Interesting article on the latest Basel 2015 AML Index and the impact of FATF standards on country evaluation. Calls made for the group to take ‘a “holistic approach to the risks of money laundering and terrorist financing,” such as including the perception of corruption and the general transparency of a country’s financial sector and even a region’s freedom of the press and the liberties of its civil society groups’.
The latest iteration of an influential index grading countries’ financial crime vulnerabilities, now with the ability to weave in richer data on implementation of laws from the Financial Action Task Force (FATF), has resulted in some countries falling lower in the rankings.
The current top 10 riskiest regions on the 2015 Basel AML Index remain mostly unchanged from the prior year, and crown countries including Iran, Afghanistan, Mali, Mozambique and Myanmar as representing the highest risks of financial crime. Finland and Estonia remained the lowest risk in 2015. This is the fourth iteration since the creation of the Index in 2012.
The index’s overall, composite score is a weighted average of 14 indicators from various publicly available sources such as the Paris-based 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 final tallies for countries on the 2015 Basel AML index – and whether it’s perceived the regions are improving or weakening in their fight against financial crime – have taken on even 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.
At the time same, 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 2013.
As part of a broad strengthening of standards, the group engaged in a tectonic shift of focus in its evaluations, moving from centering much of its analysis on technical compliance, such as laws on the books, to the actual effectiveness of the laws, which could scrutinize metrics such as if the country is slowing the movement of illicit funds, seizing more 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 152 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.
Tougher standards, new data prompt countries to improve AML rules
Since the inception of the project three years ago – and coinciding with the FATF revamping and heightening its standards in 2013 and putting a greater focus on effectiveness – there has been growing momentum toward more countries adapting stronger rules against financial crime and ensuring the improvements are not just on paper, said Selvan Lehmann, the project’s manager.
“There is general trend for many countries to have improved scores due to implementing and adopting new legislation more harmonized with international standards,” and the updated requirements, he said, noting that countries don’t want to be judged too harshly when FATF evaluators are on the ground in the new round of assessments.
Interestingly, of the five countries that have been evaluated by FATF under the new standards and had their results published – Australia, Belgium, Ethiopia, Norway and Spain – they saw their AML index scores drop, chiefly due to the now available details on the true effectiveness of laws against a broad array of financial crimes, Lehmann said.
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.
A good source of regional risk data, but more inputs needed
More regionally, the index ranks Tajikistan, Ukraine and Russia as some of the highest risk countries in Europe and Central Asia, while Luxembourg, Greece and Germany have the highest risks among EU member states. Iran, Yemen and Lebanon are the highest risk countries in the Middle East & North Africa region.
The index, however thorough and rigorous, is “not the answer for any one bank in any one activity, but is part of the mix of calculating a bank’s risk of doing business in a country,” said Alma Angotti, a managing director in the Washington, D.C. office of Navigant, a consulting firm.
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 and expected and actual transactions passing through the account and to what other countries and their corresponding risk ratings, she said.
Even so, the AML index is widely utilized as the group putting it together is “very respected, with a lot of knowledge,” Angotti said
The index can be a critical data point for financial institutions looking to defend extra spending to mitigate risk, or regulators inquiring why monitoring protocols in a given region were pulled back, she said.
It’s also not surprising that FATF effectiveness scores can drop a country’s score in the index. Those details are a key bellwether of the true commitment a country has to fighting financial criminals and holding banks accountable for failings in programs and controls, she said.
“When it comes to effectiveness, [institutions, regulators and watchdog groups] are looking at as much information as possible from as many sources as possible” to get the most accurate, relevant and timely data, said Angotti.
Index reveals higher country crime risks linked to anemic income, lax laws
Some interesting rankings in the index include Mexico being better than Canada, and Peru ranking better than the US and UK, said Angotti, who has more than 25 years of regulatory practice experience through senior enforcement positions at the Securities Exchange Commission, FinCEN and the Financial Industry Regulatory Authority, the securities’ sector’s chief self-regulatory body.
The greatest improvements from the previous 2014 edition have been made by Azerbaijan, Cambodia, Spain, Tunisia, Turkey and United Arab Emirates. The countries that significantly worsened their scores in the latest index are Guinea, Guatemala, Jamaica, and Montenegro.
The latest data in the index illustrates that the risk of money laundering and terrorism financing is “particularly high in low-income countries with inadequate anti-money laundering legislation and structural and functional vulnerabilities such as high rates of perceived corruption, lack of judicial strength and lack of public and financial transparency.”
Even so, the index reveals that in some cases, several high-income and known financial centers perform only with “average scores when it comes to addressing risks of money laundering,” according to the group, which describes itself as the only research-based rating of country money laundering/terrorist financing risk by an independent non-profit institution.
The new list does have some other changes from the prior years.
A dozen countries were removed from the list compared with last year’s addition due to insufficient data: Bahamas, Belarus, Brunei, Comoros, Djibouti, Kosovo, Maldives, Syria, Sudan, Togo, Iraq, and Oman. Conversely, two countries, Ethiopia and Rwanda, were added.
Nearly 80 entities, including large companies, financial institutions and central banks, have come to rely on the index, subscribing to a more rigorous paid version, Lehmann said.
True risk figure tied to corruption perceptions, liberties and transparency
Accurately calibrating risk for a financial institution is “very complicated,” he said, as those results will inform what entities need enhanced due diligence procedures, which draw on more compliance resources.
“Some financial institutions have to gauge transaction risk, business risk and product risk and do that for each country, and can struggle to do that, particularly smaller and medium-sized institutions,” which may not have access to sophisticated automated systems or vendor programs, Lehmann said.
The index has been a boon to such operations, he said, adding that beyond data driven points, the country rankings are reviewed by a panel of experts to ensure, as much as possible, that some countries which are clearly more at risk for financial crime are raised or lowered to their appropriate risk strata.
Knowing the pressure financial institutions are under to get risk ranking right, it’s critical the group takes a “holistic approach to the risks of money laundering and terrorist financing,” such as including the perception of corruption and the general transparency of a country’s financial sector and even a region’s freedom of the press and the liberties of its civil society groups, Lehmann said.
“We have tried to create a balanced score that is not just based on a single issue, but related to the country’s general vulnerabilities to money laundering. That is important because typically there is no hard data available about the amount of money laundering going on in a country by organized crime groups because so much would be black figures.”
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