Integrity in Mobile Phone Financial Services is part of the World Bank Working Paper series. These papers are published to communicate the results of the Bank’s ongoing research and to stimulate public discussion.

Governments are challenged to make an innovation-friendly climate while simultaneously ensuring that business
developments remain sustainable. Criminal use of the technology—terrorist financing and money laundering—
challenges long-run business viability via risk of massive investment flight and public distrust of new players entering the market.

Sustainable business models are those that base regulation on a careful risk-based analysis. This study identifies the perceived risks and compares them with the actual level of risk for each category of mobile phone financial services. The comparison reveals that the perceptions do not weigh up to the reality.

Based on fieldwork in seven locations where the technology has taken off, this paper finds that providers apply measures that are consistent with international standards to combat money laundering and terrorist financing. It identifies the sometimes non-traditional means the industry uses that both mitigate the risks and are in line with good business practices. Acknowledging that mobile phone financial services are no riskier than other channels, governments are called to treat them as an opportunity to expand access to finance.

Executive Summary:

This working paper explores strategies to identify and manage potential money laundering (ML) and terrorist financing (TF) risks in mobile financial services (m-FS). Using fieldwork in seven economies1 as a basis, the paper provides guidance on the best means of assessing perceived versus actual ML and TF risks, then identifies specific measures to mitigate the actual risks. The paper concludes with recommendations that aim to promote a regulatory balance to foster an enabling environment for business while minimizing ML and TF risks that hinder its sustainability.

Mobile phones hold great potential to become a common way of conducting financial transactions on a global scale in the near future. Billions of people around the world use mobile phones to communicate, and the technology has even become accessible to lowincome and remote populations in recent years. For the nearly three billion people who currently do not have bank accounts, mobile technology offers new means for them to access financial services. Policymakers, bank and non-bank financial service providers, and regulators all have reason to support m-FS development.

Despite the development potential of m-FS, distinctive risks concern observers in affected service markets. These perceptions merit urgent attention because m-FS providers may fall outside anti-money laundering (AML) and combating the financing of terrorism (CFT) controls generally adhered to by traditional financial institutions. In order to balance perceptions against the fear of over-regulation,which can damage business, actual rather than perceived risks need to be identified. ...

Foreword:

Akey pillar to sustainable development is expanding access to finance.Until recently, no one had envisaged that mobile phones could be such a powerful medium to achieve this objective.Private sector initiatives in utilizing mobile technologies to facilitate payments have successfully brought financial services to the doorsteps of billions of unbanked poor around the world.Today, almost half the world owns a cell phone and an estimated 1.4 billion will use cell phones to remit money domestically and across borders by 2015. The promise of mobile phone financial services lies in their delivery platform. Mobile phones are unrestrained by the infrastructural and cost requirements that have traditionally hindered banks and others from reaching the impoverished.

In order that mobile technology can facilitate access to finance for the poor, policymakers, faced with emergence of new and non-traditional service providers and changing market structures, are challenged to create an enabling environment for the sustainable growth of mobile financial services. This includes the design of a balanced regulatory framework that both supports innovation and mitigates risks that threaten its development.

Concerns on money laundering and terrorist financing risks have made identifying the actual risks an even more daunting task. The need to comply with international standards to mitigate these risks has further created market fears that the cost of regulatory compliance could be prohibitive, creating a disincentive to expand mobile financial services and, resultantly, undermine development.

This Working Paper, based on fieldwork in a variety of markets, is the first of its kind to specifically evaluate these concerns. Initial results have substantiated findings in recent analyses that market practices to mitigate prudential risks often coincide with those for money laundering or terrorist financing. Consequently and contrary to perceptions, mobile service providers’ risk mitigation measures are consistent with international AML/CFT standards. Possibilities of sharing of information among bank and non-bank mobile service providers offer potential to reduce compliance costs, an important factor in the expansion of mobile financial services to promote access to finance and development.

Greater cooperation among regulators of financial services and TelCos to facilitate the convergence of regulations of financial services and payments systems can further reduce regulatory cost.

It is our hope that the new information, findings, analyses and proposals in this paper will contribute to policymakers’ efforts to promote a safe and sound regulatory regime. The right balance of regulations and cost to manage risks will provide the required enabling environment for mobile phone financial services to facilitate access to the poorer segments of society, and ultimately, foster sustainable development.

