Journal of Money Laundering Control

Factors affecting money laundering: lesson for developing countries

Santha Vaithilingam Mahendhiran Nair
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Santha Vaithilingam Mahendhiran Nair, (2007),"Factors affecting money laundering: lesson for developing
countries", Journal of Money Laundering Control, Vol. 10 Iss 3 pp. 352 - 366
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JMLC
10,3 Factors affecting money
laundering: lesson for
developing countries
352
Santha Vaithilingam
Department of Econometrics and Statistics, School of Business,
Monash University Malaysia, Petaling Jaya, Malaysia, and
Mahendhiran Nair
School of Business, Monash University Malaysia, Petaling Jaya, Malaysia
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Abstract
Purpose – The primary objective of this paper is to examine the factors that underpin the
pervasiveness of money laundering. An empirical method was used to study the relationship between
technology (information and communication technology infrastructure), quality of human capital,
efficiency of the legal framework, ethical behavior of firms (corporate governance) and capacity for
innovation on the pervasiveness of money laundering in developed and developing countries. Based on
the empirical findings, key strategies and policies to reduce the pervasiveness of money laundering
were examined in this paper.
Design/methodology/approach – The sample period for this study was 2004-2005 entailing
88 developed and developing countries. The ordinary least square method was used in this paper to
examine the impact of the above-mentioned factors on the pervasiveness of money laundering.
Findings – The empirical analysis showed that efficient legal framework with good corporate
governance lower the pervasiveness of money laundering activities. The empirical analysis also
showed that a high-innovative capacity contribute negatively to the pervasiveness of money
laundering activities.
Research limitations/implications – One of the limitations of this study is the lack of quality data
measuring pervasiveness of money laundering patterns over a longer period of time. Over the next two
years, as more data becomes available, a more robust econometric modeling framework called the
dynamic panel data method can be used to assess the impact of the above-mentioned factors on the
pervasiveness of money laundering. This new method will not only capture the factors contributing to
variations of pervasiveness of money laundering across the different countries but also across the time
period.
Practical implications – Strategies to reduce the pervasiveness of money laundering in developing
countries are discussed.
Originality/value – While there are numerous studies in the literature that critically examine factors
that contribute to money laundering, the number of empirical studies that examined the factors that
contribute to money laundering are rather scarce. This study hopes to fill this gap in the literature.
Keywords Money laundering, Corporate governance, Legal principles
Paper type Research paper

1. Introduction
Journal of Money Laundering Control The new global economy fuelled by advances in information and communication
Vol. 10 No. 3, 2007
pp. 352-366 technology (ICT) holds potential benefits and opportunities for countries world wide.
q Emerald Group Publishing Limited
1368-5201
However, these opportunities also have their own challenges. Among these challenges
DOI 10.1108/13685200710763506 include crimes related to the information economy which is seen as an increasing
 source of concern within the international financial community. The proceeds from Factors affecting
these crimes are camouflaged to give it a legal appearance and this process is known as money
“money laundering”. The seriousness of money laundering is reflected in the aggregate
volume of funds laundered which has been estimated by the International Monetary laundering
Fund (IMF) to be around 2-5 percent of global gross domestic product.
Money laundering and other financial-related crimes have significant economic and
social consequences for nations worldwide. It weakens the financial systems which 353
are the main players for global financial transactions. This in turn will jeopardize
the socioeconomic development of these nations. For money laundering activities to be
carried out, a medium to launder the illicit funds is required. The preferred medium
chosen by money launderers is the financial institutions (Masciandaro, 1999) due to its
efficiency and its low cost in carrying out financial transactions. These activities taint
the integrity of financial institutions which has a negative impact on the soundness
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and stability of these financial institutions. When the integrity of the financial
institutions is weak, it has a discouraging effect on foreign direct investment due to
lack of investor confidence. This in turn can distort the long-term growth of the
economy. Studies by Quirk (1997), Barrett (1997), Paradise (1998) and Masciandaro and
Portolano (2003) have argued that money laundering threatens economic and financial
systems in countries.
To this extent, to develop a robust economy and sustained standard of living,
countries should undertake all efforts to combat money laundering activities. In this
context, good governance is vital for ensuring the integrity of the financial systems.
Countries across the world have developed laws and regulations to curb money
laundering. Anti-money laundering efforts world-wide were focused on enhancing the
resilience of the financial institutions against money laundering and other related
financial crimes.
While there are numerous studies in the literature that critically examine factors
that contribute to money laundering, the number of empirical studies that examine the
factors that contribute to money laundering are rather scarce. To this end, this study
hopes to fill this gap in the literature. The primary objective of this paper is to examine
and understand the factors that underpin the pervasiveness of money laundering. The
factors considered in this study include technology (ICT infrastructure), quality of
human capital, efficiency of the legal framework, ethical behavior of firms (corporate
governance) and capacity for innovation in the economy. This study will also examine
the relationship between these factors and pervasiveness of money laundering in
selected 88 developed and developing countries using the ordinary least square (OLS)
method. The study was conducted for the following sample period 2004-2005.
The rest of this paper is organized as follows. Section 2 briefly discusses the
literature. In Section 3 the empirical framework is discussed. The empirical results are
presented in Section 4 followed by the strategies and initiatives in Section 5. Section 6
provides the conclusion and the future research directions.

