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Basel Index finds slippage in AML efforts

Joe Mont | August 3, 2016

It is a top ten list that no country should want to be on.

Each year, the Basel Committee on Banking Supervision, an international consortium that develops banking standards, issues the “Basel AML Index,” an annual ranking of country risk regarding money laundering/terrorism financing. The report focuses on anti-money laundering and counter terrorist financing (AML/CTF) frameworks and other related factors, including financial transparency and judicial strength.

Released in late July, the fifth edition of the index offers an overview of 149 countries according to their risk level in money laundering/terrorist financing using public sources and third party assessments. A total of 14 indicators that deal with AML/CFT regulations, corruption, financial standards, political disclosure and rule of law are aggregated into one overall risk score.

The ranking also takes into consideration guidance and best practices promoted by the Financial Action Task Force, an inter-governmental body that promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing, and related threats to the integrity of the international financial system.  FATF updated its guidance in June.

By combining these various data sources, the overall risk score represents a holistic assessment addressing structural as well as functional elements in the AML/CFT framework. As there are no quantitative data available, the index does not measure the actual existence of money laundering activity or amount of illicit financial money within a country but is “designed to indicate the risk level, i.e. the vulnerabilities of money laundering and terrorist financing within a country,” the authors of the index say.

Among this year’s assessments:

  • More countries improved their rating since last year in the Basel AML Index, “but the effectiveness in fighting money laundering remains weak.”
  • Although a majority of countries legally comply with current AML/countering terrorism financing standards, they fall short in the effective implementation and enforcement of these laws.
  • 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.
  • Organisation for Economic Co-operation and Development (OECD) countries—including those with large financial centers such as Luxembourg, Japan, Switzerland, Italy, Germany, the United States, France, and the United Kingdom have not demonstrated much progress to improve their rating.
  • Among the European countries, the highest risk countries are Luxembourg, Serbia, Greece, Switzerland, Italy, Germany, Moldova and Bosnia-Herzegovina. The rankings for Slovenia, Estonia, Serbia, and Finland have deteriorated significantly within this region.
  • Canada has switched positions with the US, and is now considered lower risk as compared with last year’s ranking.
  • In Latin America and the Caribbean region, Paraguay, Haiti, Bolivia, Panama, Argentina, the Dominican, Republic and Venezuela are considered as higher risk countries. Ecuador, Costa Rica, Honduras, and Paraguay were the top improvers within the region.
  • In East Asia and the Pacific, Cambodia, Myanmar, Laos, Vanuatu, China, Marshall Islands, and Vietnam are on the top of the higher risk countries. South Korea and Timor-Leste recorded the largest improvements, whereas Vanuatu’s ranking deteriorated most.
  • The Sub-Saharan African region has the poorest scores worldwide with Uganda, Guinea-Bissau, Mozambique, Mali, Sudan, Kenya, Guinea, Liberia, Sao Tome and Principe and Zambia being the top 10 highest risk countries in the region.
  • Among the six South Asia countries, Afghanistan, Nepal, and Sri Lanka stand out with particular high risk scores in the Basel AML Index. Sri Lanka has seen its ranking deteriorate most in this group compared to the previous year.

The study found 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.

“Effectively combating money laundering and the financing of terrorism require a high degree of transparency and efficient law enforcement,” the report says. “The Panama Papers demonstrated that again. The 2016 Basel AML Index scores illustrate, however, that high-income countries including large financial centers have not been able to demonstrate significant progress in these areas. 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.”