Financial Crime Insights Episode 24: FATF’s Unintended Consequences: The Present

(upbeat music) - Hi, welcome to Financial Crime Insights, a podcast brought to you by the Center for Financial Crime and Security Studies at Rusey. My name is Alana Putza and I'm the program manager. I'll be introducing the episodes which cover the breadth of our research. We'll hear from top financial crime thinkers who took part in our past events, as well as some behind-the-scenes research interviews with the team. The topics they discuss remain timely and our aim is to bring these financial crime insights from the computer screen to our listeners on the go. Today's episode is the second in our three-part series focusing on the past, present, and future of the FATF standards and their unintended consequences. Isabella Chase examines the present with Mahabuhu of Jordan Payments and Clearing Company, Adam Engelwitz of Rovellut, Poland, and Barry Cooper of Sunfree. Together they delve into FATF's current work on financial exclusion and its practical implications. - Good afternoon everyone and good evening and good morning depending on where you are around the world. My name is Isabella Chase and I'm a research fellow here at the Center for Financial Crime and Security Studies at Rusey. So as I'm sure many of you are aware, earlier this year FATF launched its project on unintended consequences, which in their own words aims to study and mitigate the unintended consequences that can result from the incorrect implementation of the FATF standards. This project aims to look at four key areas and these are de-risking, financial exclusion, targeting of NPO's and the curtailment of human rights. Since launching this project, FATF has completed its first phase by performing a stocktake of what is known about these topic areas. It'll now move into phase two, where we'll begin to try and find solutions to the problems it has identified. As you all know here at Rusey, we spend a lot of our time working and tracking the outputs of the financial action task force. So when this excellent initiative was announced, we thought it would be fitting to set up a series to bring some new voices to this debate and to allow us to consider FATF's past, present and future relationship with unintended consequences. Session one looked back and it assessed the past efforts by FATF to reverse unintended consequences, specifically on the NPO sector, money service businesses and on correspondent banking and considered what we could learn from those past experiences as we move forward. For our second session in this series, we're looking at the present and the current challenges that the FATF faces from unintended consequences. To do so, we've decided to really focus on financial exclusion in this session and we've selected this topic because over the past 18 months, it seems that the momentum around financial exclusion has really taken off. Both as a response to the pandemic, but also in the work that we see from FATF itself. For those who might be new to this topic, why should we care about financial exclusion and why do we talk about it in the context of FATF? Well, it's argued that the FATF standards when applied disproportionately can place unreachable expectations on some of the poorest and most disadvantaged people in this world, making it nearly impossible for them to access formal financial services, which could be used to bring them out of poverty. In addition, leaving these people excluded from the financial system also undermines its integrity, forcing these people to use unregulated channels which increase money laundering and terrorist financing risks in an economy, which of course the FATF system itself is designed to curtail. At this point, I will note that we're not saying in any way shape or form that FATF is solely responsible for the problem of financial exclusion. Financial inclusion is constrained by a huge range of factors, and these differ across continents, across countries, and even within countries themselves. But today to consider this unintended consequence of FATF on financial inclusion, I'm very fortunate to be joined by this really expert panel. We are joined by Maha Buhu, the CEO of the Jordan Payments and Clearing Company, Adam Ankelwitz, the Emeralo at Revolut Poland, and Barry Cooper, the Technical Director at SEMFRI. So to get going, we have the FATF system, and we know it gives us this unintended consequence of financial exclusion. But I wanna hear from the panel, what does this look like in reality on the ground? Can you give us a sense of what you've seen in your day-to-day of how this system is impacting financial inclusion and exclusion? Maha, perhaps we can start with you. - Good morning, good evening, and I'm more than happy to be today with you because I can give an idea about the real case of resistance and the problems. In reality, especially when we talk about the most vulnerable, whether we're talking about forcibly displaced, for example, in Jordan, we have almost 30% of the population are forcibly displaced, even the resistance is higher, the risk is more augmented. I believe there should be some kind of guidance towards UNHCR as the official state of the segment. So they don't have their official documents from their homeland, and UNHCR, they are really violated, their human rights are violated. So that was the start of my journey with facing the difficulties of implementing FATF, and I started my commitment towards investigating how much the regulator and the incumbents and others are facing problems