Economic and Financial Crime Corruption Shadow Economy and Money Laundering by Monica Violeta Achim Sorin Nicolae Borlea (Z

Studies of Organized Crime 20
Monica Violeta Achim
Sorin Nicolae Borlea
Economic
and Financial
Crime
Corruption, shadow economy, and
money laundering
Studies of Organized Crime
Series Editor
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Willem Pompe Institute, Utrecht University, Utrecht, The Netherlands
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Monica Violeta Achim • Sorin Nicolae Borlea
Economic and Financial

Crime
Corruption, shadow economy, and money
laundering
Monica Violeta Achim Sorin Nicolae Borlea
Faculty of Economics and Business Faculty of Economics
Administration University of Oradea
Babes-Bolyai University Oradea, Romania
Cluj-Napoca, Romania
Faculty of Economics, Informatics
and Engineering
‘Vasile Goldis’ Western University of Arad
Arad, Romania
ISSN 1571-5493
Studies of Organized Crime
ISBN 978-3-030-51779-3 ISBN 978-3-030-51780-9 (eBook)
https://doi.org/10.1007/978-3-030-51780-9
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Preface
The present book deals with economic and financial crime issues regarding its most
spread forms of our days – corruption, shadow economy and money laundering.
The approaches throughout the book focus on both the theoretical and practical
sides of the investigation of causes leading to the committing of such blameable acts
and to the identification of their effects on the economic, social and political life as
well as of the measures to prevent, fight against and investigate them.
Unlike other researches in the field, this book brings a significant added value by
means of a structured presentation of the main important economic and financial
crimes (corruption, shadow economy and money laundering) in the light of causes
and effects produced, with knowledge of the state of the art, but also with empirical
studies carried out by the authors within some of their own researches. Also, the
causal approaches from the perspective of economic, political, social and cultural
determinants represent an important added value brought to the present literature
researches. The comparisons, discussions and critical analysis of economic and
financial types of crime committed at the international level increase the additional
value of this book.
This book is addressed to large categories of users represented by researchers
and business experts, but is also addressed to decision-making authorities at national
and international level, who, in this way, will know the causes and effects of these
economic and financial crimes and will finally adopt the best solutions to fight
against such blameable acts. This book gathers the vast existing economic and
financial crime literature within a condensed work, providing an extremely useful
database and research themes to develop advanced research studies destined to
researchers in the field of economic and financial crime.
Thus, the core audience of this book are most likely academic scholars, students
and researchers in law and social sciences (economics, sociology, criminology,
political science and economic psychology), and experts working in political insti-
tutions (ministries of finance, international organizations, e.g. OECD).
v
vi Preface
We are aware that the theme approached through the present book is very com-
plex and generous; therefore, we fully assume the limitations of the current research
work. With gratitude in advance, we remain open to any opinion, comment or
criticism from the readers regarding improvement of the judgements used as well as
of the book as a whole.
Cluj-Napoca, Romania Monica Violeta Achim
Arad, Romania Sorin Nicolae Borlea
A valuable, accessible and up-to-date resource for academic scholars in economics,

political science and criminology, sociology and economic psychology and for
experts in political institutions dealing with financial crime, corruption, money
laundering, shadow economy, and tax avoidance.
– Prof. Dr Erich Kirchler, University of Vienna
Financial and economic crimes especially in periods of crises are dangerous chal-
lenges of democratic systems. The authors address important issues of a modern
economic system in their book. This book offers a broad variety of analysis from a
scientific and practical standpoint.
– Maximilian Edelbacher, University of Vienna
Acknowledgements
Warm and special thanks to Professor Ilie Parpucea, PhD, for providing useful
suggestions in the area of statistics and economics during our hard work over many
years in the field of economic and financial crime research.
Special thanks to PhD Candidate Delia Dragomir, PhD Candidate Camelia
Catana, PhD Candidate Narcisa Bodescu and authorized person Alexandra
Pescariu for supervising the translation of our book.
vii
About This Book
The book titled Economic and financial crime: Corruption, Shadow Economy and
Money Laundering. Causes, effects and solutions. Theoretical and practical
approaches” is structured on four chapters as follows:
The Chap. 1 entitled “Economic and Financial Crime: Theoretical and
Methodological Approaches” presents historical issues, concepts, forms of eco-
nomic and financial crime and their showing up areas as well as the highlighting of
their characteristic features (volume, intensity, direction and frequency). Then, this
first chapter reveals the concepts of corruption, shadow economy, tax avoidance and
money laundering and presents the measuring instruments of corruption, shadow
economy and money laundering as well as the some case studies.
The Chap. 2 entitled “Determining Economic and Political Factors of Economic
Crime” presents the main economic and political causes of such acts, resulting in
the reviewing of the specialized literature. Some of these important causes we iden-
tified are: the level of the economic development, the tax pressure, the pubic gover-
nance, the corporate governance and soundness of the banking system. Based on the
specialized literature review, for each of these causes, the conceptual issues includ-
ing the practical ways of measurement as well as the influence of these factors on
the level of corruption, shadow economy and money laundering have been high-
lighted. Also we have documented with our own empirical studies the influences of
these variables on economic and financial crime, adding a significant value to
this work.
The Chap. 3 entitled “Determining Behaviour Factors of the Economic and
Financial Crime” is focused to behaviour factors which determine and influence the
economic and financial crimes. Among these factors, particular attention is paid to
cultural factors, religion, tax morale, trust (focussing on the trust in the state) and
happiness condition (subjective well-being) of individuals. For each of these fac-
tors, there are theoretical approaches including definitions of concepts as well as
practical ways of measuring these variables, indicating some possible databases
ix
x About This Book
available worldwide. Additionally, the chapter brings documentation from the spe-
cialized literature about the existence of some causality relations between
behavioural factors and economic and financial crimes as well as our own empirical
studies.
The final chapter entitled “Effects of Economic and Financial Crimes: Ways of
Fighting Against” emphasizes the effects of such economic and financial crimes at
economic, financial social and political levels. The presentations summarize the
main types of effects of the economic and financial crimes based on a large review
of the specialized literature. In order to fight against these crimes, this chapter also
reveal the international bodies and initiatives to prevent, fight against and investi-
gate the economic and financial crime. Finally, short allegations are made about
using judicial expertise as specific technical method used to investigate economic
and financial crime.
Contents
1 Economic and Financial Crime: Theoretical and Methodological

Approaches �� 1
1.1 Theoretical Approaches�� 1
1.1.1 Theoretical Approaches Regarding the Economic
and Financial Crime�� 1
1.1.2 Theoretical Approaches Regarding Corruption�� 7
1.1.3 Theoretical Approaches Regarding Shadow Economy�� 9
1.1.4 Theoretical Approaches Regarding the Tax Avoidance�� 13
1.1.5 Theoretical Approaches of Money Laundering�� 20
1.1.6 Relation Between Corruption, Shadow Economy,
and Money Laundering. Theoretical Approaches �� 26
1.2 Measuring Instruments�� 30
1.2.1 Corruption Measurement�� 31
1.2.2 Shadow Economy Measurement�� 32
1.2.3 Money Laundering Measurement �� 35
1.2.4 Assessing an Economic and Financial Crime Index�� 38
1.3 Practical Approaches�� 41
1.3.1 Corruption in the European Union countries�� 41
1.3.2 Shadow Economy in the European Union Countries �� 42
1.3.3 Money Laundering in the European Union Countries�� 43
1.3.4 Relation Between Corruption, Shadow Economy,
and Money Laundering. Empirical Approaches �� 44
1.4 Determinants of the Economic and Financial Crime�� 51
References�� 63
2 Economic and Political Determinants of Economic
2.1 Economic Development�� 73
2.1.1 Concept of Economic Development and Measuring Tools�� 73
2.1.2 Economic Development and Corruption�� 74
2.1.3 Economic Development and Shadow Economy �� 77
xi
xii Contents
2.1.4 Economic Development and Money Laundering �� 80

2.2 Tax Pressure�� 82
2.2.1 General Approaches Regarding the Tax Pressure �� 82
2.2.2 Tax Pressure and Corruption�� 88
2.2.3 Tax Pressure and Shadow Economy �� 96
2.2.4 Tax Pressure and Money Laundering�� 98
2.3 Public Governance�� 101
2.3.1 General Approaches Regarding the Public Governance �� 101
2.3.2 Public Governance and Corruption�� 106
2.3.3 Public Governance and Shadow Economy �� 109
2.3.4 Public Governance and Money Laundering�� 113
2.4 Corporate Governance�� 115
2.4.1 Concept of Corporate Governance�� 115
2.4.2 Corporate Governance, Data Manipulation, and Fraud�� 118
2.4.3 Measuring Instruments of the Corporate Governance�� 129
2.4.4 Corporate Governance and Corruption �� 140
2.4.5 Corporate Governance and Shadow Economy �� 143
2.4.6 Corporate Governance and Money Laundering�� 147
2.5 Banking System Soundness�� 152
2.5.1 General Approaches�� 152
2.5.2 Soundness of Banks and Corruption�� 157
2.5.3 Soundness of Banks and Shadow Economy �� 160
2.5.4 Soundness of Banks and Money Laundering�� 162
References�� 169
3 Behavioural Determinants of Economic and Financial Crime�� 177
3.1 Culture�� 177
3.1.1 General Approaches Regarding Culture �� 179
3.1.2 Culture and Corruption �� 183
3.1.3 Culture and Shadow Economy�� 195
3.2 Religion�� 209
3.2.1 Conceptual Approaches Regarding Religion�� 209
3.2.2 Religion and Corruption �� 210
3.2.3 Religion and Shadow Economy�� 214
3.3 Tax Morale�� 218
3.3.1 Conceptual Approaches on Tax Morale�� 218
3.3.2 Tax Morale and Corruption�� 219
3.3.3 Tax Morale and Shadow Economy �� 220
3.4 Trust in the State �� 221
3.4.1 General Approach on Trust in the State�� 221
3.4.2 Trust and Corruption�� 223
3.4.3 Trust and Shadow Economy �� 224
3.5 Happiness�� 225
3.5.1 Conceptual Approaches on Happiness�� 226
Contents xiii
3.5.2 Assessment of Happiness in the European

Union Countries�� 227
3.5.3 Happiness and Corruption�� 228
3.5.4 Happiness and Shadow Economy �� 232
4 Effects of Economic and Financial Crimes. Ways
of Fighting Against�� 245
4.1 Effects of Economic and Financial Crime�� 245
4.1.1 Economic and Financial Effects �� 245
4.1.2 Social Effects�� 250
4.1.3 Political Effects�� 255
4.2 Bodies and Initiatives to Prevent, Control, and Investigate
the Economic and Financial Crime�� 255
4.2.1 Bodies for Preventing and Fighting Against Economic
4.2.2 Measures to Prevent and Fight Against Economic
4.2.3 Judicial Expertise: Specific Technical Procedure Used
in the Process of Economic and Financial Crime
Investigation�� 263
Index�� 273
About the Authors
Monica Violeta Achim is affiliated to Babeş-Bolyai University, Faculty of

Economics and Business Administration, Department of Finance, Cluj-Napoca,
Romania. She obtained her PhD in 2004 from Babes-Bolyai University, Romania.
Since 2017, she has been a Professor in the Department of Finance, Faculty of
Economics and Business Administration, Babes-Bolyai University, Romania. In the
same year she became PhD supervisor in the field of Finance within Doctoral
School of Economics, in the same faculty. She teaches the discipline “Economic
and financial crime” at the Doctoral School of Finance, Faculty of Economics and
Business Administration, Babeş-Bolyai University, Romania.
Sorin Nicolae Borlea is affiliated to two Romanian universities as follows:

University of Oradea, Faculty of Economics, Doctoral Scool of Economics, Oradea,
Romania, and “Vasile Goldis” Western University of Arad, Faculty of Economics,
Informatics and Engineering, Department of Economics, Arad, Romania. He
obtained his PhD in Finance in 2008 from Babes-Bolyai University, Romania. Since
2015, he has been a Professor at “Vasile Goldiș” Western University of Arad,
Faculty of Economics, Informatics and Engineering, Department of Economics.
Since 2018 he has been a PhD supervisor at Oradea University, Faculty of
Economics, Doctoral School of Economics, Romania, where he teaches the disci-
pline “Economic and financial crime.”
xv
List of Figures
Fig. 1.1 Money laundering circuit. (Source: own processing) �� 25
Fig. 1.2 Relation between shadow economy, tax avoidance, and
money laundering. (Source: own processing) �� 32
Fig. 2.1 Laffer curve. (Source: Laffer (2004), The Laffer Curve:
Past, Present, and Future, The Heritage Foundation)�� 88
xvii
List of Graphs
Graph 1.1 Corruption in European Union countries, 2005–2015.

