The 10th Basel AML Index paints a grey picture of the fight against money laundering. Despite counter efforts worldwide, the average global money laundering risk score, defined as a jurisdiction’s vulnerability to money laundering/terrorist financing and its capacities to counter it, has increased from 5.22 to 5.3 out of 10.
The aim of the Basel AML Index is to provide a holistic picture of money laundering risk, and the latest edition reveals four key AML risk trends in 2021:
1. Ineffective AML systems are contributing to increased money laundering risk.
Despite the availability of advanced technology for fighting financial crime, ineffective AML systems are unfortunately the general pattern across the globe. Jurisdictions are consistently scoring worse for the prevention of money laundering than for enforcement – even though performance for enforcement is of an unsatisfactory standard. The Index finds that while jurisdictions may have laws and institutions in place that are largely compliant with FATF Recommendations, they are largely ineffective in practice.
Based on the latest FATF data, the average score for effectiveness across all assessed jurisdictions is just 30%, while the average score for technical compliance with FATF Recommendations is at 64%.
The UK and Spain were the only jurisdictions to achieve scores of 67% or above for both prevention and effectiveness criteria.
2. Jurisdictions are struggling to respond to money laundering threats related to virtual assets.
As the use of virtual assets such as cryptocurrencies is rapidly gaining pace on a global scale, jurisdictions are struggling to respond to the money laundering threats they bring.
FATF recommendation 15 states that: “To manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes, and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.”
However, the Index finds that the average compliance score for recommendation 15 across all jurisdictions assessed decreased from 70% to 60%. The Basel report warns of the risk of “regulator shopping” in the virtual assets sector, where jurisdictions with a weak regulatory framework become safe havens for illicit activity using virtual assets.
3. Slow and ineffective implementation of beneficial ownership registries continues to provide safe havens for dirty money.
Despite frameworks and promises to improve beneficial ownership registries, poor performance is widespread and undermining all global efforts to tackle money laundering.
No jurisdiction has an effective beneficial ownership registry system, where legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is readily available. In fact, almost half the of the jurisdictions assessed scored zero for effectiveness.
The scale of these shortcomings has been exposed by the press on several occasions, most recently in the Pandora Papers.
The report recommends strong government action to improve beneficial ownership transparency.
4. Non-financial businesses and professions are a serious vulnerability in most jurisdictions AML/CFT systems.
Despite customer due diligence obligations applying to financial institutions and designated non-financial businesses and professions (DNFBPs) alike, the report finds DNFBPs continue to underperform on compliance with AML/CFT standards. Not only are DNFBPs less protected against ML/TF risks, but their AML/CFT efforts are comparatively less, creating a serious vulnerability and dangerous loophole risk.
In particular, the report notes that DNFBPs have a limited understanding of risks and obligations, poor implementation of AML/CFT measures and weak monitoring and supervision. It urges for more supervision to improve performance.
Regional takeaways from the Basel AML Index
Understanding money laundering risks according to the geographic location of a business or customer is integral to KYC and adopting a risk-based approach.
Aside from the above four trends, the Basel AML Index provides a useful regional analysis of money laundering risks:
- European Union and Western Europe
Despite having a generally lower risk than the global average, this region is let down by the overall quality of AML/CFT systems.
- Europe and Central Asia
This region has slightly higher ML/TF risks than the global average, although there has been a general improvement since 2020.
- East Asia and Pacific
With significant variation across the East Asia and Pacific region, risk scores are slightly higher than the global average. Many jurisdictions have increased their risks in the last year.
- Latin America and Caribbean
The region’s higher than average overall risk score is in part due to high risks related to financial secrecy in the Bahamas, Panama and the Cayman Islands, as well as a high risk score for financial transparency and standards.
- Middle East and North Africa
There is significant variation in risk levels across the region. The main weaknesses relate to public transparency and accountability, and to legal/political risks.
- North America
While highlighting that this region scores better than the global average in all categories, the report emphasises “Canada and the US could dedicate a lot more human and technological resources to countering ML/TF risks”.
- South Asia
High risks in this region stem from poor quality AML/CFT frameworks, as well as very high levels of corruption and bribery, and poor financial transparency.
- Sub-Saharan Africa
With the highest overall risk score of all regions, the quality of AML/CFT frameworks is the biggest concern. Most assessed jurisdictions also face high risks of corruption and bribery, and poor financial transparency and standards.
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