2. Literature review
The origins of money laundering can be traced back to as early as 1930s in organized
criminal activities (Bosworth-Davies and Saltmarsh, 1994). As such money laundering
is not a new concept but lately money laundering activities gained momentum and
became a worldwide problem debated widely. In response to this growing concern,
 JMLC international agreements were initiated to combat money laundering activities.
10,3 Amongst the main agreements, the UN was the first international organization that
initiated the combating of money laundering globally. Subsequently, the Financial
Action Task Force (FATF) recognized as an international standard setter for
anti-money laundering efforts was established in 1989 by the G-7 Summit in Paris to
implement and monitor effective anti-money laundering programs. More importantly,
354 the FATF has compiled 40 recommendations for money laundering control which
provides a basic framework relevant to all parties involved in the effort to combat
money laundering. According to FATF, money laundering is defined as:
. . . the processing of a large number of criminal acts to generate profit for individual or group
that carries out the act with the intention to disguise their illegal origin in order to
legitimize the ill gotten gains of crime. Any crime that generates significant profit-extortion,
drug trafficking, arms smuggling and some kind of white collar crime may create a “need” for
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money laundering (FATF).

The main strand of the literature on money laundering is concerned with the legal
framework which includes legislation and regulatory issues and can be traced back to
the US “War on Drugs” in the 1980s (Gill and Taylor, 2004). It is the repercussions of
this war that subsequently led to the formation of the FATF in 1989. According to the
FATF (2006b) annual report, many illegal activities are associated with corrupt
practices and lack of transparency, which will subsequently give rise to weak
governance. This in turn results in poor and ineffective implementation of anti-money
laundering programs. Corrupt practices and poor governance arise from ineffective
institutions such as the judiciary or regulatory authorities. A well-functioning legal
system and efficient enforcement of laws and regulations are important precursors for
a stable financial sector (Fergusson, 2006). This in turn can lead to effective
implementation of international anti-money laundering programs. Hence, an
institutional characteristic which include judicial independence, efficiency of the
legal framework, and effectiveness of law making bodies of a country does give rise to
a better developed financial sector. To this end, institutional economist, North (1990)
stressed the importance of institutional environment as having an impact on economic
performance.
New technology, especially ICT has introduced new ways for banks to offer
products and services through new delivery channels. The features of these new
products and services include increase speed of transmission of digitized information,
facilitating the movement of funds and services transcending distance within and
across national boundaries (Bradley and Steward, 2002) and anonymity (Philippsohn,
2001). According to Mishkin and Strahan (1999) and Berger (2003) speed, distance and
anonymity are the key factors that are transforming the financial system. However, the
new products and services which include electronic banking and the introduction of
e-money technologies have made money laundering activities even more prevalent
(Masciandaro, 1998, 1999; Philippsohn, 2001). In fact the FATF (2001) report on Money
Laundering Typologies identifies online banking and internet as major
money laundering vehicle. According to the Chief Financial Officer (2002) report,
“Technology changes have influenced the operating strategies of many banks and
non-banks as they seek to compete in the increasingly fast-paced and globally
interdependent business environment”. Alexander (2001) argued that these alternative
payment technologies has open breaches that can be exploited for disguising profits
 from criminal activities, as money can be channeled through multiple accounts in a Factors affecting
