Offshore Financial Centers (OFCs) frequently come up in conversations with our clients when assessing AML country risk. In this blog, we want to share data-driven insights and reflections on how to identify OFCs and evaluate their role in money laundering and terrorist financing (ML/TF) risks.

What constitutes an Offshore Financial Center?

Most practitioners seem to recognize an OFC when they see one, yet defining it in a precise and practical way remains challenging. The most commonly referenced document is the IMF’s 2000 Background Paper on Offshore Financial Centers (Link), along with the U.S. Department of State’s 2004 report (Link). While both are over two decades old, their definitions continue to hold significance.

The IMF report highlights the ambiguity of the term:

“At its broadest, an OFC can be defined as any financial center where offshore activity takes place. This would include all major financial centers in the world.”

It further refines the scope by noting that OFCs typically exhibit several characteristics:

A significant number of financial institutions primarily serving non-residents;

Financial systems with external assets and liabilities that are disproportionate to domestic economic activity; and

Features such as minimal or no taxation, lenient regulatory frameworks, banking secrecy, and anonymity.

For this blog, we focus on two core elements of the definition:

1.    Identifying countries with disproportionately large financial sectors;

2.    Assessing whether these countries are flagged by international organizations for deficiencies related to ML/TF, especially concerning anonymity and transparency in beneficial ownership.

To identify jurisdictions with exceptionally large financial sectors, we follow the methodology presented in the BIS Working Paper “Cross-Border Financial Centres” by Pogliani and Wooldridge from 2022 (Link). The authors note the challenges of relying on regulatory or tax attributes, which tend to be qualitative and challenging to quantify.

Instead, they propose a quantitative approach:

Cross-border financial intermediation, defined as the minimum of a country’s external financial assets or liabilities. This focuses on the jurisdiction’s role as a conduit for global capital flows, rather than a source or destination of funds.

We use BIS Locational Banking Statistics, normalized by nominal GDP from the World Bank. For smaller jurisdictions not included in World Bank data—such as Gibraltar, Jersey, and the British Virgin Islands, among others—we have supplemented our data with other credible sources. Although the quality of data varies, particularly for smaller Offshore Financial Centers (OFCs), this approach allows a structured comparison.

The chart above illustrates a strong correlation between GDP and cross-border financial intermediation. To identify “outsized” cases, we estimate a model where GDP explains financial intermediation and then calculate residuals. Countries with the largest positive deviations are those where the financial sector is disproportionately large relative to their economic size. Therefore, let’s revisit the chart and add the country codes of the top 30 outliers.

This metric offers an effective means to rank countries based on the relative scale of their financial sectors.

Step 2: Overlaying ML/TF Risk Assessments 

A large financial sector alone is not necessarily a red flag; it may indicate political stability, strong institutions, or financial expertise. Therefore, we overlay the top 30 outliers identified in Step 1 with independent assessments of ML/TF risk.

FATF Grey List: Jurisdictions under increased monitoring that are actively working with the FATF to address strategic deficiencies in their frameworks for combating money laundering, terrorist financing, and proliferation financing.

EU List of High-Risk Third Countries: Jurisdictions identified by the European Commission as having strategic deficiencies in their anti-money laundering and counter-terrorist financing (AML/CFT) regimes.

EU List of Non-Cooperative Jurisdictions for Tax Purposes: Comprises countries that have either failed to meet their commitments to implement tax good governance standards within an agreed timeframe or have declined to do so.

OECD Ratings on Transparency and Exchange of Information on Request: The Global Forum conducts peer reviews to evaluate jurisdictions’ compliance with the standard for exchange of information on request (EOIR) and assigns ratings accordingly.

OECD Assessment of “Golden Visa” Schemes: While residence and citizenship by investment (CBI/RBI) programs may serve legitimate purposes, they also present potential risks for abuse—such as concealing assets offshore and circumventing reporting obligations under the OECD/G20 Common Reporting Standard (CRS).

Corporate Tax Haven Index: Evaluates the extent to which a jurisdiction’s legal and regulatory framework enables or facilitates corporate tax avoidance, whether by design or effect.

U.S. Department of State OFC Classification (2004): Identifies jurisdictions categorized as offshore financial centers based on the Department’s 2004 assessment.

None of the top 30 countries with outsized financial intermediation are currently listed on the FATF grey list. The FATF assessments examine, among other factors, whether authorities are able to identify and trace beneficial ownership (Immediate Outcome 5), as well as compliance with Recommendations 24 and 25 on the transparency of legal persons and arrangements.

