Integrity in Mobile Financial Services AFI, SBS Peru and WB Forum, - - PowerPoint PPT Presentation

Integrity in Mobile Financial Services

AFI, SBS Peru and WB Forum, Lima Peru, May 12-13 2011

Pierre Laurent Chatain Lead Financial Sector Specialist (Financial Systems) The World Bank Wameek Noor Consultant (Financial Systems) The World Bank Najah Dannaoui Consultant (Financial Systems) The World Bank

New Research

 Anatomy of Current Mobile

Money Business Models

 New Outcomes in terms of Risk  Stocktaking of Regulatory

Practices and Related Policy Guidance Currently Observed

• n these contentious topics

 KYC/CDD  Agents Regulation  Reporting Obligations  Supervisory/Enforcement

Responsibilities

 Other Contentious Issues

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UK, France, Russia, Kenya, Zambia, Malaysia, Philippines and Mexico

New Outcomes in terms of Risk



Our Risk Matrix is Still Valid (Anonymity, Elusiveness, Rapidity and Lack of Oversight)



Mobile Money less risky than cash



No new ML or TF risks found in Mobile Money (Cases of Consumer Fraud Observed)



Can be used strategically to lower national ML/TF risks by facilitating the move away from “higher risk” cash transactions to “lower risk” mobile money transactions



Smart Risk Mitigation Practices Utilized by M-Money Providers and Regulators

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Risks Associated to M-FS

From Regulators

IT security consumer protection AML/CFT

From Industry

Too much regulation kills the business

From Policymaker

Financial inclusion impeded

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Mobile Money Less Risky Than Cash

5

No ML or TF risks found in Mobile Money but Cases of Consumer Fraud Observed

Philippines Experience Case 1: Using Multiple SIM Cards but through one Phone Case 2: Many Transactions to One

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Case 1

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Transferred the corresponding amount to a mobile phone Amount transferred to a mobile phone through G-Cash Transferred the corresponding amount to a Transferred the corresponding amount to a

• Mr. E went to

G-Cash business center

• Mr. E
• Mr. E’s mobile

account

Iphone was never received by

• Mr. A

Mr E. cashed out victim’s money using his mobile phone

• Mr. D’s mobile

account

• Mr. C’s mobile

account

• Mr. B
• Mr. A
• rdered an Iphone from Mr. B

through Ebay

Case 2

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Money collected through G-Cash remittances the promised deployment abroad never materialized

• Mr. A & Mr. B

Advertised fake overseas employment offers as caregivers and nurses

VICTIMS

Sent between $65 and $975 for training and processing fees

Innovative Risk Mitigation Practices Utilized by M-Money Providers

 Smaller payments (size of transactions and volume of

payments) – including capping. Smurfing is a risk but can lead to easier detection

 Limitations of cross-border operations and operations in

foreign currencies

 Geographical restrictions  Limitation to one account for one cellular phone.  Irrespective of business model, sophisticated internal

control/detection systems

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Observed Control Measures

Type of Risk Possible ML/TF Risks Key Control Measures Anonymity

Off-the-branch or non-face-to-face customer origination Innovative KYC and identity verification procedures MTN Banking – SA Wizzit - SA Unauthorized use of mobile phones for financial transactions Advanced identification mechanisms

• Bradesco – Brazil
• Korea

Elusiveness

Use of mobile phone at the layering stage

• f the ML process

Use of multiple m-FS accounts Limits on transactions

• Korea FSS

Customer profiling

• Brazil

Reporting

• Macau SAR China

Monitoring

• Korea
• Malaysia

Cross-border mobile-to-mobile remittances In-field service risk assessment

• Hong Kong FIU

Identification of sender

• Maxis – Malaysia

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Observed Control Measures (cont’d)

Type of Risk Possible ML/TF Risks Key Control Measures Rapidity Lack of capacity to monitor/freeze real-time messaging and settlement Integrated system of internal controls

• Itau – Brazil
• Philippines

Managing risk of 3rd party service providers

• Wizzit – South Africa

External Legal issue: Poor

• versight

Oversight loopholes for providers Guidelines on m-FS and risk management

• Philippines, Korea

Lack of regulation, supervision of new providers M-FS Shell companies Regulator-provider collaboration (Philippines, Malaysia) New e-finance laws and guidelines to m-FS providers (Korea) Clear licensing of non-bank m-FS (Malaysia, Korea) IT & AML supervision capacity (Philippines) AML/CFT training (South Africa)

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KYC/CDD

HOW TO UNDERSTAND AND INTERPRET THE FATF CDD/KYC STANDARDS: Under Rec. 5, customer should be identified and his identity verified

 FATF allows reduced CDD/KYC measures (not full exemption of CDD/KYC)

in circumstances when low risk can be PROVEN

 A Risk Assessment can be used to prove cases of low risk, which would merit

reduced CDD/KYC measures

 Full exemption of CDD/KYC for certain financial activities (not specific

financial transactions) is only permitted if:

 (I) policymakers are able to prove that the risk is low i.e. they can demonstrate

that specific and unique circumstances around the activity generate a low level

• f ML or TF risk and,

 (ii) that they are able to provide evidence in that respect

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KYC/CDD (cont’d)

THE CURRENT CHALLENGE:

 Customers do not have the relevant identification

and/or verification documents required

 Flexibility accorded to KYC/CDD standards not always

understood, leading to potentially overly restrictive AML/CFT regulations

 Countries have not tailored AML/CFT standards to the

appropriate level of risk given low value and/or low risk transactions

 Policymakers feel lack of clarity/guidance on KYC/CDD

from FATF, leading to misinterpretation of the standards

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Document requirements in developing countries are more stringent than in developed countries

Source: Financial Access Database

Percentage of countries that require certain criteria to open an account

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KYC/CDD (cont’d)

OUR PROPOSED SOLUTIONS:

1.