host of different sources. This poses problems relating to traceability of the individual money
transactions which requires vast amount of record keeping. Further, due to difficulties
in traceability, law enforcement intervention occurs only after the event has taken laundering
place (FATF, 1998). Philippsohn (2001) and Vargas and Backhouse (2003) argued that
legislation and regulation implemented to combat money laundering activities needs to
deal with the use of new technology. As such a sound financial system to monitor and 355
control transactional activities compounded with strong anti-money laundering
regimes are vital to curb money laundering activities.
A review of the literature indicates that much of the money laundering literature
have focused more on the legal and regulatory framework and the recognition of
technology as mechanisms for combating money laundering activities. The number of
studies empirically examining the factors that lower the pervasiveness of money
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laundering is rather scarce. Owing to this gap in the literature, this study will
contribute to the literature by examining the impact of the five factors identified
above on pervasiveness of money laundering in selected developed and developing
countries.

3. Empirical methodology
In this section, the theoretical framework for capturing the pervasiveness of money
laundering via two channels, namely through banks and non-banks in a sample of
88 developed and developing countries is discussed. This is then followed by a
discussion of the econometric method employed to examine the relationship between
the key factors and the pervasiveness of money laundering in these countries. In this
paper, it is assumed that the pervasiveness of money laundering through banks and
non-bank channels are composed of three stages as shown in Figure 1.

Money Laundry (y)

Money Laundry
Activity (low)

Y1

Money Laundry
Activity (high)

Figure 1.
Key Drivers (x) Three stages in money
Stage 1 Stage 2 Stage 3 laundering activities
(High Incidence) (Declining) (Low)
 JMLC The first stage of the money laundering activities refers to countries which are
10,3 characterized by low investment in the key factors of the money laundering activities.
These countries still remain passive and complacent with regards to financial,
economic and political dangers posed by laundering. In this stage of development, the
factors of the money laundering activities namely technology, quality of human
capital, efficiency of the legal framework, ethical behavior of firms and capacity for
356 innovation are usually weak and ineffective. Investments in the factors are low; hence
result in high-money laundering activities.
The second stage represents the countries where the pervasiveness of money
laundering improves rapidly due to efforts taken to improve the quality and quantity
of the factors of the money laundering activities namely technology, quality of human
capital, efficiency of the legal framework, ethical behavior of firms and capacity for
innovation. Improvements in the key drivers which include implementation of laws
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and regulations tend to decrease the money laundering activities. New technology and
new financial instruments together with good integrity system reduce money
laundering activities.
The third stage represents matured financial sectors where the factors of the money
laundering activities namely technology, quality of human capital, efficiency of the
legal framework, ethical behavior of firms and capacity for innovation are highly
developed hence the prevalence of money laundering is low.
The pervasiveness of money laundering activities can be modeled using the logistic
function:
ys
Yt ¼ ð1Þ
1 þ ae f ðx;bÞþm
where Yt is the pervasiveness of money laundering through banks and non-bank, ys is
the upper limit of Yt (refer to Table I). The factors that have an impact 0
on money
laundering are denoted by the design matrix where X ¼ [X1,X2,X3,X4,X5] (the factors
are defined in Table I) and b is the factor that capture the marginal return of the factors
on the pervasiveness of money laundering. Equation (1) can be re-written as:
*
Y ¼ f ðx0 bÞ þ u ð2Þ
where:


