Assessing AML Geographic Risk

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Disclaimer: The contents of this article are meant to provide a general understanding of the subject matter. However, this article is not intended to provide legal or other professional advice and should not be relied on as such.

 

 

 

This article is the final in a three-part series exploring the elements of customer money laundering risk. In part 1, Elements Of Customer Risk: Profiles And Relationships, we discussed risks associated with customer characteristics and relationships. In part 2, Elements Of Customer Risk: Products, Services, Activities And Behaviors, we analyzed the money laundering risks associated with financial products and services, as well as the red flags presented by patterns of customer activities and behaviors. In Part 3, we examine the geographic risk element of money laundering vulnerabilities.

 

 

 

Categorizing Risk Elements: Who, What, Where

There are many different risk factors to consider when assessing acustomer risk elements customer’s money laundering risk, which may be logically grouped into categories as shown in the chart at right. Note that while each risk category in this chart appears to have an equal share of the total risk, this is not always the case.

 

Who: Customer Profile and Relationships. This is the set of risk factors associated with the characteristics of a customer, as well as the customer’s relationships to other individuals and other legal entities. We covered this category in depth in Part 1 of this series.

 

What: Products, Services, Activities and Behaviors. This group of risk factors includes what the customer will do, or is currently doing, through the financial institution. It includes the types of products and services that may have a higher money laundering risk, as well as customer transactional activities and behavior patterns that may indicate potential illegal activity. In this article, we explore this category in greater depth.

 

Where: Geographic Risk. The geographic locations where a customer’s payment activities, assets, and business relationships occur are inherently tied to the money laundering risks associated with those locations. In the final installment of this article series, we will review one particular methodology for risk scoring individual countries from a money laundering and terrorist financing perspective.

 

 

 

Why Assess AML Geographic Risk

Geography is a key element of a customer’s overall money laundering risk. A customer’s transactions with counterparties outside of their country of residence or domicile – whether personal or commercial – may pose a greater risk of money laundering activity.

 

Geographic risk is based upon the potential money laundering risk posed by individual countries. With a means to denote those countries with high money laundering or terrorist financing risks, a financial institution can more comprehensively assess a particular customer’s money laundering risk based on their dealings, transactions, or relationships with counterparties in other countries.

 

However, geographic risk alone does not necessarily determine a customer’s money laundering risk level, either positively or negatively. All relevant risk factors, including geographic risk, must be evaluated holistically to derive a more accurate, and comprehensive, risk score.

 

 

 

Country Money Laundering/Terrorist Financing Risk Factors

What characteristics make a country at a higher risk for money laundering or terrorist financing activity? Unfortunately for compliance professionals, there is no clear regulatory standard for measuring these risks.

Therefore, in order to assess risk we must find a way to quantify all of the regulatory, legal, political and financial indicators that influence a given country’s vulnerability to money laundering and terrorist financing. However, quantifying these risk indicators will not result in any level of factual or quantitative measurement of actual money laundering or terrorist financing activity.

 

The many indicators of a country’s vulnerability to money laundering and/or terrorist financing fall into four high-level categories:

 

  1. The quality of the AML/CFT regulatory framework
  2. The degree of financial transparency and associated regulatory standards
  3. The level of bribery and corruption
  4. The involvement in or support of sanctioned activities, such as illegal narcotics production, support of terrorism, or human rights abuses

 

 

 

A Geographic Money Laundering Risk Model

Before exploring each of these high-level categories of risk in greater detail, it is important to consider how these risks would be used in a model that compiles and quantifies them into individual country money laundering risk scores.

 

Historically, a financial institution had no other option but to develop its own model for this purpose. While this continues to be an option, there is an alternative.

 

The Basel AML IndexSince 2012, the not-for-profit Basel Institute on Governance has compiled an annual AML Index by Country.The Basel AML Index is the only independent, research-based ranking of countries according to their risk of money laundering and terrorist financing. Its risk scores are based on data from seventeen publicly available sources covering five high-level domains, including the quality of countries’ AML/CFT regulations; levels of bribery and corruption; financial transparency standards; public transparency and accountability; and legal and political risks.

