Basel AML Index methodology

Data sources

The Basel AML Index uses a composite methodology based on 16 indicators relevant to evaluating ML/TF country risk. These are categorised into five domains in line with the five key factors considered to contribute to a high risk of ML/TF:

AML risk factors illustration
Risk factors for money laundering and terrorist financing

The objective of the Basel AML Index is to provide a holistic picture of money laundering risk. It therefore includes a wide range of indicators, each with a different focus and scope. Indicators may be added or removed by the Basel AML Index to reflect changing ML/TF risks and data sources. 

In the 9th Public Edition released in July 2020 and in the Expert Edition from 1 July 2020 onwards, indicators are the following. Click the down arrows to read more about each indicator and why we have decided to include it in the Basel AML Index.

Domain 1: Quality of AML/CFT Framework (65%)

  • FATF Mutual Evaluation Reports (35%)
  • Tax Justice Network Financial Secrecy Index (20%)
  • US State Department International Narcotics Control Strategy Report (INCSR) (5%)
  • US State Department Trafficking in Persons (TIP) Report (5%)

Domain 2: Corruption Risk (10%)

  • Transparency International Corruption Perceptions Index (5%)
  • TRACE Bribery Risk Matrix (5%)

Domain 3: Financial Transparency and Standards (10%)  

  • World Bank Extent of Corporate Transparency Index (2.5%)
  • WEF Global Competitiveness Report – Strength of auditing and reporting standards (5%)
  • World Bank IDA Resource Allocation Index – Financial sector regulations (2.5%)

Domain 4: Public Transparency and Accountability (5%)

  • International IDEA Political Finance Database – Political disclosure (1.66%)
  • International Budget Partnership Open Budget Index – Budget transparency score (1.66%)
  • World Bank IDA Resource Allocation Index – Transparency, accountability and corruption in the public sector (1.66%)

Domain 5: Legal and Political Risk (10%)

  • Freedom House: Freedom and the Media (2.5%)
  • WEF Global Competitiveness Report – Institutional pillar (2.5%)
  • WEF Global Competitiveness Report – Judicial independence (2.5%)
  • World Justice Project Rule of Law Index (2.5%)

Criteria for the inclusion of indicators

  • Relevance and relationship to risks of ML/TF (related survey questions or assessment of relevant financial standards and regulations)
  • Methodology of sources
  • Availability of recent data (maximum age of data is 2 years with the exception of FATF MERs)
  • Country coverage
  • Public availability
  • Low overlap with other indicators

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Scaling and weighting 

Most indicators chosen for the Basel AML Index have their own scoring system. To achieve a unified coding system, individual indicator scores (variables) are collected and normalised using the min-max method into a 0 –10 system, where 10 indicates the highest risk level.

As with any composite index, each variable then receives a weight to aggregate all scores into one score. In this case, the variables used differ in quality, coverage and relevance, with some components being more applicable than others in assessing ML/TF risk.

The Basel AML Index therefore uses an expert weighting scheme (or so-called “participatory approach”), whereby experts assign a weight for a variable based on their in-depth knowledge and expertise in the matter.

Basel AML Index weighting scheme
Basel AML Index weighting scheme

The expert weighting method includes a degree of subjectivity. The role of the annual Basel AML Index expert review meetings is critical in ensuring that the original weighting decisions continue to be adequate and are not influenced by bias or other undue types of subjectivity.

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Notes and limitations

Data availability and limitations

Data collection for the 2020 Public Edition of the Basel AML Index was finished in June 2020 and does not reflect developments after that date. The Expert Edition is updated at regular intervals throughout the year. There is not always a complete set of 16 indicators available for all countries. 

A country’s overall score is calculated based on available data only, and missing values are not replaced.

In addition, only countries with sufficient data to calculate a reliable ML/TF risk score are included in the Public Edition of the Basel AML Index. The Expert Edition contains a more comprehensive overview of all 203 countries with their risk scores and details of the available data.

Perception-based indicators

The Index relies heavily on perception-based indicators such as Transparency International’s Corruption Perceptions Index. In contrast to financial risk models based purely on statistical calculations, the Basel AML Index evaluates structural factors by quantifying regulatory, legal, political and financial indicators that influence countries’ vulnerability to ML/TF.

Transforming qualitative data into quantitative data does not fully overcome the limitations of perception-based indicators. Unlike financial risk models, country risk models cannot be used as a solid basis for prediction or for calculating potential loss connected to ML/TF.

Comparability of results

The Basel AML Index methodology evolves each year to more accurately capture ML/TF risks, which affects the comparability of the results from year to year. In this case, the addition of two new indicators and subsequent changes in weighting (see section on the Review meeting below) affect the comparability of results.

Comparability between countries is also severely hampered by a lack of full coverage of countries by FATF fourth-round evaluations. Data from FATF Mutual Evaluation Reports and Follow-up Reports, which assess the quality of countries’ AML/CFT systems, makes up 35% of the total risk score in the Basel AML Index. The FATF methodology was revised in 2013 (fourth round of evaluations) in order to emphasise not only technical compliance with the Recommendations but the effectiveness of AML/CFT systems according to 11 Immediate Outcomes.

As per July 2020, 86 jurisdictions out of the 141 covered in the Public Edition (61%) had been evaluated with the FATF's fourth-round methodology, while 55 jurisdictions (39%) have still only been assessed with the third-round methodology. Most countries assessed in the fourth round of evaluations so far have received dramatically lower scores for effectiveness than for technical compliance. This has also had a major impact on their performance in the Basel AML Index, which weighs countries’ results in effectiveness as twice as important as their results in technical compliance.

Use for compliance or risk assessment purposes

Due to the above limitations, we recommend that the Basel AML Index Expert Edition, rather than the Public Edition, should be used for compliance or risk assessment purposes. The Expert Edition should also form part of a comprehensive, risk-based compliance programme along with additional indicators and procedures relevant to the organisation’s specific needs.

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Review meeting and changes in 2020

Each year the Basel Institute brings together external experts from a diverse set of AML, compliance and risk assessment backgrounds to review the methodology of the Basel AML Index for continued validity and adequacy, and to discuss trends in global AML regulation and practice that may impact its effectiveness.

At the two virtual review meetings on 22 and 24 April 2020, the following methodological changes were agreed:

  • New indicator on judicial independence: Data from the World Economic Forum’s Global Competitiveness Report - Judicial Independence will be included in domain 5 “Political and Legal Risks”. The overall weight of domain 5 rises from 5% to 10%.
  • New indicator on human trafficking: Data from the Trafficking in Persons (TIP) Report published by the US Department of State will be included in domain 1 “Quality of AML/CFT Framework”. The indicator will have a 5% weighting. 
  • Exclusion of indicator “Regulation of securities exchanges” from domain 3 “Financial Transparency and Standards” due to the absence of relevant data. The overall weighting of domain 3 decreases from 15% to 10%.
  • Decrease in weight for US INCSR data, which lists jurisdictions assessed by the US as “major money laundering jurisdictions” and appears in domain 1 “Quality of AML/CFT Framework”, from 10% to 5%. In line with the UNSCR’s methodological changes, only one classification level will be used and all listed jurisdictions will be given a score of 10/10.

In addition, due to increasing coverage of countries by FATF fourth-round evaluations, the following jurisdictions now have sufficient data to be included in the Public Edition of the Basel AML Index in 2020: Andorra, Antigua and Barbuda, Bahamas, Barbados, Bermuda, Cayman Islands, Cook Islands, Macao, Mauritius, Samoa, Seychelles, Sri Lanka, Tunisia, Turks and Caicos.

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