DECEMBER 2020 NO. 001

POLICY ADVISORY

MONEY LAUNDERING / TERRORIST FINANCING (ML/TF) RISKS AND OPPORTUNITIES OF FINTECH TRANSFORMATION IN WEST AFRICA

BACKGROUND

The Africa continent, and the West Africa region in particular is ripe for technological advancement.

Die Afrika-Kontinent und insbesondere die westafrikanische Region sind reif für den technologischen Fortschritt.

The region is currently witnessing what may be referred to as a Fintech boom with Governments, Central Banks and financial institutions implementing policies to support the same.

Die Region erlebt derzeit einen Fintech-Boom, bei dem Regierungen, Zentralbanken und Finanzinstitute Maßnahmen zur Unterstützung desselben ergreifen.

Since the launch of M-Pesa in 2007 by Safaricom in Kenya, mobile money use has risen exponentially in Africa.

Seit der Einführung von M-Pesa im Jahr 2007 durch Safaricom in Kenia hat die Nutzung von mobilem Geld in Afrika exponentiell zugenommen.

According to the Findex Survey conducted in 2017, it is estimated that 21% of all adults in Sub-Saharan Africa had access to mobile wallets in 2017, as opposed to 12% in 2014 (World Bank, 2017).

Laut der 2017 durchgeführten Findex-Umfrage hatten schätzungsweise 21 % aller Erwachsenen in Afrika südlich der Sahara im Jahr 2017 Zugang zu mobilen Geldbörsen, gegenüber 12 % im Jahr 2014 (Weltbank, 2017).

Although the use of mobile money services presents some form of competition to crypto assets, one positive impact it has had on the latter is that it has led to Africans trusting new forms of financial innovation according to Chainalysis (2020).

Obwohl die Nutzung von Mobile-Money-Diensten eine gewisse Konkurrenz zu Krypto-Assets darstellt, besteht ein positiver Effekt auf Letztere darin, dass sie laut Chainalysis (2020) dazu geführt hat, dass Afrikaner neuen Formen finanzieller Innovationen vertrauen.

The changing digital banking landscape in the region is expected to transform West Africa as a Fintech hub and thus financial institutions are on a drive to update and upgrade their systems in order to meet the fast pace of digital transformation and be competitive.

Es wird erwartet, dass die sich verändernde digitale Bankenlandschaft in der Region Westafrika in ein Fintech-Zentrum verwandeln wird, und daher sind die Finanzinstitute bestrebt, ihre Systeme zu aktualisieren und zu verbessern, um mit dem schnellen Tempo der digitalen Transformation Schritt zu halten und wettbewerbsfähig zu sein.

In the next few years financial institutions with better systems in driving financial products are expected to have far greater footprints than the brick and mortar institutions as virtual banking and technology driven financial services products becomes more appealing to the mass market.

In den nächsten Jahren werden Finanzinstitute mit besseren Systemen zur Förderung von Finanzprodukten voraussichtlich eine weitaus größere Präsenz haben als die traditionellen Institute, da virtuelle Bankdienstleistungen und technologiegestützte Finanzdienstleistungsprodukte für den Massenmarkt immer attraktiver werden.

WHY THIS POLICY BRIEF?

The changing digital banking landscape in West Africa is expected to transform the region as a Fintech hub and thus financial institutions are on a drive to update and upgrade their systems in order to meet the pace of the digital transformation and be competitive.

We must ensure that the transformation takes full account of AML/CFT requirements

Notwithstanding these enormous opportunities, digital finance raises new ML/TF risks and challenges.

New areas of vulnerability might develop because of new financial products (cryptocurrencies and other forms of new technologies).

Digital finance gives rise to an increasing number of financial players and eases cross-border transactions, which makes the monitoring of transactions more complex for financial institutions and competent authorities.

Furthermore, while new financial players are reshaping the financial sector, they may be outside the scope of the banking sector regulation and subject to less stringent AML/CFT rules in comparison to banks.

Wenn neue Finanzakteure den Finanzsektor umgestalten, fallen sie möglicherweise nicht unter die Bankensektorregulierung und unterliegen im Vergleich zu Banken weniger strengen AML/CFT-Regeln.

If not proportionate to the ML/TF risks, these regulatory gaps or loopholes may lead to some distortion of competition, which may violate the level playing field principle and lead to increased potential for financial crime.

