Quick guide on assessing the Money Laundering risks of the informal economy

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Informality makes it easier for criminals to operate, both for committing a predicate offence and for laundering the proceeds. It is therefore an important contextual factor and a potential vulnerability that can be exploited. Where relevant to their risk and context, countries should focus on the effects of the prevalence of the informal economy to their AML system, the size of the economy, cash activities and the prevalence of informal financial services. Analysis of the informal economy could be incorporated into the analysis of different threats and vulnerabilities in the NRA, since it can often be a cross-cutting issue, rather than as a stand-alone chapter.

Countries can have many reasons for assessing their level of informal economy including for policy making and taxation, including the development of risk-based AML/CFT policies including simplified measures for assessed lower risk areas. This means that some authorities involved in this exercise may not be directly part of the AML/CFT regime. This presents an opportunity for domestic co-ordination with, for example, the national statistics office of the country or whichever authority is responsible for compiling statistics about population, income, commerce, etc. and to leverage their work.

Assessing and understanding the level of financial exclusion and inclusion in a country is key to for understanding the ML risks related to the informal economy. Financial exclusion may arise from multiple factors that limit access to and usage of formal financial services, and can be an unintended consequence of inappropriate or insufficient application of the risk-based approach to ML, TF and PF risks. Financial exclusion not only harms individuals and businesses, but can also represent a real risk to achieving effective implementation of FATF Standards by driving financial activity into unregulated channels [77].

To consider the relevant ML risks the analysis of the informal sector should cover its root causes and the interplay between financial exclusion, the informal economy, and informal service providers. The risks of financial exclusion are mitigated through financial inclusion measures that increase reliance on regulated, registered or licensed financial services, ultimately strengthening the integrity of the financial system. NRAs should also consider a country's success and effectiveness in reducing the informal economy and use of informal service providers, as a risk mitigating measure. Countries should also consider the impact of government initiatives to cut informality and increase financial inclusion (e.g., simplified measures for assessed lower-risk scenarios) [78], as having more transactions and activity taking place in the formal financial system can help to mitigate some risks. Crucially, when considering the risks represented by products, channels or initiatives seeking to bring formerly informal activity into the formal financial system, countries should compare these with the risk represented by leaving the same activity in the informal economy, and not with an imaginary baseline in which the activity does not take place at all.

As already noted in the NRA guidance, the private sector also has a key role by identifying unlicensed, unregistered financial service providers. These unlicensed, unregistered competitors put them at a disadvantage due to the lack of regulatory burden.

Useful working definitions to reflect on in this section: 

  • Informal economy: As defined by the OECD [79]. Also characterised by the absence of regulation of economic and commercial activity and the frequent use of cash which is apparent or normal to the population [80]. In an AML context, this makes FIs and DNFBPs less susceptible to report transactions involving large amounts of cash. The size of the informal economy is often measured using domestic or international labour statistics [81]. It is important to note that informal economy is not only about informal businesses - it also includes off-the-record transactions of legitimate businesses.
  • Shadow economy: Refers to people who either operate entirely outside the tax and regulatory system or are known to the authorities, but do not correctly report their tax obligations [82]. Another definition is that it refers to market-based production of goods and services whether legal or illegal that escapes detection in the official estimates of GDP [83]. May be used interchangeably with “informal economy”.
  • Use of cash or cash economy: Focuses on the use of cash for high value transactions, cash-intensive lines of business such as trade in vehicles and works of art, and more broadly preferred over other payment methods [84].
  • Informal financial services providers: Entities that offer financial services without regulatory oversight or supervision. These providers operate outside formal financial systems and often rely on personal relationships and community trust. High levels of use of informal financial services may point to financial exclusion from formal financial services and can be addressed by effective financial inclusion policies.
  • De-risking: The phenomenon of FIs refusing to provide, terminating or restricting business relationships with categories of customers (or individual customers) in order to avoid risks altogether, rather than sufficiently understanding and managing the risks in line with the FATF’s risk-based approach [85]. 

As noted in the NRA Guidance, NRA teams should practice scepticism of claims or long-held assumptions that certain sectors “do not exist” in the country or are fully banned by domestic law or regulation, recalling that services may be offered online within a country even if they are hosted in a foreign jurisdiction. While informal usually means something that is “in the shadows” and difficult to measure, there are indicators and assumptions that countries have used to measure informal economy and its impact on criminality including ML [86].

