An exclusive article by Fred Kahn

A growing debate in the compliance community questions why the global AML system continues to portray certain jurisdictions as high performers despite overwhelming public evidence that they remain deeply exposed to illicit financial flows. From major Western financial hubs to smaller offshore and emerging markets, the persistent contradiction between formal FATF ratings and real-world risk has become too visible to ignore. Positive scores promise stability and control, yet the jurisdictions most celebrated for regulatory alignment still appear regularly in global investigations, offshore leaks, hidden ownership structures, and high-value financial secrecy cases. This article examines the widening gap between expectation and reality by analysing several hand-picked jurisdictions whose public profiles contradict the reassuring picture painted by their FATF assessments.

FATF evaluations grade legislation, frameworks, supervision, and selected enforcement metrics. They do not measure the structural role a jurisdiction plays in offshore investment, cross-border corporate layering, private wealth engineering or political economy vulnerabilities. This distinction explains why strong ratings often coexist with repeated patterns of laundering exposure. A sophisticated financial centre can build a technically advanced AML system, pass assessments and implement reforms, yet remain a hub for hidden capital because the demand for secrecy and asset protection bypasses the very mechanisms the evaluations are designed to measure. The result is a dangerous illusion of strength that reassures regulators but does not necessarily reflect the real risks at play.

The systemic AML paradox

The systemic AML paradox emerges when a jurisdiction performs well in ratings that examine the quality of its legal and supervisory architecture, yet continues to exhibit real-world laundering vulnerability that undermines the practical value of those ratings. This paradox is rooted in the fundamental difference between what FATF evaluates and what illicit finance exploits. FATF methodology measures whether a jurisdiction has adopted the right structures, risk assessments, cooperation mechanisms, and enforcement tools. Criminal networks, however, do not assess the quality of legislation before choosing where to move funds. They examine secrecy, market access, asset protection, corporate layering and economic incentives.

This difference explains why a country can excel on paper yet remain central in laundering pathways. A strong AML system may exist, but criminals exploit the complexity of legitimate financial products, the volume of cross-border activity, the depth of private wealth services, and the availability of legal structures that obscure ownership. These features often belong to jurisdictions with high ratings simply because those jurisdictions invested in regulatory sophistication. FATF ratings reward administrative and legal performance, not the structural exposure inherent in global financial hubs.

The paradox becomes clearer when considering that FATF does not evaluate the attractiveness of a jurisdiction to illicit wealth. It does not measure how often foreign actors use certain investment instruments to hide assets. It does not quantify how offshore companies, trusts or special purpose vehicles are deployed in real transactions. It does not assess the political realities shaping enforcement priorities, nor does it capture the large volume of activity hidden behind intermediaries. As long as a jurisdiction can demonstrate alignment with the standard and deliver evidence of supervisory and enforcement activity, it can score well even while remaining deeply integrated into laundering ecosystems.

This article uses hand-picked jurisdictions to illustrate this structural disconnection. These examples are frequently mentioned in public AML discourse and highlight how on-paper compliance can diverge sharply from practical reality. The cases span Western financial centres, offshore hubs, and less developed markets, demonstrating that the paradox is not limited to any region but is embedded in the way global AML performance is measured.

The best example: Russia

FATF has suspended the Russian Federation’s membership in February 2023. Before its suspension from the global network, Russia was assessed as Highly Effective in both IO6 and IO9, meaning the evaluation concluded that competent authorities made appropriate use of financial intelligence for money laundering and terrorist financing investigations, and that terrorist financing offences were investigated and prosecuted with effective and dissuasive outcomes. Yet public reporting consistently described a financial environment marked by entrenched corruption, large informal economies, complex cross-border financial channels, and persistent concerns about sanctions evasion. The contrast between these high effectiveness scores and Russia’s real-world risk profile became even sharper following geopolitical developments that led to its suspension. The earlier evaluations captured the formal organisation and capabilities of Russian AML and counter terrorist financing institutions, but they did not reflect the deeper systemic vulnerabilities, governance issues, and geopolitical behaviours that shape how illicit funds move within and beyond the country. Russia, therefore, stands as a clear demonstration that strong ratings can mask realities that no on paper methodology is designed to uncover.

