Basel AML Index 2021: An ounce of prevention worth a pound of effectiveness when it comes to countering criminals, championing compliance

The Skinny:

  • A global index on financial crime risks has issued its annual rankings, with the diminutive European principality of Andorra, taking the top spot, while the besieged and beleaguered Caribbean Island of Haiti, got the worst score.
  • But there are some nuances in the 10th Annual Edition of the Basel Anti-Money Laundering (AML) Index. Overall, the index noted that, broadly, countries are getting worse at effectively countering and preventing the trillions of dollars in illicit finance flowing around the world each year.
  • Why? That is chiefly due to four overarching challenges: weak or non-existent compliance rules around cryptocurrency, not preaching on prevention and foundering on effectiveness, failing to boost beneficial ownership and tackle corporate opacity and continuing to leave certain non-bank groups unbound by AML rules, like gatekeepers. 

By Brian Monroe
bmonroe@acfcs.org
September 17, 2021 

A global index on financial crime risks has issued its annual rankings, with the diminutive European principality of Andorra, taking the top spot, while the besieged and beleaguered Caribbean Island of Haiti, got the worst score.

There are some nuances in the 10th Annual Edition of the Basel Anti-Money Laundering (AML) Index. Overall, the index noted that, broadly, countries are getting worse at effectively countering and preventing the trillions of dollars in illicit finance flowing around the world each year.

Why?

That is chiefly due to four overarching challenges: weak or non-existent compliance rules around cryptocurrency, not preaching on prevention and foundering on effectiveness, failing to boost beneficial ownership and tackle corporate opacity and continuing to leave certain non-bank groups unbound by AML rules, like gatekeepers.

Running parallel to these perennial challenges, Basel, along with other watchdog groups and jurisdictions is focusing more on effectiveness and results when it comes to country countercrime efforts.

But as more countries get graded under the stronger standards, the gap between regulations and results has only widened.

“It is disappointingly common for countries to score highly on technical compliance but poorly – or even zero – in terms of effectiveness,” according to Basel, adding that in other words, “countries may have state-of-the-art [anti-money laundering/countering the financing of terrorism (AML/CFT)] systems that don’t in fact work.”

Much of the data that forms the heart of the index’s rankings come from recently updated Financial Action Task Force (FATF) Mutual Evaluation Reports (MERs), making up 35 percent of a country’s risk score, with other groups factored in, including Transparency International, the World Bank and the World Economic Forum.

The composite score is aggregated by analyzing more than a dozen indicators of countries’ adherence to anti-money laundering and countering the financing of terrorism (AML/CFT) regulations, levels of corruption, financial standards, political disclosure and the rule of law – as well as, more recently, concrete metrics of effectiveness.

The Paris-based global watchdog group refreshed its methodology in 2013 to give a greater weighting to effectiveness, think assets forfeited and large cases crushed, rather than technical compliance, or laws on the books.

This poor performance in effectiveness typically causes countries to “drop down the Basel AML Index rankings as they undergo FATF fourth-round evaluations, affecting comparability between countries.”

The five worst in 2021:

  • Haiti
  • Dem. Rep. of the Congo
  • Mauritania
  • Myanmar
  • Mozambique 

The five worst in 2020:

  • Afghanistan*
  • Haiti
  • Myanmar
  • Laos*
  • Mozambique*

The asterisks for the 2020 rankings indicate those countries had not yet been graded by FATF on effectiveness.

As well, some perennial bottom dwellers have not made the list in recent years, including Iran and North Korea, because they don’t participate in FATF reviews, technical compliance or effectiveness.  

The five best countries for 2021:

  • Andorra
  • Finland
  • Cook Island
  • Slovenia
  • Norway 

The five best countries for 2020:

  • Belgium
  • Macedonia*
  • United Kingdom
  • Grenada*
  • Iceland 

The best of the best, the worst of the worst: tanking rankings equal rising risks

While country risk is just one of many risk strata fincrime compliance professionals must inculcate into individual and company risk rankings, it can have an enormous effect on alert management and investigator resources.

Some banks in recent years have become so fearful of exposure to more stringent regulatory scrutiny – and the specter of fincrime compliance penalties that have soared into the billions of dollars – that they have engaged in a trend of jurisdictional de-risking, where they drop physical and correspondent ties to entire regions.

The five worst countries in 2021: Haiti, Dem. Rep. of the Congo, Mauritania, Myanmar and Mozambique. The five countries with the least fincrime compliance risk in this year’s index: Andorra, Finland, Cook Island, Slovenia and Norway.

The five worst in 2020: Afghanistan*, Haiti, Myanmar, Laos* and Mozambique*. The five best countries for 2020: Belgium, Macedonia*, United Kingdom, Grenada* and Iceland.