in implementing. So I started my research standards. Some areas are not really very clear to the regulator or the market participants. When they allow us, like it's voluntarily you can do this, the regulator cannot take this responsibility or take this liability. So the regulator would put open statement policy. One of them, risk-based approach. Okay, risk-based approach. As a service provider, how can I implement this? I go to the regulator, the regulator cannot help me. Okay, how can I assess Isabella as high risk and lower risk, depending on which criteria. They improvise, they do their best, but in reality, they cannot take this responsibility. So I used to brag over the last decade that in Jordan, I implemented tiering KYC and simplification for KYC, especially for mobile wallets. But in reality, that wasn't the case. More documentation, more proofs and evidences, even when the regulator conduct inspection over this sector, they always have concerns. The mutual evaluation report, they contain or consist of explicitly, like criticism to the practice, to the real practice. So how can we do? We are really crippled. We cannot facilitate people. We are violating their human rights. We are expanding the problem. This is one area, but another area Isabella, I really need to focus on, it's not only access to financial services. I started working on this project when the financial inclusion rate in Jordan was 24.6%. Now we exceeded 60% of financial inclusion. But still, this is not really helping because the usage, the adoption is more important. Having a bank account or formal wallet does not help me. If I don't have usages, I will still go to the informal market to conduct the transaction. So many of the areas, I don't want to take longer time, but this is like high level. And not only in Jordan, I'm not only talking about Jordan. I went to Lebanon to investigate and have several meetings to other countries in the region, even those who have high financial inclusion rate, but they have a huge number of expats and workers. Still the problem is there, even if we don't want to announce that we have this problem. In the guidance or in the recommendations, in the policy of the regulator, and in practice, how to handle it. - Thank you, Mahay. You've touched on a number of really important high level points there. Barry, I was wondering if I could come to you next. Semfri works across a number of countries. You have a really long history in this area. Do the problems that Mahay raises sound familiar, this problem with not having enough clarity in the regulations? - Absolutely. We assume positive intent, but then you look at what's been implemented. It's really dysfunctional. And it's not only just a lot of issues in the present. There's this whole legacy of issues and of methodologies that gets woven into the fabric of what happens in a jurisdiction. It's very difficult to change that. So you've got this whole legacy of issues. And often it's so dysfunctional. What it does is it reduces the footprint and scale of financial services, which really mitigates against inclusion because it becomes expensive. And often the cost of compliance we've seen is eating up like 60% of the cost of compliance is just on CDD alone. And many of the exercises in our views are full of mission because it doesn't mitigate risk really. So you've got a whole lot of these issues stacking up. And what is the root cause? - This predominantly, and I agree with Moher, is that it's lack of guidance and certain regulations. When we go into a country, we inevitably have to redo the legislation, regulation, and then the guidance, particularly, in order just to get the system on the right track. - That sounds like an awful lot of work, but very important work to do. Adam, you've worked quite extensively in a grey-listed country and no pressure to say which one. I'd be really interested to hear, in addition to your general thoughts of the impact of FATA from financial inclusion, how maybe that element of the FATA framework can impact financial inclusion in the country? - Before I answer this question, I just wanted to share some details. And I think this should provide an explanation why not only the local regulators are not willing to share very precise guidelines in terms of how we should be assessing the risk of our customers and how the customer due diligence process should look like. So the numbers are the FATA budget for 2020 is below 12 million Euro. It's a body that establishes standards globally. Recently, just last week, one of the financial crime service providers, the company issued a survey, issued a report about the global cost of fin crime compliance. The issue is that the report is based on the answers from more than 1,000 people who compliance, people responsible for financial crime, and it covers just a part of the world. Not all of the countries are involved. The cost of compliance with financial crime is above 220 billion globally. When we compare the cost of compliance on the private end, yes, the financial institutions, and in this case, it were banks, wealth management companies and insurance companies that they bear above 200 billion per year with a budget of a FATA, which is, as I've said, below 12 million Euros. We see a huge discrepancy. And the reason why I wanted to bring this fact on the table is I feel that there is a not enough scientific approach in the so-called fight with financial crime. It's just that the documents and the standards that are being drafted, but also the laws and the guidelines issued