Not only have most of the recent terror attacks been executed for little or no cost, when money is required terrorists often seek ways to access funds outside the confines of the regulated global financial system. At the same time, in many countries disproportionate CFT measures are applied in the name of countering terrorism. Practically, this translates into excluding entire groups of people rather than identifying and mitigating terrorist financing risks. Instead, insufficiently defined de-risking procedures are employed to avoid that risk altogether, by “terminating or restricting business relationships with remittance companies and smaller local banks in certain regions of the world.” As one study notes, “de-risking represents a clear instance of market failure. Regulators are scrambling to catch up with the current money laundering and terrorist financing landscape. As a result, they are increasingly shifting monitoring burdens to financial institutions, and the customer base is feeling the brunt of this shift.”
CFT policies are also leading to other unintended consequences. By depriving people access to money and financial services, they are unwittingly contributing to the list of grievances that can drive support for violent extremism. Economic exclusion is often cited as a driver of violent extremism. According to the Vice President of the World Bank for the Middle East and North Africa, the “actual or perceived marginalization of important segments of society often provides a pretext for recourse to violence. For example, it could be argued that Daesh was able to grow by capitalizing on the perceived marginalization of the Sunni populations in Iraq and Syria.”
To address this problem, responsible financial inclusion should be an integral element of every strategy to prevent violent extremism. Such inclusion can facilitate and sustain more access to banks and other regulated financial services to alleviate, or at least not trigger, some core grievances that can drive violent extremism. Additionally, as usage of bank accounts and mobile money platforms to make transactions increases globally, it will be more difficult for terrorists to completely avoid the regulated financial system. Combined with balanced regulation, increased financial inclusion therefore also provides an opportunity to prevent or identify illicit financial flows, including the financing of terrorism.
The Benefits of Financial Inclusion
Creating incentives for people to use financial services has many obvious benefits. Access to bank accounts helps reduce reliance on cash, and loans and insurance provide a safety net to mitigate often devastating financial shocks. Evidence shows that financial inclusion is “positively correlated with growth and employment.” It empowers people and technologies, such as mobile banking on mobile phones, for example, which makes the movement of money easier, safer, and traceable, and it promotes financial transparency.
In the last two decades there has been a growing recognition that more needs to be done at the international, regional, and national levels to ensure that access to financial services is available to all people no matter how low their income and where they live. This trend has been spurred by an international effort to raise awareness and incentivize inclusion. In 2009 the United Nations Secretary-General appointed Queen Máxima of the Netherlands as the world body’s Special Advocate for Inclusive Finance for Development. She continues to highlight the issue, particularly the need for including financial services to more low-income women. Queen Máxima also serves as a patron for the Global Partnership for Financial Inclusion of the Group of 20 (G20), which has developed a set of indicators to assess its “ambitious” financial inclusion targets. It also points out that financial inclusion is essential for meeting many of the UN’s Sustainable Development Goals. Universal Financial Access is a priority for the World Bank and the World Bank is working with the Consultative Group to Assist the Poor (CGAP), a partnership of over 30 nongovernmental organizations who collect data and support efforts to advance financial inclusion worldwide. The International Finance Corporation helps to raise capital and the Alliance for Financial Inclusion brings central banks and other financial institutions together to enable access to banking and financial services to over 90 developing countries.
There is also considerable support from the private sector. The Bill and Melinda Gates Foundation, for example, is funding initiatives to extend the reach of digital payment systems and provide access to financial services to poor people and rural inhabitants in Africa and South and Southeast Asia. The World Economic Forum, the Ford Foundation, the MasterCard Foundation, and numerous private banks are also involved, in part because financial inclusion is good for their own bottom line.
