Anti-money laundering regulations and financial inclusion: empirical evidence across the globe
| DOI | https://doi.org/10.1108/JFRC-12-2021-0106 |
| Published date | 09 May 2022 |
| Date | 09 May 2022 |
| Pages | 646-664 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Isaac Ofoeda |
Anti-money laundering
regulations and financial
inclusion: empirical evidence
across the globe
Isaac Ofoeda
Department of Accounting, University of Professional Studies,
Accra, Ghana
Abstract
Purpose –This study aimsto examine the impact of anti-money laundering(AML) regulations on financial
inclusion using a comprehensive measure of AML regulations developed by the Basel Institute on
Governance. Again, this study investigates the existence of threshold effects in the AML regulations–
financialinclusion nexus.
Design/methodology/approach –This study uses panel data across 212 economies (developed,
developingand Africa) of the globe-spanning from 2012 to 2019. This studyuses the dynamic panel threshold
estimationtechnique proposed by Seo et al. (2019).
Findings –In general, the results indicate that AML regulations promote financial inclusion across the
globe. However, AML regulationsspur financial inclusion below the threshold of AML regulations, whereas,
above the thresholds,AML regulations have damaging effectson financial inclusion. Further, the author finds
that AML regulations have a detrimentalimpact on financial inclusion for developed economies. In contrast,
AML regulationspromote financial inclusion at all levels of AML regulationsfor African countries.
Practical implications –The findings of this study imply that countriesmust make conscious efforts in
combating the incidenceof money laundering by establishing sound AML regulatory regimesas a means of
promotingfinancial inclusiveness. However, there is a need for regulatorsto ensure cost-effective and efficient
implementationof AML regulations.
Originality/value –The value of this paper is its contribution to literature as it is a major attempt in
empirically assessingthe impact of AML regulations on financial inclusion. Again, to the best of the author’s
knowledge, this is the first study to examine the non-linear relationship between AML regulations and
financialinclusion.
Keywords Anti-money laundering regulations, Financial inclusion, Money laundering,
Threshold regression, Financial services, Anti-money laundering
Paper type Research paper
1. Introduction
In recent times, financial inclusion has become a topical issue among policymakers and
regulators, especially of developing nations, because of its role in poverty reduction,
provision of affordablecredit, provision of employment opportunities, facilitationof savings
for productive activities, promotion of financial sector stability and promotion of human
capital development among others (Agbloyor et al., 2022;Asongu et al., 2018;Park and
Mercado, 2018;Sethi and Acharya, 2018;Tchamyou, 2020). Over the years, countries have
made significant efforts and adopted policies in improving financial inclusiveness among
their citizenry by formalizingfinancial inclusion goals for implementation. However, in spite
of the considerable efforts made by countries to promote financial inclusiveness, it appears
JFRC
30,5
646
Received5 December 2021
Revised16 March 2022
11April 2022
Accepted13 April 2022
Journalof Financial Regulation
andCompliance
Vol.30 No. 5, 2022
pp. 646-664
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2021-0106
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
the extent of financial inclusion,although improving, is still low across the globe. According
to the World Bank’s Global Findex2017, around 1.7 billion adults are unbanked, thatis, they
do not have a bank account or access to mobile money (Demirguc-Kunt et al.,2018). This is
close to about 30% of the global adultpopulation. This means there is the need for deliberate
policy direction from policymakersand creating the right environment to promote inclusive
finance. In spite of the proliferation of literature on the factorsthat drive financial inclusion
in a country, it appears empirical literature has not paid particular attention to how anti-
money laundering (AML)regulations influence financial inclusion.
Money laundering has become aglobal canker, mainly because of its impact on nations’
global financial systems and economies. Thus, it has far-reaching consequences on the
soundness and survival of countries’financial systems. The large capital inflows and
outflows artificially exacerbated by money laundering, according to Aluko and Bagheri
(2012), constitute a substantial threat to the financial system’s stability. These unplanned
inflows and outflows of funds could create liquidity challenges for financial institutions,
thus, affecting their stability. For instance, the international monetary fund estimates
between $2.17 and $3.61tn, whereas the United Nations estimates between $1.6 and $4tn as
proceeds of criminal activities laundered every year [Weeks-Brown, 2018;Financial Action
Task Force (FATF), 2020]. Aluko and Bagheri (2012) noted that more than $1tn of illicit
funds flowed annually through the international financial systems into the USA alone.
Further, money laundering exposes the financial system to criminal elements that may
defraud the financial institution or its customers. In addition, money laundering affects the
trust and confidence of customers in the financial system which has implication for the
soundness of the entire financial system. This is because unchecked money laundering
suggests financial institutionsand their officials are complicit in the crimes that generate the
illicit funds [FinancialAction Task Force (FATF), 2020].
According to Greenspan (1998), the entire financial system thrives on the trust and
confidence of customers. Therefore, customer trust and confidence may determine the
financial system’s ability to promote financial inclusion. The World Bank’s Global Findex
2014 reports that about 13% of unbanked adults cited the lack of trust in financial
institutions as a barrier to account ownership (Demirgüç-Kunt et al.,2015). Again, Ghosh
(2021) provides evidence thattrust leads to a significant improvement in account ownership
and use in India, whereas Xu (2020) reports that socialtrust remains an important indicator
of financial inclusion around the world. Undoubtedly, money laundering and how it is
regulated has the potential to influence financial inclusion. AML regulations prevent the
infiltration of criminal elements into the financial systems, protect the financial system’s
integrity, enhance the reputationof financial institutions and promote good governance and
prudent management of financial institutions. Consequently, effective AML regulations
promote customer trust and confidence in the financial system and thereby a major tool in
promoting financialinclusion.
Although we argue that AML regulation can promote financial inclusion, this positive
effect may be reversed if AML regulation becomes excessive or goes beyond a certain
threshold. AML compliancehas become a resource-intensive enterprise andmay discourage
financial institutions from offering products to low-end customers as it may be costly to
institute AML compliance mechanisms in such environments (Mccarthy et al.,2015).
According to a LexisNexis Risk Solutions study report for 2021, AML compliance costs US
financial firms $35.2bn, $39.8bn in the UK, $57.1bn in Germany, $24.8bn in France and
$20.0bn in Italy, whereas the global AML compliance cost is projected at $213.9bn
(LexisNexis Risk Solutions, 2021). Also, FATF acknowledges that the implementation of
overly cautious/stringent AML controls may frustrate the financial inclusion efforts of
Anti-money
laundering
regulations
647
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