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JMLC
24,1 Money laundering in selected
emerging economies: is there
a role for banks?
102 Sulaiman Abdullah Saif Alnasser Mohammed
Department of Economic and Finance, College of Business Administrative,
University of Hail, Hail, Saudi Arabia

Abstract
Purpose – Understanding money laundering plays an important role in understanding economic growth
(EG). Extensive research is conducted about that, previous research lacks answers about the relationship of
anti-money laundering (AML) and EG by investigating the roles of the performance of Islamic banks, legal
environment, financial crisis (FC) and bank size. Therefore, the purpose of this paper is to cover that gap.
Design/methodology/approach – SmartPLS 3.0 was used and 33 Islamic banks were selected from
developing countries between 2007 and 2010.
Findings – Note that AML, Islamic bank performance, legal environment, and FC are significantly related
to EG.
Research limitations/implications – The research would be of importance to those seeking to
understand the determinants of EG; it is also beneficial for those writing books about money laundering and
Islamic banks in developing countries. The limitation of the study is the low number of Islamic banks that
have complete data. Thus, this could be future research contribution.
Originality/value – To the best knowledge of the author, research on money laundering and Islamic
banks in developing countries are not extensive, we have found an ample room to discuss the said variables.
Keywords Developing countries, Financial crisis, Economic growth, Money laundering,
Shadow economy, Bank performance
Paper type Viewpoint

Journal of Money Laundering
Control
Vol. 24 No. 1, 2021
pp. 102-110
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-12-2019-0096
1. Introduction
Laundering of money is a constant headache to many officials in many countries and is an
international issue that has caused political instability and a reduction in economic growth
(EG). A country such as Jordon is said to lose 2 per cent of its gross domestic product because of
money being laundered out of the official system. Other countries have shown abnormal
numbers as well. The laundering of money is not only about the loss of funds from the official
system but it is also about where this money goes. Indeed, research has shown evidence of a
linkage between money laundering and crimes, drugs and other illegal matters. Therefore,
international communities have formed guidelines and protocols to tackle or minimize money
laundering; however, the actual impacts of these activities often lack quantification
To fill this knowledge gap, this paper addresses the relationship between anti-money
laundering (AML) and EG in selected emerging countries. Indeed, this research seeks to
answer whether AML activities and EG are related. In doing so, this research is different
from previous papers for four noteworthy reasons. First, the paper selects selecting
Islamic banks in developing countries as an indicator of bank performance (BP), which
many have ignored. Second, this paper considers differences in legal origin (LO), which
previous papers have not done. Third, the study uses partial least squares (PLS) rather
than panel analysis. Lastly, this current research, following the recommendations of Role for banks
previous research on the measurement of Islamic BP, uses a mixture of indicators rather
than the traditional ones.
The literature review introduces data about money laundering that was drawn available
studies, the methodology section discusses how the study was conducted, the results section
discusses what was found and the last section presents the conclusion of the study.
103
2. Literature review
Although developing countries seem exposed and vulnerable to the impacts of money
laundering (Aluko and Bagheri, 2012), estimates of these impacts often lack accuracy. Some
data have assumed that $300-$500bn of dirty money enters the international capital markets
every year; others have much higher estimates. For example, according to figures by the United
Nations Office on Drugs and Crime (UNODOC), based on a meta-analysis, US$2.1tn was
laundered in 2009, equal to 3.6 per cent of the global GDP. According to the European
Commission, member states annually lose between 2 and 2.5 per cent of their combined GDP to
tax crimes.
The literature has allocated much attention towards measuring the influence of money
laundering on EG, yet researchers are facing problems in measuring to what extent
laundering harms the development of a country’s economy. Scholars have looked at evidence
concerning the reduction in productivity though the diversion of resources, an increase in the
crime rate and expanding corruption. Thus, scholars who study money laundering are
seeking to find an appropriate way to quantify the impacts.
Money laundering can be implemented through different channels. One is the import and
export sectors, which are channels through which money may be converted into goods that
are then either imported back to the country on a legal basis or exported. Another avenue
through which money may be laundered is offshore financial centers.
Studies have examined the impacts of money laundering from several angles. One is the
influence that money laundering exerts on a country. In these studies, the effects are greater
on small developing countries rather than in big countries highly countries. Some studies
have looked at the relationship between money laundering and tax evasion. One critical
issue related to money laundering is the actual amounts of money laundered in each country
rather than the number of cases of money laundering.
Often studies have produced contradictory results that may be ascribed to different
methods used to quantify money laundering dimensions. For example, some studies have
concluded that money laundering has a dilatory impact on an economy. Others have found
that an increased level of money laundering leads to a rise in the real GDP growth rate using
a linear regression model.
Despite the international community’s effort to minimize the influence of money
laundering, the crime continues to survive. Interestingly, the fight against money laundering
can even have perverse effects (Veiga et al., 2006). Therefore, a demand exists for an
extended investigation into the relationship between money laundering and EG. In bridging
this knowledge gap, this paper is an additional submission of knowledge to enhance the
understanding of EG and fighting money laundering activities.

