The Determinants of Anti-Money Laundering Compliance among Financial Action Task Force (FATF) Member States

Abstract

The purpose of this research is to identify the determinants of AML compliance among member countries of FATF. This study measured the AML/CFT compliance levels of 165 member states of FATF from the year 2004 to 2016 by composing an AML.CFT Compliance Index. The Ordinary Least Squares technique of estimation was used to run multiple regressions of the data. The OLS technique was employed due to the low frequency, and quality of Money Laundering data. The results of the study suggest that although AML/CFT compliance levels have shown some improvement, compliance levels still remain low. The study also found that country-specific factors like Regulatory Quality, Technology and Trade Openness determine the AML/CFT compliance levels of countries. This study, to the author’s best knowledge, is the first to measure country-level AML/CFT compliance with an index that merges both 2004 and 2012 FATF Recommendations from the year 2004 to 2016. This study is also the first of its kind to test whether factors like technology and education impact the AML/CFT compliance levels of countries. In this current AML regime where there are several calls for migration from the rule-based, “one-size-fits-all” approach to the risk-based approach, policy makers can glean some knowledge from the findings of this research in order to formulate and implement better AML policies to ensure effectiveness in the fight against Money Laundering and Terrorist Financing.