Investigating the relationships between FATF recommendation compliance, regulatory affiliations and the Basel Anti-Money Laundering Index

Abstract

Money laundering (ML) is harmful as it provides an opportunity for criminals to launder (or legitimise) criminal proceeds and reinvest laundered funds into their activities. ML also creates economic distortions, erosion of financial sectors, reduced government revenue and other socioeconomic effects. To reduce potential ML, governments use security intelligence and financial regulation. To enhance financial security and reduce the illicit ML opportunities, countries will benefit from understanding how the adoption of the Financial Action Task Force (FATF) Recommendations and their regulatory affiliations affect the risk of ML. Our findings reveal irregularity in the guidelines used by countries to develop AML regulatory policy, which undermines AML security. Further, highly FATF-compliant countries tend to enjoy lower ML risk and are often affiliated with well-established regulatory groups. This suggests the need to maintain ongoing and consistent compliance standards across all affiliation groups and further facilitate cross-jurisdictional cooperation among financial intelligence agencies to maximise the spillover effect from highly compliant and low ML-risk jurisdictions.