by specific local regulators based on those standards, are just very, very general in their nature. And then when it comes to auditing of financial companies, it's all about the so-called finding specific cases of non-compliance and then issuing penalties. So it seems that the whole burden of fighting, not whole, but the vast majority of the burden or the cost of fighting with financial crime was put on the financial sector or on the private sector. And lots of issues that could be more effectively tackled by the public sector are, again, shifted to private sector. The same with the so-called centralized registers of ultimate beneficial owners, where supposedly that was a tool that should have helped us, a private sector, when identifying ultimate beneficial owners. But in the end, for example, in Europe, or in case in Poland these days, financial institutions are obliged to report discrepancies between the central register and their findings and not only report the discrepancy, but also document them and justify those discrepancies. So this is exactly this responsibility being shifted to the private sector. And then coming back to our original question, from my perspective, the biggest impact was basically when it comes to not necessarily even the financial inclusion because the banking, the percentage of population that was banked in the country that I was working for was really high, but the costs of financial services were increasing on one hand, and especially the cost of international transfers and remittances. At some stage, they were way above what the local population could afford. And that's why, for example, Havala systems or the so-called informal value transfer systems were quite popular in the country. So statistics, again, of banked population look really good in the country. However, the costs are driving the good actors, and average Joe from a given country, from the official financial sector to unofficial ones. - Mahan, Barry, I was just wondering before I ask my next question, if you'd like to respond to anything that Adam was saying there. - Absolutely, we see it very often. When it becomes difficult for low-risk ordinary consumers to gain access to financial services, and it becomes either there's a really not-well-thought-through barriers or the way it's been implemented, or there's some other aspects with regard to where a person lives or whatever, it feeds this informal sector. And in one jurisdiction, what we noticed is that the amounts of formal remittances was tricking down to, I think it was about 250 million, eventually it trickled down to like seven million US dollars. And the government agency that looks at the diaspora estimates that between 57 billion US dollars is going in. It's feeding the illicit flows, it's feeding trade-based money laundries, it's feeding all kinds of other illicit activities, and you're really just pulling the public into an illicit activity. So, yeah, absolutely, we see that. And it's not that informal services are less efficient that they're very sophisticated, in most cases, more sophisticated and more efficient than formal services, and they're not at a level playing field, they don't have to comply. For me, it's a growing issue. - Yeah, I totally agree. The informal market is by far more efficient than the formal market because they don't need to comply with many restrictions and regulations. They innovate. I remember working in one of the countries and they told me, no, go this alley to another alley. So I managed to conduct cross-border remittance in seconds while if I wanted at the time to do it through the official channels, it would take me days and a huge cost and et cetera. So when we finished the transfer, it sent the instructions to a shredder. I witnessed that and I was so scared. I am a central banker. You are asking me to transfer official amount and the formal clean amount. And believe me, Huala is the first system in the world similar to blockchain. It's a blockchain-based system, extremely efficient, extremely appealing to all customers. So why not to go into a better thing? Even countries like Jordan and many others, we need efficient ecosystem to optimize our GDP growth and to optimize the benefits and resources, limited resources. So the compliance cost is not justified. It's tremendously not justified. I can comply. I can respect the spirit. It's not about how the terms and regulations and standards are stated as words. It's not a checklist. Even with these restrictions, I can comply. I can 100% comply. But this is not what we want. Honestly, we want an ecosystem with high integrity and efficiency. When I launched in Jordan, instant payment system, part of the discussion with the banks, they told me, no, no, no, no, we will not allow. We are not in. Why? Because I cannot implement instant payment system even for micro payments without having full due diligence and I monitor every single transaction. This is micro payment. The bank answered me, even if it is one JD, I will not allow seamless and the straight through processing. The regulator allows, or even if the regulator allows, I cannot take this risk. My compliance department will not allow me. So I think there's a huge work should be done in this area because the compliance cost is not justified. This is what I say. I'm willing to put compliance costs. I'm willing to comply to protect our financial ecosystem and to protect our countries. But not just to comply a checklist, refusing to conduct any business, having a huge opportunity cost, pushing the economic agents