Financial Inclusion & AML /CFT

 Affordable financial products and services—such as transactions, payments, savings, credit and insurance—help people manage risks, build wealth and invest in businesses. Financial inclusion means that individuals and businesses have access to and use affordable financial products and services that meet their needs, which are delivered in a responsible and sustainable way. Financial inclusion is a catalyst for achieving seven of the 17 Sustainable Development Goals (SDGs). It fosters economic growth and employment, promotes economic empowerment of women, and contributes to eliminating poverty.

FATF on Financial Inclusion

The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats.

The FATF Recommendations, therefore, set an international standard, which countries should implement through measures adapted to their particular circumstances. The FATF Standards comprise the Recommendations themselves and their Interpretive Notes, together with the applicable definitions in the Glossary. 

The Customer Due Diligence(CDD) requires REs to obtain the Identity documents and positively verify the same to generate the customer profile. Also understand the potential relationship with the customer in the process. Periodic updation of the profile , transaction monitoring and maintaining the records thereof form part of the CDD process that result in arriving at 'Know Your Customer'. 

AML/CFT measures, while crucial for combating financial crime, can inadvertently hinder financial inclusion by making it difficult for low-income individuals and businesses to access formal financial services due to strict regulations and compliance costs. 

In June 2011, FATF published a Guidance paper which provided support to countries and their financial institutions in designing AML/CFT measures that meet the national goal of financial inclusion, without compromising the measures that exist for the purpose of combating crime. Following the revision of its Recommendations in February 2012, FATF adopted an updated version of its Guidance on financial inclusion in February 2013.

 FATF is convinced that the promotion of well-regulated financial systems and services is central to any effective and comprehensive Anti-Money Laundering and Terrorist Financing (AML/CFT) regime. However, applying an overly cautious approach to AML/CFT safeguards can have the unintended consequence of excluding legitimate businesses and consumers from the financial system.

The Guidance paper February 2013 focuses on ensuring that AML/CFT controls do not inhibit access to well-regulated financial services for financially excluded and underserved groups, including low income, rural sector and undocumented groups. The document provides clarity and guidance on the FATF Recommendations that are relevant when promoting financial inclusion and shows how the Recommendations can be read and interpreted to support financial access.

The revised Guidance seeks to reflect the changes brought to the FATF Recommendations in 2012. It focuses in particular on the reinforcement of the risk-based approach (RBA), as a general and underlying principle of all AML/CFT systems. FATF believes that the development of risk-sensitive AML/CFT frameworks will be a key step for countries that wish to build a more inclusive formal financial system, and give access to appropriate financial services to a larger proportion of the population, including the most vulnerable and unserved groups.

The 2017 supplement to the 2013 guidance provides country examples of customer due diligence measures adapted to the context of financial inclusion. Those examples illustrate how a simplified set of CDD measures or alternative forms of identity verification, for example the use of e-identity tools, can support financial inclusion, while appropriately mitigating the ML/TF risks. 

The AML/CFT standards 

The FATF Recommendations 1, 10 & 15 cast the standards to follow globally by all nations in their Risk Based approach to customer due diligence .

FATF Recommendation 1

 

Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and should take action, including designating an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively. Based on that assessment, countries should apply a risk-based approach (RBA) to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified. This approach should be an essential foundation to efficient allocation of resources across the anti-money laundering and countering the financing of terrorism (AML/CFT) regime and the implementation of risk- based measures throughout the FATF Recommendations. Where countries identify higher risks, they should ensure that their AML/CFT regime adequately addresses such risks. Where countries identify lower risks, they may decide to allow simplified measures for some of the FATF Recommendations under certain conditions..

Countries should require financial institutions and designated non-financial businesses and professions (DNFBPs) to identify, assess and take effective action to mitigate their money laundering and terrorist financing risks.

 

 "Assessing Risks and Applying a Risk-Based Approach," forms the cornerstone of the FATF's framework for combating money laundering, terrorist financing, and proliferation financing, emphasizing the need for countries to identify, assess, and understand their specific risks, and to apply resources effectively to mitigate them. 

FATF Recommendations 10

FATF Recommendation 10 focuses on Customer Due Diligence (CDD), requiring financial institutions to verify customer and beneficial owner identities, and clarify business relationships, particularly when establishing relationships or conducting transactions, or if suspicious activity is suspected. 

FATF Recommendations 15

Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks.

