Share this post:
Money laundering is an increasing global issue, often involving multiple countries, intermediaries and organizations. One needs to look no further than recent headlines concerning an Iranian-backed Lebanese terrorist organization or a Malaysian government development company to witness this troubling trend.
AML and sanctions risk in every corner of the world
As the United States increases financial pressure against Hezbollah and other sanctioned organizations, a recent conviction of a Lebanese businessman reveals the extent global terrorist networks and other criminal organizations would go through to facilitate money laundering schemes. In a plea agreement, he admitted to engaging in up to $1 billion in transactions cleared through the U.S. financial system and wiring at least $30 million to unwitting U.S. vendors in order to finance Hezbollah, a U.S. sanctioned entity.
On a different front, the increasingly global nature of anti-money laundering (AML) showed its colors in the recent 1Malaysia Development Berhad (1MDB) embezzlement scandal which created a ripple effect that resulted in probes in at least ten different countries. U.S. prosecutors unveiled criminal charges against two former Goldman Sachs bankers and a Malaysian financier tied to the alleged theft of billions from Malaysian sovereign wealth fund 1MDB. Prosecutors announced that a former partner for Goldman Sachs in Asia, had pleaded guilty to conspiracy to launder money and conspiracy to violate the Foreign Corrupt Practices Act, and agreed to forfeit $43.7 million.
Understanding geographic risk is an AML step unwittingly missed
Money laundering and terrorist financing continue to cripple economies, distort international finances, erode trust in the financial industry and harm citizens around the globe. Estimates of the amount of money laundered worldwide range from USD 500 billion to a staggering USD 1 trillion.
A fundamental aspect of ensuring a robust and effective AML program is assessing geographical risks to better understand if a corporate entity’s, organization’s or individual’s location has a material impact on the amount of risk they represent to your financial institution. But while this seems like a basic tenant of risk analysis, for many institutions, the AML risk ratings of each country and territory rely on insufficient, outdated and/or incomplete data. Without regular updates and feedback from regulators as well as other leading financial institutions, banks may be unknowingly opening themselves up to heightened risk. By using the wrong data, it could be as if the risk rating didn’t even take place.
Old risk ratings also mean missed opportunities
While most compliance professionals focus on ensuring underlying risks aren’t missed, financial services organizations must also look for ways to continuously expand their business in a responsible way. But without accurate data, institutions may either de-risk out of fear that they cannot adequately manage evolving sanctions regimes or fail to enter markets when AML risk ratings are lowered as well.
Case in point, Namibia: Last November, the European Union finance ministers removed Namibia from the bloc’s blacklist of tax havens after the country committed to changing its tax rules and practices to bring them in line with the EU’s standards. This significant change in Namibia’s sanctions status could easily have been missed by stale risk rankings with insufficient and outdated data. Having regularly updated and verified information helps detect both increases and decreases in risks of geographic locations enabling banks to assess risks more accurately and make AML controls more efficient, possibly minimizing false-positive alerts as well as increasing true-positive detection.
IBM provides institutions accurate and timely AML risk insights
Understanding that having the right information readily available is the first step in managing compliance risk. IBM Financial Crimes Geographic Risk Insight is an independent, regularly-updated ranking that assesses risk and provides ratings of 281 sovereign and dependent states. Using a methodology developed by Promontory Financial Group, the solution ensures consistency and accuracy applying risk rating best practices on a global scale. Each country is assigned a risk score, a rank and a rating of high, medium or low, based on a cumulative weight of factors indicative of money laundering and terrorist financing. Ratings are adjusted three times per year to accurately monitor the evolving risks of each country. Risk is calculated from the compilation of more than 18 third-party data sources as well as guidance and feedback from regulators and leading financial institutions.
In an interconnected and increasingly complex global financial system, having the right information continuously updated is absolutely essential to maintaining compliance, but also the only way to identify newly opened markets. Without the right data, you may be missing risks as well as opportunities.