An Analysis of the Impact of the Risk-Based Approach to Combat Money Laundering and the Financing of Terrorism on Financial Inclusion in South Africa

Abstract

A risk-based approach entails the development of appropriate risk control measures based on a process of the identification and categorisation of risk in a bid to prevent and combat such risk. This approach includes the tailoring of rules to focus on instances of higher risk and it gives private actors more discretion on how to employ risk-based approach measures. It requires regulated institutions to exercise sound judgement and respond appropriately to 30any identified risks. The risk-based approach seeks to make regulation better and more cost-effective by ensuring that control requirements are commensurate with actual risk, such that the greatest risks receive the most attention, while lower risk warrants more simplified control measures. In the South African context, the shift from a rules-based to a risk-based approach was formalised through the 2017 amendment of the Financial Intelligence Centre Act. This shift introduced flexible customer due diligence (CDD) requirements, empowering financial institutions to align their compliance measures according to the assessed risk of each customer. The aforesaid changes were intended to encourage financial service providers to open their doors to previously excluded customers. This article analyses the implementation of the risk-based approach by South African financial service providers and evaluates its practical implications for financial inclusion. It interrogates whether the risk-based framework has succeeded in balancing the dual objectives of safeguarding financial integrity and expanding access to financial services to the poor, the vulnerable and low-income earners.