The latest edition of a global, data-driven index grading countries’ financial crime vulnerabilities, now with the ability to infuse more precise implementation data from a powerful, international standard-setting body, has resulted in nearly a dozen countries falling lower in the rankings.
The index’s overall, composite score is a weighted average of 14 indicators from various publicly available sources such as the Paris-based Financial Action Task Force (FATF), which sets the global anti-money laundering (AML) agenda, Transparency International, the World Bank and the World Economic Forum, other groups and internal analyses. The report can be accessed here.
The current top 10 riskiest regions on the 2016 Basel AML Index remain mostly unchanged from the prior year, and crown countries including Iran, Afghanistan, Tajikistan, Cambodia and Myanmar as representing the highest risks of financial crime. Specifically tied to their FATF scores, countries including Norway, Australia, Belgium and Italy fell, while only Spain, Armenia and Costa Rica rose.
Conversely, Finland, Lithuania and Estonia remained the lowest risk regions in 2016, similar to their prior rankings. The greatest improvements since 2015 have been made by Kuwait, Ecuador, Seychelles and Albania. This is the fifth iteration since the creation of the Index in 2012.
The 2016 Basel AML Index scores “illustrate… that high-income countries including large financial centers have not been able to demonstrate significant progress in these areas,” according to Selvan Lehmann, the project’s manager.
As well, low-income countries, particularly in the Sub-Saharan region, “keep struggling with improving their AML/CTF framework as a whole and suffer from structural vulnerabilities. This explains their relatively high presence in the top third of high-risk countries in the Basel AML index,” he noted, in the report.
More recently, country laws tied to corporate transparency have become the global financial crime focus du jour in the aftershocks of the Panama Papers scandal. The largest data leak in history, tied to Panamanian law firm Mossack Fonseca, revealed how individuals and criminal groups can use shell companies and corporate opacity to move and safeguard illicit assets.
Here is a snapshot of some of the findings in the 2016 Basel AML Index:
- The top 10 countries of highest risk are Iran, Afghanistan, Tajikistan, Guinea-Bissau, Mali, Cambodia, Mozambique, Uganda, Swaziland and Myanmar.
- Finland is the lowest risk country, followed by Lithuania and Estonia.
- The greatest improvements since 2015 have been made by Kuwait, Ecuador, Seychelles and Albania.
- The countries that decreased their scores in 2016 most prominently are Vanuatu, Chile, Sri Lanka, Slovenia, China, Estonia, Serbia and Turkey.
- OECD countries including those with large financial centers such as Luxembourg (5.89), Japan (5.76), Switzerland (5.46), Italy (5.36), Germany (5.33), US (5.17), France (5.03) and UK (4.77) have not demonstrated much progress to improve their rating.
- The 2016 Basel AML Index finds that 59 out of 149 assessed countries have increased their money laundering risk scores since last year. 79 countries improved their ratings but the global average score of money laundering/terrorism financing risk slightly deteriorated. The World average score was 5.82 in 2015 and is 5.85 in 2016 on a scale of 0=low risk to 10=high risk.
Countries face specter of financial ‘de-risking’
The final tallies for countries on the 2016 Basel AML index – and whether it’s perceived the regions are improving or weakening in their fight against financial crime – have taken on greater importance in recent years as large US and international banks have engaged in a broad “de-risking” of customers, products and regions deemed to carry too high a compliance risk.
Overall, countries themselves are under more pressure than ever to retool their laws and bolster implementation mechanics after the FATF updated their 40 recommendations on financial crime in 2012.
As part of a broad bolstering of standards, the group engaged in a major shift of focus in its evaluations, moving from more analysis on technical compliance, such as laws on the books, to the actual effectiveness of the laws, which could inculcate metrics such as if the country is seizing more or less dirty money or dismantling major criminal networks.
The AML Index is developed by the Basel Institute on Governance, through its International Centre for Asset Recovery (ICAR). The institute is affiliated with the University of Basel, with other divisions focusing on corporate and public governance. The index is not associated with the Basel Committee on Banking Supervision.
The current Basel AML Index edition covers 149 countries and assigns each country a score on a scale from 0, the lowest risk, to 10. High-risk scores in the index “generally indicate weak AML/CFT standards, low institutional capacities and a lack of transparency in the financial and public sector,” according to the group.
Effects of FATF effectiveness regime
With the FATF having completed more country-wide mutual evaluations under its new effectiveness regime, a key change in the group’s methodology finalized in 2013, how are those results affecting their AML Index scores? The answer: For more countries than not, the focus on more concrete metrics to halt illicit flows is lowering index scores. FATF findings account for a third of the cumulative index ranking.
Here is a list of the countries that have been assessed by the FATF and saw their scores fall lower, with the bottom three dropping the furthest:
- Trinidad And Tobago
- Sri Lanka
Countries that saw their AML Index scores improve due to the new FATF findings:
- Costa Rica
Concrete metrics, country struggles
More financial institutions are coming to rely on the index as a key indicator, though they must also weave in other data points.
In addition to the country risk, financial institutions will also stir in other risk factors to form an amalgam figure comprised of aggravating and mitigating variables, such as the type of business, products, services, counterparties and partners. Expected and actual transactions passing through the account, and to what other countries they are flowing and their corresponding risk ratings, will also be a factor.
And just as institutions are using more data to come up with more precise risk figures on customers and companies, the AML Index is planning to do the same.
For future countries, when the effectiveness ratings become available from FATF, the group will update the AML index, which is weighing those results heavily. Lehmann noted that effectiveness and enforcement standards account for as much a third or more of the finalized ranking.
With more data coming out on additional countries tied to actual implementation of laws, some countries “are struggling,” Lehmann said, adding that while Italy and Belgium actually improved legislation, their FATF evaluations had worsened from prior years, dropping them overall.
What is somewhat surprising is that some of the most powerful countries in the world, and those that have the economic capacity to improve, really haven’t, he said, while a smaller number of regions are actually improving metrics to show more conclusively “they are adhering to international standards,” he noted.