Research ¦ Between a Rock and a Hard Place: Managing the Conflict Between AML and Financial Inclusion

Balancing Act in Banking: Managing the Conflict Between Anti-Money Laundering Regulations and Financial Inclusion in Developed Countries

Banks in developed countries face a significant challenge today: they must simultaneously prevent financial crimes such as money laundering (ML) and terrorist financing (TF) while ensuring broad financial inclusion (FI). These goals often conflict, as stringent anti-money laundering and countering the financing of terrorism (AML/CFT) regulations can lead to the exclusion of certain customers from the formal financial system. This article explores how banks can manage this conflict effectively, based on insights from a recent qualitative study conducted in Finland, a highly developed country with robust AML/CFT frameworks.

The Conflict Between AML/CFT and Financial Inclusion

AML/CFT measures require banks to conduct rigorous customer due diligence (CDD), monitor transactions, and report suspicious activity. When banks cannot verify a customer’s identity or assess their risk adequately, regulations compel them to restrict or terminate business relationships. This can exclude individuals and businesses from essential financial services such as payment accounts, which are vital for everyday economic participation.

On the other hand, financial inclusion is about providing affordable, accessible, and appropriate financial services to all individuals and businesses. This access promotes social inclusion, reduces poverty, and supports economic resilience. However, excessive AML/CFT regulations may unintentionally harm FI by encouraging banks to adopt risk-averse behaviors, such as “de-risking” — exiting customers deemed high-risk — which disproportionately affects vulnerable groups.

This dilemma is particularly pronounced in developed countries where the regulatory environment is often stringent. While these countries boast high account ownership rates and legal guarantees of access to basic banking services, the reality of balancing AML/CFT compliance with inclusive service provision remains complex.

Bastian Schwind-Wagner_Follow "Ongoing research and policy development are needed to further refine strategies that harmonize these important objectives across different developed countries. Enhanced collaboration between regulators, banks, and other stakeholders will be key to achieving sustainable solutions that serve both security and inclusion goals."

Key Findings on Managing the Conflict

The study conducted interviews with AML experts, banking professionals, and regulators in Finland. Three main themes emerged that offer guidance on managing the tension between AML/CFT obligations and financial inclusion:

1. The Principle of Least Harm

   At the core of balancing AML/CFT and FI is the principle of least harm. This principle advocates that banks should implement AML/CFT measures that are the least restrictive to customers, minimizing harm to financial inclusion. Rather than immediately terminating high-risk customers, banks should apply targeted controls—such as enhanced transaction monitoring or product restrictions—that allow continued access to essential services while managing risks appropriately.

   This approach requires a risk-based assessment rather than a blanket exclusion policy. For vulnerable customers, flexibility is critical; for example, allowing alternative identity verification methods when standard documentation is unavailable. The ultimate measure — terminating a business relationship — should be reserved for cases where risks cannot be mitigated adequately or when illegal activities are clearly evident.

2. Maturity of Risk Management

   The ability of a bank to implement the principle of least harm depends heavily on the maturity of its risk management practices. Mature risk management includes well-developed internal controls, advanced technology for monitoring, knowledgeable staff trained in both AML/CFT and FI considerations, and clear communication protocols with customers.

   A mature risk management framework enables banks to make nuanced decisions that balance compliance requirements with customer inclusion. It also reduces the likelihood of overly strict measures driven by fear of non-compliance or resource constraints. Importantly, clear internal guidelines prevent individual employees from making inconsistent or biased decisions and help ensure that customer exclusions are justified and proportionate.

3. Common Approach and Shared Responsibility
   

   Managing this conflict effectively requires collaboration among banks and regulators. A common approach across institutions helps avoid situations where some banks de-risk aggressively while others take on disproportionate risk by retaining high-risk customers. Shared responsibility encourages a more even distribution of risk in the market and enhances overall effectiveness in combating financial crime without unduly restricting access.

   Clear, unambiguous regulation and guidance from authorities are essential to empower banks to adopt proportionate AML/CFT measures confidently. Moreover, improved information sharing between banks and financial intelligence units (FIUs) can strengthen risk management capabilities while supporting FI goals.

Implications and Recommendations

This research highlights that banks should strive to maintain business relationships with high-risk customers through targeted risk mitigation rather than defaulting to exclusion. Regulators should support this by providing clearer guidance that endorses flexible, risk-based approaches tailored to individual circumstances.

Banks must invest in developing their risk management maturity by enhancing technology, training staff comprehensively on balancing AML/CFT and FI goals, and establishing clear internal policies. Furthermore, fostering industry-wide cooperation through shared practices and information exchange can reduce systemic risks associated with uneven de-risking practices.

Ultimately, AML/CFT regulations must be designed and implemented in ways that do not sacrifice financial inclusion’s socio-economic benefits. While preventing financial crime remains paramount, it is equally critical to ensure that legitimate customers retain access to essential banking services.

Conclusion

The conflicting demands of AML/CFT compliance and financial inclusion place banks “between a rock and a hard place.” However, by adopting the principle of least harm supported by mature risk management and common industry approaches, banks can navigate these challenges more effectively. This balance not only protects the integrity of the financial system but also preserves inclusive access to vital services for all members of society.

Dive deeper

• Research ¦ Sonja Josefina Korpela; Between a rock and a hard place: managing the conflict between anti-money laundering and financial inclusion. Journal of Money Laundering Control 2025 ¦ Link