Michael Klein
Vice President Finance and Private Sector Development, The World Bank
Chief Economist, IFC

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Integrity in Mobile Phone Financial Services
Measures for Mitigating Risks from Money Laundering and Terrorist Financing
Pierre-Laurent Chatain
Raúl Hernández-Coss
Kamil Borowik
Andrew Zerzan

The International Bank for Reconstruction and Development/The World Bank
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
First Printing:May 2008

Contents:
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Objective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Scope and Target Audience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Geographical Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. m-FS Growth Potential and Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
m-FS Offers Unique Economic Development Potential . . . . . . . . . . . . . . . . . . . . . . . 7
m-FS Development Demands a Convergence of Stakeholder Incentives. . . . . . . . . . 9
Perceived ML and TF Risks and the Case for Regulation. . . . . . . . . . . . . . . . . . . . . . 11
Market Access and the Case for Regulatory Balance. . . . . . . . . . . . . . . . . . . . . . . . . . 14
3. Analyzing and Responding to ML and TF Risks: Observations
of Applied Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
New Challenges to Old Risk Analysis Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
New Framework for Risk Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ML and TF Risks Inherent in the Four m-FS Service Categories . . . . . . . . . . . . . . . 20
ML and TF Risks External to m-FS Service Categories . . . . . . . . . . . . . . . . . . . . . . . 29
4. Applying FATF Recommendations to m-FS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Observed Mitigation Responses and their Consistency with FATF
Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Application of AML and CFT Standards to All m-FS Providers . . . . . . . . . . . . . . . . 41
5. Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Policy Recommendations and Issues for Consideration . . . . . . . . . . . . . . . . . . . . . . 48

Author Biographies:

Pierre-Laurent Chatain joined the World Bank’s Financial Market Integrity Unit in September 2002 as Senior Financial Sector Specialist. He has led several anti-money laundering assessment missions as part of the Financial Sector Assessment Program in Anglophone, Francophone, and Spanish speaking countries, and designed and delivered many technical assistance programs and outreach events in Africa, the Middle-East, and Latin America. Before joining the World Bank, Mr. Chatain worked for the Bank of France for more than 15 years. He held several positions in succession within the legal and inspection departments. He was auditor from 1992 to 1996, then was promoted to inspector. He also served as mission chief at the French Banking Commission where he led multi-disciplinary on-site inspection teams in commercial banks in France and overseas.

He also exercised managerial responsibilities at the Bank of France as Deputy-Director of the On-site Control Department. Mr. Chatain has published widely on issues of mediation, conflict resolutions, and civil bankruptcy. He is a graduate of the French Political Science Institute.

Raúl Hernández-Coss has been the primary task manager for the development of Bilateral Remittance Corridor Analysis (BRCA), which is aimed at supporting countries on strengthening their remittances systems and promoting a shift from informal to formal fund transfer (FFT) systems. His work on remittances has supported regional efforts directed towards analyzing remittance markets and has engaged donors on promoting financial literacy and migrant access to formal funds transfer systems.

His work has also helped design effective policy avenues aimed at enhancing partnerships between remittance sending and recipient countries. As part of the Bank’s legal department, Mr. Hernández-Coss contributed to the review of central banks and banking laws to determine the effectiveness of the legal framework in ensuring a sound banking system. His analysis has also helped determine the adequacy of the Bank’s exit framework and deposit insurance system.

Mr. Hernández-Coss has worked with the Consultative Group to Assist the Poor (CGAP) on the first analysis of AML and CFT regulations and their implications for financial service providers that serve low-income people. He graduated with a Law degree from Instituto Tecnológico Autónimo de México (ITAM), a Masters of International Affairs from Columbia University, and a Masters of Law from Georgetown University.

Kamil Borowik, as a Financial Analyst in the World Bank’s Financial and Private Sector Development Network, focused on risk management, capital market development, and access to finance through bank and non-bank financial institutions. Since the organization of the 2006 International Conference on Migrant Remittances and Access to Finance, he expanded the World Bank’s interest in exploring technology as safe and sustainable means to develop access to financial services. He has spearheaded this work since its conception, and participated in the entire fieldwork related to this study. Before joining the World Bank, he was a Senior Consultant at KPMG Advisory Services focusing on enterprise risk management, management information systems, and project management engagements in financial services. Mr. Borowik graduated with a masters in Corporate Finance from the Cracow University of Economics, Erasmus Socrates scholarship at the University of Greenwich, UK and the Vanderbilt University-BAI Postgraduate School of Bank Operations, Payments and Technology.

Andrew Zerzan analyzes technology as a key driver for sustainable economic development. At the World Bank, his work focuses on new innovations and their role in promoting access to financial services and market integrity.

In 2006, Mr. Zerzan initiated published research on information and communication technologies for economic development at the World Bank Institute. His analysis has gauged the effectiveness of national and international regimes to mitigate the risks of growth, such as illicit money flows, terrorist financing, and money laundering. Mr. Zerzan draws on his private sector experience as a consultant in Japan where he built a grassroots business that has bridged disparities in strategic communications among global companies. He was educated in the United Kingdom, Spain, Canada and the United States.

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