 

The 10th edition of the AML Index was published in 2021.

 

The Public Edition of the Basel AML Index includes 110 countries, which are those with sufficient data to calculate a reliable ML/TF risk score. The Expert Edition includes a more detailed overview of all 203 countries and their risk scores based on the available data. In 2021, Basel added a new Expert Edition Plus, providing detailed analyses of the Financial Action Task Force’s Mutual Evaluation Reports, as well as special reports on some of the highest-risk offshore jurisdictions.

 

The Basel AML Index is one of several options available to a financial institution with respect to a country’s money laundering risk scoring model. The institution may choose to build its own model based on the risk factors it considers most significant, or use Basel’s rankings as a starting point and adjust for additional risk factors that Basel’s model does not include. All three approaches are incorporated in the following sections discussing each risk factor category in more detail.

 

 

 

Risk Category: The AML/CTF Regulatory Framework

The quality of a country’s AML and CFT regulatory framework refers to how well-designed and effective are its laws and regulations in mitigating the risks of money laundering. The absence of meaningful AML/CFT legislation in a particular country, along with a lack of effective prevention and mitigation efforts, allow for increased and uncontrolled flows of illicit funds into and out of a country, and consequently, an increase in its risk of money laundering activity.

 

There are four key information sources regarding countries’ AML/CFT regulatory quality:

 

 

  1. The Financial Action Task Force (FATF) evaluations of member countries’ AML and CFT regulations
  2. The U.S. Treasury Department’s designations of Entities and Jurisdictions of Primary Money Laundering Concern
  3. The U.S. State Department’s annual International Narcotics Control Strategy Report (INCSR)
  4. The U.S. State Department’s annual Trafficking in Persons Report

 

Each of these data sources is discussed in more detail next.

 

 

 

The Financial Action Task Force

the FATF

 

The Financial Action Task Force (FATF) is familiarly known as the global money laundering and terrorist financing watchdog. FATF is not a regulator; rather, the organization’s mission is to establish international standards for AML and CFT regulations to which its member countries agree to abide. These standards are known as the FATF Recommendations.

 

The FATF Recommendations establish a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction. Because individual countries have diverse legal, administrative, operational, and financial systems, they cannot all take identical measures to counter these threats. The FATF Recommendations set an international standard, which countries should implement through measures adapted to their particular circumstances.

 

The FATF currently has 39 member countries. As well, nine autonomous regional organizations, known as FATF-Style Regional Bodies, help promote the implementation of FATF Recommendations by their member countries. In total, over 200 countries have agreed to implement the FATF Recommendations.

 

The FATF evaluates its member countries’ degree of implementation of the Recommendations. Known as Mutual Evaluations, these examinations by FAFT-appointed experts can take over one year to complete. A comprehensive Mutual Evaluation Report (MER) is then published with the findings, and non-compliance issues are then monitored and re-examined.

 

FATF examiners assess a country’s degree of technical compliance with each of the forty FATF Recommendations, assigning one of four grades: compliant, largely compliant, partially compliant, and non-compliant.

 

For example, the most recent Mutual Evaluation of the United States was completed in 2016, with the following results:

 

• Compliant: 9 Recommendations
• Largely compliant: 21 Recommendations
• Partially compliant: 6 Recommendations
• Non-compliant: 4 Recommendations

 

 

Jurisdictions of Primary Money Laundering Concerns (Section 311 Special Measures)

A second data source associated with a country’s AML and CFT regulatory framework is the U.S. Treasury Department’s designation of jurisdictions (as well as financial institutions and international transactions) to be of “primary money laundering concern.”

 

Section 311 of the USA PATRIOT Act

 

Administered by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), these designations are made through authorities created by Section 311 of the USA PATRIOT Act. The Secretary of the Treasury may designate a foreign country, a financial institution, a class of transaction, or a type of account as being of “primary money laundering concern.” U.S. financial institutions must then take certain “special measures” against the subject of primary money laundering concern.

 

These special measures range from requiring additional due diligence and data collection for certain accounts or transactions to completely prohibiting any correspondent or payable-through accounts. Each designee has specific and unique special measures imposed on it.