The AML/CFT Standards Review 25 February 2025

FATF released the revised Guidance for public consultation until April 4, 2025. The revisions are a response to the recently adopted amendments to the FATF standards and an evolving financial landscape marked by technological advancements.

The draft moves beyond FATF’s original focus on access to financial services to also encompass the usage of appropriate, safe, convenient, and affordable financial products

The changes are informed by a public consultation which gathered more than 140 responses, including from non-profit organisations, banks, payment providers, insurers, academics, accountants, lawyers and other international organisations.

The changes to the Standards include:

• Replacement of the term “commensurate” with “proportionate”,  defined as a measure or action that appropriately corresponds to the level of identified risk and effectively mitigates the risks, throughout the Recommendations in order to provide clarity on how the concept should be applied in the context of a risk-based approach and align the FATF’s language more closely with that of financial inclusion stakeholders and frameworks. [R.1 and consequential amendments throughout the Standards]
• Explicit requirement for countries to allow and encourage simplified measures in lower risk scenarios. This induces clarity in the countries’ obligations in enabling simplified measures in their AML/CFT regimes, and further incentivises countries to be more active in advocating their implementation. [R.1 and consequential amendments throughout the Standards] Correspondingly, financial institutions and Designated Non-Financial Business and Professions (DNFBPs) are also required to consider differentiating their measures depending on the type and level of risks. [INR.1 paragraph 16]
• Requirement for supervisors to also review and take into account the risk mitigation measures undertaken by financial institutions and DNFBPs to avoid overcompliance resulting from an only partial understanding of associated risks, and to ensure that they are proportionately implementing their obligations. [INR.1 paragraph 9]
• Addition of qualifier to clarify that non-face-to-face business relationships and transactions would be considered as an example of potentially higher-risk situations only where appropriate risk mitigation measures have not been implemented. This amendment recognises that non-face-to-face interactions has become standard business practice in many countries and technological advancements in digital identity systems that may reduce the risks associated. [INR.10 paragraph 15]
• Further clarity in the requirements related to the application of simplified measures and exemptions in lower and low-risk scenarios respectively. [Throughout R.1 and INR.1]

Examples of Risk Based Approach and Financial Inclusion practiced by nations

• In Sweden, the Swedish Bankers Association, in collaboration with the Swedish Migration Agency, designed a process to enable identification of asylum seekers for the purpose of opening a bank account, through confirmation provided by the Swedish Migration Agency through an online process.
• In the Netherlands, the Dutch Association of Banks published a risk-based industry baseline on implementing AML/CFT measures for low, neutral, and high-risk scenarios related to EU list of high risk third countries. The baseline defines different risk scenarios and specifies how FIs should approach each scenario with practical use cases, thus helping to take proportionate measures.
• In Singapore, the Monetary Authority of Singapore works with retail banks to offer Limited Purpose Banking Accounts to individuals with higher ML/TF risks (e.g. ex-offenders in serious financial crimes). These accounts enable individuals to meet basic banking needs, and are subjected to enhanced monitoring measures to prevent abuse. Banks must document risk assessments and provide clear review processes in case of account closures and rejections.

The Financial Inclusion guidance given for public discussion in 25 Feb 2025 was finalized by 18 June 2025 including responses from over 100 members. 

Correspondent banking & Financial Inclusion

Since June 2015, the FATF has clarified the application of the risk-based approach to correspondent banking relationships. The financial sector welcomed this, but sought further clarification on regulatory expectations in terms of customer due diligence

In the wake of the global financial crisis and countries’ response to it, the international community has been increasingly concerned about de-risking. The FATF understands this term to mean situations where financial institutions terminate or restrict business relationships with entire countries or classes of customer in order to avoid, rather than manage, risks in line with the FATF’s risk-based approach (RBA). This is a serious concern for the FATF and the FATF-style regional bodies (FSRBs) to the extent that de-risking may drive financial transactions into less/nonregulated channels, reducing transparency of financial flows and creating financial exclusion, thereby increasing exposure to money laundering and terrorist financing (ML/TF) risks.

