Questionnaire on Enterprise Risk Management and Anti-Money Laundering

247 Pages·2015·11.07 MB·English

University of Ghana http://ugspace.ug.edu.gh
UNIVERSITY OF GHANA

ANTI-MONEY LAUNDERING AND ENTERPRISE RISK MANAGEMENT

BY
JONATHAN NII OKAI WELBECK
(10259262)

THIS THESIS IS SUBMITTED TO UNIVERSITY OF GHANA, LEGON IN
PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF PHD
FINANCE DEGREE

MARCH, 2015
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DECLARATION
I, Jonathan Nii Okai Welbeck, declare that this work is the result of my own research and
has not been presented by anyone for any academic award in this or any other university.
All references used in the work have been fully acknowledged.

………………………………………........... ……………………………
JONATHAN NII OKAI WELBECK DATE
(10259262)

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CERTIFICATION
This is to certify that this thesis is the result of research undertaken by Jonathan Nii Okai
Welbeck, towards the award of the Doctor of Philosophy in Finance Degree in the
Department of Finance, University of Ghana, under the supervision of Dr. Godfred A.
Bokpin, Dr. Albert Gemegah and Dr. Simon K. Harvey, all of the University of Ghana
Business School, Ghana.
In places where references of other works have been cited, full acknowledgement has been
given. No part of this thesis has either been presented in whole or in part to any institution
for any award.

………………………………….. …………………….
DR. GODFRED A. BOKPIN DATE
(PRINCIPAL SUPERVISOR)

…………………………………….. ……………………..
DR. ALBERT GEMEGAH DATE
(CO-SUPERVISOR)

……………………………………. ……………………..
DR. SIMON K. HARVEY DATE
(CO-SUPERVISOR)

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DEDICATION
This thesis is dedicated to my beloved wife, Edem Emerald Welbeck (Mrs.), my three (3)
boys: Jefferson Reuben Nii Adama Welbeck; Jonathan Nii Ayitey-Adjin Welbeck; and
Sedem Nii Ayisam Welbeck, and also to my parents – Mrs Victoria Nueki Welbeck and
Edward Niifio Welbeck (deceased).

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ACKNOWLEDGEMENTS
I have been able to complete this thesis with the support and active co-operation of
concerned bodies and authorities as well as several persons; I am really indebted to them.
My God saw me through this journey and I would forever be grateful. I would like to
express deep feelings of gratitude to my Head of Department (HOD), Department of
Finance, University of Ghana Business School, Dr. Godfred A. Bokpin and Prof. A.Q.Q.
Aboagye, Department of Finance, University of Ghana Business School, for their
invaluable guidance at different stages of this thesis.
I am intensely indebted to my thesis supervisors, Dr. Godfred A. Bokpin, Dr. Albert
Gemegah and Dr. Simon K. Harvey, all of the Department of Finance, University of
Ghana Business School, for their very useful guidance and counseling in overcoming
various bottlenecks during the study and also for their commitment. My gratitude also
goes to Prof. Joshua Abor, Dean, University of Ghana Business School, Prof. Charles
Adjasi, University of Stellenbosch Business School, Stellenbosch University and Prof.
Isaac Kwame Dontwi, Dean, Institute of Distance Learning, Kwame Nkrumah University
of Science and Technology, Kumasi for their extraordinary support and encouragement to
the whole process of this thesis. I am truly blessed to benefit from their invaluable
contextual insights.
I am equally grateful to Mr. Millison Narh, Deputy Governor, Bank of Ghana, Mr.
Nicholas Okoe Sai, former Head Banking Supervision Department, Bank of Ghana and
Mr. Madoc Quaye, Director, Bank of Ghana Training Center for their support. I am highly
indebted to Mr. Essel Thompson, Chief Executive Officer, Financial Intelligence Centre
(FIC) for his wonderful interpretation of the AML/CFT laws to me.
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I would similarly like to thank Ms. Kristel Grace Poh, Senior Financial Sector Expert,
Financial Integrity Group, Legal Department, International Monetary Fund and Mrs.
Rebecca Obare, Resident Advisor, Africa, International Monetary Fund, for their
continuous interest in the outcome of this thesis. Furthermore, I also wish to express my
profound gratitude to Mr. Jose Lewis, Association of Certified Anti-Money Laundering
Specialists (ACAMS), Miami, USA for his AML/CFT brochures and Mrs. Milimo Moyo,
Office of Technical Assistance (OTA), United States Department of Treasury for her
invaluable material support.
Again, I would take this opportunity to thank Prof. Kwame Adom Frimpong, Managing
Director, Main Stream Re-insurance and Mrs. Frances Van-Hein Sackey, Deputy Head,
AML/CFT Unit, Bank of Ghana whose significant contributions were evident in this
thesis; they lifted my spirit when it was most needed.
My sincere appreciation also goes to Mrs. Cecilia Adewale, and as well as my family for
their immense contributions and support.
Finally, my heartiest thanks go to my sweet wife, Mrs. Edem Emerald Welbeck, my lovely
sons, Nii Adama Welbeck, Nii Ayitey-Adjin Welbeck, and Nii Ayisam Welbeck, whose
proximity, love and affection provided me joy and relaxation. A special mention to
Jefferson Reuben Nii Adama Welbeck who played a leadership role for his siblings within
the period that I was writing this thesis, I am so grateful Jefferson.
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ABSTRACT
This thesis investigates the link between Anti-Money Laundering (AML) and Enterprise
Risk Management (ERM) as well as firm performance and ERM in the Ghanaian banking
industry. The study attempts to construct two barometers; AML and ERM barometers
using PCA methodology to gauge levels of compliance and adoption. The global financial
system continues to be plagued with uncertainties that need effective dynamic operational
risk management programmes in order to ensure financial institutions stay in business.
Though risk management in banks has improved over the years with the adoption of
enterprise risk management (ERM) and anti-money laundering compliance frameworks,
the association between the two has not been tested. This study therefore adopts a
positivist management research philosophy, a deductive and quantitative approach to
establish the relationship between AML and ERM within the Ghanaian banking space.
Also, the drivers of AML and ERM in Ghanaian banking sector are also investigated.
Results indicate that, the eight COSO ERM input variables are statistically significant and
could drive ERM in Ghanaian banks. Also, money laundering risk assessment, records
management, compliance programme and corporate governance significantly predict AML
in Ghanaian banks. In addition, AML influences banks adoption of ERM. Surprisingly,
there was no statistically significant relationship between firm performance and ERM.
The study concludes that as banks devote resources to AML compliance, the ERM
improves. The study recommends that banks invest in their AML systems in order to
improve their ERM. Furthermore, the study provides policy support to the global AML
standard setters/regulators.
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TABLE OF CONTENTS
CONTENT PAGE
DECLARATION ................................................................................................................... i
CERTIFICATION ................................................................................................................ ii
DEDICATION .................................................................................................................... iii
ACKNOWLEDGEMENTS ................................................................................................. iv
ABSTRACT ......................................................................................................................... vi
TABLE OF CONTENTS .................................................................................................... vii
LIST OF TABLES .............................................................................................................. xii
LIST OF FIGURES ........................................................................................................... xiv
LIST OF EQUATIONS ...................................................................................................... xv
LIST OF ACRONYMS AND ABBREVIATIONS ........................................................... xvi

