Enhancing risk assessment processes for improved remittance access

Enhancing risk assessment processes for improved remittance access

12 April, 2022    

Early insights from IFAD’s Financing Facility for Remittances and Cenfri

Our work with IFAD to improve remittance access across seven African countries has shown that overly restrictive know-your-customer (KYC) and customer due diligence (CDD) requirements continue to hold back remittances. This is partly due to blanket labelling of customers as high-risk based on one risk factor (such as country of origin) and thereby applying enhanced due diligence measures across entire customer segments.

Such an approach neglects the nuances needed for proportionate risk assessment processes. In most cases low-income and rural customers do not pose high money-laundering risks simply because they are from a high-risk country. Moreover, these customer segments especially struggle to comply with enhanced due diligence measures. For example, a low-income migrant might not be able to present proof of address (due to living in an informal dwelling or in an area without an address). Yet, the Remittance Service Provider (RSP) requires proof of address for customers in high-risk categories which often applies to migrants from high-risk countries. This drives exclusion and pushes these and many other remittance receivers to use informal remittance services.

The Remittance Access and Innovation Initiative works with RSPs like FlexMoney in Kenya to tap into this large underserved market by rethinking their approach to risk assessments as well as KYC and CDD requirements in line with existing regulatory frameworks. This article showcases benefits of implementing improved risk assessment processes from the perspective of Flex Money in Kenya.

Four benefits RSPs can reap from improving their risk assessment processes

Improving the understanding and assessment of money laundering (ML), the financing of terrorism (FT), and proliferation financing (PF) risks not only enhances financial inclusion of remittance senders and receivers; it also advances RSPs’ business and revenue objectives. More specifically, an improved application of the risk-based approach reaps the following benefits for RSPs:

  • Increase in customer base. Proportionate documentation requirements enable underserved or excluded customers to more easily access remittance services, thereby growing the customer base. Flex Money re-rated low-income and rural clients from specific corridors which were previously rated as inherently risky through a more holistic customer risk segmentation. This enabled Flex Money to serve its existing customers more effectively and to serve new low-income and rural customers. Additionally, Flex Money was able to free additional resources through proportionately reducing its controls and increased its potential to establish correspondent banking relationships due to improved risk assessment frameworks.
  • Improved ability to align with regulatory requirements: Through an improved definition, understanding and assessment of the various risks (compliance risk, ML, TF, PF and financial exclusion risks), Flex Money was in a better position to engage with and respond to the Mutual Evaluation assessors and increased its alignment with both local and international regulatory requirements.
  • Reduced compliance costs. By allocating resources towards addressing higher-risk areas and by improving alignment with regulatory requirements as outlined above, compliance costs that arise from elaborate KYC and CDD for customers can be reduced. A cost-of-compliance study (2020) found that nearly 40% of compliance costs for six institutions (in Kenya, Ghana and Mozambique) is due to onboarding due diligence measures which could be significantly reduced through a more targeted risk assessment approach. A reduction in compliance costs would enable RSPs to offer more affordable products, reaching more customer segments.
  • Enhanced ability to implement appropriate, risk-based innovations, such as remote onboarding or leveraging alternative distribution channels, which were previously deemed too risky. Flex Money has been able to develop a remote onboarding process for its new app, which takes product, customer and channel risks assessments into account and is sensitive to the type of customer.

Six steps for RSPs to improve their risk assessment processes

To date, the main lesson from the IFAD’s ongoing Remittance Access and Innovation programme is that for RSPs to surface and realise the above opportunities, it is important for them to chart a path that includes the following key elements, among others:

  1. Disentangle various risks: RSPs should differentiate between ML risks, TF risks, PF risks, compliance risks, the risks financial exclusion (FE) poses to financial integrity and illicit flow risks. Lumping together these different risks often result in RSPs addressing compliance risk rather than ML-TF-PF and FE risks. Disentangling these risks (as done by Flex Money) in the AML-CFT policy and risk assessment processes allows RSPs to know exactly which risks they are mitigating.
  2. Define and identify risk factors beyond geography: To effectively identify different risks, a variety of different risk determinants such as product and delivery channel, customer, jurisdiction, transaction should be considered. Examples of other considerations across the various factors include non-face-to-face business, rapidity, cash, anonymity, elusiveness, methods of funding, and oversight. Each identified risk determinant and the related risk factors should be assessed in terms of the ML-TF-PF-FE risk levels before and after accounting for the effect of risk mitigation measures. The detailed and integrated assessment of these different risks and risk factors enabled Flex Money to re-rate low-income and rural clients from higher risk to lower risk.
  3. Establish risk appetite: RSPs should clearly define their risk appetites and link this to risk assessments and resulting decisions. Flex Money defined its risk appetite in discussions between the compliance officer and management, which was critical for reconsidering its risk management approach towards low-income and rural customers and to optimise its risk-return profile.
  4. Create clear operational guidelines: Once the above is done, it should be complemented by developing or updating relevant operational manuals that will guide staff members in implementing the above-outlined processes and risk mitigation measures. Examples of such operational manuals are anti-bribery and corruption policies, information security policies, AML-CFT policies and a well-defined compliance and risk manual/framework.
  5. Build internal team capacities: It is important to dedicate at least one staff member to solely focus on compliance and risk. In some cases (especially, in the case of small to medium-sized RSPs), RSP compliance staff double up with other duties, resulting in not having sufficient time and capacity available to conduct more comprehensive risk assessments. If it is not possible to dedicate staff to the risk and compliance function, then small to medium-sized sized RSPs could empower risk champions among the different departments and branches. Moreover, top management can play an important role in overseeing the execution and implementation of the risk assessment process in the case of small to medium-sized RSPs.
  6. Empower branch staff: The RSP branch staff need to be capacitated to implement and communicate the identified risk controls in an appropriate way. Effective communication through branch staff and providing sufficient background information for why certain questions are asked are critical for building customers trust and to avoid alienating customers who previously were rated as higher risk and were made to feel like suspects.

Improving the definition, identification and assessment of ML-TF-PF risks require the building of in-house capacities and systems. The Remittance Access and Innovation programme with IFAD’s Financing Facility for Remittances and Cenfri provides technical assistance to RSPs and supports RSPs on the road towards an improved application of the risk-based approach. Ultimately, RSPs and remittance receivers stand to benefit from an improved application of the risk-based approach, which will lead to both improved access to remittances and more effective counteracting of ML-TF-PF risks.

The Remittance Access and Innovation programme forms part of IFAD’s Platform for Remittances, Investment and Migrants’ Entrepreneurship in Africa (PRIME Africa) initiative, co-financed by the European Union. We are working with RSPs in seven countries (The Gambia, Ghana, Kenya, Morocco, Senegal, South Africa and Uganda). For more information, contact Masiiwa Rusare. This article was written by Vera Neugebauer and Rhoda Mbulwa, the former compliance office for FlexMoney Kenya.

Similar Articles
The Remittance Innovation Toolkit: Guidance on improving access to remittances
There’s no disputing the contribution of migrant remittances to the economic well-being of friends and family back hom...
Supporting the development of a digital finance index
Digital financial services are transforming global financial service provision and access. Rapid developments in fintech are disrupting and transfo...
The untold realities of women cross-border traders
A diagnostic study on women cross-border traders between South Africa and Lesotho, Malawi and Mozambique​ ...
State of instant and inclusive payment systems in Africa
  Real-time retail payments that enable consumers to send and receive cross-border and domestic transactions digitally are on the rise ...