 

Historically, most of the designees have been financial institutions; however, a number of countries have also been designated since the USA PATRIOT Act was enacted in 2001. Most of the country designations have now been rescinded, but these remain in place: Iran, North Korea, and Burma (or more accurately, Myanmar). The complete list and history of all designations is available on FinCEN’s website.

 

 

 

Burma’s Section 311 Designation

Comprehensive U.S. economic sanctions against Burma were lifted in 2016. However, the Section 311 special measures designation as a jurisdiction of primary money laundering concern remains in place, but with an administrative exception. This exception allows U.S. financial institutions to provide correspondent services to Burmese banks, subject to appropriate due diligence.

 

The Treasury Department states this exception is based on Burma’s progress in improving its anti-money laundering regulations and its commitment to continue making progress in addressing money laundering, corruption, and narcotics-related activities. FinCEN intends to rescind the designation completely when it has been determined that Burma has made sufficient progress in addressing these issues.

 

The Basel AML Index does not incorporate Section 311 Special Measures in its risk model. This could be because these designations are strictly U.S.-based. However, a financial institution could choose to incorporate this data as a risk factor in a self-developed model. As well, it could be included in a modified Basel AML Index model by adding an extra point value to reflect this higher risk.

 

 

 

International Narcotics Control Strategy Report

The third data source for AML and CFT regulatory quality is included in the Basel AML Index, even though its source is the U.S. State Department.

 

The annual International Narcotics Control Strategy Report (INCSR) is a country-by-country, two-volume report describing the U.S. government’s efforts to combat the international drug trade and its related money laundering and other financial crimes.

 

Compliance professionals will be most interested in Volume II of the report, titled Money Laundering and Financial Crimes.

 

The U.S. government researches and reports its findings on each country’s laws and regulations targeting narcotics-related money laundering. Those that are designated in the report as a “Major Money Laundering Country” are whose financial institutions are believed to engage in transactions involving significant proceeds from international narcotics trafficking.

 

Note that a country’s presence on the list does not necessarily indicate it is not making efforts to combat money laundering, or that has not fully met international AML standards. The report is not a “blacklist” and there are no sanctions tied to it. However, many of the listed countries are not unexpected and will have other risk factors as well.

 

 

 

INCSR 2021: Major Money Laundering Countries

Afghanistan​Albania​Algeria​Antigua/Barbuda​Argentina​
Armenia​Aruba​Bahamas​Barbados​Belgium​
Belize​Benin​Bolivia​Brazil​British Virgin Isl​
Burma​Cabo Verde​Canada​Cayman Isl​andsChina​
Colombia​Costa Rica​Cuba​Curacao​Cyprus​
Dominica​Dom Rep​Ecuador​El Salvador​Georgia​
Ghana​Guatemala​Guyana​Haiti​Honduras​
Hong Kong​India​Indonesia​Iran​Italy​
Jamaica​Kazakhstan​Kenya​Kyrgyz Republic​Laos​
Liberia​Macau​Malaysia​Mexico​Morocco​
Mozambique​Netherlands​Nicaragua​Nigeria​Pakistan​
Panama​Paraguay​Peru​Philippines​Russia​
St. Kitts/Nevis​St. Lucia​St. Vincent/Grenadines​Senegal​Sint Maarten​
Spain​Suriname​Tajikistan​Tanzania​Thailand​
Trinidad/Tobago​Turkey​Turkmenistan​Ukraine​UAE​

 

An interesting side note regarding the 2021 INCSR is that it is the first time that the United States has not listed itself as a Major Money Laundering Country.

 

 

 

Trafficking in Persons Report

According to the United Nations Office on Drugs and Crime, the trafficking of human beings is the third-largest source of income for organized crime groups, after drug and arms trafficking. It is the fastest-growing and most profitable form of international crime, and it affects nearly every country in the world. The International Labour Organization estimates that human trafficking generates over $150 billion USD in profits every year. And those profits must be laundered.

