Anti‐money laundering regulations and financial sector development

Abstract

This paper is aimed at establishing the effect of anti-money laundering regulations on financial sector development across the globe. Using data from 2012 to 2018 across 165 economies across different continents, income levels and regulatory environments, we test a number of complex and related hypotheses. (a) We examine the effect of anti-money laundering regulations on financial sector development. (b) We examine if this effect differs across developing and developed economies. (c) We examine the nonlinearities in the anti-money laundering regulations-financial sector development nexus. We use the Prais-Winsten approach and the panel threshold estimation approaches to test our hypothesized relationships. We find evidence that anti-money laundering regulations generally promote financial sector development; however, this positive effect is concentrated in developing economies. We also find evidence of threshold effects of anti-money laundering regulations for our sample. Consistent with the earlier findings, the positive effect of anti-money laundering regulations on financial development is concentrated in countries below the threshold value of anti-money laundering regulations. These countries are mostly developing countries. Our findings suggest that strengthening antimoney laundering regulations will be beneficial to developing countries.

Foreign direct investment, anti‐money laundering regulations and economic growth

“…This index ranges from 0 to 10 where 0 represents the lowest AML risk or the most effective AML regulatory system and 10 represents the highest AML risk or the least effective AML regulatory system. However, we rescale the index following Agoba et al (2019) and Ofoeda et al (2020), where the lesser the score, the weaker the AML regulatory framework. We use the formula −1*(AMLR‐10), where AMLR is the AML regulations index.…”

“…The index ranges from 1 to 7 where 7 denotes weak institutions while 1 denotes strong institutions. We again rescale the civil liberties score following Agoba et al (2019) and Ofoeda et al (2020), where higher scores now denote strong institutions and lower scores denote weak institutions. Quality institutions are expected to exert a larger impact on productivity and therefore expected to have positive outcomes for growth.…”

“…Extant literature contends that crime has negative outcomes on economic growth (Debnath & Das, 2017). Money laundering affects the growth of countries through its impact on the development and stability of the global financial system (Financial Action Task Force [FATF], 2020; Ofoeda et al, 2020). Furthermore, it undermines legitimate efforts by the private sector as it creates uncompetitive output markets, distorts domestic market operations and has the potential of throwing local economic policies out of control (Fundanga, 2003; McDowell & Novis, 2001).…”

Anti-money laundering regulations and financial inclusion: empirical evidence across the globe

“…Kodongo (2018), using a probit regression over a cross-section of households in Kenya, provides evidence that agency banking regulations could improve financial inclusions, whereas regulations in the form of know-your-customer rules and capital regulations may frustrate financial inclusion. Again, Ofoeda et al (2020) examined the impact of AML regulations on financial sector development. Although their study provides evidence that AML regulations promote the financial sector globally, this impact is concentrated in developing countries.…”

The Impact of the Pilot Free Trade Zone on Regional Financial Development

“…Competition would react between off shore financial centers in the region and financial institutions in neighboring countries (Ge et al, 2016). Based on the sole analysis of the innovative financial system introduced in the pilot FTZ, the risks with respect to the exchange rate, interest rate, and credit via capital fl ows have gradually become prominent (Gennaioli et al, 2012), and this is in a severe situation of anti-money laundering, anti-terrorist fi nancing, and antitax evasion policies (Ofoeda et al, 2020). The practice of the pilot FTZ and the double "ice-breaking" of fi nancial system innovation will not only lead to a higher degree of openness but will also open up greater loopholes in institutional supervision (McKinnon and Schnabl, 2014).…”