Over one-third of the world’s adult population is still unbanked and there are some signs of plateaus in progress, however these initiatives are having a significant impact. According to the World Bank, the percentage of the adult population across the globe with access to a formal bank account rose 11 percent from 2011 to 2014. Some countries have made remarkable progress. In Malaysia initiatives such as agent banking and consumer education have helped 92 percent of the adult population (of 22 million) establish bank accounts. In Nigeria loans backed by the International Finance Corporation helped to mitigate the impact of inflation and secure funding for millions of small business, and are now being extended in local currencies. In the Philippines low interest loans with flexible repayment terms are paired with specialized training to help local farmers. In Kenya, mobile money for payments and transfers is helping to get people out of poverty. It has spurred the creation of new businesses and it has also helped to curtail graft. “By enabling users to transfer money to each other and make payments directly to businesses and service providers,” Daniel Runde, Director of the Project on Prosperity and Development at the Center for Strategic and International Studies, points out that, “mobile money platforms cut down on corruption by reducing the need to operate in a cash-only economy.”
Facilitating access to banks and financial services such as small loans is having a significant impact on development. It also enhances security if done responsibly. A greater number of people using the formal banking system will allow for wider implementation of financial risk management that will be facilitated by a “paper trail” and greater transparency than the cash transactions and other transfers of value employed within informal systems. This allows for the monitoring and reporting of suspicious transactions and makes it more difficult to use money for illicit purposes, including terrorism.
When CFT Contradicts Financial Inclusion
If not designed and implemented carefully CFT regulations can have a devastating impact on financial inclusion. According to CGAP, “over the past 30 years, access to formal financial services for low-income people has increased dramatically. However, misguided efforts to reduce criminal behavior threaten to slow the pace of that progress.” The Council of Europe conducted a thorough assessment of the issue and found that “while their exact impact is not yet clear, financial inclusion policies and initiatives appear to constitute an important aspect of the fight against money laundering and terrorist financing.” Efforts have been undertaken by the international standard-setting body on anti-money laundering and CFT, the Financial Action Task Force (FATF), to overcome the challenge arising from limiting inclusion by altering its guidance on financial inclusion, based on an assessment of the demand and the supply sides of the problem of financial exclusion. The assessment acknowledges that “(AML and) CFT obligations can increase the cost of doing business, which is transferred to customers, potentially discouraging some from using the formal financial system, particularly if informal options are cheaper and equally reliable.” However a number of governments and financial institutions are using CFT regulations to exclude millions of (mainly low-income) people from using the formal financial system, particularly by putting up barriers that hinder correspondent banking. CGAP therefore calls for steps to mitigate the damage by implementing CFT measures gradually and offering exemptions for low-risk transaction categories.
Preventing Violent Extremism through a Financial Inclusion Lens
Financial exclusion has a negative impact on trust-building efforts with the public as partners in seeking to prevent violent extremism and make communities more resilient. Lack of economic opportunity, marginalization and discrimination, and poor governance all contribute to grievances and are often cited as some of the key drivers of violent extremism. One study focused on the Middle East and North Africa region found, for example, that “[w]hile terrorism is not associated with poverty and low levels of education, the lack of inclusion seems to be a risk factor of radicalization into violent extremism.” Peter Neumann recently noted that the policy of de-risking “has resulted in the de facto exclusion of entire countries, mostly poor ones such as Afghanistan and Somalia, from the global financial system. The bank accounts of refugees, charities that operate in regions torn apart by civil war, and even Western citizens with family links to so-called risk countries have been closed.”
Focusing on economic inclusion of women is a particularly wise investment when it comes to preventing violent extremism. According to Krista London Couture at the Brookings Institution who has conducted research on the role of women and countering violent extremism in Morocco and Bangladesh, “(with) micro lending, for every $1US a woman earns, she reinvests 90 percent back into her family and/or community; men reinvest only 40 percent.” There is a significant gender gap when it comes to financial inclusion, particularly in South Asia. In a study that assesses how countering terrorism financing rules impact women’s rights organizations and gender equality, Jayne Huckerby of the Duke University School of Law and her co-authors explain “[i]n some countries, women face additional burdens in obtaining identification documents, which is in turn required for many banking services.” Initiatives such as the Denarau Action Plan, which specifically address these challenges and support women and girls, are helping improve the lives of entire communities.
