BASEL INSTITUTE OF GOVERNANCE – AML INDEX, ITS CALCULATIONS & POSITION OF PAKISTAN

BASEL INSTITUTE OF GOVERNANCE – AML INDEX, ITS CALCULATIONS & POSITION OF PAKISTAN

INTRODUCTION

Basel Institute of Governance is a not-for-profit organization established in Basel, Switzerland in 2003. The institute works in collaboration with its partners worldwide for advance knowledge, practice and policy on anti-corruption, asset recovery and business integrity. The institute specializes in the promotion of governance and counter corruption around the world for peace, justice and sustainability. For this purpose, the institute publishes an annual report known as the AML Index highlighting the issues in financial compliance, governance and money laundering of a particular country along with its position.

BASEL AML INDEX

The Basel AML Index is an independent and research based index that is issued annually by the Basel Institute of Governance in which the countries are ranked in accordance to the money laundering and terrorist financing risks. The index calculates the risk score of the country based on the currently implemented anti-money laundering and countering the financing of terrorism (AML/CFT) framework along with its associating factors of corruption, standards implemented within the financial sector and transparency.

The first edition of the Basel AML Index was issued in 2012 and has been providing a thorough evaluation of all countries on annual basis. The latest AML Report is of 2023 which evaluates the countries on an approach best suited to curb money laundering and relevant activities that appear to be in connection with money laundering or terrorist financing. The report even furnishes detailed analysis over the recommendations and immediate outcomes of the FATF along with its efficacy in different countries and regions. The AML index calculation is based on data that has been issued by independent bodies like Financial Action Task Force (FATF), World Bank (WB), World Economic Forum (WEF) & Transparency International. A total of 18 indicators of countries’ adherence to AML/CFT regulations, levels of corruption, financial standards, political disclosure and the rule of law are aggregated into one overall risk score. By combining these data sources, the overall risk score represents a holistic assessment addressing structural as well as functional elements of the country’s resilience against ML/TF.

The five domains that are focused in the AML index calculation for a reliable ML / TF Score are as follows:

1. Quality of AML / CFT Framework – 65%
2. Bribery & Corruption – 10%
3. Financial Transparency Standards – 10%
4. Public Transparency & Accountability – 5%
5. Political & Legal Risks – 10%

QUALITY OF AML/CFT FRAMEWORK – 65%

FATF mutual evaluation reports & Follow up reports 35%

FATF Mutual Evaluation Reports (MER) make up 35% of the entire risk assessment score as it provides a complete snapshot of the country’s legal structure and its implementation with respect to the AML / CFT measures. This evaluation is based on the compliance with the 40 FATF Recommendations and 11 Immediate Outcomes.

The importance of FATF Mutual Evaluation Reports (MER) is that it acts as a primary source for complete evaluation of the AML / CFT framework along with its practice in a country as a part of its legal and institutional framework. In case of absence of AML / CFT legislative frameworks along with preventive and mitigating measures the risk of money laundering increases allowing illicit outflow of assets.

Tax Justice Network Financial Secrecy Index 15%

The Financial Secrecy Index (FSI) is furnished by the Tax Justice network which measures the extent of a country’s offshore banking activity, the level of bank secrecy and the size of its financial center. The measurement of the bank secrecy is qualitative and so are the results as a part of the secrecy score which evaluates the level of transparency, secrecy and cooperation with information exchange processes based on the legal framework. The second measure as apart of the financial secrecy is quantitative and highlights the size of each jurisdiction’s share of the global market for financial services provided to non-resident clients. The qualitative and quantitative results are the combined using a formula in calculating the final score which is then used as a part of the FSI Ranking.

The importance of this index is that is furnishes relevant data pertaining to the environmental and jurisdictional factors that favor money laundering. The logical reasoning deployed by the FSI is that the larger the financial institution the more the opportunities for concealing illicit financial flows.

US State Department: International Narcotics Control Strategy 5%

The International Narcotics Control Strategy Report (INCSR) is based on 2 volumes and published annually by the US Department of State regarding the efforts made by the countries tackling the different aspects of international drug trade. The Basel AML Index uses the second volume of the report as it covers the topics of money laundering and financial crimes. This includes the countries or jurisdictions that been evaluated to be the major money laundering states under the definition “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking”.

