of banks and other financial institutions, or shipping companies, or food supply networks. There is likely to be a convergence of the retail and enterprise focus areas over the next few years as the industry matures. Several central banks are currently exploring the use of CBDCs.

Opinions vary as to what type of applications would be most impacted by DLT-based solutions, such as for KYC/CDD management and compliance.235 The IMF has noted that DLT could provide secure and lower-cost payment options.236 However, DLT is often viewed as a potential long-term solution, not likely make a significant short-term impact upon refusal and financial inclusion challenges. The implementation of DLT could mean

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changing existing infrastructures and a maturation process requiring several years of progress, even in affected jurisdictions such as the Caribbean contemplating use of DLT solutions.

Trading of crypto-currencies and the ability to effectively bypass centralized systems such as SWIFT has led to the development of some crypto-currency-based remittance solutions. These remittances usually occur in three different forms: (i) fiat to fiat currency using crypto-currency for the transfer; (ii) crypto-currency to (a different) crypto- currency; and (iii) crypto-currency to fiat.

Many remittances providers using models involving crypto-currencies have faced significant hurdles and challenges resulting in their exit from the marketplace. Volatility of the value in crypto-currencies is the most cogent reason, leading to the introduction of so-called ‘stablecoins’ pegged often to some fiat currency such as the USD or some other real-world asset.237 Facebook, for example, has announced its ‘Libra’238 stablecoin that will act as a P2P solution across borders but reportedly separate from the Facebook system.239 Some crypto-currency-based remittances do remain which have some appeal to population segments in developing regions, such as Ripio in Argentina,240 SureRemit in Nigeria,241 and the use of Dash in Venezuela.242

Other hurdles which crypto-currency based remittances solutions face include recipients in developing countries often lacking the tools (such as smartphones) and sophistication necessary to complete transactions. Another challenge is that exchanges of fiat and crypto-currency adds the cost of two currency exchanges – one on each end243 – which use volatile crypto-currency. Longer processing times exacerbate the problem and makes insurance a costly undertaking for all involved. Similarly, new FATF rules on crypto-currency trading requiring KYC of even pseudonymous holders of crypto-currencies is likely to have a chilling effect on these solutions.244

While crypto-currency-based remittances or “rebittances” are hyped as refusal solutions, the reality is that cash out and vendor acceptance in many developing countries is low and transactions are likely to take place primarily in urban areas involving more educated users.

In a pilot-project partnership with seven rural banks, Philippines-based bank Unionbank worked with ConsenSys Solutions to build a decentralized approximately real-time inter-rural bank payment platform called Project i2i to connect rural banks to each other and to national commercial banks, using Enterprise Ethereum. This effectively brings these some 130 rural bank partners into the domestic financial system and increases inclusion access to the communities in which they operate.245

Crypto-assets can act as a bridge between different fiat currency pairs potentially enabling financial institutions with access to liquidity on demand, without having to pre-fund accounts in the destination country. For example, crypto-currency network Ripple246 is using its global RippleNet payment system to connect a number of developing countries together to undertake interbank transfers through the XRP crypto-currency. The solution - especially since it bypasses SWIFT - is touted as solution to refusal, inserting liquidity into markets by enabling remittance flows to countries that have been impacted by removal or refusal of CBRs as well as facilitating trade finance.247 Ripple’s XRP asset using its XRapid system has been in place for interbank transfers and are finalized over the local payment systems, which added just over two minutes to payments, speeding up from settlement times of 2-3 days on legacy systems. Portions of the payment that rely on XRP last 2-3 seconds, minimizing exposure to price volatility.248

Abra operates a blockchain-based crypto-currency wallet which allows users to purchase, hold and trade over 25 crypto-currencies and 50 fiat currencies.249

9.9 Development Bank Voucher-Based System

A creative response to refusal actions has included a recognized financial institution, familiar with the recipients of remittances in a developing country, act as a conduit to connect senders and receivers. After a wave of refusal

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activities occurred in the Pacific Islands small states in Oceania,250 a voucher system251 was launched in Tonga in 2017 by the Tonga Development Bank252 to facilitate the flow of remittances from New Zealand and (potentially) other developed jurisdictions to Tonga residents. New Zealand residents were able to send New Zealand Dollars to the Tonga Development Bank who, in turn, pay the equivalent to recipients in Tongan currency with vouchers that are redeemable at the bank.253

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10 Regional Efforts

10.1 Overview

Centralized solutions are an appropriate potential Issues Addressed remedy and/or mitigant to problems for regions

consisting of member jurisdictions which are • Risks/Presence of ML/FT challenged by refusals to provide financial services. • These affected jurisdictions often share similar Overall risk appetite characteristics and are likely to benefit by creating a • AML/CFT compliance requirements & costs • Regulatory uncertainty single touch point, providing the same benefits of standardization and centralization discussed earlier, • Business costs and low profitability which typically results in increased efficiencies which • High risk classification of customer base reduce costs and efforts of participant members. • Reputational risk Accordingly, these approaches have the potential to • Insufficient CDD downstream (consolidation) mitigate costs and risks which are drivers of actions of refusal to supply. • Profitability concerns

According to IMF and World Bank studies, regions which reported the most significant decline of correspondent banking relationships were in areas of Europe and Central Asia, the Caribbean, Africa and the Pacific Islands small states in Oceania.254 Attributes shared by impacted regions include jurisdictions of relatively small size which, individually, generate comparatively lower transaction volume and profitability.255 Each jurisdiction may have its own legal, political and economic environments which can present a less than compelling business proposition for large, multinational banks and financial institutions. The similarities of trends and drivers among impacted jurisdictions in de-risked regions suggest leveraging the benefits of a shared regional response.

Some industry participants have coalesced to join forces for regional solutions such as centralized transaction hubs, common digital fiat currencies and other strategies designed to remedy issues plaguing fragmented markets. These strategies, along with others discussed below, may generate sufficient conditions and metrics as a united group which may run with lower costs, lower associated risks, greater efficiencies and increased profitability potential which may present a more appealing environment to correspondent banks.

10.2 Consolidation of Banks/Correspondent Banks

Consolidations of financial entities can take place within national and international boundaries, creating fewer and more concentrated banking solutions. Such action can provide benefits similar to the creation of a regional/centralized transaction hub (with consolidation efforts within national boundaries presenting a shorter-term solution) and reduce issues characteristic of fragmentation. Fewer competing entities will result in greater transaction volumes, reduced overall costs from singular/fewer operations which can also be shared with participating banks.256

Concerns do exist as to whether a jurisdiction can function sufficiently with fewer correspondent banks and whether anti-competition concerns may arise as a result. Creating fewer transaction points also means placing a greater collection of risky transactions under each point, potentially increasing the risk profiles of those entities and attracting greater scrutiny by regulators and banks.

Members of the Eastern Caribbean Currency Union (ECCU) have promoted the consolidation of banks within their jurisdictional boundaries to achieve the minimum operating scale to make investments in technology profitable. It

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also represents an attempt to avoid refusal by increasing the return of enhanced coordination of financial policies under a banking union. However, membership in a currency union is not a necessary condition for the enlargement of banking markets.257

10.3 Regional or Centralized Entity/Transaction Hub

The characteristic of ‘being too small to play’ is often cited as a reason given by correspondent banks to avoid or exit existing relationships to provide financial services to smaller jurisdictions, which can come with minimum transaction threshold expectations to gauge interest.258 Substantial costs are required in maintaining CBRs. This solution contemplates the ‘pooling’259 of regional transactions into a single, centralized, regional solution and transaction touch point. An existing or newly created financial institution could act as a conduit for transactions traffic between regional and foreign correspondent banks.

A centralized regional financial institution could provide a myriad of benefits, in addition to the sharing of costs that are typically associated with maintaining CBRs. As a centralized solution it would, in the aggregate, generate higher volumes and profit potential on both sides of the transaction. Overall costs of running the entity would be shared between participants and operating costs could theoretically be lowered given the potential for greater efficiencies, such as reduced duplication and shared resources. The regional entity, acting as a recognized and supported authority, would possess significant familiarity with local customers which can act to directly reduce risk levels. Provided that sufficient CDD is performed, a regional correspondent bank may be able to provide greater assurance to foreign correspondents that adequate levels of capacity, expertise and competence exist in the jurisdiction. Such a solution could prove especially effective and appropriate for clusters of smaller countries who characteristically have smaller gross domestic product (GDP), global assets and fewer transactions such as found among the Caribbean islands and the Pacific Islands small states in Oceania.

The establishment of a regional correspondent bank or centralized transaction hub represents a considerable long- term effort, a substantial cost outlay, and is not viable as a short-term solution. Success is predicated upon the ability of member countries to agree on critical components such as the amount of capital contributions for the startup phase, any additional cash infusion that may be needed, how the entity is to be governed and which jurisdiction would serve as the host country. The inclusion of multiple jurisdictions in a regional solution adds complexity in terms of differing legal requirements (including privacy and data protection laws), various levels of commitment to compliance and may raise additional concerns about the possibility of non-compliant nesting transactions and increased competition against regional banks.260

The operations of a regional entity solution will likely be subject to substantial regulatory scrutiny, characteristic of challenges for all consolidation efforts in being potentially weakened by the sum of its parts. A regional entity is vulnerable to being considered high-risk, being comprised of individual member jurisdictions which often lag behind with AML/CFT related legislation, regulation, capacity building and overall dedication to preventing abuses within that jurisdiction’s financial system. It is intended to provide remittance services to a chain of customers in different jurisdictions where, at present, there is no standardization of global compliance processes. The Wolfsberg group though is attempting to address this.261

A significant gap can exist between lower average compliance levels at remittance providers versus higher standards that regional banks are expected to have in order to maintain a CBR.262 Remittance operators may also not have the capacity, facilities, funding and technical expertise to successfully complete such an integration within the reasonable future. This lack of harmony presents significant barriers to entry on both a country and industry level and may ultimately prove to be a challenging approach to use to solve or mitigate refusal.

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10.4 Region-Owned Correspondent Bank, Clearinghouse or Agency in Foreign Country

Another proposed approach for regions whose members face problems with a growing number of CBR withdrawals is the creation of a region-owned bank, clearinghouse or agency – created in a G7 country –which would provide CBRs to its member financial institutions. The Caribbean Development Bank (CDB) has proposed such a regional solution through the setup of a ‘US Federal Reserve approved US dollar clearing account facility for Caribbean correspondent banking transactions.’263

While such an entity would be a substantial benefit to the region, the CDB noted significant challenges to implementation. The endeavor would be costly, requires raising capital contributions from member countries, agreement on all major issues, and an estimated 3 to 5 year time frame for establishment which limits this approach to being only long term.264 The same challenges cited above regarding centralized solutions among smaller country clusters apply, being the sum of its better and worse component parts, which could invite greater regulatory scrutiny and still potentially categorized as high-risk.

10.5 Centralized KYC Utility Entity

Centralized KYC Utilities265 can provide additional benefits to regions impacted by refusals to provide financial services. A centralized, single touch point can reduce duplication of efforts, increase accuracy and reliability of information (especially through standardization), increase efficiency and reduce costs. A centralized, regional information repository collected from member respondent banks – a single KYCU entity – might better directly address concerns correspondent banks have with the data required and provided as part of the due diligence process. Adequate and satisfactory responses can impact perceived risks and bank decisions on whether to continue or terminate existing banking relationships.

However, these entities can be costly to create and operate, as was apparent in the effort made to establish the Association of Banks in Singapore KYC Utility Project.266 In addition to potentially being cost prohibitive, other challenges exist resulting from different legal and regulatory requirements in multiple jurisdictions coupled with potentially high liability and operational risks.

Alternative to a regional KYCU, every nation could establish its own centralized utility which collects cross-border transactional information into a database, in a similar fashion to the operation of the Mexican transaction database and KYCU. Separately (assuming there is adequate standardization and harmonization of legal requirements), regional members may be able to share information to improve transaction flows and respective due diligence requirements.

11 Multilateral Efforts

11.1 Overview

Meaningfully addressing the problems related to the refusal to supply financial services and declining number of CBRs requires Issues Addressed the collaboration and cooperation of multiple jurisdictions and regions. Accordingly, this section examines approaches and • AML/CFT compliance requirements responses on a multilateral level which includes • Insufficient CDD information intergovernmental communications, public-private partnership • Regulatory uncertainty meetings and the actions of international organizations such as standard setting bodies.

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11.2 Collaboration, Dialogue and Diplomacy

11.2.1 Intergovernmental Interactions/Diplomacy

Diplomacy, while not a solution by itself, can help raise greater awareness of a problem such as refusal. Discussion can serve as a catalyst to opening doors of communication at a high level, leading to meaningful discussions of challenges and proposals for solutions. It represents the beginning step which leads to the involvement of necessary parties to develop, implement and execute upon a plan of action.

Regional diplomacy can assist some geographical regions impacted by refusal. Solutions may be discussed collectively to both improve the situation between themselves as well as through united appeal to correspondent banks and the international community. Heads of government from Caribbean countries meet twice annually at the Conference of the Heads of Government of CARICOM267 and have created a series of comprehensive analyses268 in an effort to solve problems afflicting the region as a whole as well as its member states.269 Efforts have been undertaken by representatives of Caribbean countries to convince Canadian banks, who have a heavy presence in the region, to become more aware of advances and progress in the region which would mitigate decisions for refusal local jurisdictions.270

However, diplomacy has its limits internationally, as agreements may be impacted by changing leadership, political cycles and may not work as a whole when there are a number of important national and institution specific issues.271 Also creating some complications are that foreign embassies are perceived to be high-risk clients to financial institutions with some history of refusal. 272

11.2.2 Public-Private Partnership Meetings

Collaborative meetings between the public/private sectors and influential entities could generate working solutions to refusal to supply, such as AUSTRAC’s Fintel Alliance. Encouraging ecosystem participants to meet face-to-face and discuss challenges could lead to a better understanding between the parties and potentially lead to substantive ongoing discussion.

Examples of PPP meetings include FATF’s Private Sector Consultative Forum, where the topic of refusal is a priority.273 At the FATF Private Sector Consultative Forum of 2017 in Vienna,274 the FATF sought an information exchange with the private sector on topics relating to refusal, CBRs, financial inclusion, AML/CFT and remittances. Significant progress was reported.275Having all sides present and discussing concerns with each other in the same room could potentially yield superior results.276 The FATF held the forum annually in April 2018 and May 2019 where refusal was discussed.277 Other PPPs include cooperation between the FATF, Financial Stability Board (FSB), Basel Committee for Banking Supervision (BCBS), Committee on Payments and Market Infrastructure (CPMI) and the Wolfsberg Group have all cooperated on solutions to refusal.278

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11.3 International Organizations and Standard Setting Bodies

11.3.1 Overview

Period Activity May 2015 IMF & Union of Arab Banks survey on De-risking279 June 2015 FATF public statement on awareness of De-risking280 October 2015 FATF public statement on awareness of De-risking281 October 2015 World Bank Report on the G20 Survey on de-risking activities in the remittance market282 November FSB report to G20 on decline in correspondent banking283 2015 March 2016 FSB established Correspondent Banking Coordination Group (CBCG) 284 June 2016 IMF Staff Discussion Note - the Withdrawal of Correspondent Banking285 July 2016 CPMI report on Correspondent banking286 August 2016 FSB Progress report on Correspondent Banking287 August 2016 FSB Report to G20 on decline of correspondent banking288 September Arab Monetary Fund (AMF), IMF, World Bank Report on withdrawal of CBRs in the Arab 2016 region289 October 2016 FATF Guidance on Correspondent Banking Services290 December FSB action plan to assess and address the decline in correspondent banking291 2016 February 2017 CPMI Distributed ledger technology in payment, clearing and settlement - an analytical framework292 May 2017 Wolfsberg Group Guidance on Politically Exposed Persons (PEPs)293 July 2017 FSB action plan to assess and address the decline in correspondent banking294 October 2017 Wolfsberg Group Guidance Payment Transparency Standards295 September IFC Survey on Correspondent Banking296 2017 November BCBS Revisions to the annex on correspondent banking297 2017 February 2018 CPMI Paper Cross-border retail payments298 March 2018 FSB action plan to assess and address the decline in correspondent banking299 March 2018 FSB Stocktake of remittance service providers’ access to banking services300 March 2018 CPMI Central bank digital currencies301 April 2018 World Bank: Migration and Remittances: Recent Developments and Outlook302 April 2018 World Bank Study: The decline in access to correspondent banking services in emerging markets303 November FSB action plan to assess and address the decline in correspondent banking304 2018 April 2019 World Bank: Migration and Remittances Recent Developments and Outlook305 May 2019 Remittance service providers’ access to banking services: Monitoring of the FSB’s recommendations306 May 2019 FSB action plan to assess and address the decline in correspondent banking: Progress Report307 June 2019 Wolfsberg Group Correspondent Banking Due Diligence Questionnaire (CBDDQ)308

Exhibit 8: Timeline of SSB Activities Relating to Refusal to Supply.309

This section examines and discussion actions which may be undertaken by standard setting bodies (SSBs) and international organizations to address and potentially provide some remedies to refusal. SSBs include FATF, FSB, BIS, CPMI, and the World Bank. Exhibit 8 shows a timeline of select SSB activities relating to refusal to supply.

