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Auditing and
Strength of auditing and reporting reporting
standards, corruption and money standards

laundering: a cross-country
investigation 1243
Ines Amara and Hichem Khlif Received 4 October 2018
Revised 24 May 2019
Departement of Accounting, College of Business Administration, 15 October 2019
King Faisal University, Al-Ahsa, Saudi Arabia, and 20 June 2020
Accepted 10 August 2020
Anis El Ammari
Faculty of Economic Sciences and Management of Mahdia,
University of Monastir, Mahdia, Tunisia

Abstract
Purpose – This paper aims to investigate the relationship between the strength of auditing and reporting
standards (SARS) and money laundering, and test whether the SARS moderates the association between
corruption and money laundering.
Design/methodology/approach – The sample consists of 348 country-year observations over the period
2015–2017. Data on money laundering are collected from Basel Anti-Money Laundering Reports for 2015–2017,
while data on SARS and corruption are collected from the Global Competiveness Reports for the same years.
Findings – The findings of this study suggest that the SARS is negatively associated with money
laundering, while corruption has an insignificant effect on the same variable. The effect of corruption on
money laundering becomes positive and significant after removing the SARS. This result implies that the
SARS and corruption represent two concurrent forces influencing money laundering phenomenon with a
prevailing negative effect for the SARS. When testing for the moderating effect of SARS on the positive
association between corruption and money laundering, findings show that the positive association remains
stable under low SARS environments, while it is mitigated under high SARS. This moderating effect is
further confirmed when using an interaction variable between the SARS dummy variable and corruption as
this interaction variable has a negative effect on money laundering.
Originality/value – The findings emphasize the role played by the SARS in reducing money laundering
and mitigating the positive association between corruption and money laundering. These results may have
policy implications for governments aiming to combat this phenomenon.
Keywords Corruption, Money laundering, SARS
Paper type Research paper

1. Introduction
Money laundering represents a widespread phenomenon and a global problem worldwide
for both developed and developing countries (Habib et al., 2018; Amara and Khlif, 2018).
Money laundering has become of increasing concern to policymakers in recent years, mainly
because of its connections with terrorism (Norton, 2018). It has damaging impacts on the
Managerial Auditing Journal
Vol. 35 No. 9, 2020
We would like to address our gratitude for both reviewers, the associate editor and the editor for their pp. 1243-1259
helpful comments to improve the content of the paper. The author acknowledges the Deanship of © Emerald Publishing Limited
0268-6902
Scientific Research at King Faisal University for the financial support under Nasher track. DOI 10.1108/MAJ-10-2018-2026
MAJ economy as it leads to economic distortions, monetary instability, vulnerability of the
35,9 financial system and socioeconomic instability (Drayton, 2002; Dowers and Palmreuther,
2003). Thus, examining its economic determinants at country level is crucial for
governments that aim to combat these criminal economic practices. As auditing and
reporting standards outline “the principles to be applied in financial reporting and assures
the fair and reliable presentation of information in financial reports” (Karaibrahimoglu and
1244 Cangarli, 2016, p. 56), it becomes crucial to investigate their impact on money laundering.
Therefore, the objective of this study is to examine the effect of the strength of auditing and
reporting standards (SARS) on money laundering and whether the SARS moderates the
association between corruption levels and money laundering.
While there are numerous studies in the literature that critically examine factors that
contribute to money laundering (Norton, 2018), the number of empirical studies that
examine the determinants of money laundering are rather scarce [1] (Vaithilingam and Nair,
2007). Chong and L
opez-de-Silanes (2015, p. 78) suggest that “although the relevance of
money laundering seems to be growing, there is relatively little theoretical and even less
empirical work on the topic”. For instance, Vaithilingam and Nair (2007) examine the
determinants of the pervasiveness of money laundering for a sample of 88 developed and
developing economies and document that efficient legal framework with good corporate
governance lower the pervasiveness of money laundering activities. Chong and L
opez-de-
Silanes (2015) show that the degree of regulation in one country reduces money laundering
across 100 countries. More recently, Reganati and Oliva (2018) examine the same topic in the
Italian setting and provide evidence that very high levels of enforcement efforts and
education (corruption rate and mafia activities) are associated with lower (higher) levels of
money laundering.
Several regulations have been enacted to combat this phenomenon worldwide (e.g. the
Proceeds of Crime Act 2002 in the UK). These regulations have emphasized the role of
auditors who has a reporting obligation when there is a reasonable suspicion of criminality
(Norton, 2018).
When conducting their audit mission, auditors will have access to all transactions and
documents of their clients. Accordingly, they will be able to detect suspicious operations
linked to money laundering. However, the intention to reveal these detected financial crimes
to the judicial authorities will depend on legal and institutional environment prevailing in
one country. For instance, if the auditing and reporting standards are well-established in one
country, auditors will normally comply with them and reveal the detected financial crimes.
By contrast, if auditors operate in low auditing and reporting infrastructure, they will not
report detected money laundering transactions as legal environment will not protect them
and they will have a risk of losing their clients following the revelation of financial crimes. In
addition, the SARS may play a moderating role on the association between corruption and
money laundering. For instance, if auditors operate in low auditing and reporting
infrastructure, they may choose to avoid reporting financial crimes to judicial authorities if
these authorities receive bribes from their clients under high corrupt environment. If
auditors report these criminal acts, clients may use their discretion to escape from legal suits
and punishments through bribes attributed to government officials. Accordingly, weak
auditing and reporting infrastructure will reduce auditors’ incentives to report financial
crimes leading. By contrast, high SARS may give incentives to auditors to combat
corruption and money laundering. Thus, it is expected that the SARS may mitigate the
positive association between corruption and money laundering.
To test these theoretical predictions, a sample of 348 country-year observations over the
period of 2015–2017 is used. Findings show that the SARS is negatively related to money
laundering, while corruption is insignificantly associated with the same variable. When the Auditing and
SARS is removed, the results show that corruption has a significant positive effect on money reporting
laundering. These findings suggest that the SARS and corruption represent two concurrent
forces influencing money laundering phenomenon with a prevailing negative effect for the
standards
SARS. Testing for the moderating effect of the SARS on the association between corruption
and money laundering, findings show that the positive association remains stable under low
SARS, while it becomes insignificant under high SARS. This moderating effect is further
confirmed when using an interaction variable between the SARS dummy variable and 1245
corruption as this interaction variable has a negative effect on money laundering.
The findings provide substantive evidence that the SARS plays an important role in
reducing money laundering and mitigating the positive effect corruption on money
laundering. These empirical findings have policy implications for governments aiming at
combatting financial crimes and suspicious financial transactions through strengthening
the role of auditors by implementing solid auditing and reporting infrastructure.
The remainder of the paper is organized as follows. Section 2 develops theoretical bases
for the association between SARS, corruption and money laundering and formulates
research hypotheses. Section 3 describes the research design. Section 4 summarizes and
analyses the empirical results of this study. Section 5 concludes the paper.

