Microcredit, money service firms tightening AML systems amid challenges
Published:Wednesday | October 19, 2022 | 12:10 AM
Microfinance institutions, remittance services and cambios are reporting success in improving anti-money laundering and counter-financing of terrorism, or AML/CFT, systems amid what are said to be formidable challenges facing the sectors in their compliance quest.
“If you don’t have a sensible risk-rating system in all of this, we are not going to be able to manage it. The transactions are too many, so you cannot be looking at every little one. It is not feasible. The regulators have to deal with what is statistically significant numerically, and in terms of the amount of money involved,” warned Dr Blossom O’Meally-Nelson, chairman of Jamaica Association for Micro-Financing, also known as JamFin.
‘It doesn’t make sense if a man is going to be laundering $500,000 or $50,000 or $2,000 and you are going to be running him down with a whole police force and whole regulatory agency, while the big man laundering millions take a plane and gone. We have to get the risk rating down to fine point,” she stressed in a presentation at last week’s annual AML/CFT conference in New Kingston.
O’Meally-Nelson was critical of the approach to enforcement so far being taken by the authorities, led by Bank of Jamaica, BOJ, which now regulates microcredit firms, which are required to be registered and to conform with several new operating and reporting standards. It is estimated that there are more than 200 microcredit businesses operating in Jamaica, but just over 100 are said to have so far applied to be licensed.
“We are all taking about regulation, but nobody is talking about enforcement. The enforcement is woefully inadequate,” she said.
She shared a long list of challenges faced by microfinance institutions in complying with BOJ regulations and broader AML/CFT compliance requirements.
“Microfinance institutions target largely the unbanked. We don’t have an adequate database for carrying out background checks on people. The customers operate mainly in the cash economy. They demand rapid disbursement. They don’t want to go through any process, and the majority of loans are personal. Even if a person has a business, the business is not registered, they just want to buy something now to sell it back. This makes the whole sector vulnerable,” she noted.
One of the more noticeable results of telling micro credit customers about AML/CFT, she added, is that they disappear like the microfinance institutions that are not applying for registration.
“I think that we are going to create the greatest non-compliance (situation) in history. We are feeding the underground economy,” O’Meally-Nelson warned.
She has accused the BOJ of setting the bar for compliance so high that it encourages non-compliance by a significant number of microcredit operators.
“There is a strong feeling that this is done to cull the sector and to reduce the sector to a few people, like what happened to commercial banks some time ago,” she charged.
The microcredit sector spokesperson issued an urgent call for the introduction of the national identification system, NIDS, to assist the industry with background checks.
She also wants the BOJ to implement a national public education programme to inform persons about financial inclusion, financial literacy, and the benefits of ‘know your customer’ and AML/CFT requirements.
Meanwhile, Denise West, chief compliance officer at Lasco Financial Services, said the cambio and remittance trade carried an inaccurate perception of being highly risky, facilitating fraud and lacking sufficiently tight AML/CFT compliance standards.
“We are implementing front-end systems for screening, enterprise risk management for AML/CFT, reviewing risk indicators and risk profiles for both individuals and corporate clients. We review historical activities, ascertain related parties’ information, and we go behind the veil of the ultimate beneficial owner,” the cambio and remittance industry representative said.
In addition to independent internal audits by companies, she said there are external audits by global payment providers who are represented locally, as well as independent reviews, including by BOJ.
“They don’t play, even though they tell you that they are there not to sanction you but to help you,” West said of the central bank’s approach to regulating the sector.
“We have to ensure that our AML/CFT framework is up to standard for the commercial banks, our regulators, and for the correspondent banks. We do not want the correspondent banks to de-risk our commercial banks because we need their services, and we do believe they need us just as we need them,” West added.
She noted that compliance is an expensive venture, requiring major investments in information technology, data processing, and ensuring compliance with local and global regulatory standards.
“We look at data intelligence, data gaps, data storage and data privacy. Information is required to build a holistic view of our customers,” the Lasco Financial compliance officer noted.
Meanwhile, O’Meally-Nelson said that despite the obstacles, the microcredit sector was also getting its house in order in as far as compliance is concerned.
“We have set up a relationship with Global Risk and Data Authority, and a number of our members have outsourced their compliance to GRADA. This is really costly. We have done compliance training with them. We have AML, and POCA (Proceeds and Crime Act) training coming up,” she said.
She added that JamFin is also assisting microfinance firms identify suitable persons to be company directors, as well as the staff training.
“We are still having a rough time automating their systems. If you don’t automate, you can’t get the reporting. We have eliminated cash transactions. People have to go and lodge their money in a bank,” she added, noting that the businesses were now being registered and their lending activities have to be separated from other activities, as required by law.