The report provides a complete picture of the Legal AML Structure of country or jurisdiction along with its capacity to share information and cooperate in international investigations

US State Department: Human Trafficking in Persons Report 5%

The TIP report is prepared by the Office to Monitor and Combat Human Trafficking in person, US Department of State. The report ranks the countries based on the efforts to recognize and combat human trafficking. The countries are divided into 4 tiers based on the country’s compliance with the standards laid in the Trafficking Victims Protection Act (TVPA) of 2000.

The importance of the report is based on the fact that human trafficking happens to the third largest source for income to organized crime group after drug and arms trafficking according to the United Nations Office on Drugs and Crime (UNODC). In accordance to the Organization for Security and Co-operation in Europe (OSCE), the estimated profit generated through human trafficking mounts to USD 150 Billion. The same estimate has been backed up the FATF Financial Flows from Human Trafficking and had been regarded as one of the most rapidly growing and profitable forms of international crime that is affecting nearly every country of the world. Based on the profits human trafficking is deemed as an offence towards money laundering.

Global Organized Crime Index – Flora, fauna, non-renewable resources 5%

The Global Organized Crime Index was first published in 2021 by the Global Initiative Against Transnational Organized Crime to measure countries for risks relevant to environmental crimes. This index is made from the publicly available information that is carried out by the county or regional experts. The Basel AML Index uses data related to fauna crimes and flora crimes.

The importance of the index and the report is based on the crimes involving wildlife, minerals, fish, forests and waste not only threaten the health of our planet and sustainable livelihoods, but the integrity of financial systems. Such crimes are known as the most profitable enterprise which generates a massive amount ranging from USD 110 to 280 Billion is illicit profits according to the FATF. The FATF regards environmental crimes as one of the basis of money laundering and has urged both the public and private sector to detect and highlight financial flows that generate from environmental crimes

BRIBERY & CORRUPTION – 10%

Transparency International: Corruption Perceptions Index 5%

Corruption Perception Index (CPI) issued by Transparency International highlights the perception of experts and business executives with respect to the corruption in the country’s public sector.

The Index is the most used and recognized source of assessing the level of corruption in any given country. With corruption being one of the major offences that contribute to money laundering, the countries that are subject to high risk or vulnerability have an equally higher risk of money laundering. For this matter perception-based surveys on corruption are carried out to understand the level of corruption in any country since it not possible to measure the actual levels associating it with any crime or secretive activity. International organizations and other regulatory bodies have regarded the CPI score to be the key in country’s risk assessment

TRACE: Bribery Risk Matrix 5%

The TRACE Bribery Risk Matrix or most commonly called as the TRACE Matrix was developed the year 2014 and its annual reports have been available since 2017 covering 200 countries. The matrix is known to provide the country scores related to business bribery risk. The Basel AML Index uses the Domain 1 & 2 as a part of its evaluation. Domain 1 is known as Opportunity and includes factors such as interaction, expectation and leverage. Domain 2 is known as Deterrence which furnishes data on anti-bribery, deterrence and enforcements such as societal disapproval of bribery (Dissuasion) along with government anti-bribery enforcement (Enforcement).

The matrix is relevant and important in terms that corruption and bribery contribute a significant amount of proceeds of crime that are later laundered in the financial system of the country.

FINANCIAL TRANSPARENCY & STANDARDS

World Bank: Extent of Corporate Transparency Index 2.5%

As a part of the World Bank’s Doing Business Project, the extent of Corporate Transparency Index measures the corporate transparency with respect to ownership stakes, compensation, audits and financial prospects. This information is based on the responses from corporate & securities lawyers on the World Bank Doing Business questionnaire. It should be noted that the World Bank’s Report was discontinued in 2021. That last issued report is of September 2021 as continue to be a part of Basel AML index evaluation till the time the World Bank releases its replacement. Four countries happen to be excluded from this report because of major identified discrepancies which are Azerbaijan, China, Kingdom of Saudi Arabia & United Arab Emirates

The importance of transparency and particularly this type of information is a key element for the business sector while considering the risks of money laundering. The secrecy in these areas allows the true ownership be hidden or unknown whish serves as an essential aspect for money laundering.

