[guest author: Dr. Kateryna Boguslavska]*
Today we are very pleased to welcome, once again, guest blogger Dr. Kateryna Boguslavska of the Basel Institute on Governance (“Basel Institute”), who will discuss the Basel Institute’s release of the 12th annual Public Edition of the Basel AML Index (the “Index”). The data-rich annual Index is a research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing. It is one of several excellent online tools developed by the Basel Institute to help both public- and private-sector practitioners tackle financial crime. We are excited to continue this annual dialogue between the Basel Institute and Money Laundering Watch.
Established in 2003, the Basel Institute is a not-for-profit Swiss foundation dedicated to working with public and private partners around the world to prevent and combat corruption, and is an Associated Institute of the University of Basel. The Basel Institute’s work involves action, advice and research on issues including anti-corruption collective action, asset recovery, corporate governance and compliance, and more.
Dr. Kateryna Boguslavska is Project Manager for the Basel AML Index at the Basel Institute. A political scientist, she holds a PhD in Political Science from the National Academy of Science in Ukraine, a master’s degree in Comparative and International Studies from ETH Zurich as well as a master’s degree in Political Science from the National University of Kyiv-Mohyla Academy in Ukraine. Before joining the Basel Institute, Dr. Boguslavska worked at Chatham House in London as an Academy Fellow for the Russia and Eurasia program.
This blog post again takes the form of a Q & A session, in which Dr. Boguslavska responds to several questions posed by Money Laundering Watch about the 12th Basel AML Index. We hope you enjoy this discussion of global money laundering risks — which addresses terrorist financing, de-risking, non-profits, forfeiture, emerging technologies, and more. – Peter Hardy
The Index emphasizes a failure to confiscate – in the U.S., the phrase would be “forfeit” – illicitly obtained assets. What are the perceived failures here, and why are they important?
Forfeiting illicit assets is key to ensuring that justice is done and that stolen money is returned to victims. That includes citizens of states suffering the effects of widescale corruption and organized crime. Asset forfeiture is also key to preventing crime – the idea is that it deters wrongdoers and prevents illicit funds from being reinvested in illegal activities.
A failure to forfeit illicitly obtained assets undermines the fundamental principles of democracy, too. Citizens rightly ask: where is the rule of law if people get to keep what they steal?
Different countries obviously have different capacities to go after illicit assets. The U.S. is a high-capacity jurisdiction, for example, with strong laws enabling both criminal and civil forfeiture. The Department of the Treasury Forfeiture Fund recorded “total gross non-exchange revenues of $1.150 billion” in 2022, according to its Accountability Report. In 2023 it announced blockbuster forfeitures in the millions and even billions of dollars for cryptocurrencies, in cases ranging from relationship scams and narcotics trafficking to the hack of crypto exchange Bitfinex and the Silk Road dark web marketplace.
Many other countries are also equipped with strong asset forfeiture laws. Data from FATF evaluations shows that most jurisdictions have sufficient legal instruments to confiscate illicit assets. Globally, the average score for technical compliance with Recommendation 4 (the FATF’s standard on confiscation or forfeiture) is 76 percent. This is well above the average of 65 percent across all 40 Recommendations. No jurisdictions are assessed as non-compliant.
The main problem lies with the effectiveness of asset forfeiture in practice. The average global effectiveness in terms of the FATF’s Immediate Outcome 8 (measuring the effectiveness of a jurisdiction’s forfeiture measures) is just 28 percent. The score has not changed since last year.
If you were a factory owner with a process that was just 28 percent effective in producing a good, you would take urgent steps to sort it out.
Typical reasons for poor performance are a lack of resources, poor coordination between law enforcement authorities, a failure to conduct parallel financial investigations alongside criminal investigations, and problems with international cooperation. Readers who are curious about their own country’s effectiveness at confiscating assets can consult the latest FATF evaluations.
The picture is particularly complicated in international cases of asset forfeiture, as these require mutual legal assistance between countries involved in the case. Technical compliance with the FATF’s Recommendation 38 (covering mutual legal assistance for the freezing and forfeiture of illicit assets) is not too bad, at 66 percent globally. But there is no data on the effectiveness of mutual legal assistance in practice.
At the International Centre for Asset Recovery, a specialized center at the Basel Institute that works closely with partner countries to build capacity to recover assets in complex international cases, we see much scope for improvement in mutual legal assistance. But there has been improvement and some of our partner countries are leading the way. Interested readers can learn more about that in this article for the FCPA Blog.
How can confiscation / forfeiture efforts be improved?
How to improve forfeiture rates is hotly debated, especially since the FATF and INTERPOL launched a joint initiative to improve global asset recovery as a way to fight financial crime.