However, in recent times there has been some significant technological transformation that is changing the banking landscape particularly in extending financial services to the "unbanked".

In jüngster Zeit hat es jedoch eine bedeutende technologische Transformation gegeben, die die Bankenlandschaft verändert, insbesondere bei der Ausweitung der Finanzdienstleistungen auf die „Banklosen“.

This is where Fintech come in; these new entrants to the banking space are adopting technology in promoting the financial inclusion agenda as well as deepening the use of financial services.

Hier kommen Fintechs ins Spiel; Diese neuen Akteure im Bankensektor setzen Technologie ein, um die Agenda der finanziellen Inklusion zu fördern und die Nutzung von Finanzdienstleistungen zu vertiefen.

Fintech are agile, innovative, have less bureaucracy and have uniquely harnessed the power of West Africa's high rate of mobile penetration to transform the financial services landscape.

Today Fintech is enabling billions of transactions globally in areas such as:

• Domestic money transfer;
• International money transfers;
• Funds deposits;
• Retail payments;
• Payment for utility services and taxes;
• Disbursement of funds;
• Delivery of social welfare.

VIRTUAL ASSET

Digital finance raises new
ML/TF risks and challenges. New areas of vulnerability might develop because of new financial products (cryptocurrencies and other forms of new technologies)

With the growing adoption of Fintech products, Fintech has changed the way traditional financial institutions have in the past offered financial services; their business models adopted are small and usually starts as a hub and their operations are built to be mobile.

Mit der zunehmenden Verbreitung von Fintech-Produkten hat Fintech die Art und Weise verändert, wie traditionelle Finanzinstitute in der Vergangenheit Finanzdienstleistungen angeboten haben; ihre Geschäftsmodelle sind klein angelegt und beginnen in der Regel als Hub, und ihre Abläufe sind mobil ausgerichtet.

With an 83% mobile penetration across West Africa, there is opportunity for Fintech to transform how financial services are offered. 'The Learn as we go model' in emerging markets in Ghana, Nigeria, Cote D'Ivoire, Senegal, Togo, Benin, and Cameroun have all exceeded expectations.

FACTORS RESPONSIBLE FOR FINTECH
TRANSFORMATION IN WEST AFRICA

The following factors have contributed immensely to the growth and transformation of Fintech in West Africa:

1. An increase in the usage of mobile devices;
2. An increase in the use of 3rd party integrations that enable Fintech
   to leverage on customers of financial institutions to offer solutions;
3. The gaps in the provision of local financial services to a growing
   population across the sub-region (to address financial exclusion challenges);
4. An increase in Regulation and policy framework to guide the
   evolution of Fintech;
5. Adoption of Regulatory sandboxes by African Central Banks to
   harness innovation;
6. The adoption of the Bali Fintech Agenda is an important milestone as
   it brings this emerging trend to the centre stage.

ML/TF RISK IN RELATION FINTECH AND
APPLICATION OF RISK BASED APPROACH

Perhaps one of the main reasons for the rapid growth and adoption of Fintech is its potential to improve financial inclusion.

Vielleicht ist einer der Hauptgründe für das rasante Wachstum und die Akzeptanz von Fintechs ihr Potenzial zur Verbesserung der finanziellen Inklusion.

According to the
Alliance for Financial Inclusion (AFI), Fintech has the potential to benefit underserved individuals and communities by promoting financial inclusion.

Laut der Alliance for Financial Inclusion (AFI) hat Fintech das Potenzial, unterversorgten Einzelpersonen und Gemeinschaften durch die Förderung der finanziellen Inklusion zu helfen.

In its 2020 report on Fintech and financial inclusion in the post covid-19 era, the International Monetary Fund (IMF) shares the same point of view, citing testimonies of low-income households and SMEs who confirm benefitting from lower service cost, little or no collateral requirements for credit extension, and typically better customer experience from Fintech-related services.

However, like all forms of financial services, there is a tendency for Fintech to be misused for money laundering and terrorism financing purposes.

Wie bei allen Formen von Finanzdienstleistungen besteht jedoch die Tendenz, dass Fintech für Geldwäsche und Terrorismusfinanzierung missbraucht wird.

