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 Is the money being deposited to the institution only for a short time, to be withdrawn immediately?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.
For the past three months since May 2012, a series of seminars on leadership and governance were conducted for officers of microfinance institutions in Vietnam. The course was aimed at helping the participants clarify governance, leadership and management functions and be able to delineate roles of various positions in the structure of their institutions.
At the start of the seminar, most of the participants admitted during the discussions that the concepts of leadership, governance and management were confusing for them. The confusion usually stemmed from their practice of having positions with multiple functions. This practice was traced at the time when an organization, starting small, has to have people assuming multiple roles. As the organization grows, the functions of these people became ingrained and cannot be segregated anymore. Forcing the segregation would involve emotional and reputational concerns that may affect the smooth operation of the organization. This apparent confusion was evident not only among the participants to the training but also to other microfinance institutions as well. It may even be true to other non-government organizations in the country.
One of the sessions emphasized two main qualities inherent and distinct to a leader. The first is the ability to express and share a vision; and second, the ability to inspire the people to work towards the attainment of that vision. An exercise was done where each participant was asked to identify a person whom they think has the qualities of a leader, a sort of their model leader. The responses placed on top of the list Ho Chi Minh with four leaders considering him the ultimate model of a leader. Following closely after Uncle Ho were responses pointing to the director of the MFI as the other model of leadership. These responses were mostly from the participants who are senior leaders of the MFIs. The fact that MFIs in Vietnam are part of the Women’s Union explains the tendency to look at leaders of mass organizations as the epitome of leadership. Steve Jobs, Mohamad Yunus and Jesus followed after Uncle Ho and the MFI leaders.
Governance on the other hand, refers to the decision-making structure of an institution. This function is usually the mandate of the board of directors of an institution. The board that represents the general assembly of a membership-based organization or the investors of a company provides policy directions to the management team of the institution.
Finally, the implementation of the policies approved by the board is given to the management team. The team is composed of the executive director and his team who makes sure that the policies are translated into work plan and budget designed to attain the long-term vision and the immediate operation of the institution.
The confusion is mostly in not knowing the difference between policy-making and implementation. There are instances where some members of the board who are more knowledgeable than the executive director tend to micro-manage and even do the implementation themselves. There are also instances where the executive director is dominant and the board has degenerated into a mere rubber stamp. The ideal situation therefore is the capacity of the people in the institution to maintain a balance between the two functions.