Financial exclusion as a consequence of counter-terrorism financing

Author:Zeynab Malakoutikhah
Position:School of Law, University of Leeds, Leeds, UK

Purpose The purpose of this paper is to analyse the unintended consequences, financial exclusion, of counter-terrorism financing regulations in terms of their impact on financial inclusion and, consequently, the creation of an ineffective counter-terrorism financing framework. A further aim is to make recommendations to mitigate these unintended consequences. Design/methodology/approach... (see full summary)

Financial exclusion as a
consequence of
counter-terrorism nancing
Zeynab Malakoutikhah
School of Law, University of Leeds, Leeds, UK
Purpose The purpose of this paper is to analyse the unintended consequences, nancial exclusion, of
counter-terrorismnancing regulations in terms of their impact on nancial inclusion and, consequently,the
creation of an ineffectivecounter-terrorism nancing framework. A further aim is tomake recommendations
to mitigatethese unintended consequences.
Design/methodology/approach This subject is examined by using the practices of a range of
countries and organisations. The interdisciplinary approach of the paper is highlighted, which comprises
criminallaw, banking law, international law and human rights law.
Findings Financial exclusion is a focal point that results in ineffective counter-terrorism measures which are
caused mostly by the formal nancial sector, in particular, the banking system. The nancial exclusion also leads
to counter-productive counter-terrorism nancing through a low risk-appetite, de-risking, de-banking, nancial
exclusion and using unregulated or less-regulated and supervised nancial systems.
Originality/value No article comprehensivelyanalyses nancial exclusion as a consequence of counter-
terrorism nancing framework.The paper examines the process of counter-terrorism nancing regulations,
which leads to nancialexclusion. In addition, the impact of nancial exclusion on all relevantactors, such as
individuals, correspondent banking relationships, money and value transfer services, charities and virtual
currencies,is examined.
Keywords Counter-terrorism nancing, Financial exclusion, Financial culture, Human rights,
Unintended consequences
Paper type Research paper
A rampant demand for countering terrorism nances was launched following the 9/11 attacks.
The process of international counter-terrorism nancing (CTF) was signalled by the United
Nations Security Council (UNSC) Resolutions 1267 (1999) and 1373 (2001), the International
Convention for the Suppression of Financing of Terrorism (1999) (the Financing Convention)
which came into force in 2002 and the Financial Action Task Forces(FATFs) nine special
recommendations (2001 and 2004) on combating terrorism nancing. CTF at the international
and national level consists of three main aspects: the criminalisation of terrorism nancing;
nancial regulations as preventive measures; and sanctions imposed on individuals and entities
who support terrorist acts, terrorists and terrorist organisations. The focus of this article is on
those regulations which have been imposed on the nancial sector, in particular, the banking
system, as preventive measures for countering terrorism nancing. The aim is to analyse the
unintended consequences of these regulations in terms of causing nancial exclusion and,
consequently, creating an ineffective CTF framework to make recommendations to mitigate the
unintended consequences.
The effectiveness of setting regulations as preventive measures is mostly based on the risk-
based approach which is highlighted as a central issue in the FATF recommendations and is set
Journalof Financial Crime
Vol.27 No. 2, 2020
pp. 663-682
© Emerald Publishing Limited
DOI 10.1108/JFC-09-2019-0121
The current issue and full text archive of this journal is available on Emerald Insight at:
out in Recommendation 1. Recommendation 1 includes four main criteria: to identify, assess and
understand terrorism nancing risks; to designate an authority or mechanism for coordination; to
ensure the adopted measures are commensurate with the identied risks; and to be an essential
foundation in allocating anti-money laundering (AML)/CTF resources efciently (FATF, 2012).
Risk is a function of three factors in the form of threat, vulnerability and consequence (FATF,
2013a). To assess the risk of terrorism nancing, the following factors must be determined. First,
threats are the terrorists, their facilitators and their funds. Second, vulnerabilities comprise three
major sectors, in the form of the formal nancial system, the informal nancial system and non-
prot organisations, all of which can be exploited by terrorist threats.Third, consequences are the
impact and harm which terrorism nancing can do to the population, nancial sectors and
national and international interests.
The application of the risk-based approach and the subsequent strict regulations within the
nancial system can be counter-productive and lead to nancial exclusion. Financial exclusion
can be viewed through two perspectives: the rst and most common perspective, which came to
attention in the 1990s, focuses on the level of nancial capability of customers, their level of
knowledge and their ability to make nancial decisions (Blake and De Jong, 2008), which can lead
to poverty and social exclusion (Koku, 2009;Solo, 2008;World Bank, 2008). The second
perspective, which is the core element of this paper, is the nancial exclusion caused by the
conict between the liberalisation of the nancial industry through deregulation (Koku, 2015)and
strict regulations imposed on the nancial system, such as CTF regulations, which hinder access
to nancial services. The deregulation of the nancial industry seems to have led to difculty
because nancial institutions are encouraged to boost shareholdersprot(Koku, 2015), rather
than paying attention to vulnerable customers or the needs of society. The result of nancial
exclusion in terms of the second perspective leads not only to social injustice, but also to an
ineffective CTF framework.
The revised FATF Guidance on Financial Inclusion (2013) declared the issue of nancial
inclusion and encourages nancial institutions to use a exible risk-based approach, with the
purpose of increasing nancial inclusion while countering terrorism nancing (FATF, 2013b).
However, this issue remained as a concern and led to the 2017 CTF framework in which the
FATF Customer Due Diligence Supplement expands on the previous guidance (2013), with a
special focus on the making progress on nancial inclusion. This is done through several
recommendations, including increased nancial education, expanded access to regulated
nancial services for low-income and under-served people and more reliable proof-of-identity
systems provided by governments (FATF, 2017). However, the practice of nancial exclusion as
a result of the CTF regulation remains unsolved, as illustrated in this paper.
Financial exclusion undermines the legitimacy and the effectiveness of CTF regulations, and
the procedure which leads to nancial exclusion is not a fair procedure. Regarding legitimacy,
nancial exclusion violates human rights. Financial inclusion is associated with other human
rights such as economic growth, development, job creation and eliminating poverty (FCA, 2016).
In terms of effectiveness, access to nancial services not only precludes progress in terms of the
implementation of CTF, but also helps to identify and prevent nancial crimes such as terrorism
nancing, by bringing people under the umbrella of effective regulation and supervision. The
more access to a regulated and supervised nancial system, the less nancial exclusion there will
be, and subsequently, the more effective the CTF framework will be. Encouraging unregulated or
less-regulated and supervised nancial sectors instead of a formal nancial system will have an
adverse impact on the CTF framework. Financial exclusion derives from different kinds of
exclusion, including access exclusion, condition exclusion, price exclusion, market exclusion and
self-exclusion. The only exclusion relevant to the aim of this paper is access exclusion, which is
the restriction of access as a result of the process of risk assessment (Carbo et al., 2007). Thus, to

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