Efforts to include youth, through economic citizen training, are also effective when undertaken in a context-sensitive way. Programs such as Aflatoun are reaching 4 million youth and children in over 100 countries, and teaching financial literacy at an early age. When it comes to preventing violent extremism, reaching young people at an early age and providing support that can link education with financial opportunity is one key challenge. But it is still not enough. Mercy Corps offers this note of caution, “when not paired with meaningful governance reforms, such programs may simply stoke youth frustrations with exclusive, elder-dominated formal institutions. This may explain why we found civically engaged youth to be more supportive of armed opposition groups, not less. Confident, outspoken and politically conscious young people, it turns out, are not the types to sit quietly by when the society around them disappoints.” It is therefore essential that financial inclusion is sustainable by embedding it politically and institutionally.
A Way Forward and Recommendations
When it comes to crafting policies for addressing violent extremism, there is no simple silver bullet solution. Broadly, what we do know is that political marginalization and economic exclusion are often linked, and can be drivers of violent extremism. We also know that prevention requires reaching people at the community level, so trusting partnerships between governments and civil society are essential. Sue Eckert notes that CFT efforts that are based in de-risking “can contribute to drivers of violent extremism, undermining the very objectives that (AML and) CFT measures are intended to support.” However it is also important to emphasize her conclusion that while the “goals of financial inclusion and financial integrity have been characterized as incompatible . . . both can be achieved.” Professor Abdullahi Y. Shehu, the Director General of the Inter-Governmental Action Group Against Money Laundering in West Africa, also calls for a balance between both goals asserting that “strategies to overcome the inertia of financial inclusion will still need to be developed in the areas of accessibility and affordability of financial services, and design of adaptable products and services for the vulnerable and low income segments of our societies.”
In addition to the sensible recommendations in Eckert and Shehu’s papers on the subject of financial inclusion and CFT, here are two additional policy suggestions for helping to address the contradictions between CFT and PVE objectives.
- Help countries to review CFT laws and procedures to address contradictions with PVE objectives.
Bilateral assistance providers and others including the UN Office on Drugs and Crime, International Monetary Fund, and the World Bank should ensure that all efforts to support countries’ capacity to address money laundering and terrorist financing also include a specific focus on enhancing financial inclusion. This means, for example, that national financial intelligence units (FIUs) should be encouraged to actively promote and support measures to enhance financial inclusion. They should be provided with the necessary training to do so, as well as opportunities to partner with national agencies responsible for financial inclusion efforts (for example, ministries of finance or development).
Place trained experts on financial inclusion inside financial intelligence units. This will require seconding a person that has access to the director of the unit and is able to provide context-specific guidance to help recognize practices that exclude low-risk individuals and then recalibrate the guidance and operational outputs of the FIU, and if necessary other stakeholders.
Support capacity building that specifically addresses barriers to financial inclusion. Develop capacity-building programs to support the production of national identity cards in countries that do not currently have uniform identification documents. Training and equipment should also be offered to detect document forgery, and ensure that IDs are used effectively as part of customer due diligence procedures. In the meantime, FIUs of those countries should consider compiling specific guidance for conducting customer due diligence on transactions relating to their country, and presenting them to companies that have de-risked sections of their population.
- Incorporate financial inclusion as a key objective in the development and implementation of National PVE Action Plans.
The UN Secretary-General’s Plan of Action to Prevent Violent Extremism, recommends that “each Member State should consider developing a national plan of action to prevent violent extremism which sets national priorities for addressing the local drivers of violent extremism.” A growing number of countries are developing these plans with support from donors and expert facilitators, including the National Action Plans Task Force and UNDP. Each national and regional action plan should include specific guidance on responsibly enhancing financial inclusion in an effort to address drivers of violent extremism linked to economic exclusion and lack of financial opportunity. Furthermore, finance ministries should be part of the action plan coordination and implementation process as they are relevant to PVE and should be part of such efforts going forward.
Alistair Millar, President
Thank you to Eric Rosand, Danielle Cotter, and Patrick Pinnick for their comments on earlier drafts, and to Linda Gerber for her research support. Any errors or omissions are of course my responsibility.