* Yt
Y ¼ ln
Ys 2 Yt
and u is the residual.
The impact of the factors on the pervasiveness of money laundering will be
examined using the following regression model:
Model 1:

*
X
k
Y ¼ b0 þ b i X i þ ui ð3Þ
i¼1

Model 2:
 Factors affecting
Variables Description Proxy
money
Infrastructure (X1) Facilitate connectivity to the Number of internet users laundering
(internet users per 10,000
global economy that is access to
ICT facilities inhabitants, 2003)
Intellectual capital (X2) Knowledge workers’ Quality of the educational
system (1 ¼ does not meet the 357
needs of a competitive economy,
7 ¼ meets the needs of a
competitive economy).
Institutions (X3) Legal and regulatory framework Efficiency of legal framework
that facilitate the knowledge (1 ¼ is inefficient and subject to
economy manipulation, 7 ¼ is efficient
and flows a clear, neutral
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process)
Integrity (X4) Governance systems (corporate Ethical behavior of firms
governance) (1 ¼ among the world’s worst,
7 ¼ among the world’s best)
Innovation (X5) R&D and new product Capacity for innovation
development (1 ¼ exclusively from licensing
or imitating foreign companies,
7 ¼ by conducting formal
research and pioneering their
own new products and
processes)
Pervasiveness of money Money laundering through Pervasiveness of money
laundering through banks and banks and non-banks channels laundering through banks and
non-banks channels banks ( y) banks non-bank channels (where the
ranking for the pervasiveness of
money laundering ranges
between 1 and 7 with
1 ¼ pervasive denoting very
high occurrence of money Table I.
laundering and 7 ¼ extremely The factors and the
rare denoting very low incidence dependent variable
of money laundering) include

*
X
k
Y ¼ b0 þ bi X i þ d o D 1 þ u i ð4Þ
i¼1

Model 3:

*
X
k X
k
Y ¼ b0 þ bi X i þ d o D 1 þ di ðD1 £ X i Þ þ ui ð5Þ
i¼1 i¼1

where D1, is the dummy variable for developed countries (D1 ¼ 1 if developed and 0
otherwise); do, is the slope coefficient for the dummy variable; di, is the slope coefficient
which captures the marginal effects of the 5Xs on the pervasiveness of money
laundering in developed countries and developing countries; ui, is the error term.
 JMLC The first model which is a general model (equation (3)) considers the factors which
10,3 include technology, quality of human capital, efficiency of the legal framework, ethical
behavior of firms and capacity for innovation on the pervasiveness of money
laundering. The second model (equation (4)) includes an intercept dummy variable that
controls for developed and developing countries. Lastly the third model (equation (5))
includes the intercept and slope dummy variable. This will enable the model to capture
358 the marginal effects of the factors on the pervasiveness of money laundering in
developed and developing countries.
An underlying assumption of OLS is that the residuals of the model are normally
distribution with mean 0 and variance s 2 I T (homoskedastic), that is ui , N ð0; s 2 I T Þ.
As such, equation (2) can be estimated using OLS method. However, if the residuals are
heteroskesdastic and the generalized least squares method (The White-Estimator) is
employed as the OLS estimator will be inefficient.
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Several statistical diagnostic tests were carried out to ensure the estimates were
robust. Multicollinearity test was conducted using the variance inflation factor (VIF)
method. A maximum VIF value exceeding 10 will indicate that multicollinearity will
lead to biased estimators. Parameter stability test was carried out to ensure the model
was correctly specified. The residuals of the estimated model were subjected to the
heteroskedastic test and Jarque-Bera normality test. This is to ascertain if the residuals
satisfied the standard regularity assumptions (homoskedastic and normally
distributed).
In this study, secondary data were collected for 88 developing and developed
countries (Appendix) for the period 2004-2005 from The Global Competitiveness Report
2004-2005 (Cournelius et al., 2005). It should be noted that data availability for more
than one period for some of these variables were not reported. As such this study is
limited to only one year to maintain consistency in the variables. Money laundering
activities transfer funds via two channels, namely via the banking channel or non-bank
financial institutions. Table I provides a description of the factors and the
pervasiveness of money laundering.