to conduct their transaction in the shadow economy in formal market instead of formal. I would thank any system that would really allow me to see the suspicious transactions. I should promote them and rework them because in the shadow economy, I cannot see. Not even that. Nothing, unless something wrong happens and after investigation. But maybe I can protect this before happening or after a few funds before it becomes like significant. That's my opinion. - Absolutely, and you touched on a really important point that both Barry and you, but the point around, of course, the FATF system is made up of two elements, the technical compliance, but also the effectiveness. And I feel there's so much focus on the technical compliance and there's trying to have this culture shift towards effectiveness. And really, as we believe at Roosie, an effective compliance with the FATF system, you wouldn't have problems like financial exclusion because as you say, Maher, it's crucial for the integrity and the effectiveness of the system to include people. But a key barrier, and I think a problem area that we talk about a lot when we're thinking about FATF and financial inclusion is this issue of simplified due diligence, which you have also, you've all alluded to. I was just wondering if, before we move on to thinking about solutions, what are the main barriers to simplified due diligence? We've spoken that there is not enough regulatory clarity, but is that it or is there more to this problem of simplified due diligence than a lack of detail in the regulations or in the standards themselves? - So simplified due diligence is always an option, but it's not compelled. So enhance the diligence compelled, but simplified due diligence isn't. And also there is no restriction in not accepting people into the system. So effectively de-risking customers. So there's no consumer rights, there's no consumer framework and whereby people, we don't even consider whether people need to be part of the economic system. We allow to just delete them like a cell on an Excel sheet. So those issues for me are important because, I mean, if you look at simplified due diligence as a regulator, as an institution, you put yourself at risk when you do simplified due diligence, you don't do that with enhanced due diligence or just with standard due diligence. So just the requirements are simplified due diligence. Yeah, the risk grading of customers is also a big issue. If we go into the individual institutions, which we do and we look at how they grade the customers, I mean, the kinds of risks are just putative risks that never could, there's no evidence based on that. It's just something that somebody dreamt up. Yes, some of them are risks and some of them are validly, but most of the risks are not accurately monitored or understood and you end up with, I mean, two thirds of the client-based and medium risk and some in high risk and almost none in lower risk, which is absurd because they're low income people with very predictable financial habits. So yeah, and it means that the way people perceive risk and the pressures that not only the regulators, but the correspondent banking paternity and external regulators or other jurisdictions put on institutions is always in the way of more compliance, more ostensible compliance. In other words, let's count the number of identity documents that we've got, let's count other things, not let's really understand the risk and understand how people can be facilitated into the economy, not out of the economy. I would totally agree with that, Barry. Maher, did you want to come in on that point as well? In Jordan, we have central registry and we have accurate and very precise comprehensive national identity for individuals and for even legal entities. But still, some of the data change, how much these central registries can cover any updates or this is a huge deviation and difference among different countries and regions in the world. So it's not about having full documentation or having accurate identity. It's about how they understand the risks, how they can calculate the risks, how they do this risk-based. So I believe we can work together on many of the areas to enable what they use as reasons or causes, but the real cause is the mentality and the legacy. Believe me, as long as Fatah would not adjust or announce specific guidance, how to calculate, how to do or national regulators, the mentality is like more and more. The culture is more and more within incumbents or within the government. No more of requirements. As a central bank in Jordan, we work as a bank to the government, not only bank for the bank, so we are the bank for the government. They are now implementing AML, CFP standards on the government itself, the same way they apply it on any individual. Why? Only because they want the ranking of Jordan to become better. Come on, am I going to transfer money to longer my money with the Treasury Department or the Customs Department? Come on, there's no rationale behind it, except the result of having better ranking. As a student, it's not by just the study to have a good grade at the exam, even if I don't understand anything. So this is not the case. Allow me to express the real pain. The pain in the market is really significant and we will keep on suffering. The longer the regulator and the incumbents are like more of controlling everything. Controlling, don't allow zero risk appetite. Zero risk appetite to close and go back home. Absolutely, I mean, yes, and the question, I suppose, is how do we