ON Monday, Finance Minister Ishaq Dar surprised his hosts when he chose to discuss a draft law to combat money laundering and terror financing during an event on financial inclusion.

The Digital Finance Conference, organised by the State Bank, was supposed to showcase the steps taken to advance financial inclusion for the millions of unbanked individuals in Pakistan.

One of the principal impediments to financial inclusion has been the onerous burden of documentation that banks require to open an account, as well as stringent know-your-customer policies mandated by anti-money laundering stipulations.

Financial inclusion is increasingly becoming an important goal worldwide, but so is safeguarding the financial system from illicit activity. And sometimes these objectives can pull the financial system in opposite directions.

Also read: Draft law being prepared to subvert cyber-crimes: Dar

This is why participants at the conference on financial inclusion were surprised when Finance Minister Ishaq Dar chose to discuss the draft anti-money laundering legislation at the venue. It has long been recognised that stringent anti-money laundering and counterterrorist financing (AML/CFT) stipulations can lead to financial exclusion.

Sometimes this happens directly by imposing documentation requirements that the unbanked cannot fulfil. At other times it happens indirectly by skewing the compliance cost in a way that deters banks from taking on low-value and high-volume services for the poor.

By excluding a large number of poor people from the financial sector, these AML/CFT stipulations can, in fact, complicate the task of tracing illicit money, because the unbanked resort to informal financial services that can be harder to monitor.

This is why extreme care is necessary when designing an AML/CFT framework to ensure that it is properly harmonised with financial inclusion efforts.

The critical ingredient is consultation. An AML/CFT framework should be designed with extensive and ongoing input from financial service providers, as well as those knowledgeable about financial exclusion. Pakistan has been struggling to meet international standards of compliance in AML/CFT legislation since 2010. Since then, we’ve been on the grey list of countries that are bordering on being non-compliant. The IMF has made passage of AML/CFT legislation an important condition of the current programme.

Last June, an action plan to come into compliance was presented, and now we have until February 2015 to reassure our global partners that it is being credibly implemented, which includes AML/CFT legislation as a key component. But it is not clear yet how much consultation has gone into drafting the legislation, and how it will impact ongoing financial inclusion efforts to advance branchless banking. The fact that conference participants were surprised by the finance minister’s remarks on the subject at the Digital Finance Conference does not inspire confidence that the goals being pursued in the financial sector have been properly harmonised. More consultation and fewer surprises would work to the government’s advantage in pursuing these 21st-century challenges to the growth of the financial system.

Published in Dawn, November 19th , 2014