This Week in AML

Basel AML Index 2022 – Moving Backward

This week, the Basel Institute on Governance published its 2022 AML Index. The index assesses countries’ money laundering and terrorist financing risks and capacity to counter them. John and Elliot chat about how the index is constructed, what it says about the state of the global response to these risks, and other key take-aways from this year’s report.



Basel AML Index 2022 – Moving Backward TRANSCRIPT


Elliot Berman: Hi John, how are you this week? 

John Byrne: Hi, Elliot. , doing fine. Obviously, a lot going on, and I just wanted to sort of dive right into it. We had the Basel Institute on Governance actually reached out to us to let us know that they were posting and announcing their AML index for 2022.

Earlier this week. And so we immediately asked them whether they'd be willing to sit down and do a lengthier conversation, so we'll be doing that at some point. But I thought it was important that you and I chat briefly about the index because, as we always talk about, the need for resource information so you can do better training and better due diligence, whether it's from FATF, us, what have you, and this index.

We've known about it. It's a pretty interesting metric of sort of the global response or gap in AML. Both compliance and strategy. 

Elliot Berman: It is indeed for those who aren't familiar with the index. It looks at 18 different factors, which I'm not gonna read out to you, but you can see them in the press release and in the report.

And it scores countries from one to 10, 10 being the highest risk and one being the lowest risk for both money laundering and terrorist financing risk. And then, it comes up with, among other things, an individual country index number and a global index number. The global index number this year is 5.25, which is the same as in 2021.

And what I found interesting is they noted that the first was stuck. Secondly, there was some improvement in the establishment of effective frameworks, but there were four key areas where things went backwards. These are things you and I have talked about quite regularly and we've written about quite regularly corruption, financial transparency, public transparency, and political and legal risks.

And basically, their short description is the results are one step forward and four steps back. 

John Byrne: Right. And just to give you some quick stats, you'll see the countries, all the countries that they rank. The US is 99th with a 4.32. Ireland is 109 at four. Canada is another place where we're obviously located, 101 at 4.25.

Bad or worse countries would be Turkey at 5.54, and then you go all the way up to the number one country listed, which is the Congo, followed by Haiti. So you look at this, and you go, well, what does that mean? And as you said, it's the metrics. They don't just look at things like effectiveness.

They look at a whole series of indicators, what FATF said, what others have said. It's really pretty fascinating. Again, I've seen this before, but sort of looking at it now from a what can we learn from this perspective. I think there's a lot of good. Solid information and, you know, in terms of areas of needed improvement, no surprise.

But because we've talked about this constantly, the issue of beneficial ownership, you know, corporate transparency, is still a big gap. Certainly, you know, we're not finished with the registry in the US. A lot of other countries are still working on this. So things like that are listed in the rankings as well.

Elliot Berman: Yes. They did note that of the ranked countries. They see that both countries, governments, and financial institutions are doing better in running risk-based programs. Right. And they mainly focus, as you and I have many times, on the fact that means putting in the resources you have and focusing them on your highest risk thing. So that was a good thing they talked about the fact that there's still a significant need to improve international cooperation. And they also noted, and this doesn't surprise me, and I know it won't surprise you, that compliance levels are dropping significantly as it relates to cryptocurrencies and virtual assets.

You and I have talked about those spaces a fair amount. They are very fast-moving and fast-evolving, and this is a place where governments often lag when new technologies are racing along as governments try to get their policy viewpoints focused on a very fast-moving target. 

John Byrne: Yeah, And besides country rankings, they do regional rankings too, which I thought was pretty important.

And they list things that we don't always talk about, like which countries that have a high risk of money laundering and terrorist financing also suffer from a high risk of environmental crime. You know, obviously, we've talked a little bit about that. We've actually interviewed some folks, but that's a pretty interesting space as well.

And they also do talk. What happens in terms of high risk? So they say, for example, you know, once they decide, once they measure a country that's considered high risk from all the things that they look at to come up with that. The designation that those high-risk countries can also suffer de-risking, you know, so institutions decide to terminate their operations in those countries to avoid the increased risk and compliance cost.