WEF: Global Competitiveness Report – Strength of Auditing & reporting Standards 5%

The World Economic Forum (WEF) annual Global Competitiveness Report is based on a questionnaire broadly covering 12 categories. The Basel AML Index take into account only one category which related auditing & reporting standards.

The importance of the particular category in the report is that that vigorous auditing and reporting standards are required to be in position in order to protect companies along with the financial industry from the abuse of financial crime. Auditing helps in the detection of irregularities and prevent money laundering activities in the private sector including the financial sector. Countries that have a low level of auditing and reporting standards are highly exposed to the curse of money laundering.

World Bank: IDA Resource Allocation Index – Financial Sector Regulations 2.5 %

The World Bank’s International Development Assistance (IDA) Resource Allocation Index (IRAI) rates the countries based 16 pointers divided in four clusters. The indicator on the financial sector assesses the policies and regulations that impact the development of the financial sector. Three dimensions are covered in this regard financial stability; the sector’s efficiency, depth and resource mobilization strength; and access to financial services.

The importance of the index is relevant as sufficient banking standards and following the regulations may suggest a country’s openness towards financial crime. The banking standards cover the quality of risk management along with the supervision and regulatory framework. The factors are deemed relevant in the prevention of money laundering and terrorist financing

PUBLIC TRANSPARENCY & ACCOUNTABILITY – 5%

International Budget Partnership: Open Budget Survey – Budget Transparency Score 1.66%

The International Budget Partnership’s Open Budget Index measures the commitment of countries regarding budget transparency and even allows for comparison between countries. The OBI is based on 109 questions that focuses on whether the government furnishes comprehensive information to the public in eight key documents.

In terms of the importance of this index the transparency of public funds helps in a better understanding of its utilization and whether they are at a risk of being used for illicit purposes. Here the public and civil society can jointly keep a check and balance on the government spending and help in the reduction of risk related to the misuse of public funds for private gain and money laundering.

International IDEA: Political Finance Database – Political Disclosure 1.66%

The International IDEA Political Finance Database is used in assessing the country’s rules and regulations regarding the disclosures made by political parties. The experts examine whether there are provisions that make political parties disclose their finances and whether donors have to disclose the contribution made to the party. The Basel AML Index considers the following four main questions in this regard from the IDEA Database as they happen to relevant for money laundering and terrorism financing in a country’s 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?

The importance of this database is because of the campaign financing as it can provide the basis not only for illicit funding and spending but also serve as an opportunity for the misuse of public funds. Money laundering can occur in the funding of political parties and election campaigns for the sole purpose of bribery and contribution that have been made in advance for gains and misuse of state resources for electoral purposes. Having appropriate regulations and disclosures in political financing can help in the prevention of misuse of public funds

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

This particular indicator from the World Bank’s IDA Resource Allocation Index (IRAI) evaluates the degree to which the executives, legislators and other high level officials can be held accountable for the utilization of funds, their administrative decisions and the results obtained.

The index holds importance since the transparency happens to be an essential part of accountability and helps in fighting corruption and improvising public governance. Accountability is enhanced by transparency in decision making, access to relevant and timely information, public and media scrutiny along the with institutional check on the authority of the chief executive.

POLITICAL & LEGAL RISKS

WEF: Global Competitiveness Report – Institutional Pillar 2.5%

The institutional pillar is a part of the World Economic Forum (WEF)’s Global Competitiveness Report highlighting the quality of institutions in a country. It is based on a variety of questions from the Executive Opinion Survey on the diversion of public funds, corruption and auditing standards.

The significance of the report is that it furnishes a valuable measure indicating a country’s current capacity in the prevention of money laundering based on the quality of governance and institutions. Countries that have weak institutions or levels of governance are more prone to crimes of money laundering and corruption. Countries that have strong institutions are found to be able to deter, detect and prosecute money laundering offences.

