International Money Laundering: Basel Index

How well are jurisdictions around the world combatting money laundering risks? In short – not very.

The 2021 Basel AML Index report (“the report”) has raised concerns as to whether jurisdictions are serious about tackling their money laundering and terrorism financing (ML/TF) risks.

This article provides an overview of the Basel AML Index, before exploring the key risk trends outlined in the report.

 

What is the Basel AML Index?

The Basel Anti-Money Laundering Index is an independent annual ranking that assesses ML/TF risk around the world, as well as related factors that impact risk such as corruption, transparency, and the rule of law.

It is important to note that the Index measures risk, rather than the actual amount of money laundering activity.

Risk scores are based on data from publicly available sources such as the Financial Action Task Force (FATF), Transparency International, the World Bank, and the World Economic Forum.

 

Money laundering risk trends in 2021

Four key risk trends were observed throughout 2021: virtual assets, ineffective AML/CFT systems, beneficial ownership, and non-financial professions.

 

Trend 1: Virtual assets

Cryptocurrencies such as Bitcoin are commonly used to launder money. Global actions have been taken to mitigate the threat of virtual assets such as cryptocurrencies, and in 2018, the FATF revised its Recommendation 15 on virtual assets and virtual asset service providers.

Regarding the implementation of Recommendation 15 to date, the report states that “initial signs are not encouraging”.

A key challenge is that criminals wishing to abuse virtual assets to launder money can simply choose to operate in jurisdictions where regulations are weak and not enforced, effectively creating safe havens for illicit activity.

 

Trend 2: Ineffective AML/CFT systems

The report found that across jurisdictions:

  • AML/CFT systems are generally ineffective.
  • Performance relating to the prevention of money laundering is worse than for enforcement of such offences.

The report further states that “It is all too common for jurisdictions to have laws and institutions in place that are largely compliant with FATF Recommendations yet ineffective in practice.”

The U.K. and Spain are the only jurisdictions assessed so far to achieve scores of 67 percent or above for both prevention and effectiveness criteria. Comparatively, the East Asia and Pacific region scored 26 percent for prevention and 32 percent for enforcement.

 

Trend 3: Beneficial ownership

The report states that “slow and ineffective implementation of beneficial ownership registries continues to provide safe havens for dirty money”.

Beneficial ownership can be viewed as a pillar of AML/CFT systems, and low levels of transparency can thwart investigations and attempts to trace and freeze illicit assets. The issue becomes particularly challenging when money passes through multiple jurisdictions with different methods for recording and sharing beneficial ownership information.

Shockingly, the report states that no jurisdiction has an effective beneficial ownership system. Even where jurisdictions are compliant with FATF Recommendations, the data reveals no strong correlation between technical compliance and effectiveness.

 

Trend 4: ML/TF vulnerabilities beyond the financial sector

The report states that “Lawyers, accountants, real estate agents and other non-financial businesses and professions continue to underperform on compliance with AML/CFT standards.”

Such professionals and businesses are referred to as designated non-financial businesses and professions (DNFBPs). While traditionally, AML/CFT policies have focused more on financial institutions, DNFBPs also have high money laundering risks. For example, money is commonly laundered through real estate.

The report states that supervision of DNFBPs is a particular weak spot across jurisdictions. There is also a need for increased customer due diligence, which includes identifying and verifying beneficial owners.

 

Key takeaways

Global jurisdictions are performing poorly when it comes to tackling money laundering and terrorism financing (ML/TF) risks. Key risks relate to virtual assets, AML/CFT systems, beneficial ownership, and vulnerabilities amongst non-financial businesses and professions. According to the 2021 Basel AML Index report, jurisdictions may not be taking these risks seriously enough. Even where jurisdictions do make efforts to comply with FATF Recommendations, AML/CFT systems and measures continue to prove ineffective.

Nyman Gibson Miralis provides expert advice and representation in complex international money laundering investigations.

Contact us if you require assistance.