Expanding list of acceptable IDs or Permit the use of alternative IDs (that not necessarily bear a picture)

2.

Exempting the verification phase (verification vs. identification)

3.

Implementing progressive KYC approach : countries could envisage a tiered customer identification program, in terms of which a customer that can only provide minimal verification is restricted to basic services and can access higher levels of services after more comprehensive verification

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KYC/CDD (cont’d)

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Gradual KYC scheme adopted by Moneybookers LTD, an internet payment provider in the UK

Source: Word Bank

Agents

THE CURRENT CHALLENGE:

 Different approaches in ways AML/CFT regulations

implemented in regard to agent regulation

 Uncertainty about agent AML obligations, including

their Licensing and Regulation, Scope of their AML duties, Supervision and Internal Procedures

 Do agents needs to be regulated? Do they need to

comply with AML/CFT and if so to what extent and how?

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Agents (cont’d)

OUR PROPOSED SOLUTIONS:

 Agents (Retailers) should not be regulated

 Under FATF standards, they are not required to be license

• r registered

 They are not the account providers  They are not the “outsourcee” of the MNO in the sense of

FATF Interpretation

 They act on behalf of the Account Provider  Impossible to regulate and supervise thousands of agents

(retailers) on a practical level

 Principle monitors all regulation and supervision of agents

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Agents (cont’d)

OUR PROPOSED SOLUTIONS (cont’d):

 Agents should be covered by certain AML/CFT

• bligations

 Perform some AML/CFT checks including KYC on the

customer

 Record keeping  STRs to the Account Provider

 Duties should be specified between the agency

agreement of the AP and the Agent

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Agents (cont’d)

OUR PROPOSED SOLUTIONS (cont’d):

 Ultimate Legal Liability

 Ultimate Legal Liability lies on the AP

 KYA (Know Your Agent)

 Principal (Account Provider) held accountable for AML/CFT

compliance of agents, including determining extent and scope of CDD/KYC requirements between AP and Agents

 Should perform KYC/CDD on agents prior to recruitment, fit

and proper tests and ongoing monitoring and scrutiny (including on-site visits)

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Agents (cont’d)

Example of Countries where Providers Assume Liability for Agents

 In the Philippines, the e-money circular explicitly states that it is the

responsibility of the institutions to ensure that their agents comply with all AML laws, rules and regulations. Section 4 (e) states the following: “it is the responsibility of the electronic money issuers to ensure that their distributors/e-money agents comply with all applicable requirements of the Anti-Money Laundering laws, rules and regulations.” Similar Situation found in Brazil, Colombia, Brazi and Peru. Exception currently only is Kenya, where the provider does not assume liability for its agents legally

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Reporting Obligations

FATF Standards

 Financial Institutions are required to report suspicious activity to the FIU

The Current Challenge

 Since Mobile Money involves multiple entities such as agents/retailers, there

is uncertainty in terms of who should bear the final reporting responsibilities to the FIU

 Uncertainty in terms of scope and nature of information to be reported in

the particular context of mobile money, including consumer communications data and need to respect consumer data privacy issues Our Proposed Solutions

 Agents should report suspicions to the AP  AP should be responsible for reporting STRs to national authorities as they

are the principal manager (and should be legally held responsible) for account records and transactions

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Supervisory/Enforcement Responsibilities

FATF Standards

 R. 29: supervisors should have adequate powers to monitor and

ensure compliance by financial institutions with requirements to combat ML/TF including the authority to conduct inspection The Current Challenge

 Mobile Banking is a new category of financial activity involving new

types of players not familiar to supervisory agencies

 Confusion about who is the primary supervisor for MNOs  Possible conflict between Agencies that hold supervisory

responsibilities (Central Bank, Communications Commission and FIU)

 Complexity of supervision for cross-border transactions and cross-

border mobile remittances

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Supervisory/Enforcement Responsibilities (cont’d)

Country Practices

 Many countries have chosen the Central Bank to be

primary supervisory authority for mobile money Our Proposed Solutions

 There is more pros in favor of entrusting the Central

Bank with responsibilities to regulate and supervise mobile money services

 Cons include: scarce human resources, limited budget,

prudential arbitrage and

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Supervisory/Enforcement Responsibilities (cont’d)

Whoever is the primary supervisor:

 Supervisors need to be entrusted with the same

responsibilities and allowed to carry the same tasks as for any type of financial institution

 Supervisors should be allowed to conduct onsite

visits including telecom companies

 Supervisors should also have access to personally

identifiable information that includes name, copy of IDs, and other related documents, M-Money account balance and correspondence

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World Bank Policy Recommendations for National Authorities:



Balance compliance burden with actual risks



Low risk low value products (accounts, payment and remittance services)



Adopt risk-based and tiered approaches to regulation / supervision



Foster public / private dialogue to ensure practicality, proportionality

• f regulation / supervision



Clarify some thorny issues in relation to Agents, Supervision, STRs

• bligations, consumer protection



Promote formal financial services by reducing the “comparative advantage” of informal / unregulated providers



Simplified identification requirements – including on verification



Creativity in and tailoring of CDD requirements (types of identifiers for instance)

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World Bank Policy Recommendations for The Industries

 Industry to engage in dialogue with national authorities to

shape policy and regulations

 Establish clear contractual arrangements between mobile

providers and their retailers that clearly delineate breakdown

• f AML duties

 Provide ongoing training to their staff as well as their retailers  Establish effective internal control mechanisms to trace

suspicious activities through mobile money channels

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Thank you

Pierre-Laurent Chatain

pchatain@worldbank.org

Wameek Noor snoor@worldbank.org Najah Dannaoui ndannaoui@worldbank.org

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