 

Trafficking in Persons Report

 

A personal checking account is undoubtedly the most flexible and accessible product type available. Transactions can be completed anonymously through online/mobile banking; cash deposits and withdrawals are common; and foreign wire transfers or ACH are probably allowed as well, depending on the financial institution’s policies. On the other hand, a one-year certificate of deposit might permit a small number of cash withdrawals, depending on features, but otherwise would not be particularly useful in the laundering process.

 

The Trafficking in Persons (TIP) Report has been published annually for the past 21 years by the U.S. State Department. It is the U.S. government’s primary diplomatic tool to involve foreign governments in advancing anti-trafficking reforms, and to target resources on prevention, protection and prosecution. Although there are other trafficking reports published around the world, the TIP Report is considered the most comprehensive resource available on individual countries’ anti-trafficking efforts.

 

The report ranks each country’s efforts to comply with minimum standards for eliminating human trafficking using a four-part tier system. These minimum standards are described in the Trafficking Victims Protection Act of 2000, a U.S. federal law. Note that these standards reflect only what a country’s government is doing; it excludes the efforts of nongovernmental groups as well as public awareness and broad-based law enforcement initiatives that don’t have concrete ties to prosecutions, victim protections or trafficking prevention.

 

A Tier 1 ranking indicates that a country fully meets the minimum standards. While Tier 1 is the highest ranking, it should not be interpreted to mean that the country has no human trafficking issues or that it is doing enough to address these problems. To maintain a Tier 1 ranking, a country must demonstrate continued progress each year in combating trafficking.
Tier 2 includes countries whose governments do not meet the minimum standards but are making significant efforts to come into compliance.

 

The Tier 2 Watch List is a provisionary ranking given to countries whose anti-trafficking efforts fall somewhere between Tiers 2 and 3. These countries have a two-year period to address the issues and meet minimum standards.

 

Tier 3 countries are those which do not fully comply with the minimum standards and are not making demonstratable efforts to do so. Interestingly, U.S. federal law restricts foreign assistance to countries with a Tier 3 ranking.

 

The TIP Report also calls out several countries as “special cases.” These countries are essentially the most egregious with respect to human trafficking. They are countries where recruitment of child soldiers, forced labor, excessive human rights violations, and infiltration of the government by armed militias and criminal networks are common.

 

The TIP Report includes detailed narratives on every country and the rationale for its rank in a particular tier. It also provides extensive detail on the types of human trafficking, the impact on victims, personal stories, and more.

 

The Trafficking in Persons Report was added to the Basel AML Index model in 2020. A financial institution developing its own country risk model would add extra point values to countries in the Tier 2 Watchlist and below.

 

 

2021 Trafficking in Persons Report: Country Rankings

2021 Trafficking in Persons Report: Country Rankings Tier 1 and Tier 2

2021 Trafficking in Persons Report: Country Rankings Tier 2 Watchlist

 

 

Risk Category: Degree of Financial Transparency

The lack of financial transparency is the primary driver in illicit funds movement around the world.
The Tax Justice Network estimates that as much as $32 trillion USD is held in offshore wealth, and that countries lose over $427 billion USD in tax revenue each year to international corporate tax abuse and private tax evasion.

 

Lost tax revenues mean less money for roads, schools, healthcare (including COVID-19 treatment and vaccines) and other basic human needs. Investigative exposés such as the Panama Papers in 2016 offer a closer look into the magnitude of this problem.

 

Countries that are effectively “selling secrecy” are at the heart of the matter. Customer transactions to and from these countries without a clear and legitimate business purpose should be considered high risk and examined closely for possible suspicious activity reporting.

 

 

 

Data Sources: Countries Promoting Financial Secrecy

The Basel AML Index model’s underlying data for this risk category comes from the World Bank and the World Economic Forum. Analysts examine indicators such as the strength of auditing requirements, business disclosures, and quality of financial standards.

 

However, a financial institution may prefer to utilize data that is more concrete, verifiable, and relatively easy to update in its own country risk scoring model. One excellent resource is the Financial Secrecy Index, discussed further below. The Basel AML Index does use this data source but classifies it under the category of countries’ AML/CFT regulatory framework.