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11.3.2 Financial Stability Board (FSB)

The Financial Stability Board launched a four-point action plan in November 2015, coordinated by an established Correspondent Banking Coordination Group (CBCG), designed to assess and address the decline in correspondent banking relationships.310

These include:311 ● Further examining the dimensions and implications of the issue; ● Clarification of regulatory expectations, as a matter of priority, including through guidance by the FATF and the BCBS; ● Domestic capacity-building in jurisdictions that are home to affected respondent banks; ● Strengthening tools for due diligence by correspondent banks.

The FSB reports makes recommendations in four areas: ● Promote better dialogue between stakeholders and better practices in the remittance sector, ● Improve the implementation of international standards and oversight of the remittance sector; ● Encourage the use of innovation to facilitate remittance firms’ greater access to banking services; ● Encourage technical assistance related to remittances. The FSB, FATF, the G20 Global Partnership for Financial Inclusion (GPFI) and IMF/World Bank will coordinate to monitor take-up of the recommendations and report back to the G20 in July 2019.

The FSB has also encouraged technical measures, such as the development of KYCUs, which would contribute to reduce costs of correspondent banking relationships while maintaining the effective application of CIV requirements.

The FSB also initiated the global legal entity identifier (LEI) initiative, established after the global financial crisis to promote transaction transparency in the marketplace. The LEI is a 20-character, alpha-numeric code based on the ISO 17442 standard which serves as a unique identifier assigned to a legal entity participating in financial transactions.312

Ownership structure of legal entities may be determined through the use of LEIs and can assist in the determination of UBO issues. Global LEIs are managed by the Global Legal Entity Identifier Foundation (GLEIF), established by the Financial Stability Board in June 2014 with funding and oversight provided by the LEI Regulatory Oversight Committee (a consortium of public authorities.)313 Messaging systems such as SWIFT provides for the usage of LEIs314 and a significantly increasing number of jurisdictions have either requested or required their usage in financial transactions.315

11.3.3 Financial Action Task Force (FATF)

Besides the FATF Private Sector Consultative Forum of 2017, 2018 and 2019 in which FATF sought information exchange with the private sector on topics relating to refusal, it has attempted to maintain the continuity and clarify regulatory expectations in four areas that are particularly relevant to refusal:316

● Guidance on the RBA for Effective Supervision and Enforcement by AML/CFT Supervisors to reiterate the existing expectation that regulators and supervisors should use a RBA when supervising financial institutions’ compliance with AML/CFT measures and to clarify how to properly identify and manage risk in the context of correspondent banking and remittances;317

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● Guidance to assist MTOs in identifying and managing their risks, and to assist banks evaluate and manage the risks of providing financial services to money remitters;318 ● Guidance on correspondent banking; ● Develop best practices on appropriate customer due diligence to facilitate financial inclusion in a manner that strikes an appropriate balance with AML/CFT objectives;319 ● Revising standards to help governments properly identify those non-profit organizations which are most vulnerable to terrorist financing abuse and address those risks in a proportionate way.320

In its May 2019 plenary,321 FATF discussed the development of guidance for countries on assessing terrorist financing risk, in particular, the effect of refusal on the non-profit sector which has been most affected by refusals. FATF delegations met with representatives from the non-profit sector to discuss the draft Guidance, and to seek feedback on common challenges and good practices in assessing financial transaction risk within non-profit organizations.

11.3.4 The Basel Committee on Banking Supervision (BCBS)

The BCBS revised its guidelines on the sound management of risks related to money laundering and financing of terrorism in June 2017 to provide further clarification consistent with the FATF’s guidance on correspondent banking services. The relevant revised text notes that an industry-wide questionnaire may be useful, provided it is used as a starting point for the risk assessment.’322

11.3.5 Wolfsberg Group

The Wolfsberg Group is an association of thirteen global banks which aims to develop frameworks and guidance for the management of financial crime risks. In 2018 it published a Correspondent Banking Due Diligence Questionnaire323 as an industry initiative to address the decline in CBRs by facilitating due diligence processes. The Questionnaire aims to standardize the collection of information that correspondent banks ask from other banks when opening and maintaining these relationships, such as their ownership, the products and services they offer and their programs for AML/CFT as well as compliance with sanctions regimes and Anti-Bribery and Corruption (ABC) programs. The Questionnaire is also part of a cooperative effort by the public and private sectors to recognize KYCUs as an effective and efficient tool to support due diligence processes.

11.3.6 World Bank

The World Bank has played an important role in the research, study and analysis of de-risking activity. Pursuant to the requests of the G20, FSB and CPMI324, it has produced studies on de-risking activity and CBRs in particular325 and the remittance marketplace.326 Besides raising awareness among world leaders of the importance of understanding and finding solutions to counter this growing trend,327 it has provided technical assistance to central banks and financial institutions to mitigate the effect of de-refusals.

Technical assistance example includes the following: ● Assisting the Central Bank of Samoa in finding alternative methods to transfer funds via Australian commercial banks; ● Assisting with the supervision of money transfer businesses in Somalia to strengthen business processes and enhance transparency and compliance – remittances in 2015 were estimated to reach a total of USD 1.4 billion in Somalia and support 23% of the GDP;328 ● Improve systems for providing and verifying customers’ identity, including through digital ID systems via the Identification for Development (ID4D) initiative; ● Improving their supervisory and monitoring capacity, including through digital technologies and data analysis;

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● Conducted surveys on behalf of the G20 GPFI.

11.3.7 The International Monetary Fund (IMF)

The IMF – alongside other supra national bodies such as the World Bank Group – has provided technical assistance to affected countries as well as producing surveys and reports that analyze the process.

12 Legal Actions and Regulatory Approaches

12.1 Overview

At present there is no uniform, universal right for persons Issues Addressed and businesses to have access to a bank or any financial account. In some jurisdictions though, removal or refusal of • Regulatory uncertainty an account needs to be cogently explained to the entity or • Declining risk appetite person whom from whom the account was removed or • Anti-competitive conduct refused.329

There are also jurisdictions which have been more attentive towards addressing the challenges of banks exiting financial services relationships with little to no prior notice; refusing to supply financial services to new applicants; and withholding reasons behind decisions to exit or supply financial services.

Legal challenges (such as in court and before tribunals) and appeals to relevant authorities (such as to governmental bodies) have been made by parties impacted by refusal actions with some but limited measures of success. This section examines select jurisdictions where legal and regulatory activity relating to refusal has occurred.

12.2 Australia

In 2014, numerous money transmitters were informed by Westpac Banking Corporation - one of the last major banks in Australia providing services to MTOs330 - that their accounts would be closed imminently. The closure was potentially the result of concerns about terrorist financing in the remittances industry.331 A class action was filed against Westpac by two dozen MTOs claiming Westpac engaged in unconscionable conduct and failed to provide reasonable notice.332 Shortly after the case was settled with Westpac providing for the filing MTOs to have until the end of March 2015 to find an alternative banking service provider.333

12.3 Africa

South Africa

Bredenkamp v Standard Bank (2010):334 The US Office of Foreign Asset Control (OFAC)335 had listed Bredenkamp and several of his entities as ‘specially designated nationals’ (SDNs) resulting from their belief that he was closely connected with and had financially supported the Robert Mugabe regime in Zimbabwe.336 In addition to being investigated for fraud in the UK, Bredenkamp was also alleged to have been involved in illegal activities relating to arms smuggling and profiting from war in Congo. Bredenkamp was labeled a PEP and a high-risk for business, legal and reputation related concerns by Standard Chartered Bank. These concerns and a US prohibition on companies conducting business with SDNs led the bank to terminate the relationship with Bredenkamp using their bilateral ‘reasonable notice’ contract provision.

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Bredenkamp sued arguing that the termination violated the Constitution of South Africa mandating fairness in dealing and that this act would also prevent him from obtaining financial accounts in other banking institutions. The court ruled for the bank, reasoning that the agreement was not constitutionally unfair since multiple factors would be taken into account by a new banking entity in considering a new agreement, such as the OFAC designation. Furthermore, a bank should not be obligated to retain a client and have its own bona fide judgment about business decisions be undermined because a terminated client might be unlikely to find another banking agreement.337

Hlongwane and Others v Absa Bank Limited and Another (2016):338 Hllongwane, a former advisor to a defense minister in South Africa, was the subject of investigation by state authorities of engaging in illegal arms transfers and claimed a direct association with ex-President Jacob Zuma of South Africa who has and continues to face substantial fraud and corruption charges.339 Hllongwane was labeled as a PEP by Absa Bank who sent notice to Hllongwane that it would be terminating his account and related entities.

Hllongwane disputed the allegations and sued to obtain bank information related to the closure. The court ruled in favor of the bank, reasoning that it appeared to act in good faith by having a bona fide business reason to close the accounts in the face of clear commercial and reputational risks, including AML/CFT costs which could render such a client not financially desirable and/or unprofitable.340

Minister of Finance v Oakbay Investments (Pty) Ltd and Others; Oakbay Investments (Pty) Ltd and Others v Director of the Financial Intelligence Centre (80978/2016) [2017] ZAGPPHC 576; [2017] 4 All SA 150 (GP); 2018 (3) SA 515 (GP) (18 August 2017): In a noted South African case, the South African office of an Indian bank cut off ties with PEPs – three brothers connected to the President - because it was unable to cope with the work required to review every transaction with a small staff, and could face legal liabilities from the central bank and the FIU if it failed to monitor the accounts properly.341 The PEPs successfully sued the bank for restoration of its accounts, a temporary victory though as they eventually fled the country leaving their companies to fend for themselves. The bank, however, eventually closed its doors in South Africa given the reputational damage it had suffered and loss of its local CBRs.342

12.4 Caribbean

To address several financial challenges including the dangers343 of potential loss and rising cost of existing CBRs, Eastern Caribbean Central Bank (ECCB) members have moved to consolidate indigenous banks and respective AML/CFT supervision into a central effort under the ECCB.344 A consultative paper to effectuate this effort has also been issued.345 Direct appropriation from the U.S. Treasury has already been allocated for technical assistance to provide consulting services to accomplish the project and to provide capacity building.346

12.5 European Union

As exhibited throughout this paper, refusal actions can result in the termination of a client account by a financial institution with limited or no notice and without explanation. The exited client has not only lost access to financial services but may also be denied an explanation which might otherwise help them understand what can or still could be done do to save a vital financial services relationship.

One goal of the EU’s Payment Accounts Directive (PAD),347 adopted in 2014, is for every person to have the right to have access to a basic payment account.348 The Payment Services Directive 2 (PSD2)349 of 2015 provides greater attention to both the onboarding process as well as account maintenance, and was intended to address the aforementioned challenges without impacting significantly on freedom of choice of financial institutions to choose with whom they wish to conduct business.

Goals of the PSD2 include leveling of the playing field for payment service providers, increasing competition by lowering access barriers, hoping to result in lower prices in the marketplace.350 It also intends to eliminate

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undesirable business practices, such as unexplained exits from customer relationships. Recital 39 of the PSD2 provides some insight into the problems it intends to solve, recognizing that payment services providers simply cannot operate and service clients without being able to open and reliably continue to maintain accounts with credit institutions.351

Article 35 and 36 of the PSD2 cover access to payment systems and accounts maintained with a credit institution, respectively. The EU Member States are tasked to ensure that registered payment service providers (PSPs) have access on a proportionate, objective and non-discriminatory (POND) basis and free from hindrance and inefficiency.352 In the event services to a payment institution are rejected, the credit institution refusing to supply must provide the appropriate authority in the respective Member State with ‘duly motivated reasons’ for the rejection.

Some industry experts believed that Article 36 compelled credit institutions to provide accounts, providing hope of relief against pre-risking and refusal activities.353 The HM Treasury in the UK provided clarity, stating that its implementation of Article 36 in the FCA Payment Services Regulations (PSR) regulation 105 does not impose any such absolute obligation upon credit institutions to provide access.354 Such decisions are still commercial in nature, leaving the participating institution with the ability to factor cost and risk into the equation. It only requires that all applications be treated alike and that decisions of access be made in a POND manner.355 Should an application be denied or services withdrawn from an existing client, PSR 3.27 Regulation 105(3) requires the credit institution to provide the FCA with duly motivated reasons for taking such action.

The following cases represent some results of asserting legal remedies which challenge a refusal to supply.

12.5.1 United Kingdom

Dahabshiil Transfer Services Ltd. V. Barclays PLC: Legal challenges to refusal activities may begin with the filing for an interim injunction to ensure continuation of financial services and avoid the shutting down of the plaintiff’s business while the dispute is adjudicated. Such was the case with the interim injunction issued in 2013 by the High Court of Justice in the UK to Dahabshiil Transfer Services Ltd. In May 2013,356 Barclays PLC sent notices of termination of banking services to the bulk of its UK MTO clients, including Dahabshiil, which had been a client for 15 years with AML compliance programs deemed satisfactory by the bank during its duration.

Reasons given by Barclays for exiting these relationships included changes in the bank’s eligibility criteria across the MSB sector in conjunction with the bank’s risk-based approach.357 Subsequently Dahabshiil, one of the impacted MTOs, sued Barclays for unlawful abuse of U.K. competition law through its ‘dominant market position’ in which the bank was alleged to have serviced at least 70% of money remitters in the U.K. and set a very high minimum level of net tangible assets required for MTOs providing remittances services.

The High Court found that issues existed for litigation and granted an injunction to Dahabshiil. However, in 2014 Dahabshiil entered into a settlement agreement with Barclays to provide additional time to find a suitable replacement banking relationship.358 Proceeding further would have required Dahabshiil to expend substantial additional legal costs without guarantee of winning its case and implementation of a permanent remedy.

12.5.2 Spain

Safe Interenvios v Liberbank, Banco DeSabadell, Banco Bilbao Vizcaya Argentaria: In 2016, the Court of Justice of the European Union (CJEU) confirmed that EU Member States cannot enact blanket laws which assume that sending funds abroad will always be considered high risk (and automatically trigger enhanced due diligence requirements) if they do not pass the proportionality test for impinging upon fundamental rights and freedoms guaranteed under EU law.

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Safe Interenvios is a Spanish remittance company that refused (upon legal grounds) to provide information requested by three banks pertaining to irregularities discovered concerning Safe’s agents. One bank informed Spain’s FIU (SEPBLAC)359 that it suspected money laundering activities. Subsequently Safe’s accounts were terminated by all three banks pursuant to Spanish Law 10/2010, which is the country’s implementation of the EU‘s third Anti-Money Laundering Directive of 2005.360 The Commercial Court of Barcelona rejected Safe’s application and its argument that the banks violated competition law by terminating its accounts, preventing Safe from competing with the banks who also provide cross-border remittances. It ruled that the banks were entitled to adopt the EDD measures it took in requesting customer data although justification for the account closures required examination in each case. However, the court did find that the two banks, which did not file a report with SEPBLAC, had acted unfairly by failing to set forth its reasons for closing Safe’s bank accounts. Safe and the two banks appealed the judgment to the Provincial Court in Barcelona, which submitted a request for a preliminary ruling on three questions to the CJEU.

