Are Anti–Money Laundering Policies Hurting Poor Countries? – Clay Lowery and Vijaya Ramachandran

Summary

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.

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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.

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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]

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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.

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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]

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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]

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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]

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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]

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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)

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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.

Transcript

[A]

Foreign.

[B]

Hello, I'm Rajesh Merchandani and welcome to the CGD podcast. Now I've got some letters for you today. AML cft. They might mean something to you if you work in national security or finance. They stand for Anti Money Laundering and Combating the Finance of Terrorism and they relate to legislation designed to prevent international flows of funds to criminal or terror groups. It's not an unreasonable thing to be worried about. Fair enough. But the effects of these policies on people in poor countries can be dramatic. Why is that? Well, because millions of people in developing countries rely on money sent home by migrant workers. And remittances total three times foreign aid, some $400 billion a year. To send those funds home, people use money transfer organizations and money transfer organisations need bank accounts. But here's the problem. Banks that handle international money flows can face stiff penalties if they cannot track the end customer of the transaction. Faced with that risk, banks have been pulling out of the money transfer industry wholesale. It's called de risking. It's a problem that's been recognised at the highest levels of government and at central banks. And CGD has just issued this report on these unintended consequences of anti money laundering policies with recommendations about how they can be made much more equitable. It's on our website. And I'm joined by Clay Lowry, who chairs the working group. He's the Vice President of Rock Creek Financial Advisors now and is of course former Assistant Secretary of Treasury for International Affairs. And also Vijaya Ramachandran, a CGD Senior Fellow and the Director of the Working Group on AML cft. Welcome to you both. Thanks for joining me.

[A]

Thank you. Rajesh.

[B]

Clay, let's start with you first of all and let's start with the reason for having AML CFT laws. We'll just call them AML CFT for brevity, presumably for reasonable national security reasons. Not an unreasonable thing.

[C]

Absolutely. It's hard to imagine a higher policy goal from a government perspective than to protect the homeland and protect national security. One way of doing that is to suss out who's a criminal. The underlying thing for criminals is they need finance. The AML CFT law has been put in place over a long period of time to try to figure out where is money going to bad people. And so basically trying to get at that problem is a foremost policy priority of not just the United States, but countries all over the world. Because it's, by the way, it's bad for poor people, it's bad for rich people, it's bad for middle income people, it's just bad for our society. So I think that that's where this comes from, if anything. Nine, 11, that tragic day also showed us that money and how it flows around the world is very, very important to get at. So the idea of getting strong policies to prevent this is a key, key goal of any administration within the United States, but also around the world.

[B]

What are the potential consequences and why are they happening of these AML CFT policies? The unintended consequences?

[A]

We've identified three different channels by which these unintended consequences may occur. One is the issue you just raised, which is the debanking of money transmitters. In 2013, Barclays debanked almost 90% of the money transfer organizations it was doing business with, arguing that they don't meet eligibility criteria for AML cft. So that was one channel that we identified that we're very worried about because it's a very important channel for migrants to send money home to their families. But we've also identified other things, such as that small businesses in poor countries are less able to get trade, finance or letters of credit in order to do business internationally because they're not able to access an international bank. And finally, there also seems to be some anecdotal evidence that nonprofits that are trying to work in post conflict or in conflict situations are having trouble getting bank accounts.

[B]

And so if people, organizations can't transfer money to the traditional methods of using banks or money transfer organizations, they're using other means.

[A]

Correct? You know, that seems to be what's happening. So 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. So, you know, individuals are resorting to things like bulk foreign exchange clearing houses or, you know, more informal networks, some of which are within traditional hawala systems. And you know, while this may serve as purposes to transfer the money, they're often more expensive for the people sending the money and they're less transparent.

[B]

And you talked about Barclays as an example. That's not the only example, is it? There are a lot of examples of banks de risking.

