Resource Alert: Ranking AML/CFT risks around the world
Wednesday, September 4, 2019 at 8:08AM
Gretta Fenner and Kateryna Boguslavska in AML, Basel Institute on Governance, CFT, anti-money laundering, counter financing of terrorism

Just because a country has a law -- or a company has a compliance system, for that matter -- it doesn't automatically mean it works or is put to work. And so it is with countries’ anti-money laundering and counter financing of terrorism (AML/CFT) systems, in which this year’s Basel AML Index has recorded a spectacular lack of progress.

A big problem, it seems, is that when it comes to AML/CFT, technical compliance and effectiveness rarely go hand in hand. Take the Pacific offshore jurisdiction of Vanuatu. Its AML/CFT system meets most of the FATF’s recommendations at a technical level. This means the required laws and institutions are in place.

Yet when it comes to effectiveness -- measured according to FATF’s 11 “Immediate Outcomes” -- Vanuatu scores zero. And it is not the only country. The Seychelles and Myanmar score just 3 percent; Botswana and Cambodia 6 percent. This same disappointingly low level of effectiveness kicked China, Colombia, Latvia and Lithuania way down the rankings in this year’s Basel AML Index.

The FATF only started assessing the effectiveness of AML/CFT systems in 2013 when it kicked off its fourth round of evaluations. As a growing number of countries are evaluated with this methodology, we are watching them plummet down the rankings.

What's going on? Have some countries been focused on ticking the boxes and hiding the loopholes with paperwork? There is a case to be made for this, yes, though there are of course significant variations. Some governments are making a genuine effort, while others are not even ticking boxes.

For example, the international community calls repeatedly for greater transparency of beneficial ownership. Yet analysis of FATF data shows that on average, technical compliance in this area is only just over 40 percent and effectiveness is a paltry 23 percent. Continued lack of transparency of beneficial ownership undermines any government’s claim to be serious about preventing and combating money laundering.

But there are glimmers of hope: Indonesia and Tajikistan, for example, managed to buck the trend and lower their risk ratings in the Basel AML Index this year thanks to a more favorable FATF evaluation. And we -- ever hopeful -- do expect that more governments will come to understand the negative impact on their economies of doing poorly in the FATF evaluations, and, by extension, the Basel AML Index. 

Because it is bad for (good) business to be seen as a good place to launder illegal money.

The discrepancy between compliance and effectiveness may also go some way to explaining what has been puzzling many of us: why countries and companies we all thought were quite safe have recently become embroiled in high-profile money laundering scandals. We may well have looked at the wrong or insufficient data until now. 

What can those in charge of analyzing the risk of money laundering and terrorist financing in particular countries do? Well, we strongly suggest that taking a close look at the FATF Mutual Evaluation Reports helps.

First and foremost, to see whether the country has already been assessed according to the latest methodology. And then to see what that evaluation says about the effectiveness of AML measures and not just their technical compliance.

Secondly, look more widely at other components of money laundering or terrorist financing risk. The Basel AML Index includes indicators of corruption, financial standards, public transparency and legal and political risks. Companies should do the same in order to gain a fuller picture of the country’s risk exposure.

Thirdly, scan for red flags associated with client and transaction/service risks, such as high numbers of non-resident legal persons and shell companies, or reports of illicit trading schemes. Check which other countries are involved.

It is nothing new, but it is worth reminding ourselves: when evaluating an AML system, we should beware of paper tigers and be sure to check for the teeth.

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Gretta Fenner, pictured above right, is the Managing Director of the Basel Institute on Governance, where she also holds the position of Director of the Institute’s International Centre for Asset Recovery. She is a political scientist by training and holds bachelor’s and master’s degrees from the Otto-Suhr-Institute at the Free University Berlin, Germany, and the Paris Institute for Political Science (Sciences Po), France. She also holds an MBA from the Curtin University Graduate School of Business, Australia. 

Dr. Kateryna Boguslavska, above left, is Project Manager for the Basel AML Index at the Basel Institute on Governance. A political scientist by trade, she holds a PhD in Political Science from the National Academy of Science in Ukraine, a master’s degree in Comparative and International Studies from ETH Zurich as well as a master’s degree in Political Science from the National University of Kyiv-Mohyla Academy in Ukraine. Before joining the Basel Institute, Katya worked at Chatham House in London as an Academy Fellow for the Russia and Eurasia program.

Article originally appeared on The FCPA Blog (https://www.fcpablog.com/).
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