For the 2019 version of the AML Index, the worst countries for money laundering risk were Mozambique, Laos, Myanmar, Afghanistan and Liberia. Estonia, Finland, New Zealand, Macedonia and Sweden have the best scores on the latest index.

In the 2018 rank, Tajikistan was the top country for money-laundering risk, according to the index, followed by Mozambique, Afghanistan, Laos and Guinea Bissau. The lowest-risk countries, according to the index for that year, were Finland, Estonia, Lithuania, New Zealand and Macedonia.

In 2017, the 10 countries with the highest AML risk were Iran, Afghanistan, Guinea-Bissau, Tajikistan, Laos, Mozambique, Mali, Uganda, Cambodia and Tanzania. Conversely, in 2017, the three lowest risk countries were the same as the prior year: Finland, followed by Lithuania and Estonia.

Quad-rant: the top four reasons countries are struggling to conquer AML, prevent felonious funding

But as in any ranking divined from a diverse delineation of data sources, numbers don’t always tell the full story.

There are several core fulcrum points causing many regions to remain inured in the quagmire of toothless laws, ineffective regulations and regulators and failing to fully arm law enforcement against ever more creative and aggressive criminal syndicates laundering money in the real and virtual worlds.

The four overarching challenges, according to Basel:

  • Crypto compliance: Lax or non-existent rules covering virtual assets and related exchanges. This has been a challenge for countries large and small, with some countries categorizing crypto coins as an asset, others a security, and still others a form of value akin to fiat currency.
  • There are also technical and technological challenges when trying to link the actual users of “pseudo anonymous” virtual value to transparent, immutable blockchain. The most high-profile virtual asset and provider initiative is FATF’s “Travel Rule.”
  • Enforcement vs. prevention: Failing to not just enforce compliance requirements, but actually prevent money laundering.
  • This year’s edition went into greater detail on the widening gap between technical compliance and effectiveness – and the further layer that the ultimate expression of effectiveness is actually seeing less illicit finance flowing through a given region – the pinnacle premonition of prevention.
  • Battling corporate opacity: Stamping out beneficial ownership blindspots and boosting corporate transparency. This has been a longstanding, stubborn bastion for criminal groups of all stripes, including narco cartels, oily oligarchs and terror financiers.
  • Many countries, including the United States, Europe, the United Kingdom, have taken aim by requiring data on the live, human decision-makers behind corporates be captured and, in some cases, memorialized in public databases and registries.   
  • Non-financial sectors, guarding gatekeepers: Failing to capture gatekeepers – like attorneys – with AML rules has in some recent cases allowed them to become professional enablers for money laundering tied to illicit entities and conduits to cleanse the proceeds of grand corruption.  
  • In addition, some countries have dragged their feet, leaving out certain designated non-financial businesses and professions and non-financial entities (DNFBPs), such as accountants and company formation agents – groups with power and opportunity to cook books and shill shell companies. 

High scores, based on a 10-point scale, indicate a country is more vulnerable to money laundering – and the latest edition reveals more countries are at a greater risk for money laundering.

The average global money laundering risk score “increased from 5.22 to 5.3 out of 10, as assessed across all 110 jurisdictions” in the last edition of the index. “Even among jurisdictions whose risk scores improved this year, none managed to improve by even one point out of 10. Half of improvements were 0.3 of a point or less.”

That begs the question: Is there any sign of improvement in the figures for 2021, particularly tied to the most important metric of all: effectiveness?

Not really.

“Based on the latest FATF data, the average score for effectiveness across all assessed jurisdictions is only 30 percent,” according to the index. “That is two times lower than the average score for technical compliance with FATF Recommendations, which stands at 64 percent.”

Andorra, at the top, not as clean as you think, with recent high-profile bank designation

The latest edition of the index, as in past years, is a heavily data-driven exercise with immense value for fincrime fighters.

But its rankings don’t always line up neatly with reality, a microcosm of the sector as a whole which is deeply dependent on the always subjective area of human decision-making, informed by an amalgam of country, transaction, rising and receding risks.

For instance, even though the index lauded Andorra, the tiny independent nation has a decidedly checkered past when it comes to major money laundering scandals.

Firstly, watchdog groups for many years considered it a tax haven, with Portugal in January of this year finally dropping it from a tax haven blacklist.

Prior to that, in 2015, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) named the now defunct Banca Privada d’Andorra S.A. (BPA) a “primary money laundering concern,” effectively making it radioactive to the international financial system.

Investigators alleged BPA had helped a host of organized crime groups from Venezuela to China launder an estimated billions of dollars. The day after the designation, Andorran law enforcement authorities seized the bank and later liquidated its accounts.

