Microfinance institutions providing financial intermediation functions can be used as conduits of money laundering and terrorism financing. With MFIs, it is even harder to track down since transfer of money in small amounts through a non-profit “charitable” institutions may not be monitored effectively.
Deterring people with motives to use MFIs as a channel of their illegal activities should be part of the risk management efforts of the institution. It should be the lookout of MFIs to ensure that they will not be part of money laundering and terrorism financing. Among the basic steps that should be done are the following:
1. Anti-money laundering policies. Microfinance institutions should establish policies against money laundering and terrorism financing. Implementing procedures for these policies should immediately be cascaded down to the frontline staff.
2. Know your client (KYC). The first thing to determine is the origin. Inflows deposit, money transfer and even grants should be scrutinized. From where is the money coming from? The individual owner of the fund must be determined. A grant coming from a foreign foundation is to be highly appreciated, but it is more important to determine who are the people behind the foundation. The ultimate beneficial owner (UBO) must be identified to make sure that it is not just a front for a terrorist-supporting organization.
3. Another KYC effort is to know the destination of the money. Who is the final receiver and user of the money? Is the money being deposited to the institution only for a short time, to be withdrawn immediately? Or is the money invested to be used only for a certain group without expectations of being repaid? Answers to these questions will reveal the intention of the destination.
It is surprising that in the series of anti-money laundering seminars we have conducted, most microfinance institutions are not aware of the possibility that their institution may be used. Appropriate policies and mechanism and vigilance are the answers to ensure that your institution will not be used by people with criminal intention.