One area of improvement relates to laws and policies. In October 2023, the FATF amended the above-mentioned Recommendations 4 and 38 to strengthen asset recovery obligations. In brief, states should do the following:
- Prioritize asset recovery as a policy objective.
- Allow Financial Intelligence Units to take immediate action to stop suspect money from being transferred.
- Implement and enforce non-conviction based forfeiture mechanisms.
- Ensure international cooperation to freeze and confiscate assets, including in non-conviction based forfeiture cases.
- Ensure the effective management of property that is frozen, seized or forfeited.
In our view, the latest amendments are a move in the right direction towards stronger laws and a more harmonized approach globally.
But as we explain above and in our Basel AML Index report, laws are not the main problem. Even if states align quickly with the FATF’s latest changes to the standards, the question remains how effectively the laws are implemented.
And that will very much depend on the resources available in different jurisdictions and their political readiness to cooperate with others.
The Index notes the tension between the funding of non-profits – an admirable goal – and the unfortunate risk that certain non-profits may serve as conduits for terrorist financing. This risk in turn contributes in part to the phenomenon of “de-risking” by financial institutions. What exactly is the problem here, and how should it be best addressed?
The FATF’s Recommendation 8 is aimed at preventing non-profit organizations from being misused for terrorist financing purposes. It was added to the list of 40 Recommendations following the 9/11 attacks in the U.S.
It is understandable that governments want to block all possible channels that might serve as conduits for terrorist financing. But our analysis shows that Recommendation 8 is very often applied without a proper risk-based approach.
On the government side, national risk assessments generally lack a proper analysis of different types of non-profit organizations. They do not identify which are high risk and which can be safely left alone.
Financial institutions, for their part, are under pressure to comply with regulatory obligations. They often do not have a clear picture of the specifics of non-profit organizations’ day-to-day work. It is easier – and cheaper from a compliance point of view – to “de-risk” them en masse.
This leads to negative and unintended consequences for legitimate non-profits that do valuable work in some of the world’s most desperate contexts. In practical terms, non-profits complain that they have difficulties in performing even basic operations, like opening bank accounts or receiving donations.
The FATF’s amendments to Recommendation 8 in October 2023 may slightly change the situation for better, for example by specifically excluding research and advocacy organizations from the definition of non-profits covered by the standard. But it will not address all the issues. In our view there must be, at the very least:
- a proper assessment of the risks that specific non-profits or categories of non-profits may pose depending on the sources and destinations of their funds and their underlying activities; and
- the ability to tailor regulations, supervision and due diligence to match this understanding.
An understanding of such data and context can only be gained through cross-sector cooperation. Governments, financial institutions and non-profits themselves all have a role to play (see the report for more detail on this).
A risk-based approach to implementing the standard would make far better use of scarce resources on all sides. It would also prevent legitimate non-profits from being over-burdened with due diligence requirements or cut off from the financial system altogether.
The Index also notes that, in this area, the application of seemingly objective technical standards can be subject to politically-motivated abuses. What can be done about that?
The “big picture” message of the Basel AML Index is that laws and standards are only part of the story. How they are implemented is what determines whether or not they have a positive result. And implementation is always a political topic.
Our report notes that the way the FATF’s Recommendation 8 on non-profits is applied is open to abuse for political purposes. For example, non-profits that seek to hold governments accountable could suffer unwarranted targeting and even expulsion. This affects not only the humanitarian work of non-profits but can impact the fundamental human rights of their employees.
A transparent risk-based approach as we encourage above would go some way to easing the situation. But non-profits working in countries where political institutions are weak, the judiciary is compromised, media and civil society freedoms are constrained – incidentally all aspects measured by the Basel AML Index – will always be at greater risk.
The Index suggests that countries should “super charge” their efforts to understand the evolving financial risks of new technologies, including cryptocurrencies. That’s a nice phrase, but what does it mean, in day-to-day practice?
Keeping abreast of the fast evolutions in financial technology – and in the cryptocurrency sphere specifically – is an immense challenge. Whenever authorities narrow the gap by tightening laws and their enforcement, criminals race to get ahead and uncover fresh loopholes.
Our Basel AML Index report looks at how well states are tackling the risks stemming from new technologies like cryptocurrencies. We assessed 161 countries based on their technical compliance with the FATF’s Recommendation 15. This standard covers measures to curb the misuse of cryptocurrencies for money laundering and terrorist financing, among other things.
Global compliance with Recommendation 15 has drastically dropped over the last two years, plunging from 63 percent in 2021 to a mere 43 percent last year. This fall is partly due to a large increase in jurisdictions assessed since 2021, most of which are deficient in this Recommendation.
