Each year, the Basel Institute on Governance releases its AML Index, a report which assesses and calculates a risk score for 128 global jurisdictions, based on its vulnerabilities and ability to counteract money laundering (ML) and terrorist financing (TF).
The 11th Public Edition of the Basel AML Index, released in early October 2022, highlighted a worrying lack of progress in the global mitigation of risk, with little to no overall improvement in the last 12 months. This should concern us all.
The average global risk remains stagnant at 5.25- though down slightly from 2021’s score of 5.3- out of 10, which is the maximum risk level. While some areas have shown signs of improvement, notably the quality of anti-money laundering/combatting the finances of terrorism (AML/CFT) frameworks, these have been counteracted by an increased risk profile in the other four areas measured, namely:
- Financial transparency
- Public transparency
- Political and legal risks
This lack of progress matters for regulated organisations, because they are legally required to conduct risk assessments to identify the countries that have high ML/TF risks. All customers that have links with such countries must also be treated as high risk and therefore subject to Enhanced Due Diligence (EDD).
Jurisdictions classed as high risk include those that are listed by the Financial Action Task Force (FATF) as triggering a ‘call for action’ or ‘jurisdictions under increased monitoring’; countries that are in the European Commission high-risk third country list for EU regulated entities; and other countries posing ML/TF risks to a regulated entity.
What does the Basel AML Index show?
More broadly, poor progress in global risk mitigation has a huge civic and social impact.
Continued vulnerabilities provide an easy way for corrupt networks to launder dirty money originating from a range of criminal activities, from massive fraud schemes to corrupt procurement deals that hinder a country’s sustainable development. For individual countries, failure to manage risk can seriously impact business and investment opportunities.
Crucially, an initial analysis shows a near perfect correlation between low risk countries for ML/TF and low risk countries for environmental crime.
A jurisdiction’s failure to mitigate risk has a number of serious knock-on effects:
- Financial institutions and investors may shy away
- Exports can suffer as a result
- Barriers to local market entry and partnerships with local companies are increased
- Small businesses may have trouble winning overseas supply contracts
- Donors to aid organisations, other charities or non-profit organisations could fear their money may end up in the wrong hands
- Its citizens may have trouble opening a bank account or obtaining a loan in foreign countries
How much progress has been made since 2021?
On the plus side, at least in terms of technical compliance, the Index found that countries are generally getting better at assessing their specific ML/TF risks and applying a risk-based approach to tackling them.
Much of the progress made this year was achieved with the involvement of the private sector and came as a result of the more comprehensive compliance measures being taken to assess and mitigate risks related to high risk countries, politically exposed persons, and wire transfers, including the application of enhanced due diligence.
The least progress was made in areas traditionally covered by public authorities, such as international cooperation, mutual legal assistance, and legal enforcement.
The Index showed that jurisdictions are failing to address the fast-evolving risks related to cryptocurrencies and other virtual assets. Recent trends show that those involved in organised crime are making more use of virtual assets and virtual asset service providers, such as cryptocurrency exchanges, to commit crime in new forms.
Medium progress was seen in the policing of ML/TF offences, implementing sanctions, conducting customer due diligence, record keeping and filing Suspicious Activity Reports (SARs). Beneficial ownership, long recognised as an area in which governments should do more to address, also saw medium progress. Transparency in this area is crucial to resilience against ML/TF threats, as it has a direct impact on the effectiveness of a jurisdiction in preventing, detecting, prosecuting and sanctioning against financial crimes.
Technical compliance with FATF guidelines remains elusive
The need to improve not just technical compliance, but the practical effectiveness of AML/CFT systems, is a constant theme of this year’s AML Index. It is common for jurisdictions to have laws and institutions in place that are largely compliant with the FATF Recommendations, yet utterly ineffective in practice. Worryingly, the gap between effectiveness and technical compliance isn’t closing, it's growing.
Equally, the quality of supervision remains poor, thus technical compliance is improving slightly but effective application is reducing.
Summary of the Basel AML Index
The Index concluded that tackling ML/TF is too big and too complex a task for governments alone.
Financial institutions also have a key part to play in guarding their countries’ financial security, whether that be through public-private partnerships, industry-led standard setting, or by working together with governments in Collective Action initiatives.
DNFBPs (designated non-financial businesses and professions) such as accountants, estate agents, gambling companies, and lawyers also have their role to play.
In addition, the Index notes the vital work of civil society and journalists in ensuring that the public and private sectors are held to account through their investigative work, collaborating in multi-stakeholder initiatives, or through advocacy and awareness raising about ML/TF and the costs of financial crime.
In short: we all have an interest- and a role to play- in ensuring that next year’s Index is a much more positive end of year report.
The Basel AML Index is developed and maintained by the International Centre for Asset Recovery at the Basel Institute on Governance, an independent, non-profit organisation working around the world to strengthen governance and counter corruption and other financial crimes.
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Photo by Ferhat Deniz Fors on Unsplash