Financial inclusion is a critical element of maintaining the integrity of any financial system. Nonetheless, when it comes to financial inclusion and risk management, financial institutions must walk a fine line. Under current guidelines, they must strike a balance between detecting and combating financial crimes and ensuring that, far from achieving financial inclusion, their efforts are not counter-productive and do not exacerbate the financial exclusion of already underserved and vulnerable populations. A recent statement from the Financial Action Task Force (FATF) highlighted the potential for tension between these goals, but emphasised that improving financial inclusion ultimately serves the aims of anti-money laundering and counter financing of terrorism (AML/CFT) measures. The latest guidance from the FATF advocates for a flexible, risk-sensitive approach to customer due diligence (CDD) that incorporates advances in technology, serving to promote financial inclusion without compromising efforts to combat crime.

A world-wide problem

Financial exclusion is a significant problem world-wide. An estimated two billion working-age adults around the globe have no access to formal financial services of any kind. Closer to home, nearly two million adults in the UK do not have a bank account, and millions more experience some form of financial exclusion or financial distress. Poverty, disability, poor mental health, and informal employment are all major drivers of financial exclusion, which can itself exacerbate the effects of poverty. People who lack access to affordable cash, credit, and insurance incur a ‘poverty premium’, whereby they pay more for basic transactions than those with access to high-quality financial services. This fuels a vicious cycle of poverty, inequality, and exclusion.

Exacerbated by risk management policies

AML/CFT policies can aggravate financial exclusion by systematically excluding certain categories of vulnerable people deemed ‘high risk.’ Low-income people, refugees, and other displaced groups often lack reliable identity documentation and data verification, and are therefore less likely to pass the traditional CDD requirements for banks and other financial institutions. This documentation problem is most visible in developing countries, particularly those without a national identification infrastructure. Nonetheless, it also affects many vulnerable people in more developed countries like the UK. In both developed and under-developed countries, undocumented migrants and refugees, as well as those living in rural areas or employed in the informal sector, often lack reliable documentation of their identities or sources of income. This poses a challenge to financial institutions attempting to conduct adequate due diligence without unnecessarily excluding legitimate potential customers.

FATF statement

On 3 November 2017 the FATF issued a new statement on due diligence and financial inclusion, accompanied by a customer due diligence supplement to the FATF’s Guidance on Anti-Money-Laundering and Terrorist Financing Measures and Financial Inclusion, most recently updated in 2013.

The FATF statement reiterated the importance of financial inclusion to its mission of combating and deterring money laundering and terrorist financing, explaining that “[w]ithout access to the formal financial system, unserved or underserved customers will resort to cash and unregulated channels, which limits transparency and increases the risk of crime and money laundering.” However, the FATF acknowledged that an “overly cautious approach” to AML/CFT can have the “unintended consequence of excluding legitimate businesses and consumers from the formal financial system.”

Striking a balance

The 2013 FATF guidance therefore encourages financial institutions and policy-makers to use a flexible, risk-based approach (RBA) to customer due diligence, with the aim of increasing financial inclusion without undermining the effectiveness of crime-combating measures. The guidance emphasises that a risk-sensitive approach to AML/CFT measures should take into consideration the risks of financial exclusion and the benefits of bringing people into the formal financial system. Nonetheless, the guidance cautions that “financially excluded and underserved groups, including low income, rural sector and undocumented groups, in both developing and developed countries should not be automatically classified as presenting lower risk for ML/TF. ”

The 2017 FATF customer due diligence supplement expands on the previous guidance, specifically addressing the challenge posed to effective due diligence by the lack of reliable documentation for many potential customers, and advocating for better integration of digital technologies where appropriate. The supplement advocates for a broad and holistic approach to balancing financial inclusion and financial integrity, which would encompass increased financial education, expanded access to regulated financial services for low-income and underserved people, more reliable government-provided proof-of-identity systems—including support for developing digital identity systems—and support for developing digital financial services.

The supplement notes that the basic financial products and services most often provided to newly banked people are inherently low-risk, due to their generally limited purpose and restricted uses. These products may therefore reasonably be exempted from some standard due diligence requirements or subject to a simplified due diligence regime. The guidance also suggests that people seeking basic financial services be permitted to use new or alternative forms of identity verification, including digital documentation, where they cannot provide ‘traditional’ forms of identification. The supplement recommends that policy-makers consider the risks associated with new technologies and distribution channels, but also cites the growing use of ‘innovative, technology-based means’ to verify customer identity and information, such as biometric databases.


Universal financial inclusion remains a distant goal. While vulnerable people continue to struggle with poverty and displacement, widespread financial exclusion is likely to deepen existing inequalities and exacerbate the risk of crime. Nonetheless, advances in technology have the potential to improve access to financial services and help overcome the challenges posed to financial inclusion goals by more traditional customer due diligence measures. Ultimately, a world with greater financial inclusion is a world with less financial crime, and these complementary policy goals can and should be reconciled. Financial institutions and policy-makers in both developing and developed countries would therefore be well served to heed the spirit of the new FATF guidance by embracing more flexible and innovative approaches to customer due diligence that promote rather than hinder financial inclusion.