Haiti, at the bottom, not the worst due to a lack of will, but a lack of capacity, punishing poverty

For Haiti, that it again, in some or other ranking, is again the best at being the worst really feels like kicking a country when it’s down.

For perspective, more money is laundered in the world’s major financial centers, including the United States, Europe and United Kingdom.

The issue with Haiti is that it is beset by so many challenges at the same time – chronically – and then those get further punctured by horrific natural disasters.

Over the last decade, in 2010 and as recently as last month, Haiti has been hit with devastating earthquakes as high as 7.2, which “destroyed much of its capital city, Port-au-Prince, and neighboring areas,” according to Know Your Country, which also reviews countries from a fincrime compliance perspective.

That already exacerbated a situation where Haiti had little capacity to prioritize, craft and implement AML laws and investigate or enforce them.

Haiti’s stability eroded even further with a foreign group assassinating the president in July. 

The country is currently the poorest in the Western Hemisphere, with 80 percent of the population living under the poverty line and 54 percent in abject poverty, according to Know Your Country.

Those struggles have also been highlighted by global counter-crime sentinel FATF, which in June placed Haiti on a grey list of countries under increased monitoring to counter money laundering and terrorist financing, joining Malta, the Philippines and South Sudan.

The desperation of the people of Haiti has reached a breaking point in recent weeks, as some 13,000 thousand migrants trekked through Mexico to a border crossing in Del Rio Texas, eventually camping under a bridge.

U.S. authorities are currently engaged in a mass expulsion program to ferry the migrants back to Haiti, according to news reports, even as authorities on the other end of the spectrum work to absorb thousands of Afghans fleeing the country after the takeover of the Taliban.  

Composite ranking snapshot: What does the Basel AML Index measure?

The Basel AML Index is an independent annual ranking that assesses the risk of money laundering and terrorist financing (ML/TF) around the world.

Published by the Basel Institute on Governance since 2012, it provides risk scores based on data from 17 publicly available sources, such as the Financial Action Task Force (FATF), Transparency International, the World Bank and the World Economic Forum.

The risk scores cover five domains:

  • 1. Quality of ML/TF Framework
  • 2. Bribery and Corruption
  • 3. Financial Transparency and Standards
  • 4. Public Transparency and Accountability
  • 5. Legal and Political Risks

The Public Edition of the Basel AML Index 2021 covers 110 countries with sufficient data to calculate a reliable ML/TF risk score.

Data requirements this year have been raised to include at least a fourth-round FATF Mutual Evaluation Report, which measures effectiveness as well as technical compliance with the FATF’s AML/CFT standards. 

FATF has been engaging in multiple rounds of member country reviews, with tightening expectations and updated standards, with the latest, the fourth round, fully done under the bolstered focus on effectiveness and results. 

By combining these data sources, the overall risk score represents a holistic assessment addressing structural as well as functional elements of the country’s resilience against ML/TF.

The scores are aggregated as a composite index using a qualitative and expert-based assessment in order to form the final country ranking.

Getting less effective at effectiveness, not practicing, preaching prevention

While many countries have not faced the same herculean challenges as Haiti, and even acknowledging that regions the world over have struggled to move forward on counter-crime initiatives during a pandemic-pummeled 2020 and 2021, the numbers in the latest index reveal jurisdictions are largely less effective at being effective.

Ideally, as countries get better at crafting and enforcing stronger laws, that allows law enforcement to build more and better cases, feeding prosecutors to take down larger organized criminal networks – with the final end result being threat actors launder less money in a region: a dynamic that leads to actually preventing money laundering.

But that is not what is happening.

Based on an analysis of 112 jurisdictions assessed with the fourth-round methodology by 15 July 2021, the data shows that “jurisdictions are less effective at preventing ML / TF than at enforcing AML /CFT measures.”

And this is in a context where performance for enforcement is unsatisfactory already.

  • Globally, average effectiveness for prevention was 27%, compared to 31% for enforcement.
  • Nineteen jurisdictions (17%) scored zero for the effectiveness of their preventive measures, compared to 12 jurisdictions (11%) for enforcement.
  • Nine jurisdictions demonstrated zero effectiveness in both prevention and enforcement criteria. These are: Cape Verde, Democratic Republic of the Congo, Haiti, Mali, Mauritania, Mozambique, Pakistan, Uganda and Vanuatu.
  • The UK and Spain are the only jurisdictions assessed so far to achieve scores of 67% or above for both prevention and effectiveness criteria.

“A regional perspective shows some variation, but the same overall story: When it comes to money laundering, jurisdictions seem to be more effective at enforcement than prevention,” according to the index.

“These findings should ring an alarm bell for policy makers. Jurisdictions should invest more resources in the prevention of ML/TF, without reducing resources for enforcement, because a fire contained is always better than an arsonist caught when the house has burnt down.