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2018 Basel AML Index Measures Risk and Cites Lack of Effective Enforcement and Declining Global Press Freedom

Denmark Suffers Greatest Increase in Annual Risk Rating

The Basel Institute on Governance (“Basel Institute”) recently announced that the associated Basel Centre for Asset Recovery has released its seventh annual Basel Anti-Money Laundering Index (“AML Index”) for 2018, described by the Basel Institute as “an independent, research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing.”  The risk scores for each country in the AML Index “are based on 14 publicly available indicators of anti-money laundering and countering the financing of terrorism (AML/CFT) frameworks, corruption risk, financial transparency and standards, and public transparency and accountability.” The Basel Institute, which is associated with the University of Basel, describes itself as “an independent not-for-profit competence centre working around the world with the public and private sectors to counter corruption and other financial crimes and to improve the quality of governance.”

The public AML Index, which pertains to 129 countries, is here; an “expert edition” containing a full list of scores and sub-indicators for all 203 countries — available for cost to private persons or industry, or for free to academic, public, supervisory and non-profit organizations — is here.  A summary of the public AML Index is here.

As we will discuss, the AML Index bemoans a lack of progress in the global fight against corruption, and in particular cites lack of enforcement of existing laws and declining press freedom across the globe. The AML Index also underscores how countries with seeming low risk in fact have lurking problems.

Lack of Enforcement and Attacks on the Press

According to the summary for the AML Index, “[t]he most concerning aspect illustrated by the [AML Index] is the apparent low level of effective enforcement of AML/CFT measures.”  Noting that the Financial Action Task Force (“FATF”) revised its methodology in 2013 for compiling its Mutual Evaluation Reports on the legal and institutional AML/CFT frameworks of member countries (and their implementation of those frameworks) in order to emphasize the actual effectiveness of AML/CFT systems, the AML Index consequently has issued “dramatically lower scores for effectiveness than for technical compliance” to the “overwhelming majority” of countries assessed with FATF’s updated methodology.

If this pattern continues, “it will indicate that [many governments] are consciously neglecting efforts to boost implementation effectiveness by hiding behind formal compliance structures that merely give the appearance of AML/CFT commitment.”  Ironically, this same criticism of “check the box” AML/CFT compliance trumping substantive compliance is often leveled in pronouncements and enforcement actions by governments against financial institutions found to have violated their AML/CFT duties.

The summary for the AML Index also states that, “[d]espite the recent surge in reporting on high-profile corruption and money laundering schemes, such as the Panama Papers, Paradise Papers and Odebrecht scandal, indications are that global press freedom has declined to its lowest point in 13 years.”  This conclusion likely was drawn in part because of the notorious car-bombing murder in Malta of journalist Daphe Caruana Galizia, who had been investigating corruption in Malta relating to the Panama Papers.  Although the AML Index was compiled prior to the following, it also very recently has been reported that journalist Jamal Khashoggi, who was reporting on possible corruption in Saudi Arabia, allegedly recorded his own retaliatory murder on his Apple Watch.  The AML Index summary warns that “public transparency is showing signs of decline, with governments making less information available about how they manage public funds.”

Low Risk, High Risk, and Increasing Risk

The AML Index describes the characteristics shared by countries with low risk ratings as the following:

  • Strong AML/CFT legislation including on the freezing of terrorist funds
  • Competent authorities with the mandate and resources to investigate and prosecute ML/TF offences and issue sanctions for non-compliance
  • Comprehensive measures for domestic and international cooperation
  • High level of press freedom, with the media playing a central role in uncovering and reporting financial crime
  • Financial sector highly regulated with competent supervisory authorities and minimal, if any, cash-based transactions
  • High levels of transparency and integrity in public institutions and businesses
  • Low levels of corruption

The countries listed as having the lowest risk ratings are, from lowest to highest:

  • Finland
  • Estonia
  • Lithuania
  • New Zealand
  • Macedonia
  • Bulgaria
  • Slovenia
  • Sweden
  • Croatia
  • Israel

In contrast, the AML Index describes the characteristic shared by countries with high risk ratings as:

  • Weak public institutions, political rights and rule of law
  • Low levels of financial/political transparency
  • Restrictions on press freedom
  • Lack of resources to control the financial system
  • Predominantly cash-based economies
  • High levels of smuggling activity and illegal trafficking (in drugs, humans, wildlife products, etc.)

The countries listed as having the highest risk ratings are, from highest to lowest:

  • Tajikistan
  • Mozambique
  • Afghanistan
  • Laos
  • Guinea-Bissau
  • Myanmar
  • Cambodia
  • Liberia
  • Kenya
  • Vietnam

But the most interesting discussion in the AML Index pertains to the countries which were deemed as having the greatest increase to their risk rating.  As stated in the press release from the Basel Institute, “The findings tie into recent high-profile probes involving countries generally considered low-risk.” Perhaps not surprisingly, in light of the still-evolving and enormous money laundering scandal involving Danske Bank, as well as a recent elaborate corruption scandal involving the Danish taxing authority (described in this fascinating article by the New York Times), Denmark holds dubious distinction of having the risk score which worsened the most from 2017 to 2018. Overall, Nordic countries did not fare very well in the 2018 AML Index: although Finland and Sweden remained in the top 10 low-risk countries, Denmark was joined by Iceland, the Netherlands, and Finland as placing among the top 10 decliners in 2018 (i.e., although Finland suffered one of the largest increases in risk rating, it nonetheless remained in the top 10 least risky countries).  This phenomenon is consistent with the overall AML vulnerability facing Europe about which we have blogged: the use of Nordic and Eastern European banks to funnel money – often Russian – through allegedly suspicious transactions.

The AML Index lists the United States as #82 out of 129 countries, immediately below (i.e., less risky) than Cyprus and Saudi Arabia, and immediately above (i.e., more risky) than Brazil and Guatemala.

Methodology and Conclusions

The AML Index includes a section on its methodology, which it summarizes as:

The Basel AML Index uses a composite methodology, meaning that the Basel Institute draws its components by aggregating various publicly available sources. In the first stage, the Basel Institute conducted extensive research in measuring money laundering and its challenges before carefully selecting the applied indicators. Only relevant indicators, sub-indicators and assessments that examine AML/CFT framework and other factors related to money laundering risk were considered. This was followed by the weighing of indicators according to their importance, based on expert opinions with academic, financial and senior AML experts. The review process entails an annual review meeting with external experts verifying the quality of data, the date, country coverage and methodology.

It is fair and necessary to question the quantitative conclusions of rating surveys such as the AML Index as being inherently imprecise, given the enormous amount of potential variables, the inevitability of imprecise and incomplete information, and the role of subjective judgment amongst the raters.

However, it is hard to argue with the basic lessons drawn by the Basel Institute from the 2018 AML Index: actual enforcement by government authorities of existing laws is critical, and attacks on the free press are both a worrying symptom of existing corruption, and a potential facilitator of future corruption.

Copyright © by Ballard Spahr LLP

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About this Author

 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He...

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