2. Hypotheses development
2.1 Strength of auditing and reporting standards and money laundering
The role of auditors in facilitating money laundering has been widely discussed in the
literature (Arnold and Sikka, 2001; Neu et al., 2013). Mitchell et al. (1998) suggest that
auditing firms play key role in facilitating the specific crime of money laundering as they are
principally concerned with the control of recorded transactions and the identification of
criminal behaviors. Similarly, Compin (2008) suggests that auditing profession plays a
critical role in the process of setting up organized criminal networks.
Auditors operate within an auditing and accounting infrastructure which is mainly
shaped by quality of auditing and reporting standards applicable in one country. A country
characterized by high SARS [2] score is viewed as more compliant with auditing and
reporting standards (Boolaky et al., 2012). The SARS cannot be achieved in isolation, but
requires a conducive regulatory system that emphasizes on institutional transparency
(Boolaky et al., 2012). Operating under strong auditing and accounting standards, auditors
will act with a high level of scepticism when conducting their audit mission to detect
suspicious operations linked to money laundering and report them. For instance, Khlif and
Guidara (2018) posit that the SARS play an important role in shaping the commitments
towards transparency in one country.
Auditors generally make disclosure about verifiable information and this is not the case
for money laundering where information is not verifiable and financial crimes are
committed without traces (Unger and Van Waarden, 2009). Accordingly, auditors “have to
estimate the risks of a transaction being suspect of money laundering and the risks of being
accused of false reporting, or more generally of being held responsible for whether they did a
good job or not” (Unger and Van Waarden, 2009, p. 954). Thus, auditors have to estimate the
litigation risks, which are directly linked to auditing standards and reporting requirements
prevailing in one country, before deciding to report detected financial crimes. This implies
that the SARS in one country will play a fundamental role in combatting money laundering
through the reporting of financial crimes.
For instance, auditors will not have concerns about future law suits and litigations risk
with their clients linked to the disclosure of confidential affairs as auditing and reporting
MAJ standards already predict the obligation to report them to specific authorities. If the auditors
35,9 take the decision of non-reporting, the risk of non-reporting (future sanctions from judicial
authorities) will outweigh the risk of revelation of criminal acts. In this regard, Guedhami
and Pittman (2006) posit that enhanced reporting standards and legal institutions that
discipline auditors may limit corrupt business practices by improving the financial
reporting process.
1246 By contrast, if auditors operate in weak auditing and accounting infrastructure, they will
not report detected money laundering transactions as legal environment will not protect
them and they have a risk of losing their clients following the revelation of financial crimes.
If they reveal, their clients may easily escape from punishments using their political
connections and they will simply lose their clients and probably incur litigation risks (e.g.
the client may take legal action and accuse the auditor of reporting false information which
will damage his/her reputation). Generally low auditing and reporting infrastructure
coincides with relationship-based system which is characterized by low levels of
transparency, weak corporate governance mechanisms and where contracts are poorly
enforced (Gul, 2006). Under these circumstances, power relationships substitute for
contracts (Gul, 2006). Accordingly, auditors will be more reluctant to reveal money
laundering crime under weak auditing and accounting infrastructure.
Accordingly, it is expected that countries having strong auditing and accounting
infrastructure may reinforce the role of auditors in combatting money laundering crimes
implying low levels of money laundering. Thus, this first hypothesis is formulated:

H1. SARS is negatively associated with money laundering.