4. The empirical results

In this section, the trends of the pervasiveness of money laundering in developed and
developing countries were examined. This is then followed by a report of the empirical
results from the regression models discussed in the last section.
From Figure 2, it can be noted that the technology (ICT infrastructure) gap between
developed and developing countries was large, with developing countries having
significantly lower number of internet users than developed countries. It is interesting
to note that the maximum number of internet users per 10,000 inhabitants for
developing countries was 4,057 as opposed to 6,126 for developed countries. However,
it is very discouraging to find that the minimum number of internet users per 10,000
inhabitants was only 18 for developing countries as compared to 1,500 users for
developed countries. Similar pattern exists for quality of human capital, efficiency of
the legal framework, ethical behavior of firms and capacity for innovation as shown in
Figure 3.
Table II presents the empirical findings of the regression models given in equations
(3)-(5) above. In addition, recursive residuals were used to assess the parameter
stability of the estimated model. The recursive residual plots[1] showed that the test
 7.000 Factors affecting
6,126
6.000 money
laundering
ICT Infrastructure, X1

5.000
(in thousands)

4,115 4,057
4.000

3.000 359
2.000
1,500
982
1.000
18
0 Figure 2.
Mean Minimum Maximum Infrastructure
development in developed
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Developing Countries Developed Countries

and emerging countries

6.00 5.27 5.23 5.35

4.71 4.75
5.00
3.96 3.95
4.00 3.34
3.17 3.06
Scale

3.00
2.00 Figure 3.
1.00
Developments in quality
of human capital (X2),
0.00 efficiency of the legal
framework (X3), ethical
g

5
rin

behavior of firms (X4),

de
un

capacity for innovation

La

(X5) and pervasiveness of

ey
on

money laundering in
M

developed and emerging

Developing Countries Developed Countries countries ( y)

statistic is within two standard deviations. Hence, the model is correctly specified at
the 5 percent significance level. The Jarque-Bera normality test showed that the
residuals of the estimated equations are normally distributed. The VIF statistics for all
the factors were below 10, indicating that multicollinearity was not a major problem for
the regression models in equations (3)-(5).
Based on the adjusted R 2, Model 3 recorded the highest value of 0.818. As such
Model 3 was selected to be the best model and the interpretation below was based on
Model 3. Using Model 3, the marginal effect of the factors on pervasiveness of money
laundering in developed and developing countries was also studied. However, it can be
noted that in all three models, efficiency of the legal framework (X3) and ethical
behavior of firms (X4) had a positive and significant effect on the pervasiveness of
money laundering at the 5 percent level of significance.
The empirical results showed that technology (X1) has a negative but an
insignificant effect on the pervasiveness of money laundering. The negative results
 JMLC
Model 1 Model 2 Model 3
10,3
Constant 2 1.589(0.000) 2 1.514(0.000) 21.397(0.000)
X1 4.29 £ 102 05(0.143) 2.09 £ 102 05(0.527) 23.83 £ 102 05(0.396)
X2 2 0.0316(0.500) 2 0.0308(0.509) 0.0784(0.238)
X3 0.167(0.0032) * 0.158(0.0052) * 0.140(0.046) * *
360 X4 0.396(0.000) * 0.395(0.000) * 0.429(0.000) *
X5 2 0.0593(0.233) 2 0.072(0.153) 20.228(0.017) * *
D1 0.151(0.170) 20.0819(0.869)
D1X1 0.000132(0.059) * * *
D1X2 20.179(0.098) * * *
D1X3 20.0705(0.575)
D1X4 0.0784(0.684)
D1X5 0.158(0.169)
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R
2 0.807 0.809 0.818

