Estimating the magnitude of money laundering in the United Arab Emirates (UAE): evidence from the currency demand approach (CDA)

Gamal, Awadh Ahmed Mohammed

Abstract

Purpose: Despite the vulnerability of rapidly developing and emerging market economies, researchers have paid less attention to the determination of the size of money laundering (ML) in these economies, including the United Arab Emirates (the UAE). Therefore, this paper aims to estimate the magnitude of ML in the UAE between 1975 and 2020 based on the currency demand approach (CDA). Design/methodology/approach: The study uses the Gregory–Hansen cointegration technique alongside the autoregressive distributed lag bounds testing procedure to estimate the CDA model. Findings: The results illustrate that an amount equivalent to about 19.034% of the GDP is laundered in the UAE between 1975 and 2020, on average, with the value lying between 15.129% and 23.121%. In addition, the results demonstrate the importance of the real estate market, gold trade, remittance channels and the size of the underground economy in facilitating the laundering of illicit funds in the country. Originality/value: To the best of the authors’ knowledge, the study is the pioneering attempt at estimating the amount of illicit funds laundered in the UAE. Besides, the adoption of a novel, yet robust, approach based on the modification of the CDA technique also sets the study apart as it ensures a correct, clear, unambiguous and indisputable estimate of the magnitude of ML is obtained. In addition, it is expected that the outcome of the study will expand the frontiers of knowledge among policy makers and relevant agencies and ensure the adoption of the most efficient and effective measures to curb the ML menace in the country. © 2023, Emerald Publishing Limited.

References

Abu, N., Gamal, A.A.M., Sakanko, M.A., Mateen, A., David, J. and Amaechi, B.O.O. (2021), “How have COVID-19 confirmed cases and deaths affected stock markets? Evidence from Nigeria”, Contemporary Economics, Vol. 15 No. 1, pp. 76-100.

Alldridge, P. (2008), “Money laundering and globalization”, Journal of Law and Society, Vol. 35 No. 4, pp. 437-463.

Ardizzi, G., De Franceschis, P. and Giammatteo, M. (2018), “Cash payment anomalies and money laundering: an econometric analysis of Italian municipalities”, International Review of Law and Economics, Vol. 56 No. 1, pp. 105-121, doi: 10.1016/j.irle.2018.08.001.

Ardizzi, G., Petraglia, C., Piacenza, M. and Turati, G. (2014), “Measuring the underground economy with the currency demand approach: a reinterpretation of the methodology, with an application to Italy”, Review of Income and Wealth, Vol. 60 No. 4, pp. 747-772, doi: 10.1111/roiw.12019.

Argentiero, A., Bagella, M. and Busato, F. (2008), “Money laundering in a two-sector model: using theory for measurement”, European Journal of Law and Economics, Vol. 26 No. 3, pp. 341-359.

Bagella, M., Busato, F. and Argentiero, A. (2009), “Money laundering in a microfounded dynamic model: simulations for the U.S. and the EU-15 economies”, Review of Law and Economics, Vol. 5 No. 2, pp. 879-902, doi: 10.2202/1555-5879.1420.

Bhattacharjee, M., Chowdhury, J.R. and Ghosh, D. (2020), “Financial integration, its implication for money laundering – an introspection”, in Bhattachayya, R. (Ed.), The Gains and Pains of Financial Integration and Trade Liberalization, Emerald Publishing, Bingley, pp. 207-217, doi:10.1108/978-1-78973-999-220191025.

Blore, S. and Hunter, M. (2020), “Dubai’s problematic gold trade”, in Page, M.T. and Vittori, J. (Eds), Dubai’s Role in Facilitating Corruption and Global Illicit Financial Flows, Carnegie Endowment for International Peace, Washington, DC, pp. 35-47.

Cagan, P. (1958), “The demand for currency relative to total money supply”, Journal of Political Economy, Vol. 66 No. 4, pp. 303-328.

Centre for Advanced Defence Studies (C4ADS) (2018), “Sandcastles: tracing sanctions evasion through Dubai’s luxury real estate market”, Centre for Advanced Defense Studies (C4ADS)Washington, DC, available at: www.c4reports.org/sandcastles/.

De Boyrie, M., Pak, S. and Zdanowicz, J. (2005), “The impact of Switzerland’s money laundering law on capital flows through abnormal pricing in international trade”, Applied Financial Economics, Vol. 15 No. 4, pp. 217-230, doi: 10.1080/0960310042000313200.

