Demand for money laundering in developing countries and its deterrence: a quantitative analysis
| DOI | https://doi.org/10.1108/JMLC-06-2021-0063 |
| Published date | 16 August 2021 |
| Date | 16 August 2021 |
| Pages | 625-636 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Anam Javaid,Noman Arshed |
Demand for money laundering in
developing countries and its
deterrence: a
quantitative analysis
Anam Javaid and Noman Arshed
Department of Economics and Statistics, University of Managementand Technology,
Lahore, Pakistan
Abstract
Purpose –Money laundering is an activity where illegal proceeds are hidden. This often leads to a
reduction in governmentrevenue and loss of government control of public funds. This studyaims to identify
the importantsources of growing demand for money laundering in developingcountries. Further, it identifies
the factorsthat reduce the impact of sources of demand for money laundering.
Design/methodology/approach –This study used the panel approach of feasible generalized least
square to investigate the growing demand for moneylaundering in 62 developing countries and provides a
moderation-basedsolution for managing the demandfactors.
Findings –The empirical resultsof this study indicate that there are two sourcesthat increase the demand
for money launderingin developing countries. This includesa high tax rate on profit linked with private firms
and businesses and diversion of public funds related to government officials and politicians. The results
indicate that profit tax and diversion of funds increase the demand for money laundering. The profit tax-
based money launderingcan be moderated by the quality of the educationsystem and the diversion of public
funds and moneylaundering can be moderated using bureaucracyquality.
Originality/value –This is one of the first studies to empirically estimate the impact of two important
sources (i.e. diversionof public funds by government officials and politicians and a high tax rate) that create
demand for money launderingin developing countries. The findings help developing countries’governments
formulatepolicies and curb the growing demand for moneylaundering.
Keywords Shadow economy, Underground economy, Dirty money, Tax evasion, Illicit income
Paper type Research paper
1. Introduction
Money laundering is a type of financial crime mostly prevalent in developing countries. It is an
illegal activity where criminals turn their dirty money into clean money. In today’sworld,by
using technology, money laundering takes place within seconds. Through electronic banking,
money launderers transfer money to different countries to hide the origin of funds. Due to the
development of financial markets, criminals use instruments of financial institutions for money
laundering instead of using traditional ways of money laundering (Hetemi et al., 2018).
Money laundering cases can be relatedto public and private sectors through suspicious
business activities. Diversion of public funds and high tax on profit increases money
laundering cases via the public and private sectors, respectively. It creates social problems
JEL classification –E26, H26, E41
Authors acknowledge School of Business and Economics, University of Management and
Technology in providing authors means to conduct research project.
Demand for
money
laundering
625
Journalof Money Laundering
Control
Vol.25 No. 3, 2022
pp. 625-636
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-06-2021-0063
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