2.1 Money laundering and economic growth

Money laundering activities cause disturbances to the financial system of which the
banking industry is part. Idowu (2012) studied the macroeconomic effects of money
laundering. He concluded that it has a negative impact on investment financing, government
revenue, the rate of EG and threatens political stability and internal security of a nation.
JMLC Hendriyetty and Grewal (2017) has studied the macroeconomic effects of money laundering
24,1 and found that this phenomenon negatively affects EG and financial stability. Bartlett (2002)
reported that money laundering will reduce the foreign trade and long-term cash flows
Therefore, researchers agree that low activities of money laundering could allow a bank to
operate in a typical efficiency. For this reason, the following hypothesis is posited:

H1. AML activities and BP are significantly and negatively related.

104
Some justification exists for the argument that money laundering has a positive impact on EG.
The rationale is that once money laundering has been completed, the money is ready to return
in the economy, thus providing funds for investment and consumption and consequently EG
(Araujo, 2006). Therefore, this current paper posits that the following:

H2. AML and EG are significantly and negatively related

2.2 Legal origin and economic growth

LO refers to the type of legal system that a country adopted. Countries may adopt an Anglo-
Saxon legal system, an Islamic system, communism or others. Studies have found that legal
environment matters for the performance of banks as well as economic developments
(Asongu, 2014). Studies have consistently proved that a positive relationship exists between
LO and EG. Therefore, the following hypothesis is posited:

H2. LO and EG are significantly and positively related

2.3 Financial crisis and economic growth

During the worldwide economic meltdown from 2007 to 2008, banks were under severe
economic pressure and many failed. As the contagion spread, the EG of many countries was
adversely impacted (Barro, 2001) and adversely impacting Islamic banks too. However,
according to studies such as (Hasan and Dridi, 2011), Islamic banks were protected from the
financial crisis (FC). Therefore, the following hypothesis is posited:

H3. FC and EG are significantly and positively related

2.4 Bank size and economic growth

The size of a bank matters. Bigger banks have more capital and can improve the circulating
of money in an economy, thus improving EG. Therefore, it is hypothesized that:

H4. Bank size (BS) and EG are significantly and positively related
The equation has the form Y = a þ b X, where Y is the dependent variable (i.e. the EG that goes
on the Y axis), X is the independent variable (i.e. it is plotted on the X axis named as money
laundering, LO, FC and BS), b is the slope of the line and a is the y-intercept provided
considering the error at the end of the equation to generate the below final equation.

Economic growth EG ¼ a þ bMoneylaundeting þ blegalorigin þ bfinancialcrisis

þ bbanksize þ error
3. Method Role for banks
Based on the literature review, several methods have been used to examine the relationship
between money laundering and EG. However, because the data in this study are of BP type,
the data are analyzed using the SmartPLS 3.0 software. The new versions of this software
supports econometric analysis, particularly generalized least squares. The samples were
selected randomly from 12 developing countries that have launched Islamic banking
services. This study has a complete dataset of 33 Islamic banks covering the period from
2007 to 2010, which included the FC and Bankscope was the data source (Table I and
105
Figure 1).
Because this study investigated three main variables, namely, money laundering, BP
and EG, three models were constructed. The first model examined the relationship
between money laundering and BP. The second model examined the relationship
between BP and EG. The third model discussed money laundering and EG. The study
included the FC, LO and BS to investigate the influence of those variables on EG
(Diagram 3.2).

