Methodological approach

The Basel AML Index uses a composite methodology, meaning that the Basel Institute draws its components by aggregating various publicly available sources. In the first stage, the Basel Institute conducted extensive research in measuring money laundering and its challenges before carefully selecting the applied indicators. Only relevant indicators, sub-indicators and assessments that examine AML/CFT standards and other factors related to money laundering risk were considered. This requires a thorough review of the data and methodology.   This was followed by the weighing of indicators according to their importance, based on expert opinions with academic, financial and senior AML experts. The review process entails an annual review meeting with external experts verifying the quality of data, the date, country coverage and methodology. The final selection of sources can be viewed in the box on the right side.

AML methodological Overview

There is no universally accepted list of indicators in assessing a country’s money laundering risk, but some guidance exists on what to look out for. A key consideration is whether a jurisdiction has an adequate AML/CFT framework in place. Other factors include the level of corruption and sanctions. Additional factors such as financial and public transparency as well as a country’s global role in the financial system should be considered to assess the whole picture.

The overall score and its weighting

The overall score is aggregated from 14 indicators / sub-indicators. Each indicator is descaled into a 0 (low risk) to 10 (high risk) scale. The converted indicators are aggregated using a weighting scheme based on a qualitative expert assessment. Consequently, the individual indicators are not weighted equally nor are they weighted as a result of their statistical quality. The individual weights are given by senior anti-money laundering experts from the Basel Institute on Governance and ICAR. The Basel Institute reviews the sources and weighting each year whereby views from external experts are taken into account. Particular emphasis has been placed on the indicators reflecting AML/CFT assessments and financial standards. As a result, the FATF Mutual Evaluation Reports which deal specifically with the topic of AML/CFT have been weighted stronger than, for example, indicators reflecting the civil rights or press freedom, which should be also factored in but in a less representative way.

Notes on the methodology and findings

The Basel AML Index scores provide an overall picture of a country’s risk level and serve as a solid starting point for examining progress over time. While the Basel AML Index scores summarise a complex and multidimensional issue, they should not be viewed as an actual quantitative measurement of money laundering and terrorist financing activity or as a specific policy recommendation for countries or institutions. For a detailed country diagnostic, the Basel AML Index should be complemented by a more fine-grained country profile study. Researchers, policy-makers and compliance officers who are interested in better understanding a country’s risk rating/result are encouraged to consult the specific sub-indicators employed in the construction of the Index. The sub-indicators provide for each country a score that might be more relevant to a specific risk assessment such as for different client segments.

In terms of the weighting, there is no objective standard in creating a composite index, which is why in the development of the Basel AML Index choices and judgments on indicators and weightings were made.

One of the discussion points in our annual reviews were the use of the FATF Mutual Evaluation Reports (MER), which is a key indicator in calculating the overall score.  The FATF MERs and follow-up reports are not conducted annually, resulting in some country assessments being older than others. This issue has been an on-going concern over the years. Due to lack of alternative assessment, however, the Basel AML Index team can only encourage the FATF, and particularly its FATF–regional style bodies, to ensure a consistent and comparable approach in assessing their member countries, while continuing to use the more recent reports available when collecting data for the composite Index. The Basel Institute reviews its methodology frequently and therefore welcomes comments and suggestions on our methodological approach.

What leads to high risk in the Basel AML Index?

Sources

The variables are grouped into the following five categories so that each category has its own weighting.

 

The following table lists all data suppliers and sources that have been used for the Basel AML Index (in alphabetical order).

SOURCEDATE
FATF – Mutual Evaluation Reports
http://www.fatf-gafi.org/
N/a
Freedom House – Freedom in the World & Press Freedom Index
http://www.freedomhouse.org/
2015 - 2016
International IDEA Political Finance Database - selected questions
http://www.idea.int/political-finance
2016
International Budget Partnership - Open Budget Index
http://internationalbudget.org/what-we-do/open-budget-survey/
2015
Tax Justice Network - Financial Secrecy Index
http://www.financialsecrecyindex.com/introduction/fsi-2015-results
2015
Transparency International - Corruption Perception Index (CPI) http://www.transparency.org/cpi2015/2015
US State Department - International Narcotics Control Strategy Report (INCSR): Volume II Money Laundering and Financial Crimes
http://www.state.gov/j/inl/rls/nrcrpt/2016/vol2/index.htm
2016
World Bank Doing Business Ranking – Business Extent of Disclosure Index
http://data.worldbank.org/indicator/IC.BUS.DISC.XQ
2015
World Bank IDA Resource Allocation Index – Selected categories
http://ida.worldbank.org/financing/ida-resource-allocation-index
2014
World Economic Forum - Global Competitiveness Report 2014 – 2015 - selected scores from the Executive Opinion Survey
http://reports.weforum.org/global-competitiveness-report-2015-2016/
2015 - 2016
World Justice Project – Rule of Law
http://worldjusticeproject.org/rule-of-law-index
2015

 

Missing data / Imputation of missing data

There is not always a complete set of 14 indicators available for all countries. A country’s overall score is calculated based on available data only, and missing values are not replaced. In the Public Edition of the 2016 Basel AML Index, only countries for which data is available for a minimum of 8 out of 14 indicators are included in the ranking. Countries for which data is missing in relation to all three indicators in the key category (ML/TF Risk) were excluded as well, regardless of whether in total data on 8 or more indicators was available for them. By contrast, in the Expert Edition 203 countries are included because also those countries that are failing the above criteria are included to a certain extent. These are specifically marked and indicated in the Expert Edition.