Tax evasion and money laundering: the moderating effects of the strength of auditing and reporting standards and judicial independence

Imen Khelil, Achraf Guidara and Hichem Khlif

Journal of Financial Crime, 2024, vol. 32, issue 4, 776-789

Abstract: Purpose - The purpose of this paper is to investigate the relationship between tax evasion and money laundering and test whether the strength of auditing and reporting standards (SARS) and judicial independence moderate this relationship. Design/methodology/approach - The sample contains 684 country-year observations from 2012 to 2017. The authors collect data on money laundering by using Basel Anti-Money Laundering Reports from 2012, 2013, 2014, 2015, 2016 and 2017. According to Medina and Schneider (2019), tax evasion is measured as a percentage of gross domestic product (GDP) by the shadow economy. The SARS, judicial independence and the remaining variables are derived from Global Competitiveness reports for the same years. Findings - The findings show that tax evasion is positively associated with money laundering. This positive association is mitigated for countries with high SARS and weakened for countries characterized by high judicial independence. By contrast, the positive association between tax evasion and money laundering is maintained with the same significance level for countries characterized by low SARS and low judicial independence. Practical implications - From a managerial standpoint, tax evasion may represent a signal of unethical management behaviour through money laundering. This may cause severe government penalties and heavy reputational costs in case of detection leading to both management and firm failures. Originality/value - The findings have policy implications for countries and governments seeking to combat both tax evasion and money laundering. The findings also emphasize the important role played by SARS and judicial independence to mitigate and weaken the positive effect of tax evasion on money laundering.

Keywords: Tax evasion; Money laundering; SARS; Judicial independence (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfcpps:jfc-06-2024-0172

DOI: 10.1108/JFC-06-2024-0172

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