4. Analysis and result

Though the sample size was small because of limited availability of data about Islamic
banks in developing countries, this study was among the few that have implemented PLS
technique through the SmartPLS 3.0 software (Ringle et al., 2005) to analyze the data
collected. The software is becoming more popular among researchers because it is less
restrictive in its distributional assumptions and accommodates both reflective and
formative measures in its analysis of the research model in question. Following the
suggestion of Anderson and Gerbing (1988), a two-step analysis approach was adopted in
analyzing the data whereby the measurement model was first estimated before assessing
the structural model.

4.1 Measurement model

The measurement model examines the relationship between independent or dependent
variables and their dimensions. Indeed, prior to empirically documenting the hypothesis
testing, the measurement model is tested, ensuring that models are valid to process the
assessment. This was performed by assuring the extent to which the indicators reflected

Country No. of Islamic Banks

Bahrain 4
Malaysia 10
UAE 4
Qatar 2
Jordon 3
Egypt 1
Thai 1 Table I.
Singapore 1
The demographics of
Lebanon 1
Pakistan 3 Islamic banks in
Sudan 1 developing countries
Indonesia 2 selected for the
Total 33 current study
JMLC
24,1

106

Figure 1.
Theoretical
framework
their underlying constructs (main variables). Dimensions in a measurement model need to Role for banks
demonstrate sufficient convergent and discriminant validity as a condition for establishing
construct validity. As Hair et al. (1998) recommended, factor loadings, composite reliability
and average variance extracted (AVE) were used to assess convergent validity. Table II
shows a list of variables, their dimension’s loadings/weights, reliabilities and AVE for all the
dimensions listed in the model.
The loadings of all reflective indicators met the required level of 0.60, as suggested
by Bagozzi and Yi (1988) except for the items PR, ROA, ROE and GDPG. Therefore, 107
these items were dropped from the analysis because they were not able to surpass at
least the minimum value of 0.50 as Hair et al. (1998) suggested. The composite
reliability values for all reflective constructs exceeded the threshold value of 0.70 that
Hair et al. recommended, while the AVEs for each construct were more than the
recommended value of 0.50, which Fornell and Larcker suggested. In short, convergent
validity was established.
Unlike convergent validity (Tables III and IV), discriminant validity can be tested for
both the reflective constructs. Discriminant validity is the degree to which the measures of
different constructs are distinct from one another and is assessed by comparing the
correlations between constructs with the square root of the AVE for a construct. Based on
Tables III and IV, the elements in the matrix diagonals, representing the square root of the
AVEs, were greater in all cases than the off-diagonal elements in their corresponding row
and column, indicating discriminant validity had been achieved.

Item loadings/ Composite

Main variables Dimensions weights reliability alpha AVE

Anti-Money laundering (AML) AML 1 1 1

Bank Performance (BP) Profit Margin (PM) 0.91 1 1
Profit Ratio (PR) 0.36
Return on Asset (ROA) 0.34
Return on Equity (ROE) 0.25
Economic Growth (EG) Gross Domestic Product (GDP) 0.601 0.70 0.56
Gross Domestic Product 0.075
growth rate (GDPG)
Inflation rate (IR) 0.85
Legal Origin (LO) LO 1 1 1
Bank Size (BS) BS 1 1 1 Table II.
Financial Crisis (FC) FC 1 1 1 Convergent validity

Variables AML BP BS EG FC LO

AML 1.000
BP 0.107 1.000
BS 0.043 0.154 1.000 Table III.
EG 0.438 0.251 0.094 0.740 Discriminant validity
FC 0.023 0.066 0.027 0.354 1.000 latent variable
LO 0.502 0.049 0.191 0.072 0.010 1.000 correlation
JMLC 4.2 Structural model
24,1 Following the assessment of the measurement model, the structural model was then
analyzed. The structural model comprises the hypothesized relationship between exogenous
and endogenous variables in the model. Table V shows the results for the structural model.
The explanatory power of the estimated model can be assessed by observing the R2 of the
endogenous constructs. The R2 value obtained from the analysis was 0.460, indicating that
108 46 per cent of the variance in adoption can be explained by all the exogenous variables in the
model. Table V AML was negatively and significantly related to BP at 5 per cent. AML is
positively and significantly related to EG at 5 per cent, and BP and EG are negatively and
significantly related at 5 per cent. FC is positively and significantly related to EG at 5 per
cent, and LO is negatively and significantly related to EG at 5 per cent. Therefore, only H1,
H3, H7, and H9 were supported where remaining hypothesizes were not supported despite
the proposed significance of the relationship.

