Biases in National Anti-Money Laundering Risk Assessments

Abstract

This paper considers predictors and potential biases in national Anti-Money Laundering (AML) assessments by the two leading international bodies in the field: the Financial Action Task Force (FATF) and the U.S. State Department (INCSR II). The FATF's technical compliance rankings are found to be predictive based upon national economic and geographic characteristics. There is no strong evidence, and may be zero evidence, of racial bias in this assessment. The FATF's effectiveness ratings, by contrast, are shown to respond most strongly (and troublingly) to whether or not the assessed jurisdiction is black majority.

The State Department INCSR II list is demonstrated to display a strong western hemisphere geographic bias. As a practical matter, this will translate into anti-Hispanic and anti-black bias when INCSR II is used as part of any global AML national risk rating exercise.

Finally, the paper surveys the obvious but seldom commented-upon facts that the vast majority of dirty money and assets resides in, passes through, or is facilitated by the world's largest and richest countries. How then do the world's main AML risk rankings invariably centre blame upon small, relatively poor, and nonwhite jurisdictions?

Keywords: Racial bias, AML, Anti-Money Laundering, FATF, INCSR, Mutual Evaluation Reports

JEL Classification: D02, O19