[A]

That's correct. We observed as we were doing this work a number of banks issuing letters to money transfer organizations and to other entities saying that if you're not able to meet the AML CFT criteria or we don't think you can meet them, then we don't want to do business with you. And this has been happening in the US as Well, and it's gotten a lot of attention in the US because many members of the Somali migrant community in Minnesota and the state of Washington and California are not able to send money home because banks have been de risking and not, you know, giving business or not enabling money transfer organizations working with sending remittances to Somalia to get a bank account. And so this is a phenomenon, you know, that's happening in different countries.

[C]

I just want to add one thing to that is the Somalia phenomenon is important and it's the one that in some respects has gotten the most attention in the United States and maybe rightfully so, but it is a, we need to be careful. It can be considered a one off Somalia being a little bit different type of country. That being said, I think that from some of the work that we've done, it's pretty clear that the problem is more, is wider spread than just Somalia. So Somalia gets the most attention and we should obviously think about that. But we have to think about a broader perspective than just.

[B]

And is it fair to say that it's becoming more recognized as a problem or the kind of the recognition of this has changed?

[C]

I think the answer on that is definitely yes. So we're about to have a G20 leaders meeting in Turkey. The Turks have put forward that one of the things that they want to think about is inclusive growth. And the G20 has talked about in the past the importance of financial inclusion and about making sure remittance flows are as least expensive as possible and moving in the most efficient manner. All of those issues are actually potentially slightly at risk through the problem that we're talking about here. If you had asked me a year ago, I think there would have been, or forget me, a lot of financial officials around the world, I think there would have been a little bit of debate about is this really a problem or is it really a Somalia issue. And I think now the conclusion is this is a problem. It's not a systemic problem, but it is a problem and we need to try to figure out how to address it or the goals that we and the G20 are talking about about better remittance flows, financial inclusion, inclusive growth, are all going to be slightly at more at risk because of this issue.

[B]

Fij, when you were studying this, when the group was working hard on this, what were the main issues that you found? What are the main problems? What are the main deficiencies in the current policy structure?

[A]

So one of the main problems that we encountered while we were working on this report was a lack of data. You know, it was really difficult to disentangle these different effects and to really understand how these laws and the resulting DE risking was affecting these different groups. You know, one question that keeps coming up is, you know, how much of this de risking is due to AML CFT and how much of it is due to other factors? You know, our sense from doing this work is that, you know, it's likely that some of this de risking is due to AML cft, but we don't have rigorous causal evidence as yet. And so we have recommended in the report that the Financial Action Task Force, which is an international body, that they undertake a systematic evaluation of this problem. And that also all of the various financial bodies, the standard setters, the regulators get more data to answer this question and share the data that they currently have. 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 of exactly what's going on. What exactly is the impact of AML CFT versus other factors that's driving this de risking that we are observing.

[B]

Why are they not sharing it at the moment, do you think?

[A]

Well, you know, I'm not sure why. You know, I think different agencies collect data. They're sort of in their own space doing their thing. And you know, we have seen some reports from the different agencies which were very helpful. You know, there may be here that it's a situation where the sum can be much greater than the parts. And we're hoping that by making this recommendation in our report that we bring some more awareness to the fact that we need more information and that there is some information out there that can be used better. So we're really hoping that this report will catalyze that.

[B]

Okay, so clay more and better quantities of and access to data. That's one recommendation. What else are you guys recommending?

[C]

So I was going to say that we have essentially a five point plan. First, VIJ is exactly right. You need better data. Secondly is the assessment process. So to the credit of the Financial Stability Board, the Financial Stability Board is basically an overseer of international standard setters in the financial regulatory space. They have started to assess these AML CFT laws that should be made as rigorous as possible and look for the causal links that VIJ was just talking about. Third party is to, and this is a hard thing to do, clarify and strengthen the risk based approach that FATF uses. FATF, as VIJ mentioned, is an international organization which is a standard setter. For AML CFT issues. And so they should try to clarify definitions of money laundering.

[B]

There's no actual definition of it, no clear definition of it at the moment.