(Source: own processing)��44
Graph 1.2 Corruption trend in the European Union countries,
2005–2015�� 45
Graph 1.3 Corruption in the European Union countries by regions,
2005–2015. (Source: own processing)�� 45
Graph 1.4 Shadow economy (% in GDP) in European
Union countries, 2005–2015. (Source: own processing)�� 47
Graph 1.5 Shadow economy in the European Union countries
by regions, 2005–2015. (Source: own processing) �� 47
Graph 1.6 Evolution of the shadow economy (% in GDP) in the
European Union countries, 2005–2015.
(Source: own processing)�� 48
Graph 1.7 Money laundering in the European Union countries,
Graph 1.8 Evolution of money laundering in the European
Union countries, 2012–2017. (Source: own processing)�� 50
Graph 1.9 Money laundering in the European Union countries by
regions, 2012–2017. (Source: own processing)�� 50
Graph 1.10 Correlation between corruption and shadow
economy. (Source: own processing)�� 53
Graph 1.11 Correlation between corruption and money laundering�� 54
Graph 1.12 Correlation between shadow economy and
money laundering. (Source: own processing) �� 55
Graph 2.1 Correlation between GDP/capita and corruption�� 76
Graph 2.2 Correlation between GDP/capita and shadow economy�� 79
Graph 2.3 Correlation between GDP/capita and money laundering�� 83
Graph 2.4 The fiscal freedom in the European Union countries
xix
xx List of Graphs
Graph 2.5 The fiscal freedom by geographical zones in the European

Union countries at average, 2005–2018.
Graph 2.6 Evolution of fiscal freedom in the European Union
countries, in average, 2005–2018. (Source: own processing)�� 91
Graph 2.7 Correlation between corruption and fiscal freedom�� 94
Graph 2.8 Correlation between the shadow economy and fiscal freedom �� 100
Graph 2.9 Correlation between money laundering and fiscal freedom�� 103
Graph 2.10 Governance effectiveness in the European Union countries,
Graph 2.11 Regulatory quality in the European Union countries,
Graph 2.12 Rule of law in the European Union countries,
Graph 2.13 Correlation between corruption and public governance�� 111
Graph 2.14 Correlation between shadow economy and public governance �� 116
Graph 2.15 Correlation between public governance and money laundering�� 119
Graph 2.16 Correlation between efficacy of corporate board and
strength audit and reports. (Source: own processing) �� 135
Graph 2.17 Efficiency of corporate board in European Union
countries, 2006–2016�� 145
Graph 2.18 Efficiency of corporate board by geographical areas in
European Union countries, 2006–2016�� 145
Graph 2.19 Strength audit and reports in European Union countries,
2006–2016�� 146
Graph 2.20 Strength audit and reports by geographical area, in the
countries of the European Union, 2006–2016, (Source: own
processings)�� 146
Graph 2.21 Correlation between corruption and efficacy of corporate board�� 149
Graph 2.22 Correlation between corruption and strength audit and reports�� 150
Graph 2.23 Correlation between shadow economy and efficacy
of corporate board�� 154
Graph 2.24 Correlation between shadow economy and strength
audit and reports�� 155
Graph 2.25 Correlation between money laundering and efficacy
of corporate board �� 158
Graph 2.26 Correlation between money laundering and strength
Graph 2.27 Soundness of bank in European Union countries, 2006–2016�� 164
Graph 2.28 Soundness of bank by geographical regions of the
European Union, 2006–2016. (Source: own processing)�� 165
Graph 2.29 Correlation between corruption and soundness of banks�� 165
Graph 2.30 Correlation between shadow economy and soundness of banks�� 166
Graph 2.31 Correlation between money laundering and soundness of banks�� 168
List of Graphs xxi
Graph 3.1 Power distance (PD) in European Union countries.

Graph 3.2 Individualism versus collectivism (IDV) in European
Union countries. (Source: own processing)�� 183
Graph 3.3 Masculinism versus feminism (MAS) in European
Graph 3.4 Uncertainty avoidance (UAI) in European Union countries.
Graph 3.5 Long-term orientation (LTO) versus short-term orientation
in European Union countries. (Source: own processing)�� 184
Graph 3.6 Indulgence versus restraint (IND) in European
Graph 3.7 Corruption and power distance (PD) by geographical
areas of the European Union�� 189
Graph 3.8 Corruption and individualism versus collectivism (IDV)
by geographical areas of the European Union. (Source:
own processing)�� 189
Graph 3.9 Corruption and masculinism versus feminism (MAS) by
geographical areas of the European Union�� 189
Graph 3.10 Corruption and uncertainty avoidance (UAI) by
geographical areas of the European Union. (Source:
Graph 3.11 Corruption and long-term orientation (LTO) by geographical
areas of the European Union. (Source: own processing)�� 191
Graph 3.12 Corruption and indulgence versus restraint (IND)
by geographical areas of the European Union. (Source:
Graph 3.13 Correlation between shadow economy and power
distance (PD) in European Union�� 199
Graph 3.14 Shadow economy and power distance (PD) by
European Union regions. (Source: own processing)�� 200
Graph 3.15 Correlation between shadow economy and individualism
versus collectivism (IDV) in the European Union�� 200
Graph 3.16 Shadow economy and individualism versus
collectivism (IDV) by European Union regions.
Graph 3.17 Correlation between shadow economy and masculinism
versus feminism (MAS) in the European Union�� 202
Graph 3.18 Shadow economy and masculinism versus
feminism (MAS) by European Union regions.
uncertainty avoidance (UAI) in the European Union�� 203
Graph 3.20 Shadow economy and uncertainty avoidance (UAI)
by European Union regions. (Source: own processing)�� 203
xxii List of Graphs

long-term orientation (LTO) in the European Union�� 204
Graph 3.22 Shadow economy and long-term orientation (LTO)
Graph 3.23 Correlation between shadow economy and indulgence
versus restraint (IND) in the European Union�� 205
Graph 3.24 Shadow economy and indulgence versus restraint (IND)
Graph 3.25 Shadow economy and trust. (Source: D’Hernoncourt
and Méon (2012))�� 225
Graph 3.26 Happiness (well-being) in European Union countries �� 228
Graph 3.27 Happiness (happy life years) in European Union
countries. (Source: own processing) �� 228
Graph 3.28 Correlation between corruption and subjective well-being�� 231
Graph 3.29 Correlation between corruption and feeling of
happiness. (Source: own processing)�� 231
Graph 3.30 Correlation between shadow economy and subjective
well-being�� 236
Graph 3.31 Correlation between shadow economy and happy life
years. (Source: own processing)�� 236
Graph 4.1 Plot of corruption against health variables. (Source:
Achim, Borlea and Văidean (2019). Corruption and
health outcomes within an economic and cultural framework,
European Journal of Health Economics, 1–13)�� 254
List of Tables
Table 1.1 Terms used to designate “another” economy than

the official one�� 10
Table 1.2 Taxonomy of shadow economy activity types�� 11
Table 1.3 Delimitation of “observed” economy from the
“unobserved” one �� 13
Table 1.4 Classification of EU countries by regions�� 43
Table 1.5 Correlation coefficients of corruption, shadow economy,
and money laundering�� 52
Table 1.6 Regression of shadow economy depending on corruption�� 53
Table 1.7 Regression of money laundering depending on corruption�� 54
Table 1.8 Regression of shadow economy depending on the money
laundering�� 55
Table 2.1 Correlation coefficients between corruption and GDP/capita�� 77
Table 2.2 Regression of corruption depending on the GDP/capita�� 77
Table 2.3 Correlation coefficients of the shadow economy
with the GDP/capita �� 80
Table 2.4 Regression of shadow economy depending on the GDP/capita �� 81
Table 2.5 Correlation coefficients of money laundering and GDP/capita�� 83
Table 2.6 Regression of money laundering depending on the GDP/capita�� 84
Table 2.7 Correlation coefficients between corruption and fiscal freedom�� 94
Table 2.8 Regression of corruption depending on the fiscal freedom�� 94
Table 2.9 Correlation coefficients between shadow economy
and fiscal freedom�� 101
Table 2.10 Regression of the shadow economy depending
on the Fiscal freedom �� 101
Table 2.11 Correlation coefficients between money laundering
and fiscal freedom�� 103
Table 2.12 Regression of money laundering depending
on the Fiscal freedom �� 104
xxiii
xxiv List of Tables
Table 2.13 Correlation coefficients between corruption and public

governance�� 112
Table 2.14 Corruption regression depending on the public governance�� 113
Table 2.15 Correlation coefficients between shadow economy and public
Table 2.16 Regression of shadow economy depending on the public
Table 2.17 Correlation coefficients between public governance and money
laundering�� 119
Table 2.18 Regression of the money laundering depending on the
public governance�� 119
Table 2.19 Similarities and differences between creative accountancy
and fraud�� 126
Table 2.20 Coefficients of correlation between corruption and efficacy
Table 2.21 Coefficients of correlation between corruption
and strength audit and reports�� 150
Table 2.22 Regression of corruption depending on efficacy
Table 2.23 Regression of corruption depending on strength
audit and report�� 151
and efficacy of corporate board�� 154
Table 2.26 Regression of shadow economy depending on efficacy
Table 2.27 Regression of shadow economy depending on strength
and efficacy of corporate board�� 158
Table 2.29 Regression of money laundering depending on efficacy
Table 2.31 Regression of money laundering depending on strength
Table 2.32 Correlation coefficients between corruption and soundness
of banks�� 166
Table 2.33 Regression of corruption depending on the soundness
of banks�� 166
and soundness of banks�� 167
Table 2.35 Regression of shadow economy depending on soundness
of banks�� 167
List of Tables xxv

and soundness of banks�� 167
Table 2.37 Regression of money laundering depending on the soundness
of banks�� 167
Table 3.1 Descriptive statistics and corruption modelling �� 213
Table 4.1 Sanctions on fraud in the Member States of the European
Union�� 261
Table 4.2 Differences between financial control and judicial
accounting expertise �� 265
Chapter 1
Economic and Financial Crime:
Theoretical and Methodological
Approaches
1.1 Theoretical Approaches
1.1.1 T
heoretical Approaches Regarding the Economic
and Financial Crime
1.1.1.1 History of the Economic and Financial Crime
To better understand the concept of economic and financial crime and to try a defini-
tion of, it is necessary to make a short incursion regarding the history of this fact.
The economic crime is a notion which “timidly” occurred at the beginning of the
twentieth century. By the middle of the same century, it got “strengthened” and
became a fact which was very present by the end of the twentieth century and par-
ticularly at the beginning of the millennium (twenty-first century).
Bonger (1905) was among the first researchers who made the distinction between
“street” crime and “economic” crime, including in the second category the crimes
committed by merchants and entrepreneurs in relation with the properties as a result
of the maximization of the speculative logic and capitalization.
Later on, Sutherland (1940) defined the “white collar criminality” as being
closely related to the upper classes showing there really existed another crime (from
the upper classes) punished by the criminal law, and until that time, the criminology
had not paid any scientific attention. In other words, we distinguish the differences
regarding the approaches of the two authors mentioned above. While Bonger (1905)
considered the economic crime as crime on the “property” resulting from the maxi-
mization of the speculative logic and capitalization, Sutherland (1940) considered
this crime as a crime of white collars.
The phrase “white collar criminality”, as economic and financial crime, was
acknowledged by Sutherland in his famous work entitled “White-Collar
Criminality”, issued in 1940. It is to be noted that the Sutherland’s theory is e mpirical
© The Editor(s) (if applicable) and The Author(s), under exclusive license to 1
Springer Nature Switzerland AG 2020
M. V. Achim, S. N. Borlea, Economic and Financial Crime, Studies of
Organized Crime 20, https://doi.org/10.1007/978-3-030-51780-9_1
2 1 Economic and Financial Crime. Theoretical and Methodological Approaches
and based on the investigation of the criminal activities of 70 companies belonging

to the largest 200 companies from the United States.
In his work Criminalité économique et criminalité organisée, Queloz (2002)
summarized most of Sutherland’s learnings in three steps:
(a) Sutherland showed that it is committed by upper classes, namely, by honourable
people with a high social status, in relation with their business and culture and
their professional environment.
(b) Sutherland underlined that the white-collar crime reflect crimes forbidden and
punished by the criminal law (fraud, breach of trust and abuse of position,
fraudulent management, corruption, etc.) which are harmful from social point
of view and causes significant economic damage.
(c) Finally, Sutherland criticized the fact that criminology had not paid previously
any scientific attention to this crime committed by the white collar individuals,
but made all the efforts for the street crime and consequently, against those who
are most convicted by criminal court and sent to prison.
The criminals belonging to the “white collars” are “people who hold an upper
position in the society, hold managing positions (...), posing as philanthropic per-
sons as they are involved in various activities for community benefit” (Leția
2014, p. 14).
The authors Bonger and particularly Sutherland wanted to demonstrate that,
besides the so-called “classic” crime or “common” crime considered as “poor peo-
ple’s crime”, there exist the crime committed by the “rich,” but the criminology paid
no special attention to it. Despite the existence of some empirical and doctrinaire
proofs related to such more special criminality, it will not raise any deep interest
except for the situations when it started to become more and more intense and
spread within several countries and even worldwide (end of the twentieth century,
early twenty-first).
With the time, Sutherland’s study proved to be only partly true because the eco-
nomic and social growth created other categories of economic criminals who are not
necessarily owners of properties or individuals from upper classes. Thus, a study
performed by KPMG on 69 countries, investigating more than 348 economic crime
files, concluded that profile of a business criminal is represented by a man of
36–45 years old; he works in financial domain; if employed, he commits frauds
against his own employer; hold a high management position; has been employee of
the same companies for more than 10 years; commits the crimes to satisfy his greed
and not to achieve the professional target; and takes advantage of the functional
weakness of the control structures (Leția 2014, p. 15).
On the other hand, the studies of the specialized literature (Queloz 2002; Niță
2008, p. 26; Leția 2014, p. 14; Aniței and Lazăr 2016, p. 16) identified another char-
acteristic of the crimes of the economic criminality and, namely, that they assume
high-professional knowledge and competence and respectively a specialization of
the knowledge by those who commit such crime. Under such circumstances, the
economic and financial crime is closely related to the economic and social changes
and development of the society, and it can occur as innovations made by individuals
1.1 Theoretical Approaches 3
so they adjust to the society changes (Merton 1968). In an ever-changing society,

the adjustment to the new economic and social conditions can be carried out in a
different way by individuals of the society. Thus, businessmen can invent different
forms of the white-collar crime as tax evasion and money laundering, while poor
people can develop illegal activities, such as prostitution, gambling, and drug sales
(Aniței and Lazăr 2016, pp. 17–18).
According to Durkheim (1974), one of the greatest sociologists of the time,
“criminality is normally part of the society like birth and death, and a society with-
out crime would be pathologically over controlled”, so that from theoretical point of
view, “crime could completely disappear only if all the members of the society had
the same values, but such a standardization is neither possible nor wanted” (quoted
by Amza (2002, p. 420)).
Consequently, the economic and financial crime can be approached from at least
two perspectives:
As legal fact
From a legal point of view, the criminality includes “the ensemble of human behav-
iour considered as crimes punished and convicted as such, under certain circum-
stances, within a criminal law system (sub-system) specifically determined from
geo-historical perspective” (Moldoveanu 1999, p. 13).
As social fact
As for the social point of view, the criminality constitutes a mass social fact occur-
ring on regular basis, which has existed and will always exist. According to the
specialists, all that can be done is to adopt measures to reduce it. And it is “a utopia
to think that criminality will be completely rooted out” (Niță 2008, p. 23).
1.1.1.2 Concept of the Economic and Financial Crime
At international level, there is no common definition given to all the states, regard-
ing the economic and financial crime (Leția 2014, p. 13), but in practice, this con-
cept is associated with numerous deeds such as corruption, theft, cheating,
embezzlement, data distortion, electronic fraud, forgery, counterfeiting, data and
document cover up and destruction, money laundering, tax evasion, crimes regard-
ing the accounting books, faked offers at public acquisitions, tender etc.
The fact there is neither legally nor didactically is any unitar definition explained
in the light of the continuous evolution of the technical means which result in
extremely different ways of manifestation of such activities. However, different
authors have tried to define the concept of economic and financial crime in various
forms as follows:
• The economic crime represents “the illegal acts committed by an individual or a
group of individuals to obtain a financial or professional advantage. In such
crimes, the offender’s principal motive is economic gain. Cyber crimes, tax
e vasion, robbery, selling of controlled substances, and abuses of economic aid

