Basel AML Index 2022: Global fincrime progress stalling, falling in more areas than rising as minor improvement in compliance frameworks outpaced by surging corruption, corporate opacity, political chicanery

The Skinny:

• An annual index ranking global fincrime compliance efforts has concluded that, overall, progress has ground to a halt – and in too many areas may be retrenching as cagey criminals continue to be nimbler than the investigators, legislators and regulators trying to stop them.
• At issue: meager improvements in upgrading rules and understanding regional risks have been overwhelmed by the sheer magnitude of corruption, fueled in many cases by a lack of financial and corporate transparency and the ease of crafting shell companies with impenetrable and inscrutable ownership structures.
• Those are just some of the takeaways of the 11th Public Edition of the Basel AML Index, released Tuesday. What also should give regulators and investigators pause in the latest index is that the much-ballyhooed shift in many countries from making more laws to actually enforcing them – effectiveness – has yet to take root.

An annual index ranking global fincrime compliance efforts has concluded that, overall, progress has ground to a halt – and in too many areas may be retrenching as cagey criminals continue to be nimbler than the investigators, legislators and regulators trying to stop them.

At issue: meager improvements in upgrading rules and understanding regional risks have been overwhelmed by the sheer magnitude of corruption, fueled in many cases by a lack of financial and corporate transparency and the ease of crafting shell companies with impenetrable and inscrutable ownership structures.

Those are just some of the takeaways of the 11th Public Edition of the Basel AML Index, released Tuesday.

“When it comes to tackling dirty money, most countries are taking one step forward and four steps back – and remaining too many steps behind criminals seeking to launder illicit funds,” according to the 50-plus-page Anti-Money Laundering (AML) index.

Eleven years since the first publication of the Basel index – a leading independent ranking of money laundering and terrorist financing (ML/TF) risks in countries around the world – progress in anti-money laundering and counter terrorism financing (AML/CFT) remains, in a word: paralyzed.

A diminutive decrease in risks relating to the quality of AML/CFT frameworks has been offset by increased risks in the other four areas measured by the Basel AML Index: corruption, financial transparency, public transparency, and political/legal risks.

What does this mean on the ground?

More governments are realizing they need to be a partner, not adversary, with private sector banking groups – the tacit tip of the spear in the fight against money laundering.

This has allowed law enforcement to better guide institutions on the rising, and shy away from the receding, risks posed by organized criminal groups, grand corruption, terror finance and more aggressive cyber-enabled fraudsters.

Even so, this isn’t enough.

Because just as illicit networks operate and move funds internationally, countries also must better band together to see that seemingly disparate and far-flung transactions and entities are pumping organs part of the same diseased corpulent criminal body.

As criminal groups jump to virtual worlds, value, countries struggle to follow

Moreover, in some of the newer and more nascent areas of finance, such as virtual value, average compliance levels are falling, according to the index.

“This is a worrying development considering the speed at which criminals are embracing new technologies to commit crimes and launder money,” the group said.

“In areas where criminals are moving fast and innovating, authorities are dragging their feet. The crypto sphere is one: average levels of compliance with international standards on risks from virtual assets are dropping dramatically as more countries are assessed.”

What also should give regulators and investigators pause in the latest index is its sobering realization that the much-ballyhooed shift in many countries from making more laws to actually enforcing them – effectiveness – has yet to take root.

“The gap between technical compliance with standards and the effectiveness of measures in practice is widening,” according to the index. “The growing disconnect is especially concerning when it comes to key weak spots such as beneficial ownership transparency and the quality of supervision.”

Those weaknesses have been highlighted in recent high-profile investigations, enforcement actions and regulatory statements.

Investigative agencies in the United States, United Kingdom and Europe in recent months, ratcheting sanctions higher against Russia for its invasion of Ukraine, highlighted how corporate opacity enable Russian oligarchs and Putin cronies to amass massive secretive fortunes – with luxury homes, boats and assets aplenty in these countries.

In this year’s edition, Basel also tried to extend analysis to more regions.

This year it was able to include a total of 128 jurisdictions – 18 more than last year – as more countries were assessed under the latest FATF mutual evaluation methodology.

But AML is more than just reporting on potential illicit acts and actors – it is also about protection, people and the environment.

The latest addition of the index has inculcated a new data point: an indicator of environmental crime.

Such a move occurs as more financial institutions – and corporates more broadly – champion environment, social and governance (ESG) initiatives in a bid to prove to customers and investors they care about “green” causes, social justice efforts and compliance and counter fraud controls.

Giving more weight to effectiveness: The interplay of risks, rules and results

While environmental details are a welcome addition, the AML index, as it has done in the past, gives the greatest weighting of a country’s efforts from the most influential body in the field – the arbiter of global AML standards.

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 (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.”

Five years of risk mapping: Some of the names have changed, but the song remains the same

The annual Basel AML Index exercise is a powerful resource to add more detailed backend metrics and methodologies to the more esoteric concepts of low, medium and high-risk regional rankings – something banks must do themselves regularly.  

For fincrime compliance professionals, there are few surprises here – at least when looking at many of the countries that have been historical cellar dwellers.

These countries have struggled for decades for a variety of reasons, including lack of capacity, weak rule of law, poverty, corruption, poor government and fiscal management, decreasing foreign direct investment (FDI), natural disasters, terror attacks, rebellions and military attacks.

In the 2022 index, many of the best of the worst are similar to last year, with the basement occupied by the Congo, Haiti, Myanmar, Mozambique and Madagascar.

Conversely, Nordic and Baltic banking scandals, a reputation as a historical secrecy haven and a top official at one of the country’s largest banks going on trial for fincrime compliance failings has done little to tarnish the sheen of the top ranked regions.