Derisking is a complex issue driven by various considerations including: profitability; reputational and liability risks; changes in banks’ financial risk appetites; the amount of financial penalties imposed by supervisory and law enforcement authorities, increased compliance costs associated with implementing conflicting regulatory requirements, including anti-money laundering and counterterrorist financing (AML/CFT) and confusion caused by the term Know-Your-Customer’s-Customer (KYCC). A recent survey2 also shows that in some cases, banks will exit the relationship solely on the basis of profits (“de-marketing”), irrespective of the risk context and of market circumstances

The term KYCC has created a lot of confusion. To clarify, the FATF Recommendations do not require financial institutions to conduct customer due diligence on the customers of their customer (i.e., each individual customer). In a correspondent banking relationship, the correspondent institution will monitor the respondent institution’s transactions with a view to detecting any changes in the respondent institution’s risk profile or implementation of risk mitigation measures (i.e. compliance with AML/CFT measures and applicable targeted financial sanctions), any unusual activity or transaction on the part of the respondent, or any potential deviations from the agreed terms of the arrangements governing the correspondent relationship. In practice, where such concerns are detected, the correspondent institution will follow up with the respondent institution by making a request for information (RFI) on any particular transaction(s), possibly leading to more information being requested on a specific customer or customers of the respondent bank. There is no expectation, intention or requirement for the correspondent institution to conduct customer due diligence on its respondent institution’ customers.

Prudential and other regulatory requirements as well as the complexity, number and changes in sanctions regimes, and also uncertainty related to the interplay of different sanctions regimes and their applicability to financial institutions, were also mentioned as drivers of de-risking. AML/CFT regulations are therefore only one of a multitude of factors cited for closing correspondent banking relationships. These results are largely in line with the prevailing understanding of the FATF and other international organisations doing work in this area, including the Financial Stability Board (FSB), Committee on Payments and Market Infrastructures (CPMI), Basel Committee for Banking Supervision (BCBS)’s Anti-Money Laundering Experts Group (AMLEG), International Monetary Fund (IMF) and the World Bank.

Correspondent banking is an activity that has been negatively impacted by de-risking in certain regions6 and sectors. This is of concern to the international community, as correspondent banking is an important means of facilitating cross-border movements of funds, and enabling financial institutions to access financial services in different currencies and foreign jurisdictions, thereby supporting international trade, charitable giving, commerce and remittances flows, all of which contributing to promoting financial inclusion.

India & Financial Inclusion

Financial Inclusion is an importantpriority of the Government. The objective of Financial Inclusion is to extend financial services to the large hitherto un-served population of the country to unlock its growth potential. The Government initiated the National Mission for Financial Inclusion (NMFI), namely, the Pradhan Mantri Jan Dhan Yojana (PMJDY) in August, 2014 to provide universal banking services for every unbanked household, based on the guiding principles of banking the unbanked, securing the unsecured, funding the unfunded and serving un-served and under-served areas.

The "JAM trinity" – comprising Jan Dhan accounts (bank accounts), Aadhaar (biometric identification), and Mobile numbers – has been instrumental in driving financial inclusion and literacy in India, enabling direct benefit transfers and simplified financial services. 

RBI Advised all banks to open Basic Saving Bank Deposit (BSBD) accounts with minimum common facilities such as no minimum balance, deposit and withdrawal of cash at bank branch and ATMs, receipt/ credit of money through electronic payment channels, facility of providing ATM card.

AML/CFT @ India & Financial Inclusion

The Reserve Bank of India (RBI) plays a crucial role inpromoting financial inclusion and implementing Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) measures, ensuring a stable and secure financial system while fostering access to financial services for all. 

The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

A.    Small Accounts

a.        In terms of Rule 2 clause (fb) of the Notification 'small account' means a savings account in a banking company where- (i) The aggregate of all credits in a financial year does not exceed rupees one lakh; (ii) The aggregate of all withdrawals and transfers in a month does not exceed rupees ten thousand; and (iii) The balance at any point of time does not exceed rupees fifty thousand.

b.      Rule (2A) of the Notification lays down the detailed procedure for opening 'small accounts'. Banks are advised to ensure adherence to the procedure provided in the Rules for opening of small accounts.

c.       It has been brought to our notice that banks are not promoting opening of 'Small Accounts' for greater financial inclusion. Banks are, therefore, advised to open 'Small Accounts' for all persons who so desire. It is reiterated that all limitations applicable to 'Small Accounts' should be strictly observed.

B.     Officially valid documents The Notification has also expanded the definition of 'officially valid document' as contained in clause (d) of Rule 2(1) of the PML Rules to include job card issued by NREGA duly signed by an officer of the State Government or the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number.