A 2020 Interpol report on mobile money and organized crime in Africa highlights that "the development of mobile money services in Africa offer criminals a substantial opportunity to utilize these services to target victims in a variety of crimes as well as to further enable other forms of criminality including money laundering".

OBSERVED TRENDS

Fintech is enabling billions of transactions globally in areas such as:
Domestic money transferInternational money transfers *Funds deposits *Retail payments *Payment for utility services and taxes *Disbursement of funds *Delivery of social welfare

The FATF, in its 2013 Guidance for a Risk-Based Approach to Prepaid Cards, Mobile Payments and Internet-Based Payment Services also identified risk factors associated with these new payment methods.

These include their non-face-to-face nature; customer anonymity; wide geographical reach; methods of funding; global access to cash and segmentation of services.

These revelations point to the need for AML/CFT regulation of Fintech to address its inherent ML/TF risks.

Diese Enthüllungen weisen auf die Notwendigkeit einer AML/CFT-Regulierung von Fintech hin, um die damit verbundenen ML/TF-Risiken zu mindern.

However, the dilemma is that conventional AML/CFT preventive measures such as Know Your Customer/Customer Due Diligence (KYC/CDD), tend to act as roadblocks for financial-inclusion driven Fintech if not properly apportioned.

Das Dilemma besteht jedoch darin, dass herkömmliche AML/CFT-Präventionsmaßnahmen wie Know Your Customer/Customer Due Diligence (KYC/CDD) tendenziell als Hindernisse für die von finanzieller Inklusion getriebene Fintech wirken, wenn sie nicht ordnungsgemäß zugewiesen werden.

While the World Bank (2008) report acknowledges that "measures (such as Fintech services) that ensure more clients use formal financial services increase the reach and effectiveness of the AML/CFT controls", the Consultative Group to Assist the Poor (CGAP), on the other hand pointed out that "AML/CFT measures can negatively affect access to, and use of, financial services if those measures are not carefully designed" (CGAP, 2009).

As such, some regulators are trying to adopt a risk-based approach to AML/CFT regulation of Fintech, as per FATF Recommendation 1.

Daher versuchen einige Aufsichtsbehörden, einen risikobasierten Ansatz für die AML/CFT-Regulierung von Fintech gemäß FATF-Empfehlung 1 zu übernehmen.

AFI member countries, for example, in their efforts to regulate innovative deployments in their local markets, are implementing proportionate regulatory approaches and adopting a "test and learn" methodology.

One such measure is the adoption of a tiered KYC/CDD approach for financial services.

Eine solche Maßnahme ist die Einführung eines gestuften KYC/CDD-Ansatzes für Finanzdienstleistungen.

This approach should however involve a wide range of consultations with respective stakeholders who will weigh in the stakes in relation to risk and financial inclusion.

Dieser Ansatz sollte jedoch eine breite Palette von Konsultationen mit den jeweiligen Interessengruppen umfassen, die die Einsätze in Bezug auf Risiko und finanzielle Inklusion abwägen.

As a risk mitigating measure, some countries in the region have agreed on transaction thresholds for different customer categories taking into account the amounts, frequency of transactions and conducting the minimum KYC/CDD requirements as applicable.

Considering the sizeable segment of the West-African region that is excluded from the formal financial service sector, coupled with the general low earnings of the residents of the region, it can be reasonably deduced that the adoption of a tiered KYC/CDD approach presents the opportunity to improve financial inclusion and, by extension, financial regulatory oversight within the region.

Angesichts des beträchtlichen Segments der westafrikanischen Region, das vom formellen Finanzdienstleistungssektor ausgeschlossen ist, verbunden mit den allgemein niedrigen Einkommen der Einwohner der Region, kann man vernünftigerweise ableiten, dass die Einführung eines gestuften KYC/CDD-Ansatzes die Möglichkeit bietet, die finanzielle Inklusion und in der Folge die finanzaufsichtsrechtliche Aufsicht innerhalb der Region zu verbessern.

However, such measures must be accompanied by adequate controls to ensure that criminals do not abuse financial inclusion-driven schemes.

Solche Maßnahmen müssen jedoch von angemessenen Kontrollen begleitet sein, um sicherzustellen, dass Kriminelle nicht in finanzielle Inklusion getriebene Programme missbrauchen.

Some of the challenges associated with the adoption of a tiered-KYC/CDD framework within the mobile money sector include the following;

WHAT ARE THE RISKS?