shift that culture from more and more to just better, right? Because more doesn't equal effective, as we all know. We will have this huge problem of too many stars. You can't possibly go through them all and get any information from it. So we know more isn't better. How do we shift from quantity to quality? I think maybe technology has a really interesting role to play there. Adam, before we move on to looking at some solutions, I was wondering in your experience, if you have any other elements of simplified due diligence that are problematic or maybe any thoughts on how we can use technology to overcome this issue? I think the issue is quite simple. The regulations and the standards say that an SDD can be applied whenever we are dealing with a situation of a lower risk of financial crime, be it money laundering, tourism financing, or from reasonable proliferation financing. The issue is that my understanding from my freedom of experience, but also from my colleagues and panelists, that what financial institutions are afraid of is a fear that the regulatory risk of application of a simplified due diligence is considerably higher than actually a financial crime risk. Because it's probably more inevitable that at some stage the regulator would not on our doors and would question the underlying reasons or underlying justifications we have applied for an application of simplified due diligence. And I think that the problem here is fear, but obviously we would have to concentrate where is this fear coming from? And from my understanding, and I'll just keep repeating it, we need a more scientific approach in the area of financial crime, in the area of money laundering risk, terror financing risk, or proliferation risk. From my perspective, a good example is the Bank of International Settlements that issues multiple guidelines with respect to how other types of risks like financial risks should be managed and measured. There is value at risk measure for financial risk, which is, I mean, it has its deficiencies, but it's globally recognized and globally applied. And then when we are talking about risks or credit risk, when we mention a measure we apply, everybody then understands what we are really talking about. Probably myself and then Barry and Maha would start talking about money laundering risk, the way we've seen how it is being calculated in our previous experiences. Probably it would look completely different in each of our cases. So even though we are using same words, we're not talking about same things. And that's a global problem. And I truly believe that scientific approach is needed. And I recently read a book, and there is this statement, and I wanted to bring it up to your attention, which says that from the perspective of risk management, various risk management practices, what we basically apply in many areas in financial crime area and money laundering risk, we design and external vendors design these matrices. Yes, those risk matrices with those arous colors, et cetera. And the issue is, and I find it a really big issue, is the fact that something has a structure, like risk matrices, doesn't mean that it brings any value, that it brings any problems, because that it solves any problems. And there is a good comparison. Astrology has a structure in it, but it doesn't mean that it's a science. And same is, sometimes I feel that same is with our industry. We have a structure in it, we talk about risks, but we are talking continuously, we are talking about different things and the way we develop our risk management practices with regard to the risk which is undefined from my perspective, because I sometime ago was on a mission to read fad of documents and find a clear definition of what money laundering risk is. And I couldn't, maybe I haven't found the right document, but I couldn't really find a proper definition of what money laundering risk is. So I think it all boils down to the foundations. And once we continue just building up on foundations that are not stable, I mean, we can't expect that the system will be efficient. So, and just a final comment. Fad of fees, and not only fad of, but local regulations are continuously expanding, expanding including adding additional the so-called obliged institutions, yes? So today we are talking about financial exclusion in the context of financial institutions. But I'm just wondering whether in five years' time, on 10 years' time, we'll just wake up to see that the problem with financial exclusion or in general with services exclusion is in other industries that are just recently were added to the list of so-called obliged institutions that have to comply with AML regulations. Because the reason is if you are a new industry and you need to address these various requirements and all of them are quite very new to you, you don't have knowledge and experience. The easiest solution, which does not cost you too much, is to just exclude part of your potential customer base and not to have to deal with the complexities that you are not able to comprehend with your experience. Thank you very much, Fran. I hope that goes some way in answering your question about information asymmetry is the answer, is everyone's doing it differently. So it's hard for information to be consistent, I suppose, in that way. But moving on, and we've spoken about the problem, and we all know that there is a problem here, FATAF itself knows that there is a problem, hence the Unintended Consequences Project. But let's be positive, let's look for some solutions, and let's put ourselves