In March 2016, the CJEU found that EU Member States, such as Spain, can set higher levels of AML protection (such as requiring standard or enhanced due diligence measures over simplified) above the floors set by EU legislators. But they cannot do so where such AML/CFT measures impinge upon or restrict fundamental rights and freedoms guaranteed under EU law. Public interest protections may only be overridden to the extent that an action is proportionate to the risk that has been identified.361 Neither national legislators nor financial institutions can make blanket presumptions about risk levels without considering rebuttal evidence that may be proffered by a complainant that cross-border money transfers are automatically considered high risk and thus elevated levels of due diligence are always required. The proportionality in applying customer due diligence measures is dependent upon the results of an actual risk assessment and whether due diligence measures are in compliance with the law.

12.6 Latin America

Several incidents of refusal to supply crypto-currency exchanges in Latin America led to legal challenges to restore financial accounts. Arguments were made based on anti-competition law as well as on jurisdictional requirements which address the rights of parties to be given reasonable prior notice in the event a financial institution intends to discontinue or refuse service.

12.6.1 Brazil

In June 2019, a Brazilian found in favor of Mercado Bitcoin, the largest crypto-currency exchange in Brazil, upholding an earlier ruling and fine imposed against Santander Bank362for freezing approximately USD 350,000. The Bank claimed that the Mercado’s crypto-currency related activities were ‘incompatible’ with the ban policy.363

Walltime, a crypto-currency exchange, had its bank accounts terminated by several Brazilian banks during 2018, including Caixa Economia Federal in March without prior notice or explanation. After Walltime filed in Brazilian federal court in April 2018, it was awarded a temporary injunction in July, releasing over USD 212,000 frozen in the account, held open pending final adjudication of the case.364 Walltime’s legal counsel asserted that banks refusal without prior notice are in violation of the Central Bank’s circular (No. 3,788/2016) which mandates prior notice of intent to terminate along with a stipulation for settlement.365

In September 2018, a Brazilian Civil Court found in favor and reinstated the bank accounts of crypto-currency exchange, Bitcoin Max, which found Santander Bank was in violation of consumer protection laws and the Central Bank’s account closure law when it terminated the plaintiff’s account without prior notice citing “commercial disinterest.”366 In the same month, the Civil Court of Sao Paulo ruled that the Bradesco bank was required to reinstate the bank account of the Braziliex crypto-currency exchange after it terminated the plaintiff’s bank accounts without adequate prior notice and reportedly in violation of the period mandated by the Central Bank.367 CADE,368 Brazil’s antitrust regulator, investigated the wave of bank account closures of crypto-currency exchanges which resulted in the exchanges suing their banks to reopen accounts and filing an antitrust complaint with CADE.369

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12.6.2 Chile

Decisions made by Chilean courts on complaints alleging anti-competitive conduct of banks refusal crypto-currency and digital asset exchanges spawned a recently introduced bill in April 2019 to regulate crypto-currency.370 An early 2018 decision in Chilean Supreme Court held in favor of a bank’s right to terminate the accounts of a crypto- currency exchange (Orion Tradex) as being within their discretion and not contrary to the national constitution. The court noted concerns related to the characteristics of crypto-currencies and their inability to receive information about transaction participants among other issues.371

In 2018, this decision was appealed and three crypto-currency trading platforms372 filed a complaint in Competition Court373 against multiple banks, including Banco del Estado de Chile, the country’s state-owned bank), accusing them of collusion and anti-competitive actions to shut down the crypto-currency industry.374 The Competition Court ordered the banks to reopen the plaintiff’s accounts while the lawsuit was being actively adjudicated.375 In December 2018,376 The Competition Court ruled against two of the banks who filed for a declaration that the banks possess the legal right to refuse to supply services to crypto-currency exchanges.377

In April 2019, the Chilean Minister of Finance announced that he would be introducing a bill to regulate Fintech activities and crypto-currencies which would also mitigate risks, such as those related to AML/FT, and also provide legal certainty about such activities to the public.378 The banks asserted that uncertainty and lack of clear regulation led increased risks which were the subject of termination.

12.7 New Zealand

E-Trans International Finance Ltd v Kiwibank Ltd [2016] 3 NZLR 241:379 E-Trans is a money remittance provider in New Zealand, and which held a number of accounts with Kiwibank. Kiwibank notified E-Trans that it was going to terminate its relationship with E-Trans and close all of its accounts. E-Trans successfully sought an interim injunction restraining Kiwibank from doing so, pending resolution of the substantive issues in the case. Kiwibank asserted that its relationship with E-Trans was at an end as it had terminated its contract with E-Trans on 14 days notice, as permitted by its general terms of contract. E-Trans contended, however, that Kiwibank had breached an implied term of the contract to act fairly and reasonably in exercising its power to terminate the contract. E-Trans said that that term was implied into the contract through the Code of Banking Practice.380

The New Zealand High Court dismissed the E-Trans’ argument in holding that the bank was entitled to rely upon its general terms and conditions to close a customer’s accounts on 14 days’ notice, often without reasons.381

12.8 United States

12.8.1 Federal

OCC FinTech Charter: In an effort to promote competition and responsible innovation, the Office of the Comptroller of the Currency (OCC) announced in July 2018 that it would accept applications for ‘national bank charters from non-depository financial technology companies engaged in the business of banking.’382 As of April 2019, there have been no charters issued and only one fintech reported to be in late stage discussions for approval.383 The program is also in jeopardy, facing a legal challenge by the New York Department of Financial Services and the Conference of State Bank Supervisors.384

Congressional Hearings: In 2018, the Subcommittee on Financial Institutions and Consumer Credit of the House Financial Services Committee held two hearings to ventilate issues related to refusal activities.385 In the first hearing in February 2018 and in its report de-risking activities occurring near the southern US border,386 the US Government Accountability Office (GAO)387 reported finding evidence of refusal activities due to the perception of the presence of high risk levels which could attract additional regulatory scrutiny. The GAO made four primary

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recommendations, including that FinCEN should ‘jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with FDIC, the Federal Reserve, and OCC. This review should focus on how banks’ regulatory concerns may be influencing their willingness to provide services.’ 388

12.8.2 State

OCC and FinCEN: In an August 2016 response to banking industry concerns about EDD expectations, the OCC and FinCEN’ issued a ‘Joint Fact Sheet. 389 The Sheet represented a concise effort to provide a clearer set of expectations of US regulators conducting AML/CFT examinations and an appreciation for its approach towards penalties and sanctions for non-compliance.

In addressing its first clarification, the US Treasury announced that there is no general requirement or expectation that US banks conduct EDD390 but without significant additional detail. FinCEN has subsequently released advisories to stem the tide of refusing to provide financial services without conducting an appropriate risk assessment in its FinCEN Advisory bulletins.391

This bulletin was also intended to alleviate potential overreaching by state regulators and termination of clients by financial institutions resulting from their concerns about being sanctioned for potential violations of related AML/CFT regulations.392 That is, even when regulators issue policy guidance to banks393 and bank examiners that ostensibly provide guidance on how to assess a RBA without overtly pressuring the supervised entity to proactively cut off ‘risky’ clients, the information may not filter down to the examiner level - the people who are actually inspecting banks.

As a result, there can be a gap between policy recommendations/guidance issued on an entity level and actual implementation. Examiners may implement rules-based inspections rather than use a RBA, which invariably will prompt especially smaller banks to initiate EDD on – and even cut off - many of its clients to pre-empt further investigations from inspectors. Proper instructions from regulators to their inspectors may ward off this pre- emption. Similarly, there also isn’t any incentive for informed regulators to issue merit marks for excellent compliance efforts. This is because they are more often measured by their ability to find fault and, as a result, may be overly fastidious in their reviews, regardless of what policy approach dictates from the national office.

13 Conclusions

Part 1 of our study on the phenomenon of ‘refusal to supply’ financial services – known colloquially as ‘de-risking’ – investigated and analyzed some of the issues emanating from refusal to supply new services to entities in developing countries because of fears of heightened risk exposures, as well as mostly unilateral termination of account relationship and correspondent banking relationships (CBRs) by global correspondent banks (GCBs). We demonstrated and concluded then that it is a hydra-headed, multi-national and multi-dimensional issue with no easy solutions. Often than not the reasons for refusal are business-related, with little nexus to risk

Given this set of not-inconsequential challenges, in this paper - the Part 2 of the two-part study – we investigated, analyzed and devised a taxonomy that categorizes and systematizes the most prevalent approaches and ostensible solutions that may address the issue of refusal to supply.

Exhibit 1 indicates concisely the universe of issues driving the refusals and terminations, alongside potential mitigants, approaches and solutions that have been and can be deployed to address the issues.

Many of the issues driving refusal to supply relate to identifying and verifying customers of financial institutions and of recipients of remittances, recognizing that one of the main reasons for refusals are compliance-related money

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

laundering concerns by GCBs as to the ultimate beneficiary of funds sent through their systems to banks and money transfer organizations (MTOs) in and to what these GCBs consider high-risk regions.

Many of the anti-money laundering (AML) and countering the financing of terrorism (CFT) related and Customer Identification and Verification (CIV) related concerns could be addressed through improved guidance from regulators in affected countries, so-called ‘safe harbor’ provisions provided by GCBs to respondent banks in affected areas, and deploying centralized solutions that properly and quickly identify customers in affected regions. Use of legal entity identifiers (LEIs) as well as so-called centralized Know Your Customer Utilities (KYCUs) as part of a suite of what are known as regtech (regulatory technology) solutions which may assist in lifting the fog of suspicion and information asymmetries prevalent in CBRs. Similarly, initiatives to create regional or transaction hubs are gaining traction in some regions.

Fintech solutions, such as distributed ledger technologies (DLTs) may also assist. We believe that many of these technology-based solutions, though, require dramatic reengineering of not just the technology capabilities of those thinking of deploying them but also retraining of current staff to be data analysts rather than pure compliance officers. Much of this training and funding thereto may come –as it has traditionally been - from technical assistance programs from the International Monetary Fund (IMF), World Bank, and sympathetic Western and Asian governments.

Notably, we find, often what appears to be a ‘stop-gap’ solution acting as a band aid to a particular problem of refusal of service in a particular jurisdiction may become the only, and thus permanent solution. ‘Cash Carrying’ is a simple example of the trend.

It is clear, though, from an analysis of each of the approaches and ostensible solutions, that there are no ‘silver bullets’ to halting refusal to supply and loss of critical cross-border financial services but rather that strategies are needed at a supra-national, regional, and/or national level as the circumstances require it. The goal in most cases is to reverse the global decline in CBRs and to break through informational asymmetries that are often a trigger of CBR terminations or refusal of service.

Without that leadership, the trend of refusal to supply will increase, and increasingly skew international trade and affect the economic growth of developing countries. Affected countries too should step up their compliance regimes while still investigating alternative methods of cross-border transfer of value that allows their economies not just to survive potentially catastrophic effects of refusals on their gross domestic product (GDP), but also to grow.

14 Recommendations

These recommendations are context specific, unless applicable as indicated to a particular entity or body.

14.1 Knowledge Sharing

● Standard setting bodies (SSBs) and national governments should encourage and prioritize more frequent and meaningful public-private forums where banks, financial institutions, non-bank financial institutions (NBFIs) and regulators can address each other to discuss problems and remedies with personal interaction of the parties. Greater attention should be given to the needs of developing countries to provide them with more guidance, knowledge, tools and information to develop a set of best practices and approaches towards identifying key risks and harmonizing regulation.394 ● While the Financial Action Task Force (FATF) prefers not to engage in trying to define an impossibly large set of rules in fear of fostering a ‘tick-the-box approach to risk management’395 which might lead to greater refusal actions by correspondent banks, evaluation is completely subject to what may be differing

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

interpretations, perceptions and expectations of bank compliance officers and regulators. In order to deal with perceptions that this approach may be the result of ‘shifting the regulatory burden’, investigation as to a possible compromise between the two approaches may be needed in addition to elaborating upon policy and expectations regarding different types of situations. ● While correspondent banks may be prevented by law or regulation to divulge suspicions that were reported to authorities (prohibition of “tipping off”), improving the communication and dialogue between correspondent and respondent banks, as recommended by FATF, 396 can help respondents understand expectations and resolve incidents, avoiding terminations. ● A good example is the Joint Money Laundering Intelligence Taskforce (JMLIT), which was set up for that purpose and involves 20 major UK and international banks, law enforcement and government agencies. It is a collaborative approach which is designed to provide ‘an environment for the financial sector and government to exchange and analyze intelligence to detect, prevent and disrupt money laundering and wider economic crime threats against the UK.’397 Participants are encouraged to share specific intelligence about suspected money laundering.

14.2 Regulatory Approaches

● Global use of the legal entity identifier (LEI) is recommended, which increases transparency and information about sender(s) and recipient(s). The Financial Stability Board (FSB) should explore measures to expand the use of the LEI globally and to establish uniform standards and requirements of implementation. ● Guidance, clarity and more detailed expectations should be provided by the US, FATF and appropriate SSBs regarding enhanced due diligence (EDD) expectations and more specific instruction on how to handle high-risk customers. ● The US Treasury and banking agencies should clarify their approaches to penalties and sanctions to aid the financial industry to set reasonable expectations and appreciate fairness by understanding consistency in application. ● With regard to cross-border remittances, consideration should be given to an MSB/MTO white list comprising of those who meet or exceed an approved set of high standards and best practices, determined collaboratively in conjunction with the banking industry, which would be recognized as compliant with internal banking risk standards in the industry.398

14.3 Technology Use

● Encourage development and use of Customer Identification and Verification (CIV) technology such as electronic Know Your Customer (eKYC), electronic identification (eID), national ID databases, electronic KYC Utilities (KYCU) and fintech and regtech solutions. ● While KYC tools and biometric solutions are often mentioned as the start of providing greater transparency in developing nations, the World Bank, IMF and FSB should undertake feasibility studies to explore how such technology may be best received by individuals who may not be receptive nor have sufficient capacity to understand and appreciate such innovation. ● Use of DLTs and alternative payment rails. ● Investigate the potential of Central Bank Digital Currencies (CBDCs) and alternative currency options which can facilitate cross-border money transfers while reducing reliance on correspondent banks.

14.4 Capacity Building and Technical Assistance

● The World Bank, IMF, FSB, Bank of International Settlements (BIS), International Finance Corporation (IFC), FATF, and other relevant SSBs and international organizations should investigate which jurisdictions require the greatest assistance with capacity building to address AML/CFT compliance deficiencies and explore the optimal method and means of providing assistance.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

● Guidance and support for capacity building efforts in high-risk jurisdictions, especially where compliance may be suspect, is essential. Regulators and legislators should be educated on how they can better apply and implement FATF standards and be able to distinguish different tiers of risk levels of customers.399 ● On a global level, international organizations should investigate and create a proposition which provides assistance developing countries to implement reliable national identification systems and implement usage.

14.5 Financial Assistance

● IFC is providing additional capital and liquidity by investing directly in and with correspondent banks to sustain and/or expand their CBRs. ● Encouraging multilateral organizations to innovate their product offerings to further support correspondent banking, particularly trade finance. ● Providing additional funding and guidance to assist some emerging market banks in adapting their KYC systems and/or AML/CFT processes.

