The implications of money laundering activities in developing economies have yielded mixed findings. However, existing studies have not specifically examined the role of anti-money laundering (AML) regulations in relation to entrepreneurial development. This study aims to fill this gap by analyzing the impact of AML regulations on entrepreneurship in Africa. The analysis utilizes data from 21 African nations for 2012-2018. The empirical analysis employs panel-corrected standard errors (PCSEs) and instrumental variable (IV) regression. The results demonstrate a significant positive impact of AML regulations on entrepreneurship. It is also revealed that AML regulations bolster institutional quality, thereby fostering entrepreneurship. Moreover, the study finds that AML measures facilitate financial development, further promoting entrepreneurial growth in Africa. Importantly, these results remain robust even after conducting a thorough robustness check. Consequently, the study advocates for the implementation of effective AML regulations to enhance the African business environment.
TopIntroduction
Goal 16 of the United Nations (UN) sustainable development agenda is specifically concerned with peace, a just and inclusive society which can be achieved by reducing insecurity and, the fight against crime (UN, 2019). Money laundering is a global concern and has been recognized to have a direct link to crime funding. It involves a situation where the perpetrators conceal proceeds of crime-related activities through the mainstream of the financial system, cross-border trading, or other efforts to make it legitimate within an economy (Hendriyetty & Grewal, 2017). Money laundering constitutes a crime, and its reduction has been acknowledged to promote financial integrity, effective governance, well-being, and sustainable development in general (Canhoto, 2021). Various efforts are now put in place to formulate laws, regulations, and policies to combat money laundering issues in the economy (Ball et al., 2015). Consequently, anti-money laundering (AML) refers to the initiatives such as financial action task force, sharing of intelligence and setting measures to combat issues related to money laundering. AML strengthens trust, confidence and transparency in the financial system and economy as a whole (Yildirim & Rafay, 2021). Given these critical roles, AML regulations have important impacts on business and entrepreneurial development in developing nations.
Interestingly, there are many channels by which money laundering may affect entrepreneurial ventures. Schumpeter (1934) explains the role of finance as a business fundamental for stimulating entrepreneurial effectiveness for growth and development in the economy. This theoretical proposition has gained empirical attention. A high level of financial development ensures efficient allocations of finances and induces growth through entrepreneurial productivity (Ajide, 2020; Ibrahim & Alagidede, 2020). However, in a situation of an underdeveloped financial system, scholars suggest that financial markets may hunt entrepreneurship and economic growth (Williams, 2019; Ajide & Ojeyinka, 2022). One of the factors that may reduce the effectiveness of financial development is money laundering activities. Raweh et al. (2017) hint that the financial system serves as the main channel for money laundering in which the proceeds from illegal transactions are launched into the economy. It destabilizes financial firms by eroding the integrity of the financial market and trust (Mekpor et al., 2018). This necessitates the introduction of anti-money laundering regulation to enhance the efficiency of financial development in promoting entrepreneurship. Money laundering may also affect entrepreneurship through the weak institutional framework. A country with poor-quality institutions would have a high size shadow economy and money laundering transactions. As such, formal channel of shifting money becomes riskier due to poor institutions. Money laundering hampers legitimate business initiatives and promotes corrupt practices in government institutions. It increases inefficiencies and costs of conducting business venturing, making outputs less competitive. (Loayza et al., 2019).