2.2 Moderating effect of the strength of auditing and reporting standards on the association
between corruption and money laundering
Corruption is defined as an operation in which one agent typically pays a sum of money or
performs a service in exchange for an illicit act by a public official (Andreoni et al., 1998).
Corruption may harm the level of transparency in one country (Amara and Khlif, 2018).
Corruption may decrease the capability of any country to enforce laws and penalize
individuals that commit financial crimes (Amara and Khlif, 2018). Reganati and Oliva (2018,
p. 405) suggest that “corruption and money laundering are two intrinsically linked types of
crime”. Accordingly, it is expected that corruption may have a positive effect on money
laundering.
Under strong auditing and reporting infrastructure, auditors may be in more comfortable
situation to report money laundering acts. Auditing and accounting infrastructure will
encourage them to reveal these financial crimes and report corrupt acts given the fact that
they are protected by this strong legal environment. Khalil et al. (2014, p. 384) suggest that
“external auditors are also likely to be more vigilant in combating bribery in countries where
governments or quasi government bodies are likely to impose criminal sanctions in the case
of financial misreporting”. Higher quality disclosure requirements will prevent “grand
bribery” as it becomes virtually impossible to conceal huge payments from public scrutiny
(Khalil et al., 2014). Khalil et al. (2014) also document that firms operating within settings
characterized by extensive disclosure requirements are less likely to engage in bribing
government officials. This will provide auditors with more incentives to report financial
crimes, which in turn, leads to lower money laundering.
By contrast, under weak auditing and reporting infrastructure, auditors may choose to
avoid reporting financial crimes to judicial authorities if these authorities receive bribes
from auditors’ clients and either if auditors report these criminal acts, clients may use their
discretion (e.g. personal connections with judicial authorities) to escape from legal suits and Auditing and
punishments through bribes attributed to government officials. Thus, low quality of reporting
disclosure requirements will encourage “grand bribery” practices and it becomes easy to
standards
hide huge payments from public scrutiny.
Accordingly, it is expected that the SARS in one country may moderate the association
between corruption and money laundering. More specifically, it is assumed that the positive
relationship between corruption and money laundering will be insignificant for countries
1247
characterized by high SARS. Thus, the following second hypothesis is formulated:

H2. The positive association between corruption and money laundering is more (less)
pronounced in settings characterized by low (high) SARS.
Figure 1 below illustrates the conceptual framework for the associations explored in this
study.

3. Research design
Data for this study are collected from a wide range of public sources (e.g. The Global
Competiveness Reports and Basel Anti-Money Laundering [AML] Index Reports). Table 1
provides details about the data used to measure the different variables and their various
sources.

3.1 Sample
The initial sample consists of 144 countries included in the Global Competitiveness Reports
(2015–2016, 2016–2017 and 2017–2018). The Basel AML Index Reports considered are for
2015–2016 and 2017 and they include only 125 countries identified in the Global
Competitiveness Report. Accordingly, we remove 19 settings. As not all countries are
reported for the three years considered either in The Basel AML Index Reports or the Global
Competitiveness Reports, nine further countries are deleted. Thus, the final sample includes
116 countries over the period 2015–2017 yielding 348 country-year observations. Table 2
displays more details about the sample selection process and the list of countries included in
the sample.

(+)
Corruption Money laundering
level
Moderating
effect
H2

H1

Strength of auditing
and reporting Figure 1.
standards (SARS) Conceptual
framework
MAJ Variable Description Source
35,9
ML The Basel AML Index which measures the risk of money Basel AML Index Reports (2015–
laundering and terrorist financing of countries based on 2016; 2017)
publicly available sources
SARS In your country, how strong are financial auditing and The Global Competiveness
reporting standards? (1 – extremely weak; 7 – extremely Reports (2015–2016; 2016–2017;
1248 strong) 2017–2018) (country profiles)
COR The weight of corruption as the most problematic factor in The Global Competiveness
doing business (a percentage). From a list of 16 factors, Reports (2015–2016; 2016–2017;
respondents were asked to select the 5 most problematic 2017–2018) (country profiles)
and rank them from 1 (most problematic) to 5. The results
were then tabulated and weighted according to the ranking
assigned by respondents (World Economic Forum, 2016,
2017, 2018)
IP The level of investor protection The Global Competiveness
Reports (2015–2016; 2016–2017;
2017–2018) (country profiles)
MKS The size of the national domestic and foreign market in an The Global Competiveness
index ranging from 0 to 7 Reports (2015–2016; 2016–2017;
2017–2018) (country profiles)
CTR The weight of tax regulation as the most problematic factor The Global Competiveness
in doing business (a percentage). From a list of 16 factors, Reports (2015–2016; 2016–2017;
respondents were asked to select the 5 most problematic 2017–2018) (country profiles)
and rank them from 1 (most problematic) to 5. The results
were then tabulated and weighted according to the ranking
assigned by respondents (World Economic Forum, 2017)
PIS Political instability as the most problematic factor in doing The Global Competiveness
business (a percentage). From a list of 16 factors, Reports (2015–2016; 2016–2017;
respondents were asked to select the 5 most problematic 2017–2018) (country profiles)
and rank them from 1 (most problematic) to 5. The results
were then tabulated and weighted according to the ranking
assigned by respondents (World Economic Forum, 2017)
JIND In your country, how independent is the judicial system The Global Competiveness
from influences of the government, individuals or Reports (2015–2016; 2016–2017;
companies? (1 = not independent at all; 7 = entirely 2017–2018) (country profiles)
independent)
ETHB In your country, how do you rate the corporate ethics of The Global Competiveness
companies (ethical behaviour in interactions with public Reports (2015–2016; 2016–2017;
Table 1. officials, politicians and other firms)? (1 = extremely poor – 2017–2018) (country profiles)
Data description and among the worst in the world; 7 = excellent – among the
sources best in the world)