Gibraltar and the United Arab Emirates were recently removed from the FATF grey list, yet they remain on the EU list of high-risk third countries, along with Barbados.

The OECD’s ratings on transparency and exchange of information, the British Virgin Islands, Seychelles, and Anguilla are rated “Partially Compliant”—the second-lowest rating assigned. All other countries in the group have either a “Compliant” or “Largely Compliant” rating.

Several jurisdictions—particularly within the top 10—are classified as corporate tax havens. While such classifications raise concerns around tax evasion and its broader societal impact, we do not automatically equate low corporate tax rates with an elevated money laundering risk.

Some notable jurisdictions—such as Cyprus, Monaco, and Panama—do not appear among the top 30. This suggests that, based on our methodology, their financial intermediation is not disproportionately large relative to the size of their economies.

Identifying OFCs and evaluating their role in money laundering risks requires quantitative and qualitative analysis. By combining data on cross-border financial intermediation with independent ML/TF risk assessments, we get a clearer picture of which jurisdictions may merit closer scrutiny.

A large financial sector does not equate to financial crime—but where anonymity, secrecy, and weak oversight converge, the risk rises. Regular, data-driven reviews are essential for informed risk assessments in today’s globalized financial system.

This blog explores how Offshore Financial Centers (OFCs) intersect with money laundering and terrorist financing (ML/TF) risks. Using a data-driven approach, it identifies jurisdictions with disproportionately large financial sectors based on BIS statistics and GDP data, then overlays this with global AML/CFT risk indicators such as FATF grey list status, EU high-risk third country lists, and OECD transparency ratings. Key findings reveal that while many OFCs are not currently on FATF watchlists, several show concerning patterns related to beneficial ownership transparency and corporate tax avoidance. The analysis offers practical guidance for AML country risk assessments, emphasizing the need for both quantitative benchmarks and regulatory scrutiny.

Offshore Financial Centers in AML/CFT Risk Assessments

In our recent blog post, “Why ‘No Code’ Wasn’t Enough: Lessons from Country Risk Modelling” (Link), we detailed our journey in developing the ESG Index Builder—a tool that enables users to quickly construct ESG country indices, compare countries, and track trends over time. We also highlighted some of the limitations and challenges we encountered during this process.

Additionally, we have updated the underlying datasets powering the ESG Index Builder. The latest data is now accessible and extends the timeline to the end of 2024. Although the tool’s methodology and structure remain the same, the updated data enhances the platform’s relevance and accuracy.

You can access the ESG Index Builder through the CountryRisk.io Lab here (Link). We encourage you to explore it and, as always, we welcome your feedback.

The primary objective of Anti-Money Laundering (AML) country risk ratings is to assess and quantify the level of money laundering and terrorist financing (ML/TF) risk associated with a particular country or jurisdiction. These ratings serve as a critical input for financial institutions and other regulated entities to calibrate their AML controls in line with the specific risks posed by different countries.

Effective assessments of AML country risk require a two-pronged approach: evaluating the inherent risks of ML/TF (such as corruption levels) and assessing the effectiveness of the control environment (which includes the quality of law enforcement and legal institutions). Although these factors are interconnected, it can be argued that the control environment is more critical. A country with a strong legal and regulatory framework provides fewer opportunities for illicit activity to thrive.

The most commonly referenced lists of countries with significant AML deficiencies are those published by the Financial Action Task Force (FATF) and the European Commission.

The FATF publishes two public reports three times a year that identify countries with inadequate AML/CFT (Countering the Financing of Terrorism) and proliferation financing controls (Link):

High-Risk Jurisdictions (the “black list”)

These countries exhibit significant strategic deficiencies. The FATF recommends that all jurisdictions implement enhanced due diligence, and in the most severe cases, countermeasures to safeguard the international financial system from related risks.

Jurisdictions Under Increased Monitoring (the “grey list”)

These countries are actively working with the FATF to rectify the identified gaps. Countries on the grey list have committed to execute action plans within agreed timelines and are under heightened monitoring.

The European Commission’s rationale for its own list of high-risk third countries aligns with that of the FATF (Link):

“The identification of high-risk countries is required to protect the EU financial system and ensure the proper functioning of the internal market… These are countries with strategic deficiencies in their AML/CFT frameworks.”

