The determinants of anti-money laundering compliance among the Financial Action Task Force (FATF) member states

Author:Emmanuel Senanu Mekpor, Anthony Aboagye, Jonathan Welbeck
Position:Department of Finance, University of Ghana Business School, Accra, Ghana
Pages:442-459
SUMMARY

Purpose This paper aims to compute a measure for anti-money laundering/counter-financing of terrorism (AML/CFT) compliance and investigate its determinants. Design/methodology/approach Using the Financial Action Task Force (FATF) recommendations and assigning weights to them, the study computes a measure for AML compliance. Further, the determinants of AML compliance... (see full summary)

 
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The determinants of anti-money
laundering compliance among the
Financial Action Task Force
(FATF) member states
Emmanuel Senanu Mekpor and Anthony Aboagye
Department of Finance, University of Ghana Business School, Accra, Ghana, and
Jonathan Welbeck
Bank of Ghana, Accra, Ghana
Abstract
Purpose This paper aims to computea measure for anti-money laundering/counter-nancingof terrorism
(AML/CFT)compliance and investigate its determinants.
Design/methodology/approach Using the Financial Action Task Force (FATF) recommendations
and assigning weights to them, the study computes a measure for AML compliance. Further, the
determinants of AML compliancewere investigated using ordinary least squares (OLS)data of 155 countries
between 2004and 2016.
Findings The ndings suggest that AML compliancehave slightly improved over the years. Further, the
OLS regression results show that technology, regulatory quality, bank concentration, trade openness and
nancialintelligence center signicantly determined and improvedAML compliance.
Practical implications From the ndings, it is evident that countriesthat wish to improve the AML
compliance should focus more on technology,regulatory quality, structure of the banking sector, size of the
economyand institution of nancial intelligence center so as to enhance AMLcompliance.
Originality/value To the best of the authorsknowledge, this paper reveals a rst AML/CFT compliance
index that measures the cross-country level of AML/CFT compliance from the year 2004 to 2016.
Subsequently, this paper adoptedan OLS econometric model to identify the key determinantsof AML/CFT
complianceamong member states of FATF.
Keywords Anti-money laundering, Money laundering, Terrorist nancing,
Financial Action Task Force
Paper type Research paper
Introduction
A new era of globalization has emerged, and it is consolidating the continents and
re-engineering local politics and international relationships. Globalization demands the
international amalgamation of information, capital and technology, leadingto a sole global
market and, to a large extent, a globalvillage (Schroeder, 2001). Although globalization has
expanded opportunities leading to free market capitalism, these same opportunities have
resulted in new risks across countries (Schroeder, 2001). Notable among these risks is the
increase in the incidence of money laundering and terrorist nancing. Money launderingis
the process of disguisingthe origin of ill-gotten money to make it seem as though such funds
were obtained from legitimate sources. Simply put, money laundering is the process of
washing dirty moneyto make it look clean. Money laundering activities do not only
JFRC
26,3
442
Journalof Financial Regulation
andCompliance
Vol.26 No. 3, 2018
pp. 442-459
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-11-2017-0103
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
threaten the criminal justice systems, but they have the capacity to destabilize nancial
institutions and entirenancial system.
In addition to the main threatsmentioned above, money laundering also undermines the
integrity of the private sector (Ungerand Den Hertog, 2012), undermines democracy and the
rule of law (Diamond, 2016) and leads to reputational damages (Unger, 2014). Anti-money
laundering (AML) policy dates as far back as the 1980s when governments and private
actors saw the need to combat the cancer of money laundering (Verhage, 2011). The
Financial Action Task Force (FATF) is the main body tasked by the seven largest
economies (G-7) with the mandate of ghting money laundering and terrorist nancing
across the globe. Terrorist nancing therefore encapsulates any activity that provides
nancial support or funding either in partor whole to terrorists or terrorist organizations to
perpetuate acts of terrorism (Zdanowicz, 2004). Other international bodies such as the
International Monetary Fund (IMF), the World Bank and United Nations Ofce on Drugs
and Crime (UNODC) and all the FATF-style regional bodies (FSRBs) are partners with the
FATF in this global crusade. However, in recent times, the signicant increase in the
number of predicate crimes coupled with the discovery of new techniques and methods of
money laundering has been a huge source of concern to stakeholders (FATF,2013a,2013b,
2013c-TFinWA).
It is worrying to know that given the persistent increase in the scale of money
laundering, compliance cost increased by a rate of 53 per cent globally for just banking
institutions and show no signs of slowing down (PricewaterhouseCoopers, 2012). Also, the
biennium budgetary allocation by the UNODC alone for AML activities in 2014-2015 was
$760.1m; this includes about $88.9m(11.7 per cent) from the UNs regular budget (UNODC,
2014).
It is very obvious that on September 11, 2001, the world changed, the horrifying events
that plagued the USA completely altered the existing approaches to combatting money
laundering/terrorist nancing.Nearly every country introduced, revised or strengthened its
AML regime, with reports being churned out by various countries annually to reveal the
level of progress being made in the ght againstthe global menace.
However, with the continuous and persistent increase in funds laundered across the
globe, fueled by increase in technology, coupled with the increase in terrorist activities
across the globe, there still existsa lot of pessimism as far as AML and counter-nancing of
terrorism is concerned (Demetis, 2010). The statistics provided above indicate that millions
of dollars and a great deal of effortare committed to AML activities. However, amidst all the
efforts and funds investedin AML/CFT activities, there still remains a lot of work to be done
in the area, especially where compliance is concerned (Yepes, 2011). Thisstudy investigates
whether there exist country-specic factors that enhance or inhibit compliance with the
FATF Recommendations enacted to combat global money laundering and terrorist
nancing. The ndings from this research pose signicant policy implications at both
national and global levels: at the national level, countries are well equipped to ght money
laundering as this study makes knowledge available on the factors that drive and inhibit
AML compliance; hence, they know where to direct their efforts. At the global level,
international organizationsand stakeholders are awakened to the efforts made by countries
and the factors that affect country-level compliance, as well as alterations that should be
made to the current AML/CFT framework, to ensure effectiveness of the global regulatory
framework. This paper is organized into four sections; the next section outlines the
theoretical and empiricalframework on which this research is built. The section that follows
discusses the methodology adopted in this research, followed by a next section that
enumerates the conclusionand recommendations of the research.
Anti-money
laundering
compliance
443

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