A geographic risk indicator is a piece of information showing that a customer, counterparty or transaction is connected to a country, territory or local area with higher risk of money laundering, terrorist financing, sanctions evasion, corruption or fraud. Examples include a customer's residence in a jurisdiction under FATF increased monitoring, a wire routed through a known secrecy centre, or cash activity in a domestic area designated for extra reporting.
Geography is one of the standard risk factors in an AML risk assessment, alongside customer type, products and delivery channels. A geographic risk indicator is the operational form of that factor: the field, flag or score that feeds customer risk ratings and the transaction monitoring scenarios that look for higher-risk flows. The broader practice of understanding the countries a firm deals with is sometimes called know your country.
Geographic risk indicators in plain terms
A travel insurer asks where you are going before it quotes a price. A beach holiday in a calm country costs less to insure than a trip to a place with frequent storms or unrest. The insurer is not saying everyone who visits the riskier place will make a claim, only that the chances are higher, so it looks a little more carefully.
Banks treat countries in a similar way when it comes to financial crime. Some places have weak anti-money laundering laws, heavy corruption, active terrorist groups or are under sanctions. When money comes from or goes to those places, the bank's system marks it. The mark does not mean the payment is wrong; it means a person may need to check it more closely.
Sources of country risk
Firms build their country risk lists from a mix of official and independent sources:
- FATF lists. The FATF names "high-risk jurisdictions subject to a call for action", known as the FATF blacklist, and "jurisdictions under increased monitoring", known as the FATF greylist. Both are updated after each plenary, three times a year. FATF Recommendation 19 asks countries to apply enhanced measures to higher-risk countries when the FATF calls for it.
- Regional and national lists. The European Commission keeps a list of high-risk third countries under Delegated Regulation (EU) 2016/1675, and EU firms must apply enhanced due diligence to business involving them. The UK keeps its own list in its Money Laundering Regulations.
- Sanctions programmes. Countries and regions subject to economic sanctions, such as comprehensive embargoes administered by OFAC, are usually the top risk tier.
- Independent indices. Measures such as the Basel AML Index and Transparency International's Corruption Perceptions Index, and FATF mutual evaluation results.
- Secrecy and tax factors. Use of an offshore financial centre or a tax haven with weak beneficial ownership rules.
- Threat-specific risk. Areas linked to terrorist financing, drug production, human trafficking or proliferation financing, including border regions next to conflict zones.
Sub-national and domestic indicators
Geographic risk is not only about countries. In the US, FinCEN can issue a geographic targeting order that lowers reporting thresholds for certain businesses in named counties or ZIP codes, and federal agencies designate High Intensity Financial Crime Areas. Free trade zones, border towns with heavy cash trade and ports known for trade-based money laundering are also common indicators. Online firms increasingly look at the location implied by IP address and device data, not only the declared address.
How firms use the indicator
Most firms translate the sources into a country risk score or tier (for example low, medium, high, prohibited) and apply it at several points:
- Onboarding. Nationality, residence, place of incorporation and countries of operation feed the customer risk rating and customer risk segmentation.
- Monitoring. Scenarios flag wires to or from high-tier countries, sudden new corridors for a customer, or flows that pass through several jurisdictions, which can also be a layering indicator.
- Correspondent banking. The home country of a respondent bank is a central factor in reviewing a correspondent banking relationship.
- Payments screening. Country fields in payment messages are checked alongside names in sanctions screening.
Limitations and criticism
Country lists are blunt tools. A high country score applied mechanically can lead to de-risking, cutting off remittance corridors and legitimate businesses in poorer countries, a concern the FATF and the World Bank have raised. Lists also lag reality: a jurisdiction may stay on a list after reforms, while risk can grow quickly in places not yet listed. Criminals use intermediate countries to make flows look low-risk, so firms are expected to consider the full route of funds and not only the first and last country.