Indicators

Money Laundering/Terrorist Financing risk

FATF Mutual Evaluation Reports

What does it measure?

Financial Action Task Force (FATF) Recommendations are designed to reduce ML/TF risk by increasing effectiveness, detection and prevention, investigation and prosecution, and domestic and international information sharing in the assessed countries.

FATF Mutual Evaluation Reports (MER) provide a comprehensive assessment of a country’s legal framework and its implementation of AML/CFT measures. The assessment is based on compliance with the 40 FATF Recommendations and 11 key effectiveness goals, or “immediate outcomes”.

Why is it important?

FATF data is a primary source for assessing the quality of a country’s legal and institutional AML/CFT framework and its application in practice.

The absence of AML/CFT legislation and of preventive and mitigation measures allow for increased and uncontrolled flows of illicit assets and consequently an increase in the risk of money laundering.

Financial Secrecy Index

What does it measure?

Produced by the Tax Justice Network, the Financial Secrecy Index (FSI) measures the scale of a country’s offshore banking activity, the level of bank secrecy and the size of its financial centre.

The measure for bank secrecy is qualitative and results in the “secrecy score”, which assesses the level of transparency, secrecy and cooperation with information exchange processes based on the legal framework. The second measure is quantitative and reflects the size of each jurisdiction’s share of the global market for financial services provided to non-resident clients. The secrecy score and the weighting are combined using a formula to calculate the final score, which is then used for the FSI ranking.

The FSI underwent a critical methodological review in 2016 and increased its country coverage to 112 countries in 2018.

Read how we handled these changes in calculating the Basel AML Index in 2018.

Why is it important?

The rationale for the inclusion of the FSI score is to take into account relevant environmental and jurisdictional factors that are conducive to money laundering. The logic employed by the FSI is that larger financial sectors provide more opportunities for illicit financial flows to be hidden.

While the methodology is unique, the FSI is based on credible sources and sound methodological standards.

US State Department International Narcotics Control Strategy Report (INCSR): Volume II Money Laundering and Financial Crimes

What does it measure?

The INCSR is an annual report compiled by the US Department of State that assesses the money laundering situation in 200 jurisdictions.

As stated in the 2017 report, it includes an “assessment of the significance of financial transactions in the country‘s financial institutions involving proceeds of serious crime”. It also takes into account steps taken or not to address financial crime and money laundering, each jurisdiction‘s vulnerability to money laundering, the conformance of its laws and policies to international standards, the effectiveness with which the government has acted, and the government‘s political will to take needed actions”.

The Index uses data from Volume II, which covers money laundering and financial crimes. This includes a list of Jurisdictions of Primary Concern, assessed to be “major money laundering countries”.

Why is it important?

The report provides a snapshot of the AML legal infrastructure of each country or jurisdiction and its capacity to share information and cooperate in international investigations. 

Corruption

Transparency International Corruption Perception Index

What does it measure?

Transparency International’s Corruption Perception Index (CPI) score represents an aggregated perception-based dataset, which gives each assessed country a score between 0 (low levels of perceived corruption) and 100 (perceived as highly corrupt).

Why is it important?

Corruption (bribery) is a common predicate offence to money laundering, so countries with high exposure or vulnerability to corruption have a higher risk of money laundering.

Perception-based surveys on corruption are the best approximation to understanding corruption levels because, as with any crime and secretive activity, measuring the actual levels of such activity is not possible.

International organisations and regulatory bodies consider the CPI score as a key criterion for a country risk assessment. The CPI is the most widely used and recognised source for assessing the level of corruption. 

Financial transparency and standards

World Bank Extent of Corporate Transparency Index

What does it measure?

Part of the World Bank’s Doing Business project, the Extent of Corporate Transparency Index measures corporate transparency in ownership stakes, compensation, audits and financial prospects. The information is based on the World Bank Doing Business questionnaire for corporate and securities lawyers.

Why is it important?

Transparency of this type of information in the business sector is a key aspect when considering money laundering risks. Secrecy in these areas allows the true ownership of assets to hidden – an essential aspect of money laundering.

WEF Global Competitiveness Report – Strength of auditing and reporting standards

What does it measure?

The World Economic Forum’s Global Competitiveness Report (GCR) is based on survey questions in 12 categories. One of the categories which feeds into the Basel AML Index relates to the strength of auditing and reporting standards.

Why is it important?

Robust auditing and reporting standards need to be in place to protect companies and the financial industry from being misused for financial crime. Audits can detect irregularities and prevent money laundering activities within the private sector, including the financial sector.

Countries with a low level of auditing and reporting standards might be more vulnerable to money laundering.

WEF Global Competitiveness Report – Regulation of securities exchanges

What does it measure?

Another of the 12 categories of the WEF GCR looks at the capacity of regulators “to ensure the stability of the financial markets”.

Why is it important?

