Anti-money laundering and combating the financing of terrorism compliance. Are FATF member states just scratching the surface?

DOIhttps://doi.org/10.1108/JMLC-09-2018-0057
Published date02 July 2019
Pages451-471
Date02 July 2019
AuthorEmmanuel Senanu Mekpor
Subject MatterFinancial risk/company failure,Financial compliance/regulation,Financial crime
Anti-money laundering and
combating the nancing of
terrorism compliance
Are FATF member states just scratching
the surface?
Emmanuel Senanu Mekpor
Department of Finance, University of Ghana, Accra, Ghana
Abstract
Purpose The purpose of this paper is to investigatehow well countries comply with global anti-money
launderingand counter-nancing of terrorism (AML/CFT) regulations.
Design/methodology/approach With the help of an AML/CFT compliance index composed by the
author, this study is able to numerically quantify countriesAML/CFT compliance levels. Countries were
selected based on their membership with the Financial ActionTask Force (FATF), precisely members who
have gone through at least one roundmutual evaluation and have duly submitted a report to the task force.
The AML/CFT indexwas composed by assigning numeric values to theindividual country ratings across all
49 FATF recommendationscontained in their mutual evaluation reports (MER).
Findings Some notable ndings include the yearly global level of AML/CFT compliance between the
period 2004 and 2016, as well as compliance levelsacross continents for the same period. Compliance levels
for the seven components of the FATF recommendations were also reported to help assess which set of
recommendations countriescomply with the most and why they do. It was also found that countrieslack of
compliancewas as a result of high cost of compliance with FATF recommendations.
Research limitations/implications The main limitation of this studywas a lack of high-frequency
AML data of countries,especially less-developed countries.
Originality/value The uniqueness of this paper lies in the fact that the AML/CFT compliance index
constructedand used in the study is the rst of its kind.
Keyword Money laundering
Paper type Research paper
Introduction
Money laundering is the process used to disguise the origin of ill-gotten money to make it
seem as though such funds were obtained from legitimate sources or businesses (FATF,
2012). Simply put, money laundering is the process of washing Dirty Moneyto make it
look Clean.
The activities of launderers do not only impact on the criminal justicesystems, but they
also have the capacity to destabilize nancial institutions and nancial systems. Money
laundering, which is also knownas a crime of concealment, usuallyinvolves large sums of
illegal money being mobilizedin many economies through the nancial system (Omar et al.,
2015). Money laundering poses several threats to the global nancial system (Force, 2012).
The activities of launderers undermine the integrity of the global nancial system. Other
dangers are that money laundering poses severe threat to life and property, as the funds of
launderers are obtainedfrom criminal activities (Sandler and Enders, 2008;De Goede, 2008).
Financing of
terrorism
compliance
451
Journalof Money Laundering
Control
Vol.22 No. 3, 2019
pp. 451-471
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-09-2018-0057
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
In addition to the main threatsmentioned above, money laundering also undermines the
integrity of the private sector (Unger and Den Hertog, 2012),democracy and the rule of law
(Diamond, 2016) and leadsto reputationaldamages (Unger, 2014).
These threats motivated the G-7 (formerly G-8) to commission the FATF in the year
1989. The FATF is the international body responsible for ghting the menace of money
laundering (ML) and terrorist nancing (TF) across the globe. The FATF combats ML/TF
across the globe through its action plan known as the FATF Recommendations. These
recommendations are also referred to as Standards and Guidelines which countries are
required to comply with. The ideais that, when countries adopt and comply fully with these
FATF Recommendations, ML/TF will be eradicated or at least reduced to the barest
minimum. These FATF Recommendationsare, therefore, critical to the global ght against
ML and so is compliance with them. Close to three decades after the FATF
Recommendations were enacted, there is no clear indication that the ght against ML and
TF is being won. There is the need for a holisticanalysis of how well countries have fared in
relation to their compliance with these FATF Recommendations. Previous studies have
found that, although huge funds havebeen invested in AML and CFT, compliance with the
global AML/CFT recommendations has been low over the years (Verdugo Yepes, 2011).
This study measures the AML/CFT compliance levels of FATF member states by
constructing a compliance index for all the countries that have ratied the FATF
Recommendations.The ndings from this paper present policy implications at bothnational
and global levels: rst of all, at the national level, memberstates are able to know how well
they are performing in terms of their ght against ML and TF. Most importantly,
information on the compliance levels with the subcomponents of the FATF
Recommendations is availableto help countries to reorient their AML policies to focus their
efforts in areas where they are lacking. At the regional and continental levels, compliance
levels of the FATF-style regional bodies will make it possible for regional bodies to assess
how well they are performingand what they can do to improve on compliance levels of their
respective continents. Finally, at the global level, international organizations and
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
demarcated into four sections; the next section outlines the theoretical and empirical
framework on which this research is built. Section 3 gives a background about how the
AML/CFT compliance index was constructed, while Section 4 presents the conclusion and
recommendationsof the research.
Literature review
The scale of money laundering
The irony about ML is that, though much research has been conducted on the topic and
large amounts of dollars committedto ghting the menace, the question of the scale of funds
laundered globally on an annual basis still remains unanswered. It was the IMF that
estimated in the year 1996 that 2-5 per cent of the global gross domestic product (GDP) is
laundered on an annual basis (Force, 2012). Since then, it has been a difcult task for
organizations or individual researchers to quantify the amount of funds laundered on an
annual basis. Buchanan (2004)argues that the actual quantum of monies laundered globally
has been underestimatedin existing literature. This, he argued, was because most estimates
are based on actual data collected on reported crime, and reported crimes are just a
percentage of all crimes. Buchanan (2004) also explained that the size of underground
economies across the globe are different and usually ignored because only crime data
JMLC
22,3
452

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