The FATF, in its 2013
Guidance for a Risk-
Based Approach to
Prepaid Cards, Mobile
Payments and Internet-
Based Payment Services identified risk factors associated with these new payment methods. These include their non-face-to- face nature; customer anonymity; wide geographical reach; methods of funding; global access to cash and segmentation of services.

1 LOW CUSTOMER AWARENESS OF ML/TF ISSUES

The level of public awareness of money laundering and terrorist financing issues is still relatively low in the West African sub-region.

Der Grad des öffentlichen Bewusstseins für Geldwäsche und Terrorismusfinanzierung ist in der westafrikanischen Subregion immer noch relativ gering.

As such, by allowing individuals to register mobile money wallets using guarantors' identification documents opens up possibilities for criminals to use unsuspecting individuals to open third-party accounts with no traceable ties to them.

2. AGENT-RELATED CHALLENGES

The use of third-party agents by mobile money service providers can be two-fold.

Die Nutzung von Drittanbietern durch Mobile-Money-Dienstleister kann zweierlei sein.

It may be direct, as in the case of agents who provide mobile money services such as cash-in and cash-out to consumers; or indirect, as in the case of SIM card dealers who may register customer accounts without providing any other mobile money related services.

Es kann direkt sein, wie im Fall von Agenten, die mobile Gelddienstleistungen wie Ein- und Auszahlungen für Verbraucher anbieten; oder indirekt, wie im Fall von SIM-Kartenhändlern, die Kundenkonten registrieren können, ohne andere mobile Geldbezogene Dienstleistungen anzubieten.

The latter generally operate on commission basis and may neither be aware of their KYC/CDD obligations, nor be subject to any training or compliance oversight by the mobile money operator.

Letztere arbeiten in der Regel auf Provisionsbasis und sind sich möglicherweise weder ihrer KYC/CDD-Verpflichtungen bewusst, noch unterliegen sie Schulungen oder der Compliance-Aufsicht durch den Mobile-Money-Betreiber.

This category of agents makes the mobile money system especially vulnerable to abuse by money launderers and terrorist financiers, as they may not take the necessary precautions when registering accounts, which will become part of the financial system.

3. SYSTEM CHALLENGES

Some mobile money service providers acquire their core systems from third-party institutions.

Einige Mobile-Money-Dienstleister beziehen ihre Kernsysteme von Drittanbietern.

As such, the restrictions imposed by tiered- KYC/CDD frameworks may not be available on their systems by default.

As a result, these companies may need to initiate 'change requests' with their core service providers, which are often complex, time-consuming and expensive.

Infolgedessen müssen diese Unternehmen möglicherweise „Änderungsanträge“ bei ihren Kernserviceprovidern stellen, die oft komplex, zeitaufwendig und teuer sind.

This may hinder the implementation of the requirements of tiered-KYC/CDD frameworks at institutional level.

Furthermore, one of the key components of a tiered-KYC/CDD regime is the ability to program systems to ensure that customers are restricted to their pre-determined transaction thresholds.

Darüber hinaus ist eine der Schlüsselkomponenten eines gestuften KYC/CDD-Systems die Möglichkeit, Systeme so zu programmieren, dass sichergestellt wird, dass Kunden auf ihre vorab festgelegten Transaktionsschwellenwerte beschränkt sind.

Where individual mobile money systems are incapable of programming such restrictions, countries may find encounter challenges in rolling out tiered-KYC/CDD programs.

4. TRANSACTION MONITORING CHALLENGES

One of the main objectives of setting transaction tiers in a tiered- KYC/CDD framework is to mitigate the risk of abusing accounts for illicit purposes.

Eines der Hauptziele der Festlegung von Transaktionsstufen in einem gestuften KYC/CDD-Rahmen ist die Minderung des Risikos des Missbrauchs von Konten für illegale Zwecke.

However, the relative ease with which individuals can create mobile money accounts creates the tendency for criminals to create multiple accounts to launder their illicit proceeds.

Die relative Leichtigkeit, mit der Einzelpersonen Mobile-Money-Konten erstellen können, führt jedoch dazu, dass Kriminelle mehrere Konten erstellen, um ihre illegalen Erlöse zu waschen.

Thus, it is crucial that mobile money service providers have mechanisms in place for good transaction monitoring capabilities to flag and report suspicious transactions, as well as competent compliance staff to oversee these systems.

