Think-tank WEF calls for rethink of anti money-laundering rules

By Huw Jones

LONDON, Aug 28 (Reuters) - Regulators and central bankers should rethink how rules are applied to stop extremist financing and money laundering, or some emerging market economies risk grinding to a halt, an official of the World Economic Forum (WEF) think-tank said.

Anders Borg, the former Swedish finance minister who chairs a WEF initiative to improve how the financial system can foster long-term growth, said quick action was needed.

"What we have seen in the last year or so is the increased risk of countries being left stranded without much access to the financial system," Borg said in an interview on Friday.

Banks are under pressure to make burdensome checks on cross-border financial transactions, at the risk of harming the flow of remittances to countries ranging from Somalia to Mexico.

Lenders are pulling out from some countries because they are coming under U.S (Other OTC: UBGXF - news) .-led pressure to know not just their customers, but who their customers do business with, a costly undertaking when profits from transactions are small, Borg said.

Barclays (LSE: BARC.L - news) for instance has withdrawn banking services from Somalia, whose economy depends on an estimated $1.3 billion transferred each year from Somalis abroad.

Virtually all U.S. banks have ended remittance services to Somalia because of rules that hold them responsible if they transfer funds to militant groups such as al Shabaab.

When one bank leaves a territory, others follow to avoid being saddled with a higher volume of potentially risky but low-margin business, Borg said.

He and other members of the WEF initiative set up last November will meet with banks and officials from the Group of 20 economy's regulatory task force, the Financial Stability Board, and the World Bank, in New York on Monday.

"It (Other OTC: ITGL - news) 's important to act in the short term," Borg said. "There is a risk of setting a 'know your customer's customer' standard for the whole global system."

Separately the British government announced a review into the effectiveness of rules designed to prevent money laundering and financing of extremist groups.

The review will look at whether the rules are proportionate and not unintentionally holding back British business abroad, the government said in a statement.

Borg said a distributed ledger, like that which underpins virtual currencies such as bitcoin and which records values without the physical exchange of notes and coins, could also provide a simple and cheap method of transmitting money. (Editing by David Holmes)