Anti‐money laundering regulations and financial sector development

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 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.