3.2 Dependent variable: money laundering

There is a difficulty in accurately quantifying the extent of money laundering worldwide
(Mulig and Smith, 2004). The individuals and organizations who engage in these activities
obviously are not reporting them to their governments (Mulig and Smith, 2004).
Accordingly, it is difficult for researchers to quantify the amount of money laundering at
country level. To identify a credible measure of the extent of money laundering at country
level, the analysis is based on the reports issued by the International Centre for Asset
Recovery, which represents a part of the Basel Institute on Governance and it contains
scores concerning money laundering activities for 125 countries.
Sample selection process
Auditing and
Countries in the Global Competitiveness Reports (2015–2016; 2016–2017; 144 reporting
2017–2018) standards
Countries reported in the Basel AML Index 2017–2016 and 2015 Reports 125
Initial sample Minimum (144: 125) = 125 = 144
Countries not included in both international reports for the three years of 9
investigations (the Global Competitiveness Reports and Basel AML Index
Reports) 1249
Final sample 116
Country-year observations (2015–2017) 348
List of countries included in the analysis
Albania Iran Qatar
Algeria Ireland Romania
Argentina Israel Russia
Armenia Italy Rwanda
Australia Jamaica Saudi Arabia
Austria Japan Senegal
Azerbaijan Jordan Serbia
Bahrain Kenya Sierra Leone
Bangladesh Korea south Singapore
Benin Kuwait Slovakia
Bosnia-Herzegovina Kyrgyzstan Slovenia
Botswana Latvia South Africa
Brazil Lebanon Spain
Bulgaria Lesotho Sri Lanka
Cambodia Liberia Sweden
Canada Lithuania Switzerland
Cape Verde Malawi Taiwan
Chile Malaysia Tajikistan
China Mali Tanzania
Colombia Malta Thailand
Costa Rica Mauritania Tunisia
Croatia Mauritius Turkey
Cyprus Mexico Uganda
Czech Republic Moldova Ukraine
Denmark Mongolia United Arab Emirates
Dominican Republic Montenegro UK
Ecuador Morocco USA
Egypt Mozambique Uruguay
El Salvador Namibia Venezuela
Estonia Nepal Vietnam
Finland The Netherlands Zambia
France New Zealand Zimbabwe
Gambia Nicaragua
Germany Nigeria
Ghana Norway
Greece Pakistan
Honduras Panama
Hong Kong Paraguay
Hungary Peru
Iceland Philippines
India Poland Table 2.
Indonesia Portugal Sample description
MAJ The Basel AML Reports define financial crime as “the risk of money laundering and
35,9 terrorist financing of countries based on publicly available sources” (p. 2). The overall risk
score is computed based on a total of 14 indicators dealing with AML regulations,
corruption, financial standards, political disclosure and rule of law. The minimum score for
money laundering is obtained for Finland with 2.530 in 2015, whereas the maximum score is
for Iran and it accounts for 8.610 in 2016.
1250
3.3 Strength of auditing and reporting standards
SARS score is proxied through a survey conducted among senior managers from companies
in 144 countries, to collect experts’ opinions about the SARS of companies in which they
operate (Global Competitiveness Reports, 2017–2018, 2016–2017, 2015–2016). A survey is
conducted among business leaders who were asked to score the SARS on a scale ranging
from “1” indicating a weakest legal enforcement to “7” indicating the strongest standards
enforcement. A weighted average of the scale reported by the respondents in one country is
then calculated to obtain the SARS score of this country. The highest score is obtained for
South Africa (6.700) in 2016 and the lowest score is observed for Mauritania (2.100) in 2017.
The median of SARS in the sample amounts to 4.600%.

3.4 Level of corruption

Following Khlif et al. (2016), corruption level is measured by the weight of corruption as the
most problematic factor in doing business (a percentage). From a list of 16 factors including
corruption, surveyed individuals in one country were asked to select the five most
problematic factors and rank them from 1 (most problematic) to 5. The results of the survey
are tabulated and weighted according to the ranking assigned by respondents. The highest
score is obtained for Albania (23.600%) during 2016. Countries in the sample for which
corruption does not represent an obstacle in doing business (nil score) are Finland, Ireland,
Japan, New Zealand, Rwanda, Sweden, Singapore and the UK.

