How Regulatory Gaps Fueling Money Laundering in High-Risk Jurisdictions?

Did you know Haiti, with an alarming risk score of 7.92, and Venezuela, at 7.59, became the highest-risk country for money laundering and terrorist financing in Latin America in 2024?

High-risk regions are often focal spots for illegal financial flows. The focus on high-risk jurisdictions has grown ever more intense in recent years.

These regions, marked by weak regulatory controls and lenient enforcement, have become ideal destinations for illegal financial flows since they are designated as the leading contributors to money laundering on a worldwide scale.

As money laundering proceedings become more tricky, understanding the link between high-risk jurisdictions and rising global financial crime is no longer a choice. It is a must-have for financial institutions to create a secure financial ecosystem in the future.

Whether it is high-risk or low-risk regions, criminals implement their money laundering strategies to exploit vulnerabilities in the AML compliance framework.

The difference remains where low-risk regions capture maximum illicit activities due to their strict and revolutionary AML legislation. On the contrary, high-risk regions are struck under the web of these illegal operations.

Organized crime with a bespoke approach leads to bypassing the protective gateways against financial crime. It conveys the high global demand for institutions to implement anti-money laundering solutions operating in any jurisdiction for comprehensive protective AML measures.

Mapping the Path of Money Laundering Practices

The course of action to launder funds is constantly changing as criminals have come up with inventive ways to wash their illegal money.

Robert Mazur, a former federal agent who operated undercover as a money launderer, shared his insights in January 2013 following the HSBC penalty:

Money laundering operates by hiding the actual source of funds that are procured from illegalities that, in most cases, are known as “dirty money,” such as bribery, corruption, embezzlement, terror financing, and drug trafficking.

These criminal earnings are then converted into legal sources through different methods, usually by forming a front corporation.

Revolutionizing Money Laundering Concept

As per US regulations, money laundering is the process of conducting financial transactions to conceal one’s true identity to get funds illegally.

Meanwhile, its definition somehow varies within the UK common law, that is, “the process of converting illicit proceeds into assets that seem to have a lawful origin that enables their permanent retention or reuse in further illegitimate activities.”

In previous times, money laundering was just about the financial transactions that were linked to organized crime.

Currently, its scope has much expanded under global provisions and legal situations, which is stated as “any financial transaction that creates an asset or value derived from illegal activities, including practices like tax evasion or falsifying accounts.”

Starting with the placement stage, money laundering works by placing illegal money into the financial chain through smurfing and invoice fraud, followed by the layering phase, where complex transactions are conducted to conceal the fund’s source.

The complete cycle of money laundering ends with the integration of the legitimized funds and allowing financial criminals to utilize them openly without any doubt.

What are High-Risk Jurisdictions or Top Money Laundering Hubs?

High-risk jurisdictions represent territories with substantial shortcomings in their legislation to encounter terror funding and money laundering practices.

A global entity, FATF, specifies the term “high-risk money laundering countries or jurisdictions” as the places with strategic AML/CFT drawbacks.

It constitutes the long list of high-risk jurisdictions susceptible to a call for action and countries under intense scrutiny that is usually updated three times per year.

High-risk money laundering countries have shortcomings in their terror funding antidotes and hold a significant degree of corruption, as per the transparency index list, amongst other critical issues.

These jurisdictions are subjected to greater supervision and are exclusively designated by global entities or governments, touching down the consequences of the following:

• Basel AML Index
• FATF’s greylist or blacklist
• High-risk jurisdiction valuations of the European Union, United States, and United Kingdom.

What Does the BSA AML Index Measure?

As the number of incidents of money laundering increases, the amount of dirty money is spreading fast around the world. Government and financial institutes are trying hard to combat these practices of money laundering in any relevant financial and non-financial organizations.

The Basel AML Index is a prominent independent ranking that assesses global risks related to money laundering. Under this procedure, scores are calculated by the Basel Institute on Governance using credentials from different origins, such as the World Bank, FATF, and the World Economic Forum.

The risk ratings incorporate five major categories with 17 indicators that assist in financial illegalities:

• Political threats
• Fraud and corruption
• Public transparency and accountability
• Financial transparency and standards
• Quality of the AML/CFT framework

FATF Approach to Addressing High-Risk Jurisdictions

The FATF’s protocol to openly record high-risk money laundering countries with weak AML/CFT rules has proved its capability.

On 23 October 2024, the FATF assessed 137 countries and jurisdictions that underlined 112 with significant AML/CFT weaknesses. Reassuringly, 85 of these have since taken the necessary steps to strengthen their systems and are no longer under review.

The FATF operating framework for assessing countries on key domains and indicators includes the following steps, which are given below in detail:

• The first step of technical compliance involves the evaluation to check if the country is following all the 40 FATF recommendations in its judicial and institutional framework. These recommendations focus on customer due diligence, beneficial ownership, and global cooperation.
• Practical assessment measures how well a country works in anti-money laundering and CFT systems. It operates on 11 direct impacts, such as comprehending associated risks by following preventive measures and punishing criminals.
• FATF looks out for how countries detect and combat risks by counting on their previous work history. It includes the evaluation of policies for high-risk sectors such as real estate or virtual assets.

The final step of high-risk and monitored jurisdictions involves the FATF recognizing countries under intense monitoring (grey list) or subject to a call for action (black list). These categories are built on considerable strategic deficiencies in their AML/CFT systems.

