Combating trade-based money laundering: Do the Financial Action Task Force recommendations bite?
Project Completed
PROJECT TEAM
Dr Sami Bensassi
University of Birmingham
Contact: s.bensassi@bham.ac.uk
Dr Sami Bensassi is a Reader in Trade and Development Economics in the Birmingham Business School and is a member of the Centre for Crime, Justice and Policing. His research interests lie at the intersection of trade, development and institutions. His recent work has focused on trade informality, corruption and conflict zones. Dr Sami Bensassi's research appears in leading academic journals including World Development, The Journal of Development Studies, The Journal of African Economies and the Review of International Economics. He has received research funding from FCDO, the European Union, the Economic Research Forum and the IFPRI, and collaborated with the World Bank and the Food and Agriculture Organisation. He has received the University of Birmingham Outstanding International Impact for his research on smuggling at Tunisian land borders. He holds a PhD in Economics from the University of Paris-Nanterre.
PROJECT SUMMARY
The Financial Action Task Force (FATF) focuses on combatting money laundering. In February 2012, it codified its recommendations setting the global standard on combating money laundering and terrorist financing. Countries voluntarily accept FATF recommendations and must produce their anti-money laundering (AML) framework for assessment by FATF once they’ve accepted. This project seeks to answer one simple question: is this working?
By 2020, 105 countries accepted FATF recommendations, increasing to 120 countries by 2021. This project examines eight African and Middle Eastern countries that voluntarily implemented these recommendations from 2012 to 2020. It tests the hypothesis: Does implementing FATF recommendations reduce trade gaps? Using a ‘difference in difference’ methodology the project tests whether suspected illicit financial flows (IFF), measured through the trade-gap methods, decline after the decision to implement FATF recommendations. While results need to be seen as exploratory and treated with some caution, particularly given the limited sample of countries examined, the findings are promising.
Key findings demonstrate that:
FATF recommendations implemented by the importing country significantly reduces trade gaps (-18%) originating from either import under-invoicing and/or export over-invoicing.
If tax avoidance is considered a more widespread phenomenon than TBML, a policy targeting a specific type of crime can have positive spill-over effects in related crimes.
The effect of FATF recommendations diminishes after the initial year of implementing new anti-money laundering (AML) systems.
There is no observed effect on the trading partner of the reporting country, confirming the absence of a FATF multiplier effect in combating tax evasion.
The research contributes to two strands of literature. Firstly, by examining the impact of FATF recommendations on IFF beyond their targeted scope, it contributes to literature on the economics of financial crime, in particular money laundering. Secondly, this research is potentially the first to show the impact of the FATF recommendations on tax avoidance, particularly in regions connected with widespread and consequent tariff avoidance, contributing to economics literature related to this phenomenon.
PUBLICATIONS
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Combating money laundering does implementing the Financial Action Task Force recommendations bite? (SOC ACE Briefing Note 11)
ENGAGEMENT
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Sami Bensassi, ‘Revealing hidden transactions: hidden financial transactions nurture rogue state, organised crime and terrorist groups’, University of Birmingham, 25 August 2022.
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An online roundtable on 'The Future of the FATF', Centre for Financial Crime & Security Studies, RUSI, Friday, 24 November 2023, 10:00-12:00 (UK). Invitation Only Event. Find out more about CFS’s research.