3.5 Control variables

We consider six control variables including the level of investor protection, tax regulation,
market size, policy instability, judicial independence and ethical behaviours of firms. On the
one hand, the level of investor protection may reduce the scope of illegal acts including
money laundering. On the other hand, tax regulation complexity may create a favourable
environment to avoid the legal rules and operate under shadow economy which is conducive
of money laundering crimes (Reganati and Oliva, 2018). Furthermore, market size may
reduce the scope of shadow economy in one country (Amara and Khlif, 2018), which may
decrease money laundering crimes. Policy instability (e.g. turbulent political environment)
may engender the absence of state authorities to enforce legislations which may increase the
likelihood of committing financial crimes. Judicial independence is also included as a control
variable as it may play an important role in imposing strict sanctions on financial crimes
which may decrease money laundering activities in one country (Vaithilingam and Nair,
2007). Finally, the score of ethical behaviour of firms is included as a control variable as it
may lead to lower levels of financial crimes (Vaithilingam and Nair, 2007).

3.6 Models specification

To test the empirical validity of the hypotheses formulated above, we conduct a balanced
panel data analysis. Panel data analysis is a sequence of pictures of the same observations
but at different points in time. In a fixed-effects model, indicator variables (1/0) are
introduced for all years and the first year is dropped. The following regression model is Auditing and
performed: reporting
MLit ¼ a0 þ a1 SARSit þ a2 CORit þ a3 IPit þ a4 MKSit þ a5 CTRit þ a6 PISit standards
þ a7 JINDit þ a8 ETHBit þ « it (1)
where:
Dependent variable: 1251
ML = level of money laundering in one country as proxied by the Basel AML score.
Test variable:
SARS = the strength of auditing and reporting standards.
Moderating variable:
COR = the level of corruption.
Control variables:
IP = the level of investor protection;
MKS = market size;
CTR = complexity of tax regulation;
PIS = the degree of policy instability;
JIND = judicial independence; and
ETHB = ethical behaviour of firms.
To capture the incremental effect of the SARS in explaining money laundering, model 2 is
performed after excluding this variable as follows:

MLit ¼ a0 þ a1 CORit þ a2 IPit þ a3 MKSit þ a4 CTRit þ a5 PISit

þ a6 JINDit þ a7 ETHBit þ « it (2)

3.7 Moderating effect of the strength of auditing and reporting standards on the
relationship between corruption and money laundering
To test for the moderating effect of the SARS on the relationship between corruption and money
laundering (H2), the overall sample is sub-grouped into two sub-samples: low SARS (below or
equal to the median of SARS) and high SARS (above the median). A test of H2 consists of
observing a significant positive association between corruption and money laundering only
under low SARS and an insignificant relationship between corruption and money laundering
under high SARS. To test H2, we regress model 2 for the two groups considered. Accordingly,
model 3 is performed as follows for high and low SARS environments:

MLit ¼ a0 þ a1 CORit þ a2 IPit þ a3 MKSit þ a4 CTRit þ a5 PISit

þ a6 JINDit þ a7 ETHBit þ « it (3)

A complimentary test for the moderating effect of the SARS on the association between the
corruption and the level of money laundering consists of using an interaction variable
analysis. This interaction variable is the multiplication result between corruption and the
dummy SARS variable that equals 1 if the SARS level is above the median and 0 otherwise.
Such an interaction variable will equal to corruption score if the country of interest has a
high SARS and 0 otherwise. This variable captures the effect of corruption on money
MAJ laundering only if the country of interest is characterized by high SARS. Thus, the test of H2
35,9 consists of observing an insignificant positive association or negative and significant
association between the interaction variable (SARSD*COR) and money laundering
(model 4).

MLit ¼ a0 þ a1 SARSDit *CORit þ a2 IPit þ a3 MKSit þ a4 CTRit þ a5 PISit

1252 þ a6 JINDit þ a7 ETHBit þ « it ð4Þ (4)

4. Empirical results
4.1 Descriptive statistics
Table 3 displays descriptive statistics for all variables included in the model. Money
laundering variable has an average score of 5.716 and ranges from 2.530 to 8.610. SARS has
a mean of 4.724 and ranges from 2.100 to 6.700. Corruption level has a mean of 8.944 and
ranges from 0 to 23.600. The average for the strength of investor protection variable
accounts for 5.684 and varies from 2.700 to 8.300. Finally, the means for political instability,
tax regulation complexity, market size, judicial independence and ethical behaviour of firms
are 6.731, 6.486, 4.027, 4.133 and 4.141, respectively. Table 3 reports more information about
descriptive statistics concerning all variables considered in this study.

4.2 Univariate analysis

Table 4 reports the results of univariate analysis. Findings show that there is a significant
negative relationship between the SARS and money laundering score (0.548), and this
result provides preliminary support for H1. Corruption is positively and significantly
correlated with money laundering with a Pearson correlation coefficient amounting to 0.439.
The strength of investor protection is negatively associated with money laundering score
with a Pearson correlation coefficient accounting for (0.405). Market size is negatively
correlated with money laundering with a Pearson correlation coefficient accounting for
0.205. Finally, judicial independence is negatively related to money laundering with a
Pearson correlation coefficient amounting to 0.422.

