FINDEV BLOG 25 February 2019

The Hole in the Bucket: The Impact of De-risking on

Non-Pro t Organizations
Who loses out in the global push for individual financial inclusion?

Nubian woman in Egypt. Photo by Ali Hegazy.

The international frameworks on Anti-Money-Laundering (AML) and Countering the Financing of

Terrorism (CFT) are seen as crucial tools for advancing stability and security objectives, as well as for
curbing criminal and extremist activity. However, increased due diligence and reporting requirements for
financial institutions have led banks to develop their own increasingly risk-averse controls – generally
termed “de-risking.” There are growing concerns about the unintended consequences of de-risking
practices on financial inclusion goals, particularly for vulnerable consumers, including the poor, women,
migrants and refugees. Global financial inclusion actors, such as the World Bank, G20 and CGAP, have
joined the debate on de-risking, aiming to guide policymakers on the implementation of AML/CFT
standards while promoting financial inclusion.

The focus of these debates, however, has been the effect of de-risking on the micro level and the individual
consumer, and not on the organizations which are crucial to supporting these inclusion processes. While
we see a global push for financial inclusion at the individual level on the one hand, whole groups are at
risk of falling out of the system on the other, a veritable “hole in the bucket” which needs to be plugged
with some urgency. We would like to draw attention to these organizations, as a growing body of evidence
shows that the non-profit sector is bearing the brunt of de-risking decisions.

 
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 We are not able to open a new bank account anymore... They did not
officially refuse it, but the regulations to get the approval to open an
account are impossible for us, in regards to the papers we have to provide,
information we have to give.
Women’s rights organization in Turkey

In many contexts, not-for-profit organizations (NPOs) have become the direct and indirect target of AML-
CFT rules. As a result, they are losing critical access to resources and banking facilities, and thus losing
their ability to provide the key services that contribute to financial inclusion processes. Studies have
found various negative impacts of de-risking on financial access for NPOs, such as banks’ refusal to release
received funds, or issues in opening bank accounts.

An increasing number of non-profits are facing growing barriers to financial access. As one of the women’s
rights organizations in Turkey pointed out, “We are not able to open a new bank account anymore... They
did not officially refuse it, but the regulations to get the approval to open an account are impossible for us,
in regards to the papers we have to provide, information we have to give. We do not have the structure to
set up all those mechanisms for reporting. And within the bank, there seems to be no one who can explain
the regulations to us.”

Another women's organization from Egypt reported, “In 2011 we had nine grants from different donors, all
postponed or frozen with no response. Some donors waited two years for us.”

We are collecting a growing body of evidence for other NPOs that encounter similar challenges –
organizations being asked onerous questions about the work they do, and in some cases, being required to
register as a trust fund in order to open a bank account. Issues such as these have led some NPOs to resort
to “carrying cases of cash to support their personnel and programs on the ground”, leading to serious
security issues.

Oxfam has gone as far as to state that “the goal of countering terrorism financing has been given
preference over that of financial inclusion”. Most notably, the wider banking sector in countries in the
Global South is heavily dependent on correspondent banking relationships (CBRs) with established
multinational banks. The global decline in CBRs thus reduces these countries’ ability to participate in the
global economy, threatening trade and development. Cross-border remittances from migrants to family
members have suffered as well, as banks have stopped doing business with money transfer organizations
altogether. There are also concerns that the AML/CFT frameworks are counter-productive and actually end
up facilitating illegal money streams since access to formal banking is denied
/
up facilitating illegal money streams since access to formal banking is denied.

In 2011 we had nine grants from different donors, all postponed or frozen
with no response. Some donors waited two years for us.
Women's organization from Egypt

The consequences of de-risking have been discussed in several fora in recent years. The Financial Action
Task Force (FATF) has been active in clarifying the international standards to avoid misunderstandings
that could contribute to de-risking, for example in its report to the G20 Leaders’ Summit. The World Bank
and Association of Certified Anti-Money Laundering Specialists have developed workstreams with relevant
stakeholders in order to identify solutions, especially focused on bank transfers for humanitarian support.

However, solutions for NPOs are more difficult to find due to banks’ unfamiliarity with their work. In order
to change that and move the needle on this issue for civil society, here are a few of the actions we need to
take:

Include NPOs as target groups in financial inclusion agendas. These organizations are crucial to
financial inclusion efforts, considering they often provide the link between individuals and the
banking system. 
Promote proportionate and calculated risk-based implementation of AML/CFT measures. By
advancing financial inclusion goals for both individuals and organizations, a more nuanced
implementation of AML/CFT could bring more economic activity into the formal banking sector, thus
enhancing transaction monitoring and customer due diligence, and in turn helping advance AML/CFT
goals.
Address the lack of NPO expertise within financial institutions, especially for local (non-
international) organizations which are little known and even less understood by financial institutions.
On the flip side, address the lack of financial capability and knowledge of financial sector
requirements within NPOs. To tackle this gap, some banks (e.g., Standard Chartered) have started
organizing financial literacy programs for NPOs on regulatory complexities – these examples can be
brought to the forefront of the discourse.

The Human Security Collective has engaged in a number of fora, including becoming part of a
transnational coalition of non-profit organizations seeking to highlight, stem and reverse the unintended
consequences of these financial policies on civil society space. The Non-Profit Platform on the FATF has
been set up to ensure that civil society is effectively engaged in the debate. However, as long as there is a
lack of awareness and understanding of these problems, it is unlikely that a clear mandate to develop
solutions will appear. We need to build collaborations and co-create suitable solutions to these issues by
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engaging with policy makers as well as the financial sector in order to prevent these issues getting more
engaging with policy makers as well as the financial sector, in order to prevent these issues getting more
deeply embedded in the intergovernmental order, national laws and banking practice. We are looking
forward to getting feedback and reactions from the financial inclusion stakeholders on how to effectively
bring these issues to the forefront of the discourse. 

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Comments
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Christoph Carlowitz 18 March 2019

In my eyes, it is not a risk-shift, but larger organizations (be it for-profit or not-for-profit ones) benefit from
the increasing complexity of rules (be it AML or other) and all the smaller ones suffer. Thus also economies /
countries with larger entities benefit and the smaller ones in the third world struggle. This will further
increase the problem of the drifting apart of the rich from poor, making our world an increasingly unsafe
and also unpleasant place to be.
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ABOUT THIS POST

By Karina Avakyan, Floor Knoote, Sofia Ortega, Lia van Broekhoven, Fulco van Deventer & Sangeeta Goswami

Karina Avakyan, Floor Knoote and Sofia Ortega are consultants with Dimes Consultancy, a collective of consultants that offers support in the research,
design and implementation of programs focused on economic empowerment, financial inclusion, and social and economic justice. Lia van Broekhoven,
Fulco van Deventer, Sangeeta Goswami work with The Human Security Collective, an organization based in the Netherlands that addresses the
asymmetric character of decision-making in the domain of security by ensuring multi-stakeholder engagement, and protecting and expanding the
operational and political space of civil society.

Published 25 February 2019

Topics Risk Management

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