 

 

 

The Financial Secrecy Index

The Tax Justice Network’s Financial Secrecy Index (FSI) ranks countries according to their secrecy and the scale of their offshore financial activities. Politically neutral, it is a tool forThe Tax Justice Network understanding global financial secrecy and secrecy jurisdictions, illicit financial flows, and capital flight. Updated every two years, the most recent index was published on February 18, 2020.

 

The Tax Justice Network believes that tax and financial systems are the most powerful tools for creating a just society. But under pressure from corporate giants and the super-rich, governments have programmed these systems to prioritize the wealthiest over everyone else, building financial secrecy and tax havens into the core of the global economy. This fuels inequality, fosters corruption and undermines democracy. The Tax Justice Network seeks to repair these injustices by inspiring and equipping people and governments to reprogram their tax and financial systems.

 

The FSI rankings are provided in various downloadable formats from the Tax Justice Network’s website, with links to detailed narratives on each country.

 

Below are the top 15 countries for 2020:

The Financial Secrecy Index Top 15 rankings

*Gurnsey is a British Crown Dependency. The Tax Justice Network states: “If the UK and its network of Overseas Territories and Crown Dependencies were treated as a single entity, this UK spider’s web would rank first on the [Financial Secrecy] index.”

 

Countries in the top five vary from one period to the next in their positions within this range, but the same ones are consistently present in the group. This includes the United States. The Tax Justice Network detailed analysis indicates the U.S. has continually failed to establish strict regulations regarding formal, verified disclosure and reporting by companies of their beneficial owners.

 

Corporate formation agents are allowed to establish shell companies with nominee owners, and many states actively promote anonymous corporate formation in their jurisdictions.
To include this data in a country risk score model, one approach would be to assign an extra point value to the top fifteen countries (excluding the financial institution’s country of domicile.)

 

 

Risk Rating Your Own Country

Should a financial institution calculate a country’s money laundering risk score for its own domicile?

 

If all the institution’s customers are also based in the same country, applying a risk score to this country has no real value as all customers would incur the same point score.

 

If an institution is multi-national, calculating and/or applying a risk score to every country makes more sense, as each office would use the scores for all countries outside its own locale.

 

 

 

Risk Category: Corruption and Bribery

Corruption and bribery are common predicate offenses to money laundering. Countries with a high prevalence of perceived corruption are at a greater risk of money laundering because the proceeds of corruption have to be laundered.

 

Corruption is defined as dishonest or fraudulent conduct by a person in power. For example, a public official may select vendors for government contracts based on how those contracts will benefit him or her personally. Bribery is a form of corruption. It is defined as the illegal flow of money or other valuables from a private entity to a public official in exchange for being granted a government service or privilege.

 

There are two well-respected data sources for this information, both of which are included in the Basel AML Index model. They are Transparency International’s Corruption Perceptions Index and the TRACE Bribery Risk Matrix.

 

 

Corruption Perceptions Index

Corruption Perceptions Index

Transparency International (TI) develops and publishes an annual Corruption Perceptions Index, or CPI. TI’s mission is to work together with governments, businesses and citizens to stop the abuse of power, bribery and secret deals. Every year, the CPI ranks 180 countries and territories by their perceived levels of public sector corruption, according to experts and businesspeople. The 2020 analysis, published in early 2021, illustrates how corruption is more pervasive in countries where big money can flow freely into electoral campaigns, and where governments listen only to the voices of the wealthy or the well-connected.

 

One unusual aspect of the CPI is that the higher a country’s score, the lower the level of corruption. Therefore, each of the 180 countries ranked may have a score ranging from zero (highly corrupt) to 100 (very clean). At right is a snapshot of the top and bottom five countries from the most recent CPI. Note as well that countries may have the same score; for example, New Zealand and Denmark are tied for the top spot with a score of 87.

 

Corruption Perceptions Index Top 5 most corruptOther notable scores included the United Kingdom, Canada, Australia, and Hong Kong, all with a score of 77. The United States’ score was 67. Remember, the lower the score, the greater the level of perceived public sector corruption.