Classification of Black and Grey Lists in Financial Compliance

FATF’s black and grey lists help identify and reduce risks that are related to money laundering, bribery, and other monetary frauds. The Financial Action Task Force (FATF) usually manages these lists because each department deals with particular issues accordingly.

High-Risk Regions Pointed to a Call for Action (Black List)

High-risk countries designate jurisdictions or regions with strategic faults to combat terror financing, money laundering, bribery, and proliferation funding.

All member states are recognized as high-risk money laundering countries, and the FATF demands all personnel and encourages regions to implement enhanced due diligence in the most intense situations.

Jurisdictions Under Intense Supervision (Grey List)

Jurisdictions under intense supervision continuously operate with the FATF to identify strategic failures in their schemes to counteract financial fraud.

When the FATF places a jurisdiction under intense scrutiny, it means the country is dedicated to settling the recognized strategic failures within the contractual duration and is subjected to more advanced surveillance.

Monaco and Venezuela have recently been added to the greylist, while Turkey and Jamaica have been removed. Monaco’s inclusion follows insufficient progress since its 2022 review by MONEYVAL. Venezuela is encountering issues that are associated with illegal mining and terrorist funding.

Moving on, Turkey and Jamaica revealed notable improvements in applying anti-money laundering (AML) standards. High-risk country ratings assist businesses in assessing difficulties linked to customers and transactions. It enables them to implement appropriate securities.

Instances of Money Laundering Cases from High-risk Countries?

High-risk jurisdictions are often at the center of complex money laundering schemes, as recent cases have demonstrated. Here are some notable examples:

1. Operation Destabilise (October 2024)

• The UK’s National Crime Agency dismantled two money laundering networks in 2024—the Smart Group and TGR Group—that facilitated billions of dollars in illicit transactions annually. These networks used cryptocurrencies to obscure funds for Russian oligarchs, European drug cartels, and cyber criminals.
  • Facilitated transactions for Russian oligarchs, linked to jurisdictions flagged for weak AML measures and sanctions evasion.
  • Exploited regulatory gaps in digital asset oversight are often seen in high-risk jurisdictions.

2. Cyprus Confidential (November 2024)

• The International Consortium of Investigative Journalists (ICIJ) exposed how Cyprus-based financial service providers assisted Russian oligarchs in concealing wealth and bypassing sanctions.
  • Cyprus, historically known for weak AML regulations, allowed offshore companies to provide anonymity to high-risk entities.
  • These activities showcased how high-risk jurisdictions enable financial secrecy and asset protection for sanctioned individuals.

How AML Watcher Mitigates Risks Associated with High-Risk Jurisdictions?

AML Watcher simplifies the complexities of screening from high-risk jurisdictions, offering an advanced suite of tools to safeguard institutions from compliance breaches and financial risks.

It offers:

1. Comprehensive Sanctions and Watchlist Screening

• Institutions need to screen against sanctions lists and global watchlists to ensure they are not engaging with entities or individuals from jurisdictions flagged by FATF (e.g., North Korea, Iran, Myanmar)
• Real-time updates ensure compliance with new restrictions targeting specific high-risk regions.

2. Politically Exposed Persons (PEP) Screening

• Many PEPs operate in or are connected to high-risk jurisdictions with known corruption issues or weak AML controls.
• AML Watcher categorizes politically exposed persons based on risk, helping institutions flag individuals from unstable or high-risk political environments.

3. International Leaks Database

• Offshore accounts and shell companies in jurisdictions like the British Virgin Islands or Cyprus are frequently linked to high-risk activities.
• Access to leak databases helps uncover hidden connections to these regions.

4. Adverse Media Screening

• News about financial crimes, corruption, or illicit activities often originates in high-risk jurisdictions.
• Monitoring global media ensures institutions can identify adverse associations tied to these regions in real-time.

5. Ongoing Monitoring and Alerts

• High-risk jurisdictions often have volatile political or regulatory environments. Continuous monitoring ensures immediate identification of new risks or sanctions tied to these regions.

6. Multilingual and Regional Adaptability

• Adverse media or regulatory updates in high-risk jurisdictions often appear in local languages. Multilingual screening ensures comprehensive coverage.

7. Risk Scoring and Reporting

• Institutions can assign higher risk scores to entities from regions flagged by FATF, EU, or other regulatory bodies, tailoring compliance workflows to these jurisdictions.

8. Enhanced Due Diligence (EDD) Capabilities

• For individuals and entities in high-risk jurisdictions, AML Watcher enables thorough background checks and advanced due diligence. For companies, it identifies beneficial ownership linked to offshore accounts or sanctioned entities. For PEPs, it offers network analysis to uncover associations and risks tied to controversial or conflicted regions.

9. Advanced Name-Matching Algorithms

• AML Watcher’s sophisticated algorithms address linguistic and regional name variations, ensuring precise screening in high-risk jurisdictions where naming conventions differ widely. This reduces false positives and identifies aliases or connections often missed by conventional systems.

10. Real-Time Updates and Monitoring

• AML Watcher provides continuous updates on clients and entities linked to high-risk jurisdictions. Alerts for new sanctions, updated risk profiles, or changes in PEP status ensure institutions are proactive in identifying and mitigating risks emerging from politically unstable or high-risk regions.