14.6 Regional Approaches

• One method of achieving greater scale and efficiencies through consolidation with neighboring jurisdictions. Driven by the potential risks posed by refusal, members of the Eastern Caribbean Currency Union (ECCU) are in the process consolidating certain banking services within their countries, as is examined in greater detail in Section 10.2 Consolidation of Banks / Correspondent Banks.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

Endnotes

1 The Bank for International Settlements (BIS) has defined correspondent banking as ‘an arrangement under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services to those respondent banks.’ Relating to cross-border money transfers, the BIS describes this relationship as ‘essential for customer payments and for the access of banks themselves to foreign financial systems for services and products that may not be available in the banks’ own jurisdictions.’ BIS (2016) Correspondent banking, available at https://www.bis.org/cpmi/publ/d147.pdf; The European Central Bank (ECB) highlights the importance correspondent banking relationships play in cross-border transactions such as remittances as ‘these relationships are frequently reciprocal, in that each institution provides services to the other, normally in different currencies.’ ECB (2015) Ninth survey on correspondent banking in euro, available at https://bit.ly/1JUfvD6 2 See Part 1 on the nature of ‘refusal to supply.’ Perlman, L (2019) A Refusal to Supply (Part 1): De-constructing Trends In Financial De-risking and the Impact on Developing Countries, available at www.dfsobservatory.com 3 Columbia University De-risking Roundtable, November 2017. DFSO (2017) Roundtable: De-Risking and International Remittances - Challenges and Solutions, available at https://dfsobservatory.com/event/roundtable-de-risking-and- international-remittances-challenges-and-solutions 4 Wechsler, M (2017) Webinar: De-risking And Financial Inclusion: Challenges and Solutions, available at https://dfsobservatory.com/event/de-risking-and-financial-inclusion-challenges-and-solutions 5 Durner, T & Lucas, A (2019) Webinar: De-risking And Financial Inclusion: Challenges and Solutions, available at https://dfsobservatory.com/event/de-risking-and-financial-inclusion-challenges-and-solutions 6 Perlman, L (2019) A Refusal To Supply (Part 1): De-constructing Trends In Financial De-risking and the Impact on Developing Countries, available at www.dfsobservatory.com

13 The most impactful and prominent entities undertaking refusal of services are the global financial institutions acting as correspondent banks for international transactions, otherwise known as Global Correspondent Banks. 14 A report on remittances activities and competition in LATAM indicates that in those countries where local regulations prevent foreign banks from exercising absolute control over the capital of banks and local financial institutions, the refusals seems to have been less perverse. These include Guatemala, Colombia, Ecuador, and Brazil. See IMTC (2019) Family Remittances and "De-risking": The Case of Mexico, available at https://bit.ly/2XLAUqk 15 Datta, K & Vicol, D (2019) Derisking London’s Remittance Marketplace, available at http://bit.ly/2XDqxFb 16 Digital Financial Services (DFS) is a relatively new, low-cost means of digital access to transactional financial services. Often termed ‘mobile money’ or ‘mobile financial services,’ DFS is one of the core solutions used in developing countries to catalyze financial inclusion and provide much-needed low-cost access to financial services. Perlman, L (2018) An Introduction to Digital Financial Services (DFS), available at https://bit.ly/2JEIDDb 17 ACAMS defines KYC as: ‘AML policies and procedures used to determine the true identity of a customer and the type of activity that is “normal and expected,” and to detect activity that is “unusual” for a particular customer.’ ACAMS (2018) AML Glossary of Terms, available at https://www.acams.org/aml-glossary/ 18 Identification and verification are two different processes. Identification is the process of obtaining identity information and a second process is the verification of some of that information (which ensures reliability.) See FATF (2013) Politically Exposed Persons (Recommendations 12 and 22), available at http://bit.ly/2G6dPZI; See also De Koker, L (2019) AML Trends in the Developing World and the impact of 30 years of FATF integrity standards (Webinar), available at http://bit.ly/2YOkwXM; ACAMS defines CDD as: ‘In terms of money laundering controls, CDD requires policies, practices and procedures that enable a financial institution to predict with relative certainty the types of transactions in which the customer is likely to engage. CDD includes not only establishing the identity of customers, but also establishing a baseline of account activity to identify those transactions that do not conform to normal or expected transactions.’ ACAMS (2018) AML Glossary of Terms, available at https://www.acams.org/aml-glossary. See Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, available at https://bit.ly/2G2aXNh. 19 ACAMS defines CDD as: ‘In terms of money laundering controls, CDD requires policies, practices and procedures that enable a financial institution to predict with relative certainty the types of transactions in which the customer is likely to engage.

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

CDD includes not only establishing the identity of customers, but also establishing a baseline of account activity to identify those transactions that do not conform to normal or expected transactions.’ ACAMS (2018) AML Glossary of Terms, available at https://www.acams.org/aml-glossary/;.On the nature of refusal, see Perlman, L (2019) A Refusal To Supply (Part 1): De- constructing Trends In Financial De-risking and the Impact on Developing Countries, available at www.dfsobservatory.com See Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 20 For more information, see Section 6.2 The Evolution of KYC Utilities for Customer Identification and Verification. ion of KYC Utilities for Customer Identification and Verification. 23 Perlman, L & Wechsler, M, (2019) Mobile Coverage and its Impact on Digital Financial Services, available at http://dx.doi.org/10.2139/ssrn.3370669 24 Perlman, L & Wechsler, M, (2019) Mobile Coverage and its Impact on Digital Financial Services, ibid. 25 Murthy, G; Fernandez-Vidal, M; Fax, X et al. (2019) Fintechs and Financial Inclusion: Looking past the hype and exploring their potential, available at https://bit.ly/2R3rEMx 26 Wechsler, M; Perlman, L & Gurung, N (2018) The State of Regulatory Sandboxes in Developing Countries, ibid. 27 WorldRemit provides international remittances services, which includes the ability to deposit funds into mobile money accounts. Existing law required KYC identification to be performed in person. WorldRemit was permitted to implement its remote, online solution such as through video. Wechsler, M; Perlman, L & Gurung, N (2018) The State of Regulatory Sandboxes in Developing Countries, available at http://dx.doi.org/10.2139/ssrn.3285938; See also Wines, C (2017) Presentation of Catherine Wines, World Remit, for CGAP Webinar: Regulatory Sandboxes: Harnessing Innovation for Financial Inclusion?, available at https://bit.ly/2O0N4uK 28 The term BOP was introduced sometime in 1999 by Prahalad and Hart to describe what they observed were ‘Four Consumer Tiers.’ AT the bottom are 4 billion people with an annual per capita income — based on purchasing power parity in US dollars — of less than USD 1,500, the minimum considered necessary to sustain a decent life. For well over a billion people — roughly one-sixth of humanity — per capita income is less than USD 1 per day. See Prahalad, C & Hart, S (1999) Strategies for the Bottom of the Pyramid: Creating Sustainable Development, available at https://bit.ly/2OdTYsV. For an analysis of the BOP concept years later with revised figures, see Kolk, A, Rivera-Santos, M & Rufin, C (2012) Reviewing a Decade of Research on the 'Base/Bottom of the Pyramid' (BOP) Concept, available at https://ssrn.com/abstract=2193938 29 Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 30 Kirschenmann, K & Steinruecke, L (2017) The Fight Against Financial Crime: How Global Banks’ De-Risking Affects Trade and the Local Economy, available at https://ssrn.com/abstract=3088506 31 Toronto Center (2017) FinTech, Regtech and SupTech: What They Mean for Financial Supervision, available at https://goo.gl/R3vWxH

33 Dias, D & Staschen, S (2017) Regtech and Digital Finance Supervision: A Leap into the Future, available at https://bit.ly/2GThDQe 34 Suresh, A (2019) RegTech: A new disruption in the financial services space, available at https://pwc.to/2LLnxo0 35 KPMG, The nexus between regulation and technology innovation, available at http://bit.ly/2YXtemF 36 An FCA study in the UK reported increased effectiveness and accuracy and the reduction of compliance costs through technological innovation, which included those related to the use of data analytics, machine learning and natural language processing (NLP) to enable firms to spot suspicious transactions and assess their risk in real time, all of which could potentially transform the AML compliance lifecycle. UK FCA (2017) New Technologies and Anti-Money Laundering Compliance, available at http://bit.ly/2LdPzJj 37 The concept of standardization of data is examined in Exhibit 4. 38 ‘Deep-learning software attempts to mimic the activity in layers of neurons in the neocortex, the wrinkly 80% of the brain where thinking occurs. The software learns, in a very real sense, to recognize patterns in digital representations of sounds, images, and other data.’ Hof, R (2013) Deep Learning, available at http://bit.ly/2JvogrT 39 Machine learning has been described as ‘…the machine’s ability to keep improving its performance without humans having to explain exactly how to accomplish all the tasks it’s given.’ Brynjolfsson, & McAfee, A (2018) The Business of Artificial Intelligence: What it can — and cannot — do for your organization, available at http://bit.ly/2LhPd4e 40 Predictive coding refers to the identification of patterns of conduct and is frequently helpful in identifying aberrations and anomalies which might flag concerns. Common uses can include detection of unusual entry and exit times of employees and unusual communication patterns. Arner, D; Barberis, J & Buckley, R (2016) The Evolution of FinTech: A New Post-Crisis Paradigm, available at http://bit.ly/2LK1pdy 54

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41 This chart is a modified version of core compliance list. See Wang, R (2017) How regtech can help banks conquer compliance mountain, available at http://bit.ly/2SbeKgm

43 IIF (2016) Regtech in Financial Services: Technology Solutions for Compliance and Reporting, available at https://goo.gl/A62STL 44 Di Castri, S & Grasser, M & Kulenkampff, A (2018) An API-based Prudential Reporting System for the Bangko Sentral ng Pilipinas (BSP) R2 A Project Retrospective and Lessons Learned, available at http://bit.ly/2G75pRS 45 FSB (2017) Artificial Intelligence and Machine Learning In Financial Services, available at https://bit.ly/2h1h8UT; Rodriguez, J (2017) Types of Artificial Intelligence Learning Models, available at https://bit.ly/2qpDQeq 46 PWC (2018) Building Trust in Data Analytics, available at https://pwc.to/2LLyFRL 47 Toronto Center (2017) FinTech, Regtech and SupTech: What They Mean for Financial Supervision, available at https://goo.gl/R3vWxH 48 Microsoft Azure (2018) What Is Cloud Computing?, available at https://bit.ly/2oIZmu4; IBM (2018) What is cloud computing?, available at https://ibm.co/2Fxo2vr 49 See World Bank (2018) Blockchain & Distributed Ledger Technology (DLT), available at https://bit.ly/2yvQHzS; FCA (2016) Feedback Statement Call for Input On Supporting the Development and Adopters of Regtech, available at https://bit.ly/2bXLSrg 50 Rinaldi, A (2015) Biometrics’ New Identity- Measuring More Physical And Biological Traits, available at https://bit.ly/2CYBKdI 51 SWIFT (2019) The KYC Registry, available at http://bit.ly/2XGRuN9 52 FCA (2016) Feedback Statement Call for Input on Supporting the Development and Adopters of Regtech, available at https://bit.ly/2bXLSrg 53 FCA (2018) Call for Input: Using technology to achieve smarter regulatory reporting, available at https://bit.ly/2CyYCzf 54 Data sourced from author research, and Ramachandran, V & Woodsome, J (2018) Fixing AML: Can New Technology Help Address the De-risking Dilemma?, available at https://bit.ly/2IKMECI; KPMG (2017) The Nexus Between Regulation And Technology Innovation, available at https://bit.ly/2q61nBO; FCA (2016) Feedback Statement Call For Input On Supporting The Development And Adopters Of Regtech, available at https://bit.ly/2bXLSrg; Toronto Center (2017) FinTech, Regtech and SupTech: What They Mean for Financial Supervision, available at https://goo.gl/R3vWxH; Deloitte (2017) The Regtech Universe On The Rise, available at https://goo.gl/LUpKtH 55 Topics such as ID verification are covered in Section 6 Addressing CIV. 56 Although FATF largely discarded the term ‘KYC’ in its documents onwards from 2003, KYC as the overall descriptor for CIV and related processes is still firmly embedded in the minds of national regulators, compliance officers, industry associations, academic works, and customers. Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 57 On the nature of refusal, see Perlman, L (2019) A Refusal to Supply (Part 1): De-constructing Trends In Financial De-risking and the Impact on Developing Countries, available at www.dfsobservatory.com 58 Europa Analytics (2018) E-Identification, available at http://bit.ly/32i2UFN 59 For example, the UNCHR at refugee camps using its (independent) IrisGuard biometric capture system. UNHCR (2017) Executive Committee of the High Commissioner’s Programme, available at http://bit.ly/2G6OcYx; In some cases, a private entity may be permitted to facilitate such capture of biographical and biometric details for eKYC purposes, such as occurs in Tanzania. The Citizen (2019) Biometric SIM listing set to start, available at https://bit.ly/30vGAH6 60 The Singapore government will provide software development kits to industries such as banking and finance, for connecting their services to NDI. AVISIAN (2018) Singapore national ID to include facial recognition, available at https://shar.es/a18G3l 61 Some scholars differentiate between eID and what they term in the context of their work on a digital finance, ‘digital identities.’ Digital IDs may mean something else in another context. Arner et al say a legal identity they say is external and personal and summarizes who someone is, while a physical or behavioural identity is internal and interactive and defines who someone is. eID’s would represent in large measure the former and have relatively static legal identifiers such as physical features, birth data, along with some biometrics. A ‘digital ID’ they say would have the eID features but may be more advanced and critical to the development of a digital finance ecosystem. It could possibly include dynamic or behavioural identity features such as the holder’s status in the community, akin to the social identity scores being used in China. They recognize however that such systems – while technically feasible – may not be politically feasible in many countries. See also see Zetzsche, D; Buckley, R; Arner, D et al. (2017) From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance, available at https://ssrn.com/abstract=295992 62 Iris images would exceed the 144kb available storage. 63 National ID databases are covered in Section 3.3 National IDs and Country Examples. 55

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64 FATF (2017) Guidance On AML/CFT Measures and Financial Inclusion, With A Supplement On Customer Due Diligence, available at https://bit.ly/2wLMObN 65 This is entity responsible for developing a national ID system, issuing ID and attesting to true ownership when presented for authentication purposes to third parties and government services. 66 GSMA (2016) Mandatory Registration of Prepaid SIM Cards, available at https://bit.ly/2rysm90 67 LEIs are covered in Section 11.3.2 Financial Stability Board (FSB). 68 Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 69 InterMedia (2017) Bangladesh, Wave 4 Report, FII Tracker Survey, available at https://bit.ly/2y2Wvmv; Bdnews24.com (2016) Deadline for Biometric Re-registration of SIM Cards Extended by a Month, available at https://bit.ly/2thSdmy 70 Mayhew, S (2015) Biometrics Registration for SIM Cards in Bangladesh Starts Wednesday, available at https://bit.ly/2trT2J3 71 Modern Ghana (2017) Ghana Launches New National ID Card, available at https://bit.ly/2ECOus7 72 The services are regulated by the National Identification Authority under the National Identity Register Act. NIA (2008) National Identity Register Act of 2008, available at https://bit.ly/2CvL8V8 73 ITU (2017) Aadhaar: India’s route to digital financial inclusion, available at https://news.itu.int/SDPSP; Your Story (2017) History of Aadhaar: How Nandan's core team came together, available at https://bit.ly/2Eu98KE 74 Aadhaar is now considered the world’s largest national identification number project and operated by the Unique Identification Authority of India (UIDAI). For more information on Aadhaar and UIDAI, see https://www.uidai.gov.in 75 For more information about the legal challenges, see Section 6.4 National, Multinational and PPP CIV Approaches. 76 The Hashemite Kingdom of Jordan (2018) Jordan Smart Card, available at https://bit.ly/2thfXY2. 77 UN Malawi (2018) Malawi’s National ID Project Praised at Africa’s Largest Forum on Digital Identity, available at https://bit.ly/2J3Pxjb; Malik, K (2018) Malawi’s Journey Towards Transformation: Lessons from its National ID Project, available at https://bit.ly/2yNXMLG 78 IPA (2017) Access to Credit and the Scale-Up of Biometric Technology in Malawi, available at https://shar.es/a1KM1P 79 Transaction details recorded in the database include, among others, sender identification and originating bank, the destination bank, transfer beneficiary and the currency and amount sent. Chatain, P-L; Van der Does de Willebois, E; Gonzalez del Mazo, E et al. (2018) The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions, available at https://bit.ly/2wtH1HN 80 Several government agencies undertook biometric data capture following regulatory requirements from inter alia the Nigerian Communications Commission (NCC); the Independent National Electoral Commission; the Federal Road Safety Corp; and the Central Bank’s mandated use of bank verification numbers (BVN) for financial transactions. 81 Balancing Act (2013) Bio-key Biometric Tech Implemented for Nigerian SIM Registration, available at https://bit.ly/2IdDu0H 82 It is believed that harmonization of all private and government agency databases could save the country about USD 110 million in operational costs by the different government agencies for their stand-alone data collection and evaluation. Central Bank of Nigeria (2017) Bank Verification Number (BVN) Enrollment for Customers, available at https://bit.ly/2HPgfip; Online Integrated Solutions (2018) BVN Enrolment, available at https://oisservices.com/bvn.php; Azeez, K (2018) 80 To 90% Bank Fraud Caused by Customers – NIBSS Boss, available at https://bit.ly/2IMRejB 83 For more information about the legal challenges, BVN, NIDB and National ID in Nigeria, see section 3.4 Legal, Privacy and Data Protection Considerations in eKYC. 84 BBC (2014) Nigeria Launches National Electronic ID Cards, available at https://bbc.in/2IbsiBQ; MasterCard (2013) Nigeria National ID Card (NID), available at https://bit.ly/2MdfehK 85 Gidvani, L (2015) The Promise of Biometric KYC and Remote Account Opening for Branchless Banking in Pakistan, available at https://bit.ly/2rFPhiP 86 Matthew, W (2016) Digital Identity: A Prerequisite for Financial Inclusion?, available at https://bit.ly/2IbavdW 87 Standard Kenya (2015) EAC Banks On Regional SIM Card Law to Curb Insecurity, available at https://bit.ly/2rCflui 88 Failure to confirm customers’ information could allow registrations with other person’s IDs and the mismatch of the customer’s photos with the one on the ID. 89 FATF (2017) Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion with a Supplement on Customer Due Diligence, available at https://bit.ly/2taubZM 90 Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 91 This is especially so where proper infrastructure and capacity to produce these documents is lacking. 92 FATF (2017) Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion with a Supplement on Customer Due Diligence, available at https://bit.ly/2taubZM 93 Livemint (2018) Aadhaar Legal Validity: SC Constitution Bench to Commence Hearing Today, available at https://bit.ly/2KaTZ2t 56

