Global money laundering appeal index: application of principal component analysis

The paper aims at developing a global ranking system determining a country's appeal as a destination for money laundering.

This paper uses principal component analysis (PCA), with a mix of standardised and unstandardised components relating to attractiveness, economic freedom and money laundering risk to come up with an index of money laundering appeal.

Four components relating to economic feasibility, financial liberty, government spending and tax regime are critical in influencing a country's money laundering appeal.

This paper attempts to use a standardised and replicable methodology to condense into a single measure the complex and multifaceted phenomenon of a country's appeal as a destination for money laundering, thus avoiding the difficulty associated with precisely calculating illicit financial flows.

The ranking system could be used to determine the destinations attractive for laundering money. Such information can be used to come up with more effective preventative strategies to combat phenomena responsible for the stagnation of economic growth through tax evasion, corruption and creation of non-competitive markets.

It is the first attempt to use a statistical technique to understand the underlying components of a country's money laundering appeal.