Money laundering has been a common financial crime globally over the decades. Despite the various financial regulators and governments devising numerous policies to deal with the problem, evidence shows that money laundering is still a common crime within the global financial system. The proposed study examines the impediments to anti-money laundering rules involving financial institutions and recommends possible remedies. An overview of the existing literature indicates that financial institutions such as banks are at the centre of money laundering schemes, either knowingly or unknowingly. The literature further suggests that money launderers have adopted new ways of disguising their illegal transactions to manoeuvre through anti-money laundering regulations. Accordingly, the study will adopt a qualitative approach and an analytical research design. Data will be collected from secondary sources such as peer-reviewed journal articles, World Bank and IMF reports, and case studies on the topic. Subsequently, the researcher will engage in qualitative content analysis to synthesise the data according to the research objectives.
Keywords: money laundering, financial systems, banks, and anti-money laundering regulations
Introduction
Funds acquired through illegal means such as human trafficking, drug trafficking, smuggling and robbery require money laundering to make them appear legitimate (Lodge, 2020). Criminals engage in money laundering in different ways, such as disguising the funds’ source or moving it from its origin to a different place or country (George and Robert, 2014). Accordingly, the International Monetary Fund (IMF), World Bank and other financial regulators have been engaged in deliberate efforts to reduce financial crimes like money laundering and enhance the economic systems’ integrity (Lodge, 2020). Despite such efforts, available evidence suggests that the anti-money laundering policies and regulations have not successfully curbed the vice (Lodge, 2020). According to Sarıgül (2012), the financial system has specific policy implementation gaps and discrepancies that encourage increasing money laundering activities. Some studies have also argued that lack of integrity in the financial system has been the primary cause of increased financial crimes globally (Yurieva, 2018). Nonetheless, money laundering bears profound economic implications worldwide, thus requiring further research in this area. This study assesses the impediments to anti-money laundering rules involving financial institutions and the possible remedies.
Literature Overview
This section provides an overview of the theoretical and empirical literature on money laundering.
Theoretical Review
Different researchers have presented various theories explaining the concept of money laundering and why it is difficult to end. Two of the most common money laundering theories are the economic theory and the crying wolf theory. The economic theory, first forwarded by Adam Smith, identifies two factors that dictate human behaviour (Raweh et al., 2017).
The first factor is that every human acts rationally and seeks to maximise personal utility. In contrast, the second factor is that the private utility of an economic venture relies on expected costs and revenues, which are determined by supply and demand (Raweh et al., 2017; Mei et al., 2014). The theory implies that individuals tend to act with no intention of promoting public interest but are only interested in personal welfare. As a result, despite anti-money laundering regulations, individuals within the financial systems are still likely to aid money laundering activities for personal benefit.
On the other hand, the crying wolf theory suggests that excessive reporting, also referred to as ‘crying wolf,’ may dilute the value of the reports (Dobrowolski and Sułkowski, 2019). Accordingly, crying wolf theorists observed that one of the critical elements of anti-money laundering regulations is that financial institutions must report suspicious transactions (Raweh et al., 2017). However, since reporting such transactions is a legal obligation, the banks tend to do it only for compliance purposes, thereby filing reports with many legitimate transactions (Alsuwailem and Saudagar, 2020). As a result, the financial regulators falsely assume that all banks are compliant with the anti-money laundering law, and their reports indicate declining money laundering activities. Therefore, the theory implies that excessive routine reporting has become less focused on curbing money laundering activities since banks only do it to comply with the regulations.
Empirical Review
Previous researchers have examined how money laundering occurs through banks. Goel and Singh (2018) commented that the complexity and international systems of the banks make it easy for money launderers to find ways of hiding their illegal funds. Similarly, George and Robert (2014) established that money launderers commonly use banks to transact large sums of money quickly and securely and make them appear legitimate.
Besides, banks also provide ways of converting money to other products, thereby enabling the money launderers to disguise their illegal funds in the form of assets and other valuable property (Acharya, 2015). As such, the evidence suggests that banking systems provide an enabling environment for money laundering.
On the contrary, Benson (2020) pustulates that the anti-money laundering regulations introduced in recent years have significantly resulted in a decline in the cases within the banking system. Anti-money laundering regulations such as disallowing anonymous accounts and reporting suspiciously large transactions might have boosted the banks’ ability to prevent money laundering. However, Goel and Singh (2018) posit that the regulations have prompted money launderers to change their tactics while using banks for their illegal transactions. Therefore, most existing literature concurs that banks remain the most used financial institutions in money laundering schemes, whether knowingly or unknowingly.
Furthermore, Yurieva (2018) observed that in many instances, the anti-money laundering regulations have resulted in slight changes in how the launderers operate, such as by smurfing or using their colleagues’ bank accounts. In addition, Yurieva (2018) further notes that money laundering has become more sophisticated than smurfing in some cases. Nonetheless, the authors’ central argument is that regardless of the methods used by the money launderers, banks remain at the centre stage of financial crimes. A previous study by Lucian (2010) also emphasised that banks still play a significant role in aiding money laundering activities despite numerous financial regulations. On the same note, Lodge (2020) highlighted that some of the new ways money launderers now use banks for their illegal transactions include wire transfers, electronic payments, private banking, offshore banking, and branchless banking. Although the studies look into various ways money launderers use banks for their criminal activities, there is little literature focusing on the application of anti-money laundering rules by financial institutions and why they fail to curb money laundering. Therefore, there is a need for more extensive research in this area and how the loopholes in the banking system can be sealed.
Research Design and Quality Criteria in General
A research design constitutes the selected research methods framework and techniques. According to Gaus (2017), a research design plan the researcher adopts before embarking on data collection to outline how the research objectives will be achieved properly. It helps the researcher translate the research problem into data that can be analysed and draw relevant answers to the set research questions. Hunziker and Blankenagel (2021) provided an almost similar definition, highlighting that a research design enables the researcher to collect relevant data, analyse it and achieve the study’s objective at the minimum possible cost. In addition, Hunziker and Blankenagel (2021) explain that a suitable research design should be neutral or free from bias and reliable. The research design must also provide helpful measuring tools relevant to the study objectives and generalisable results (Gaus, 2017). According to Matthews and Ross (2014), research designs are generally grouped into three categories: qualitative, quantitative, and mixed methods research (Matthews and Ross, 2014). The three categories are further broken down into distinct types of research designs. Some of the most common research designs include descriptive, experimental, correlational, explanatory, and analytical (Hunziker and Blankenagel, 2021). Therefore, the preferred research design may vary depending on the research aim and objectives. A poor selection of the design would result in outcomes that do not fully address the research question.
Accordingly, quality criteria include elements used to evaluate the overall quality of a research methodology, its reliability and trustworthiness (Treharne and Riggs, 2015). Researchers widely use four criteria to appraise the quality of research; credibility, dependability, confirmability, and transferability. The credibility of research concerns its outcomes’ reasonableness and trustworthiness, while dependability considers the research’s replicability (Treharne and Riggs, 2015). Meanwhile, confirmability concerns whether the findings are linked to the data collected, and transferability concerns whether the study may apply to a different setting or context. Therefore, a study that meets all the five criteria is considered valuable and reliable.
Research Questions and the Selected Study Design
The main research question for the proposed study is: What impediments are to anti-money laundering rules involving financial institutions? Accordingly, the study will seek to address the following specific questions:
- What are the existing anti-money laundering regulations?
- How do financial institutions apply the anti-money laundering rules to curb the vice?
- What are the shortcomings of the regulations regarding their implementation by the financial regulations?
- What are the potential remedies to the shortcomings?