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94 For Supreme Court of India judgment, see https://bit.ly/2OM50Gx; Livemint (2018) Supreme Court Verdict on Aadhaar: Constitutionally valid, doesn’t violate privacy, available at https://bit.ly/2CKBDlT 95 Economic Times (2018) Payments companies asked to stop Aadhaar-based services, available at http://www.ecoti.in/tfgiUb. For the Supreme Court of India judgment, see https://bit.ly/2OM50Gx; Livemint (2018) Supreme Court Verdict on Aadhaar: Constitutionally valid, doesn’t violate privacy, available at https://bit.ly/2CKBDlT 96 Bjelica, J & Adili, A Y (2018) The E-Tazkera Rift: Yet another political crisis looming?, available at http://bit.ly/2xCGEs7 97 India Times (2018) French Cyber Expert Cracks Official Aadhaar App In 1 Minute, Realizes UIDAI's Worst Nightmare, available at https://bit.ly/2MfmEAX; The Tribune (2018) Rs 500, 10 Minutes, and You Have Access to Billion Aadhaar Details, available at https://bit.ly/2E4qEjK 98 Watts, D; Medine, D & De Koker, L (2018) Customer Due Diligence and Data Protection: Striking a Balance, available at https://bit.ly/2KKJAHk; GSMA (2016) Mandatory Registration of Prepaid SIM Cards, available at https://bit.ly/2rysm90 99 DLA Piper (2018) Data Protection Laws of the World, available at https://bit.ly/2k0dA73; Deloitte (2017) Building Trust Across Cultures, available at https://bit.ly/2KsPcGh 100 Australia, Hong Kong, India, Japan, Kazakhstan, Kyrgyzstan, Macao, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, and Turkmenistan. 101 Rich, C (2017) A Look at New Trends: Privacy Laws in East, Central, and South Asia and the Pacific, available at https://bit.ly/2tFQdUK 102 Dahir, A (2018) Africa isn’t Ready to Protect its Citizens Personal Data Even as EU Champions Digital Privacy, available at https://bit.ly/2rzHN0b 103 Venture Beat (2017) What zero-knowledge proofs will do for blockchain, available at https://bit.ly/2k4XLwk 104 World Economic Forum (2016) A Blueprint for Digital Identity, available at https://bit.ly/2aOblg1; Insurance Journal (2018) Data Privacy Risks as Digital Identity Moves to Biometrics, Blockchain, available at https://bit.ly/2Kb7qQ1 105 Aadhar use history includes any update relating to name, date of birth, gender or address, or addition/deletion of mobile numbers or email addresses. NDTV (2018) Aadhaar Update History Feature Now Available to Download, available at https://bit.ly/2Jl2JUo 106 Huffington Post (2018) UIDAI’s Aadhaar Software Hacked, ID Database Compromised, Experts Confirm, available at https://bit.ly/2CPdTgf. 107 Communications Week (2014) NIMC, CBN at Loggerheads over BVN Scheme, available at https://bit.ly/2PIiunb 108 Biscaye, P; Coney, S; Ho, E et al. (2015) Review of National Identity Programs, available at https://bit.ly/2EFgs6B 109 New Telegraph (2018) Only BVN data useful for national database –NIMC, available at https://bit.ly/2CZh98X 110 New Telegraph (2018), ibid. 111 FinCEN (2016) Customer Due Diligence Requirements for Financial Institutions, available at https://bit.ly/2ySJMQS 112 The breaking down large amounts for transfer into smaller amounts to avoid detection by authorities. 113 For example, ‘smurfing’. 114 eKYC Utilities are discussed in greater detail in Section 6.2 The Evolution of KYC Utilities for Customer Identification and Verification. 115 Check sanctions, blacklists and geography of users to identify risks for the service providers authenticating the identity of the user and the regulators monitoring the financial sector. 116 Limits could be monitored to ensure that the user is not exceeding them. 117 Smurfing is a common phenomenon where financial transactions are broken down and executed in a specific pattern to avoid raising suspicion of money laundering. Frequency can thus be monitored and high frequency and/or identifiable patterns of financial transactions using DFS could trigger suspicious activity alerts. 118 The concept of a ‘KYC Utility’ is commonly considered to be a central repository that aim to streamline the collection and exchange of data between member institutions, while maintaining appropriate privacy controls. While a KYC Utility may be commercially used for the purpose of CIV, the KYC Utility model can encompass the full range of CDD obligations and can extend benefits to both the private and public sector. A type of Utility has been established in South Africa. Powered by Thomson Reuters ‘Org ID’ as ‘KYC-as-a-service,’ three large national banks provide their customers with unique login keys to the Utility for provision of documents that would form part of a KYC by the major banks. The Utility undertakes KYC on the customer. The customer can choose which of these documents it wishes the Utility to share it with, and with whom. Org ID is also available in n the UK, Poland, and Malaysia. See Thomson Reuters (2016) Strong Growth for KYC Managed Service Org ID, available at https://tmsnrt.rs/2P7TybP; and also PwC (2015) Share and Share Alike: Meeting Compliance Needs Together With A KYC Utility, available at https://pwc.to/2IOl7Aa; CITI (2014) Know Your Customer Utilities, available at http://citi.us/2HtqUvy; Lyman, T & De Koker, L (2018) KYC Utilities & Beyond: Solutions for AML/CFT Paradox?, available at https://bit.ly/2OqOgso 119 Connon, H (2016) Know your customer: the complexities explored, available at http://bit.ly/2Y3Znf6

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120 For more on the practicalities of a KYC Utility, see Lyman, T & de Koker, L (2018) KYC Utilities & Beyond: Solutions for AML/CFT Paradox?, available at https://bit.ly/2OqOgso 121 In Tanzania in September 2017, 6 MNOs were together fined a record USD 5 million by the Tanzania Communication Regulatory Authority (TCRA) for registering new SIM cards for subscribers whose IDs were questionable, and others could not be traced in the database. The TCRA also indicated that there were other irregularities such as were failure to confirm customers’ information, allowing registrations with other person’s IDs and the mismatch of the customer’s photos with the one on the ID. 122 The Central Bank through its preferred CIV process for AML may specify which forms of ID are acceptable for initial registration of a DFS account. The degree of transactional ability will also be determined by the Central Bank based on the degree of identity verification determined through the authenticating documents the customer provides. 123 The FIU may set policies for AML/CFT purposes, either as general principles or as specific guidelines. FIU policies may be implemented by repowering entities such as the CB and NTA, who may need to report back to the FIU as part of FATF- mandated National Risk Assessments. 124 Airtime value refers to credit held with a mobile network operator which entitles the owner to use airtime (such as time talking) on the operator’s network. 125 A DFS wallet is fiat value stored online by a DFS Service Provider on behalf of its customer, allowing the customer to undertake transactions seamlessly. See on DFS, Perlman, L (2018) DFS Primer, available at http://bit.ly/2Jvzcpn? 126 Benefits to a user can be in relation to an amount of security provided by CIV data in levels or ‘tiers.’ For example, based on SIM card registration data, customers who fulfill a basic ‘Tier 1 KYC’ for a DFS account obtain a limited transaction limit. Higher transaction limits can be obtained if Tier 2 and Tier 3 KYC requirements are fulfilled but reach those require more documents and verification. 127 Tarpael, F (2017) FG to Harmonize BVN, Others into National Identity Database, available at https://bit.ly/2yxAufX 128 Financial Telecommunication (SWIFT) is the world’s largest electronic payment messaging system. It is an international organization servicing over 11,000 financial institutions in more than 200 countries and territories. See https://www.swift.com. 129 Collin, M and Cook, S & Soramaki, K (2016) The Impact of Anti-Money Laundering Regulation on Payment Flows: Evidence from SWIFT Data, available at https://ssrn.com/abstract=2893790 130 SWIFT (2019) The KYC Registry - Overview, available at http://bit.ly/2SgoBBD 131 SWIFT (2019) The KYC Registry - Features, available at http://bit.ly/2XUuoC4 132 SWIFT (2016) SWIFT’s KYC Registry crosses 3,000-member milestone, available at http://bit.ly/2G49juM 133 SWIFT (2019) SWIFT - History, available at http://bit.ly/2XDrwdu 134 SWIFT (2019) Compliance Analytics, available at http://bit.ly/2XDNF6t 135 Esptein, M & Mendelsohn, H (2016) BankThink Here's How to Solve the De-Risking Riddle, available at http://bit.ly/2Lejml6 136 IHS Markit (2019) KYC Services, available at http://bit.ly/30qEg43 137 The FATF defines the UBO as ‘the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.’ FATF (2019) Glossary, available at https://bit.ly/32zMeK2 138In June 2019, Refinitiv was reported to be exiting its KYC as a service tool. A-team Insight (2019) Refinitiv Withdraws KYC as a Service Solution, available at http://bit.ly/2NICxpd 139 It was reported in June 2019 that Bloomberg intends to exit its KYC product. Wong, WS & Malakian, A (2019) Bloomberg Plans to Exist SSEOMS, KYC Business Lines, available at http://bit.ly/2YLoPDd 140 LEIs are covered in greater detail in Section 11.3.2 Financial Stability Board (FSB). 141 Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 142 AUSTRAC (2019) Fintel Alliance, available at http://bit.ly/30tlwB2 143 IndiaStack (2018) About eKYC API, available at http://indiastack.org/eKYC/ 144 Livemint (2018) Aadhaar Legal Validity: SC Constitution Bench to Commence Hearing Today , available at https://bit.ly/2KaTZ2t 145 Livemint (2018) Aadhaar Legal Validity: SC Constitution Bench to Commence Hearing Today, ibid. 146 Permanent Account Number (PAN) refers to a ten-digit alphanumeric number issued by the Income Tax Department in India and required for tax filings. National Informatics Centre (2019) Apply for a Permanent Account Number (PAN), available at https://archive.india.gov.in/howdo/otherservice_details.php?service=15 147 For Supreme Court of India judgment, see https://bit.ly/2OM50Gx; Livemint (2018) Supreme Court Verdict on Aadhaar: Constitutionally valid, doesn’t violate privacy, available at https://bit.ly/2CKBDlT 148 Privacy International (2018) State of Privacy Jordan, available at https://bit.ly/2Ceqzgr 149 BIS (2016) Correspondent Banking, available at http://bit.ly/32iAX0l 58

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150 The Association of Banks in Singapore (2018) Industry Banking KYC Utility Project After-Action Report-Knowledge Sharing, available at http://bit.ly/2JqCuKo 151 De Koker, L (2019) AML trends in the developing world, and the impact of 30 years of FATF integrity standards (webinar), available at http://bit.ly/2XBeMEc 152 With regard to its eID system, South Africa’s new SIC includes a person's photograph, their full name, date and place of birth, and their unique ID number. Fingerprint data is also taken and printed along with biographical details and a color photograph, on the SIC. Perlman, L & Gurung, N (2018) Focus Note: The Use of eIDs and eKYC for Customer Identity and Verification in Developing Countries: Progress and Challenges, ibid. 153 Biometric Update (2018) South Africa to launch ABIS, add face and iris to national identity system, available at https://bit.ly/2EAz6wh 154 Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing,and amending Directives 2009/138/EC and 2013/36/EU. See http://bit.ly/2xKRU5K 155 European Commission (2016) Questions and Answers: Anti-money Laundering Directive, available at http://bit.ly/2JvJSEt 156 Cash in cash out transactions are defined as digital liquidity in DFS – ‘the instantly accessible e-money value placed and stored in a SVA - within a DFS ecosystem is usually facilitated by electronic-human combinations of human ‘agents’ of DFSPs and banks. Agents provide what are known as CICO services, swapping cash for e-money and vice versa. Value in the SVA is redeemable on demand and on par at these agents.’ Perlman, L (2019) An Introduction to Digital Financial Services (DFS), ibid. 157 As a KPMG for the Asian Pacific (AsPAC) region notes: ‘AsPAC financial institutions offering AML training to their board members is also substantially lower than global findings (47% against a global average of 62%). This is significant because regulators in AsPAC are becoming much more vocal in their expectations with respect to the role of the Board of Directors in the management and oversight of their AML compliance programs.’ Additonally: ‘AsPAC financial institutions surveyed have rated the lack of qualified resources as one of their top concerns: with only 67% of the respondents in AsPAC having more than 3 years of experience in AML as compared to 82% in Western Europe and 85% in North America. This challenge is also reflected in the respondents’ AML budget allocation, where 46% ranked recruitment as one of the top three AML budget spending areas.’ KPMG (2014) Global Anti-money Laundering Survey, available at https://bit.ly/2LXr8PO 158 A bank client may act as a travel agent but also provide a money transfer service and is registered with the FCA in the UK as a PI. Yet the bank may still list the client on its books as a travel agency as a result of a failure to be informed about checking the FCA registry. How to document this? Leon I conversation. 159 For examples, see Section 11.3 International Organizations and Standard Setting Bodies. Other examples include the United States Agency for International Development (USAID), the Department for International Development and the Alliance for Financial Inclusion (AFI). 160 Examples include the Bill & Melinda Gates Foundation, Omidyar Network and the Rockefeller Foundation. 161 Some examples include MicroSave and its ePaathshala Capacity Building eSchool, GIZ (German Corporation for International Cooperation GmbH), MasterCard and Consult Hyperion. 162 ‘We are ready to work with all developing countries on this critical issue. As part of our work on Universal Financial Access, we are currently providing technical and financial support to national authorities to mitigate risks in the financial sector without harming financial inclusion efforts.’ World Bank (2016) De-risking in the Financial Sector, available at http://bit.ly/30pHEfq 163 Chatain, P-L; Van der Does de Willebois, E; Gonzalez del Mazo, E et al. (2018) The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions, available at http://bit.ly/2XDOYm3 164 Strand, I (2018) Three signs of fundamental recovery in Somalia, available at http://bit.ly/2LLlGzj 165 Giles, C; Binham, C & Strauss, D (2019) Bank of England intends to open its vaults to tech companies, available at https://on.ft.com/32k0jLm 166 For more information about MoMo, see their home page at http://momo.global/ 167 Hopper, R (2016) Disconnecting from Global Finance. De-risking: The Impact of AML/CFT Regulations in Commonwealth Developing Countries, available at http://bit.ly/2LduFdp 168 The nature of this mechanism was for the CBS to use its ‘public finances to transfer the equivalent in Samoan currency to MSBs operating in Samoa, retaining the original remittance transfer in its foreign exchange reserves.’ Hopper, R (2016) Disconnecting from Global Finance. De-risking: The Impact of AML/CFT Regulations in Commonwealth Developing Countries, ibid. 169 Remarks of the central bank of Samoa governor, Maiava Atalina Emma Ainuu-Enari, at the AFI Global Policy Forum, Sochi Russia, September 2018. 170 ‘Digital Fiat Currency (DFC) is a term used by ISO TC68/SC7 for allocating currency code, and is also known as Central Bank issued digital currency.’ See ITU (2019) Focus Group on Digital Currency including Digital Fiat Currency, available at http://bit.ly/2NVaN0S; ‘CBDC is a new form of money, issued digitally by the central bank and intended to serve as legal 59

