THE EU SAYS:- FINANCIAL SECRECY IS A GEOGRAPHICAL RISK FACTOR AND MUST BE CONSIDERED

The new EU Anti-Money Laundering Regulation (EU 2024/1624) introduces a harmonised rulebook for obliged entities across the EU and explicitly lists “financial secrecy” as a geographical risk factor when assessing customers from third countries.

This EU UPDATE  is critical because Traditional high-risk country lists (so-called ‘blacklists’) fall short of helping manage money laundering and other financial crime risks – the reasons are varied, but it can be said these lists are

• Politically biased,
• Binary (yes-no)
• Overly simplistic and risk having discriminatory effects.
• Usually target small countries or low-income countries, while large financial centres are often overlooked. 

This may be the reason that the new EU Money Laundering Regulation (EU 2024/1624) explicitly defines and states:-

• FINANCIAL SECRECY AS A GEOGRAPHICAL RISK FACTOR
• THAT OBLIGED ENTITIES MUST CONSIDER WHEN APPLYING THEIR CUSTOMER DUE DILIGENCE OBLIGATIONS TO CUSTOMERS FROM THIRD COUNTRIES IN THE FUTURE.

According to the EU  regulation,

• Financial secrecy arises, for example, when countries hinder the exchange of information, fail to maintain registers of beneficial owners, or maintain strict banking secrecy.

What does this mean?

• Under Article 21 and Annexe I of the Regulation, obliged entities must apply enhanced customer due diligence (CDD) when dealing with jurisdictions that:
• Promote financial secrecy or lack transparency.
• Have weak AML/CFT frameworks or insufficient cooperation with international standards.

Why was this added?

• Past scandals (e.g., Panama Papers, Paradise Papers) showed how financial secrecy jurisdictions facilitate money laundering.
• The EU aims to close loopholes by requiring firms to treat such jurisdictions as high-risk, triggering stricter checks.

The EU requirements overlap with the indicators of the Financial Secrecy Index (FSI), thereby enabling a more evidence-based, less politically biased assessment of geographical risks in money laundering prevention.

The Financial Secrecy Index

• Assesses 141 countries using 20 indicators.
• Score reflects the extent of financial secrecy in each country on a scale of 0 to 100, thus providing an objective basis for geographical risk models.
• The underlying database is structured according to scientific standards. It makes unrivalled wealth and depth of comparative legal data and gap analyses publicly available, with over 120 data points per country.

The Financial Secrecy Index is a ranking of countries most complicit in helping individuals to hide their finances from the rule of law:-

• Evaluates how much wiggle room for financial secrecy a country’s laws and regulations provide – this is the country’s ‘Secrecy Score’.
• Monitors how much financial services the country provides to residents of other countries – this is the country’s ‘Global Scale Weight’.

These two factors are then combined to determine how big a role the country plays in enabling financial secrecy globally –

• This is the country’s ‘FSI value’ and is what the government is ranked on.

The index method was statistically validated by the Joint Research Centre of the European Commission in 2018.

The model

• Presented combines the secrecy score with the transaction volume and uses this to calculate a risk score for each transaction or suspicious activity report. This allows suspicious activity reports to be prioritised – particularly important given the large volumes that are received daily by the FIU or generated by transaction monitoring by obliged parties. This model can serve as a safety net to ensure that no big (money laundering) fish slip through the net of other risk assessments.
• As an example,  this method applies to the FinCEN Files, a dataset containing over 18,000 suspicious activity reports from the United States.
• Can help not only FIUs but also banks and other obliged parties fulfil their reporting obligations more effectively and efficiently, thereby reducing the risk of fines. Supervisory and law enforcement authorities can sort suspicious activity reports by urgency and substantiate national risk analyses with data (as we outline in greater detail in an article in the European Journal of Criminal Policy and Research—open access, here).
• Is modularly expandable – for example, for sectors such as real estate or cryptocurrencies – and can be continuously improved via feedback loops. Using anonymised data packages from FIUs, supervisory authorities or obliged parties, the model could be further refined and calibrated to achieve the best results and reduce false positives. We are therefore open to partnerships with authorities, supervisory bodies, the private sector, and obliged parties to improve anti-money laundering and risk assessment further.

A data-based geographical risk assessment could lead to a more targeted use of resources and thus make the fight against money laundering significantly more effective.

The European Union could certainly be even more ambitious in this regard. According to the EU Money Laundering Directive, the above-mentioned consideration of financial secrecy as a geographical risk factor is only mandatory for non-EU member states (‘third countries’).

Of course, obliged entities can go beyond this and apply the same risk parameters to transactions or business relationships within EU countries. After all, the idea that financial secrecy and money laundering risks are not a problem in the EU is far from reality.

Sources

• https://fsi.taxjustice.net/#scoring_id=268
• https://taxjustice.net/2025/10/21/follow-the-money-rethinking-geographical-risk-assessment-in-money-laundering/?utm_source=newsletter&utm_medium=email&utm_campaign=state_of_tax_justice_2025_475_billion_lost_to_global_tax_gag_order&utm_term=2025-11-04
• You can read the full text of the Regulation on EUR-Lex here. [eur-lex.europa.eu] https://eur-lex.europa.eu/eli/reg/2024/1624/oj/eng