are all examples of economic crimes” (US legal 2020).
• The economic and financial crime consists of the “asset misappropriation, brib-
ery and corruption, accounting and tax fraud, cybercrime, procurement fraud”,
and “it represents a persistent threat to business and business process”
(PricewaterhouseCoopers 2016, p. 4).
• According to the Cambridge Dictionary (2020), the concept of “criminality”
means illegal activities or behaviour.
• The economic and financial crime includes “the crimes provided by the special
laws with dispositions belonging to the business criminal law, refers to the com-
petition, commercial societies intellectual property, money laundering, banking
regime, securities, tax evasion, accountancy regime, customs procedure, public
authority, lands etc.” (Pantea 2010).
• The economic and financial crime represents “all those forms of non-violent
crime causing a financial loss” (Leția 2014, p. 14).
• The economic and financial crime represents a breach of trust exploiting the
good faith of participants at the economic life, the apparent credibility and stabil-
ity of the financial, commercial, banking circuit of documents, etc. (Leția 2014,
p. 14).
• The economic and financial crime, called also “business crime”, is defined as the
total unlawful acts and deeds committed by individuals, associations, societies,
or organizations in relation with the progress of some businesses or financial,
banking, customs, commercial transactions using the cheating, fraud, breach of
trust, forgery of turnovers, money laundering, fraudulent bankruptcy, tax eva-
sion, insurance policies, etc. (Aniței and Lazăr 2016, p. 15).
• The economic and financial crime is defined by the identification of the features
common to deeds circumscribed in this notion, respectively:
(i) WHERE? – their committing under the economic, business and financial
life, either private or public
(ii) HOW? – using the means and methods which do not call on force or psychi-
atric violence – cheating, forgery, counterfeiting, corruption, exploitation of
commercial secrets, of personal data
(iii) WHO? – by persons who have knowledge in the economic, commercial, or
financial field
(iv) GOAL? – with the goal of accumulating profit, economic domination, sav-
ing of economic entities in difficult condition (processing based on Queloz
2002 quoted by Leția 2014, p. 14)
In accordance with the specialized literature (Pantea 2010), the economic and finan-
cial crime can be approached at two levels (macro and micro) as follows:
• The economic and financial macro-criminality comprises the segment of eco-
nomic and financial crime which prejudices the state and national security. These
crimes are committed by groups of criminals highly specialized and resulting in
the triggering of significant prejudices or the creation of some severe dangerous
conditions, assume corruption deeds at a higher level, crimes of money launder-

ing, and customs crimes, which have a trans-border character.
• The economic and financial micro-criminality is the segment of economic and
financial crime defined by a minimum breach of social values defended by the
criminal laws, prejudicing life quality and could be a severe danger in future.
This form of economic and financial crime occurs as fraud crime, tax avoidance,
and corruption and causes small and repeated prejudices to the state or citizens.
Starting from the definitions identified in the specialized literature and
practice, the economic and financial crime could be defined as an ensemble of ille-
gal deeds (crimes) committed by individuals or organizations in order to produce or
intermediate the production of economic and financial benefits. The economic and
financial crime is specific for the businesses and could occur as business crimes
such as corruption, fraud, tax evasion, money laundering, etc. Also, the illegal busi-
ness such as prostitution, gambling, smuggling drugs or human beings trade, etc.
produce (or intermediate) the obtaining of economic and financial benefits for cer-
tain stakeholders. Consequently, we appreciate that we should include in the defini-
tion of the economic and financial crime concept such crimes, too.
1.1.1.3 C
haracteristic Features of the Economic and Financial Crime:
Volume, Intensity, Direction, and Frequency
The analytic approach of the economic and financial crime reveals a series of char-
acteristic features:
(a) Volume or extent, providing the number of crimes related to a population frac-
tion (usually 100,000 inhabitants) for a given period of time, for instance, 1
year. The ratio between the number of economic-financial crimes and the popu-
lation taken into account is called crime rate. It shows several forms as
follows:
• Real crime represents the total crimes concretely committed in a given
period of time at the level of a number of inhabitants. This is the largest
dimension of the crime rate, its limits being impossible to know.
• Registered crime represents all the crimes tracked and identified.
• Crime brought to justice represent all the crimes submitted to the law court
for settlement.
• Judged crime represents all the judged crimes against which the entitled
bodies decided, in relation with a fraction of population.
• These four forms represent the revealed, apparent or lawful crime.
• Blacklisted or hidden crime represents all the crimes that were not registered
and consequently not detected and nor judged. These are crimes which have
not been submitted to the entitled authorities. Their number is much bigger
than that of the crimes registered, detected, and judged.
(b) Intensity expresses the ratio between the total highly socially dangerous antiso-
cial deeds and the socially little dangerous deeds committed.
(c) Crime direction represents a characteristic feature indicating the concrete
objects towards which the antisocial deed is oriented. This may be the national
security, the individual, the public and private property, morals, and manners.
The weight of a certain category of crimes occurring within a certain period of
time, all being categorized as criminal deeds, actually indicates the prevailing
direction of the crimes within the respective period.
(d) Crime frequency indicates the number of crimes of a certain type related to a
time unit. The number of thefts or robberies committed by year, month, week,
day, hour, or second can be calculated for instance at national, zonal, and county
level.
1.1.1.4 Forms of the Economic and Financial Crime
The economic and financial crime is usually considered as covering the follow-
ing crimes:
• Corruption
• Tax evasion
• Fraud
• Electronic criminality
• Money laundering
• Cybercrime
• Terrorism funding
• Market abuse and utilization of confidential information
• Information security
• Gambling, prostitution, smuggling, drugs trade, etc.
In the following, the main fields and forms of crime occurrence are presented,
although in real life they merge in a very complex way:
• In the financial and banking field: illegal lending operations, accepting too high
risks as well as there are not ensured the necessary guarantee conditions of reim-
bursement and recovery of the debt on due dates, card fraud, embezzlement
operations and illicit fund transfer (in fact, money laundering through banking
circuit); illegal and inefficient capital placement, utilization of some false pay-
ment means, crimes regarding the commercial effect procedure-bill of exchange,
promissory note, cheques, crimes associated with the securities, crimes regard-
ing the capital market; illegal foreign currency take out of the country; money
counterfeiting; crimes associated with derived instruments, crimes in relation
with virtual currencies (BITCOINS, ETHEREUM, etc.), including money laun-
dering using such currencies (European Commission 2017)
• In the commercial field: trade and smuggling of cigarettes, alcohol, coffee, elec-
tronic devices, energetic raw materials, and primary processed products of p etrol,
wood, metal etc.; utilization of dummy companies particularly in case of com-

mercial companies developing import-export operations; illicit sales of raw
materials and strategic products or products making the object of export special
control procedure established at international level; seizing of markets and
enforcement of excessive prices
• In companies: company procedure crimes consisting of the introduction of
untrue data in the documents submitted to the public or associates, utilization of
goods, or credit of the company for a purpose which is in contradiction with the
company interests; crimes related to illegal share capital issue; bankruptcy
crimes including fraudulent bankruptcy consisting of the insolvency and creditor
defrauding, transfer or cover up of some parts of assets, etc. (see the work Bodu
and Bodu (2016) for a detailed presentation of the crimes associated with the
company procedures and bankruptcy crimes)
• In the economic and social field: trade of drugs, gambling; prostitution and pros-
titution promotion, illegal sales of art objects, “work under table”, irregular
migration; use of non-profit organizations (foundations) to offer a lawful appear-
ance to the money obtained from dirty business (money laundering)
• In the informatics field: the development of digital technologies and internet cre-
ated a new category of individuals passionate by cybernetics attacks, the so-
called hackers group. A study carried out by PricewaterhouseCoopers (2018)
indicated that the cybercrime is the third most important type of fraud reported
at the level of industries from worldwide (representing about 34% at average of
the total frauds), behind the frauds associated with the asset embezzlement
(about 44%), and frauds against the consumers (about 36%). The same study
reflects an enhanced concern of the managers regarding the cybercrime (41% of
the managers interviewed said that they spent two times more time at least, to
investigate the cybercrime). The results of the study also identified that the cyber-
attacks mainly aimed at the disturbances of the business process (30%), asset
embezzlements (24%), security leaks (21%), and intellectual thefts (12%).
Crimes committed in this way have no frontier given that both the aggressors and
the victims are found all over the world and it makes difficult to identify them.
Moreover, in most of cybercrime cases, the criminals use false identities or per-
sonal data obtained also through this system.
In the following chapters, we will conduct a detailed analysis of the main forms
of economic and financial crime, namely, corruption, shadow economy (including
tax evasion), and money laundering.
1.1.2 Theoretical Approaches Regarding Corruption
From etymology point of view, the word corruption is derived from the Latin word
“rumpere” and means “to tear/ break”, and here the meaning is to break the law.
According to the definition given by the World Bank “corruption is the illegal
utilization of the public resources in order to obtain a personal gain”. Likewise,
Transparency International (2020) defines corruption as being the “abuse of power
given for obtaining private benefits.”
The corruption disrupts the democratic governing and the rule of law and influ-
ences in a negative way the economic development as it is an obstacle for the
increase of investments and economic growth (Mauro 1995). The corruption is a
deed which had occurred since the Ancient Times being considered as the most
severe and most spread form of behaviour meant to pervert the public business man-
agement (Conseil de l’ Europe 1996, p. 78). In our days, corruption is an extremely
complex fact, and it can be approached from different perspectives economic, legal,
sociological, philosophical ethical, etc. (Cârjaliu 2009).
Most of the literature about corruption associates this term with bribery for
obtaining private benefits. This private benefit may be attracted by entrepreneurs for
avoiding the taxation or regulations or to win public contracts. Different studies
indicated that the corruption negatively influences the business and economic
growth (Mauro 1995; Djankov et al. 2002; Dreher and Schneider 2010; Sahakyan
and Stiegert 2014).
Johnson (2018) considers that corruption can take many forms such as bribery,
embezzlement, money laundering, or tax evasion. In other words, the corruption is
closely related to other economic and financial crimes approached in this work.
From the point of view of the corruption deed, we identify small-, big-, and
medium-scale corruption. In order to classify corruption in a size category, the cor-
ruption laws and regulations in Romania (Law no. 78, 2000; Emergency Ordinance
no. 43, 2002; Emergency Government Ordinance no. 63, 2013) provide three crite-
ria, as follow:
(a) Value of the bribery or of the unfair benefits is more than 10,000 Euro.
(b) Prejudices caused is more than 200,000 Euro.
(c) Regardless of the value of the prejudice, the corruption crimes are committed
by individuals holding important positions in the state (state secretaries, mem-
bers of the government deputies, senators, judges, prosecutors, etc.)
As for the volume of such fact, a study carried out by the European Commission
(2015) within the Eurobarometer Flash 2015 about the attitude of companies against
corruption in EU provides:
• 40% of the companies from EU declare that corruption represents a real concern
for them during the activity development.
• 71% of the companies declare that corruption is widely spread in their
countries.
• 44% of the respondents declare that the only method to succeed in business is to
have political connections.
• 34% of the companies which have participated at public tenders or public acqui-
sitions procedures during the last 3 years considered corruption an obstacle in
winning a contract.
• 68% of the companies agreed that favouritism and corruption hindered the com-
petition in business in their country.
• 4% of the enterprises declare that they have been asked or have been expected to
pay bribery to receive certain public service supply contracts or authorizations
during the last 12 months.
More recently, the study drawn up by Transparency International (2017) within
the report entitled Global Barometer referring to Corruption indicated that 25%
individuals from the whole world declared that they were forced to pay bribery to
access the public services during the last 12 months. The study also found out that
policemen and elected officials from government represent the most corrupt groups.
1.1.3 Theoretical Approaches Regarding Shadow Economy
Corruption and shadow economy are two destructive activities which often work
together undermining the democratic governing and the rule of law and negatively
influencing the economic growth.
Compared to corruption, the shadow economy seems to be a much more com-
plex fact.
From conceptual point of view, we notice that the specialized literature present
extremely different opinions about the definition of the shadow economy. Certainly,
the term suggest the existence of another economy, an economy alternative to the
usual or known one and which designate the activities which escape to legal norms
and statistics.
To this aim, the study drawn up by Roubard and Seruzier (1991) presenting the
terms used in the specialized literature when the shadow economy concept is dis-
cussed is remarkable. Moreover, these terms are classified depending on three char-
acteristics and namely: neutrality of the term (code 1); practices deliberately occult
(code 2); and positive judgement (code 3) (Table 1.1).
The first category of the characteristics called neutrality of term (code 1) adopts
a point of view considered neutral which does not comprise any value judgement on
the activity itself and neither does it present any motivation of the subjects engaged
in this type of activities.
The second category of the characteristics called practices deliberately occult
(code 2) designate an ensemble of practices found at the law borderline, and the
adjectives used have a prevailing negative nuance.
The third category of the characteristics called positive judgement (code 3)
reflects behaviour of the subjects which aim at the alternative economic space also
comprising other issues such as the social and cultural ones related to the social
organization, solidarity networks, and cultural origins and combine the traditional
forms of organization with the basis of “another development”.
In the present work, we preferred to use the term of “shadow economy” when we
refer to the “other” economy.
Table 1.1 Terms used to designate “another” economy than the official one
1; 2 Unofficial economy 1 Unregistered economy
1 Unstructured economy 1 Unobserved economy
1; 2 Undeclared economy 2 Undisclosed economy
2 Dissimulated economy 2 Submarine economy
2 Underground economy 2 Illicit economy
2; 3 Parallel economy 3 Secondary economy
3 Alternative economy 3 Dual economy
3 Autonomous economy 2 Occult economy
2 Grey economy 2 Black economy
3 Marginal economy 2 Irregular economy
1; 2 Invisible economy 3 Peripheral economy
2 Illegal economy 2; 3 Informal economy
3 Counter economy 2 Shadow economy
Source: Roubard and Seruzier (1991)
Once we clarified the approaches from semantic and conceptual point of view,
we shall proceed with the definition of this term from the perspective of actions to
which it refers. As for the definition of shadow economy, the opinions of different
authors are much varying.
The shadow economy is defined in different ways depending on the scope of its
components as follows:
• “All the economic activities commonly unregistered and which, if were observed,
would contribute to the official calculation of the Gross Domestic Product calcu-
lated (or observed)” (Feige 1989, 1994; Schneider et al. 2010, 2015a, b; Frey and
Pommerehne 1984).
• “The production of goods and services from the market, either legal or illegal,
which escapes from detection in the GDP official estimations” (Smith 1994,
p. 18).
• “Those economic activities and the derived incomes which bypass the regulating
rules, taxation or government observation” (Thomas 1999; Feige 1989;
Dell’Anno 2003; Dell’Anno and Schneider 2004);
• “Drugs, commercial vice and prostitution, loan sharking, gambling (except
where permitted by law), barter, illegal production of trademarked goods,
employment of illegal aliens, do-it-yourself projects, skimming of business rev-
enue, tax evasion” (Shelak 1997).
• A larger definition of the underground economy is provided by Lippert and
Walker (1997), who carry out a differentiated presentation of the taxonomy of
the underground economy types as shown in the Table 1.2:
As shown in Table 1.2, the shadow economy does not include only illegal activi-
ties but also undisclosed incomes obtained from the production of lawful goods and
services, either from monetary or non-monetary transactions.
Table 1.2 Taxonomy of shadow economy activity types