World Justice Project: Rule of Law Index 2.5%

The Rule of Law Index by the World Justice Project (WJP) measures how the rule of law is actually experienced and perceived in each country by providing scores and rankings that are based on the following themes:

1. Constraints on government powers
2. An absence of corruption
3. Open government
4. Fundamental rights
5. Order and security
6. Regulatory enforcement
7. Civil justice
8. Criminal justice.

The importance of the report is based on a functioning and independent judicial system as it plays a critical measure to deter crime which includes financial crimes and money laundering. A thorough assessment of the rule of law in a country highlights the capacity in enforcing legislation and regulations in general including the ones related to AML / CFT.

Freedom House: Freedom in the World – Political rights & civil liberties 1.67%

The report on Freedom in the World tracks the global trends prevailing in a country regarding political rights and civil liberties. The report takes into account a complete analysis of the electoral process, political participation and pluralism, functionality of the government, freedom of expression and beliefs, associational and organizational rights, the rule of law and personal autonomy along with individual rights in 195 countries and 15 territories.

This holds importance in the Basel AML Index because civil society and strong political rights act as powerful mechanisms in monitoring money laundering offences and ensuring integrity of AML / CFT systems. Political and social activists can hold politicians accountable for the quality of AML / CFT system along with the country’s resilience to money laundering and terrorism financing threats. On the other hand, if the civil society is suppressed and the political rights are continuously violated then criminals and corrupt politicians can easily launder money with impunity

WEF: Global Competitiveness Report – Judicial Independence 2.5%

The judicial independence indicator form the WEF report responds to the question: “In your country, to what extent is the judiciary independent from influences of members of government, citizens, or firms?” Scores range from 1 (heavily influenced) to 7 (entirely dependent). The best results signify that the country’s courts are not subject to any influence from other branches of government or private interests. The score is based upon the integration of latest statistics from international organizations and survey of executives.

The importance of independent judiciary is a key requirement in combating financial crimes. A politically dependent judicial system would result in politically motivated prosecutions and mislead about the number of convictions in ML / TF.

Reporters without Borders: World Press Freedom Index 0.83%

Press Freedom Index is an annual report published by Reports without Borders based on the press freedom in 180 countries. The report is based on quantitative data in form of survey and statistics extract from the data on abuses and acts of violence against journalists during the period being evaluated.

It is important in the sense that freedom of expression as a part of journalism is an important tool that exposes the money laundering offences along with other policy matters of public interests. Financial institution can use media report as a source of information in issuing suspicious activity report regarding clients. Media’s function as a watchdog can be effective in the detection of money laundering offences. In case of absence of press freedom, the risk of money laundering increases.

PAKISTAN’S POSITION IN BASEL AML INDEX 2023

In order to understand Pakistan’s position in Basel AML Index 2023 there are certain aspects of the report that one needs to consider. These aspects not only light Pakistan’s score and ranking but also its standing at regional & global level.

The AML Index scores countries on a scale of 10 with 0 being the lowest risk and 10 being the highest risk, however, the ranking starts from the country scoring the highest in AML. Taking Haiti as an example in this regard, the country has a risk score of 8.25 which is high risk and is ranked 1 in this risk. Similarly, Iceland having the lowest risk in terms of ML / TF is ranked at the bottom of the table.

Historical Scores & Position of Pakistan:

The First Basel AML Index was published in 2012 and Pakistan’s score and position has always been towards the higher risk associated countries in terms of money laundering & terrorism financing. Pakistan’s placement in the FATF Grey List was during this time which led to many changes and new regulations to strengthen the AML Policies which led to an improvement in the overall score and position of Pakistan in the Basel AML Index 2023 and removal from the grey list as well.

The historical position and scores of Pakistan in the Basel Index since 2012 are:

YEAR	SCORE	POSITION
2012	6.75	30
2013	6.75	30
2014	6.53	47
2015	6.52	44
2016	6.62	45
2017	6.64	46
2018	6.49	25
2019	6.45	23
2020	6.30	28
2021	6.00	28
2022	6.16	27
2023	5.44	61

Understanding Pakistan’s Current Score & Position as per Basel AML Index 2023:

According the Basel AML Index 2023 report, Pakistan is ranked 61 with a score of 5.44 which still reflects that the country is subject to the curse of financial crimes, money laundering & terrorism financing. In the AML Index of 2022 the country was ranked 27 with a score of 6.16 which shows that Pakistan improved its AML outlook by 0.72.