in the shoes of FATAF. How do we go about reversing this unintended consequence? And I'm going to ask you from the perspective of what does the private sector need to do? What do regulators need to do? And what do we need from FATAF and international standard setters? So starting with MAHA, private sector, what do you need? I think we need to throw in FATAF to start publishing and putting what Adam mentioned, some of the scientific approaches, detailed guidance. And maybe I want to raise the bar, maybe I want to be more restricted than them, but at least this guidance will allow harmony and level playing field, even among the different institutions, different countries, because this is a very important one. Another thing I believe FATAF should work maybe on the assessors themselves, because at the end of the day, we care about the assessor and what they would publish about us or write about us. So maybe the assessors should also follow a kind of criteria on specific methodology, I'm sure they have. But at the end of the day, depending on some differences between different assessors, so maybe there should be a more of awareness and training to assessors in different jurisdictions so they can witness and sense the differentiations. FATAF maybe should build better relationship with the regulators in different countries in terms of ensuring comprehensive and better understanding of the policy makers in these countries. And I'm not only talking about financial regulator, because we have many of the areas where might take place of illicit transactions in other areas like lands or anything. So many of the things I think they should at least ensure a minimum level of very full and comprehensive understanding from the regulators. As the BIS do, the regulator should transfer this knowledge and share it with the public sector and private sector and to build strong awareness, strong culture among them to reverse that much work. And many of the initiatives should be on a roadmap how to work in a more scientific way with specific timeline, because as I mentioned, the longer we keep on within the trend or the previous methodology, I think the problem will become deeper and deeper and reversing it would not be the case. Technology, as you mentioned, will help in many of the areas, but I still believe in having at least something scientific to follow, then implementing technology or without technology, we can have better reason. - That's really interesting. Barry, from your perspective, what do you think or what do you need from regulators in the future going forward when you're helping different countries to balance financial crime and financial inclusion objectives? What do you think regulators need to meet that balance better? - First of all, I don't think there's a balance. These things are supporting. So there's a perception that you trade off on financial crime if you have financial inclusion. And actually, what you're seeing is that financial integrity can actually drive financial inclusion. We've seen that in some markets. And you go and speak to some of the institutions. So that for me is one way that we've seen work. It's where the regulators, there's multiple regulators that are impacted. The regulators don't speak to each other, but the original bodies and the regulators fairly irregularly meet. It's about creating that contact and creating this community of faith between them. They don't just sit in isolated pockets and particularly putting the regulators in the same room as the institutions. It has been really mind-blowing because what comes out of that are these forums, the regular contact and the statements that we all on this road together. I would really guide against if there's any kind of templates because the turning of templates is what we try and unearth or get out of systems. A lot of the foundational or the roots of issues arise from these cuts and paste templates, cut and paste legislation that's inappropriate for the jurisdiction, inappropriate for the region, even the type of law it's inappropriate for. Often it's been bargained through the legislative assembly, it means very little. So those kinds of templates are harmful. It's about finding a fit for purpose, appropriate, effective solution in a country. I think to a degree, the fat of recommendations have emerged and are getting to a point where they are reasonably fit for purpose. It's the implementation of this. So higher degree of guidance and particularly important points of guidance, for instance, proof of address and all these kinds of things which seem very logical in developed markets are completely alien in a market where we don't have surveyed addresses. It's really allowing these approaches to adapt but also reining in the developed market, the financial service sector that is imposing on the developing markets, imposing their jurisdictional requirements within another jurisdiction. So I think it's more in implementation. It's understanding that these things do not just exist in isolation. You can't just create a template but definitely a scientific approach and a view. I think it's absolutely necessary because the majority of what we see and particularly in risk assessments is completely not scientific. I had two actuaries looking at this and they were horrified about what passes as risks. So it's more fierce than risks that have been incorporated and that's a problem. It's the conflation of different risks like as we discussed earlier, the compliance risk being conflated with money laundering risk or proliferation