Activity type Monetary transactions Non-monetary transactions
Illegal Trade of stolen goods, production and Trade with drugs, stolen goods,
activities trade of drugs, prostitution, gambling, smuggling, etc.; growth of plants
smuggling, fraud and trade of human to obtain rugs for own use, theft
beings, drugs, and weapons for own use
Legal Tax fraud Lawful tax Tax fraud Lawful tax
activities avoidance avoidance
Undisclosed incomes Employees’ Barter with All activities
obtained by the free discounts and lawful goods carried out on
lancers, incomes, salaries collateral and services own account and
and assets resulted from benefits neighbours’
unregistered work aiming mutual aid
at obtaining lawful goods
and services
Source: Lippert and Walker (1997)
• According to the OECD (2002, 2008) and Eurostat (2014), the “unobserved”
economy refers to all the production activities which cannot be comprised in the
source of basic data used for the elaboration of the national accounts. It includes
the following activities:
1. “The underground (shadow- our note) activities, define those lawful and pro-
ductive activities, but which are deliberately undisclosed by the public author-
ities in order to avoid:
(a) payment of incomes, value added tax or other taxes;
(b) payment of contributions to social security;
(c) the requirements regarding certain lawful standards of labour market
such as the minimum wage, maximum work hours, standards of safety or
health etc.;
(d) compliance with certain administrative procedures such as the filling
in of statistic questionnaires or of other administrative forms.”
2. Illegal activities define those productive activities at production borderline
comprised in the national account system which:
(a) Generate goods and services forbidden by the law (for instance, the
production and distribution of illegal drugs)
(b) Are illegal when are carried out by unauthorized producers (for
instance, unlicensed practices for medicines)
3. Production of goods in own households for final own use representing those
productive activities which result consists of the goods or service consump-
tion in the household where they were produced, for instance:
(a) Production of crops and animal breeding
(b) Production of other goods for own use and use
(c) Construction of own houses and other own real estate properties
(d) The rent required by the dwelling owners and payment for domestic
services to the persons who supply such services
4. Informal unobserved services in the unofficial sector covering also the
observed activities informally undertaken. In general, the informal activities
are “those productive activities performed within the households, which are
unregistered and/or smaller business than those which size is specified regard-
ing the labour force occupation and which obtain a certain market production
(...)”.
• In different studies, Schneider and his collaborators proposed to periodically
measure the shadow economy level in different states of the world, and their
initiatives are remarkable (Alm et al. 2004; Schneider and Klinglmair 2004;
Schneider et al. 2010, 2015a; Schneider 2011, 2013; Medina and Schneider
2018). In numerous studies conducted by Schneider and his collaborators
(Torgler and Schneider 2009; Schneider 2011, 2013), for measuring the level of
the shadow economy, the authors used the following definition given to the
shadow economy:
• “The shadow economy includes those productive and lawful activities, but which
are deliberately undisclosed in order to avoid:
(a) payment of incomes, value added tax or other taxes;
(b) payment of contributions to social security;
(c) requirements to meet certain lawful standards of the labour market such as
the minimum wage, maximum number of work hours, safety or health stan-
dards etc.;
(d) compliance with certain administrative procedures like for instance, filling
in the statistic questionnaire or other administrative form.”
Considering the vast definition of the “unobserved” economy proposed by OECD
(2002, 2008) and Eurostat (2014) (see Table 1.3), we notice that Schneider adopts a
more restricted version of defining the shadow economy maintaining only the first
category of activities within the area of underground economy and, namely, the
underground activities. As a result, to measure the shadow economy, Schneider has
not included the illegal activities (for instance, trade of drugs, smuggling, money
laundering, and embezzlement), the production carried out in households for own
use or any informal unobserved activity which are part of the formal sector. All
these activities are difficult to measure, and this is why Schneider does not take
them into account in his work to estimate the shadow economy level.
Within this more restricted definition, the shadow economy presents two main
components (Schneider 2013). The first component representing a higher weight
(about two thirds) is the undeclared work which refers to the salaries which the
employees and employers do not declare to avoid taxation or the regulation of the
labour force market. The second component (about a third) is represented by unre-
ported incomes from business, to avoid a part of the tax burden.
Table 1.3 Delimitation of “observed” economy from the “unobserved” one
Non-observed economy Observed economy

Underground (shadow-our note)
activities Reported/registered activities
Illegal activities
Informal sector
Non-observed Observed
Activities undertaken by
households for their own
Deficiencies in the basic data

collection programme
Source: Eurostat (2014), Essential SNA: Building the basics. 2014 Edition.
Luxembourg: Publications Office of the European Union, p. 122.
Source: Eurostat (2014, p. 122)
Within this work, the terms, definitions, and evaluation of the shadow economy
are used in accordance with Schneider’s point of view. Consequently, when we refer
to the shadow economy, we refer only to the lawful activities but which are not dis-
closed to the public authorities, and we do not consider the illegal, domestic, or
informal activities. Also, we use the evaluation of the shadow economy as presented
by Schneider (2013, 2015; Medina and Schneider 2018), where the shadow econ-
omy is calculated as a percentage of the official GDP. The databases elaborated by
Schneider and his collaborators are largely used by different authors in their studies
about the shadow economy (Nastav and Bojnec 2008, 2014; Torgler 2002, 2007;
Torgler and Schneider 2009; AT Kearney 2013) but also by the European
Commission (2014).
1.1.4 Theoretical Approaches Regarding the Tax Avoidance
According to Schneider (2013, 2015; Medina and Schneider 2018) regarding the
definition and measurement of the shadow economy, the tax avoidance represents
an important component of shadow economy when the goal of the shadow economy
is to avoid the lawful regulations for paying less taxes and fees to the state budget.
There are also other partial opinions (Ciupitu and Tudorache 2015) or even con-
trary opinions (Dinga 2008) about the existence of a very close connection between
shadow economy and tax avoidance. Based on the idea that the tax avoidance can be
identified (observed) and non-identified (non-observed), the study conducted by

Ciupitu and Tudorache (2015) appreciate that the tax avoidance is born both from
the official economy and particularly from shadow economy. In other words, the
two facts are partly overlapping. On the other hand, the study carried out by Dinga
(2008) considers that “although the tax avoidance has connotations which belong to
the semantic area of the shadow economy, this is not a component of the shadow
economy but rather this is at the interference of the shadow economy with the offi-
cial one”.
Given the differentiated approaches found in the specialized literature regarding
the relation between shadow economy and tax avoidance, in this section we shall
review the definitions of the tax avoidance identified in the specialized literature in
order to clarify the concepts.
Thus, the definition of the tax avoidance has various approaches in the special-
ized literature:
• Tax avoidance represents “A term that is difficult to define but which is generally
used to describe the arrangement of a taxpayer’s affairs that is intended to reduce
his tax liability and that although the arrangement could be strictly legal it is usu-
ally in contradiction with the intent of the law it purports to follow” (OECD
2020- Glossary of tax terms).
• Tax avoidance represents “ways of paying only the smallest amount of tax that
you legally have to” (Oxford Dictionary 2020).
• Tax avoidance reflects “an intended distortion of the material facts carried out by
the tax payer in order to specifically escape from the tax payment” (Internal
Revenue Service IRS, USA 2017).
• In Romania, the tax Law 241/2005 about the prevention and fight against the tax
avoidance at Art. 9 stipulates the followings:
1. the following deeds committed in order to escape the fulfilment of the fiscal
obligations constitute crimes of tax avoidance and they are punished with
imprisonment of 2 years up to 8 years and the interdiction of some rights:
(a) Concealment of the good or taxable or billable source
(b) Omission (total or partial) of highlighting in the accounting books or
other lawful documents, the commercial operations performed or the
incomes obtained
(c) Registering in the accounting books or in other lawful documents the
expenses which are not based on real operations or the highlighting of
other fictitious operations
(d) Modification, destruction, or concealment of accounting books,
memories of taximeters, or fiscal electronic cash registers or of other
devices for data storage
(e) Execution of double entry bookkeeping using documents or other
devices for data storage
(f) Escaping from the financial, fiscal, or customs controls by failure to

declare, fictitious declaration, or incorrect declaration of the head-offices
or secondary establishments of the checked entities
(g) Substitution, deterioration, or alienation by the debtor or by thirds of
the seized goods in accordance with the provisions of the Fiscal Procedure
Code and Criminal Procedure Code.
2. If, as a result of the deeds provided at paragraph (1), a prejudice of more than
100,000 EUR equivalent in national currency was caused, the minimum sen-
tence provided by the law and its maximum limit will be increased by 2 years.
3. If the prejudice resulting further to the commitment of the deeds provided at
paragraph (1) is more than 500,000 EUR in equivalent of national currency,
the minimum limit of the punishment provided by the law and its maximum
limit will be increased by 3 years.
• The tax avoidance is a deliberate and intended practice of the tax payers to not
fully disclose the taxable income, so that they pay a smaller tax and a fiscal law
breaching by means of which a taxable entity neglect to pay the due tax or
reduces the fiscal obligation through fraudulent actions or false actions regarding
the form of the income tax. (Olabisi 2010).
Based on the definitions of the tax avoidance and of the shadow economy,
we join Schneider’s opinion considering the tax avoidance as a component of the
shadow economy when the main goal is to avoid the taxes to the state.
Tax avoidance could be realized legally or illegally. The legal tax avoidance is
also called as tax optimization. The illegal tax avoidance is called tax evasion.
A. Legal tax avoidance (tax optimization)
If tax avoidance represents the avoidance of tax payment to the state by breaking the
law provisions, then tax avoidance represents “that form of interpretation of the fis-
cal laws which, without being fraudulent, leads to the diminution of the taxable base
and thus, to the payment of smaller taxes” (Bodu and Bodu 2016, p. 196). This
method to reduce the taxable base is also called legal (lawful) tax avoidance if it is
considered in relation with the illegal tax avoidance which, under this context is
called tax fraud (Bodu and Bodu 2016, p. 196).
The tax optimization or the legal tax avoidance represents the tax payer action to
bypass the law when it presents certain gaps or glitches, totally or partly evading the
tax payments because of this legislation deficiency.
This type of tax avoidance also occurs when new regulations are adopted in the
field of tax avoidance, when new taxes are adopted, or when the legislation in force
is frequently amended. Considering these changes, the tax payers try to find the
main methods and exploitation means of the law. Thus, the factors which encourage
the lawful tax avoidance are related to the granting of some tax concessions, tempo-
rary exemptions, income taxation based on income standards, law gaps, and lack of
regulation of some expenses.
The existence of “tax-free” zones encouraged the increase of the legal tax avoid-
ance at international level. These are also called tax haven zones, and they represent
territorial enclaves where the national legislation is not applied. In relation with
these tax haven zones, there were also developed tax optimization processes carried
out through the offshore companies. The offshore companies represent those com-
panies which are incorporated in jurisdictions enjoying a differentiated taxation rate
depending on the place where the commercial business is developed, and in most
offshore jurisdictions, the profit tax and tax on dividends is 0%.
In accordance with Tax Justice Network (2018), in 2018, among the ten biggest
tax havens of the world are Switzerland, the United States, Cayman Islands, Hong
Kong, Singapore Luxemburg, Germany, Taiwan, United Arabian Emirates, etc. This
ranking is determined using the score of the financial secret of each country calcu-
lated depending on the fiscal laws, transparency of the tax system and company
structures, as well as the confidentiality regulations of the banking field.
The tax optimization implies the identification of the means through which a
company can benefit of tax concessions or beneficial provisions of the legislation
regarding its business. The purpose of the tax optimization is to benefit of the exist-
ing tax concessions and the favourable provisions of the legislation, and it results in
the lawful diminution of the fiscal impact. In other words, tax optimization can be
considered a component of the lawful tax avoidance carried out to obtain a maxi-
mum fiscal gain, and it often implies the relocation in different jurisdictions where
the income taxation is low. Thus, there exists a competition between countries from
taxation point of view. The multinational companies play a very important role for
the economy of a country so that many countries try to facilitate their presence on
the own territory to benefit by the potential contributions to their economy.
The easiest way to attract or convince the multinational companies to stay in the
host country consists in offering them a taxation system with low rates. This is the
reason which actually triggered a fight in the whole world including in Europe. The
average of taxation rate applied to the companies in European Union decreased
from 18.2% in 1995 to 16.9% in 2010 (European Commission 2012). This way,
multinational enterprises exploit gaps and mismatches in the international tax rules
to artificially shift profits to low or no tax jurisdictions and avoid paying their fair
share of tax. Although these tax avoidance strategies were in most cases legal, it has
begun to be considered a major issue for the OECD because of avoiding paying the
fair share of taxes. As a result, the fight of combating international tax avoidance
materialized in an international collaboration to end tax avoidance under the
Inclusive framework of Base erosion and profit shifting (BEPS). Under the OECD/
G20 Inclusive Framework on BEPS, over 135 countries are collaborating to put an
end to tax avoidance strategies that exploit gaps and mismatches in tax rules to
avoid paying tax. An international account of tax legislation and procedure is very
welcome in order to understand the procedure and tax rules in an international and
comparative environment (Costaș 2018).
B. Illegal tax avoidance (tax evasion/tax fraud)

