WHEN TRADE OPENNESS MEETS WEAK INSTITUTIONS: EVIDENCE ON TRADE-BASED MONEY LAUNDERING VULNERABILITY
DOI:
https://doi.org/10.69980/n42vj366Keywords:
Trade-based money laundering, illicit financial flows, institutional quality, trade openness, panel data, composite index, AML regulation, ForensicAbstract
Trade-based money laundering (TBML) exploits the scale, documentary complexity, and jurisdictional fragmentation of international trade to disguise the proceeds of crime, yet the phenomenon remains poorly measured relative to its estimated economic significance. Drawing on principal-agent theory and the economics of informational asymmetry, this study develops and empirically tests a Composite TBML Vulnerability Index (CTVI) that integrates trade-price discrepancy, institutional quality, and trade-finance opacity into a single, reproducible diagnostic. Using an unbalanced panel of 40 economies spanning all World Bank income groups over 2013-2022, the study estimates a two-way fixed-effects model in which CTVI is regressed on trade openness, regulatory quality, financial depth, shadow-economy size, and the interaction between trade openness and regulatory quality. The results show that trade openness is positively associated with TBML vulnerability, but that this relationship is substantially moderated by institutional quality: economies in the lowest decile of regulatory quality experience amplification of TBML risk from trade liberalisation that is roughly twice the sample average. Financial depth and shadow-economy size are independently and positively associated with vulnerability. The findings imply that trade liberalisation and anti-money-laundering (AML) capacity-building should be pursued jointly, and they support specific revisions to the FATF Recommendation 14 framework and to cross-agency data-sharing architecture.
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