Podcast Summary: “Are Anti–Money Laundering Policies Hurting Poor Countries?”

Podcast: The CGD Podcast
Host: Rajesh Merchandani, Center for Global Development
Guests: Clay Lowry (Vice President, Rock Creek Financial Advisors; former Assistant Secretary of Treasury for International Affairs), Vijaya Ramachandran (CGD Senior Fellow and Director of the Working Group on AML/CFT)
Date: November 10, 2015
Episode Theme: Examining the unintended consequences of anti–money laundering (AML) and combating the financing of terrorism (CFT) policies on poor countries, particularly the impact on remittances, small business, and nonprofit funding, and offering actionable policy recommendations.

Overview

This episode explores how well-meant international policies designed to combat financial crime and terrorism inadvertently harm vulnerable populations in developing countries. Specifically, it dissects how AML/CFT regulations, intended to prevent illicit financial flows, have led to banks “de-risking” or withdrawing from relationships with money transfer organizations (MTOs), nonprofits, and small businesses. This has made it harder for migrants to send money home, undermined financial inclusion, and pushed money flows into less transparent and potentially riskier channels. The conversation highlights findings and recommendations from a new CGD report addressing the issue.

Key Discussion Points

1. What Are AML/CFT Policies and Why Do They Exist?

[01:45] Clay Lowry:

• AML/CFT laws are designed to protect national security by dismantling the financial networks of criminals and terrorists.
• These policies are a major priority globally following events like 9/11.
• “It’s hard to imagine a higher policy goal from a government perspective than to protect the homeland and protect national security... The AML CFT law has been put in place...to try to figure out where is money going to bad people.” [01:59 – 02:45]

2. Unintended Consequences: Channels of Impact

[03:13] Vijaya Ramachandran:

• Debanking: Banks withdraw services from MTOs, making it difficult for migrants to send remittances.
  • Example: Barclays debanked 90% of its MTO clients in 2013.
• Small Businesses: Struggle with international trade as they lose access to trade finance/letters of credit.
• Nonprofits: Face challenges opening bank accounts, impeding their work in conflict and post-conflict zones.
  • “Nonprofits...are having trouble getting bank accounts.” [04:10]

3. Informal and Less Transparent Money Flows

[04:24] Vijaya Ramachandran:

• When formal channels are closed, people turn to informal, less traceable networks like hawala or foreign currency clearinghouses.
  • These are often more expensive and harder to monitor, undermining both security and development goals.
  • “We are worried about the fact that these other means are often less transparent. And that’s not what we want, both from a security perspective and from a development perspective.” [04:24 – 04:57]

4. The Global Nature of “De-Risking”

[05:04] Vijaya Ramachandran & Clay Lowry:

• This is not just a Somalia issue; Somali remittances have drawn attention, but similar challenges are surfacing globally.
  • “The problem is wider spread than just Somalia.” [05:53 – 06:29]

5. Growing Recognition and the Policy Dilemma

[06:37] Clay Lowry:

• Increasing recognition among G20 and central banks that AML/CFT-driven de-risking threatens global financial inclusion.
  • “Now...the conclusion is this is a problem. It’s not a systemic problem, but it is a problem...” [06:37 – 07:45]

Challenges in Addressing the Problem

1. Lack of Data and Transparency

[07:57] Vijaya Ramachandran:

• Difficult to measure how much de-risking is directly caused by AML/CFT versus other factors.
• Calls for:
  • Systematic evaluation by the Financial Action Task Force (FATF)
  • Increased data sharing among regulators and with researchers
  • “Different agencies are sitting on information and if they can share this information between themselves and also if possible, release some of it to researchers, I think we could all get a better understanding...” [08:38 – 09:57]

2. Challenges in Defining and Implementing Risk-Based Approaches

[11:03] Clay Lowry:

• Current definitions of money laundering and risk may be vague, hampering targeted and effective compliance.

3. Practical Hurdles for Banks

[12:23] Clay Lowry:

• Banks fear that regulations require them to know not just their customer (“know your customer” - KYC), but their customer’s customer, and beyond.
  • This uncertainty amplifies the incentive to de-risk.

