AMLComplianceCrime PreventionFinancial IndustryMoney Laundering

Conservative Firms less likely to be involved in Money Laundering

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A recent study has found that firms that adopt a culture of conservative accounting are less likely to be involved in money laundering scandals.

The authors used three measurements of the concept of conservative accounting, and in all three the results were the same.

The degree of conservativism is significantly and negatively associated to the firm’s risk to money laundering

Bolgorian, M., & Mayeli, A. (2020). Accounting conservatism and money laundering risk. Accounting Research Journal, 33(2), 343-361.

The study reviewed 924 firms across a five year time-span and accounted for metrics like firm size and sector in the findings. The results open up questions that the financial compliance industry may find useful to consider.

  1. The lack of regulatory framework in offshore jurisdictions may encourage firms to be less prudent with standards.
  2. The lack of requirement to submit accounts in offshore jurisdictions may cause less routine rigour in day to day activities.
  3. Offshore regions may be more susceptible to money laundering and terrorist financing simply due to these points, as well as the more liberal use of business registrations without full due diligence.

Accounting conservatism has been shown to reduce risk in the value of a business crashing via the stock price and to favour longevity as opposed to ‘quick win’ capitalistic strategy.

It follows that the concept ‘dampens’ the temptation to over state accounts within a firm and inculcates throughout the firm a more robust approach to audit.

The questions raised by the paper relate a different reasoning to offshore money laundering from the firm side of the transaction. That is to suggest that criminals come to offshore for the perceived secrecy and confidentiality cloak, whereas the firms (Law, Accounting, Corporate Support, Accounting, Audit) operate more loosely because necessary regulatory rigour is absent. This effectively inculcates a less than conservative approach to business.

We suggest because of these two aligned concepts, regulators are more likely to find money laundering, tax evasion, bribery, fraud and other white collar crime in offshore regions because the criminals want to exploit the opportunity and the firms are less likely to turn them away. if they adopt a more relaxed approach to prudence.

Firms are advised to be cognisant of this research established metric and understand the culture in their firm to reduce the risk of wittingly or unwittingly facilitating criminality.

Contact us to review your firm’s cultural conservatism.

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