Western jurisdictions and the persistent gap between FATF ratings and real-world exposure

Western financial centres provide the clearest demonstration of how strong AML ratings can mask significant money laundering vulnerabilities. These jurisdictions have advanced regulatory bodies, experienced financial intelligence units and extensive legal frameworks. They are capable of demonstrating high technical and effectiveness scores. Yet their global economic roles make them naturally attractive to illicit wealth regardless of their compliance maturity.

The United Kingdom illustrates this contradiction vividly. Public discussions routinely describe London as a magnet for offshore wealth funneled into real estate through multi-layer corporate structures. Investigative reporting has repeatedly shown properties owned via companies registered in secrecy jurisdictions, making it difficult to determine the true owners. This persists despite a sophisticated AML system, years of reforms and high evaluation scores. The FATF rating reflects the strength of the UK’s institutional response, not its real-world vulnerability as a global investment destination.

The United States offers a similar example. While the country maintains powerful enforcement authorities and achieves strong AML ratings, it remains one of the most attractive jurisdictions for those seeking secrecy. Public sources repeatedly emphasise how US-based legal vehicles, including LLC structures, can be used by non-residents to store wealth with limited visibility. This structural secrecy is not fully captured in evaluation metrics because the standard focuses on the presence of rules rather than the volume of hidden wealth flowing through the system. A high rating does not mitigate the appeal of instruments that permit asset protection with minimal disclosure.

Switzerland remains associated with cross-border wealth management, even though it has significantly strengthened its AML regime. Its banking sector and financial services ecosystem serve global private wealth, attracting both legitimate and illicit funds. Despite improvements in transparency and information sharing, public commentary continues to highlight Switzerland’s role in protecting assets held by foreign individuals. The FATF score acknowledges the jurisdiction’s robust framework, but it does not eliminate the inherent exposure of a specialised wealth management industry that is deeply integrated into international financial flows.

Luxembourg stands as another example of high evaluated yet structurally vulnerable performance. Its financial sector includes thousands of investment funds, holding companies and corporate vehicles designed to enable cross-border transactions. These tools serve legitimate global finance, but they can also be used to conceal ownership or move funds discreetly. Public discussions often reference the appearance of Luxembourg structures in complex international arrangements. The jurisdiction’s strong ratings reflect the quality of its institutions, yet they coexist with persistent exposure stemming from its role as a major European investment hub.

These Western cases demonstrate that strong FATF ratings do not necessarily indicate low risk. Instead, they reflect the quality of the system while overlooking the economic and structural factors that make certain jurisdictions perpetual targets for laundering networks.

Less developed hand-picked examples showing formal progress but persistent risk

While Western financial centres show the most pronounced version of the paradox, several less developed jurisdictions also reveal how strong ratings can coexist with ongoing exposure. These jurisdictions often undertake extensive reform programmes to address weaknesses identified in evaluations. As a result, they may significantly improve their technical scores and enhance their institutional frameworks. Yet the structural vulnerabilities that enabled illicit financial activity rarely disappear as quickly as the ratings improve.

Mauritius is a notable example. Over recent years it has transformed its AML framework, strengthened supervision and enhanced its enforcement capabilities. These improvements have been recognised in evaluations. However, Mauritius remains a major international financial centre with an active offshore sector used by global investors. Public commentary often highlights how its structures and treaties can attract cross-border funds seeking tax efficiency or confidentiality. The reforms have strengthened the system, but they have not erased the inherent exposure of a jurisdiction whose financial model depends heavily on international flows.

Qatar also illustrates this dynamic. It has invested heavily in modernising its AML system, achieving strong compliance scores. Yet public discussions often focus on the jurisdiction’s complex financial environment shaped by geopolitical factors, cross-border networks and concentrated wealth. While the system meets international standards, the structural risk profile reflects realities that ratings alone cannot mitigate. Sophisticated frameworks do not automatically reduce the underlying vulnerabilities created by regional political conditions.