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tender. It would differ, however, from other forms of money typically issued by central banks: cash and reserve balances. CBDC designed for retail payments would be widely available. In contrast reserves are available only to selected institutions, mostly banks with accounts at the central bank.’ Griffoli, T; Peria, M; Agur, I et al. (2018) Casting Light on Central Bank Digital Currencies, available at http://bit.ly/2JrClXi 171 Fiat money is a currency issued by a government which it has declared to be legal tender, a legally recognized medium of payment which can be used to extinguish a public or private debt or satisfy a financial obligation. It is only backed by the public confidence in the issuing government and the credit and faith in the issuer’s national economy. Bank of England (2019) What is Legal Tender?, available at http://bit.ly/2SbsSGq 172 CBDCs are distinguishable from the general usage of distributed ledger technology (DLT) and crypto-currencies, covered in Section 9.8 Distributed Ledger Technology and Blockchain. 173 For example, retail or wholesale CBDCs. 174 Unlike CBDCs, fiat money can be minted in physical form, such as cash in the form of coins or banknotes, but the value of money is greater than the value of its material. 175 See Wen, D (2016) Digital Fiat Currency for Everyone and Now, available at http://bit.ly/2NLQbYK. 176 eCurrency (2019) Governance - Central Bank Digital Currency, available at https://www.ecurrency.net/ 177 Adkisson, J (2018) Why Bitcoin Is So Volatile, available at http://bit.ly/2NMEi4T; also see Williams, S (2018) How Volatile is Bitcoin? available at http://bit.ly/2XEWbqM; Hunter, G & Kharif, O (2019) A $1,800 Drop in Minutes: Bitcoin Volatility on Full Display, available at https://bloom.bg/2JByl5q 178 The Commonwealth is a voluntary association of 52 independent and equal sovereign states, many of which were formerly members of the British Empire, The Commonwealth (2019) About Us, available at http://thecommonwealth.org/about-us 179 The Commonwealth (2015) Central bank governors urge action to protect remittances, available at http://bit.ly/30rkcOW 180 It does not have any relationship with the Bitcoin crypto-currency, only in that it uses the same type of blockchain technology used by Bitcoin. 181 PRWEB (2016) Bitt Launches Caribbean's First Blockchain Based Digital Money, available at http://bit.ly/2LlStMj 182 PRWEB (2016) Bitt Launches Caribbean's First Blockchain Based Digital Money, ibid. 183 Bitcoin Magazine (2016) Overstock Invests in Bitt to Launch Official Digital Currencies in the Caribbean Islands, available at http://bit.ly/2JGLhqu 184 See the Declaration and Issuance of the Sovereign Currency Act 2018, available at http://bit.ly/2YUqXIV 185 Alexandre, A (2019) How the Marshall Islands Envisions its National Digital Currency Dubbed ‘Sovereign’ available at http://bit.ly/2Sa2lsX; See also: ‘The SOV is not equivalent to a central bank digital currency, which is a digital form of the central bank’s liability (cash and reserves) because RMI uses the U.S. dollar as a legal tender and the SOV’s exchange rates would be determined on global cryptocurrency exchanges.’ IMF (2018) Republic of the Marshall Islands: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of the Marshall Islands, available at http://bit.ly/2XQkTnp 186 Light, J (2018) Why the Marshall Islands Is Trying to Launch a Cryptocurrency, available at https://bloom.bg/2YLx0iP 187 The IMF, in its consultation report on its bilateral discussions with the RMI, recommended against the issuance of the SOV until the RMI could identify and ensure implementation of adequate measures to mitigate the 'potential costs arising from economic, reputational, AML/CFT and governance risks.' It said that in the absence of adequate measures to mitigate them, the RMI should reconsider the issuance of the digital currency as legal tender. MF (2018) Republic of the Marshall Islands: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of the Marshall Islands, available at http://bit.ly/2XQkTnp 188 Light, J (2018) Why the Marshall Islands Is Trying to Launch a Cryptocurrency, available at https://bloom.bg/2YLx0iP 189 Adapted from World bank (2018) The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions, available at http://bit.ly/32m03LV 190 World bank (2018) The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions, available at http://bit.ly/32m03LV 191 World Bank (2019) Migration and Remittances, available at http://bit.ly/2JyAFdo 192 The Bahamas, which has a significant reliance on trade finance, is reportedly in peril of losing its valuable CBRs as a result of continued ‘de-risking practices of large global banks.’ Allan, W & Sam, A (2019) The EU AML/CFT List of High-Risk Third Jurisdictions: Implications and Options for The Bahamas, available at http://bit.ly/2LLqeWD 193 For more about the UN SDGs and the specific inclusion of remittances, see UN (2019) International Day of Family Remittances, June 16, available at https://bit.ly/2WHH7TZ 194 A pledge by the G8 and G20 to reduce the global cost of sending remittances to 5%, intended at the time of the pledge in 2009 to occur within 5 years. World Bank (2018) Reducing Transfer Costs of Migrant Remittances Designing and Implementing Policy Reforms and Monitoring of Data, available at https://bit.ly/2mzvhM9 195 World Bank (2017) Remittance Prices Worldwide, available at http://bit.ly/2S6N6Rl 60

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196 Cost reductions have also been the result of removing steps or parts which may generate fees for MTOs. Generally speaking, the remittance industry derives revenues from (1) fees which may be charged for sending and/or receiving money; Hirsi, I (2018) What you need to know about Somali money transfers and 'mysterious bags full of cash' flying out of MSP airport, available at http://bit.ly/2XZDXzB (2) foreign exchange markup on currency exchanges; (3) fees for value added services, if available, such as expedition fees for using SWIFT and cash delivery via courier. Overall costs can be reduced by eliminating or optimizing one or more components, especially foreign exchange. The cost of remittances is generally higher using banks, building societies or credit unions than MTOs, which also use SWIFT while some MTOs have avoided it altogether. 197 Ingalls, C (2016) Suitcases full of cash leaving Sea-Tac Airport, available at https://kng5.tv/30rdDvM 198 The European Commission requires cash equal to or greater than EUR 10,000 being brought into or out of the EU must be declared. http://europa.eu/rapid/press-release_IP-16-4401_en.htm; Greater than USD 10,000 being brought into or out of the US must be declared to U.S. Customs Border Protection pursuant to 31 U.S.C. § 5613, and 31 C.F.R. § 1010.340, http://bit.ly/2YRowa0. See US federal law Title 31, Subtitle IV, Chapter 53, Sec. 5316 - Reports on exporting and importing monetary instruments, available at http://bit.ly/2NMPhLF 199 Hawala is an informal method of value transfer commonly associated with the underground banking system, used for centuries, and popular in the Middle East and North Africa. ACAMS defines hawala as a system where ‘a customer contacts a hawaladar and gives him money to be transferred to another person. The hawaladar contacts his counterpart where the second person lives, who remits the funds to that person. A running tally is kept between the hawaladars of which owes the other a net sum.’ ACAMS (2018) AML Glossary of Terms, available at https://www.acams.org/aml-glossary/index-h/; See also Jost, P & Sandhu, H (2000) The Hawala Alternative Remittance System and its Role in Money Laundering, available at https://bit.ly/2frOWLH 200 Constable, P (2015) U.S. banks cut off cash transfers to Somalia amid terrorism concerns, available athttps://wapo.st/2NKMuCq 201 The Dahabshiil case is examined in greater detail in Section 12.5.1 United Kingdom. 202 Remarks by Mohammed Ibrahim, former minister of telecommunications of Somalia at the Columbia University De-risking Roundtable, November 2017. DFSO (2017) Roundtable: De-Risking and International Remittances - Challenges and Solutions, available at https://dfsobservatory.com/event/roundtable-de-risking-and-international-remittances-challenges-and- solutions; See also King 5 (2016) Suitcases full of cash leaving Sea-Tac Airport, available at https://kng5.tv/2XIxBk1 203 Reserve Bank of New Zealand (2015) Statement about banks closing accounts of money remitters, available at http://bit.ly/2xIyIFQ 204 E-Trans Group is a foreign exchange company which has been operating in New Zealand since 2000 and was unsuccessful in its suit to prevent Kiwibank from terminating its accounts with the bank. 205 Tibshraeny, J (2016) Bankers relieved and money remitters knocked high court ruling allowing Kiwibank to close E-Trans’ accounts, available at http://bit.ly/2XQEjsg 206 De Koker, L; Singh, S & Capal, J (2018) Closure of Bank Accounts of Remittance Service Providers - Global Challenges and Community Perspectives in Australia, available at http://bit.ly/2JqGR8d 207 Greenfield, C (2016) RPT-NZ remittance company buying speedboats to move cash around Pacific, available at https://reut.rs/2YNjGub and Cuevas -Mohr, H (2017) De-risking and the Great Unbanking Challenge, available at http://bit.ly/2YRrnQg 208 An example of DFSP implementation is Mobile Recharge. See their home page at https://mobilerecharge.com/ 209 Paypal (2019) What are the fees for PayPal accounts?, available at https://bit.ly/2HUpkCE 210 Money can be sent ‘using a credit or debit card, from bank account to bank account using online or telephone banking, or in certain markets using payment services like Sofort or iDeal.’ Azimo (2016) Six reasons why Azimo is top for great-value money transfer, available at http://bit.ly/2xEG3WK 211 Wired (2014) Startup of the Week: WorldRemit, available at http://bit.ly/30s4sep 212 Azimo (2019) About Us, available at https://azimo.com/en/about-us 213 World Remit (2019) How it Works, available at https://www.worldremit.com/en/how-it-works 214 By way of example, Alice in London wishes to send 10 GBP to Bob in Berlin while Charlie in Berlin wishes to send 9 EUR to Don in London. The current exchange rate is 10 GBP to 9 EUR. The most efficient manner to operate both transactions would be for Don to give his 10 GBP to Charlie locally in London (equivalent of 9 EUR) while Alice hands Bob her 9 Euros in Germany (equivalent to 10 GBP), resulting in no need for money to cross borders nor a currency exchange. 215 Fleming, S (2014) Financial Times Regulation: Banks count the risks and rewards, available at https://on.ft.com/2xFQHN9 216 Contrast this process to hawala, where value is effectively transferred between people in different jurisdictions without actually crossing borders. For more information about hawala, see endnote 199. 217 TransferWise accepts payments to mobile money accounts, such as in Ghana (among other countries.) TransferWise (2019) GHS Transfers, available at http://bit.ly/2XKr1JA 218 TransferWise earns revenues by charging a fee for services, such as a flat fee plus a percentage of the transfer amount. 61

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219 See CurrencyFair’s description of its service process. TransferWise (2019) How it Works, available at https://www.currencyfair.com/how-it-works/ 220 The US Currency and Foreign Transactions Reporting Act of 1970, commonly referred to as the BSA, mandates that financial institutions in the US must assist government agencies in the detection and prevention of money laundering. ‘Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.’ FinCEN (2019) FinCEN's Mandate From Congress, available at https://bit.ly/2xW1xPa 221 E-CFR (2019) Electronic Code of Federal Regulations, available at http://bit.ly/2Y08kWs 222 Described above in Section 9.5 Transaction / /Currency Pairing, Peer to Peer Marketplace. 223 It is not uncommon to see forex brokers offering services without transfer fees. Revenues are generated from the spread between the interbank rate and the exchange rate it charges customers. Advertised benefits being perceived at amounts such as USD 10,000 and 150,000 GBP. See Beugge, S (2013) When moving large sums, you're better off with a currency broker, available at https://bit.ly/2XWU9gN; OFX (2019) Are currency brokers cheaper than banks?, available at https://bit.ly/2xSG49B; XE (2019) Consumer Trust, available at https://bit.ly/2YXIiRb . 224 Kokalitcheva, K (2014) The Currency Cloud gets $10M to shuttle your payments across international borders, available at http://bit.ly/2XA76lw 225 ACAMS (2019) AML Glossary - “N”, available at http://bit.ly/2JCVpAH 226 The IMF has described nested correspondent banking as ‘the use of a CBR by a respondent bank’s intermediate customers (e.g., banks and financial institutions), which could then use the relationships for their own clients.’ IMF (2017) Sending Money Home: Contributing to the SDGs, one family at a time, available at http://bit.ly/2YNv7lF; See also FATF (2016) Guidance on Correspondent Banking, available at http://bit.ly/30uZjCi. 227 Boyce, T (2016), ibid. 228 As reported in the UK, ‘[o]ne tactic was to pay for a sub-account with a UK-based financial institution which, despite not being a bank, could act like one. An MTO which adopted this service, reported paying $15,000 per month in fees to its intermediary. Another tactic was to operate the business through a bank account abroad, then find means of either transferring customers’ money in cash, via authorised cash processors, or by creating an account with a merchant who could process card payments.’ Datta, K. & Vicol, D. (2019) Derisking London’s Remittance Marketplace. Brief 2, available at http://bit.ly/2Y0KLgj 229 See FATF (2016) Guidance on Correspondent Banking, ibid. 230 Payable-through-accounts, also known as pass-by accounts, are ‘correspondent accounts that are used directly by third parties to transact business on their own behalf. They are used by foreign financial institutions to give their customers access to the domestic banking system. This enables the foreign bank’s customers to write checks and make deposits at a bank in the jurisdiction like any other account holder (in effect, giving customers of respondent banks access to more services).’ SWIFT (2016) Addressing the unintended consequences of de-risking, https://www.swift.com/node/23961 231 ACAMS defines EDD as: ‘In conjunction with Customer Due Diligence, EDD calls for additional measures aimed at identifying and mitigating the risk posed by higher risk customers. It requires developing a more thorough knowledge of the nature of the customer, the customer’s business and understanding of the transactions in the account than a standard or lower risk customer. A financial institution should ensure account profiles are current and monitoring should be risk-based.’ ACAMS (2018) AML Glossary of Terms, available at https://www.acams.org/aml-glossary/ 232 FATF (2016) Guidance on Correspondent Banking, ibid. and https://www.acams.org/aml-glossary/index-n/ 233 Information provided by the Central Bank of Seychelles to the authors. 234 The financial sector in particular is seeing the release of these new asset classes - ‘crypto-assets’ - that democratize access to financial products through tokenization, catalyzing and enabling fractional ownership of legacy and new crypto-inspired asset classes. Some of these crypto-assets have attached profit or governance rights, others providing some consumption value. They may also act as payment tool as a crypto-currency, enabling the buying and selling of goods and services. The crypto- economy may also support capital raising through a now controversial method called an Initial Coin Offering. 235 Khurana, S (2018) KYC using blockchain, available at http://bit.ly/2NNgHkv 236 Mancini-Griffoli, T; Peria, M; Agur, I et al. (2019) Casting Light on Central Bank Digital Currency, available at http://bit.ly/2G6be1F 237 A ‘stable coin’ is a crypto-currency or token which is tethered to or backed by a stable asset, such as gold or a relatively stable currency such as the USD, to combat volatility and maintain a stable value. Binance (2019) Stablecoin, available at https://www.binance.vision/glossary/stablecoin; Geron, T (2019) Why Stablecoins Stand Out in the Cryptocurrency World, available at https://on.wsj.com/2Ifvakn 238 Constine, J (2019) Facebook announces Libra cryptocurrency: All you need to know, available at https://tcrn.ch/2S7Pmbl