In line with Directive (EU) 2018/843 (5th AML Directive), regulated entities such as banks must implement enhanced verification and oversight (Article 18a) when engaging with entities from these jurisdictions.

As of May 2025, the following countries are classified as high-risk:

Black list: DPRK (North Korea), Iran, Myanmar

Grey list: Algeria, Angola, Bulgaria, Burkina Faso, Cameroon, Côte d’Ivoire, Croatia, DRC, Haiti, Kenya, Laos, Lebanon, Mali, Monaco, Mozambique, Namibia, Nepal, Nigeria, South Africa, South Sudan, Syria, Tanzania, Venezuela, Vietnam, Yemen

Afghanistan, Barbados, Burkina Faso, Cameroon, DRC, Gibraltar, Haiti, Iran, Jamaica, Mali, Mozambique, Myanmar, Nigeria, North Korea, Panama, Philippines, Senegal, South Africa, South Sudan, Syria, Tanzania, Trinidad and Tobago, Uganda, UAE, Vanuatu, Vietnam, Yemen

An analysis of FATF’s country assessments—particularly for grey-listed countries—reveals a recurring set of deficiencies, including:

TF/PF controls, including targeted financial sanctions (TFS)

National risk assessments and strategic planning

Gaps in the legal and institutional frameworks

For blacklisted jurisdictions, the risk of proliferation financing—especially in the case of DPRK and Iran—is an additional and consistent concern.

To substantiate these themes, we reviewed various country-level indicators related to ML/TF risk. The box plots below illustrate a sample of the data; please reach out for the complete analysis.

Countries on the grey and blacklists exhibit among other aspects:

Elevated proliferation risk, as measured by the Peddling Peril Index

When assessing inherent or predicate risks, the distinctions are less clear-cut. For example, the Organized Crime Index, particularly the sub-indicator for “Drug production & distribution”, shows no notable differences between grey-listed and non-listed countries. The contrast is more pronounced for blacklisted jurisdictions—but with only three countries currently on this list, drawing robust statistical conclusions are limited.

Comparable trends are observed when substituting the FATF list with the EU’s list of high-risk third country: countries with higher levels of corruption are consistently more prone to being included on these lists.

Assessing Consistency Between Listings and Evaluations

One of the strengths of the FATF’s methodology lies in its comprehensive mutual evaluation reports (MERs), which assess jurisdictions based on their technical compliance and effectiveness (Link). Not surprisingly, countries on the grey and black lists exhibit deficiencies in both areas.

However, many non-listed countries also demonstrate low effectiveness scores, indicating that while they may tick the box for legal and regulatory frameworks in theory, their actual implementation is lacking. This highlights a critical challenge: technical compliance alone is insufficient.

We developed an econometric model using the FATF and EU high-risk lists as dependent variables, incorporating the following explanatory indicators:

World Justice Project – Order & Security

A 92% likelihood of Afghanistan being listed as high risk third country by the EU

The model fails to include specific countries from the current lists, including the United Arab Emirates (6.5%) and Barbados (22.5%), unless a significantly low probability threshold is applied. Consequently, we avoid making specific predictions prior to the next FATF plenary on 13 June 2025, when updates to the lists will be announced.

This post explores how Anti-Money Laundering (AML) country risk ratings help assess money laundering and terrorist financing (ML/TF) threats across jurisdictions. It explains how the Financial Action Task Force (FATF) and the European Commission classify high-risk countries through their black and grey lists, based on weaknesses in legal, regulatory, and enforcement frameworks. The analysis highlights recurring deficiencies such as poor beneficial ownership transparency, weak financial supervision, and limited international cooperation. Empirical data confirms that blacklisted and grey-listed countries often exhibit high corruption, low rule of law, and elevated proliferation financing risks.

Money Laundering: High-Risk Country Classifications

ESG Index Builder – Data Update

Bernhard Obenhuber
May 16, 2025

Offshore Financial Centers in AML/CFT Risk Assessments

Money Laundering: High-Risk Country Classifications

Written by:
Bernhard Obenhuber

ESG Index Builder – Data Update

Bernhard ObenhuberMay 16, 2025

Offshore Financial Centers in AML/CFT Risk Assessments

Money Laundering: High-Risk Country Classifications

Written by: Bernhard Obenhuber

Bernhard Obenhuber
May 16, 2025

Written by:
Bernhard Obenhuber