Variables Observations Mean SD Minimum Maximum

ML 348 5.716 1.178 2.530 8.610

COR 348 8.944 6.155 0 23.600
SARS 348 4.724 0.861 2.100 6.700
IP 348 5.684 1.214 2.700 8.300
CTR 348 6.486 4.133 0 21.300
PIS 348 6.731 4.420 0 24.600
MKS 348 4.027 1.184 1.300 7
JIND 348 4.133 1.267 1.100 6.800
ETHB 348 4.141 0.944 2.400 6.400

Notes: ML: level of money laundering in one country as proxied by the Basel AML Score; SARS: the
strength of auditing and reporting standards in one country; COR: the level of corruption in one country; IP:
Table 3. the level of investor protection in one country; CTR: complexity of tax regulation; PIS: political instability;
Descriptive statistics MKS: market size; JIND: judicial independence; ETHB: ethical behaviour of firms
 ML COR SARS IP CTR PIS MKS JIND ETHB
Auditing and
reporting
ML 1.000 standards
COR 0.439*** 1.000
SARS 0.548*** 0.622*** 1.000
IP 0.405*** 0.240** 0.344*** 1.000
CTR 0.358*** 0.309*** 0.224** 0.165* 1.000
PIS 0.039 0.031 0.129* 0.064 0.006 1.000 1253
MKS 0.205** 0.246** 0.311*** 0.311*** 0.338*** 0.193* 1.000
JIND 0.422*** 0.698*** 0.708*** 0.292** 0.170* 0.193* 0.242** 1.000
ETHB 0.391*** 0.653*** 0.679*** 0.356*** 0.201** 0.218** 0.221** 0.778 1.000

Notes: ML: level of money laundering in one country as proxied by the Basel AML Score; SARS: the
strength of auditing and reporting standards in one country; COR: the level of corruption in one country; IP:
the level of investor protection in one country; CTR: complexity of tax regulation; PIS: political instability;
MKS: market size; JIND: judicial independence; ETHB: Ethical behaviour of firms. *Significant at 10%; Table 4.
**significant at 5%; ***significant at 1% Correlation matrix

4.3 Multivariate analyses

Table 5 presents the results of multiple regressions specified in model 1. In model 1, the
findings show that the SARS is negatively associated with money laundering score
(coefficient = 0.567; t = 6.520). This result provides support for H1 and implies that the
SARS may reduce the scope of financial crimes in one country. This result is in line with that
reported by Karaibrahimoglu and Cangarli (2016) who have documented that the SARS is
positively associated with ethical behaviours of firms. The finding is also in line with Khlif
and Guidara (2018) who have provided evidence that the SARS is negatively associated with
a specific form of financial crime (tax evasion). Under strong auditing and reporting
standards, auditors will assess the risks of a transaction being suspect of money laundering
and the risks of being accused of false reporting. They will also increase the level of
scepticism when conducting their audit missions concerning suspicious operations linked to
money laundering and report these financial crimes. Auditors will not have concerns about
future litigations risk with their clients when revealing these confidential affairs to judicial
authorities as auditing and reporting standards already predict the obligation to report
them.
By contrast, corruption level is not significantly associated with money laundering.
Similarly, both judicial independence and ethical behaviour of firms are insignificantly
associated with money laundering. Concerning the remaining control variables, the level of
investor protection, policy instability and the complexity of tax regulation are negatively
and significantly associated with money laundering, while market size is positively related
to the same variable (coefficient = 0.120; t = 2.540).
Controlling for multicollinearity, the variance inflation factors (VIFs) reported suggest
that model 1 does not suffer from such a problem as the maximum VIF accounts for
3.490 [3]. The overall explanatory power of the model is significantly high (F = 25.520; p <
0.000) and the adjusted-R2 accounts for 41.410%.
In model 2, the SARS variable is removed to investigate how corruption level may
influence money laundering without SARS. The association between corruption and money
laundering becomes positive and significant (coefficient = 0.030; t = 2.410) as compared to
model 1. The overall explanatory power of the model becomes lower (F = 21.040; p < 0.000)
and the adjusted R2 accounts for 34.200%. For model 2, the adjusted R2 witnesses a
significant decrease, moving from 41.410% to 34.200%, implying that the SARS represents
 35,9
MAJ

1254

Table 5.
Multivariate
regression analysis
Dependent variable: ML
Model 1 Model 2 without SARS Model 3 high SARS Model 3 low SARS Model 4
Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic Coefficient t-statistic

Intercept 9.456 19.030*** 8.047 16.960*** 7.431 11.850*** 7.763 10.210*** 9.003 27.780***
SARS 0.567 6.520***
COR 0.016 1.340 0.03 2.410** 0.001 0.100 0.035 1.910*
COR*SARSD 0.270 2.670**
IP 0.241 5.390*** 0.275 5.850*** 0.168 2.850*** 0.391 5.260*** 0.266 5.660***
CTR 0.069 5.360*** 0.071 5.170*** 0.071 4.610*** 0.068 2.500*** 0.080 6.020***
PIS 0.026 2.200** 0.022 1.790* 0.015 1.000 0.037 1.940* 0.030 2.430**
MKS 0.120 5.540** 0.075 1.530 0.141 2.020** 0.048 0.700 0.091 1.840*
JIND 0.084 1.180 0.216 2.990*** 0.280 3.060*** 0.014 0.130 0.285 4.340***
ETHB 0.135 1.510 0.016 0.180 0.006 0.060 0.148 0.850 0.066 0.730