On the other hand, the illegal or illicit tax avoidance consists of the taxable object
covering up, sub-evaluation of the basic taxable amount or the use of other methods
to avoid the payment of the due tax. It can be defined as a conscious action of the
tax payer who is violating the law provision to not pay the due fiscal obligations.
This type of avoidance through breaking the law is also called as tax evasion or tax
fraud. According with Oxford Dictionary (2020), tax evasion is “the crime of delib-
erately not paying all the taxes that you should pay”.
This type of evasion occurs when the tax payers breach in a fraudulent way the
tax law, and it materializes in various economic documents such as:
• False accounting entries (fictitious transactions, fictitious stocks, overrated assets
or creation of fictitious investments, under evaluated debts, covering up the
increase of outstanding claims, artificial revenue growth because of some manip-
ulated estimations, etc.)
• Manipulations between the affiliated companies
• Manipulation of promotional discounts
• Illegal expenses record
• Falsification of financial and accounting documents in order to diminish the tax
base
• Destruction of financial-accounting documents
• Organization of double bookkeeping
• Failure to declare or flawed declaration of commercial activities or revenues, etc.
The methods of tax evasion expression are closely related to the impacted tax
type or fee.
In case of the profit tax, the tax fraud refers to the following situations
(Amarița 2017):
• Reduction of the tax base by including expenses that are not supported by justi-
fying documents or lawful base
• Recording of oversized expenses or over the limit allowed by the laws
• Deduction of associates’ personal expenses or interests to loans granted by the
company managers
• Failure to entirely register the revenues received or recording in the document’s
delivery prices lower than those actually practised
• The transfer of the taxable revenues to newly established companies within the
same group, which are in the period of exemption from the profit tax payment,
simultaneously with the registration of losses by the mother company
• Determination of the profit tax by unsuitable application of the law provisions
particularly regarding the diminution of the tax corresponding to the reinvested
profit
• Uncalculatingly the tax corresponding to the revenues received from economic
activities, by some non-profit organization
• The differences established through the control papers or even the obligations
associated to the due profit tax are not registered in the accounting records.
The fraud techniques used for the value added tax are found among the following
ones (Amarița 2017):
• Wrong application of the procedure for the value-added tax deductions based on
documents where the tax is not registered or deductions which are not based on
documents or are based on illegal documents, VAT deductions as a result of the
repeated registration of invoices in the purchase journals, deductions based on
documents belonging to other companies, deductions of the value added tax cor-
responding to the operations exempted of the deduction right
• Operations of the value added tax area which are not comprised in the tax calcu-
lation base
• Failure to record and to pay the value-added tax corresponding to the advance
payments from the clients
• Failure to record as subject to VAT when the minimum threshold rate is exceeded
• Avoiding the payment of the value-added tax corresponding to the import of
goods by submitting fictitious papers of donation from foreign partners.
As for the tax on wages, the most frequent tax fraud methods are (Amarița 2017):
• Non-taxation of all the sources paid to the employees as wages.
• Incorrect application of the taxation tables comprising the remuneration rights.
• Failure to withhold and transfer the tax on wages due for the personnel employed
based on agreements or for day workers.
• No cumulating of all salary incomes for taxation purpose
• Failure to record the payment obligations regarding the tax on wages.
• Non-compliance with the laws referring to the determination of the tax base.
• Failure to include in the tax base all the achieved incomes particularly those
incomes for which the taxation is based on the declaration of the taxable
subject.
• Identification of methods for generating fictitious expenses incurred by the wage
pay of some individuals.
• Establishing some incentives for the employees which would not be included in
the category that imposes the global income tax so that a smaller tax is paid to
the state budget.
• The employees obtain a certain status which gives them the right to the exempted
from the payment of the global income tax such as the certificates of revolution-
ary or certificates of disability.
Referring to the excise duties, the fraud methods include the following activities
(Amarița 2017):
• Failure to comprise all the taxable amounts in the tax base
• Tax base reduction by underevaluation of the imported products at customs using
double documents
• Failure to calculate the excise duties corresponding to the modifications of the

alcoholic concentrations
• Failure to include the excise duties in the selling price of the products for which
excise duties are due
• Failure to highlight in the accounting books the excise duty payment obligation
• Avoiding the payment of excise duties by changing the name of the products
subject to excise duty payment and their transfer to the category of products non
subject to excise duties payment or to the category of products subject to reduced
excise duties.
Such approach of the two forms of the tax avoidance (legal and illegal is also
agreed by other redoubtable specialist (Tulai 2007, p. 172).
The definition and understanding of the differences between the legal tax avoid-
ance and the illegal one is very important because they distinguish the lawful actions
made by an entity from the illegal ones. This threshold is easily and frequently
exceeded, the tax payer passing easily and progressively from the abstention from
breaching the law to the ability of doing it, and from abuse against the law to quali-
fied tax fraud (Trif 2015).
Moreover, the understanding of the two concepts is made difficult by the legal
frame regarding the tax avoidance in Romania (Law no. 241/2005 as subsequently
amended) which, according to the law experts (Puț 2017, 2018), is not rigorous
from the conceptual point of view, considering that “the tax authority does not dis-
tinguish between tax avoidance and tax fraud” although there exist clear doctrinaire
differences between the two terms. Thus, the “tax avoidance” essentially represents
the ensemble of the lawful means by which the tax payers evade the incomes from
taxation, while the “tax fraud” represents the ensemble of the actions and deeds
which by omission, evade the incomes achieved from taxation. Now, the breaching
of the tax judicial norms meets all the constitutive elements of a crime which accord-
ing to the Romanian positive law has an unsuitable name –crime of tax avoidance
(Puț 2017, 2018).
In conclusion, the Romanian legal norms use the term of tax avoidance with a
penal connotation, namely, tax fraud which is in contradiction with the international
doctrinaire regulations.
In Romania, the main cause leading to the increase of the number of the tax fraud
cases consists of the unclear, dense regulations and which leave room for interpreta-
tion. In Romania, the laws are not clear regarding the provisions and instructions for
implementation. Thus, the taxed entity but also the tax authorities have many oppor-
tunities to evade the tax laws and the payment of financial obligations. All these
result in the exploitation of these loopholes by those who intend to evade the obliga-
tions of tax and fees payment (Gyuricza et al. 2017).
1.1.5 Theoretical Approaches of Money Laundering
In a synthetic definition, the money laundering represents the make-up process of

illegally procreated sources by criminal procedures so that they get a legal
appearance.
To understand the money laundering action, a short historical presentation is
required. The money laundering concept is associated with Al Capone in 1931 dur-
ing the prohibition period, in the United States. He developed real businesses with
the “launderers” in order to hide the origin of the amounts cashed from the business
with alcohol. While Al Capone was judged for tax avoidance, Meyer Lanski trans-
ferred, in Switzerland, illegal funds through a complex system of phantom c ompanies,
holdings, and off-shore accounts. After 1934, Switzerland established the bank
secrecy principles.
In 1970, the United States opened the doors to the legislation in the field of
money laundering through the Bank Secrecy Act, according to which the banks are
required to report to Internal Revenue Service the suspect transactions higher than
10,000 USD, and the fund transfer and their hidden placement in financial institu-
tion is sanctioned as crime but without naming it money laundering. Also, the fail-
ure to report the accounts from foreign banks is sanctioned in the same way.
The term of money laundering is officially used for the first time in 1972, in
Watergate Scandal when the Committee for Nixon’s re-election as President trans-
ferred money illegally obtained for the election campaign from Mexico, then trans-
ferred them back through a company of Miami.
Concretely, the history of the money laundering regulation started in the middle
of 1980 with the criminalization of the cash from illegal crimes with drugs in the
United States, Great Britain, and Australia.
The money laundering crime was introduced and sanctioned as such in USA
through the Money Laundering Control Act of 1986. In 1989, there was established
an intra-government body called Financial Action Task Force on Money Laundering
(FATF) meant to establish policies for fighting against money laundering and terror-
ism funding. In Europe, it was only in 2005 that the Directive 2005/60/EC of the
European Parliament and of the Council of 26 October 2005 on the prevention of
the use of the financial system for the purpose of money laundering and terrorist
financing was adopted.
Despite the fight against this scourge of the world states and international orga-
nizations, the money laundering continues to represent an ever-growing fact. The
United Nation Organization for Fight Against Drugs and Terrorism (UNODC) esti-
mates the amount of money laundered in a year at global level around 2–5% of the
global GDP or 800 billion dollars–2 trillion USD (United Nation Office on Drugs
and Crime 2020).
In relation with the trial to define the money laundering, the following approaches
in the specialized literature are identified:
• The money laundering consists of “bringing the money from illegal activity in a
lawful business so that their source seems to be legal” (OECD 2017).
• The money laundering represents the conversion or transfer of property, knowing

that such property is derived from any [drug trafficking] offence or offences or
from an act of participation in such offence or offences, for the purpose of con-
cealing or disguising the illicit origin of the property or of assisting any person
who is involved in the commission of such an offence or offences to evade the
legal consequences of his actions (United Nations Convention Against
Transnational Organized Crime (2000) (Palermo Convention).
• Money launderers “send illicit funds through legal channels in order to conceal
their criminal origins”.(..) “When money is laundered, criminals profit from their
actions; they are rewarded by concealing the criminal act that generates the illicit
proceeds and by disguising the origins of what appears to be legitimate pro-
ceeds” (Schott 2006).
• The money laundering is the process through which the incomes obtained from
crimes are “laundered” through lawful channels (using bank transactions), and
then, they are reinvested in lawful activities (Ardizzi et al. 2014).
• The money laundering consists of the “illegal transfer of goods to the lawful
economic system by using labour and operations meant to hide the criminal
source of the goods submitted to laundering” (Jurj-Tudoran and Șaguna 2016,
p. 9).
• The money laundering represents a “complex of transactions which include
international transfers, dispersions in small amounts and transfer on the name of
other persons benefiting of bank experts, brokers, accountants, notaries or law-
yers. In case of money laundering there is created a perception of action legiti-
macy so that the goods (money) become available again for the criminals”
(Jurj-Tudoran and Șaguna 2016, p. 4).
• The crime of money laundering is a result crime which is always accompanied
by another result crime and other means crimes which belong to the economic
crime domain: tax avoidance, corruption, bank crime, cheating (Leția 2014,
p. 40).
• Directive 2005/60/EC of the European Parliament and of the Council of 26
October 2005 on the prevention of the use of the financial system for the purpose
of money laundering and terrorist financing (European Parliament 2005) pro-
vides that the Member States have to ensure that the money laundering and ter-
rorism funding are forbidden (art 1). In the meaning of the present directive, at
art. 2 “the following behaviours are considered money laundering when commit-
ted intentionally:
(a) the conversion or transfer of property, knowing that such property is derived
from criminal activity or from an act of participation in such activity, for the
purpose of concealing or disguising the illicit origin of the property or of
assisting any person who is involved in the commission of such activity to
evade the legal consequences of his action;
(b) the concealment or disguise of the true nature, source, location, disposition,
movement, rights with respect to, or ownership of property, knowing that
such property is derived from criminal activity or from an act of participation

in such activity;
(c) the acquisition, possession or use of property, knowing, at the time of receipt,
that such property was derived from criminal activity or from an act of par-
ticipation in such activity;
(d) participation in, association to commit, attempts to commit and aiding, abet-
ting, facilitating and counselling the commission of any of the actions men-
tioned in the foregoing points.”
• In Romania the definition of money laundering is in line with the European
Directives in the field. To that end, the Article no. 29 of the Law 656 from 7
December 2002 republished, about the prevention and sanctioning of money
laundering as well as for the implementation of measures for the prevention and
fight against the terrorism funding, provides the following issues:
• “It is considered as money laundering crime and is punished with imprison-
ment from 3 to 10 years:
(a) The exchange or transfer of goods knowing they are the result of crime com-
mitting in order to cover up or dissimulate their illicit origin or in order to
help the person who committed the crime to escape prosecution, judgement
or sentence execution;
(b) Hiding or dissimulation of the real source of goods, of their location, of the
disposition, circulation or ownership or of the ownership rights on them
knowing that the goods are the result of a crime commission;
(c) Acquisition, possession or utilization of goods, knowing that they resulted at
a crime commission.”
Based on the definitions presented above, we conclude that the money laun-
dering represents a complex process by means of which an apparent legality regard-
ing an amount of money from illegal business is acquired.
Stages of money laundering
Although numerous methods are involved in the money laundering process, the
scheme of money laundering can be reduced in general, to three big stages (National
Office for Prevention and Control of Money Laundering 2002):
1. PLACEMENT is the first stage when the amounts of money obtained from illicit
activities are put into circulation and are effectively placed in the financial sys-
tem. Before money placement, the PIECEMEAL process takes place, respec-
tively, the money split in smaller amounts which are fewer suspects (below
10,000 EUR). Then, the placement of these amounts of money is carried out by
constituting bank deposits or by buying a number of financial instruments
(cheques, promissory notes, etc.) which are cashed later on.
2. The second stage, namely, the LAYERING or STRATIFICATION assumes the
separation of illegal funds from their source by creating complex layers to hide
the source and to ensure the anonymity. This can be done using the electronic
transfer of money in the accounts opened at banks from all over the world (it
especially aims at those jurisdictions which do not cooperate in the investiga-
tions regarding the fight against money laundering). The stratification can be also
done by establishing front companies. The one making money laundering drafts,
for instance, fictitious import-export papers, on which basis the money is trans-
ferred from the initial placement location as payment for service supply or ficti-
tious export operations, to another bank. Under certain circumstances, the money
launderers can conceal the transfers as payment for goods or services, and thus,
they are apparently legal.
3. INTEGRATION, the third stage assumes the legitimization of the funds obtained
from crime commission by their reintroduction in the lawful circuit. The integra-
tion of the amounts of money in the lawful circuit can be carried out through
investments on the real estate market, luxury goods market, or the funding of
own business, and thus, these funds seem to be normal and “clean”, as providing
from commercial activities.
The three stages by means of which the money laundering can be done can be
separated and distinct phases, or they may also occur simultaneously or they over-
lap. The utilization of the basic steps depends on the available mechanisms of
money laundering and the requirements of the criminal organizations.
Figure 1.1 shows a description of the money laundering circuit:
Methods of money laundering
The money laundering represents an extremely complex process, and in practice,
there has been found out numerous methods to carry out this process. Below, there
are presented, in a limitative manner, several such methods identified more fre-
quently (National Office for Prevention and Fight Against the Money Laundering
and Terrorism Funding 2002, 2004):
1. Money laundering through bank accounts:
(a) Utilization of accounts which do not reflect the normal banking or com-
mercial activities, but they are used only for money deposition or
withdrawal.
(b) Non-operational/inactive accounts which suddenly become active involv-
ing transactions with high amounts of cash.
(c) Large cash amount withdrawal from a previously inactive account or from
an account where there has been unexpectedly transferred a significant
amount from other account opened in the country or abroad.
(d) The cash withdrawal operations which are carried out throughout the same
day from different subsidiaries of the same banking institution.
(e) Transfer of funds and real estate values between accounts which do not
seem to be controlled in common.
(f) Accounts of a company where predominantly the depositions or with-
drawals are carried out in cash (and not using the cheques).
(g) The movements of the amounts through the companies’ accounts which
cannot be clearly identified as being supported by economic justification
are not complying with the company strategy and do not seem to be related
to a lawful commercial contract.
(h) Payments or cashing of high amounts on a client’s name without any cer-
tain motivation or plausible explanation.
(i) Significant increase, without an apparent reason, of a client’s turnover
reflected by the activity of its accounts.
(j) A large number of accounts is opened by the client at the same banks or at
different banks, and there are operated repeated transfers of large amounts
of money between these accounts.
(k) Depositions of small amounts of cash in the account of a client followed
by the immediate transfer in an account opened at another bank.
(l) Crediting an account by means of cheques issued by thirds with large
amounts of money at the client’s favour.
(m) Suspect movements of the funds from a bank to another bank and back
again to the first bank. For instance, the following scheme has been
noticed: (1) procurement of cheques from a bank; (2) opening an account
in another bank; (3) deposition of the cheques in the second account; and
then (4) electronic transfer of the funds from the second account to the
account of the first bank which initially issued the cheques.
(n) Periodical transfers from personal account to countries with a high-risk
rate.
2. False loans/loans returned:
(a) Companies applying for credits although, according to the financial state-
ments, it results that the credit is not necessary.
(b) Clients who reimburse surprisingly quickly the loans with funds from
unknown sources.
(c) Fictitious loans granted by shell companies (just a cover). Such a company
registered in a tax haven is controlled by a company from the country, and
the shell company funds are, in fact, funds of the company from the country
which are recycled. The scheme is as follows: recycled money, found in the
shell company accounts, are lent to the company from the country (actually,
it is about self-loans) for which the latter pays interests and eventually
delayed payment penalties which later on, by means of different methods,
are cashed, by the real owner of shell company. Thus, the respective
amounts get in the legal circuit.
(d) The loans of cash and their reimbursement by means of bank instruments.
3. Utilization of offshore destinations (tax havens). These represent one of the
most common and usual procedures for fraud and tax avoidance at international
level.
4. The shell company (existing only on paper, they do not have any office, employ-
ees, independent assets, or own commercial operations, and they are used by
their owners as a vehicle for business transactions or for controlling other
companies).
Movement of cash from its