 

Interestingly, this was the United States’ lowest score since 2012. Transparency International’s detailed report on the U.S. describes several drivers of this increase in corruption levels. They include the year-long effort to discredit the presidential election results, mismanagement of the pandemic response, and exploitation of pandemic relief funds.

 

 

TRACE Bribery Risk Matrix

TRACE Bribery Risk Matrix

TRACE International is a 501c(6) non-profit business association that provides multinational companies and their commercial intermediaries with anti-bribery compliance support.

 

The TRACE Bribery Risk Matrix, or simply “TRACE Matrix” measures levels of business/private sector bribery risk in 194 countries. The overall country risk score is a combination of sub-scores in the areas of business interactions with government; anti-bribery deterrence and enforcement; government and civil service transparency; and capacity for civil society oversight.

 

The TRACE Matrix data is available at no cost directly from the entity’s website and is updated annually. The TRACE Matrix provides a country score where the higher the score, the higher the risk – in other words, the opposite of the Corruption Perceptions Index. At left are the top and bottom-scoring countries for 2021. As a reference, the U.S. score was 22 (up two points from 2020), the United Kingdom, 14, and Canada, 16.

TRACE Bribery Risk Matrix lowest risk

 

Incorporating Corruption/Bribery Levels in a Country Risk Scoring Model

Both the CPI and the TRACE Matrix provide a ranking of the level of corruption risk presented by individual countries. The Corruption Perceptions Index is focused on perceived levels of public sector corruption, whereas the TRACE Bribery Risk Matrix targets the business, or private sector. The Basel AML Index uses both scores in its model, assigning them equal weight.

 

In building a country risk model, some manipulation is needed to incorporate both the CPI and TRACE Matrix data. This is because the CPI scores range from high (least corrupt) to low (most corrupt) and the TRACE Matrix scores are the direct opposite.

 

One rather cumbersome approach would be to mathematically convert one of the indices so the scores are equivalent. A simpler method is to “bucket” ranges of scores into categories of High, Medium-High, Medium, Low, and Very Low. As a result, each country has a risk “level” instead of a numeric risk score that is comparable between both indices.

 

Taking this approach one step further, a point value would be determined for each risk level, for each index, and then assigned as appropriate to each country in the model. The example below illustrates how countries tend to have the same risk level under both the CPI and the TRACE Matrix. To simplify the model even further, a financial institution could select and incorporate only one of the two indices.

 

 

Sample Scoring: CPI vs. TRACE Matrix

CPI vs. TRACE Matrix

 

 

 

Risk Category: Government Sanctions on Countries

Individual countries, e.g., the United States or Canada, or groups of countries such as the European Union or the United Nations, have historically used a variety of sanctions to apply pressure to countries, or individuals, organizations or groups within countries, to cease their actions that threaten peace, violate basic human rights, or fail to comply with international law. These sanctions have ranged from comprehensive economic and trade blocks to more targeted measures such as arms embargoes, travel bans, or financial or trade restrictions.

 

The Basel AML Index does not specifically include such sanctions in its risk model, possibly due to their political origins. Basel’s model does incorporate a category titled “Legal and Political Risks.” This includes risks associated with a country’s degree of media freedom, judicial independence, and strength of the rule of law. A particular country’s weaknesses in one or more of these areas may often correlate indirectly with sanctions imposed upon it by other nations.

 

A financial institution may wish to consider countries on which its government has imposed sanctions to be high risk from a money laundering and terrorist financing perspective. The institution should flag a customer’s transaction activity and other dealings with these countries for additional scrutiny and enhanced due diligence, even though no specific matches to sanctioned parties or activities occurred.

 

Although a discussion of sanctions is beyond the scope of this article, one important point to note is that the name of a sanctions program does not always reflect the actual country or parties being sanctioned. One example is the United States’ and European Union’s sanctions programs targeting Russia’s actions against Ukraine. These sanctions programs are referred to as “the Ukraine sanctions” – yet neither the country of Ukraine nor any individual or group in that country is targeted by them.

 

In summary, when adding sanctioned countries to a country money laundering risk model, a financial institution should understand the underlying targets regardless of the names of the programs.