risk and then the remedy that's compliance measures will affect the others. And that's we've just seen just far too often as a tick box approach, compliance-based approach and that's pervasive. I think at some point we need to start creating guidance in separating out the different risks. It's difficult to actually define those risks for any particular jurisdiction but I think we brought guidelines in defining those risks, deconflating those risks and appropriate measures I think. But yeah, that takes a lot of nuance and within each jurisdiction and with each region it is very, very different. - Thank you Barry and yes, so I think we always have to remember that that the world is on an even place, right? So Adam, I was going to ask you what do you think we need from international standards setters to improve this problem? But I feel like you've already answered that a little bit but if you have more to add on it. I mean, I was just wondering 'cause I feel like you're very thoughtful about this topic. As we've just pointed to there, it's hard to have one template, the world is uneven. Do you think we should be a bit more tiered in our approaches to different countries around the world and their capacity to manage and implement the fat-off system or is it right to only have one system for everyone? - Answering this question, I would say I believe we should and then the way we could achieve this and these are just my quick thoughts but when reading mutual evaluation reports and I've read a few, basically that the vast majority of the content within the report is a detailed description of the technical compliance and then obviously the description of the effectiveness of the system. And then a judgment is being made. Yes, whether a country should be put on an enhanced monitoring program or maybe gray listed. I believe that those findings should be put in the context. And when I read, I actually yesterday read a fat-off document about the methodology of conducting those evaluation missions and the document seems to me the narrative is correct because the document states that the technical compliance but also the effectiveness of the system should be assessed in the context of risks or let's call them threats within a given country. - Yes, and I have a feeling when I read, so before I've read the mutual evaluation methodology, I've read mutual evaluation reports and to me, I haven't seen this fact of putting those effectiveness scores and technical compliance in the context of threats that are prevalent in a given country. And I think that's what's missing because a relatively small country with relatively small exposure to an external work in terms of international transfers and remittances can have when compared or benchmarked to large financial centers, let's say, might have a poor, yes, technical compliance and effectiveness but does that really mean that it poses the significant risk to international financial community or integrity of the financial sector? Yes, global financial sector. And my answer is, I mean, like a basic answer is probably not, yes? So for me, what we are missing is putting these findings into perspective context of threats but also the sheer size of the economy and how this could impact the integrity of the global financial system. But because what FATF is looking at is looking at the integrity of the financial system on a global level, yes, on a global perspective. So that's first thought. And the second thought I just wanted to, since I have a chance and I don't have this chance too often, I thought that there are some quick fixes or quick measures that could be taken. And from my perspective, is the way the FATF communicates with the world. And from my perspective, one thing could be changed pretty quickly. So when a mutual evaluation report is published, it's public. When the follow-up reports are published, it's public. But follow-up reports, they contain only information about the changes in the so-called technical compliance. Whereas at the same time, countries are taking measures to improve their effectiveness. And unfortunately, the so-called effectiveness scores are updated only every, let's say, five years when the so-called full mutual evaluation report is published. So what kind of message FATF sends to the world is that this given country, when it comes to the effectiveness, let's say it's poor, whereas from the last evaluation period, let's assume that took place four years ago, there were significant improvements that were achieved, but FATF wouldn't tell this to the world, yes? And then decision makers at various correspondent banks or other stakeholders, since they have no visibility of how these effectiveness scores are changing in time, they are actually making their decisions whether to exit the country, really on an outdated information. So I think that this is a thing that could be hopefully quickly implemented to improve the situation. - Thank you. I hope that that's a really interesting idea. And also your point around country context and risk I think is really important. And I'm just trying to think how you would square that circle. Is it up to someone to make a list of all the countries and how financial crime risky they are? The FATF standards do not seem to be subject to a regulatory impact assessment. Does anyone see any examples of impact assessments of the implementation of FATF standards at a national level? I actually was asked this question the other day and I do know that the European Union has impact assessments for their directives and so