Khanh Nguyen/ August 26, 2019/ Uncategorized

“Country indices” is a fixed term with a common definition, which puts the focus on the sources of information. A Country index for example lists countries based on specific characteristics, compiles country ranks based on (statistical) evaluations or even resorts to other sources and presents a so-called compound index. The easy availability is characteristic of this information, since the countries are in part quantitatively assessed by a point system. This makes it easy to incorporate into the company’s own quantitative risk assessment.

The most well-known index is the so-called CPI – Corruption Perception Index, published annually by Transparency International. It ranks countries by their perceived corruption in politics and administration by combining 13 individual indices from twelve independent institutions, whose data are based on expert interviews, surveys and further investigation. Another composite index is the Basel AML Index by the Basel Institute on Governance, which is also issued annually. It ranks 129 countries by their risk of money laundering and terrorist financing. Similarly, the political risk index Coface is published annually by one of the world’s leading credit insurers. However, it ranks countries by political risk. Hence, the political instability of a country could be an enabling factor for terrorist financing or corruption.

Unlike the indices mentioned above, the FATF NCCT list is not classified. Rather, it simply lists countries whose anti-money laundering and terrorist financing legislation does not meet standards according to the FATF. While the listed countries are not quantified, whether or not a country is included in the list can also be easily translated into a quantitative evaluation model.

In addition, there are numerous other rankings and metrics issued by non-governmental organizations and private companies. These also provide valuable information that can improve the quality of risk assessments. However, care must be taken to establish strict selection criteria in order to filter reliable, trustworthy and relevant sources. The following criteria should be considered:

  • How many relevant countries are covered by the index?
  • Is it a well-established index?
  • Is the index published regularly?
  • Which data sources are used?
  • Is the methodology transparent, comprehensible and consistent?
  • Is the publisher an independent and credible institution?
  • Is the index part of another index already used in the risk assessment?

But caution should be exercised not only in the selection, but also in the use of country indices There is a risk that a well-known and widely accepted index, such as the CPI, will be considered as the ultimate tool. However, if you take a closer look, you find that the CPI, for example, does not cover corruption in the private sector. When assessing the risk of corruption associated with a sales agent operating exclusively in the private sector, the CPI may not have the same weight as business activities in the public sector.

The relation of the country to the customer for the use of the CPI is important. It makes a difference whether it is the customer’s home country or the country of the business. While a high prevalence of corruption in the country of business may be an indicator of increased money laundering activity, it might not be the case for a third country which diverts dirty money. However, when country indices are adequately selected and used in a targeted and differentiated manner, they provide an essential tool in assessing compliance risks. In addition, it can help to improve the accuracy of risk assessments. This is the basic requirement for effective and efficient risk-minimizing measures.

References:

https://www.transparency.de/cpi/

https://de.wikipedia.org/wiki/Non-Cooperative_Countries_and_Territories

https://www.baselgovernance.org/asset-recovery/basel-aml-index

https://www.bafin.de/DE/Internationales/GlobaleZusammenarbeit/FATF/fatf_node.html

https://www.coface.de/News-Publikationen-Events/News/Coface-Globaler-Index-fuer-politische-Risiken-steigt-seit-2013.-Konfliktrisiko-zwischen-2007-und-2015-verdoppelt

Photo by Christine Roy on Unsplash

Khanh Nguyen

About Khanh Nguyen

About Khanh Nguyen Khanh Nguyen is a Senior Consultant with targens GmbH. After longstanding experience in the field of compliance consulting with one of the big four auditing companies she was responsible for the Compliance department with an internally operating medium-sized industrial company. With the experience of both worlds her focus is now set on the products SMARAGD CRS and CDD and she supports customers with the implementation of legal requirements in the fields of risk analysis, risk evaluation and customer due diligence.