[C]

Not in the way that kind of international standard setters usually do. So they have definitions, but they're a little vague. Here's a different point is there are nonprofits. So VIJ mentioned one of the third area besides remittances and correspondent banking is nonprofits who can't get. So there is kind of almost a definition that nonprofits are vulnerable to terrorist attacks or to terrorist abuse. That may be so, but why is it that we're focusing on the nonprofit or shouldn't we be focusing on the activities? And so I think the FATF could do a better job on clarifying some of those issues. Fourth is the need for better systems and compliance. This actually is probably even more so toward the private sector, though supervision at the local level has to be slightly better than it is currently. We talk about in the report, kind of a best practice for money transfer organizations about creating better systems internally so that it will become easier for you to be trusted by banks and by regulators. And then fifth is what I guess is to facilitate identification. So a lot of this gets into who is your customer, know your customer. And there is, 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 and money transfer, I'm like, I can't know that far down the, down the line what's happening. So what is there ways that we can improve either the technology, the identification processes. That doesn't mean we have to always be cognizant of privacy information and so forth, but, and protecting that. But I think that there are some areas in that space that can be looked at. And I think so that's what we tried to do in our report is kind of so assessment, data clarification, better identification, know your customer, and then better systems for compliance.

[B]

Peter Clay has stolen your thunder entirely there. He's given away all the recommendations. So let me ask you this. Share and share alike.

[C]

Sorry I babbled on too long.

[A]

No worries. No worries.

[B]

Is there a risk that with these recommendations, with this report, if it's adopted, that governments regulators might be seen as being soft on legitimate counterterrorism concerns?

[A]

So, you know, our sense is that these recommendations are addressing unintended and unnecessary consequences. We don't see this problem or solving 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. These are very complementary things, see them as one at the expense of the other. And in particular this question of making flows more transparent. I think a number of the recommendations in the report will serve to make flows more transparent and will serve to strengthen compliance procedures. We have made all of those recommendations and we think that those things will help to serve the security objective, which we absolutely agree is extremely important.

[C]

This exact question was one of the reasons why we had people on this working group who are in people, this is what they've done. They care about it very much. And we wanted to make sure it wasn't just the folks who worry about development finance or bankers for that matter, or even bank regulators, but people who actually understand enforcement and care very much about that. And so the recommendations come out of people looking through that who have that type of background. Secondly, there is a risk or sort of an irony in some respects is going back to Vij's original point. I think maybe Rajesh, your original point is 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 counter financing terms? Because we don't actually know what's happening. And that is something that it's almost the irony of the whole project, but hopefully that's not happening. But at the same time, it's something that we should be worried about for the future.

[B]

One point to emphasize in this also is that banks are often painted as the demons they're de risking. They're leaving all these people out in the cold, no way of transferring money. But that's not the focus that you're taking either. You talked about how implementers and regulators were part of the authorities were part of the working group considerations. Also you've taken on board the bank's point of view as well. It's about finding, not laying blame here. It's about finding a sweet spot.

[A]

Yes, that's correct. I mean, we're looking to see how banks can do their business better, how money transfer organizations and nonprofits can manage and open and have bank accounts. So the point is not to lay blame on any of these actors. You know, each actor is acting in his or her own interest and banks are looking at the situation and saying, well, if we don't know who your customers are and we have, you know, to comply with these regulations, we may have to debank you what we are hoping that we can do with this report is come up with recommendations where banks don't have to do that. You know one of the concerns that we have with this with what's going on is that it is reducing competition in the financial sector, this kind of debanking. So having fewer money transfer operators for example is not a good thing for competition. It's not a good thing for prices. And so we want to address that. We want to help the whole sector be more healthy. We don't particularly want to lay blame on anyone.

[B]

Okay. Vijaya Ramachandran, Clay Lowry, great to have you here in the podcast studio. Thanks for joining me.

[C]

Thank you very much.

[A]

Thanks Rajesh.

[B]

As we've been talking about, this is the report unintended consequences of anti money laundering policies for poor Countries. You can find it on our website cgdev.org and please remember to join me Rajesh Merchandani for the next podcast from the center for Global Development.