Methodology

What’s behind the Basel AML Index?

The Basel AML Index measures the risk of money laundering and terrorist financing (ML / TF) in jurisdictions around the world. It is based on a composite methodology, with 17 indicators categorised into five domains in line with the five key factors considered to contribute to a high risk of ML/TF.
Shortfalls in the AML/CFT framework
Corruption and bribery
Poor financial transparency and standards
Poor public transparency and accountability
Weak political rights and rule of law

High risk

Data sources

The aim of the Basel AML Index is to provide a holistic picture of ML/TF risk. Risk, as measured by the Basel AML Index, is defined as a jurisdiction’s vulnerability to ML / TF and its capacities to counter it. It is not intended as a measure of the actual amount of ML / TF activity in a given jurisdiction.

The 17 indicators differ in focus and scope. We choose indicators based on several criteria, including their relevance, methodology, jurisdiction coverage, public availability, and the availability of recent data. The indicators and weighting are reviewed annually by an independent expert group.

Click the indicators below to learn what they measure and why they are important for evaluating ML/TF risks.

Domain 1: Quality of AML/CFT Framework (65%)

FATF Mutual Evaluation Reports (35%)

Tax Justice Network Financial Secrecy Index (20%)

US State Department International Narcotics Control Strategy Report (INCSR) (5%)

US State Department Trafficking in Persons (TIP) Report (5%)

Domain 2: Corruption and Bribery Risk (10%)

Transparency International Corruption Perceptions Index (5%)

TRACE Bribery Risk Matrix (5%)

Domain 3: Financial Transparency and Standards (10%)

World Bank Extent of Corporate Transparency Index (2.5%)

WEF Global Competitiveness Report – Strength of auditing and reporting standards (5%)

World Bank IDA Resource Allocation Index – Financial sector regulations (2.5%)

Domain 4: Public Transparency and Accountability (5%)

International Budget Partnership Open Budget Index – Budget transparency score (1.66%)

International IDEA Political Finance Database – Political disclosure (1.66%)

World Bank IDA Resource Allocation Index – Transparency, accountability and corruption in the public sector (1.66%)

Domain 5: Political and Legal Risk (10%)

WEF Global Competitiveness Report – Institutional pillar (2.5%)

World Justice Project Rule of Law Index (2.5%)

Freedom House: Freedom in the World – political rights and civil liberties (1.67%)

WEF Global Competitiveness Report – Judicial independence (2.5%)

Reporters Without Borders: Press Freedom Index (0.83%)

Scaling and weighting

Most indicators chosen for the Basel AML Index have their own scoring system. To achieve a unified coding system, individual indicator scores (variables) are collected and normalised using the min-max method into a 0 – 10 system, where 10 indicates the highest risk level.

As with any composite index, each variable then receives a weight to aggregate all scores into one score. In this case, the variables used differ in quality, coverage and relevance, with some components being more applicable than others in assessing ML/TF risk.

The Basel AML Index therefore uses an expert weighting scheme (or so-called “participatory approach”), whereby experts assign a weight for a variable based on their in-depth knowledge and expertise in the matter.

Notes and limitations

Data availability and limitations

Data collection for the 2021 Public Edition of the Basel AML Index was finished in July 2021 and does not reflect developments after that date. The Expert Edition is updated quarterly.

There is not always a complete set of 17 indicators available for all jurisdictions. A jurisdiction’s overall score is calculated based on available data only.

In addition, only jurisdictions with sufficient data to calculate a reliable ML/TF risk score are included in the Public Edition of the Basel AML Index. The Expert Edition contains a more comprehensive overview of all 203 jurisdictions with their risk scores and details of the available data.

Use for compliance or risk assessment purposes

Due to the above limitations, we recommend that the Basel AML Index Expert Edition, rather than the Public Edition, should be used for compliance or risk assessment purposes.

Use of the Expert Edition should also form part of a comprehensive, risk-based compliance programme along with additional indicators and procedures relevant to the organisation’s specific needs.

Perception-based indicators

In contrast to financial risk models based purely on statistical calculations, the Basel AML Index evaluates structural factors by quantifying regulatory, legal, political and financial indicators that influence jurisdictions’ vulnerability to ML/TF. The Index relies partially on perception-based indicators such as Transparency International’s Corruption Perceptions Index.

Transforming qualitative data into quantitative data does not fully overcome the limitations of perception-based indicators. Unlike financial risk models, jurisdiction risk models cannot be used as a solid basis for prediction or for calculating potential loss connected to ML/TF.'

Review meeting and changes in 2021

In 2021, the following methodology changes were decided at the annual review meeting:

  • Change of indicator on media freedom. We are switching from the Freedom and the Media report published by Freedom House to the World Press Freedom Index published by Reporters Without Borders.
  • Change in approach to FATF data. The Public Edition will include only jurisdictions evaluated using the latest (fourth-round) FATF methodology. Jurisdictions evaluated using the older methodology but that otherwise meet the minimum data requirements will be listed separately in the report. This is to improve comparability between jurisdictions.

Comparability of results

The Basel AML Index methodology is reviewed each year to ensure that it continues to accurately capture ML/TF risks. This may affect the comparability of the results over the years.

Comparability between countries is also hampered by a lack of full coverage of countries by FATF fourth-round evaluations. Data from FATF Mutual Evaluation Reports (MERs) and Follow-up Reports, which assess the quality of countries’ AML/CFT systems, makes up 35% of the total risk score in the Basel AML Index. The FATF methodology was revised in 2013 (fourth round of evaluations) in order to assess not only technical compliance with the FATF Recommendations but the effectiveness of AML/CFT systems according to 11 Immediate Outcomes

As per July 2021, 111 jurisdictions had been evaluated with the FATF's fourth-round methodology. Although coverage with fourth-round evaluations is increasing, several countries still have MERs based on older methodologies.