Anti-money laundering regulations and financial sector development

Abstract

This paper is aimed at establishing the effect of anti-money laundering regulations on financial sector development across the globe. Using data from 2012 to 2018 across 165 economies across different continents, income levels and regulatory environments, we test a number of complex and related hypotheses. (a) We examine the effect of anti-money laundering regulations on financial sector development. (b) We examine if this effect differs across developing countries and developed economies. (c) We examine the nonlinearities in the anti-money laundering regulations-financial sector development nexus. We use the Prais-Winsten approach and the panel threshold estimation approaches to test our hypothesized relationships. We find evidence that anti-money laundering regulations generally promote financial sector development; however, this positive effect is concentrated in developing economies. We also find evidence of threshold effects of anti-money laundering regulations for our sample. Consistent with the earlier findings, the positive effect of anti-money laundering regulations on financial development is concentrated in countries below the threshold value of anti-money laundering regulations. These countries are mostly developing countries. Our findings suggest that strengthening anti-money laundering regulations will be beneficial to developing countries.