Money Laundering through Microfinance Companies

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CA Mayur Joshi
CA Mayur Joshi
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.


Microfinance companies are like banks but for people who don’t have access to regular banks. They give small loans and help people in rural or underserved areas manage their money better. Microfinance is all about making sure everyone has access to traditional financial products. When you put your money into a savings account with these financial institutions, they’re helping you save regularly. Microfinance loans are typically used to finance a small business to smooth cash flow during financial hardships.

Despite their good intentions, these companies have to deal with tough rules, like stopping money laundering. Money laundering is when people try to hide where they got illegal money from. It’s a big problem, and microfinance companies need to make sure they’re not unknowingly helping criminals.

To tackle this issue, microfinance companies need to have strong rules against money laundering. They need to check their customers carefully, watch for any suspicious money movements, and report anything fishy to the authorities. By doing this, they can stop money laundering and keep the financial system safe.

History of Microfinance

The contemporary concept of ‘microfinance’ has had its inception in the early 1970s in Bangladesh. Nobel Laureate Muhammad Yunus initiated the ‘Grameen Bank’ to empower the women of Bangladesh. In 70’s the bank was giving them small credits to become self-sufficient. The success of the Grameen Bank in Bangladesh has taken the world by surprise. This approach was a stark contrast to loan sharks who charged high interest rates, trapping borrowers in a cycle of debt. These efforts have also been replicated globally in the form of Grameen America.

The current structure of the distribution of microfinances is largely unregulated and hence most MFIs are relatively unaccountable for their actions regarding allocation of finances. The absence of stringent regulations leaves a lacuna that renders the institutions susceptible to activities beyond the purview of law. These MFIs appear to shadow deep-rooted political agendas. Additionally, the possibility of MFIs leaning towards terrorist financing activities may not be ruled out.

The success of microfinance has caught the attention of international organizations like the World Bank.

Laundering through Micro finance

A builder has surplus cash on hand received through illegitimate sources which he decides to invest in order to camouflage the origin of this unlawful money. He gives the cash to a Microfinance Institution, which further distributes it in the form of small credit to several borrowers. These borrowers return the loan and also seek further credit, thus eliminating the trail of the unlawful money of the builder.

Furthermore, if the MFI is in cahoots with the builder, the small credit may be offered to kin or even ghost borrowers. Thus, rotating the funds in a legitimate but dishonest way.

This is not a hypothetical situation, but a potential and possibly prevalent scenario.

Data suggests that regionally, the highest concentration of microfinance accounts is in India. There are approximately 188 million accounts held under the umbrella of MFI’s. These accounts represent almost 18% of the total national population.

Political Risk

Key people from the MFI Sector portray their initiatives to be a noble endeavor without any political interference or undue influential pressures- for the empowerment of the poor. But it has been observed that several MFIs from the list of the Reserve Bank of India are run by politically exposed persons.

Riskpro compiles the industry risk reports. Their report reveals the risks associated with the Microfinance Sector. Politically exposed persons is a significant risk.

Microfinance and NGO

Many MFIs have emerged from an NGO and the source of their funding is often unclear. A large number of NGOs with international interests and ample funding are operating in the world today. These NGOs are considered to be the soft power of a country. Although NGOs are not formally associated with the government they are very much in cahoots with the political agendas of certain countries and help to accomplish them by rotating the money through MFIs.

In India, Microfinance Institutions have been in the limelight for their wrongdoings. Politicians have been exposed for their involvement and many politically exposed Directors of MFIs have been identified for their misdeeds with the funds.

Informal Financial System

Money laundering risks in microfinance include criminals using microloans for illegal activities. Microfinance institutions sometimes don’t check borrowers’ backgrounds well, making it easy for criminals to use them. Some borrowers hide their illegal money by using complicated ownership structures. Since microfinance deals with a lot of cash businesses, it’s easier to hide illegal money. Also, some borrowers use informal financial systems that are not regulated, which can help criminals.

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