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239 The head of the U.S. central bank though believes Facebook should not be allowed to launch its Libra cryptocurrency until the company details how it will handle a number of regulatory concerns. CoinDesk (2019) Fed Chair Says Libra ‘Cannot Go Forward’ Until Facebook Addresses Concerns, available at http://bit.ly/2xIYR7q 240 Alexandre, A (2019), South American Startup Ripio Rolls Out Crypto-Fiat Exchange and OTC Desk, available at http://bit.ly/2YO2Prg; also See Cuen, L (2019) There’s No Crypto Winter in Argentina, Where Startups Ramp Up to Meet Demand, available at http://bit.ly/2S7UyvD 241 Katalyse.io (2018) How Cryptocurrency Can Help Developing Countries, available at http://bit.ly/2Y4mrKI 242 Hankin, A (2018) This is where cryptocurrencies are actually making a difference in the world, available at https://on.mktw.net/32tIKJ4 243 For example, from USD to Bitcoin on the sender’s end and from Bitcoin to Nigerian Nairas (NGN) on the receiver’s end in Nigeria. 244 FATF (2019) Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, available at http://bit.ly/30lUNpU 245 According to ConsenSys, Project i2i’s solution consists of a web API and a blockchain back-end. The API allows a bank’s API and/or core banking system to connect to the blockchain back-end. The connection handles key management and allows participants to construct and send signed transactions to the smart contract running on a permissioned Quorum blockchain deployed through ConsenSys’ Kaleido platform. Signed transactions instructed through the API trigger three key functions of the smart contract: Pledging digital tokens corresponding to the Philippine Pesos held in an off-chain bank account; redeeming the digital tokens; transferring the tokens among users of the platform. See ConsenSys (2018) Project i2i: An Ethereum Payment Network Driving Financial Inclusion in the Philippines, available at http://bit.ly/32j830o 246 See www.ripple.com 247 This enables those countries very low liquidity in their domestic currency to trade globally without having to buy and hold USD or Euros and bypass the SWIFT network. 248 Perlman, L (2019) Regulation of the Financial Components of the Crypto-Economy, available at http://bit.ly/32m12vB 249 ABRA (2019) Where is Abra Available?, available at http://bit.ly/2SjNI6B; McGlynn, D (2018) How non-custodial wallets let you be your own bank, available at http://bit.ly/30BLQJl 250 For more information about refusal activities occurring within the region, see Section 9.2 Cash Carrying. 251 FMA (2016) Tonga Development Bank Ave Paanga Pau Vouchers Designation Notice 2016, available at http://bit.ly/2Jwwyys 252 Ministry of Information & Communication Tonga (2017) TDB ‘Ave Pa’anga Pau Voucher Remittance Product officially launched, available at http://bit.ly/2G6e6fh 253 Chatain, P-L; Van der Does de Willebois, E; Gonzalez del Mazo, E et al. (2018) The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions, available at https://bit.ly/2wtH1HN 254 IMF (2017) Recent Trends in CBRS, available at http://bit.ly/2xIIyY2 255 In tropical regions such as the Caribbean and Small Pacific states in Oceania, the regular recurrence of natural disasters pose additional fiscal challenges to the stability of the region and ability to maintain necessary metrics which are palatable to correspondent banks and for maintaining costly CBRs. For one such example, see the Eastern Caribbean Currency Union (ECCU) which is comprised of Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. IMF (2019) Eastern Caribbean Currency Union: 2018 Discussion on Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director for the Eastern Caribbean Currency Union, available at http://bit.ly/32ilA8n 256 Boyce, T (2016) Discussion Paper: Strategic Solutions to ‘De-Risking’ and the Decline of Correspondent Banking Relationships in the Caribbean, available at http://bit.ly/2SbGDF4 257 Haley, J (2018) De-risking of Correspondent Banking Relationships: Threats, Challenges and Opportunities, available at http://bit.ly/30rceFr 258 The Belize central bank governor emphasized this point stating: ‘We were told by one large bank that if your bank does not have about $2 billion in assets, it is not feasible for us to do business with you.’ Torbati, Y (2016) Caribbean countries caught in crossfire of U.S. crackdown on illicit money flow, available at https://reut.rs/2JyctI2 259 Hopper, R (2016), ibid. 260 Boyce, T (2016), ibid. 261 The Wolfsberg Group issued a questionnaire that aims to standardize the collection of information that correspondent banks ask from other banks when opening and maintaining these relationships. See Wolfsberg (2017) Correspondent Banking Due Diligence Questionnaire, available at https://www.wolfsberg-principles.com/wolfsbergcb 262 Using one example of real-world application, while MSB compliance requirements in the US are stringent, MTOs we talked to indicated they are generally much more lax as applied to MTOs worldwide. Given the varied nature of the types of businesses

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connecting to the regional hub, the different originating countries and types of businesses, it may not be fully possible to satisfy correspondent bank expectations. 263 Boyce, T (2016), ibid. 264 Boyce, T (2016), ibid. 265 KYC Utilities are also examined in Section 6.2 The Evolution of KYC Utilities for Customer Identification and Verification. 266 The Utility Project ultimately failed to be established due to cost concerns. 267 COCHOG (2016) About COCHOG, available at http://caricom.org/cochog/about-cochog 268 Boyce, T (2016), ibid. 269 In their February 2017 meeting, CARICOM “recognized the need for a regional approach and concerted action to address effectively the challenge posed by the refusal strategies of the global banks which resulted in the withdrawal of correspondent banking services” and “…the need for continued urgent action to strengthen the integrity of the financial system in CARICOM Members States and to attenuate the perception of the Caribbean as a high risk Region.” Haley, J (2018) De-Risking of Correspondent Banking Relationships: Threats, Challenges and Opportunities, available at https://bit.ly/2LOEcXD 270 Remarks by Dr. T Boyce at the Columbia University De-risking Roundtable, November 2017. DFSO (2017) Roundtable: De-Risking and International Remittances - Challenges and Solutions, available at https://dfsobservatory.com/event/roundtable-de-risking-and-international-remittances-challenges-and-solutions 271 Boyce, T (2016), ibid. 272 Global Center on Cooperative Security (2015) Understanding Bank De-risking and its Effects on Financial Inclusion, available at http://bit.ly/2xKOUGA; also see Rieker, M & Palazzolo, J (2017) Lenders Pressed on Embassy Banking, available at https://on.wsj.com/2XBbqAV. The refusal occurs because of the fear of embezzlement and ML from dignitaries in these countries. 273 FATF (2016) AML/CFT and public-private sector partnership, available at http://bit.ly/2JH5DQK For more information, see also Section 11.3.3 Financial Action Task Force (FATF). 274 FATF (2017) Dialogue with the Private Sector, available at http://bit.ly/2LdWty7 275 FATF News (2019) FATF Private Sector Consultative Forum, Vienna, 6-7 May 2019, available at http://bit.ly/2JDuW63 276 Both sides though presented to FATF but did so in separate sessions and not in the same room. 277 FATF News (2019) FATF Private Sector Consultative Forum, Vienna, 6-7 May 2019, available at http://bit.ly/2JDuW63 278 FATF News (2018) BCBS, CPMI, FATF and FSB Welcome Industry Initiative Facilitating Correspondent Banking, available at http://bit.ly/2G6bKg7 279 Union of Arab Banks (UAB) and International Monetary Fund (IMF) (2015) The Impact of De-Risking on MENA Banks, available at http://bit.ly/2JzXKMS 280 FATF (2015) Drivers for "de-risking" go beyond anti-money laundering / terrorist financing, available at https://bit.ly/2Y9VyET 281 FATF (2015) FATF takes action to tackle de-risking, available at https://bit.ly/2JNGBiU 282 World Bank (2015) Report on the G20 survey in de-risking activities in the remittance market, available at https://bit.ly/2Z5mvXS 283 FSB (2015) Report to the G20 on actions taken to assess and address the decline in correspondent banking, available at https://www.fsb.org/wp-content/uploads/Correspondent-banking-report-to-G20-Summit.pdf 284 FSB (2015) Meeting of the Financial Stability Board in Chengdu on 21 July, available at https://bit.ly/2JLid1e 285 Erbenova, M & Liu, Y & Kyriakos-Saad, N et. al. (2016) The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action, available at https://www.imf.org/external/pubs/ft/sdn/2016/sdn1606.pdf 286 CPMI (2016) Correspondent banking – final report, available at https://www.bis.org/cpmi/publ/d147.htm 287 FSB (2016) Progress report on Correspondent Banking, available at https://bit.ly/2Y69ZKk 288 FSB (2016) Report to the G20 on actions taken to assess and address the decline in correspondent banking, available at https://bit.ly/2YZXGMR 289 World Bank, Arab Monetary Fund, International Monetary Fund (2016) Withdrawal of Correspondent Banking Relationships (CBRs) in the Arab Region, available at https://bit.ly/2YbxktY 290 FATF (2016) FATF Guidance – Correspondent Banking Services, available at https://bit.ly/2eAUhAd 291 FSB (2016) FSB action plan to assess and address the decline in correspondent banking, available at https://bit.ly/30CubB9 292 CPMI (2017) Distributed ledger technology in payment, clearing and settlement - an analytical framework, available at https://www.bis.org/cpmi/publ/d157.htm 293 Wolfsberg Group (2017) Politically Exposed Persons (PEPs), available at https://bit.ly/2zYkeSV 294 FSB (2017) FSB action plan to assess and address the decline in correspondent banking, available at https://www.fsb.org/wp-content/uploads/P040717-3.pdf 295 Wolfsberg Group (2017) Payment Transparency Standards, available at https://bit.ly/2O4Y4st 64

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296 Stames, S & Kurdyla, M & Prakash, A et. al. (2017) De-Risking and Other Challenges in the Emerging Market Financial Sector : Findings from IFC’s Survey on Correspondent Banking, available at http://hdl.handle.net/10986/28968 297 BIS (2017) Revisions to the annex on correspondent banking, available at https://www.bis.org/bcbs/publ/d389.htm 298 CPMI (2018) Cross-border retail payments, available at https://www.bis.org/cpmi/publ/d173.htm 299 FSB (2018) FSB action plan to assess and address the decline in correspondent banking, available at https://www.fsb.org/wp-content/uploads/P160318-2.pdf 300 FSB (2018) Stocktake of remittance service providers’ access to banking services, available at https://www.fsb.org/2018/03/stocktake-of-remittance-service-providers-access-to-banking-services/ 301 CPMI (2018) Central bank digital currencies, available at https://www.bis.org/cpmi/publ/d174.htm 302 KNOMAD (2018) World Bank: Migration and Remittances: Recent Developments and Outlook, available at http://hdl.handle.net/10986/29777 303 Chatain, P-L; Van der Does de Willebois, E; Gonzalez del Mazo, E et al. (2018) The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions, ibid. 304 See https://www.fsb.org/2018/11/fsb-action-plan-to-assess-and-address-the-decline-in-correspondent-banking-progress- report-to-g20-summit-of-november-2018/ 305 KNOMAD (2019) World Bank: Migration and Remittances: Recent Developments and Outlook, available at https://www.knomad.org/sites/default/files/2019-04/Migrationanddevelopmentbrief31.pdf 306 FSB (2019) Remittance Service Providers’ Access to Banking Services, available at See https://www.fsb.org/wp- content/uploads/P290519-2.pdf 307 FSB (2019) FSB Action Plan to Assess and Address the Decline in Correspondent Banking: Progress Report, available at https://www.fsb.org/wp-content/uploads/P290519-1.pdf 308 Wolfsberg Group (2019) Correspondent Banking Due Diligence Questionnaire (CBDDQ), available at https://www.wolfsberg-principles.com/wolfsbergcb 309 Table adapted from CIBAFI (2017) De-risking and Correspondent Banking Relationships, available at http://cibafi.org/Files/L1/Content/CI1386-CIBAFIBriefing,issue5,English.pdf 310 FSB (2015) Report to the G20 on actions taken to assess and address the decline in correspondent banking, available at http://bit.ly/2LLBa6D 311 FSB (2018) FSB action plan to assess and address the decline in correspondent banking, available at http://bit.ly/2LeFZ8O 312 Global Legal Entity Identifier Foundation (2019) Introducing the Legal Entity Identifier (LEI), available at http://bit.ly/2S7epeq 313 Global Legal Entity Identifier Foundation (2019) This is GLEIF, available at http://bit.ly/2S7Ka7e 314 SWIFT (2019) Messaging and Standards, available at http://bit.ly/2S5gU0W 315 Global Legal Entity Identifier Foundation (2019) Regulatory Use of the LEI, available at http://bit.ly/2LfG8sJ 316 FATF (2015) FATF takes action to tackle de-risking, available at http://bit.ly/2XGKN8M 317 FATF (2015) Guidance on the Risk-Based Approach for Effective Supervision and Enforcement by AML/CFT Supervisors of the Financial Sector and Law Enforcement, available at http://bit.ly/2YI6dUA 318 This guidance assists governments supervise these activities. 319 FATF (2014) FATF clarifies risk-based approach: case-by-case, not wholesale de-risking, available at http://bit.ly/2YKevuY 320 This work builds on the FATF Best Practices on Combating the Abuse of Non-Profit Organisations which was issued in June 2015. FATF (2015) Best Practices: Combating the Abuse of Non-Profit Organisations (Recommendation 8), available at https://bit.ly/1X7vy39 321 FATF News (2019) FATF Private Sector Consultative Forum, Vienna, 6-7 May 2019, available at http://bit.ly/2JDuW63 322 BIS (2017) Sound Management of Risks Related to Money Laundering and Financing of Terrorism, available at http://bit.ly/2G9oSRU 323 Wolfsberg (2017) Correspondent Banking Due Diligence Questionnaire, available at https://www.wolfsberg- principles.com/wolfsbergcb 324 WB (2019) World Bank Group Surveys Probe “De-Risking” Practices, available at http://bit.ly/2G6iT0h 325 WB (2015) Withdraw from correspondent banking Where, Why, and What to do about it, available at http://bit.ly/2JsRfwt 326 WB (2015) Report on the G 20 Survey on De-risking Activities in the Remittance Market, available at http://bit.ly/2LS7558 327 Barne, D (2016) Powerful Panel Weighs Progress on Financial Inclusion, available at http://bit.ly/2JryLMF 328 World Bank (2016) World Bank Makes Progress to Support Remittance Flows to Somalia, available at https://bit.ly/30JTHVd 329 Article 36 Access to accounts maintained with a credit institution states: ‘Member States shall ensure that payment institutions have access to credit institutions’ payment accounts services on an objective, non-discriminatory and proportionate 65