Overall, just 12.5 percent of countries meet the “compliant” benchmark. In the private sector too, most financial institutions seem to be adopting a cautious “wait and see” stance regarding cryptocurrencies.
There are some basic steps that governments can take to improve their compliance with the FATF’s Recommendation 15 and their ability to deal with evolving financial crime risks – not only from cryptocurrencies but other new technologies around the corner. Based on our analysis of FATF reports and the recommendations given to non-compliance countries, we see five items as essential:
- Use a risk-based approach to identify and assess money laundering risks related to new technologies, including cryptocurrencies. That process starts with national and sectoral risk assessments focused on cryptocurrencies, which few countries have conducted.
- Regulate cryptocurrency service providers in line with the FATF’s Recommendation 15 and related guidance.
- Set up specific, binding and enforceable obligations for reporting entities (such as banks and other non-financial businesses and professions) to manage and mitigate money laundering risks related to new technologies.
- Ensure adequate resources to investigate crimes related to cryptocurrencies. This is crucial: most countries only dedicate a small proportion of regulatory and law enforcement funding to cryptocurrencies. However, it is increasingly recognized that practically all organized crime groups are now using cryptocurrencies as part of their strategies to transfer and launder money.
- Supervise the cryptocurrency sector adequately, using a risk-based approach.
More generally, in order to “supercharge” our efforts we need far greater education and collaboration.
Regulators, law enforcement authorities and financial institutions need to first understand the industry and how cryptocurrencies work in order to perform their respective roles. That means investing in training and education, as well as proactively collaborating across sectors and borders to build capacity around cryptocurrencies and financial crime.
In regards to cryptocurrencies and other new financial technologies, there is a recurring concern regarding so-called “jurisdictional arbitrage” – that is, bad actors will seek to headquarter in jurisdictions with weak compliance or enforcement structures, and then try to do business – legal or not – across the globe. How can this problem be tackled effectively?
Jurisdictional arbitrage is a huge problem for cryptocurrencies, which are basically borderless. Ideally, countries would coordinate and harmonize their standards relating to cryptocurrencies and implement them effectively. We are far from reaching that ideal.
Our analysis of compliance with the FATF’s Recommendation 15 shows a broad spectrum of compliance. Some countries are doing well at regulating and supervising the crypto industry. For example, the United States and Canada demonstrate a fairly good compliance level of 66 percent. Sub-Saharan Africa and South Asia, on the other hand, have compliance levels of only 19 percent and 25 percent respectively. Latin America and the Caribbean demonstrates a regional average of 51 percent compliance.
The European Union is seeking to clarify, strengthen and harmonize legislation relating to cryptocurrency service providers with its Markets in Crypto-Assets Regulation or MiCA. Among other things, the new Regulation seeks to ensure that crypto service providers operating in the EU adhere to the same anti-money laundering and counter financing of terrorism standards as other financial institutions.
Though generally welcomed as a step in the right direction, whether or not this is successful in practice will depend on how effectively governments implement it. And crucially, whether other countries and regions follow suit.
The Index suggests that global effectiveness in fighting money laundering continues to degrade. Why is that, and what is the role here (if any) of so-called professional enablers, which the Index again references?
In the topics covered above, a recurring theme is the poor effectiveness of laws and measures in practice. Globally and across the board, the Basel AML Index notes a continued decline in effectiveness of anti-money laundering and counter financing of terrorism measures. Based on FATF data, we see a decrease in average effectiveness scores over the last two years from 30 percent to 28 percent. That’s not good news!
The topic of “enablers” is highly contentious. Even the term is disputed. Many professionals caught under its umbrella – accountants, lawyers, financial advisers, etc. – feel quite rightly that their professions are being tarnished by being lumped together with the bad guys. In our report, we use it loosely to refer to what the FATF calls designated non-financial businesses and professions or DNFBPs.
It is hard to pinpoint the contribution that DNFBPs make to the declining effectiveness of AML/CFT globally. According to FATF data, DNFBPs’ average compliance with Recommendation 22 on customer due diligence is fairly weak at 56 percent. The FATF does not yet specifically measure the effectiveness of DNFBPs’ measures to prevent money laundering, although there are currently moves to do so in the future.
Even a quick glance at the headlines will show that scrutiny on “enablers” is not going away. This is partly due to the role of some such professionals in helping clients to circumvent sanctions. In April 2023, for example, the UK imposed sanctions on so-called “financial fixers” who allegedly helped two Russian oligarchs to hide their assets.
But it is also due to the continued role of some DNFBPs in traditional money laundering. For example, art dealers and casinos often come under scrutiny – and sometimes suffer blockbuster fines, like Crown Resorts in Australia.
*Basel Institute on Governance
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