2.5 Customer Identification Requirements – Indicative Guidelines

(xii) Opening of Savings Bank Accounts and Credit Linking of account for Self Help Groups (SHGs) 

In order to address the difficulties faced by Self Help Groups (SHGs) in complying with KYC norms while opening savings bank accounts and credit linking of their accounts, it is clarified that KYC verification of all the members of SHG need not be done while opening the savings bank account of the SHG and KYC verification of all the office bearers would suffice. As regards KYC verification at the time of credit linking of SHGs, it is clarified that since KYC would have already been verified while opening the savings bank account and the account continues to be in operation and is to be used for credit linkage, no separate KYC verification of the members or office bearers is necessary.

2.6 Small Deposit Accounts (i) Although flexibility in the requirements of documents of identity and proof of address has been provided in the above mentioned KYC guidelines, it has been observed that a large number of persons, especially, those belonging to low income group both in urban and rural areas are not able to produce such documents to satisfy the bank about their identity and address. This would lead to their inability to access the banking services and result in their financial exclusion. Accordingly, the KYC procedure also provides for opening accounts for those persons who intend to keep balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs. 1,00,000/-) in a year. In such cases, if a person who wants to open an account and is not able to produce documents mentioned in Annex I of this Master Circular, banks should open an account for him, subject to: any evidence as to the identity and address of the customer to the satisfaction of the bank.

(ii) While opening accounts as described above, the customer should be made aware that if at any point of time, the balances in all his/her accounts with the bank (taken together) exceeds Rupees Fifty Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees One Lakh (Rs. 1,00,000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed. In order not to inconvenience the customer, the bank must notify the customer when the balance reaches Rupees Forty Thousand (Rs. 40,000/-) or the total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise operations in the account will be stopped. Further, banks were advised to open accounts with reduced KYC standards in respect of persons affected by floods to enable them to credit the grant received from the Government. These accounts shall also be treated at par with the accounts opened as per above instructions. However, the maximum balance in such accounts may be permitted as the amount of grant received from the Government or Rs. 50,000 whichever is more and the initial credit of the grant amount shall not be counted towards the total credit

2.8 Closure of accounts Where the bank is unable to apply appropriate KYC measures due to non-furnishing of information and /or non-cooperation by the customer, the bank should consider closing the account or terminating the banking/business relationship after issuing due notice to the customer explaining the reasons for taking such a decision. Such decisions need to be taken at a reasonably senior level

Changes to CDD of Self-help groups RBI MD Feb 25, 2016

43. Simplified normsfor Self Help Groups (SHGs) 

    (a) CDD of all the members of SHG shall not be required while opening the savings bank account of the SHG. 

(b) CDD of all the office bearers shall suffice. 

(c) CDD of all the members of SHG may be undertaken at the time of credit linking of SHGs

AML/CFT guidelines for NBFCs on Financial Inclusion

4. It was clarified in March 2006 that although flexibility in the requirement of documents of identity and proof of address has been provided in the circular mentioned above yet there may be instances where certain persons, especially, those belonging to low income group both in urban and rural areas may not be able to produce such documents to satisfy the NBFC about their identity and address. Hence, it has been decided to further simplify the KYC procedure for opening accounts by NBFCs for those persons who intend to keep balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed rupees one lakh (Rs. 1,00,000/-) in a year.

5. Accordingly, in case a person who wants to open an account is not able to produce documents mentioned in Annexure II of DBOD circular enclosed with our circular dated February 21, 2005, NBFCs may open accounts as described in paragraph 2 above, subject to

a) introduction from another account holder who has been subjected to full KYC procedure. The introducer’s account with the NBFC should be at least six month old and should show satisfactory transactions. Photograph of the customer who proposes to open the account and also his address needs to be certified by the introducer.

or

b) any other evidence as to the identity and address of the customer to the satisfaction of the NBFC.

6. While opening accounts as described above, the customer should be made aware that if at any point of time, the balances in all his/her accounts with the NBFC (taken together) exceeds rupees fifty thousand (Rs. 50,000/-) or total credit in the account exceeds rupees one lakh (Rs. 1,00,000/-), no further transactions will be permitted until the full KYC procedure is completed. In order not to inconvenience the customer, the NBFC must notify the customer when the balance reaches rupees forty thousand (Rs. 40,000/-) or the total credit in a year reaches rupees eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise the operations in the account will be stopped when the total balance in all the accounts taken together exceeds rupees fifty thousand (Rs. 50,000/-) or the total credit in the accounts exceeds rupees one lakh ( Rs. 1,00,000/-) in a year. NBFCs were advised to issue suitable instructions to their branches for implementation in this regard.

Happy reading,