does the UK government for their money laundering regulations. Both do have cursory mentions of financial inclusion in them. What are our views of impact assessments in all of this? Would that be a helpful development? - Regular impact assessments are actually quite difficult to do if you do them thoroughly. And it takes a lot of expertise and funding. And often that you don't find that. I mean, there's not, there's rudimentary funding for FICs and for regulators. Many of them don't have consistency of funding. Some of them that we've interviewed, I mean, they've only got a stationary budget, that's about it. So yes, regulatory impact assessments would really help particularly in effectiveness, but we don't see that. And it falls on institutions like us and others to effectively engage with the legislature, the policy makers to change the regulation, to change the legislation. And because often that's at the foundation of some of the issues that we find. - Yes, I think also, you know, one point that has kept on coming up today is this issue of cost. And I think we all know the cost of compliance is extreme, but I do really agree with Adam's point that you made earlier. But we do know that FATF has a really small budget and it doesn't have that many people. Of course, there are the auxiliary parts of it, but it's sort of an interesting, do we grow this framework into something much, much bigger and funded accordingly? Or does it just sit there as a principle-setting body? And that cost, as we say, is passed on to other entities that ultimately that isn't fair because capacity differs massively around the world. But I am mindful of time and I'd like to give you each a moment for final remarks. And if you'd like to respond to the point about cost, please do. And in doing so also, if you could give us one point that you think should come out of the FATF Unintended Consequences Project. I know we've listed a few just now, but if you could have your one wish answered, what would you like to see coming out of that project and any final remarks you have? Maha, let's start with you. - As we mentioned, I would love to see detailed guidance, more awareness and scientific way. - Short and sweet and easy to understand. So, yes, no, I think that that's excellent. Barry, let's go to you next. - Absolutely, detailed guidance I think is the key element that there was missing. Just the guidance on identity-proofing, the timing was impeccable for COVID, but really, really superb guidance. But more on that, particularly my big wish would be to not regard remote onboarding as higher risk because actually, scientifically, it's actually much lower risk. So, yeah, more guidance. And also the current process of feeding into FATF I think has been superb. It's a very different organization that we're encountering. - Absolutely, I think we can only really, I think it's just so excellent how collaborative FATF has been over the past 24 months, plus just the fact that we are having this conversation in response to an unintended consequences. The project is excellent and is really just assigned the current spirit of collaboration, which as you say, can only be praised. Adam, what is your one ask and any final comments? - I'll be brief this time, scientific approach. And I believe that the extension of the presidency of FATF was a step into the right direction 'cause it allows the president, the new incumbent to plan changes or plan enhancements within a two year time span, which in theory creates a room for more comprehensive changes because historically what I was seeing was a new president when being elected and then stepping up, they always had to put some new items on the agenda to show how proactive a new president is and then to be able to show some successes at the very end of a term. And I believe the change of the cut and see this step into the right direction. And I hope that this opportunity, which was created, will be used for fixing the foundations, yes? Then applying the more scientific approach to the risks that FATF tries to mitigate. - Absolutely, I definitely agree with you. And before we close, I just have a moment of shameful promotion. We at Rusey have spent the last 18 months doing a project on FATF and financial inclusion. And we've published two papers from that project in June that can be found on the Rusey website. They both look back at the impacts of FATF on financial inclusion to date. And then also list five recommendations. So you can hear my top five things that we think that FATF should do to be more financially inclusive. Of course, if you're interested in finding anything else out about the CFCS, our publication, podcasts, and events, I'd recommend going over to rusey.org/cfcs where you can sign up for our newsletter or you can follow us on our social media channels where you will get all of our regular updates. That just leaves me to say a huge thank you to our panelists for sharing their insights today. It's been fascinating as always. - Thanks for listening to this episode of Financial Crime Insights from Rusey's Center for Financial Crime and Security Studies. To find out more about our work, please visit rusey.org/cfcs where you can sign up to our newsletter. You can also find us on Twitter by following @cfcs_rusey and we're also on LinkedIn. And don't miss our other podcasts, The Suspicious Transaction Report, to get more behind-the-scenes insights. This episode is produced by Jonathan Wunderbach and edited by Karen Yates at Two Drugs Communications. Thanks for listening and bye for now.