out in Recommendation 1. Recommendation 1 includes four main criteria: to identify, assess and
understand terrorism ﬁnancing risks; to designate an authority or mechanism for coordination; to
ensure the adopted measures are commensurate with the identiﬁed risks; and to be an essential
foundation in allocating anti-money laundering (AML)/CTF resources efﬁciently (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 ﬁnancing, 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 ﬁnancial system, the informal ﬁnancial system and non-
proﬁt organisations, all of which can be exploited by terrorist threats.Third, consequences are the
impact and harm which terrorism ﬁnancing can do to the population, ﬁnancial sectors and
national and international interests.
The application of the risk-based approach and the subsequent strict regulations within the
ﬁnancial system can be counter-productive and lead to ﬁnancial exclusion. Financial exclusion
can be viewed through two perspectives: the ﬁrst and most common perspective, which came to
attention in the 1990s, focuses on the level of ﬁnancial capability of customers, their level of
knowledge and their ability to make ﬁnancial 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 ﬁnancial exclusion caused by the
conﬂict between the liberalisation of the ﬁnancial industry through deregulation (Koku, 2015)and
strict regulations imposed on the ﬁnancial system, such as CTF regulations, which hinder access
to ﬁnancial services. The deregulation of the ﬁnancial industry seems to have led to difﬁculty
because ﬁnancial institutions are encouraged to boost shareholders’proﬁt(Koku, 2015), rather
than paying attention to vulnerable customers or the needs of society. The result of ﬁnancial
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 ﬁnancial
inclusion and encourages ﬁnancial institutions to use a ﬂexible risk-based approach, with the
purpose of increasing ﬁnancial inclusion while countering terrorism ﬁnancing (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 ﬁnancial inclusion. This is done through several
recommendations, including increased ﬁnancial education, expanded access to regulated
ﬁnancial services for low-income and under-served people and more reliable proof-of-identity
systems provided by governments (FATF, 2017). However, the practice of ﬁnancial 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 ﬁnancial exclusion is not a fair procedure. Regarding legitimacy,
ﬁnancial 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 ﬁnancial services not only precludes progress in terms of the
implementation of CTF, but also helps to identify and prevent ﬁnancial crimes such as terrorism
ﬁnancing, by bringing people under the umbrella of effective regulation and supervision. The
more access to a regulated and supervised ﬁnancial system, the less ﬁnancial exclusion there will
be, and subsequently, the more effective the CTF framework will be. Encouraging unregulated or
less-regulated and supervised ﬁnancial sectors instead of a formal ﬁnancial 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