Jarque- Bera 1.563 (0.458) 1.230(0.522) 2.576(0.276)
Table II. White HSK test (obs R 2) 9.523(0.483) 10.650(0.473) 19.710(0.540)
The estimated OLS F ( p-value) 73.740 (0.000) 62.455 (0.000) 36.546 (0.000)
results for the
pervasiveness of money Notes: *, * * and * * * are significant at the 1, 5 and 10 percent significance levels, respectively, based
laundering on the student’s t-values

implies that although the internet is the basic environment enabling new payment
technologies such as internet banking, digital money and smart cards, this medium is
also prone to fraud and breach as it permits anonymity. Money launderers have the
opportunity to exploit the “secrecy haven” and the weaknesses in the internet bank
internal controls, by using this delivery channel to conduct their financial transactions.
However, the insignificance of X1 could be due to the fact that internet banking has not
been widely used in developing countries.
The marginal return of technology for developed countries is positive and
significantly higher than for developing countries at the 10 percent level. This implies
that technology that is ICT infrastructure in developed countries seems to reduce the
pervasiveness of money laundering more than in developing countries. This result
provides evidence that developed ICT infrastructure and ICT adoption rates in
developed countries seem to instill more transparent process, hence, reducing the
pervasiveness of money laundering.
The quality of human capital (X2) seems to have a positive effect in reducing the
pervasiveness of money laundering. However, the impact of quality of human capital
on money laundering was not found to be significant at the 10 percent significant level.
This is attributed to the fact that most of the front-end financial transactions are
user-friendly technology, and as such, people with diverse educational background
are able to use the financial services easily. The marginal effect of the dummy variable
with X2 has a negative significant impact on the pervasiveness of money laundering at
the 10 percent level. This negative relationship is attributed to the fact that in
developing countries, a small increase in X2 will improve the level of money laundering
much higher than in developed countries. This is due to the fact that the stock of X2 is
low for developing countries as compared to developed countries.
 Efficiency of the legal framework (X3) and ethical behavior of firms (X4) Factors affecting
have a positive and significant effect on the pervasiveness of money laundering at money
the 5 and 1 percent level of significance, respectively. The empirical analysis showed
that differences in the efficiency level of the legal framework among the developed and laundering
developing countries contribute to pervasiveness of money laundering activities. The
positive relationship shows evidence that when there is efficiency of the legal
framework that is legal and regulatory framework which is effective and independent, 361
money laundering activities are less pervasive. This is in line with the findings in the
literature where international bodies were set up to undertake combating money
laundering activities. Marginal returns for X3 and X4 are insignificant and this implies
that both X3 and X4 are vital for both developing and developed countries.
Lastly the empirical analysis indicated that capacity for innovation (X5) had a
negative and significant impact on the pervasiveness of money laundering at the
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5 percent level. This suggests that countries that invest in enhancing innovation can
increase the pervasiveness of money laundering activities as opportunities are opened
up for money laundering activities via the new technology. New technology can lead to
market failure such as tunneling where various mechanisms to transfer large sum of
money are easily devised without being detected. New technological innovation
provide easy avenue to channel funds to multiple accounts in a host of different
sources, thus providing a conducive environment for money laundering operations.
The problem is further compounded by poor regulating supervision. Marginal return
for innovation X5 was insignificant and this implies that X5 has the same impact for
both developing and developed countries.
In summary, the above analysis indicates that among the five factors, efficiency
of the legal framework and ethical behavior of the firms are vital in reducing the
level of money laundering globally. Impact of quality of human capital on the other
hand is more prevalent in developing countries. Technology seems to have a greater
impact on developed countries than developing countries. Evidence shows that
capacity for innovation has a negative impact on the pervasiveness of money
laundering.

