Mastering AML Country Risk 

The Basel AML Index is an independent ranking that assesses country-specific money laundering and terrorist financing (ML/TF) risks. Specifically, it provides risk scores for countries and jurisdictions based on data from 17 publicly available sources such as the Financial Action Task Force (FATF), Transparency International and the Global Initiative against Transnational Organized Crime. 

They have developed a composite score based on five risk factors they feel contribute to a high money laundering risk:

The information presented on the Basel AML Index website is colourful and graphical, with a tab listing the countries with a colour scale.

The Basel AML Index is maintained by the International Centre for Asset Recovery (ICAR) at the Basel Institute on Governance.

It's an excellent resource for an overview of a country's or regions inherent ML/TF risk, helping you quickly identify jurisdictions that may warrant enhanced due diligence. There are free and paid for subscriptions. 

The question is, is your firm just looking at the least mandatory resource or is it willing to look at other open source and budget willing paid subscriptions to fully understand the inherent risk of geographical area. 

Transparency International sets out their mission on their home page as '...to stop corruption and promote transparency, accountability and integrity at all levels and across all sectors of society'.

Transparency International is an independent, non-governmental, not-for-profit organisation, that works with like-minded partners across the world to end the injustice of corruption.

They state that '...Corruption happens in the shadows, often with the help of professional enablers such as bankers, lawyers, accountants and real estate agents, opaque financial systems and anonymous shell companies that allow corruption schemes to flourish and the corrupt to launder and hide their illicit wealth.'

Corruption can be both a source of illicit funds and a means to launder those funds, making it a significant area of concern for anti-money laundering efforts.

Corruption is a significant enabler of money laundering. 

Transparency International state that to fight corruption, we have to embrace transparency. They state, 'Transparency is all about knowing who, why, what, how and how much. It means shedding light on formal and informal rules, plans, processes and actions. Transparency helps us, the public, hold all power to account for the common good.'

The Corruption Perceptions Index (CPI), published by Transparency International, is a global ranking tool of countries around the world on the basis of how corrupt their public sector is perceived. It uses data from 13 data sources which are independent from Transparency International to produce their Index. The CPI does not measure activities such as Tax Fraud, Money Laundering, financial secrecy or illicit flows of money. It serves as a powerful proxy for understanding environments where illicit financial activity may flourish.

A high score on the CPI (means less perceived corruption) can be a positive indicator, while a low score suggests a higher risk environment where illicit funds might more easily flow, impacting could your client and transaction risk assessments.

Specialised databases like Know Your Country AML Database compile vast amounts of AML-related information on various jurisdictions. These often include details on a country's AML legislation, regulatory bodies, enforcement actions, and specific risk factors. 

They gather and collate information from wide and authoritative sources such as: CIA Factbook, FATF, FBI, Global Initiative, OECD, HM Treasury, IMF, The Egmont Group, Transparency International, US State Department, UN, World Bank, and Regulatory Authorities world wide. 

The consider the information and provide reports from summaries to granular insights that complement broader indices, offering practical details for your risk assessments.

They provide free executive summaries or paid services, which offer more detailed reports.

While not solely an AML tool, the CIA World Factbook is an invaluable resource for understanding a country's political, economic, social, and geographic landscape. 

This information can help you contextualize other AML risk data, identify potential red flags related to instability, economic distress, or specific industries prevalent in a region, all of which can influence ML/TF risk.

Why it matters for Law Firms: A country's political stability, economic health, and prevalent industries (e.g., resource extraction, large cash economies) significantly impact ML/TF risk. The Factbook helps firms develop a holistic understanding of a client's operating environment, informing the "why" behind certain risks and transactions. 

Impact of not using: Firms might miss crucial contextual risk factors for clients or transactions originating from unstable or economically challenging regions, leading to an incomplete risk profile and potentially overlooking critical red flags.

The U.S. INCSR Reports, published annually by the U.S. Department of State, provide detailed assessments of countries' efforts to combat drug trafficking and money laundering. Volume II specifically focuses on money laundering and financial crimes. 

These reports offer a comprehensive, government-backed perspective on a country's AML/CFT framework, its effectiveness, and areas of concern.

Why it matters for Law Firms: Especially for firms with international clients or those involved in cross-border transactions, these reports offer a critical perspective from a major global economic power. They can highlight jurisdictions with known deficiencies in AML/CTF controls or significant illicit financial activity, even if not yet on broader high-risk lists. 

Impact of not using: Firms may lack insights into significant AML vulnerabilities identified by a leading global authority, potentially engaging in transactions or with clients from jurisdictions that pose an unassessed, heightened risk, especially if there's any U.S. nexus to the transaction.

While focused on tax, the EU list of non-cooperative jurisdictions for tax purposes (often referred to as the EU tax haven blacklist) is highly relevant to AML. 

Jurisdictions on this list are considered non-compliant with international tax good governance standards, which can also indicate weaknesses in their financial transparency and regulatory oversight, increasing ML/TF risks.

The EU list of High-Risk Countries (officially, "High-Risk Third Countries identified by the European Commission") directly identifies jurisdictions with strategic deficiencies in their AML/CFT regimes that pose a significant threat to the EU's financial system. 

Businesses dealing with entities or individuals from these countries are typically required to apply Enhanced Due Diligence (EDD). This is a crucial list for any firm operating within or engaging with the EU.

Sanctions are a direct and immediate indicator of heightened risk. Regularly consulting sanctions lists and country-specific information from authorities like the UK Office of Financial Sanctions Implementation (OFSI), the U.S. 

Office of Foreign Assets Control (OFAC), and the European Union is non-negotiable. These lists identify individuals, entities, and entire jurisdictions subject to financial restrictions, necessitating immediate action and often prohibiting any dealings.

Why it matters for Law Firms: Adhering to sanctions regimes is a strict legal obligation, often with civil and criminal penalties for breaches. Any transaction involving a sanctioned country, entity, or individual is typically prohibited unless specifically licensed. Law firms must screen all relevant parties and jurisdictions against these lists diligently. 

Impact of not using: This is arguably the most severe. It is a strict liability offence. Though there is usually a risk based approach to enforcement, Firms risk criminal prosecution, massive fines, imprisonment for individuals, freezing of assets, and catastrophic reputational damage due to direct breaches of sanctions law. Ignorance is no defence.

By integrating these essential tools into your AML risk assessment methodology, your firm can move beyond generic risk models to develop a truly nuanced, data-driven, and proactive approach to managing geographical AML risk. This could help strengthen your defences against financial crime.

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This post is not legal or regulatory advice and should not be construed as such. 

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