Considerations for ML risk assessment of the informal economy

Countries could consider, but are not limited to, the following [87]:

  • Take into consideration relevant legal and regulatory and contextual issues specific to the country, and the particular threats and vulnerabilities the country faces in terms of informal economy, use of cash, cash economy or shadow economy (see definitions above). 
  • The informal economy may be assessed as one of the contextual factors that can impact risk levels by facilitating certain threats (e.g., fraud) and risks (e.g., use of cash and informal transfer methods). 
  • Analyse the size and nature of the informal economy in the country, including whether it is focused on particular regions or populations. For example, some countries find it useful to measure the difference in between household consumption and disposable income considering all known sources of income and assuming that difference is in the realm of the grey/black economy. Looking at estimated returns in certain sectors and the level of credit afforded to that sector to operate has also been considered. Countries have also looked at detected crimes as a source to calculate the black economy or sources of illegal informal income assuming this only represents 10% of what total estimates could be [88].
  • Analyse how the prevalence of the informal economy is impacting the implementation of AML controls by the private sector, (e.g., STRs not being filed by actors in the informal economy) and examine how this impacts the level of risk.
  • Analyse how the prevalence of the informal economy is impacted by the design of the AML controls by the private sector, e.g., derisking or financial exclusion due to inappropriate identity verification requirements. 
  • Analyse the main drivers of the informal economy (e.g., cultural habits, tax concerns or lack of trust in formal entities). 
  • Consider the level of financial exclusion and any national or regional level initiatives to increase financial inclusion. Lack of financial inclusion pushes individuals and businesses toward informal economic activities. For example, if an individual is not able to open a bank account due to lack of sufficient identification, they may be forced to rely on cash transactions, which are outside of the formal financial system and cannot be tracked.

Countries could consider including the following stakeholders:

  • Public sector: Ministries of Labour and employment, trade union associations, FIUs, customs authorities, immigration authorities, LEAs, security and intelligence agencies and local government authorities.
  • Private sector: market associations, microfinance institutions, mobile money operators, trade associations, remittance service providers and civil society organisations.

Countries could consider the following data sources to support their risk assessment. This list is non-exhaustive:

  • Value of small remittances by domestic workers vs. transactions occurring in unlicensed financial services where large amounts of funds are moved. Small domestic remittances may be done through mobile money or wallet to wallet transfers.
  • Frequency and volume of cash transactions, ratio of cash transactions to total transactions, Currency in circulation and cash to GDP ratio.
  • Avenues to consider when assessing use of cash include which channels are predominantly used to launder domestically (e.g., purchase of vehicles or art) and how much cash goes outside country borders.
  • Cash transaction reports by FIs and DNFBPs if required by the country and received by the FIU can be useful statistics to create a heatmap of cash use.
  • Information from LEAs on investigations and prosecutions related to the value of the cash proceeds of corruption or tax offences.
  • Reports by other international organisations (e.g., International Labour Organisation (ILO), International Monetary Fund (IMF), World Bank, OECD) on the informal economy, use of cash, statistics on how informality facilitates crime and ML in the jurisdiction.
  • Central Bank or other statistics on unlicensed or unregistered activity, statistics on money aggregates.
  • National and International statistics and research on financial inclusion and financial exclusion, such as the World Bank’s Findex database [89].
  • Engagement with micro-lending entities which often deal with informal businesses and promote financial inclusion.
  • Collaboration between banks and tax authorities to analyse statistics on credit granted, revenues and tax declarations.
  • Supervisory actions against unlicensed or unregistered entities.
  • Engagement with private sector on estimated unlicensed or unregistered financial or non-financial activity.
  • Tax authority data on audit, fiscalisation, tax collection. Data on cases of tax evasion.

Informal economy risk assessment case studies

Footnotes

[71] UN Development Programme, Informal Economy Data Explorer, https://data.undp.org/insights/informal-economy (accessed 20 March 2025).

[72] World Bank, Financial Inclusion Overview,                 www.worldbank.org/en/topic/financialinclusion/overview#:~:text=The%20expansion%20of%20digital%20financial,owning%20an%20account%20by%202021 (accessed 15 May 2025).

[73]  Elgin, C., M. A. Kose, F. Ohnsorge, and S. Yu. (2021), Understanding Informality. CERP Discussion Paper 16497, Centre for Economic Policy Research, London.       www.worldbank.org/en/research/brief/informal-economy-database

[74]  It is important not to confuse cash usage for illegitimate reasons (e.g. tax avoidance, ML) with general cash usage. Access to cash is also important from a financial inclusion perspective especially for vulnerable categories of people such as the elderly, uneducated and people with disabilities. See: FATF (2025), Financial Inclusion and AML/CFT Measures, Guidance-Financial-Inclusion-Anti-Money-Laundering-Terrorist-Financing-Measures.pdf.coredownload.pdf, footnote 99.