5. Strategies and initiatives

Money laundering activities generally operate on a global scale and exploit
cross-country differences in the factors identified above. Measures to prevent, detect
and combat money laundering activities have already been initiated by international,
regional and specialized agencies. These include the FATF on money laundering, the
United Nations, the IMF, the World Bank and FATF style regional bodies which
include the Asia/Pacific (APG) Group on Money Laundering among others. With the
aid of these existing agencies, it is timely for an effective framework for combating
money laundering activities to be undertaken by developing countries. However, this
framework should complement, rather than replicate the existing rules and
benchmarks put forth by the international agencies. To this extent, in this section
strategies and initiatives based on the empirical analysis together with the guidelines
provided by existing international and regional bodies to combat money laundering
will be discussed.
Firstly, technology related to ICT infrastructure and the internet offers a whole new
medium to transact business. It has provided an added impetus in terms of rapid
 JMLC dissemination of information, enhancing productivity and efficiency in the financial
10,3 sector and an added advantage of anonymity. These features of the internet also offer
opportunities to money launderers. The question arises on the need to regulate the
internet. To this end, a good infrastructure complemented with continuous
improvement through innovation that is development of financial instruments,
security systems and process that are “full-prove” against financial crimes are vital.
362 Benchmarking the electronic delivery systems to global standards with strong
encryption and other security features added on to the internet to protect the electronic
payment system from potential abuse is important in curbing money laundering
activities. It should however be noted that the operation of the internet crosses national
jurisdictions. Although rules and regulations produced by international agencies do
exists, however the role national administrators play in implementing them are
uncertain. To this extent, the recommendations put forth by FATF should be taken
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seriously by developing nations. The FATF (2001) has reported the following
suggestions:
.
require internet service providers (ISPs) to maintain reliable subscriber registers
with appropriate identification information;
.
require ISPs to establish log files with traffic data relating to internet-protocol
number to subscriber and to telephone number used in the connection;
.
require that this information be maintained for a reasonable period (six months
to a year);
.
ensure that this information be made available internationally in a timely
manner when conducting criminal investigations; and
.
to have good systems to improve customer identification and record-keeping
so as to facilitate identification and reporting of any suspicious transactions
especially in the case of multiple transactions (FATF recommendation 11).

In this context, following the suggestions of FATF, national administrators of

these developing countries should focus not only the above guidelines but also by
the guidelines provided by the Joint Committee on the National Crime Authority (2001):
. regulating the licensing of ISPs;
.
requesting proof of identity to open internet accounts;
.
incorporating systems of process to improve their ability to detect and prevent
any suspicious transactions; and
.
obtaining technological assistance to upgrade their systems.

Secondly, to be able to provide continuous improvement through innovation, quality

of human capital plays an important role. Quality of human capital is vital in the well
being of the financial sector and the socioeconomic development of a country. As
such to be able to reach a comparative level with the more developed economies,
developing economies should increase the number of skilled workers in the country
and should also be able to retain these valuable human resources in their countries.
The financial institutions can play a key role in increasing the supply of highly
skilled human capital for the financial sector. However, to be able to achieve human
capital development, international cooperation is vital as these developing countries
 lack the relevant infrastructure and expertise. Developed countries should provide the Factors affecting
relevant expertise or to transfer the expertise across national territories. money
As such developing countries with the aid of the developed countries should:
laundering
.
place high priority on identifying opportunities for mutual cooperation and
resource sharing with developed countries;
.
provide information on best practices based on global standards; 363
.
provide continuous education and develop appropriate training for financial
regulators and employees of financial institutions on cutting-edge technology,
new financial instruments and effective regulations in curbing money laundering
and other financial crimes (Basel Committee, 1997); and
.
ensure that personnel are well-versed in tracing and tracking illegal behavior in
the digital economy.
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Thirdly, increasing the supply of expertise together with large investments in