According to the FATF, “the securities industry, along with banking and insurance, is one of the core industries through which persons and entities can access the financial system. This access provides opportunities for criminals to misuse the financial system to engage in money laundering and terrorist financing. The securities industry is evolving rapidly and is global in nature. It provides opportunities to quickly carry out transactions across borders with a relative degree of anonymity. It is thus imperative to highlight and share current information about potential vulnerabilities.”

The vulnerability of this sector depends on the capacity of regulators to oversee and monitor securities.

World Bank IDA Resource Allocation Index – Financial sector regulations

What does it measure?

The World Bank’s International Development Assistance (IDA) Resource Allocation Index (IRAI) rates countries against a set of 16 criteria. The indicator on the financial sector assesses the policies and regulations that affect financial sector development. Three dimensions are covered:

  • Financial stability
  • The sector’s efficiency, depth and resource mobilisation strength
  • Access to financial services

Why is it important?

Sound banking standards and adherence to regulations may be indicative of a country’s vulnerability to financial crime. Banking standards cover the quality of risk management and supervision as well as the regulatory framework. These factors are considered as relevant for the prevention of money laundering/terrorist financing risks.

The indicator has limitations related to its limited country coverage and overlap with other indicators used by the Basel AML Index.

Public transparency and accountability

International IDEA Political Finance Database – Political disclosure

What does it measure?

The International IDEA Political Finance Database assesses countries’ regulations on disclosures by political parties. Experts examine whether provisions exist to disclose political parties’ finances and whether donors have to disclose contributions made.

We selected the following four questions from the IDEA database, as they are the most relevant for a ML/TF country risk assessment:

  1. Do political parties have to report regularly on their finances?
  2. Do political parties have to report on their finances in relation to election campaigns?
  3. Do candidates have to report on their campaign finances?
  4. Is information in reports from political parties and candidates made public?

Why it is important?

Campaign financing may provide avenues for illicit funding and spending as well as opportunities for the misuse of public money. Money laundering may occur in the financing of political parties and election campaigns for the purposes of bribe payments and contributions made in return for advantages, and the misuse of state resources for electoral purposes. Regulations and disclosure in political financial provisions may prevent the abuse of public funds.

Open Budget Index – Budget transparency score

What does it measure?

The International Budget Partnership’s Open Budget Index (OBI) measures the overall commitment of countries to budget transparency and allows for comparisons between countries.

The OBI is based on the answers to 109 questions and focuses on whether the government provides the public with timely access to comprehensive information contained in eight key budget documents.

Why is it important?

Transparency of public funds allows for a better understanding of their use and whether they are at risk of being used for illicit purposes.

Public and civil society can serve as a check and balance for government spending and thus reduce the risk of the misuse of public funds for private gain and money laundering.

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

What does it measure?

This sub-indicator from the World Bank IDA Resource Allocation (IRAI) assesses the extent to which executive, legislators and other high-level officials can be held accountable for their use of funds, administrative decisions and results obtained.

Why is it important?

Transparency is an essential aspect of accountability in fighting corruption and improving public governance. Accountability is enhanced by transparency in decision-making, access to relevant and timely information, public and media scrutiny as well as institutional checks on the authority of the chief executive, for example by the inspector general, ombudsman or independent auditor.

This data set is overall considered less significant than other indicators due to its restricted country coverage, with most high-income countries excluded from the index.

Political risk

Freedom House: Freedom in the World and Freedom of the Press

What does it measure?

Freedom House assesses the media in each country according to 25 indicators and assigns a press freedom score from 0 (best) to 100 (worst).

Why is it important?

Freedom of expression in the press is an important tool to expose money laundering offences and other important policy matters of public interest. Financial institutions use media reports as a source of information for issuing suspicious activity reports on their clients.

Vibrant civil society as well as the media can effectively function as watchdogs to detect money laundering offences. In contrast, low scores in press freedom and political and civil liberties tend to increase the risk of money laundering.

WEF Global Competitiveness Report – Institutional pillar

  • Type: Expert survey
  • Website: www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf

What does it measure?

The institutional pillar from the WEF’s Global Competitiveness Report represents the quality of the institutions in a country. It combines several questions from the Executive Opinion Survey, including survey questions on diversion of public funds, corruption and auditing standards.

Why is it important?

The quality of governance and institutions is a valuable measure to indicate a country’s capacity to prevent money laundering. Countries with weak institutions and levels of governance are more susceptible to crimes related to money laundering and corruption. Nations with strong institutions, on the other hand, are better able to deter, detect and prosecute money laundering offences.

Rule of Law Index

What does it measure?

The World Justice Project (WJP) Rule of Law Index reflects the rule of law in each country by providing scores and rankings organised around nine themes:

  • constraints on government powers
  • an absence of corruption
  • open government
  • fundamental rights
  • order and security
  • regulatory enforcement
  • civil justice
  • criminal justice.

These country scores and rankings are based on answers drawn from more than 100,000 household and expert surveys in 102 countries and jurisdictions.

Why is it important?

A functioning and independent judicial system is a critical measure to deter crime, including financial crimes and money laundering.

A comprehensive assessment of the rule of law in a country indicates its capacity to enforce legislation and regulations in general, including those related to AML/CFT.