5. Discussion and conclusion

This paper sought to answer the questions about the existence of a relationship between
AML activities and EG among selected developing countries. In particular, this study
examined the roles of Islamic bank performance, legal environment, Islamic BS and FC. The
findings revealed that AML could influence Islamic bank performance, which resulted in
lower EG. The study found that, when AML existed, LO and FC mattered for EG.
In stark contrast to the other dimensions above, the proposed hypotheses that AML
was negatively and significantly related to EG was rejected. This rejection has a base in
literature as more money laundered entered into the country could enhance EG. The
presentation of this study only focused on the Islamic bank performance and the
countries that have Islamic banks. As an extension of this study, future researchers

AML BP BS EG FC LO

AML 1.000 0.107 0.043 0.438 0.023 0.502

BS 0.043 0.154 1.000 0.094 0.027 0.191
FC 0.023 0.066 0.027 0.354 1.000 0.010
GDP 0.411 0.140 0.104 0.601 0.004 0.018
Table IV. IR 0.281 0.223 0.184 0.858 0.443 0.101
Discriminant validity LO 0.502 0.049 0.191 0.072 0.010 1.000
cross loading PM 0.107 1.000 0.154 0.251 0.066 0.049

Variables Original sample (O) STD T statistics P values Supported/not

AML ! BP 0.168 0.059 2.852 0.005 Supported

AML ! EG 0.591 0.088 6.736 0.000 Not
BP ! EG 0.192 0.049 3.899 0.000 Supported
BS ! BP 0.143 0.099 1.448 0.148 Not
BS ! EG 0.011 0.044 0.256 0.798 Not
FC ! BP 0.073 0.096 0.754 0.451 Not
Table V. FC ! EG 0.356 0.071 4.979 0.000 Supported
Results of the LO ! BP 0.106 0.101 1.052 0.293 Not
structural model LO ! EG 0.360 0.082 4.408 0.000 Supported
could design and conduct more sophisticated samples that include more banks whether Role for banks
conventional or Islamic. Nevertheless, for now, this study has provided a glimpse of
innovation findings using SMARPLS and new dimensions such as LO, FC and Islamic
banks, which provides additional insight into the relationship between AML and EG in
a developing country. It is hoped that the findings of this study will provide some
useful ideas for those who seek an understanding of the influence of money laundering
on EG.
109
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Further reading
Agbor, J.A. (2015), “13 How does colonial origin matter for economic performance in Sub-Saharan
Africa?”, Growth and Institutions in African Development, Vol. 309.
Valickova, P., Havranek, T. and Horvath, R. (2015), “Financial development and economic growth: a
meta-analysis”, Journal of Economic Surveys, Vol. 29 No. 3, pp. 506-526.
Jarrow, R.A. (2014), “Financial crises and economic growth”, The Quarterly Review of Economics and
Finance, Vol. 54 No. 2, pp. 194-207.
JMLC Levine, R. (1998), “The legal environment, banks, and long-run economic growth”, Journal of Money,
Credit and Banking, Vol. 30 No. 3, pp. 596-613.
24,1
Mei, D. and Zhou, L. (2015), “Anti-money laundering game between banking institutions and
employees in the progressing CNY internationalization”, Modern Economy, Vol. 6 No. 4, p. 490.
Roe, T. (2003), “Determinants of economic growth: a cross-country empirical study”, American Journal
of Agricultural Economics, Vol. 85 No. 4, pp. 1087-1088.
110 Rose-Ackerman, S. and Palifka, B.J. (2018), “Corruption, organized crime, and money laundering”, in
Institutions, Governance and the Control of Corruption, Palgrave Macmillan, Cham, pp. 75-111.
Ssaoui, F., Hassen, T. and Wassim, T. (2017), “The effects of money laundering (ML) on growth
application to the Gulf countries”, International Journal of Cyber Warfare and Terrorism
(Terrorism), Vol. 7 No. 1, pp. 13-24.

Corresponding author
Sulaiman Abdullah Saif Alnasser Mohammed can be contacted at: drsulaimanalnassermohammed@
gmail.com

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