By: Fabrice Gatwabuyege, Vera Neugebauer, Masiiwa Rusare and Julia Marin-Morales (IFAD)
Unlocking the economic force of remittances for reaching low-income and rural customers with IFAD’s Financing Facility for Remittances under the Remittance Access and Innovation (RAI) programme.
Overly restrictive KYC and CDD processes are still holding remittances back from supporting migrants in achieving their goals, as well as economic development goals more generally, according to an IFAD-DMA study (2020). These restrictive processes by remittance service providers (RSPs) are impeding access to remittances for low-income and rural customers in seven African countries: The Gambia, Ghana, Kenya, Morocco, Senegal, South Africa and Uganda. This is despite the fact that existing regulations give RSPs the opportunity to innovate on how they identify and verify low-income people who often do not pose high money-laundering risks.
KYC and CDD requirements tend to focus on the collection of traditional documents that may not be available to most low-income and rural households (such as proof of address). The existing regulations allow for the use of reliable, independent data or information for customer identification and verification (in line with FATF Recommendation 10). However, regulated institutions still rely on the use of physical documents to identify and verify customers. This is largely due the stipulation in accompanying laws of the documents that should be collected, and regulations and/or guidelines issued by regulators, resulting in institutions adopting a conservative approach to KYC and CDD. This creates barriers to accessing financial services, including remittances.
Improved and innovative KYC and CDD processes are required to make remittances more accessible. Making remittances more accessible for vulnerable communities will help them to weather economic shocks such as those caused by the ongoing COVID-19 pandemic. Improved and innovative KYC and CDD processes that are in line with existing regulatory frameworks and FATF recommendations (including the FATF’s recent guidance on digital identity) are needed to reduce documentation barriers for low-income and rural customers to enhance access to formal financial services.
To address these challenges, IFAD’s Financing Facility for Remittances – under the framework of the EU-financed PRIME Africa initiative and in collaboration with Cenfri – launched the two-year Remittance Access and Innovation (RAI) programme, which aims to enhance remittance access for those who need it most, through KYC and CDD innovations aligned with local regulatory frameworks and the FATF standards.
Understanding the regulatory context and clarifying regulatory uncertainty around KYC and CDD requirements is the first step to encourage RSPs to innovate. Our assessment of the regulatory requirements for KYC and CDD in The Gambia, Ghana, Kenya, Senegal, South Africa and Uganda reveals the following avenues for innovating on KYC and CDD for the benefit of low-income and rural remittance customers:
- Implementation of a risk-based approach (RBA) is a key avenue for innovation. The application of a risk-based approach is comprehensively mentioned throughout the guidelines and regulations, in alignment with FATF recommendations. RSPs should align their KYC and CDD measures with the risks involved and consider offering products with simplified CDD. Beyond the general mentioning of the RBA, some of the countries explicitly provide additional flexibility. For example, Senegal’s AML-CFT law (2018) makes provisions for simplified due diligence measures in the context of electronic transactions. South Africa published Guidance Note 7 in 2017, which marks a progressive shift away from the rules-based approach by focusing more on outcomes (i.e. the risks to be mitigated) than inputs (e.g. documents to be presented). Ghana’s recently released AML Act, 2020 factors in an RBA, and the AML-CFT guidance issued by the Bank of Ghana and Financial Intelligence Unit makes provisions for financial institutions to provide formal financial services to individuals who lack any form of government -issued ID. Uganda’s AML Amendment Act, 2017 does not make any specific provisions regarding which documents, in addition to the national ID, should be collected (e.g. proof of address). This leaves room for RSPs to define for themselves what is necessary for low-risk customers.
- Use of alternative data sources for identity proofing: Most of the assessed anti-money laundering and countering financing of terrorism (AML-CFT) frameworks are accommodative of innovative solutions for identification purposes, as they allow for the use of reliable data or information when identifying and verifying the identity of an individual. Some countries, for instance Kenya in its Prudential Guidelines on AML-CFT (2013), explicitly mention the use of databases for which, for instance, the Integrated Population Registration System can be leveraged. Ghana’s Digital Financial Services Policy (2020) mentions how linking the Ghana Post GPS digital addressing system with the Ghana card provides opportunities for remote account opening.
- Allowance for remote onboarding. Some laws explicitly allow for remote identity proofing, which can be used to provide formal financial services to those in hard-to-reach areas. For example, Uganda’s AML Amendment Act (2017) and Kenya’s Prudential Guidelines on AML-CFT (2013) allow for non-face-to-face business relationships, with this provision being leveraged by some institutions to offer remote identity proofing for lower-value accounts. In addition, South Africa’s Guidance Note 7 makes allowance for risk-based remote onboarding.
- Potential for proxy IDs. There is room in some countries to use an individual’s phone number as an identifier or additional identifier, which makes it highly accessible when compared to paper-based identity. The Gambia, Ghana, Kenya, Uganda, Senegal and South Africa all have KYC requirements in place for SIM card registrations, meaning there is potential to link a SIM card to an identity.
- Regulatory sandboxes: Some regulators have established regulatory sandboxes, which RSPs could leverage to test new innovative measures and technologies around CDD to help enhance access to formal remittance services. For instance, the Bank of Uganda recently published the National Payment Systems (Sandbox) Regulations (2021) and the Bank of Ghana launched a Sandbox Pilot, with the later specifically target remittance products and e-KYC among others.
RSPs can better leverage these opportunities. We found that RSPs have not made the most of innovation, mostly due to the following three constraints:
- The continued prevalence of a rules-based approach in processes, with an emphasis on documents. Recent FATF ratings as well as number of African countries that have gone in and out of grey-listing show a continued prevalence of a rules-based approach in some of the jurisdictions. This encourages a zero-tolerance approach to risk, which can translate into fines for RSPs, should they innovate outside of rigid legacy.
- Slow progress in implementing FATF’s latest guidance on digital identity. While some countries have made progress on digital identity for remote onboarding, overall, most regulators and RSPs have been slow to incorporate FATF guidance on digital identity. This guidance provides for using digital identity and remote onboarding (under the ongoing Covid-19 crisis) to address the current practice of regarding remote onboarding and transactions as inherently more risky than face-to-face transactions.
- Limited awareness of innovation opportunities and regulatory uncertainty among RPSs. Although regulations provide room for flexibilities, there is limited awareness among RSPs and regulators regarding these flexibilities.
IFAD’s RAI programme is working with regulators and RSPs in seven African countries to explore and implement innovations that are in line with existing regulatory frameworks and FATF guidance. Under the RAI programme, Cenfri provides participating RSPs with guidance and technical assistance to innovate and improve their KYC and CDD processes. RSPs are recognising that these innovations have the potential to modernise their frameworks and to reduce compliance costs, making it more profitable to provide services to low-income customers and broaden the reach of remittance services. Regulators are involved throughout the engagements and they have leveraged this as an opportunity to evaluate how current regulatory frameworks promote or inhibit financial inclusion, as well as better align their regulatory frameworks to changing needs from FATF, RSPs and the market.
Collectively, this work is helping to support remittance flows for vulnerable communities to weather crises and bounce back while reducing the overall money-laundering and terrorism financing residual risks posed to the financial systems, ultimately enhancing remittance access and boosting financial inclusion for the poorest.