Report Recommendations

[10:05] Clay Lowry: Five-Point Plan

1. Better Data Collection and Sharing:
   • Improved, coordinated data to understand and address de-risking.
2. More Rigorous Impact Assessments:
   • Strengthen the assessment process for AML/CFT effects, spearheaded by the Financial Stability Board.
3. Clarifying Definitions and Standards:
   • FATF should clarify and communicate definitions, especially of “money laundering” and risk categories (particularly regarding nonprofits).
4. Best Practice Compliance Systems:
   • Encourage banks and MTOs to implement robust internal systems to satisfy compliance, making it easier to build trust and avoid blanket de-risking.
5. Improved Identification (KYC) Solutions:
   • Streamline processes and technology for customer identification without compromising privacy.
   • “There are myths out there...that we have to basically know your customer’s customer and know your customer’s customer, customer. And so at some point, banks...can’t know that far down.” [12:23]

Addressing Security vs. Financial Inclusion

[13:36] Vijaya Ramachandran:

• The aim is not to undermine counter-terror or anti-crime goals but to address unnecessary and unintended consequences.
• Enhancing transparency and compliance is beneficial for both security and development.
  • “We don’t see this problem...as a trade off with solving the security problem. We actually think that if you can address this problem, you may well make the security system stronger as well.” [13:36 – 14:27]

[14:27] Clay Lowry:

• If money is pushed into informal, opaque channels, the original goals of AML/CFT are undermined—an “irony” that requires thoughtful attention.
  • “If the flows start going through in a less transparent manner...that could actually lead towards the types of concerns...Because we don’t actually know what’s happening.” [14:27 – 15:37]

No Villains: A Shared Challenge

[16:06] Vijaya Ramachandran:

• The focus is not to blame banks, regulators, or MTOs, but to find practical solutions that allow all actors to fulfill their roles responsibly.
  • “We’re looking to see how banks can do their business better, how money transfer organizations and nonprofits can...have bank accounts...We don’t particularly want to lay blame on anyone.” [16:06]

Notable Quotes

• “It’s hard to imagine a higher policy goal from a government perspective than to protect the homeland and protect national security.” – Clay Lowry [01:59]
• “We are worried about the fact that these other means are often less transparent. And that's not what we want, both from a security perspective and from a development perspective.” – Vijaya Ramachandran [04:24]
• “Now...the conclusion is this is a problem. It’s not a systemic problem, but it is a problem...” – Clay Lowry [06:37]
• “If the flows start going through in a less transparent manner because they’ve been driven out of the kind of regular channels, is there a possibility that that could actually lead towards the types of concerns that we have about anti money laundering?” – Clay Lowry [14:27]
• “We don’t see this problem...as a trade off with solving the security problem. We actually think that if you can address this problem, you may well make the security system stronger as well.” – Vijaya Ramachandran [13:36]

Timestamps for Key Segments

• [01:45] – Importance and rationale of AML/CFT laws (Clay Lowry)
• [03:13] – Unintended consequences and main channels of negative impact (Vijaya Ramachandran)
• [04:24] – Rise of informal remittances and loss of transparency (Vijaya Ramachandran)
• [05:53] – The Somalia case and global spread of the issue (Clay Lowry)
• [06:37] – Recognition of the problem among global policymakers (Clay Lowry)
• [07:57] – Insights on lack of data and the need for systematic study (Vijaya Ramachandran)
• [10:05] – Five key recommendations to address AML/CFT unintended impacts (Clay Lowry)
• [13:36] – Addressing concerns of appearing “soft” on security (Vijaya Ramachandran)
• [14:27] – The risk of less transparency if de-risking continues (Clay Lowry)
• [16:06] – A call for solutions, not blame (Vijaya Ramachandran)

Tone and Final Takeaways

The tone throughout the episode is constructive and collaborative, emphasizing the complexity of the issue and the necessity for balanced, pragmatic policy reforms. The speakers stress that AML/CFT frameworks are essential for global security, but must evolve to avoid collateral damage to the world’s poor. Their recommendations center on smarter data use, clearer definitions, proportional compliance, and harnessing technology for both identification and transparency—actions that would ultimately enhance both security and development outcomes.

For more, the full report can be found at cgdev.org.