Trinidad and Tobago reveals the tension between formal progress and persistent practical challenges. Its AML system has improved, and evaluations recognise its advances. Yet the jurisdiction remains exposed to laundering associated with narcotics trafficking, cash-intensive sectors and organised crime. Public reporting routinely identifies these structural vulnerabilities. The FATF score acknowledges reform success, but the jurisdiction’s domestic crime patterns continue to create significant money laundering risk.

Zimbabwe represents another case where formal improvement contrasts with systemic fragility. It has strengthened its AML framework and taken steps to address deficiencies, yet public economic discussions reveal ongoing illicit financial flows linked to corruption, informal markets and trade-based schemes. Ratings reflect legislative and supervisory enhancements, but they do not fully capture the trajectory of hidden capital shaped by political and economic uncertainty.

Nauru provides a different perspective. Once known for a permissive offshore banking sector, it dismantled its shell bank environment and rebuilt its regulatory architecture. Evaluations acknowledge this transformation. However, its historical role continues to influence how it is perceived internationally. The reforms have reshaped its system, but the lasting impact of previous vulnerabilities highlights the limits of ratings as indicators of real-world risk.

These less developed cases show that while ratings measure progress, they do not automatically resolve entrenched structural issues. The gap between on-paper performance and real-world exposure remains visible because AML frameworks evolve faster than the economic and political landscapes driving illicit finance.

Bridging the gap between strong ratings and practical reality

The disconnect between FATF ratings and real-world laundering vulnerability underscores the importance of interpreting evaluations as indicators of framework maturity rather than as assurances of low risk. The jurisdictions discussed here, both Western and less developed, demonstrate that achieving strong scores is a critical step in AML resilience, but it is only the first step. Formal compliance creates the foundation for effective supervision, meaningful investigations, and cross-border cooperation. Without this foundation, no jurisdiction can realistically manage financial crime.

However, strong frameworks cannot be examined in isolation. Real-world exposure depends on structural features such as market size, secrecy incentives, political conditions, domestic crime patterns, and the availability of intermediaries. These factors often outweigh the benefits of high ratings. A country may be aligned with every global standard yet remain deeply attractive to illicit actors. Conversely, a jurisdiction may make genuine strides in compliance but continue to be affected by longstanding vulnerabilities that ratings cannot fully capture.

AML practitioners should therefore interpret FATF evaluations as starting points for risk assessment, not as final judgments. Assessments provide essential information about a jurisdiction’s intent, capacity, and institutional strength. But they do not measure the scale of illicit finance flowing through a jurisdiction or the complexity of the mechanisms used to obscure beneficial ownership. Effective AML work requires combining the insights provided by ratings with a realistic view of the structural conditions shaping laundering exposure.

As global financial crime grows in sophistication, the gap between ratings and reality will become even more important. Jurisdictions that appear strong on paper may remain the most attractive for hidden capital due to the advantages inherent in their financial markets. Meanwhile, countries emerging from monitoring processes may continue to face vulnerabilities shaped by their political economy. Bridging this gap requires acknowledging that on-paper compliance is a necessary foundation, but it must be evaluated alongside the actual behaviour of illicit networks and the systemic conditions that enable them.

---

Related Links

• FATF Official Publications
• FATF Country Evaluations
• FATF Methodology
• UNODC Anti Money Laundering
• World Bank Financial Integrity

Other FinCrime Central Articles About the FATF

• New FATF procedures and the fast track from MER to escalation
• Inside FATF’s Revised R.16 That Redefines AML Compliance for Payments
• What ChatGPT Has To Say About the FATF 2025 Methodology Changes Compared to Previous Versions

Source: The FATF consolidated assessment ratings

Some of FinCrime Central’s articles may have been enriched or edited with the help of AI tools. It may contain unintentional errors.

Want to promote your brand, or need some help selecting the right solution or the right advisory firm? Email us at info@fincrimecentral.com; we probably have the right contact for you.