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Assessing the Assessors: From Form to Substance

Jean Pesme's picture



How good are the experts at evaluating countries’ anti-money-laundering and combating the financing of terrorism (AML/CFT) systems? That was the central question in a new report released last week by the Center on Law and Globalization. The report takes a critical look at the IMF’s evaluations of the AML/CFT systems of 150 countries from 2004 to 2013. Although we may differ on some of the analysis and recommendations, the report provides ample food for thought and raises issues that need to be addressed and, in certain instances, corrected.

It isn’t possible here to provide a full overview of all the points raised in the report, but a few key messages stand out:

The report finds that assessors were too focused on formal compliance (“rules on the books”) and did not, in any systematic fashion, try to ascertain the real impact of a country’s entire AML/CFT regime in practice. In the words of the report, “Reliance (by assessors) was placed on the prima facie plausibility of the claim that adherence to the [international AML] standards would help reduce money laundering and the financing of terrorism.” This criticism goes to a wider point: that evaluations were conducted without a clear articulation of the objectives to be achieved by AML/CFT measures. If you don’t know what a system is meant to accomplish, how can you evaluate it?

These are valid points and they hold true, not just for IMF evaluations, but also for others (including the World Bank) who carried out assessments using the same internationally agreed methodology. However, the report fails to take due account of the considerable work that has been undertaken in recent years to address and correct those shortcomings.

Since 2010, an intensive process of revision has been underway to improve the AML/CFT standards and the assessment methodology. There has been a long and vigorous debate within the Financial Action Task Force (FATF), the global standard-setter on these issues, and between the FATF and other bodies, about the best way to remedy the system’s deficiencies to make assessment reports more useful. Both the Bank and the Fund have played a very active role in this discussion.

As a result of this process, the new standards approved in 2012, along with a new methodology approved in 2013, provide a framework to address those concerns: Countries’ AML/CFT systems are to be judged based upon an assessment of their effectiveness in addressing a country’s ML/FT risks. Are government interventions commensurate to the risks faced? For example, a country with a negligible financial sector and a high use of cash should probably not spend too much money and manpower on policing its securities sector. Conversely, a sophisticated financial center providing easily usable incorporation services should probably keep a close eye on company registration. As a participant in this process, the World Bank has been a strong proponent of this pivot toward risk and effectiveness. In our view, only such an approach can help countries make meaningful decisions regarding their priorities and their strategies.

Of course, as the report notes, that principle in itself then raises a lot of new questions: Who’s going to decide what the risk is? How is it measured? How do you deal with the subjectivity of the team evaluating a risk assessment? These are all relevant points that will undoubtedly come up in our work in the future, but we are optimistic that the AML community will handle them in a sensible manner. A number of steps – such as strengthened training of assessors and upstream quality control of draft assessment reports – have already been taken to strengthen the quality and consistency in the assessment process.

The report is right in pointing out that the AML community could learn a lot from methods used in social sciences. It suggests embracing such steps as audit analysis, mystery shopping and bank-customer profiling, among other measures, all of which would be very useful, but at the same time potentially prohibitive in terms of cost and time. More can and should be done to integrate lessons learned and best practices from those disciplines into our own work.

But, at the same time, it is important to point out how little – to our knowledge – has been done on AML in these fields. Why has the economic effect of criminal flows of funds received only marginal attention by economists? So we would, in turn, like to call upon those relevant specialists within the social sciences to take up the challenge and start looking into criminal flows and money laundering as a serious object of inquiry. Money laundering (and the fight against it) is nothing if not cross-cutting. The AML community should welcome the insights of other disciplines in contributing to an effective response.

There is a lot of substance to the Center on Law and Globalization’s report – more than we could ever hope to cover here. Whatever our disagreements with some of it, however, the most important thing is not to shy away from having a proper debate on the pros and cons of AML. We hope the report can trigger a more extensive and multidisciplinary discussion between the social sciences and the AML community on what works and what does not in AML/CFT and a constructive discussion on how to continuously improve the system. All credit to our friends and colleagues at the IMF for having accepted such an external assessment – and for being willing to open themselves up to move this debate forward.