The five best countries in 2022: Finland, Andorra, Sweden, Iceland and New Zealand.

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.

Here are some snapshots of prior years:

2021

• 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 last year’s index: Andorra, Finland, Cook Island, Slovenia and Norway.

2020

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

2019

• 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 2019 index.

2018

• 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.

2017

• 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.
• Editions in recent years have gone 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.

A very depressing decade for AML: little progress overall, ebbing on effectiveness

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.

Over the last 11 years since the Basel AML Index was first published, the average global risk of money laundering has “changed depressingly little,” the group said.

“This year is no exception, with the average risk level decreasing by a negligible 0.05 percent to 5.25 out of 10, where 10 is the maximum risk level. The big picture is clear: we are not seeing significant progress in tackling money laundering at the global level.”

That begs the question: Is there any sign of improvement in the figures for 2022, particularly tied to the most important metric of all: effectiveness?

Not really.

In the latest index update, the gap between effectiveness and technical compliance is growing.

“The effectiveness of AML/CFT measures across all countries fell further in 2022, from its already low level of 30% last year to 29%,” the group said.

“That is less than half the average score for technical compliance with the FATF Recommendations, which stands at 66% in 2022 (up slightly from 64%).”

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

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.

So are the countries with the worst scores laundering the most money?

Knowing what countries are weaker or stronger at AML is, indeed, a vital endeavor – but these regions must also be viewed through the lenses of context and perspective and a bit of healthy skepticism.

The irony of regional fincrime grades: the countries laundering the most money are not those with the worst scores.

As in most initiatives driven by rigorously analyzed, scrutinized, weighted and debated figures and rankings, when you pull back to see the big picture, there is a persisting irony to the index: the countries with the worst scores are not the countries laundering the most money.

While, yes, it might be easier to launder money in Haiti or Mozambique, that is not where organized criminals, corrupt politicians, Russian oligarchs and sanctions evaders go to move and legitimize their illicit hoards.

They go to the U.S. They go to the U.K.

They go to Europe, the Nordics, Baltics and the like.

The reason: these countries have the most stable, international and trusted banking networks in the world.

If a criminal group can fool a bank in the U.S. by getting an account for its shell company, it can eventually support networks nearly anywhere.

With this dichotomy as a backdrop, the latest index has sparked some heated debate about its findings, conclusions and overall usefulness for fincrime fighters, including on social media.

Getting rankled by rankings: too much number crunching, playing politics?

To read the full post on the pros and cons of the AML index by Anna Stylianou, a fincrime compliance consultant, trainer and former AML officer with more than 20 years of experience, and be part of the discussion, click here.

“Yet more pointless repetition of the Transparency ‘Intentional’ style of playing geo-political identity politics,” said Ian Ross, an author, consultant and former police officer with more than 30 years of experience in investigations, compliance and financial forensics, in the post.  

“Definition-crunching and banal recycling of FATF and other’s ‘recommendations’ repackaged into a glorified neo-con league table.”

A critical persisting irony: one of the countries in the world where the most money is laundered is seemingly perceived as less risky, he said.

“The UK is ‘low risk’ in this goofy politically motivated index, with its kindergarten map,” Ross said. “This is not only laughable but seriously misleading. Did anyone at Basel Fawlty read the data and reports that make London the money laundering capital of the world? Evidently not. Pointless and not to be taken seriously.”

The index must also be careful not to give too much credit to countries that get high marks for rules, enforcement and prosecution.

That is if the country is also a money laundering capital of the world, said Nicholas Gilmour, a fincrime compliance consultant, teacher, author and former police officer

“I’m not suggesting it’s an easy task, nor have I given it much thought as to how such an index could be achieved,” he said.

“What I have concluded quite quickly is that it’s not actually necessary – it serves no unified purpose,” Gilmour said.  

Moreover, the index could cause some struggling regions to lose hope.

“It perhaps does more harm than good, promoting some countries to continue down a path of arrogance in their approach and suppresses others into believing they are useless,” he said.

Still, for people working as AML officers, they “need some guidance when assessing countries,” Stylianou said, noting that beyond FATF grades there are a bevy of government and private-sector watchdog groups that review and rank countries for transparency, corruption, compliance controls, drug and laundering predilections.

The findings in those reports infuse and inform the AML index.

While also complex, what could benefit further iterations of the AML index is if it also measured “the money laundering and terrorist financing activity in a country,” against its controls, she said.

The potential result: giving a more accurate picture of what criminals are going to which countries to launder the most money, Stylianou said.

The rest of the story: Countries need to be graded on if their efforts are preventing money laundering – pushing criminals elsewhere

Here was my Monroe’s Musings response:

Rarely, if ever, does anyone ever compare something like the quality of AML, fraud fighting and counter-corruption rules to the number of cases, convictions and assets frozen — PLUS, if the amount of money laundered in that region is going up or down.

What do I mean by this?

The U.S., U.K. and broadly, EU, typically get very high marks for AML rules, enforcement penalties and, in some cases, investigations.

But the rest of the story: These are the countries where most of the world’s money is laundered.

Shouldn’t it work like this: A country is bad, it launders a lot of money. The country improves AML, stops lots of bad guys. Bad guys go to jail. Bad guys lose their money. Bad guys leave that region and launder money somewhere else.

Ironically, the BEST case is that a country’s AML and law enforcement teams are SO good, the cases go DOWN, the money seizures go DOWN, the amount of money laundered goes DOWN.

This means, your entire AML regime has gone from DETECTION, to INVESTIGATION to, the goal: PREVENTION. I don’t think we really talk enough about these issues in those terms.