How proof of address fell

In our financial integrity work, we found that in the wake of global efforts to curb money laundering and combat the financing of terrorism (AML-CFT), financial integrity often came at the cost of financial inclusion.  

The requirement for financial service providers to undertake know-your-customer (KYC) and customer due diligence (CDD) comes from Financial Action Task Force (FATF) guidelines. This includes Guidance on AML-CFT Measures in Financial Inclusion, which have made provision for countries to disentangle money laundering-terrorism financing risks from compliance and financial exclusion risks. 

Despite these efforts, financial service providers strictly apply KYC and CDD processes, which exacerbates financial exclusion. The World Bank’s Global Findex data shows that in some countries in sub-Saharan Africa, up to half the adult population cannot access financial services because they lack the necessary identity-related documentation, such as proof of address. 

Our research showed that proof of address documents add little in terms of actual risk mitigation and in some cases make up 60 to 70% of the total due diligence cost of compliance and typically leads to the exclusion of low-risk, low-income clients, rather than high-risk clients.  

We sought to address this issue by working with global development institutions such as the Alliance for Financial Inclusion (AFI), FATF-style regional bodies such as Eastern and Southern African Anti-Money Laundering Group (ESAAMLG), regulators and financial institutions in specific countries to align financial inclusion and AML-CFT implementation and reduce levels of financial exclusion. Working with these institutions we were able to build robust identity systems through proportionate KYC and CDD that enable identity-for-all, not just as a legal right (consistent with SDG 16.9), but as a pathway for people to participate in economic activity safely and conveniently. 

A summary of our impact  

Over five years, we worked in several countries to develop missing frameworks and accelerate the move to a risk-based approach and strengthen the capacity of regulators. In two of these countries, one in Southern Africa and one in West Africa, we estimate that we removed barriers to access formal financial services for 5.6 million people.   

Establishing a baseline  

While the full impact of the work is yet to be realised, for now we can measure the number of customers who benefitted from the removal of barriers, and estimate the number of people who are no longer prevented from accessing formal financial services due to the way AML-CFT regulation is implemented.  

The first step in assessing our impact was to create a baseline for the state of financial exclusion due to documentation requirements in each country. To do this, we used the World Bank’s Global Findex Survey (2017), which showed that 36% of adults in the Southern African country and 14% in the West African country cited lack of documentation as the reason they are financially excluded.

Using World Bank population data, and a conservative population increase, this translates to 3 million adults in the Southern Africa country and over 2.6 million adults in the West African country.  

 The interventions 

In the Southern African country, key frameworks for the implementation of a risk-based approach to financial integrity were either missing or underdeveloped, including risk-based supervision frameworks, risk assessment frameworks, as well as key guidelines for the banking sector. We worked in collaboration with country supervisors and financial institutions to develop these frameworks and provided technical assistance in adjusting risk assessment approaches. These adjusted approaches and frameworks embedded flexibility in identity and CDD requirements to enhance financial inclusion while strengthening financial integrity. Going forward this makes it easier for institutions and customers to explore alternative ways of verifying identity beyond physical address documents.

Our interventions reduced the requirements and increased flexibility for financial institutions when serving customers with limited or no documentation. This contributed to the removal of documentation as a barrier to accessing formal financial services, without compromising financial integrity.

In the West African country, we worked with country regulators and financial institutions to draft and implement a new AML-CFT regulation that removed the need to provide proof of address documents when opening a bank or mobile money account.  

 Assessing the impact of our interventions  

With the support of FSD Africa, we estimated that these interventions removed barriers to access for approximately 3 million people in the Southern African country and 2.6 million adults in the West Africa country. Working with two financial institutions in the Southern Africa country, we were able to go a step further to count the actual number of customers who benefited from the removal of these barriers: 488,432 customers reported accessing financial services following the removal of barriers across the two institutions.  

 Taking inclusive integrity forward  

Recognising the need for more work to be done to implement frameworks that align financial inclusion and financial integrity, we co-developed a practical toolkit with AFI. The toolkit benefitted from substantial feedback from ESAAMLG, APG, and GAFILAT, among other regional bodies. It draws on our practical experience in several countries, working with ESAAMLG and the Governmental Action Group against Money laundering in West Africa (GIABA) for regulators. We are actively working with financial service providers on CDD and KYC innovations. To find out more about our inclusive integrity work, please contact Masiiwa Rusare.