source
Dirty Placement
Money
Banks/ Casinos/
Bureau de change
Clean
money
Purchase real The separation of illegal

funds from their source
estates, luxury by creating complex
assets/funding own Cash converted layers to hide the source
business Layering and to ensure the
into monetary anonymity.
Instruments
Integration Off shore
bank
Integrating illicit Material assets

money back into bought with
the economy cash then sold
Source: Own processing
Fig. 1.1 Money laundering circuit. (Source: own processing)
5. Utilization of informal systems regarding the fund transfer, more precisely, the
use of transfer systems parallel to the financial institutions, such as Western
Union and Money Gram, aiming at the compensation between several physical
or legal entities, but there is no real movement of these amounts of money.
6. Utilization of external operations particularly in relation with the tax havens.
7. Money laundering through transactions related to investments/Transactions on
the stock market:
(a) Unusual sale of high-value securities in exchange for cash which is with-
drawn later on.
(b) Transactions with securities to obtain cash which movement is not con-
ducted through the clients’ accounts.
(c) Acquisition of securities through the bank when this acquisition is not
complying with the usual activity of the client.
(a) Clients’ applications for benefiting of the investment administration when
their source is not clear or when it is not complying with the client’s
activity.
(b) Acquisition of securities which are to be safely kept by banks when it is not
complying with the client’s activity.
(c) Acquisition of shares of companies which are established in tax havens fol-
lowed by their sale to other similar companies.
(d) Sale of shares for a price much higher than the market price to a company
where the sole shareholder is just the owner of the respective shares.
(e) Purchase of real estates by companies from tax havens followed by their
sale to other similar companies.
(f) Sales of equity interests for a price much higher than their market value to
a company which sole associate if just the owner of the equity interests.
8. Utilization of non-profit organizations
The non-profit organizations collect significant amounts of money from
donors and, then, distribute these amounts to their beneficiaries, after covering
the administrative costs. The amounts transferred then to the beneficiaries as
well as the administrative expenses can be over evaluated and their utility is
difficult to estimate. The non-profit organizations are often used in bad faith,
being a widely spread method of money laundering.
9. Gambling (casinos, horse racing)
The casinos and other gambling entities are agreed by the money launderers
because they offer the possibility of intensive use of cash, being often used by
the money launderers as simple exchange office where dirty money turns in
clean money. In such cases, the criminal buys winning tickets and then the
organizer’s ticket, and thus, the source of money is justified. Based on statistics,
the electronic games annually increase by about 15%, incurring enormous
amounts of money which may reach 10 billion EUR (Leția 2014, p. 41).
10. Other methods for money laundering, such as:
(a) Evading the submission of declaration obligations regarding the amounts
transferred abroad
(b) Applying for the VAT reimbursement for fictitious operations, submission
of unreal/fictitious financial statements
(c) Making advance payments but no goods delivery/service supply takes
place
(d) Implication of financial institution officers who can be identified by their
life standard which exceeds by far their wage rate, luxury holidays
(e) Use of freelancers
1.1.6 R
elation Between Corruption, Shadow Economy,
and Money Laundering. Theoretical Approaches
All the three important forms of the economic and financial crime mentioned by us
in this book, respectively, corruption, shadow economy, and money laundering indi-
cate, among their common components, the avoidance of the regulations regarding
the calculation and payment of taxes, and, consequently, they lead to the diminution
of tax incomes and increase of public expenses and slow down the economic growth.
As for the empirical relations established between the three forms of the eco-
nomic and financial crime, based on the review of the specialized literature, we
found out that they are not very clearly delimited.
Thus, we notice first that the investigated studies of the specialized literature
referring to the relations identified between corruption and shadow economy indi-
cate the presence of both direct and indirect relations (Johnson et al. 1997; Fjeldstad
1996, 2003; Dreher and Schneider 2010; Buehn and Schneider 2009; Simonovic
and Boskovic 2016, p. 117; Virta 2007; Borlea, Achim and Miron 2017).
A first important group of studies (Fjeldstad 1996, 2003; Kaufman 2010; Ivanyna
et al. 2010; Ghosh and Neanidis 2011; Borlea et al. 2017) identify direct relations
between corruption and shadow economy. These studies offer empirical issues
about the destructive role of corruption and officers’ bribery to allow further acting
in shadow. In this context, Fjeldstad (1996, 2003) uses just the term of “fiscal
corruption” underlining thus the fiscal role of corruption. Thus, as corruption
enhances, the shadow activities extend accordingly, so that a positive relation
between corruption and shadow activity is expected.
Other authors (Johnson et al. 1997) created a complex model of corruption in
relation with the official and unofficial economy, reaching similar results. Thus,
they found out that the corruption fact functions as a fee on the activity of the com-
panies from official economy, directing them to unofficial economy. Considering
this point of view, Friedman et al. (2000) empirically demonstrate that the countries
showing a high corruption rate have also a higher rate of shadow economy. Later on,
Buehn and Schneider (2009) also identified a positive relation between corruption
and shadow economy.
In case of Serbia, too, the study performed by Simonovic and Boskovic (2016,
p. 117) shows the existence of a positive relation direct) between corruption and
shadow economy. Simonovic and Boskovic find that corruption of public officials is
identified as often being a method to mask the shadow economy or as implementa-
tion means. Whether the corruption comes from or precedes the shadow economy,
the relationship between these two facts is directly corroborated. The higher the
shadow economy rate is, the higher the corruption rate is and vice versa. The institu-
tions eroded by corruption represent weak obstacles on the way of the criminal
structure development. Further on, the authors explain that there exists a direct con-
nection between corruption and shadow economy when the public officials ask for
bribe using the blackmail and conditioning the economic entities in various ways.
Similar results were obtained by Borlea et al. (2017) in their study based on a
sample from the European Union over the analysed period 2005–2014. The empiri-
cal findings of this study also confirm the existence of a strong positive relation
between corruption and shadow economy; so, a higher rate of corruption involves a
higher rate of shadow economy.
A second group of studies, but more limited than the first, (Dreher and Schneider
2010; Virta 2007) gathers documentary evidence of the indirect results between cor-
ruption and shadow economy. Thus, the study developed by Dreher and Schneider
(2010), for the countries with high incomes, found out that the high rates of corrup-
tion correlate with low rates of shadow economy. Similar results are obtained by
Virta (2007), who investigated the relation between corruption and shadow econ-
omy in different geographical regions of the world, based on the observation that the
different types of bribe may have different consequences regarding the shadow
economy. Virta (2007) theorized that such corrupted practices are different within
the world regions, being very frequently found in some regions. Further on, Virta
underlined that the bribery made to obtain public contracts has different conse-
quences regarding the size of the shadow economy in comparison with the bribery
practised for the tax diminution. A negative relation between corruption and shadow
economy was found in the countries from the tropical zone because within this
region the public officials’ bribery is usually practised to work in the official sector.
As for the differences identified between the two groups of studies regarding the
sign of the relation established between corruption and shadow economy, several
studies offer explanations.
(a) Some of the studies (Weber 2005; Mocan 2008; Bătrâncea et al. 2017) explained
such differences in the light of the different methods of measuring the facts or
of the utilization of different control variables. For instance, the study con-
ducted by Bătrâncea et al. (2017) investigated the force of the relation between
shadow economy and corruption using data collected in 193 countries and ter-
ritories. They used as control variables (or moderating) judiciary independence,
police service reliability, human development (reflected by education level,
suitable medical assistance, and life standards), and business freedom. Their
results suggest that a small shadow economy is associated with a low corrup-
tion level when the following conditions are met for the nations: they enjoy of
jurisdictions free of any political influence; they enforce law efficiently while
protecting social interests; they make significant progress regarding the human
development (e.g. improvement of education, healthcare and living standards);
or they adopt efficient regulations for business environment in order to reduce
bureaucracy. In other words, a positive relation between corruption and shadow
economy exists when the above control variables are considered.
(b) Another category of studies (Choi and Thum 2005; Dreher and Schneider 2010;
Virta 2007) found out that the relation between corruption and shadow econ-
omy depends on the economic or regional development level of a country.
Dreher and Schneider (2010) noticed that in the countries where the incomes
are low, the public goods provided by the official are less efficient than in coun-
tries with high incomes, and this is the reason why numerous entrepreneurs
(such as the owners of restaurants, bars, or even bigger production companies)
chose to pay a bribe for operating within the unofficial sectorial. Therefore, it
was found out that in such countries with low incomes, the relation between
corruption and shadow economy is positive as a result of the fact that as corrup-
tion increases, the shadow economy is also increasing. On the other hand, in
countries with high incomes, the public goods are more efficient, and here, only
the small companies show their option to give bribe to stay in the unofficial sec-
tor. In exchange, the big companies choose to bribe the public officers to obtain
a contract concluded in the public sector (for instance in construction sector).
Further on, this contract is developed in the official sector and not in the unof-
ficial. For these reasons, in countries with high incomes, the relation between
corruption and shadow economy was identified as negative, respectively; the
high rates of corruption is correlated with the low rates of shadow economy.
The relation between corruption and shadow economy seems to be controversial
in the specialized literature and from the perspective of the causality direction, not
only from the sign perspective (direct or indirect). Intuitively, it is obvious that cor-
ruption influences the shadow economy through a simple logic mechanism, and,
namely, that for surviving in a shadow zone, the corrupted representatives of the
power must be paid, so that they allow the uninterrupted shadow business of the
entities. On the other hand, other studies (Buehn and Schneider 2009, p. 27) reveal
that the influence of the shadow economy on corruption occurrence is considered
more intense than reverse influence. They indicated that in practice, corruption is
the most profitable business of the quasi-democratic forces, the shadow economy is
their strongest social programme, and the racketeering1 is the most encouraged
taxation method (Tomaš 2010). The tax payers must use a significant part of the
avoided taxes for the corruption of the power exponents as specific forms of racke-
teering, which essentially means that, in order to survive in a shadow economy, they
have to pay grey taxes.
Referring to the relation between shadow economy and money laundering, we
identified a much more limited number of studies (Alm and Prinz 2013; Unger
2013; Cunder 2015; Pedneault 2009), and it is attributed to the fact that the regula-
tions about the money laundering at international level are relatively recent (after
1989). Thus, Alm and Prinz (2013) considers that the tax avoidance is related to the
shadow economy. On the other hand, Alm and Prinz reveal that both facts are related
to the money laundering, although this type of influence was less investigated in the
literature. Alm and Prinz (2013) explain the connections existing between tax avoid-
ance, shadow economy, and money laundering by the fact that “all the money earned
in a way or another in the unofficial economy without paying taxes (the so called
“dark money” or “illicit money”) must be brought back in the official economy for
buying goods and services”. As a result, the authors mentioned above identified the
existence of a close connection between shadow economy, tax avoidance, and
money laundering.
On the other hand, Cunder (2015) after reviewing the shadow economy and
money laundering found out that elements of the shadow economy (trade of illegal
weapons, illicit trade of drugs, prostitution and trade of human beings, piracy as
well as the incomes generated by the less organized crime and fraud such as classic
criminality, corruption, tax avoidance, incomes generated by gambling if gambling
1
Racketeeringis often associated to organized crime, consisting of the action of offering a dishon-
est service (“racket”) to work out a problem which otherwise would not exist if the entity which
offers the service had not caused this problem. A usual example of racket would be when a group
of people cut the tyres of a car in a certain street, and then, the same group offer “protection” to the
car owners in exchange for a certain price.
is illegal, smuggling) represent sources of money which the criminals must launder
so that to be able to use them in the legal circuit to improve their living standard, for
reinvestments etc. (Pedneault 2009).
A similar approach is conducted by Unger (2013) who considers that, besides tax
avoidance, money laundering, and the tax avoidance can be considered components
of the shadow economy. To this aim, Unger (2013) refers to the definitions of the
terms to clarify the concepts but also to overcome the problems associated with the
measurement of such events. Thus, referring to the definition of money laundering
in the United States (definition which includes the illegal employment of workers as
a typical example of money laundering) Unger states that it is overlapping with the
definition of the shadow economy. At the same time, money laundering is defined as
the effort to hide from authorities the sources illegally obtained, and tax avoidance
represents the effort to hide from authorities the sources legally obtained. In this
context, the two facts (tax avoidance and money laundering) can be considered
components of the shadow economy.
An almost complete overlap of the two facts (respectively, the shadow economy
and money laundering) is carried out by the study developed by Rădulescu (2010).
Thus, the author mentioned that the shadow economy consists of certain activities
which persisted in time, particularly the illegal employment, tax fraud, illegal
obtaining of goods, drug trade, smuggling, money laundering, etc. Then, the author
referring to the relation between shadow economy and money laundering considers
that “in general, all the activities belonging to the shadow economy result in the
cover up of the gains obtained from this process through different laundering meth-
ods”. In other words, Rădulescu evaluated a very close connection between the two
facts: shadow economy and money laundering. However, the study developed by
Unger (2013) assessed a differentiation of the two concepts required by the imposed
by the geographical approach. Thus, the author underlines that, while the shadow
economy is defined (Schneider 2005) at a country level (as part of the cross-border
crime), money laundering, especially that resulted from organized crime, is associ-
ated to trans-border crime (Unger 2013).
The relation between shadow economy, tax avoidance, and money laundering
could be seen according with Fig. 1.2.
1.2 Measuring Instruments
Peter Drucker stated that “if you can’t measure it, you can’t improve it”, referring
to any fact related to management domain. The fight against economic and financial
crime requires the knowledge of the way in which it can be measured as well as of
the instruments used to this aim. Further on, we shall try to review the most used
tools identified in the specialized literature concerning the measurement of corrup-
tion, shadow economy, and money laundering facts. Moreover, starting with the
determination of some individual measures, we shall try to elaborate aggregate
1.2 Measuring Instruments 31
measures for the evaluation of the economic and financial crime size at the level of
any country of the world.
1.2.1 Corruption Measurement
An important source regarding the corruption measurement is the one offered by

