Integrity in Mobile Financial Services

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Integrity in Mobile Financial Services AFI, SBS Peru and WB Forum, Lima Peru, May 12-13 2011 Pierre Laurent Chatain Lead Financial Sector Specialist

1 Integrity in Mobile Financial Services AFI, SBS Peru and WB Forum, Lima Peru, May 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 2 Anatomy of Current Mobile Money Business Models New Outcomes in terms of Risk Stocktaking of Regulatory Practices and Related Policy Guidance Currently Observed on these

2 New Research 2 Anatomy of Current Mobile Money Business Models New Outcomes in terms of Risk Stocktaking of Regulatory Practices and Related Policy Guidance Currently Observed on these contentious topics KYC/CDD Agents Regulation Reporting Obligations Supervisory/Enforcement Responsibilities Other Contentious Issues UK, France, Russia, Kenya, Zambia, Malaysia, Philippines and Mexico

3 New Outcomes in terms of Risk 3 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

4 Risks Associated to M-FS 4 From Regulators IT security consumer protection AML/CFT From Industry Too much regulation kills the business From Policymaker Financial inclusion impeded

5 Mobile Money Less Risky Than Cash 5

6 6 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

7 Case 1 7 Amount transferred to a mobile phone through G-Cash Mr. A ordered an Iphone from Mr. B through Ebay Iphone was never received by Mr. A Mr. B Transferred the corresponding amount to a mobile phone Mr. E went to G-Cash business center Mr. E s mobile account Transferred the corresponding amount to a mobile phone Mr. D s mobile account Transferred the corresponding amount to a mobile phone Mr. C s mobile account Mr. E Mr E. cashed out victim s money using his mobile phone

8 Case 2 8 Mr. A & Mr. B Advertised fake overseas employment offers as caregivers and nurses Money collected through G-Cash remittances the promised deployment abroad never materialized VICTIMS Sent between $65 and $975 for training and processing fees

9 9 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

10 Observed Control Measures 10 Type of Risk Possible ML/TF Risks Key Control Measures Anonymity Elusiveness Off-the-branch or non-face-to-face customer origination Unauthorized use of mobile phones for financial transactions Use of mobile phone at the layering stage of the ML process Use of multiple m-fs accounts Cross-border mobile-to-mobile remittances Innovative KYC and identity verification procedures MTN Banking SA Wizzit - SA Advanced identification mechanisms Bradesco Brazil Korea Limits on transactions Korea FSS Customer profiling Brazil Reporting Macau SAR China Monitoring Korea Malaysia In-field service risk assessment Hong Kong FIU Identification of sender Maxis Malaysia

11 Observed Control Measures (cont d) 11 Type of Risk Rapidity External Legal issue: Poor oversight Possible ML/TF Risks Lack of capacity to monitor/freeze real-time messaging and settlement Oversight loopholes for providers Lack of regulation, supervision of new providers M-FS Shell companies Key Control Measures Integrated system of internal controls Itau Brazil Philippines Managing risk of 3rd party service providers Wizzit South Africa Guidelines on m-fs and risk management Philippines, Korea 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)

12 KYC/CDD 12 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 of ML or TF risk and, (ii) that they are able to provide evidence in that respect

13 KYC/CDD (cont d) 13 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

14 14 Document requirements in developing countries are more stringent than in developed countries Percentage of countries that require certain criteria to open an account Source: Financial Access Database

15 KYC/CDD (cont d) 15 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

16 KYC/CDD (cont d) 16 Gradual KYC scheme adopted by Moneybookers LTD, an internet payment provider in the UK Source: Word Bank

17 Agents 17 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?

18 Agents (cont d) 18 OUR PROPOSED SOLUTIONS: Agents (Retailers) should not be regulated Under FATF standards, they are not required to be license or 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

19 Agents (cont d) 19 OUR PROPOSED SOLUTIONS (cont d): Agents should be covered by certain AML/CFT obligations 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

20 Agents (cont d) 20 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)

21 Agents (cont d) 21 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

22 Reporting Obligations 22 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

23 Supervisory/Enforcement Responsibilities 23 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 crossborder mobile remittances

24 24 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

25 Supervisory/Enforcement Responsibilities 25 (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

26 26 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 of regulation / supervision Clarify some thorny issues in relation to Agents, Supervision, STRs obligations, 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)

27 27 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 of 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

28 Thank you Pierre-Laurent Chatain Wameek Noor Najah Dannaoui 28

Integrity in Mobile Financial Services

Integrity in Mobile Financial Services Workshop on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Bangkok, Thailand June 24-26, 2008. Raul Hernandez -Coss Financial Sector Specialist