New Report Highlights Ineffectiveness of Global AML/CTF Systems

A lot of countries may have strong AML/CTF systems in place, but in practice they are not working, says a new report from the Basel Institute on Governance.

The Basel Institute on Governance has released a new report highlighting continued failures from jurisdictions to make progress to effectively address AML/CTF vulnerabilities.

The report – the 9th Basel AML Index – is an independent ranking that assesses the risk of money laundering and terrorist financing (ML/TF) around the world. Published annually since 2012, it provides risk scores based on data from 16 sources including the FATF (Financial Action Task Force), Transparency International, World Bank and World Economic Forum.

The data covers 16 indicators in five domains relevant to assessing ML/TF risk at the country level: quality of AML/CTF frameworks; bribery and corruption; financial transparency and standards; public transparency and accountability; and legal and political risks.

According to the report, the average ML/TF risk score across all 141 countries remains “unacceptably high” at 5.22 out of 10 (where 10 equals maximum risk), only slightly better than the 5.39 risk score measured in 2019. Only six countries improved their scores by more than one point, and 35 countries went backwards, it says.

Ineffective supervisory bodies

Of the 100 countries assessed so far with the new FATF assessment methodology, a full 32 countries score 0% for the effectiveness of their supervisory bodies. A major factor in this assessment is the supervision of financial institutions, DNFBPs (designated non-financial businesses and professions) and VASPs (virtual asset service providers), the report says.

“Weak implementation and effectiveness are problems that the Basel AML Index has noted ever since the FATF started using its fourth-round evaluation methodology to assess not just the technical compliance of a country’s AML/CTF systems but their effectiveness in practice,” the Basel Institute on Governance says.

Although some countries have not yet been assessed with the fourth-round FATF methodology, which limits the comparability of their risk scores, the report finds a clear trend: “most countries that undergo a fourth-round FATF evaluation rate poorly for effectiveness”.

“A lot of countries may have strong systems in place, but in practice they are not working. Or, the countries are not making them work,” it says, emphasing five key factors that contribute to ineffective supervision.

These are limited powers to sanction non-compliance, limited supervisory resources, inadequate application of the risk-based approach, poor coordination between authorities, and insufficient guidance for reporting entities on ML/TF risks.

The report calls on policymakers to analyse their jurisdictions’ risks in detail to make plans for serious reform, saying “no country is doing well.”

Notable risk scores by region

The EU (including Western Europe) has an overall risk score of 4.01, more than one point below the global average (i.e. lower risk). However, the report says high levels of financial secrecy undermine AML/CFT frameworks in Switzerland (4.74), Luxembourg (4.74), the Netherlands (4.56) and the UK (4.02).

North America also scored below the global average, measuring at 4.72. While both Canada (4.68) and the US (4.57) are noted as major money laundering jurisdictions, the US is rated as having “the highest financial secrecy risks in the region and one of the highest risks globally”.

The East Asia and Pacific region scores slightly higher than the global average overall risk score, measuring at 5.46. Nearly half of all countries in the region are listed by the US as major money laundering destinations. Financial secrecy issues are most prominent in Hong Kong (4.99), Japan (5.16), Singapore (4.56) and Taiwan (4.31).

South Asia has an overall risk score of 6.4, more than one point above the global average (i.e. higher risk). The region faces high risks of human trafficking, with
the highest risk in Afghanistan (8.16), which is also – along with India (5.15) and Pakistan (6.30) – listed by the US as major money laundering jurisdictions.

Asian jurisdictions ranking in the top five riskiest include Afghanistan (8.16), Myanmar (7.86) and Laos (7.82). The lowest risk Asia jurisdictions are New Zealand (3.24) and Australia (3.84).

The public edition of the Basel AML Index 2020 report is available here.

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