The International Centre for Asset Recovery at the Basel Institute on Governance has just brought out its annual report, which is not comforting reading.
The Basel AML Index measures the risk of money laundering and terrorist financing (ML/TF) in jurisdictions around the world. It defines risk as a jurisdiction’s vulnerability to ML/TF and its capacities to fight those scourges; it is not intended as a measure of the actual amount of ML/TF in any particular jurisdiction.
Only 110 jurisdictions that the Financial Action Task Force (FATF) has assessed with its "fourth-round methodology" and that have submitted enough data to allow Basel to calculate reliable ML/TF risk scores are included in the "public edition" of the Basel AML Index. Despite the gaps, the jurisdictions with the lowest risk scores (based on a score of 10) are as follows.
Andorra (risk score: 2.73); Finland (3.06); Cook Islands (3.13); Slovenia (3.3); Norway (3.35); Sweden (3.36); San Marino (3.42); Denmark (3.46); Lithuania (3.51); and New Zealand (3.53).
Also relatively clean are: Australia (3.75); Israel (3.83); the United Kingdom (4.05); Ireland (4.45); and the United States (4.6).
In the middle are Singapore (4.65); Indonesia (4.68); Switzerland (4.89); Hong Kong (5.2); and Malta (5.45).
The countries that pose the highest risk are: Haiti (8.49); Democratic Republic of Congo (8.35); Mauritania (8.13); Myanmar/Burma (7.83); Mozambique (7.71); the Cayman Islands (7.66); Madagascar (7.4); Mali (7.37); Senegal (7.25); and Uganda (7.18).
Also relatively risky are: the Bahamas (6.46); Panama (6); Macau (5.93); and the United Arab Emirates (5.91).
The four areas
This year, Basel looks at the data behind four topics that are hitting headlines. These are: (i) virtual assets; (ii) beneficial ownership; (iii) effective anti-money laundering (AML) systems; and (iv) non-financial professions.
In 2018-19, FATF called for the regulation of virtual asset service providers (VASPs) with the revision of Recommendation 15. It is still too early for a definitive look at the benefits to law enforcement of this rule change, but of the 27 jurisdictions assessed or reassessed for technical compliance with the new Recommendation 15 early this summer, 19 downgraded their scores, five kept the same scores and only three had improved. The average compliance score for Recommendation 15 across all jurisdictions assessed with the latest ("fourth-round") FATF evaluation method dropped from 70 percent to 60 percent. Of the ten assessed with mutual evaluation reports, none was found to be compliant.
Sandra Lawrence, a partner at international law firm Collas Crill and a money laundering legal expert, commented: "Overall, the four AML risk trends identified by Basel suggest to me that in general, industry is struggling with the enormous international fight against ML/TF, which I believe is in no small part on account of the ever-increasing ML/TF risk and compliance obligations, and the limited suitable resources available to both industry and the regulators alike.
"Taking virtual assets as one example, they are a complicated and specialist product, and both industry and regulators need to work together, rather than against each other, in order to coordinate an understanding of the ML/TF risks and impact posed by virtual assets, and cultivate practical and effective controls to forestall, prevent and detect ML/TF abuse."
The main problems that the Basel Group found with Recommendation 15 were:
- Weak implementation of the “travel rule” because financial institutions are not obtaining information about the originators and beneficiaries of cryptocurrency transactions and are not sending it to the police.
- Sluggish action by jurisdictions in implementing the new rule, with infrequent regulatory visits or punishments.
- Generally, a lack of knowledge and expertise among supervisory/regulatory bodies in the field of virtual assets, reducing their ability to oversee and guide VASPs.
Beneficial ownership and the effectiveness of AML systems
Here FATF's analysis shows, among other things, that there is still a poor level of compliance in establishing beneficial ownership registers (or other mechanisms), even when this is required by law. This spoils the otherwise acceptable AML performance of some jurisdictions.
The majority of beneficial ownership registers that do exist are either mostly or completely ineffective at doing even the minimum that they are supposed to do. In other words, they fail to provide the police with reliable information about the ultimate beneficial owners of companies or trusts incorporated in their countries.
Effectiveness of AML systems
The report finds that jurisdictions that have laws and institutions in place that are largely compliant with FATF's recommendations are still ineffective in practice. This was lamented in last year's report.
Basel writes: "Is there any sign of improvement in the figures for 2021? Not really. Based on the latest FATF data, the average score for effectiveness across all assessed jurisdictions is only 30 percent. That is two times lower than the average score for technical compliance with FATF recommendations, which stands at 64 percent."
Lawrence had her own opinion: "There is a real risk of seeing a repeat of the regulatory fatigue that we saw after the 2008 financial crisis, although this time against a perilous backdrop of the immense challenges that COVID-19 has thrust upon the industry and the appalling conduct of various high profile politicians, potentially risking an up-rise in the 'why should I bother, if they don't' culture."
She summed up the report by warning countries against their tendency to go through the motions when fighting money laundering rather than make real efforts: "To fight ML/TF effectively, in a manner which has a tangible impact against fighting financial crime and protecting some of the most vulnerable people and societies in the world, we must avoid 'mechanical compliance' and adopt a joined-up approach in our fight, which is motivated by improving cultures, values and attitudes within both the industry and regulators, rather than a tick-box approach which offers little in the way of tangible benefits."