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basis. Such access shall be sufficiently extensive as to allow payment institutions to provide payment services in an unhindered and efficient manner. The credit institution shall provide the competent authority with duly motivated reasons for any rejection.’ 330 Plaza, S (2014) Somali Australians plead with Westpac to not close remittance accounts, available at https://ab.co/2XHYGns; Plaza, S (2014) Closing of bank accounts of money transfer operators (MTOs) is raising remittance costs, available at https://bit.ly/2G94CzP 331 O’Brien, N (2014) International money transfer businesses launch class action against Westpac, available at https://bit.ly/2JCbQNz 332 O’Brien, N (2014), ibid. 333 De Koker, L; Singh, S & Capal, J (2018) Closure of Bank Accounts of Remittance Service Providers - Global Challenges and Community Perspectives in Australia, ibid. 334 Bredenkamp and Others v Standard Bank of SA Ltd (599/09) [2010] ZASCA 75; 2010 (4) SA 468 (SCA); 2010 (9) BCLR 892 (SCA); [2010] 4 All SA 113 (SCA) (27 May 2010), available at http://bit.ly/2XKqbBK 335 OFAC is a department of the U.S. Treasury which ‘administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.’ OFAC (2019) Sanctions Programs and Information, available at https://bit.ly/2FzYwZ4 336 Bredenkamp was designated as an SDN as a result of his allegedly being ‘a ‘crony’ of President Mugabe of Zimbabwe and that he had provided financial and logistical support to the ‘regime’ that has enabled Mugabe ‘to pursue policies that seriously undermine democratic processes and institutions in Zimbabwe’.’ Bredenkamp and Others v Standard Bank of SA Ltd, ibid. 337 Bredenkamp and Others v Standard Bank of SA Ltd, ibid. 338 Hlongwane and Others v Absa Bank Limited and Another (75782/13) [2016] ZAGPPHC 938, available at http://bit.ly/2XH31fq 339 Zuma is currently facing fraud and corruption charges and accused of substantial waste and mismanagement while in office. Swails, B & McKenzie, D (2018) South Africa's ex-President Zuma in Court on Corruption Charges, available at https://cnn.it/2XFjI69; Steyn, L (2018) Budget 2018 is Zuma’s Costly Legacy, available at http://bit.ly/2LWKHYL 340 Cameron, J (2017) Another listed SA bank becomes state capture battleground: Absa vs Hlongwane, available at http://bit.ly/2xEZMWr 341 Marrian, N (2017) How Bank of Baroda was overwhelmed by suspicious Gupta-linked accounts, available at http://bit.ly/30s2evC and Fin24 (2018) Gupta-Linked Bank of Baroda Gives Formal Notice of SA Exit - SARB, available at http://bit.ly/2XHfiQO Almost 20 South African companies linked to the Gupta brothers lost a court bid which sought to have Bank of Baroda, the last lender doing business with the firms, maintain operations in the country. Livemint (2018) Gupta Firms Lose Bid to Have Bank of Baroda Remain in South Africa, available at http://bit.ly/30pZ9Mw 342 Domestic bank Nedbank informed Baroda that it would be cutting ties with the bank within three months because of the Gupta-linked scandals. Fin 24 (2018) Gupta case against Bank of Baroda dismissed with costs, available at http://bit.ly/2G7XyU5 343 The ECCB is the central bank for the Eastern Caribbean dollar and is the monetary authority for the members of the Organisation of Eastern Caribbean States, with the exception of the British Virgin Islands and Martinique. See https://www.eccb-centralbank.org/ 344 Srinivasan, K (2018) Is ‘De-Risking’ Waning?, available at http://bit.ly/2JyfyYC 345 IMF (2019) Eastern Caribbean Currency Union: 2018 Discussion on Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director for the Eastern Caribbean Currency Union, available at http://bit.ly/2XYkLSS 346 US Treasury Office of Technical Assistance (2018), Current Comprehensive Project Report - As of 9/30/18, available at http://bit.ly/2YLi1oR 347 Also referred to as Directive 2014/92/EU, see Payment accounts - Directive 2014/92/EU, available at http://bit.ly/2LLDuuk. See the PAD text at http://bit.ly/2JC5vBW 348 European Commission (2018) Payment Services Directive: Frequently Asked Questions, available at http://bit.ly/2JBro4f; European Commission (2017) Access to Bank Accounts, available at http://bit.ly/32jo0U7 349 EU Directive 2015/2366 available at http://bit.ly/30xvd1l 350 European Commission (2018) Payment Services Directive: Frequently Asked Questions, Question3, available at http://bit.ly/2JBro4f 351 Recital 39 of the PSD2 ‘When engaging in the provision of one or more of the payment services covered by this Directive, payment service providers should always hold payment accounts used exclusively for payment transactions. In order to enable payment service providers to provide payment services, it is indispensable that they have the possibility to open and maintain 66

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accounts with credit institutions. Member States should ensure that access to such accounts be provided in a manner that is not discriminatory and that is proportionate to the legitimate aim it intends to achieve. While access can be basic, it should always be sufficiently extensive for the payment institution to be able to provide its services in an unobstructed and efficient way.’ 352 Article 36 Access to accounts maintained with a credit institution states: ‘Member States shall ensure that payment institutions have access to credit institutions’ payment accounts services on an objective, non-discriminatory and proportionate basis. Such access shall be sufficiently extensive as to allow payment institutions to provide payment services in an unhindered and efficient manner. The credit institution shall provide the competent authority with duly motivated reasons for any rejection.’ 353 Warburton, F (2016) No Automatic Access to Bank Accounts under PSD2, Says Treasury, available at http://bit.ly/2XEFSdt 354 FCA (2017) Consultation on Implementation of PSD2, available at http://bit.ly/2XCzheR, page 17, section 3.17 ‘The provision does not impose an absolute obligation for credit institutions to grant access. The decision to work with a given payment institution is still a commercial one, with credit institutions able to take into account cost and risk.’ 355 Cooley LLP (2016) UK Treasury interpretation of article 36 of PSD2 – a welcome surprise?, available at http://bit.ly/30nkO8a 356 All England Reporter (2013) Dahabshiil Transfer Services Ltd v Barclays Bank plc and Harada Ltd and another v Barclays Bank plc [2013] EWHC 3379 (Ch), available at http://bit.ly/2G7KFct 357 Also see Barclays UK Facebook Post in September. https://m.facebook.com/BarclaysUK/posts/639795916055279 ‘We have recently reviewed our eligibility criteria for money service businesses to take into account the above regulatory concerns. Having done that, we then assessed our UK money service business clients against our new criteria. As a result of that review, we have asked those clients who in our opinion no longer meet our new criteria to rebank, and provided them with sufficient time to do so, extending deadlines to allow this to happen where appropriate. Only a small proportion of those clients whom we have asked to rebank (4 to be precise) send money to Somalia. The vast majority do not. Although we have tried to work hard to find a resolution, given the regulatory environment, we believe that we have no choice but to exit these firms. However, to help them and the remittance industry, we have proactively engaged with the UK Government, remittance industry bodies and other stakeholders to discuss the issues around providing banking services to the remittance industry.’ 358 Arnold, M (2014) Barclays and remittance group reach deal on Somalia services, available at https://on.ft.com/2YKtghz 359 SEPBLAC is the Servicio Ejecutivo de la Comisión de Prevención del Blanqueo de Capitales e Infracciones Monetarias (Executive Service of the Commission for Monitoring Exchange Control Offences). For more information, see their website at https://www.sepblac.es/en/ 360 Safe Interenvios, SA v Liberbank, SA, Banco de Sabadell, SA, and Banco Bilbao Vizcaya Argentaria, SA Case C-235/14 – Opinion of the Advocate General, available at http://bit.ly/2XEJnR9 361 The court in Safe Interenvios, SA v Liberbank explains the proportionality test as ‘whether national legislation is proportionate depends on whether there are less restrictive means of achieving the same level of protection. The national legislation at issue in the main proceedings presumes, generally, that transfers of funds always present a high risk, without providing for the possibility of rebutting that presumption of risk in the case of transfers of funds not objectively presenting such a risk.’ Safe Interenvios, SA v Liberbank, SA, Banco de Sabadell, SA, and Banco Bilbao Vizcaya Argentaria, SA Case C-235/14 – Judgment of the Court (Fifth Chamber) 10 March 2016, available at http://curia.europa.eu/juris/document/document.jsf?text=&docid=174929&doclang=EN 362 Santander was also required to pay interest of 1% per month and legal fees at 10% of the value of the amount in issue. Zmudzinski, A (2019) Brazilian Court Rules Santander to Return $350,000 to Crypto Exchange Mercado Bitcoin, available at http://bit.ly/2XHNNBU 363 Santander was also required to pay interest of 1% per month and legal fees at 10% of the value of the amount in issue. Zmudzinski, A (2019) Brazilian Court Rules Santander to Return $350,000 to Crypto Exchange Mercado Bitcoin, available at http://bit.ly/2XHNNBU 364 Antunes, A (2018) Exchange de Criptomoedas Walltime Vence Caixa Econômica na Justiça, available at http://bit.ly/2JCanqK 365 Haan, C (2018) Brazilian Court Temporarily Restores One of Four Walltime Crypto Exchange Accounts Closed by Banks, available at http://bit.ly/2xJ1dTI; Banco Central Do Brasil (2016), Circular Nº 3.788, de 7 de Abril de 2016, available at http://bit.ly/2S7XSa9 366 Gonzalez-Mendez, A (2018) Bank Santander Reactivate Brazilian Crypto Exchange Accounts, available at http://bit.ly/2JCTMTG 367 Gonzalez-Mendez, A (2018) Brazilian Court Rules Favor Crypto Exchange, available at http://bit.ly/2XzKVf8; Antuns, A (2018) Bradesco pagará mil reais por dia se não reabrir conta de corretora de criptomoedas, available at http://bit.ly/2Y1Mfqs 368 Conselho Administrativo de Defesa Economica (CADE), known as the Administrative Council for Economic Defense. 369 The ten Brazilian cryptocurrency exchanges which filed complaints and received a questionnaire from CADE relating to banking practices are: Bitcoin Market, Bitcambio, BitcoinTrade, Foxbit, Walltime, Braziliex, BitBlue, Open Digital Capital (OTC), e-Juno, and Profitify. Nambiapurath, R (2018) Brazil: Antitrust Watchdog Sends Questions to Crypto Exchanges After 67

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Bank Account Closures, available at http://bit.ly/2YO1WPe; Basile, J (2018) Cade amplia prazo para ouvir corretoras de criptomoedas, available at http://bit.ly/2xJ4BOy 370 Ahora Noticias (2019), Government announces bill to regulate cryptocurrencies, available at http://bit.ly/30rEK9X; Shome, A (2019) Chilean Govt Introduces Bill to Regulate Crypto, Fintech to Congress, available at http://bit.ly/2XKS0db; Zmudzinski, A (2019) Chilean Government Introduces New Cryptocurrency and Fintech Regulation Bill to Congress, available at http://bit.ly/32vorLk 371 Berman, A (2018) Chile: Crypto Exchange Loses Ongoing Legal Battle in Supreme Court Ruling, available at http://bit.ly/2xG37EJ 372The three crypto-currency trading platforms appellants were Buda, CryptoMKT and Orionx. 373 Tribunal de Defensa de la Libre Competencia (TDLC) 374 Haan, C (2018) Chilean Anti-Monopoly Courts Order Banks to Restore Services to Crypto Firms, available at http://bit.ly/2XIYCDG; Bitcoin News (2018) Six Major Banks in Chile Sued by Another Cryptocurrency Exchange, available at http://bit.ly/2xHckwr 375 Russo, C (2018) Chilean Court Orders Banks to Reopen Crypto Exchange Accounts, available at https://bloom.bg/2S9Fwpi 376 Berman, A (2018) Chilean Banks Urge Anti-Monopoly Court to Revoke Decision Protecting Crypto Exchanges, available at http://bit.ly/2JuWoUP; Alvarez, G (2018) Criptomonedas: BancoEstado e Itaú llevan el fallo de la Suprema al TDLC y exigen el cierre de cuentas, available at http://bit.ly/2NJYyUy 377 Berman, A (2018) Chilean Banks Urge Anti-Monopoly Court to Revoke Decision Protecting Crypto Exchanges, available at http://bit.ly/2JuWoUP 378 Ahora Noticias (2019) Gobierno anuncia proyecto de ley para regular las criptomonedas, available at http://bit.ly/2XGbQpA; Zmudzinski, A (2019) Chilean Government Introduces New Cryptocurrency and Fintech Regulation Bill to Congress, available at http://bit.ly/32vorLk 379 Fujii-Rajani, R (2017) Money Remitters Left Out in the Cold: Blanket De-Risking Policies, Counterterrorism and Government Intervention in New Zealand, available at http://bit.ly/30rJV9Y; See also ETrans International Finance Ltd v Kiwibank Ltd [2016] NZHC 1031, available at https://bit.ly/32jQsW2 380 The Code of Banking Practice is published by the New Zealand Bankers Association, a non-profit unincorporated organization funded by its member banks, which sets forth industry best practices in banking. New Zealand Bankers Association (NZBA) (2016) The Code of Banking Practice, available at https://bit.ly/2M5U7km 381 Butler, A & Lethbridge, Z & Fitzgerald, S et al. (2016) Litigation Update – E-Trans International Finance Ltd v Kiwibank Ltd, available at http://bit.ly/2LfaHik 382 OCC (2018) OCC Begins Accepting National Bank Charter Applications from Financial Technology Companies, available at http://bit.ly/2YNFxlb 383 Alois, J (2019) After Years of Debate, Avant May be the First to Receive an OCC Fintech Charter, available at http://bit.ly/2JI9qNo 384 Kaplinsky, A (2019) NYDFS Files Opposition to OCC Motion to Dismiss Lawsuit Challenging Fintech Charter, available at http://bit.ly/2XCsNBr; updated here: Tibshraeny, J (2019) Banks and money remitters await court judgement that'll determine which industry's in for an overhaul to meet anti-money laundering standards, available at http://bit.ly/30rLcOj 385 US House of Representatives Committee Repository (2018) Examining De-risking and its Effect on Access to Financial Services, available at http://bit.ly/2JBtAIT 386 GAO (2018) Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews, available at http://bit.ly/2NLrYBD 387 The GAO is an independent, nonpartisan US Congressional agency. It ‘examines how taxpayer dollars are spent and provides Congress and federal agencies with objective, reliable information to help the government save money and work more efficiently.’ GAO (2019) About GAO, available at https://www.gao.gov/about/ 388 Statement of Michael E. Clements, Director, Financial Markets and Community Investment, GAO, available at http://bit.ly/2XYlQK9; See also GAO (2018) Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews, ibid. 389 The US Treasury’s ‘banking agencies’ include the Office of the Comptroller of the Currency, the Federal Deposit Insurance, and the Board of Governors of the Federal Reserve System. U.S. Department of the Treasury, U.S. Department of the Treasury (2016) Treasury Releases Joint Fact Sheet On Anti-Money Laundering And Sanctions Enforcement, available at www.treasury.gov/press-center/press-releases/Pages/jl0541.aspx 390 EDD is often referred to as ‘KYCC’ or ‘Know Your Customer’s Customer’ due diligence requirement. 391 FinCEN (2018) Advisory on Human Rights Abuses Enabled by Corrupt Senior Foreign Political Figures and their Financial Facilitators, available at http://bit.ly/2XZTGP4 392 Anderson, J & Erb, N & Hickman, T et. al. (2019) Correspondent Risk: Financial Crimes and Correspondent Banking, available at https://bit.ly/2O0uN1P 68

Refusal to Supply (Part 2): A Discussion of Approaches Mitigating the Impact of Financial refusal on Developing Countries

393 See for example, the Office of the Comptroller of the Currency issued guidance in October 2016 to national banks, federal savings associations, and federal branches and agencies regarding their periodic evaluation of the risks related to foreign correspondent accounts. The guidance appears aimed to address widely reported concerns that financial institutions are unnecessarily terminating relationships with foreign correspondent banks, particularly in high-risk jurisdictions, due to regulatory threats of anti-money laundering or terrorist financing violations. In particular, the guidance encourages OCC- regulated institutions to take a risk-based and individualized approach to closing foreign correspondent accounts rather than terminating entire categories of relationships. See OCC (2006) Risk Management Guidance on Foreign Correspondent Banking: Risk Management Guidance on Periodic Risk Revaluation of Foreign Correspondent Banking, available at http://bit.ly/30p6vQD 394 The Commonwealth (2016) De-risking: The Impact of AML/CFT Regulations in Commonwealth Developing Countries, available at http://thecommonwealth.org/disconnecting-from-global-finance 395 ‘It is not possible to develop a conclusive list of types of higher risk relationships for several reasons… For these reasons, any effort to define what constitutes a higher risk relationship could have the unintended consequence of encouraging rather than discouraging refusal by promoting a more rules-based and tick-the-box approach to risk management.’ FATF (2016) Guidance on Correspondent Banking, ibid. 396 FATF (2017) Private Sector Information Sharing, available at http://bit.ly/2JAY3qA 397 JMLIT (2019) Public-private information sharing partnerships to tackle money laundering in the finance sector, available at https://bit.ly/2M0CoLt 398 The Commonwealth (2016) De-risking: The Impact of AML/CFT Regulations in Commonwealth Developing Countries, ibid. 399 The Commonwealth (2016) De-risking: The Impact of AML/CFT Regulations in Commonwealth Developing Countries, ibid.