This week's release of the 2019 Basel AML Index has got us thinking about static country risk models. It's always a challenge forming a consensus around which jurisdiction is the highest risk for financial crime. It often depends on a plethora of factors, but primarily one's own experience. For a compliance professional at an institution that predominately caters to private banking clients, the answer might be Switzerland [BASEL: MEDIUM, SIGMA: MEDIUM]. But for a professional at a trade bank, it could be Hong Kong [BASEL: MEDIUM, SIGMA: HIGH]. It's a lot more challenging determining the lowest risk jurisdiction for financial crime. Despite being home to two of the largest financial centers, some might consider the United States [BASEL: MEDIUM, SIGMA: MEDIUM] and United Kingdom [BASEL: LOW, SIGMA: MEDIUM] the lowest risk due to its strong regulator effectiveness. Others might consider the Vatican [BASEL: N/A, SIGMA: LOW], the world's actual smallest country.
One thing we can agree on is Estonia is definitely not the lowest risk jurisdiction for financial crime. Estonia [BASEL: LOW, SIGMA: MEDIUM], ground-zero for the largest money laundering scandal in recent times, moved up from 2nd to 1st place in Basel AML Index's list of lowest risk jurisdictions for financial crime. According to Basel, the low risk score is "is largely driven by its good performance in the 2014 FATF Country Report." This is despite Estonia's proximity to Russia, a high-risk jurisdiction, which Basel acknowledged as a shortcoming of their methodology.
A lot has happened in the last 5 years, with the ABLV scandal first putting the Baltic states' banking sector in the spotlight. FATF is a tremendous asset to the industry, and its reports provide invaluable insights into the state of country's AML framework. However, their reports should be used in conjunction with more dynamic data. FATF can't be expected to conduct laborious evaluations on every country on an annual basis. After all, FATF is only 0.18% the size of HSBC's compliance function, which cost the institution $800 million during the first 3 months of 2017. As financial crime becomes ever more sophisticated, the shortcomings of static risk models, like Basel's, underscore the importance of new and innovative approaches to risk.