Country Risk Analysis Framework: The Basel AML Index
Country risk analysis in AML/CFT assesses a country's vulnerability to money laundering and terrorism financing, helping organizations and financial institutions make informed decisions about business operations and customer onboarding. This has three aspects such as :
ü Assessing
the money laundering and terrorism financing (ML/TF) risks related to the
countries you deal with.
o
This
forms part of the risk assessment that you are required to undertake prior to
establishing your AML/CFT programme.
ü Determining
whether a country has insufficient AML/CFT systems or measures in place.
o
Various
requirements of the Act require you to apply measures to customers or
situations involving a country that has insufficient AML/CFT measures or
systems in place.
ü Determining
whether another entity is resident in a country with sufficient AML/CFT systems
in place and supervised or regulated for AML/CFT purposes.
o
This
is a requirement if you intend to form a designated business group with a
member in another country, or if you intend to rely on an entity in another
country to undertake customer due diligence (CDD) for you.
The Basel AML Index, Country Risk analysis framework of IMF, World bank , FATF Classification of Countries and also Self-assessment etc provide significant tools in this respect.
The Basel AML Index
Published annually, the
Public Edition of the Basel AML Index ranks countries with sufficient data to
calculate a reliable risk score. It is a snapshot of global ML/TF risks and
progress by countries and regions over time.
This map displays overall ML/TF risk
scores for the 152 jurisdictions included in the 2023 Public Edition of the
Basel AML Index. Only jurisdictions with sufficient data are included. The
maximum risk is 10.
The
Basel AML Index measures the risk of money laundering and terrorist financing
(ML / TF) in jurisdictions around the world. It is based on a composite
methodology, with 18 indicators categorised into five domains in line with the
five key factors considered to contribute to a high risk of ML/TF. The
following five aspects get assessed
The Basel AML
Index is a leading independent ranking of money laundering and terrorist
financing (ML/TF) risks around the world.
It provides risk
scores based on data from 18 publicly available sources such as the Financial
Action Task Force (FATF), Transparency International, the World Bank and the
World Economic Forum. The risk scores cover five domains considered to
contribute to a high risk of ML/TF:
1.
Quality
of AML/CFT Framework
2.
Bribery
and Corruption
3.
Financial
Transparency and Standards
4.
Public
Transparency and Accountability
5.
Legal
and Political Risks
The Basel AML
Index is developed and maintained by the Basel Institute on Governance through
its International Centre for Asset
Recovery. The Basel Institute was established in 2003 as a
not-for-profit Swiss foundation. It is one of four “Associated Institutes” of
the University of Basel.
The Basel
Institute identifies its work as being focused in six areas:
a. Asset Recovery;
b. Anti-Corruption Collective Action;
c. Corporate Governance and Compliance
d. Public Governance;
e. Illegal Wildlife Trafficking; and
f. Public Finance Management
The aim of the Basel AML
Index is to provide a holistic picture of ML/TF risk. Risk, as measured by the
Basel AML Index, is defined as a jurisdiction’s vulnerability to ML / TF and
its capacities to counter it. It is not intended as a measure of the actual
amount of ML / TF activity in a given jurisdiction.
The 18 indicators differ
in focus and scope. Indicators are chosen based on several criteria, including
their relevance, methodology, jurisdiction coverage, public availability, and
the availability of recent data. The indicators and weighting are reviewed
annually by an independent expert group.