infrastructure and technology for developing countries is vital but this has to be
complemented with the supporting pillars which include the development of independent
and transparent institutional framework to foster greater integrity in preventing money
laundering activities. The supporting pillars such as the legal framework in many
developing countries have not kept up with the technological changes. This has
contributed to the lack of transparency, accountability and quality of service, thus
increasing the probability of money laundering. The efficiency of the legal framework
should be continuously upgraded and adapt to global and technological changes to create
a robust financial system. The pooling of “know-how” experience and expertise by the
regulatory and enforcement authorities is still lacking in these sample countries
particularly in the developing countries, thus lacking an effective synergy. Most of the
developing countries do have laws to curb financial crime and control criminal activities
relating to money laundering activities. However, some of these countries have so far not
criminalized money laundering. To this end, developing countries should focus on the
following recommendations put forth by the Vienna convention and FATF (2003):
.
Adapt its legislation to comply with international requirement.
.
Develop or improve training programs for its law enforcement officers to ensure
that they are updated on the changes in the way money is laundered.
.
Should make an effort to coordinate and cooperate with other countries and
international and regional agencies to enhance the effectiveness of law
enforcement action to curb money laundering activities.
.
Have laws to establish a regulatory and supervisory mechanism for financial
institutions. This is to ensure that these financial institutions adhere with
customer identification and verification procedures, minimum standards of
record-keeping, cooperation among banks, supervisory and law enforcement
agencies and mandatory reporting of suspicious transactions (FATF
recommendation 11-13). Although the banking industry is obligated to
implement customer identification (the “know your customer” (KYC) principle)
under the Basel Committee on Banking Regulation and Supervisory Practices
(Core principle 15) published its Core Principles for Effective Banking
 JMLC Supervision (1997), there has been constant opposition by banks as they feel that
10,3 it burdens them financially.
.
Allow law enforcement personnel to identify, freeze or confiscate proceeds from
money laundering activities (FATF 7 and 35).

To this extent, developed countries must provide the necessary support to developing
364 countries with respect to finance, resources, technical support and training programs.
Without this support, it will be a challenge for these developing countries to combat
money laundering activities.

6. Conclusions and future directions

In this paper, we empirically examined the impact of five key factors such as
technology, quality of human capital, efficiency of the legal framework, ethical
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behavior of firms (corporate governance) and capacity for innovation in the economy
on the pervasiveness of money laundering in a sample of developed and developing
countries. The empirical analysis showed that efficient legal framework with good
corporate governance lower the pervasiveness of money laundering activities and a
high-innovative capacity contribute negatively to the pervasiveness of money
laundering activities.
The empirical analysis also showed that the developments of the five factors in
developing countries were significantly lower than that in developed countries.
Strategies and initiatives for combating money laundering activities between
developed and the developing countries were discussed in this paper.
This research provides insights into the key factors that need to be addressed in
combating money laundering activities. This research can be further improved if the
dynamics between money laundering and the factors can be modeled using a
cross-sectional time-series model (panel data analysis). This will provide a more robust
estimation of the relationship between money laundering activities and the factors,
thus enhancing the formulation of policies that will prevent money laundering
activities in these countries. However, it should be noted that there has been difficulty
in obtaining quality and consistent data over a longer-time period. In addition, future
research could also focus on benchmarking countries with regards to money
laundering using a more robust econometric method.

Note
1. The recursive plots are not provided in this paper but can be obtained from the author upon
request.

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366 Appendix. Sample countries

Algeria, Argentina, Australia, Austria, Bangladesh, Belgium, Bolivia, Bosnia and Hercegovina,
Botswana, Brazil, Bulgaria, Canada, Chile, China, Costa Rica, Croatia, Cyprus, Czech Republic,
Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Finland, France, Georgia,
Germany, Ghana, Greece, Guatemala, Honduras, Hong Kong SAR, Hungary, India, Indonesia,
Ireland, Israel, Italy, Jamaica, Japan, Kenya, Korea, Latvia, Lithuania, Luxembourg, Macedonia
FYR, Madagascar, Malaysia, Malta, Mauritius, Mexico, Morocco, Namibia, The Netherlands,
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New Zealand, Nicaragua, Nigeria, Norway, Panama, Paraguay, Peru, Philippines, Poland,
Portugal, Romania, Russian Federation, Serbia and Montenegro, Singapore, Slovak Republic,
Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tanzania, Thailand,
Tunisia, Turkey, Ukraine, UAE, UK, USA, Uruguay, Venezuela, Vietnam.

Corresponding author
Santha Vaithilingam can be contacted at: [email protected]

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