2016 0.103 0.860 0.104 0.810 0.188 1.210 0.051 0.270 0.134 1.060
2017 0.190 1.590 0.197 1.560 0.170 1.100 0.151 0.780 0.209 1.660
F (p-value) 25.520*** (0.000) 21.040 *** (0.000) 24.630 *** (0.000) 7.780 *** (0.000) 21.270*** (0.000)
Adj. R2 41.410 34.200 24.600 25.800 34.400
Max VIF 3.490 3.200 3.160 1.480 2.480
Number of observations 348 348 172 176 348

Notes: ML: level of money laundering in one country as proxied by the Basel AML Score; SARS: the strength of auditing and reporting standards in one country;
COR: the level of corruption in one country; SARSD: dummy SARS variable that equals 1 if the SARS level is above the median and 0 otherwise; IP: the level of
investor protection in one country; CTR: complexity of tax regulation; PIS: political instability; MKS: market size; JIND: judicial independence; ETHB: ethical
behaviour of firms. * Significant at 10%; **significant at 5%; and ***significant at 1%; Italic style is used to highlight the variables of interest in the models
 Dependent variable: ML
Auditing and
Model 4 with SARS and COR Model 4 with COR reporting
Coefficient t-statistic Coefficient t-statistic standards
Intercept 9.477 17.080*** 7.790 16.540
SARS 0.572 5.270***
COR 0.015 1.140 0.045 3.500***
COR*SARSD 0.001 0.080 0.038 3.690*** 1255
IP 2.414 5.370*** 0.272 5.870***
CTR 0.069 5.350*** 0.682 5.030***
PIS 0.026 2.200** 0.022 1.830*
MKS 0.120 2.530** 0.095 1.940*
JIND 0.083 1.170 1.171 2.380**
ETHB 0.137 1.490 0.001 0.020
2016 0.103 0.860 0.091 0.730
2017 0.190 1.590 0.124 1.480
F (p-value) 23.130*** (0.000) 21.000*** (0.000)
Adj R2 0.412 0.365
Max VIF 3.72 3.30
Number of observations 348 348

Notes: ML: level of money laundering in one country as proxied by the Basel AML score; SARS: the strength of
auditing and reporting standards in one country; COR: the level of corruption in one country; SARSD: dummy Table 6.
SARS variable that equals 1 if the SARS level is above the median and 0 otherwise; IP: the level of investor
protection in one country; CTR: complexity of tax regulation; PIS: political instability; MKS: market size; JIND: Alternative
judicial independence; ETHB: ethical behaviour of firms. *Significant at 10%; **significant at 5%; ***significant regressions for
at 1%; Italic style is used to highlight the variables of interest in the models model 4

the most important variable in explaining money laundering. This result confirms the
strong univariate correlation between the SARS and money laundering.
When comparing model 1 and model 2, an interesting result emerges. Taken together the
two explanatory variables (SARS and corruption) in the same model, the results show that
only SARS is negatively associated with money laundering, while corruption is
insignificantly associated with the same variable. By contrast, when removing SARS
variable in model 2, corruption has a positive effect on money laundering. Accordingly,
SARS and corruption represent two concurrent forces influencing money laundering
phenomenon with a prevailing negative effect for SARS as it alleviates the positive effect of
corruption on money laundering.
To test how SARS may affect the relationship between corruption and money laundering
(H2), the overall sample is sub-grouped into high and low SARS environments based on the
median of this variable. The findings show that the significant positive association between
corruption and money laundering observed in model 2 remains significant for countries
characterized by low SARS (coefficient = 0.035; t = 1.910), while it becomes insignificant for
setting characterized by high SARS (coefficient = 0.001; t = 0.100).
As an additional test to examine the moderating effect of SARS, an interaction variable
between corruption and a dummy SARS variable, that equals 1 if the SARS level is above
the median and 0 otherwise, is introduced. Such an interaction variable will equal to
corruption score if the country of interest has a high SARS and 0 otherwise. The findings
show that the association between corruption, under high SARS and money laundering is no
longer positive and significant as for model 2. In model 4, the interaction variable
(SARSD*COR) is negatively and significantly related to money laundering (coefficient =
MAJ 0.027; t = 2.670); confirming the prevailing negative effect of the SARS over corruption
35,9 on money laundering.
Checking for multicollinearity problem, models 3 and 4 do not suffer from this problem
as all maximum VIFs account for 3.160, 1.480 and 2.480 in model 3 high SARS, model 3 low
SARS and model 4, respectively.
Overall, the findings provide evidence that the SARS plays an important role in reducing
1256 financial crimes. In addition, the SARS mitigates the positive effect of corruption on money
laundering. High quality of auditing and reporting requirements will prevent “grand
bribery” as it becomes virtually impossible to hide huge payments from public scrutiny
(Khalil et al., 2014). This will provide auditors with more incentives to report financial
crimes, which in turn, leads to lower money laundering.

