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11/01/23
From Global Regulation & Policy
Basel AML Index 2022: Money Laundering Risks And Trends
Rankings of corruption, transparency, and money laundering may induce fears among IFCs of superficial comparisons between jurisdictions or undeserved criticism based on the singling out of one issue in isolation.
This is not true of the Basel AML Index, a data-based ranking of money laundering and terrorist financing (ML/TF) risks around the world available at: index.baselgovernance.org. The Basel Institute on Governance, a Swiss-based non-profit organisation which has published the Index since 2012, recently released the 11th Public Edition and accompanying report of money laundering trends at the regional and global levels.
The Basel AML Index aims to assist private companies and public agencies in understanding ML/TF-related geographic risks and applying a risk-based approach to address them. AML/CFT preventive measures should be commensurate with risks, including geographic risks. That is why identifying high, medium and low-risk jurisdictions, based on the results of the Basel AML Index, can be immensely helpful when seeking to apply appropriate and effective anti-money laundering and counter financing of terrorism (AML/CFT) measures.
Holistic Data On Money Laundering Risks
The Basel AML Index seeks to reflect a holistic picture of ML/TF risk, going beyond a narrow focus on anti-money laundering systems. It thus uses a composite methodology combining 18 indicators from reputable and publicly available sources. The indicators measure different factors that contribute to high ML/TF risks at the country level and/or are relevant to assessing a jurisdiction’s capacity to counter their risks. Importantly, it does not seek to measure the actual amount of money laundered in a jurisdiction.
The indicators are categorised in five domains: Quality of AML/CFT Framework; Bribery and Corruption; Financial Transparency and Standards; Public Transparency and Accountability; and Legal and Political Risks.
Each indicator is also weighted according to its impact on ML/TF risks and the jurisdiction’s resilience to such risks. For example, data from Financial Action Task Force (FATF) evaluations – a prime source of detailed information on a jurisdiction’s ML/TF risks and capacity to counter them – make up 35 per cent of the overall score. The category Political and Legal Risks, which combines indicators of media freedom and the strength and independence of institutions, accounts for 10 per cent of the overall score.
The methodology is reviewed annually by a group of renowned experts in AML/CFT and related fields, coming from a range of backgrounds including regulators, private-sector representatives and academia. The aim of the annual review meetings is to ensure the Basel AML Index methodology remains accurate and reflective of current ML/TF risks at the jurisdiction level.
Who Uses The Index And Why?
The Public Edition of the Basel AML Index is issued annually and is widely reported in international media. Its main feature is the accompanying report, which analyses particular ML/TF trends and gaps that emerge in each year’s data. The ranking, interactive map and report are freely available at: index.baselgovernance.org. However, its use for professional purposes is limited by its provision of only the overall risk score, its coverage of just 128 jurisdictions this year and its frequency of updates. The incomplete coverage is due to strict minimum data requirements to prevent jurisdictions receiving a misleading score due to a lack of up-to-date information.
The subscription-based Expert Edition[i] covers 203 jurisdictions and enables users to filter the data by indicator and category, thus allowing them to drill down into the exact reasons behind a jurisdiction’s risk score. The website enables users to create jurisdiction profiles showing key AML/CFT-relevant data as well as regional and global comparisons.
The Expert Edition is widely used by companies and financial institutions as an ML/TF country risk rating tool for compliance and risk assessment purposes. For larger financial institutions, this often includes benchmarking of in-house systems. For smaller institutions, the filterable ranking offers a cost-effective and efficient way to check a wide range of indicators relevant to assessing risk. Beyond the private sector, the Expert Edition is used for policymaking and research purposes, and is included in several other indices relating to corruption and money laundering.
The Expert Edition Plus option offers a detailed comparative analysis of the FATF Mutual Evaluation Reports plus special reports on ML/TF risks in Jersey, Guernsey, the Isle of Man, Gibraltar and the Cayman Islands. These IFCs are not included in the regular Expert Edition ranking due to a lack of data. However, due to their international importance as IFCs and therefore in global efforts to combat ML/TF, the Basel Institute provides these special reports covering available information on the jurisdictions’ ML/TF risks and resilience, plus their appearance on any relevant sanctions or blacklists.
Subscription to both the Expert Edition and Expert Edition Plus is free for all public-sector entities and multilateral, non-profit, academic, and media organisations. As a non-profit organisation, the Basel Institute charges a modest annual fee for private-sector firms and financial institutions in order to cover the costs of producing and publishing the Index.
2022 Trends And Takeaways
The 11th Basel AML Index Public Report highlighted the following key points:
- Average ML/TF risks at the global level remain stagnant at 5.25 out of 10, where 10 is the maximum risk level. The average is down just 0.05 points from last year’s average of 5.3. While risks relating to the quality of AML/CFT frameworks improved slightly, they rose in the other four categories measured by the composite methodology, leading to the title of this year’s press release: “one step forward, four steps back”.