[75]  For example, Nicaragua’s MER notes over 75% of transactions occur in the informal economy  and queries impact on overall system (e.g. application of CDD in financial and non-financial designated entities).  Italy’s NRA describes the informal economy as a vulnerability of the socio-economic system. The MER notes the high use of cash and relatively large informal economy very significantly increases the risk that illicit proceeds may be rechannelled into the regulated formal economy.

[76]  The Association of Chartered Certified Accountants (2017), Emerging from the shadows, the shadow economy to 2025, www.accaglobal.com/content/dam/ACCA_Global/Technical/Future/pi-shadow-economy.pdf (accessed 20 March 2025).

[77]  FATF (2025), Financial Inclusion and AML/CFT Measures, Guidance-Financial-Inclusion -Anti-Money-Laundering-Terrorist-Financing-Measures.pdf.coredownload.pdf, paragraph 25.

[78]  For more details and examples of simplified measures and efforts to increase financial inclusion, countries are invited to consult FATF (2025), Financial Inclusion and AML/CFT Measures, Guidance-Financial-Inclusion-Anti-Money-Laundering-Terrorist-Financing-Measures.pdf.coredownload.pdf

[79] OECD (2002), Measuring the Non-Observed Economy – A Handbook, www.oecd.org/en/publications/measuring-the-non-observed-economy-a-handbook_9789264175358-en.html.

[80] GAFILAT (2015), Regional ML Threat assessment, https://biblioteca.gafilat.org/wp-content/uploads/2024/04/AnalysisRegionalThreatsGAFILAT.pdf.

[81]  ILO, www.ilo.org/ilo-employment-policy-job-creation-livelihoods-department/branches/employment-investments-branch/informal-economy (accessed 15 May 2025).

[82]  The Treasury of Australia’s definition of the shadow economy, available here: https://treasury.gov.au/policy-topics/economy/shadow-economy (accessed 15 May 2025)

[83]  IMF (2000), Shadow economies Around the World Size, Causes and Consequences, available at: www.imf.org/external/pubs/ft/wp/2000/wp0026.pdf, page 4 (accessed 14 January 2025). 

[84]  Brazil (2021), NRA Executive Summary, www.gov.br/coaf/pt-br/centrais-de-conteudo/publicacoes/avaliacao-nacional-de-riscos/4-1_executive-summary_national-risk-assessment_ing.pdf page 14 (accessed 14 January 2025), Germany (2019), First NRA, www.bundesfinanzministerium.de/Content/EN/Standardartikel/Press_Room/Publications/Brochures/2020-02-13-first-national-risk-assessment_2018-2019.pdf?__blob=publicationFile&v=9 page 99 (accessed 14 January 2025).

[85]  FATF (2025), Financial Inclusion and AML/CFT Measures, Guidance-Financial-Inclusion -Anti-Money-Laundering-Terrorist-Financing-Measures.pdf.coredownload.pdf, paragraph 47.

[86]  The ILO provides data points to be collected in its Recommendation 204: https://normlex.ilo.org/dyn/nrmlx_en/f?p=NORMLEXPUB:12100:0::NO::P12100_ILO_CODE:R204 (accessed 15 May 2025).

[87]  The suggested sources listed for data are non-exhaustive and should not replace data collection and analysis on a national level. Rather, the goal is to provide a variety of sources for background information that can support jurisdictions in the initial stages of research on their risks. It is recommended that countries assess the reliability of all sources used and do not take external data sources at face value, rather use them to supplement their national level data and risk understanding, especially where there are data gaps.  

[88] Braho A. (2017), Assessment on the extent of Informal Economy in Kosovo, Study funded by the EU in the framework of Project “Further support to Kosovo Institutions in the fight against Organised Crime, Corruption and Violent Extremism”.

[89] World Bank, Global Financial Inclusion (Global Findex) Database, https://microdata.worldbank.org/index.php/catalog/global-findex/?page=1&ps=15&repo=global-findex (accessed 19 May 2025)

[90]  Exchange rates have been taken from 1 January 2018 and 1 January 2020 respectively.

[91] Exchange rates have been taken from 1 January 2021.

 

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