In the details shared by the Basel AML Index 2023, Pakistan happens to be among the countries that have made significant progress terms of AML / CFT Framework which improved its ratings based of the FATF Mutual Evaluation Reports. The country still has cover a lot of aspects under the 40 Recommendations and 11 Immediate Outcomes laid down by the FATF with respect to AML / CFT Framework.

The AML Index further highlights that Pakistan’s weakest area is “Bribery & Corruption” where the score happen to be the highest. It is urged the country should take measures in curbing the menace of bribery and corruption to be abolished in an effective manner as they pose high risks.

The Financial Transparency and Standards need to be worked upon effectively to ensure that the risks are lowered by taking necessary steps with respect to auditing standards & regulations along with enhanced regulations for the financial sector

The Public Transparency is still subject to risk and the government should take measures and hold themselves accountable and be transparent not just about their activities but also about the funding they get in terms of their respective parties. The government should ensure that budget documentation should be crystal clear for the public for a better understanding to avoid any confusion / conflict.

In terms of political and legal risks, Pakistan’s position does not appear to be anywhere to satisfactory. The uncertainty in the country’s politics along with the public opinion regrading justice and the violation of basic civil rights makes Pakistan more vulnerable to the risks of financial crimes.

Comparing Pakistan’s Score with Global Average Score

DOMAIN	PAKISTAN’S SCORE	GLOBAL AVERAGE	DIFFERENCE
Overall Risk Score	5.44	5.31	+0.13
Quality of AML / CFT Framework	5.73	5.62	+0.9
Bribery & Corruption	5.85	5.02	+0.83
Financial Transparency & Standards	5.73	5.08	+0.65
Public Transparency & Accountability	4.61	4.16	+0.46
Political & Legal Risks	5.25	4.25	+1.00

In comparing Pakistan’s score with the global average its can be clearly observed that the country is having quite a difference. Pakistan has the potential of making it below the global average, but it is only possible if effective steps are taken in all the relevant domains which are:

1. The quality of AML / CFT framework has room for improvements based on the recommendations and outcome provided by the FATF. According to the Basel Index the compliance to FATF recommendations and immediate outcomes have not been fully applied.
2. The domain of bribery & corruption is the biggest known weak area of the country which can be worked upon by strengthening the rules and regulations of the National Accountability Bureau (NAB) and Federal Board Revenue (FBR). The working of these institutions with complete autonomy rather than controlling and using it for political purposes will be fruitful in curbing financial menace in the country.
3. Financial Transparency & Accountability domain can be improved by the implementation industry best practices in terms of Auditing and Reporting Standards.
4. Public Transparency and Accountability can be worked upon by ensuring that the government furnishes even minute details regarding the budget finances with periodic updates so that general public is aware of the financial situation of the country Since all political parties of the country are under the rules set by the Election Commission of Pakistan (ECP) the records of politicians and political parties should be made public at the end of each financial year with no delays. Investigation in funding or illicit or foreign funding to be concluded within a month to ensure transparency.
5. Political & Legal Risk is one of the major areas of concern in the current time after bribery & corruption. This risk remains the most critical one since the country has been facing both political and legal turmoil to a great extent with protests and sit-ins against the incumbent government, denial of basic rights and illegal exercise of power against the citizens and media outlets.

Future Outlook:

The future outlook of Pakistan in the Basel AML Index 2024 is dependent on the same parameters discussed above in detail. Considering the current scenario of the country against all the indicators it looks like that Pakistan’s score will not improve which is not a good sign and not something that the country can afford at the moment. The expected score of Pakistan in the Basel AML Index 2024 to be between 5.8 – 5.6 which will be worse than its current score of 5.44. Similarly, the position of Pakistan to be in between 49-56 worse than the current position of 61.