Domain
1: Quality of AML / CFT Framework (65%)
- FATF: Mutual Evaluation Reports and Follow-up Reports (35%)
- Tax Justice Network: Financial Secrecy Index
(15%)
- US State Department: International Narcotics
Control Strategy Report (Volume II) (5%)
- US State Department: Trafficking in Persons Report (5%)
- GITOC: Flora, fauna, non-renewable resources
(5%)
Domain
2: Corruption Risk (10%)
- Transparency International: Corruption Perceptions Index (5%)
- TRACE: Bribery Index Matrix
(5%)
Domain
3: Financial Transparency and Standards (10%)
- World Bank: Extent of Corporate Transparency Index
(2.5%)
- WEF: Global Competitiveness Report - Strength of auditing and reporting standards (5%)
- World Bank: IDA Resource Allocation Index –
Financial sector regulations (2.5%)
Domain
4: Public Transparency and Accountability (5%)
- International IDEA: Political Finance Database –
Political disclosure (1.66%)
- International Budget Partnership: Open Budget Index
– Budget transparency score (1.66%)
- World Bank: IDA Resource Allocation Index –
Transparency, accountability and Corruption in
the public sector (1.66%)
Domain
5: Legal and Political Risk (10%)
- Freedom House: Freedom in the World – Political
rights and civil liberties (1.67%)
- Reporters Without Borders: World Press Freedom
Index (0.83%)
- WEF: Global Competitiveness Report – Institutional
pillar (2.5%)
- WEF: Judicial independence data (2.5%)
- World Justice Project: Rule of Law Index
(2.5%)
Although
the country risk score is established by 18 factors, the FATF Country Risk Analysis reports
and lists play a significant determining role. If any of the 18 data sets
mentioned above for any of the countries included in the ranking are not
accessible, the corresponding country's overall score is determined using the
data that is available. Only the "Quality of AML / CFT Framework"
global average increased from the previous year, according to the examination
of the main titles based on country averages; the global averages for the other
4 titles decreased.
Some highlights from the Basel AML
Index 2023 report :
- The
average global ML/TF risk level increased from 5.25 in 2022 to 5.31 in
2023, where 10 is the maximum risk.
- Risks
increased in four of the five domains measured by the Basel AML Index:
corruption and bribery; financial transparency and standards; public
transparency and accountability; and political/legal risks. Scores for the
quality of AML/CFT frameworks remained static.
- Analysis
of data from the FATF shows a continued decline in the effectiveness of
AML/CFT systems globally. Effectiveness scores dropped from the already
low level of 30 percent to 28 percent over the last two years. Among
the least effective areas are those that are key to AML/CFT: the misuse of
non-profit organizations for terrorist financing, transparency of
beneficial ownership, supervision, prosecution, confiscation, and measures
to prevent the proliferation of weapons of mass destruction. Many of these
areas are also problematic in terms of compliance, together with new
technologies and the regulation and supervision of so-called “enablers” –
designated non-financial businesses and professionals.
- Countries
are getting better at tracing and seizing illicit assets domestically. But
permanent confiscations are rare – and even more rare when assets are
hidden in a foreign jurisdiction. Stronger laws will help, but won’t solve
gaps in implementation and crossborder cooperation.
- We
need to do better at preventing terrorist financing through bogus
non-profit organisations. But for the sake of humanitarian assistance and
human rights, it is essential to avoid collateral damage on legitimate
organisations and the people they serve.
- Countries need to supercharge their efforts to understand the evolving financial crime risks of new technologies like cryptocurrencies. Getting regulation, supervision and enforcement right is the only way to foster a thriving FinTech industry while protecting financial integrity, crypto users and investors.
The nation may choose to conduct an analysis
of other countries w r t the threats, vulnerabilities and risk it is posed from
the rest of the world and classify them. For example,
Draft of a 2.0 travel ban of USA, the countries on the list would be sorted into three
different tiers: red, orange, and yellow.
Citizens from
the 11 countries in the “red” category would reportedly be flatly barred from
entering the United States. The 11 countries listed include Afghanistan,
Bhutan, Cuba, Iran, Libya, North Korea, Somalia, Sudan, Syria, Venezuela, and
Yemen. The Times reported, though, that
this list was formed by the State Department a few weeks ago and changes could
well be made.
Citizens from the countries in the “orange” category 10 in all —which includes Haiti, Russia, and Pakistan, would have their visas heavily restricted. Per the Times' reporting, citizens traveling to the U.S. from these countries would be subjected to “mandatory in-person interviews” in order to receive a visa.
The third category includes countries in the “yellow” groupwith
22 nations —meaning they have 60 days to address concerns from the
Administration, or else each country risks being moved up to the other
categories. Countries reportedly listed under this category include Cambodia,
Zimbabwe, and The Republic of Congo.
Trump made
promises on his campaign trail, stating his intention to restore the travel ban
which caught much attention during its initial introduction during his first
term. His signing of an Executive Order titled “Protecting The United States From Foreign Terrorists
And Other National Security And Public Safety Threats”
on Jan. 20, 2025 only served to reaffirm his intentions.
Happy Reading
Those who read this, also read
2. Country Risk Assessment Framework: World Bank
3. National Risk Analysis(NRA) Framework
4. Framework for Country Risk Analysis : FATF
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