Transparency International. This international organization calculates and reports
two important indicators referring to corruption in the world countries, namely:
• Corruption perception index (CPI) aggregates the data of different investigations
regarding the corruption perception by the public sector in 180 countries of the
world. This index scores countries on how corrupt their governments are believed
to be. It is elaborated on a scale from 0 (meaning highly corrupted) to 100 (mean-
ing very clean).
• Global corruption barometer (GCB) represents a public opinion poll measuring
the corruption level in different sectors of individuals’ everyday life by assessing
the general public attitude against corruption. Unlike the corruption perception
index which represents an aggregated and more extended indicator, the global
corruption barometer allows the measurement of corruption in different sectors.
The global corruption barometer is established on a scale from 1 (meaning not
corrupted at all) to 5 (indicating completely corrupted). The indicator is calcu-
lated since 2003 for more than 100 countries of the world.
• The indicators CPI and GCB are not perfectly interchangeable, but the studies
certify a correlation which varies between 0.44 and 0.76 (Carden and Veron
2010).
Among other measures of the corruption elaborated by different international
bodies, the following measures are presented:
• Control of corruption, calculated as perception of population about the measure
where the public power is exercised to obtain private gains. The indicator is cal-
culated by the World Bank within the World Governance Indicators – WGI
(World Bank 2020). Control of corruption is calculated and reported on a scale
from – 2.5 (weak) to 2.5 (strong) about the level of the perceived corruption. The
world governance indicators among which there is control of corruption indica-
tor, too, are calculated for more than 200 countries since 1996.
• Irregular payments and bribery, diversion of public funds, favoritism in deci-
sions of government officials. All these indicators are calculated by the World
Economic Forum while undertaking the steps for elaborating the global scores
which characterize the global competitiveness of world economies. The indica-
tors range between level 1 (the worst) and 7 (the best) associated with the existing
corruption level. The indicators have been calculated since 2006 for 137
countries.
Fig. 1.2 Relation between

shadow economy, tax
avoidance, and money
laundering. (Source: own Shadow
processing) economy
Tax Money
avoidance laundering
Source : authors’ s processing
1.2.2 Shadow Economy Measurement
The measurement of the shadow economy size represents a difficult and challeng-
ing task. This happens because it is difficult to measure something which is actually
unknown (Kirchler 2007). However, many authors answered such challenges. In
this sense, the initiatives developed by Schneider and his collaborators are remark-
able, and they carried out periodical measurements of the shadow economy level in
different world states (Alm et al. 2004; Schneider and Klinglmair 2004; Schneider
2011, 2013, 2015).
Following the review of the specialized literature in the field, three main catego-
ries of methods used to evaluate the shadow economy can be concluded, respec-
tively, direct method, indirect methods, and model-based methods.
(a) Direct methods are based on volunteer answers within the questioning technics
which require the subjects to make declarations regarding their economic activi-
ties. Also, the direct methods may consist of the controls performed by tax
authorities. Both types of direct methods (using the questionnaire or controls)
are followed by extrapolation regarding tax avoidance in national economy.
Kirchler (2007) considers that the direct methods should be considered estima-
tions of a lower limit because it is unlike that the direct evaluation method
identify all the shadow activities.
Concerning the use of direct methods for the shadow economy, Schneider and
Buehn (2016) have similar opinions. They refer to the defects inherent to all inves-
tigations as the main disadvantage of direct methods. The results depend at a great
extent on the respondent wish to cooperate and most of the interviewed subjects
hesitate to declare the fraudulent behaviour. Thus, the answers provide an uncertain
reliability which makes difficult the calculation of a real estimation (in monetary
terms) of the undeclared employment dimension.
In conclusion, the main disadvantage of these direct methods (either using the
polls or the tax controls) consists of their estimative nature. These methods com-
prise only partly the shadow economy activities and may represent only estimations
regarding the determination of a lower limit of the shadow economy size. These
methods are liable to underestimate the level of the shadow economy because it is
very likely that the individuals do not declare during the polls what they intend to
hide from authorities.
(b) Indirect methods
According to Schneider and Buehn (2016) opinions, there are five indicators
which give the possibility to evaluate the shadow economy, such as:
1. The discrepancy between national expenditure and income statistics
This method is based on the discrepancy between incomes and expenses. In
national accountancy, the value of the incomes from GDP should be equal with the
expenses value. The difference between the income indicators and the expenses
ones can be used as indicator of the shadow economy measurement.
2. The discrepancy between the official and actual labour force
This method is based on the difference between the official labour force and the
real one. If assuming that the total participation of the labour force remains con-
stant, then a decreasing official rate of participation would indicate that the indi-
viduals migrate to shadow economy activities. The method could show, as a
weakness, that the differences of rate of participation may have other causes. For
instance, the individuals can clandestinely work, and at the same time, they work in
parallel in the official sector (Schneider and Buehn 2016).
3. Transactions approach
This method is developed by Feige (1994). The method assumes the existence of
a constant relation over time between the volume of transactions and official
GNP. The discrepancy between the official GNP and nominal GNP (which is based
on the total value of the transactions known from national economy) may indicate
the dimension of the shadow economy. Thus, the GNP of the shadow economy can
be calculated by subtracting official GNP from total nominal GNP.
To obtain reliable estimations regarding the shadow economy, it should be an
accurate value of the total volume of transactions. This could be difficult to apply
for cash transactions because they may be also dependent on the banknotes durabil-
ity from the point of view of quality of the paper they are printed on (Schneider and
Buehn 2016). Even if such approach is attractive, the necessary empirical require-
ments to obtain reliable estimations are difficult to meet, and consequently, the
application of this method can provide doubtful results (Schneider and Buehn 2016).
4. The currency demand approach
This method assumes that the shadow activities involve cash transactions because
the shadow transactions (or hidden ones) are carried out as cash payments so that
they do not leave any noticeable traces for the authorities. Thus, the increase of
monetary demand is considered an indicator of the shadow activity enhancement.
The approach of the monetary demand shows some disadvantages, one of them
consisting of the fact that not all the transactions of the shadow economy are settled
in cash but also many other disadvantages (see Schneider and Buehn (2016)
approaches to get a complete view). Despite these disadvantages, this method seems
to be one of the most used methods in many countries to evaluate the shadow econ-
omy size.
5. The physical input (electricity consumption) method
This method correlates the electric power consumption with the GDP value. The
method was developed by Kaufmann and Kaliberda (1996) who considered the
electric power consumption as being the “best physical indicator of the global eco-
nomic activity (official plus unofficial)”.
It is supposed that the increase of the electric power consumption is correlated
with the increase of the GDP (official and unofficial). The difference between this
proxy measurement for the global economy and the official GDP estimations shows
an estimation of the unofficial GDP.
This method seems to be very easy and attractive. In spite of these advantages
related to the simplicity of calculations, the specialists much criticized it. One of
these disadvantages would be the fact that not all the shadow economy activities
require a significant amount of electric power (for instance, personal services).
Also, many other power sources can be also used (gas, oil, coal, etc.). Another criti-
cized issue regarding this method consists of the fact that there exist important dif-
ferences or changes related to the ratio between power elasticity and GDP among
the countries, as well as in time (Johnson et al. 1997).
(c) The model approach
This method is developed by Frey and Weck-Hanneman (1984) and takes into
consideration the numerous causes of the existence and increase of the shadow
economy resulting in multiple effects. The present approach uses the application of
MIMIC techniques (i.e. estimations based on multiple causes and indicators). The
method uses models of structural equations to estimate the unnoticeable activities
starting from causes and indicators. The causes can be reflected by the tax burden,
state regulation burden, the attitude against taxes, or tax morale (Kirchler 2007). It
is expected that the shadow economy activities are bigger as the real and perceived
tax burden is higher, the rate of economic activity regulation is higher, and the tax
morale is lower. The indicators of the shadow economy activities can be reflected by
the progress of monetary transaction (in cash) and, respectively, the decrease of the
participation of the labour force in the formal sector.
Following the approaches of Schneider (2015) and Medina and Schneider (2018)
throughout this book, when we discuss the shadow economy, we refer only to the
legal activities, but which are hidden from the public authorities, and thus, our cal-
culations will not include the illegal activities, those regarding the own use and the
informal ones. For the evaluation of the shadow economy level, we use the most
recent database elaborated by Medina and Schneider (2018), where the shadow
economy is calculated as percentage of the official GDP for 158 countries during
the period 1991–2015.
If we strictly refer to the measurement of the tax avoidance, component of the
shadow economy, the specialized literature (Hanlon and Heitzman 2010; Winnie
2016; Hasan et al. 2017; Gebhart 2017) consider the following indicators as the
most used ones for tax avoidance measurement:
(a) Effective tax rate (ETR). According to General Acceptable Accounting
Principles (US GAAP), ETR is defined as a ratio between total expenses
incurred by the taxes (both current and deferred tax expenses) related to the pre-
tax incomes.
(b) Cash effective tax rate (CETR). The CETR is calculated as a ratio between the
cash taxes paid and pre-tax incomes. According to Dyreng, Hanlon, and
Maydew (2010), the ETR reflects the fiscal practices which reduce the tax
expenses for the financial reporting purpose, and the CETR reflects the fiscal
practices which reduce the effective taxes paid in cash.
Based on the comparison of the values obtained for the ETR and CETR indica-
tors with the applicable tax rate, there are obtained the indicators regarding the tax
avoidance manifestation. Thus, if the ETR and CETR values are below the statutory
tax rate, this could signal the avoidance of tax payment, respectively, the tax
avoidance.
1.2.3 Money Laundering Measurement
As for the steps undertaken to measure the money laundering level, these steps are
in an early stage (Unger 2013) and are considered a very difficult task (Ardizzi et al.
2014), at least in the light of the following reasons:
• The money laundering crimes are difficult to notice so that the resulting gains
pumped in the legal financial system can be only estimated (Unger 2013; Ardizzi
et al. 2014).
• The secret nature of these illegal activities (Vaithilingam and Nair 2009;
Vaithilingam et al. 2015).
• The regulations concerning the definition of the money laundering are different
in various countries so that these measures are incomparable by definition (Unger
2013). For instance, the undeclared work is considered money laundering crime
in the United States, while in Germany and the Netherlands, this is not valid. The
light drugs such as hashish, marijuana, as well as prostitution are legal in the
Netherlands while in many other countries, they are illegal. As a result, the com-
parison of money laundering volume between the countries is difficult to make
because of the measuring basis which is much different (Unger 2013).
The specialized literature identifies relatively few methods for money laundering
measuring, among which we mention the followings:
A. As estimated percentage of money laundering reflected in the gross domestic
product. In this sense, Camdessus (1998) quoted by Unger (2013) estimate that
the volume of money laundering is estimated at a percentage of 2–5% of the
GDP. Referring to the money laundering measurement as percentage of the
GDP, the literature considers that this method is extremely empirical as long as
it is not scientifically substantiated (Walker and Unger 2009). A detailed presen-
tation of the estimated volume of money laundering at the level of the world
countries, calculated as percentage of the GDP for the year 2009 can be referred
to in the ECOLEF project of European Commission (2013).
B. Based on the estimation of gains from cranes at world level. For instance, it is
often estimated that a percentage of 70–80% of the incomes resulted from drugs
need to be laundered, while the rest is re-used in criminal activities. The advan-
tage of using the incomes obtained from the data concerning the drug crimes is
the fact that it is based on well-enough developed measurements of the drug
production (Unger 2013).
C. Using certain models taken over from the most known models for the evaluation
of the shadow economy (method based on currency demand, method based on
national statistics regarding the expenses and incomes (Tanzi 1999; Schneider
and Windischbauer 2008; Unger 2013). For instance, the method based on the
national statistics regarding the expenses and incomes is used by the World
Bank. Thus, the difference between expenses and incomes reflect an estimation
of the amounts obtained in an illicit manner, not only of the amounts obtained
from money laundering. Even so, such a method offers extremely fluctuating
results (Unger 2013), which put in question the credibility of such a method.
D. Using certain economic models (Walker and Unger 2009; Zdanowicz 2009;
Baker 2005; Schneider and Buehn 2016; Medina and Schneider 2018; Bagella
et al. 2009). Applying these models for the evaluation of the money laundering
fact, there are obtained conflicting results (certain models show a fluctuating
evolution, others indicate an increase and others a decrease) (Unger 2013).
E. Using a score which measure the risk of money laundering (Brettl and Usov
2010; Walker and Unger 2009; Dawe 2013; European Commission, ECOLEF
2013; Savona and Riccardi 2017; Basel Institute on Governance 2020).
Among the most important studies which focused on the elaboration of an indi-
cator of the risk of money laundering, there can be mentioned Brettl and Usov
(2010) and Walker (2011). Brettl and Usov (2010) calculate the so-called threat
indicator of money laundering, representing the threat rate for a country to become
a target for money laundering in comparison with the other countries. Consequently,
the threat is not represented here, by the volume of dark money which could be
engaged in laundering operations in a certain country, but by the dimension of the
threat indicator also calculated in relation with the other countries. The threat indi-
cator is determined as a weighed arithmetical mean of the identified variables (TSk)
contributing to the threat and the relative importance granted to them (Wk), using
the formula:
n
Threat indicator = ∑ ( TSk ∗ Wk )
k =1
The Brettl and Usov’s indicators (Brettl and Usov 2010) used a number of 35
threat variables (n = 35), grouped in six domains as follows:
• Economic (GDP per capita, economic stability, trade with services, financial sec-
tor development, population and economic globalization, etc.)
• Government condition (government corruption and attitude)
• Application of the law and lawful environment (rule of law, banking secrecy,
exchange rate control, etc.)
• Social and technological changes (social globalization)
• Criminal environment (global peace indicator, terrorism, thefts, etc.)
• Special components and access (number of banks, cash utilization, casinos/gam-
bling, gift cards, language, culture etc.)
The main advantage of Brettl and Usov (2010) indicator consists of the fact that
it takes into account different types of money laundering (from white collar crimes
or drug crimes). Also, the Brettl-Usov method is based on a much more simple cal-
culation, and it does not require a set of data available at world level (like in Walker
approach) to obtain results (European Commission 2013, p. 57).
In this section referring to the measurement of the money laundering as risk of
money laundering, there have to be also mentioned the steps undertaken by The
Financial Integrity Group of the International Monetary Fund (IMF) for the elabora-
tion of a methodology by means of which the tendency rate of a country to become
a target for the money laundering is determined. The methodology elaborated by
The Financial Integrity Group consists of the utilization of a risk function between
threats, vulnerabilities, and consequences (European Commission 2013, p. 55).
Unfortunately, they have not obtained yet relevant results regarding the measure-
ment of the money laundering fact in the world countries (Dawe 2013).
Referring to the measurement of the money laundering as a risk of money laun-
dering, we welcome the initiative of Basel Institute on Governance to elaborate
such an indicator. The argument for this choice consists of the fact that there exist
reliable quantitative data available in relation with the money laundering. For these
reasons, such an indicator is meant not to measure the fact itself, but rather the risk
of money laundering. More exactly, such an indicator does not measure the real
existence of money laundering activity or of illicit amounts of money from a coun-
try, but it measures the risk rate, namely, the existing vulnerability regarding the
engagement in illegal activities of money laundering and terrorism funding (Basel
Institute on Governance 2020).
The Basel Anti-Money Laundering (AML) indicator measures the risk of money
laundering and terrorism funding in more than 129 countries of the whole world.
This indicator is based on 14 aggregated indicators collected from sources available

