General Circular 14/2020 regarding the publication of the Basel AML Index 2020 ranking money laundering and terrorist financing risks around the world # Newsletter 08/20
The Basel AML index is published annually since 2012 and it remains the only independent, research-based index by a non-profit organisation ranking countries according to their risk of money laundering and terrorist financing (ML/TF).
The Basel AML Index measures the risk of ML/TF in countries around the world. Risk is defined broadly as a country’s vulnerability to ML/TF and its capacities to counter it. It does not measure the actual amount of ML/TF activity in a country.
Risk scores are based on data from publicly available sources such as the Financial Action Task Force (FATF), Transparency International, the World Bank and the World Economic Forum. They cover 16 indicators in five domains relevant to assessing ML/TF risk at the country level:
- Quality of AML / CFT Framework
- Bribery and Corruption
- Financial Transparency and Standards
- Public Transparency and Accountability
- Legal and Political Risks
The Basel AML Index ranks countries based on their overall scores, capturing the complex global nature of ML/TF risks and providing useful data for comparative purposes. However, the primary objective is not to rank countries superficially in comparison with each other, but to provide an overall picture of different countries’ and regions’ risk levels and their progress in addressing vulnerabilities over time.
The Basel Institute has conducted extensive research in calculating the risk scores following academic best practice. The methodology is reviewed every year by an independent panel of experts to ensure that the ranking is accurate, plausible and continues to capture the latest developments in ML/TF risks.
The Basel AML Index follows the World Bank classification of countries, with an additional separation of Europe and Central Asia into two regions:
• European Union and Western Europe
• Europe and Central Asia
• East Asia and Pacific
• Latin America and Caribbean
• Middle East and North Africa
• North America
• South Asia
• Sub-Saharan Africa
While each country has different risks, we do see particular trends and problem zones in each region that help highlight weak links and areas to address.
Global money laundering risks remain high, with an average in the 2020 Basel AML Index of 5.22 compared to 5.39 in 2019. Few countries are making dramatic progress in addressing these risks. In fact, only six countries improved their risk scores by more than one point. 35 countries went backwards.
Of course, major shifts in global risk patterns cannot be expected from one year to another. What’s interesting, when a phenomenon is stagnant like this, is to really drill deeper into the underlying causes. One area in which countries score poorly across the board is the quality of AML/CFT supervision.
The factors which contribute to ineffective supervision have been identified as follows:
- Limited powers to sanction non-compliance by civil or administrative means. This leaves only criminal prosecution, for which the bar is typically high.
- Limited resources including qualified staff, processes, IT systems and tools.
- Risk-based approach is not applied meaning supervision is not commensurate with the risks and the size of the financial centre and the number and intensity of reviews are not aligned with existing risks.
- Poor coordination between competent authorities on supervision, with individual agencies focused only on their sectors.
- Insufficient guidance on ML/TF risks provided by supervisory body to reporting entities.
The example of analysing the quality of supervision and its role with respect to the overall effectiveness of AML/CFT systems is also very pertinent to demonstrate that numbers should never be taken at face value. Policymakers and analysts will need to consider features of the FATF methodology (including for effectiveness) before drawing conclusions. In addition, they need to look not only at the overall scores or at individual sub-indicator scores, but also at how the scores in different sub-indicators relate to each other and may mutually influence each other.
By way of example, the data shows that jurisdictions that are scoring well with respect to the effectiveness of supervision often score poorly in the category political and legal risks. What does that mean for the quality and manner in which the supervisory regimes operate and are executed?
Another comparison which could be looked at, again at the level of sub-indicators and their interrelation, is that countries that score poorly on political and legal risks often score quite strongly with respect to the effectiveness of their AML/CFT regimes, especially in terms of case numbers and sanctions.
In other words, where countries score at highly opposite ends of the spectrum on certain sub-indicators, we need to look beyond the overall score in order to make sure we draw the right conclusions and, as a consequence, are promoting the right reforms to further advance that country’s AML/CFT performance.