Report: 64 Percent Of Countries Have Money Laundering Risk

Amid the headlines detailing the billions of dollars in money laundering done through conduits like Danske Bank and Deutsche Bank, among others, a report shows that the problem is a global one — and that it is getting worse.

Certainly the topic is a timely one, and here we delve into why the current anti-money laundering (AML) system and standards in place are less than optimal. In an interview with Karen Webster of PYMNTS, Akli Adjaoute, founder and CEO of Brighterion, said the rules-based system adopted by banks and others battling criminal activity are “pretty much useless.” The tech and rules in place simply go about generating volumes of false positives and are hardly efficient.

A report issued earlier this week by the Basel Institute on Governance trains a spotlight on just how poorly the status quo is working. The seventh annual edition of the Basel AML Index, the report shows that 83 of 129 countries have a risk score of at least 5.0 on a 10-point scale. This classification, as The Wall Street Journal notes, means that there is a “significant” risk for money laundering and terrorist financing. Even more unsettling is the fact that the risk appears to be growing: over 40 percent of companies have higher scores than they did in the last report issued in 2017.

The Basel report notes that there is no country with a “zero” risk of such illegal activities. The risk is scored using data points from sources that come from the World Bank, the World Economic Forum and the Financial Action Task Force. The Basel report also noted that only countries with data sufficient to be used in scoring were ranked. Thus some countries — such as Iran, which stood at the top of the list across the last four years — were excluded from the risk scoring.

There is no quantification of how much money is actually flowing through money-laundering activities and across different nations.

Going down the ranks of “top spots,” Tajikistan topped the list for countries at risk for money laundering. Tajikistan was followed by, in order, Mozambique, Afghanistan, Laos and Guinea Bissa. At the bottom of the list — the lowest-risk countries, according to the index — are Finland, Estonia, Lithuania, New Zealand and Macedonia. In reference to the U.S., the score most recently was 5.0, the ranking was 82, and was up 50 basis points from last year.

What the Data Show

In terms of general trends, the headline is that 64 percent of countries show significant risk of those illegal activities. That risk comes, the Basel report said, as countries are not using the tools they have at their disposal to battle money laundering and terrorist financing.

But even the lower-risk countries, the study found, have seen upward  momentum in their risk scores, tied in part to greater access to data and of course the flow of recently-disclosed scandals at banks and elsewhere tied to money laundering. In one example, Denmark’s score was up in the most recent reading to 4.1, a significant jump from 2.98 in the previous year. Denmark’s Danske, of course, has been under investigation tied to as much as $234 billion in illicit fund flow.

“A low risk score in the Basel AML Index is not a ticket to taking a leave from [anti-money-laundering and counterterrorist financing] vigilance, either for a country’s administration or for companies and financial institutions doing business in that country,” the report pointed out. Danske is a Danish Bank, and “seems to confirm the observation that there are big issues with the effectiveness of money-laundering supervision in countries generally regarded as low risk,” the report said.

In other observations published on the Basel site and centered on the findings, at a high-level view, “money laundering and terrorist financing continue to cripple economies, distort international finances and harm citizens around the globe. Estimates of the amount of money laundered worldwide range from $500 billion to a staggering $1 trillion.”

Fewer than 4 percent of countries that were ranked — four of the 129 — bettered their scores by at least one point. Those countries were Ghana, Bolivia, Tanzania, Trinidad and Tobago. Progress has been slow, where only 17 percent of firms improved their score by one point over the period stretching from 2012 to 2018.

“The downward trend is more striking,” said the report, which noted that “42 percent of countries have worsened their risk scores between 2017 and 2018. Almost 37 percent of countries now have a worse risk score than they did in 2012.”

What Must Be Done

Against that backdrop of rising risk, said the report, “taking a holistic approach to tackling money laundering issues is therefore essential. Economic development can only contribute to reducing the risk of money laundering if it is sustainable, in other words not based on corrupt practices or illegal trafficking.”

But, cautioned the Basel Governance report, countries that undertake what the report termed indiscriminate de-risking — “avoiding rather than managing [money laundering and terrorist financing] risks” by terminating relationships with entire regions or classes of customers — can have disastrous consequences as it cuts entire jurisdictions off from international financial flows, including legal ones.

In terms of guidance, the Basel Governance report said actions to undertake — both to improve risk scores or maintain already relatively low ones — include strong legislation that includes freezing terrorist funds, and measures set in place for domestic and international cooperation. Financial sectors must be highly regulated, with “competent supervisory authorities, and minimal, if any, cash-based transactions.”