Money laundering risks surge in developing economies amid governance gaps

Economic growth and openness can spur national development, but they also carry significant risks if not tempered by robust governance and regulatory vigilance. A new empirical study published in the Journal of Risk and Financial Management, titled “Money Laundering in Global Economies: How Economic Openness and Governance Affect Money Laundering in the EU, G20, BRICS, and CIVETS”, unveils complex regional disparities in how governance structures and economic openness influence money laundering risks across global economic blocs.

The research analyzes a decade of data from 2012 to 2021 using the Basel Anti-Money Laundering Index and World Bank statistics. It reveals that foreign direct investment (FDI), trade openness, and governance quality interact in markedly different ways depending on income category and institutional strength.

How do governance and income levels affect money laundering risk?

The study shows that countries with stronger governance and higher income levels are significantly less susceptible to money laundering. The control of corruption, a key governance metric, emerged as a consistent deterrent to money laundering across all models. In high-income countries, robust institutional frameworks help counteract illicit financial flows, regardless of economic activity levels. For example, nations within the European Union, which generally score high on anti-corruption metrics, had the lowest average money laundering risk scores (4.4 on the Basel Index), while BRICS and CIVETS countries scored 5.6, indicating moderate to high risk.

By contrast, lower-middle-income and upper-middle-income nations face greater challenges due to institutional weaknesses. In these settings, economic growth and FDI inflows are linked to increased money laundering risks. The research highlights that income level alone does not offer protection unless paired with effective governance. Notably, countries in the upper-middle-income bracket faced risks nearly 0.56 points higher than their high-income counterparts, while lower-middle-income countries exhibited risks 0.96 points higher.

The results affirm theories connecting weak institutional oversight with increased illicit activity. The governance and corruption control indicators, especially those reflecting transparency and public accountability, were pivotal in curbing laundering risks. Where such governance structures were deficient or deteriorating, as observed in some upper-middle-income countries, money laundering risks were significantly amplified.

What role do trade openness and FDI play across economic blocs?

Economic openness shows a dual nature: while it can stimulate growth, it also creates vulnerabilities. FDI inflows, in particular, were found to be positively correlated with money laundering risk in high-income countries. This may seem counterintuitive, but the study notes that without adequate sector-specific regulatory oversight, even advanced economies can face heightened risks from cross-border investments.

Trade openness, on the other hand, showed variable effects. In countries with mature governance frameworks, such as EU and high-income states, greater trade openness was associated with reduced money laundering risk. This finding aligns with international trade theories that suggest transparent trade systems discourage financial secrecy. However, in low- and middle-income countries, increased trade was linked to higher risks, due in part to weaker customs oversight, limited e-governance infrastructure, and challenges in enforcing trade transparency standards.

The G20 bloc revealed unique behavior. Although composed of both advanced and emerging economies, the bloc exhibited a mix of vulnerabilities. Here, economic growth and trade openness slightly increased risks, though FDI inflows did not significantly impact money laundering indicators, hinting at the bloc’s internal heterogeneity.

Within BRICS and CIVETS, two blocs defined by rapid economic growth but inconsistent regulatory environments, FDI was strongly associated with higher money laundering risks. In both groups, the combination of financial influxes, institutional fragility, and growing global integration created fertile conditions for illicit financial practices.

What are the implications for policy and international regulation?

The study underscores that a “one-size-fits-all” approach to anti-money-laundering (AML) regulation is ineffective. Policies must be tailored to reflect regional economic structures and institutional capacities. For lower- and middle-income nations, priority should be placed on bolstering governance mechanisms, increasing transparency, and enhancing the capacity of regulatory agencies to monitor both trade and investment inflows.

The authors advocate for the adoption of enhanced due diligence protocols in FDI screening, particularly in jurisdictions lacking comprehensive beneficial ownership regulations. These include rigorous source-of-funds checks and mandatory disclosures to prevent shell company abuses. Strengthening international cooperation, especially technical support for capacity-building in vulnerable economies, was also identified as essential.

Trade policies, the study warns, should not be liberalized without corresponding advances in governance. In absence of strong customs and financial supervision, trade openness can act as a conduit for illicit finance, rather than a catalyst for growth. In particular, e-governance initiatives were recommended as scalable, cost-effective solutions for enhancing administrative transparency.

From a corporate standpoint, the findings urge multinational companies to adopt risk-adjusted compliance strategies that consider the AML environment of each jurisdiction in which they operate. Corporate governance practices must extend beyond legal compliance to include proactive monitoring of financial flows and engagement with national regulatory frameworks.