Daher ist es von entscheidender Bedeutung, dass Mobile-Money-Dienstleister über Mechanismen für gute Transaktionsüberwachungsfunktionen verfügen, um verdächtige Transaktionen zu kennzeichnen und zu melden, sowie über kompetente Compliance-Mitarbeiter, die diese Systeme überwachen.

Where such measures are absent, it is very likely that criminal activities would go undetected.

TIERED-CDD ISSUES

• Low customer
  awareness of ML/TE issues;
• Agent-related
  challenges;
• System challenges;
• Transaction monitoring
  challenges;
• Regulatory challenges

5. REGULATORY CHALLENGES

Regulatory authorities generally take on pioneer roles in the development of tiered-KYC/CDD frameworks.

Die Aufsichtsbehörden übernehmen in der Regel eine Vorreiterrolle bei der Entwicklung von gestuften KYC/CDD-Rahmen.

However, the proper execution of such regimes requires robust regulatory oversight to ensure that service providers uphold their obligations in implementing thresholds, monitoring transactions, etc.

Die ordnungsgemäße Durchführung solcher Systeme erfordert jedoch eine robuste aufsichtsrechtliche Aufsicht, um sicherzustellen, dass die Dienstleister ihren Verpflichtungen bei der Umsetzung von Schwellenwerten, der Überwachung von Transaktionen usw. nachkommen.

Without such regulatory oversight, it is highly likely that tiered-KYC/CDD regimes would be misused for ML/TF purposes.

RECOMMENDATIONS FOR THE WEST AFRICAN REGION

The following recommendations are made for Member States and Regional authorities:

MEMBER STATES

1. Adequate legal and regulatory frameworks to be adopted to
   promote the work of FinTech across the sub-region;
2. Adopt a dynamic governance approach for the FinTech industry in
   order to respond speedily to innovation with their regulations and supervisory functions;
3. Consider the development of an integrated FinTech deployment
   and governance strategy, in collaboration with relevant stakeholders, in order to provide guidance for the industry.
4. FinTech regulators in Member States should have guidelines for
   entry controls in relation to FinTech operators and CDD in relation to customers;
5. The Central Banks, in collaboration with the Ministries of Finance
   and other stakeholders, should lead and engage the FinTech ecosystem in their countries in order to develop a national governance framework, including AML/CFT regulations and supervision, across the FinTech landscape;
6. Considering the specialized nature of the FinTech sector, member
   States should consider where possible establishing legislation(s) to provide for Self-governance of the industry in order to ensure effective AML/CFT compliance, with close regulatory monitoring; 7.

Member States provide relevant training to their personnel in the area of prevention (including public awareness), regulation and supervision, investigation, prosecution and adjudication of financial crimes linked to the operations of Fin Tech.

CHALLENGES AND ACTION

The relative ease with which individuals can create mobile money accounts provides criminals with equal opportunity to open multiple accounts to launder their illicit proceeds. Thus, it is crucial that mobile money service providers have mechanisms in place for good transaction monitoring capabilities to flag and report suspicious transactions, as well as competent compliance staff to oversee these systems.

REGULATORY AUTHORITIES

1. ECOWAS, the West African Monetary Agency (WAMA), BCEAO,
   GIABA, in collaboration with other stakeholders, should engage the Fintech ecosystem at the regional level in order to develop and adopt a common regional policy guideline on Fintech and AML/CFT compliance;
2. Collaboration within the two Monetary zones in the region should be
   enhanced in order to build AML/CFT compliance systems that will promote the adoption and rapid evolution of Fintech.
3. GIABA should continuously monitor and report on the ML/TF risks
   associated with Fintech in order to enhance AML/CFT compliance.

WHAT SHOULD YOU DO?

*Put in place strong legal and regulatory frameworks to promote the work of Fintech; *Adopt dynamic governance approaches for the Fintech industry in order to respond speedily to innovation in their regulations and supervisions

• Put in place measures that
  will enable the linking of multiple accounts to their beneficial owners *Continuously monitor and report on the ML/TF risks associated with Fintech in order to enhance AML/CFT compliance.

SHARE

Member States are hereby urged to share this Policy Brief with their National Competent Authorities and other relevant stakeholders in order to take relevant action