And then they say it negatively influences those countries' financial stability cuz then capital is exiting the country. And then, of course, we've talked about this many times; it's common that the black market grows as a result of the risk and that further exacerbates the risks of money laundering.

So they do talk about de-risking, then they talk about why they rank something as high risk. As I said, they looked at all sorts of things. They look at FATF European Union. Individual countries have their own list of high-risk countries. So what goes into this is very comprehensive and

I think valuable. So if I'm an AML officer and I'm looking at this, and certainly if I'm global, but even if I'm not, I'm looking at the gaps that they've identified and try to map that to my own internal review and see what is it that we're doing as an institution or that our clients are doing and how we can improve.

Elliot Berman: Yes. I thought it was also interesting that they talked about the fact that. Our improvements in technical compliance, but those are lagged significantly by effective compliance. So again, the idea of just checking the box that your program, either at the institution level or even at the country level, has the things it's supposed to have in it

is not enough. It's that they're deployed in an effective way to actually counteract the risks of money laundering and terrorist financing. One of the things I took away from this is the executive summary. They talk about the fact that, particularly in intergovernmental cooperation, that progress remains paralyzed.

That's a direct quote from the report. That's not a good thing. Slow progress is not ideal, but being paralyzed is a very bad thing, 

John Byrne: Right? Yes. And you're right. That's in the executive summary, which points out the emphasis that they've made there. I'm really excited about talking to their folks in a couple of weeks.

Cause I want to ask not just about how they arrived at the rankings because they do tell you a lot of that in the report. But what do they recommend in terms of responding to the rankings? What can you do as a result? And one of the things they do say in the report is this cannot just be handled by governments alone.

So I think that's interesting. So they say as you're looking at the index, all stakeholders should be addressing risks and weaknesses. And that's also, of course, the private sector. We've always believed that, right? The private-public partnership has always been a key element for us. That, Since day one of making these conversations, it's always been important in our community.

Certainly embraces that, but I think that it's important that they identified that as well. Governments alone, you know, can improve effectiveness. Through simply enforcement, just the regulations. There's gotta be supervision. There's gotta be a response, and there's gotta be resources, training, and all that is sort of logical.

We understand that, but the fact that they called that out, I think, is pretty important. 

Elliot Berman: I agree. And it's something that all of us, whether we're in the government or in the private sector, really need to do. Front of mind so that we're looking for opportunities to forge those partnerships and where they exist to keep them vital and active.

John Byrne: Right. So again, we'll be having a conversation in a few weeks with the folks from the Basel Group and a lengthier conversation. I would say between now and then, if there are any particular questions you have about the report that you'd like me to ask them, send us an email, and we'd be happy to ask those folks to address it. 

Elliot Berman: That's great, John. Besides the conversation with the Basel representatives, what else do you have in the hopper?

John Byrne: We're planning a few additional interviews. So until those are finalized, I'll just leave it at that, in different areas of financial crime and fraud, some government folks, and some folks in the private sector. So we're working on a number of interviews that I hope to have completed before the end of the month. Just a quick aside in an event, a project that you and I are involved in, which is separate from AML RightSource, is our partnership forum, AML Partnership Forum.

That's gonna be held next April in Washington, DC. We're working on that. It'll be our second annual, and more to come on that. The planning committee is already engaged and working on topics and working on panels. So more to come on that, and you can reach that through our website, but also separately, just directly to the AML Partnership Forum website. Excited about that. Can never start putting these programs too early. 

Elliot Berman: No. And, on October 27th, we'll be doing this month's webinar, which will be on AMLA, an update on where we stand. And I know that FinCEN published the beneficial ownership registry regulation. So we'll be talking about that with our expert panel as well as the state of other pending regulations, guidance, and studies.

So you can sign up for that on our website

John Byrne: Sounds great, Elliot. Great talking to you. I hope you feel better, and we will catch up next week. 

Elliot Berman: You too, John. Have a great weekend. Bye-bye.