- A positive trend is seen in risk-based approaches to ML/TF. Governments and private firms/financial institutions are getting better at assessing their risks, efficiently allocating resources to address the most serious ones. IFCs are often in the lead in this area, issuing detailed national risk assessments.
- Progress on ML/TF has been driven largely by the private sector in the last five years, according to an analysis of FATF follow-up reports. Positive developments are seen in areas including the private sector’s ability to assess and mitigate risks involving high-risk countries, politically exposed persons and wire transfers. In contrast, progress remains slow in addressing several issues that have long been on the international agenda and are primarily the responsibility of public-sector actors. These include cross-border cooperation and mutual legal assistance to efficiently trace and seize illicit assets held in IFCs or other jurisdictions.
Progress in FATF Recommendations
- Addressing evolving risks from cryptocurrencies and other virtual assets remains a concern. Average levels of compliance with FATF standards in this area are falling, in part due to recent strengthening of requirements. Given their exposure, many IFCs could do more to proactively address crypto risks and engage in international multi-stakeholder forums to share knowledge on this fast-changing issue. Forums of interest include the Global Coalition to Fight Financial Crime, which has a specific taskforce focused on crypto regulations, and the Global Conference on Criminal Finances and Cryptocurrencies, co-organised by the Basel Institute on Governance, Europol and Interpol.
- The effectiveness of AML/CFT systems remains a major concern. This year’s data shows a widening gap on average between jurisdictions’ technical compliance with AML/CFT standards and the effectiveness of measures in practice. For example, beneficial ownership transparency measures may be in place, but not capable of providing timely and accurate information on ultimate beneficial owners to law enforcement or to financial institutions and other firms conducting due diligence on their customers. In general, average effectiveness of AML/CFT systems remains at a critically low level. With their specialist knowledge and agile legislative systems, IFCs have an opportunity to lead efforts to improve the effectiveness of AML/CFT measures in practice.
Regional Perspectives
The 11th Basel AML Index includes regional profiles, consisting of infographics showing regional jurisdiction rankings as well as the main risks and weaknesses of concern in each region. This feature is highly in demand as it gives a more nuanced view of ML/TF risks and allows easier comparison between neighbours.
For example, the profiles indicated that the quality of supervision is a major factor letting down AML/CFT systems in the European Union/Western Europe, while Latin America and the Caribbean had most room for improvement in issues of financial transparency and accountability. In Europe, several IFCs demonstrated improvements thanks in part to updated FATF assessments. Europe’s regional profile also highlighted Malta’s progress in addressing AML/CFT deficiencies and its resulting delisting from the FATF grey list.
Regional differences were particularly strong in relation to a new indicator on environmental crimes that the Basel AML Index added this year. The environmental crimes indicator covers crimes involving flora, fauna, and non-renewable resources and is drawn from the Global Organized Crime Index published by the Global Initiative Against Transnational Organized Crime. Its inclusion recognises recent strong statements by the FATF, UN, EU, OECD and other policy bodies about the significance of environmental crimes as predicate offences of money laundering. The indicator is assigned a 5 per cent weighting in the overall score, joining existing indicators of human trafficking and narcotics trafficking.
The environmental crime data showed a great variation between jurisdictions, from the highest score of 8.33 in the Democratic Republic of the Congo to the lowest of 0.19 in Iceland and San Marino. The region of Sub-Saharan Africa has the highest risks in this category, followed by East Asia and the Pacific. In many of these jurisdictions, a high risk of environmental crime correlated with a high risk of ML/TF overall. At the other end of the scale, there is almost 100 per cent correlation between a low risk of money laundering and a low risk of environmental crime, as indicated by countries such as Andorra, Finland, Iceland, New Zealand, San Marino, Slovenia, and Sweden.
A low risk of ML/TF correlates almost perfectly with a low risk of environmental crime
Countries with high risks of ML/TF often suffer from high risks of environmental crime
To view the Public Edition and find out about the Expert Edition and Expert Edition Plus subscriptions, please see index.baselgovernance.org or contact index@baselgovernance.org. The Expert Edition (Plus) subscriptions are free for most organisations outside the private sector, as well as media organisations.
Footnotes:
[i] https://index.baselgovernance.org/expert-edition
Kateryna Boguslavska
Kateryna Boguslavska is Project Manager of the Basel AML Index at the Basel Institute on Governance. She is a certified anti-money laundering specialist focused on identifying and analysing geographic AML/CFT risks. Kateryna holds a PhD in Political Science from the National Academy of Science in Ukraine and a Master in Comparative and International Studies from ETH Zurich.
https://baselgovernance.org/about-us/people/kateryna-boguslavska