 

 

 

Putting It All Together

After developing an understanding of the primary elements underlying country money laundering and terrorist financing risks, the next steps are (1) to determine the appropriate model; (2) select the risk factor inputs to the model; and (3) document the rationale supporting these choices.

 

A financial institution could choose to utilize the ready-made Basel AML Index. Alternatively, the Basel Index rankings could form the starting point, and additional risk factors excluded in Basel could be added manually. A financial institution could also choose to build its own model, as discussed throughout this article. Below are the key advantages and disadvantages of each approach.

 Basel AML IndexModified BaselSelf-Developed
Advantages

·   Extremely well-researched

·   Comprehensive

·   Politically neutral

·   Plug-and-play

·   All the benefits of Basel’s research and model

·   Missing risk factors included

·   Full transparency

·   Comprehensive

·   Easily updated as new risks emerge

Disadvantages

·   Only updated annually

·   Some lack of model transparency

·   Excludes some government-associated risk factors

·   Only updated annually

·   Some lack of transparency

·   More upfront effort to develop and document

·   Additional effort for periodic updates

 

All three of these options result in a numeric country money laundering risk “score.” Regardless of the model, it is recommended to convert ranges of numeric risk scores into named risk level ranges, such as High, Medium-High, Medium, etc. This extra step provides several advantages. First, it makes the results much easier to understand and interpret. Second, by assigning a point value to each named risk range, country money laundering risk is more seamlessly translated into a customer money laundering risk scoring model, as well as AML and fraud transaction monitoring systems.

 

 

 

Concluding Comments

A financial institution’s risk scoring models should be as simple as possible while still maintaining effectiveness. Although country money laundering risk has many complex variables, the model for risk scoring countries can still be straightforward and easily updated.

 

Whether a financial institution chooses to employ an independently developed model such the Basel AML Index or builds a model itself, detailed documentation of the model must be obtained/developed and then maintained. As well, this documentation should include the institution’s rationale for the model choice and if applicable, the risk factors it includes. Good documentation provides a clear reference that may be shared with regulators, management, auditors, and all relevant Compliance staff.

 

A financial institution should consider educating front-line staff about country money laundering risk factors, especially if its domestic customer base has many foreign dealings. Staff should understand not only what the risk factors are, but also why. Also, any other types of country risk, such as country credit risk, should be clearly distinguished from country money laundering risk.

 

If using a self-developed model or a modified Basel AML Index, regular updates to underlying country risk factor data are critical. Some data will only be updated annually, such as the Corruption Perceptions Index, the INCSR report, etc. However, FATF and FinCEN often publish new information about countries’ money laundering and terrorist financing risks as they emerge (or deteriorate.) Geo-political issues can go from bad to worse in a short time; therefore, it is essential that a financial institution be able to respond quickly to changes in the model’s risk factors throughout the year, along with a regular annual update.

 

Finally, it is important to reemphasize that no single risk factor exists in a vacuum. All of a country’s risk factors should be considered holistically, as some will be low risk in certain areas, and high risk in others.

 

 

 

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Sources

[1] Financial Action Task Force. FATF Recommendations.

 

[1] Financial Action Task Force. United States Mutual Evaluation Report, December 2016.

 

[1] FATF (2020), Anti-money laundering and counter-terrorist financing measures – United States, 3rd Enhanced Follow-up Report & Technical Compliance Re-Rating, FATF, Paris

 

[1] International Labour Organization. ILO says forced labour generates annual profits of US$ 150 billion. 20 May 2014.

[1] https://www.justice.gov/humantrafficking/key-legislation#:~:text=The%20Trafficking%20Victims%20Protection%20Act%20of%202000&text=No.,of%20slavery%20domestically%20and%20internationally.

[1] Tax Justice Network. How much money is in tax havens?

[1] Tax Justice Network. $427bn lost to tax havens every year: landmark study reveals countries’ losses and worst offenders. 20 November 2020.

[1] International Consortium of Investigative Journalists. The Panama Papers: Exposing the Rogue Offshore Finance Industry. 3 April 2016.

 

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Assessing AML Geographic Risk

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