Demand for money laundering in developing countries and its deterrence: a quantitative analysis

Anam Javaid and Noman Arshed

Journal of Money Laundering Control, 2021, vol. 25, issue 3, 625-636

Abstract: Purpose - Money laundering is an activity where illegal proceeds are hidden. This often leads to a reduction in government revenue and loss of government control of public funds. This study aims to identify the important sources of growing demand for money laundering in developing countries. Further, it identifies the factors that 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 money laundering in 62 developing countries and provides a moderation-based solution for managing the demand factors. Findings - The empirical results of this study indicate that there are two sources that increase the demand for money laundering in developing countries. This includes a 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 laundering can be moderated by the quality of the education system and the diversion of public funds and money laundering can be moderated using bureaucracy quality. Originality/value - This is one of the first studies to empirically estimate the impact of two important sources (i.e. diversion of public funds by government officials and politicians and a high tax rate) that create demand for money laundering in developing countries. The findings help developing countries’ governments formulate policies and curb the growing demand for money laundering.

Keywords: Shadow economy; Underground economy; Dirty money; Tax evasion; Illicit income; E26; H26; E41 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jmlcpp:jmlc-06-2021-0063

DOI: 10.1108/JMLC-06-2021-0063

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