CHAPTER ONE – INTRODUCTION ............................................................................. 1
1.0 Overview of the thesis ..................................................................................................... 1
1.1 Background of the Study ................................................................................................. 5
1.2 Problem Statement ........................................................................................................ 10
1.2.1 The Cost Implications of adopting AML and ERM frameworks ........................................... 11
1.2.2 Implications for wider range of risks and emerging risks ..................................................... 12
1.2.3 Implications of AML and ERM indices for prudent corporate governance ..................... 13
1.2.4 Implications of adopting AML and firm performance on ERM ............................................. 13
1.2.5 Implications for developing an AML Index ................................................................................... 15
1.3 Research Objectives ...................................................................................................... 17
1.5 Research Hypotheses .................................................................................................... 17
1.6 Motivation for the Study ............................................................................................... 17
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1.8 Scope of the Study ........................................................................................................ 21
1.9 Study Limitations .......................................................................................................... 22
1.10 Organisation of the study ............................................................................................ 22

CHAPTER TWO – LITERATURE REVIEW .............................................................. 24
2.0 Introduction ................................................................................................................... 24
2.1 Goal of this chapter ....................................................................................................... 24
2.2 Layout of this chapter.................................................................................................... 25
2.3 Theoretical background ................................................................................................. 25
2.4 Evolution of Enterprise Risk Management ................................................................... 28
2.4.1 The COSO ERM framework ...................................................................................... 29
2.4.1.1 Overview of COSO ERM components .......................................................................................... 32
2.5 Drivers of ERM ............................................................................................................. 43
2.5.1 Firm size ...................................................................................................................................................... 46
2.5.2 Firm industry ............................................................................................................................................ 46
2.5.3 Financial leverage ................................................................................................................................... 47
2.5.4 Earnings volatility ................................................................................................................................... 48
2.5.5 Stock price volatility............................................................................................................................... 48
2.5.6 Institutional ownership ........................................................................................................................ 49
2.5.7 Corporate governance ........................................................................................................................... 50
2.5.8 Firm complexity ....................................................................................................................................... 50
2.5.9 Presence of Chief Risk Officer (CRO) ............................................................................................... 52
2.5.10 Auditor type (Big four) ....................................................................................................................... 53
2.5.11 Management commitment ................................................................................................................ 53
2.6 ERM Effectiveness measures ........................................................................................ 54
2.7 General theoretical foundations of firm performance ................................................... 71
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2.8 Definitions of money laundering .................................................................................. 84
2.8.1 Stages of money laundering ................................................................................................................ 86
2.8.2 Empirical review on money laundering (ML) ............................................................................. 87
2.9 Drivers of AML............................................................................................................. 92
2.10 Overview of Ghana’s AML/CFT & P environment ................................................. 108
2.11 Construction of Composite Indices (CIs) .................................................................. 114
2.12 The Structure of Ghana’s Financial and Banking Systems ....................................... 118

CHAPTER THREE – RESEARCH METHODOLOGY ............................................ 121
3.0 Introduction ................................................................................................................. 121
3.1 Construction on AML and ERM Indices Using PCA ................................................. 121
3.1.1 The ERM adoption components ...................................................................................................... 123
3.1.2 Anti-money laundering components ............................................................................................ 126
3.2 Percentile categorisation and interpretation of PCA scores ........................................ 129
3.3 The Basic model for AML, Firm performance, and ERM Nexus .............................. 130
3.4 Description of selected drivers of ERM ...................................................................... 135
i. Auditor type ......................................................................................................................................... 135
ii. Firm size ................................................................................................................................................ 136
iii. Chief Risk Officer (CRO) ............................................................................................................. 136
iv. Capital Adequacy Ratio (CAR) ...................................................................................................... 137
v. Firm performance (bank profitability) ..................................................................................... 137
vi. Risk Culture .......................................................................................................................................... 138
vii. Anti-Money Laundering index ................................................................................................. 138
3.5 The Study Research Design ........................................................................................ 139
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