4.4 Alternative regressions for model 4

This sub-section is devoted to undertake further tests concerning model 4 as shown in
Table 6. The first model includes the interaction variable (SARSD*COR), corruption and the
SARS. Results reported show that neither corruption, nor the interaction variable has a
significant effect on money laundering. By contrast, the SARS conserves its strong negative
impact on money laundering (coefficient = 0.572; t = 5.270). These findings confirm that
the SARS has a prevailing negative effect on money laundering over corruption. The second
alternative model includes (SARSD*COR) and corruption. In this regression, corruption
conserves its positive impact on money laundering (coefficient = 0.045; t = 3.500), while the
interaction variable between corruption and the SARS has an opposite effect on the same
variable (coefficient = 0.038; t = 3.690). These findings confirm that the SARS represents
a concurrent force for corruption and mitigates its adverse impact on money laundering.

5. Conclusion
This study investigates the relationship between the SARS and money laundering score and
test whether the SARS moderates the association between corruption and money
laundering. Based on a sample of 348 country-year observations, findings show that the
SARS is negatively associated with money laundering. Furthermore, the SARS mitigates
the positive association between corruption and money laundering practices.
Findings imply that good reporting and auditing infrastructure may create a favourable
environment for auditors to play a critical role in combatting money laundering by detecting
and revealing financial crimes to judicial authorities. In addition, the SARS and corruption
represent two concurrent forces influencing money laundering phenomenon in one country
with a prevailing negative impact for the SARS.
These empirical results alert policymakers and governments in developing and emerging
economies about the importance of solid accounting and auditing infrastructure in limiting
financial crimes in one country. These findings imply also that countries characterized by weak
auditing and reporting infrastructure may represent a fertile ground for corruption and money
laundering. Accordingly, it becomes urgent for these countries to undertake legislations to
strengthen transparency and consolidate the role of auditors in combatting money laundering.
This paper contributes to corruption and money laundering literature in two ways.
Firstly, it enhances the understanding of the determinants of money laundering in
international settings. In this regard, Chong and L
opez-de-Silanes (2015) highlight the
scarcity of empirical enquiries dealing with the determinants of money laundering at the
international level. Secondly, the findings may provide significant insights to policymakers
to encourage the adoption of strong reporting and auditing standards that may reduce
money laundering practices and mitigate the positive effect of corruption on the same
variable. By implementing strong auditing and reporting infrastructure, auditors will have Auditing and
more incentives to report and combat financial crimes. reporting
This study is subject to some caveats. Firstly, the process of money laundering may
occur through:
standards
“[. . .] the shrewd exploitation of a complex, interweaving web of secrecy, jurisdictions and/or tax
havens, the manipulation of the concept of legal persons and legal arrangements to concoct ‘shell
companies’ that can operate as covers for corrupt individuals, the abuse of loopholes in existing 1257
anti-money laundering legislation, the weak implementation of these rules, and the corruption of
authorities. . .” (Taveres, 2013, p. 2).
Thus, some other control variables may be included in the model which implies that the findings
may suffer from omitted variables bias. Secondly, using survey data measures may raise
concerns about measurement errors (Richardson, 2006). Nevertheless, data are collected from
reputable sources (e.g. the Global Competiveness Reports). Finally, because of data unavailability,
we were not able to conduct additional tests using alternative proxies of money laundering.

Notes
1. The search for studies dealing the determinants of money laundering allows the identification of
three studies conducted by Vaithilingam and Nair (2007), Chong and L
opez-de-Silanes (2015) and
Reganati and Oliva (2018).
2. The SARS score is proxied through a survey conducted among senior managers from companies
in several countries, to collect experts’ opinions about the SARS of companies in which they
operate (World Economic Forum, 2016). The sample includes key industries of the economy and
comprises large and medium-sized firms, as well as listed and unlisted companies. Surveyed
senior managers are asked to rate their perception on the SARS on a scale of ranging from 1 to 7
(with 1 indicating extremely weak and 7 extremely strong) (World Economic Forum, 2016). A
weighted average of the scale reported by the respondents in one country is then calculated to
obtain the SARS score of this country.
3. Multicollinearity is viewed as a serious problem when the VIF exceeds 10 (Neter et al., 1989).

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Further reading 1259

Basel Institute on Governance, (2015), “Basel AML index 2015 report”, available at: https://index.
baselgovernance.org/sites/index/documents/Basel_AML_Index_Report_2015.pdf
Basel Institute on Governance. (2016), “Basel AML index 2016 report”, available at: https://index.
baselgovernance.org/sites/index/documents/Basel_AML_Index_Report_2016.pdf
Basel Institute on Governance. (2017), “Basel AML index 2017 report”, available at: https://index.
baselgovernance.org/sites/index/documents/Basel_AML_Index_Report_2017.pdf

Corresponding author
Ines Amara can be contacted at: iamara@kfu.edu.sa

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