Does size really matter? : a study of banking sector size as it relates to money laundering and anti-money laundering enforcement

2019

Money laundering has been a problem for governments ever since it began 4000 years ago in

China. In recent years though, the problem seems to be spiraling out of control. When HSBC

was sanctioned for money laundering in 2010, the amount they laundered, roughly $7 billion,

seemed like a huge amount. In the years since, however, this sum has been eclipsed by greater

sums allegedly laundered by Deutsche Bank and Danske Bank.

Despite the best efforts of national and international regulators, money laundering continues

to occur, and in doing so feeds a vicious cycle of organized crime and corruption. It is all the

more surprising then that there has been no research into which types of economies are most

vulnerable to money laundering: those with large banking sectors or those with small ones.

Using three different estimates of money laundering, this thesis presents an empirical study

of the relationship between the size of a country’s banking sector and the amount of money

laundering estimated to be going on in that country. Additionally presented is an analysis of

whether Financial Intelligence Units become more effective with higher funding levels.

Results found that as the size of a country’s banking sector relative to GDP increases,

estimated money laundering will, in turn, increase. However, when compared to absolute size,

the link is much more tenuous. This signifies that countries more dependent on banking or

financial services can expect more money laundering, and thus that the relevant authorities

should place more of an emphasis on money laundering prevention and on enforcement of

existing anti-money laundering regulations. The reason for this link could be due to

connections between politicians and firms, or due to the systemic importance of financial

services in countries whose GDP and employment figures rely on that sector.

Regarding Financial Intelligence Units, it was found that no link exists between funding levels

and efficiency, apart from efficiency as measured by Suspicious Transaction Reports. This

could be due to the high development levels of the countries observed, as there exists a point

of funding after which marginal returns will drop off.