Ferwerda, J., Kattenberg, M., Chang, H.H., Unger, B., Groot, L. and Bikker, J.A. (2013), “Gravity models of trade-based money laundering”, Applied Economics, Vol. 45 No. 22, pp. 3170-3182.

Ferwerda, J., van Saase, A., Unger, B. and Getzner, M. (2020), “Estimating money laundering flows with a gravity model-based simulation”, Scientific Reports, Vol. 10 No. 1, pp. 1-11, doi: 10.1038/s41598-020-75653-x.

Financial Action Task Force (FATF) (2020), “Anti-money laundering and counter-terrorist financing measures – United Arab Emirates, fourth round mutual evaluation report”, Financial Action Task Force, Paris, available at: www.fatf-gafi.org/publications/mutualevaluations/documents/mer-uae-2020.html.

Freedberg, S.P., Alecci, S., Fitzgibbon, W., Dalby, D. and Reuter, D. (2020), “How Africa’s richest woman exploited family ties, shell companies and insider deals to build and empire”, International Consortium of Investigative Journalists (ICIJ), Washington, DC, available at: www. icij.org/investigations/luanda-leaks/how-africas-richest-woman-exploited-family-ties-shellcompanies-and-insider-deals-to-build-an-empire/.

Gamal, AA.M.,. and Dahalan, J. (2015), “Estimating the size of the underground economy in the UAE: evidence from Gregory-Hansen cointegration based currency demand approach”, Review of Integrative Business and Economic Research, Vol. 4 No. 3, pp. 183-206.

Gamal, A.A.M., Dahalan, J. and Viswanathan, K.K. (2019), “Estimating the underground economy, illegal money and tax evasion in Qatar evidence from currency demand function”, Journal of Financial Crime, Vol. 26 No. 4, pp. 1048-1064, doi: 10.1108/JFC-05-2018-0050.

Gamal, A.A.M., Dahalan, J. and Viswanathan, K.K. (2020), “An econometric analysis of the underground economy and tax evasion in Kuwait”, International Journal of Business and Globalisation, Vol. 25 No. 3, pp. 307-331.

Gauci, T.M. and Rapa, N. (2020), “An analysis of the shadow economy in Malta: a currency demand and MIMIC model approach”, International Journal of Economics and Financial Issues, Vol. 12 No. 1, pp. 41-50.

Gregory, A.W. and Hansen, B.E. (1996), “Residual-based tests for cointegration in models with regime shifts”, Journal of Econometrics, Vol. 70 No. 1, pp. 99-126.

Hendriyetty, N. and Grewal, B.S. (2017), “Macroeconomics of money laundering: effects and measurements”, Journal of Financial Crime, Vol. 24 No. 1, pp. 65-81, doi: 10.1108/JFC-01-2016-0004.

Hockaday, J. and Brazell, E. (2021), “Afgan president fled to Dubai ‘with helicopter and cars filled with cash”, Russia claims, Metro, available at: https://metro.co.uk/2021/08/18/former-afgan-presidentghani-fled-with-169m-in-helicopter-todubai-15113307/.

Javaid, A. and Arshed, N. (2021), “Demand for money laundering in developing countries and its deterrence: a quantitative analysis”, Journal of Money Laundering Control, Vol. 25 No. 3, pp. 625-636, doi: 10.1108/JMLC-06-2021-0063.

Kirechu, P. and Vittori, J. (2020), “The illicit allure of Dubai’s luxury property market”, in Page, M.T. and Vittori, J. (Eds), Dubai’s Role in Facilitating Corruption and Global Illicit Financial Flows, Carnegie Endowment for International Peace, Washington, DC, pp. 59-66.

Lezhnev, S. and Swamy, M. (2020), “Understanding money laundering risks in the conflict gold trade from East and Central Africa to Dubai and onward”, The Sentry, Washington, DC, available at: https://cdn.thesentry.org/wp-content/uploads/2020/11/ConflictGoldAdvisory-TheSentry-Nov2020.pdf.

Loayza, N., Villa, E. and Misas, M. (2019), “Illicit activity and money laundering from an economic growth perspective: a model and an application to Colombia”, Journal of Economic Behavior and Organization, Vol. 159 No. 13, pp. 442-487, doi: 10.1016/j.jebo.2017.10.002.