Why I believe the US State Department is wrong about mobile money in Africa
The US Department of State recently released a report that identified mobile money services as particularly susceptible to money laundering in Africa. It cites services like M-PESA and M-Shwari as “services [that] remain vulnerable to money laundering activities”.
According to the World Bank, the total money transfers by African migrants to their region or country of origin surged by 3.4% to $35.2 billion in 2015. And mobile money services represent a growing proportion of these remittances both domestically and internationally.
Despite being over ten years old and driving financial inclusion for tens of millions of unbanked people across the continent, mobile money is still a nascent industry. Given recent research demonstrating mobile money’s strong impact on poverty reduction, this type of statement could negatively impact the growth of such services and the reputation of the sector as a whole. Security and regulatory scares can kill confidence and stifle growth.
It’s critical that mobile money providers adhere to strict anti-money laundering (AML) regulations and government bodies highlight issues in the interest of their citizens and the wider market.
Addressing mobile money misconceptions
With this in mind, the report from the Department of State creates a level of uncertainty to mobile money practices in Africa that is, in my opinion, neither accurate nor well judged. Furthermore, the report ignores the fact that mobile money services are inherently more secure and more compliant than existing money transfer services both formal and informal.
Players in the mobile money ecosystem have the opportunity to truly accelerate financial inclusion, whilst improving efficiency and lowering the cost of money transfer within and to Africa. Institutional trust is a critical pillar in achieving this. And in order to build both customer and regulator trust, the industry needs to correct the misperception of a lack of compliance. To ensure this perception is challenged and amended worldwide, organisations and institutions need to understand what good compliance in mobile-based cross border payment services throughout Africa looks like, as well as the additional compliance controls mobile money offers in comparison to traditional remittance services.
From three to seven lines of defence
A commonly used term in anti-money laundering (AML) circles is the “the three lines of defence”. For mobile money the following three lines are in play:
- The first line of defence – know your customer (KYC): understanding each customer that is on-boarded to your service, and having the right detail and information in place for each of those users.
- The second line of defence – compliance, monitoring, and screening teams: ensuring all practices are within compliance guidelines and investment within your monitoring capabilities, including a skills screening team to identify any discrepancies.
- The third line of defence – audit oversight of the first two lines: there is no such thing as too much auditing, organisations need to put a real focus on monitoring the first lines of defence to ensure everything is in order.
Considering the guidance from the Financial Crimes Enforcement Network (FinCEN) issued in March 2016, and also based on the ideas provided by Wolfsburg Principles on correspondent banking from 2002, some organisations are expanding these three lines of defence to seven in an effort to provide additional layers of user safety and compliance when it comes to cross-border mobile based payments. The three lines of defence for the mobile money scheme initiating the transaction, followed by the same three lines again but for the mobile money scheme receiving the transaction.
Know your partner
Know your partner is the seventh line of defence and is the key difference, and key advantage of mobile money over some other payment services.
Know your partner is essentially KYC for partners such as banks, money transfer operators, and mobile money schemes. Mobile financial services firms in Africa take continuous monitoring of partner activity extremely seriously and perform due diligence on each partner in proportion to that partner’s risk level.
For example, a partner deemed low risk (such as a large, listed global company with strong internal compliance functions) would be subject to simplified due diligence, while a high-risk partner (for instance a new, private company with a limited history, perhaps coming from a country with a low transparency index rating) would be subject to enhanced due diligence and a more in-depth oversight programme.
The ability to view and interrogate both sender and receiver system means mobile financial services can provide better AML. By seeing the full extent of all transactions, not just one side, as an individual money transfer operator would, and harnessing a wealth of compliance data, firms can provide real time controls and checks that exceed existing practices.
Mobile transfers versus traditional remittances
Traditional remittance services often use outdated core operating systems which are difficult to evolve in the ever-changing AML environment. This usually results in a poor customer experience and exorbitant prices for users. Moreover, this model tends to exclude millions, forcing them to use even more expensive, less secure, and non-compliant informal channels. The high costs of these formal and informal traditional channels drive up average remittance values, and therefore risk levels as well.
Mobile based money transfers, on the other hand, offer person to person transfers that can be of significantly smaller values while fully traceable and fully compliant to local and international regulations. New entrants operate off progressive, leaner technology platforms which are optimised for mobile’s simplicity but also allow for faster realignment to ever changing regulations. This makes for a better customer experience, lower prices, and better compliance.
Nobody would claim that mobile money schemes across Africa have reached perfect compliance when it comes to regulation. Arguably, the same could be said for financial services and institutions the world over. The difference here is that by connecting financial service providers with one another and the global economy we can provide this seventh line of defence and enhance AML capabilities beyond those of any other system.
Following the US Department of State’s report, I urge those with preconceptions of the African market to engage with us and our partners to better understand our collective mission to increase financial inclusion, make remittance services more accessible and affordable, while bolstering transparency and lowering global money laundering risk.