for the public, and they are grouped in five categories as follows:
• Quality of the regulatory framework regarding the money laundering and terror-
ism funding (65%)
• The risk regarding corruption (10%)
• Transparency and reporting standards (15%)
• Transparency in the public sector and responsibility (5%)
• Political and judicial risk (5%)
The risk of money laundering ranges between 0 (low risk) and 10 (high risk) for
money laundering and terrorism funding. The Basel AML indicator regarding the
risk of money laundering is relatively recent, and it was first published in 2012 by
Basel Institute on Governance.
Advantages of Basel AML indicator
As it is a relatively recent method, this method of evaluation of money laundering
fact has not been yet much known in the specialized literature. But, considering it is
based on a relatively large number of indicators calculated and reported by interna-
tional bodies recognized worldwide, we estimate that the calculated values of such
indicators should reflect a volume of money laundering as real as possible. Another
advantage of this indicator consists of the fact that it submits free of charge public
reports, on annual basis, accessible to all the stakeholders.
1.2.4 Assessing an Economic and Financial Crime Index
We propose further on a courageous and innovative endeavour to measure the vol-

ume of the economic and financial crime at a country level starting with the three
components of the economic and financial crime which we take into account,
namely, corruption, shadow economy and money laundering.
To this aim, we shall use the available data utilized to measure these facts pre-
sented in the previous chapters, as follows:
1. Referring to corruption measurement (C), we use the corruption perception indi-
cator (CPI), aggregating the data from different investigations regarding the cor-
ruption perception of the public sector in different countries in the world. The
indicator is elaborated on annual basis on a scale from 0 (meaning very cor-
rupted) to 100 (very clean), for 180 countries since 1995.
2. As for the measurement of the shadow economy (S), we use the database elabo-
rated by Medina and Schneider (2018), where the shadow economy is calculated
as percentage of the official GDP for 159 countries during the period
1991–2015;
3. For measuring the money laundering (L), we use the Basel AML indicator (Basel
Anti-Money Laundering indicator) which measures the risk of money launder-
ing and terrorism funding in more than 129 countries from worldwide since
2012.
Combining these three components, we build an integrated index as the eco-
nomic and financial crime index (CSL). All the three components have been nor-
malized by using global minimum and maximum in the entire period and added
giving equal weights. We assume that higher the value of the index, the higher
would be the economic and financial crime exposure. We use the normalization data
of corruption, shadow economy, and money laundering indicators, in order to obtain
comparable values. Normalization is used to scale the data between 0 and 1. It is
defined as
Yi = Xi _ n = [ Xi − Xmin ] / [ Xmax − Xmin ] ,

where Xi is the original value of variable X for the country “i”, Xmin represents the
minimum value of X, and Xmax represents the maximum value of X. So, the origi-
nal Xi values converts to the new Yi values which represents the normalized data of
Xi (Xi_n) ranging between 0 and 1 (Han et al. 2011).
Therefore, the CSL index is based on the following formula:
CSLi = ( Ci _ n + Si _ n + Li _ n ) / 3,

where:
–– CSLi is the economic and financial crime index for the country “i”
–– Ci_n is the normalized level of corruption for the country “i” (between 0 and 1)
–– Si_n is the normalized level of shadow economy for the country “i” (between 0
and 1)
–– Li_n is the normalized level of money laundering for the country “i”(between 0
and 1)
The normalized levels of corruption, shadow economy, and money laundering of
each country from the sample (for which all the data are available) are calculated
taking into account their maximization direction. To this aim, the corruption per-
ception index (CPI) is an indicator indirectly influencing the final index of the eco-
nomic and financial crime (the higher values of CPI index reflecting a lower level of
corruption). The other two indicators regarding the measurement of the shadow
economy and the risk of money laundering represent the indicators with direct influ-
ences (the high values of these indicators reflect increasing values of the economic
and financial crime).
The determination of the normalized levels (between 0 and 1) for the corruption,
shadow economy, and money laundering is based on the adapted formulas
from below:
(a) Ci_n is the normalized level of corruption for the country “i” which is deter-
mined as follows:
Ci _ n = ( Cmax − Ci ) / ( Cmax − Cmin ) ,

where:
–– Ci reflects the corruption level (CPI levels) for the country “i”
–– Cmin reflects the minimum level of CPI for the sample countries
–– Cmax represents the maximum level of CPI for the sample countries
Thus, the normalized level of corruption (Ci_n) ranges between 0, that is the
lowest level of corruption and 1 representing the highest level of corruption.
(b) Si_n is the normalized level of shadow economy for the country “i” which is
based on the formula:
Si _ n = ( Si − Smin ) / ( Smax − Smin )

–– Si represents the level of shadow economy (as percentage of the official GDP)
for the country “i”.
–– Smin represents the minimum level of shadow economy (as percentage of the
official GDP) for the sample countries.
–– Smax represents the maximum level of the shadow economy (as percentage of
the official GDP) for the sample countries.
The normalized level of shadow economy (Si_n) ranges between 0, that is, the
lowest level of shadow economy and 1 representing the highest level of the shadow
economy.
(c) Li_n is normalized level of money laundering for the country “i” following the
formula:
Li _ n = ( Li − Lmin ) / ( Lmax − Lmin )

–– Li represents the level of Basel AML indicator for the country “i”.
–– Lmin represents the minimum level of Basel AML indicator for the countries of
the sample.
–– Lmax represents the maximum level of Basel AML indicator for the countries of
the sample.
The normalized level of money laundering (Li_n) ranges between 0 that is the
lowest level of Basel AML indicator and 1 representing the highest level of Basel
AML indicator.
The economic and financial crime index (CSL) will range between 0 that is the
lowest level of the economic and financial crime and 1, representing the highest
level of the economic and financial crime. We shall use this indicator in the follow-
ing chapters to measure the economic and financial crime across different countries.
1.3 Practical Approaches 41
1.3 Practical Approaches
1.3.1 Corruption in the European Union countries
Further on, we propose to present some descriptive statistics regarding the level of
corruption for the European Union countries during the period 2005–2015.
Methodology
To calculate the corruption level, we shall use the data offered by Transparency
International regarding the Corruption Perception Index (CPI) about the corruption
perception. In our study, the level of corruption is calculated as top position occu-
pied by a country of the total 180 countries taken into account within the sample.
The higher the ranking is, the higher the level of corruption, and the lower the rank-
ing is, the lower the level of corruption, respectively.
Also, we intend to investigate a space approach of the corruption level analysis
among the European Union countries. To this aim, we shall use the classification of
the countries belonging to the European Union (28 countries) by the four regions of
Europe (Table 1.4) in accordance with the classification by regions provided
by (2020).
Results
The Graph 1.1 reveals the top of the EU countries highlighting their ranking within
the world top.
Further to the review of the data from Graph 1.1, it is noticed that Romania, for
the reviewed period, faces the highest level of corruption in the public sector among
the European Union countries ranking the 71st place of the 180 countries consid-
ered in the study. Very high levels of corruption are found in Bulgaria, Greece, and
Croatia. Opposed to them, registering the lowest level of corruption in European
Union, there are found the Northern countries, namely, Denmark, Finland, Sweden,
and the Netherlands.
As for the dynamics for the period 2005–2015, the average level of corruption in
the European Union shows insignificant movements (Graph 1.2). Between 2005 and
2011, we notice a trend of corruption level increase, a maximum value being reached
in 2011, and after that the measures adopted to reduce this fact proved a higher
efficiency so that the average level of corruption within the European Union coun-
tries indicated a descending trend. Referring to Romania, a continuous trend of
corruption diminution is noticed so that for the period analysed, Romania dropped
27 positions in the top of the countries classified based on corruption level (from
position 85 in the top of the countries classified based on corruption level, in 2005
to the 58 position reflecting a lower level of corruption in 2015). However, the cor-
ruption level registered in Romania exceeds by far the average value of the European
Union countries throughout the reviewed period.
The Graph 1.3 indicates an extremely obvious variation of the corruption level
by the four geograph quadrants of the European Union. The highest level of corrup-
tion is found, in average in the Central and East Europe countries (51), followed by
the South Europe countries (43). The countries of the Northern Europe indicate the
lowest level of corruption (3).
1.3.2 Shadow Economy in the European Union Countries
We propose further on to analyse the levels of shadow economy among the European
Union countries during the period 2005–2015.
Methodology
The level of the shadow economy is expressed in percentage as weight of the shadow
economy in the GDP, as provided by the database calculated by Medina and
Schneider (2018).
To present the levels of shadow economy in the European Union countries, we
used the descriptive methods, analysis, and synthesis. Also, as we performed in the
previous chapter, we adopt a space approach of the level of the shadow economy
within the European Union countries, too. To this aim, we grouped the 28 countries
of the European Union in four geograph zones, respectively countries from Central
and Eastern Europe (CEE), countries of Northern Europe (North), countries of
Southern Europe (South), and Western Europe (West) (Table 1.4).
Results and discussions
The results obtained reflect that the level of the shadow economy within the
European Union countries is 18% at average (as percentage of the GDP), which
shows that at average about one fifth of the European Union GDP is lost because of
the shadow economy, for the period analysed. The highest levels of shadow econ-
omy are found in Cyprus (32%), Malta (29%), and Romania and Greece (26%).
Opposed to them, there are Austria and the Netherlands (9%), Germany, Great
Britain, and Luxembourg (10%) (Graph 1.4).
The Graph 1.5 indicates the existence of a significant variation of the level of the
shadow economy by the four geograph quadrants of the European Union. The
highest level of the shadow economy is found in the countries from the Southern
Europe (about 26%), followed by the countries from Central and Eastern Europe
(about 20%). The countries from Western Europe indicate the lowest level of the
shadow economy (about 12%), then followed by the countries from Northern
Europe (about 14%). The differences found in the four regions regarding the level
of the shadow economy raised questions about the specific causes occurred at the
countries level, economic, political, legal causes (rate of economic growth, institu-
tional quality, regulation quality, tax pressure), but also the social and cultural ones
(culture, tax morale, religion, etc.).
The Graph 1.6 reveals the evolution of the shadow economy level at average,
within the European Union over the time span 2005–2015. At the European Union
level, the volume of the shadow economy, at average, (expressed as percent in GDP)
indicates a general decreasing trend from a maximum value of about 20% found in
the year 2005 to a minimum value of about 17% in the year 2015. Romania revealed
Table 1.4 Classification of EU countries by regions

No. EU regions Countries of the European Union (28)
1 North of Europe Denmark, Finland, Sweden (3 countries)
2 South of Europe Cyprus, Greece, Italy, Portugal, Spain, Malta (6 countries)
3 West of Europe Austria, Belgium, France, Germany, Ireland, Luxembourg, Netherlands,
Great Britain (8 țări))
4 Central and East Bulgaria, Croatia, Czech Republic, Estonia, Latvia, Lithuania, Poland,
Europe Romania, Slovakia, Slovenia (11countries)
Source: EuroVoc (2020)
levels of the shadow economy much higher than those of the European Union aver-
age value throughout the period of analysis. Despite it, in Romania, the general
level of the GDP lost in the shadow activities is reduced with the time, from about
30% in the year 2005 to about 23% in the year 2015.
1.3.3 Money Laundering in the European Union Countries
Further on, we propose to analyse the money laundering fact within the European
Union countries.
Methodology
We shall measure the money laundering fact using the AML (Basel Anti-Money
Laundering) index which evaluates the risk of money laundering and terrorism
funding. The Basel AML index has been calculated since 2012. There are available
data in this sense, for the period 2012–2017, and this is why we took into account
this period for our analyse.
For presenting the risk of money laundering in the European Union countries, we
used the descriptive methods, analysis, and synthesis. Also, like we did in the previ-
ous chapter, we want to adopt also an approach by European Union four geographi-
cal areas (see Table 1.4).
From the Graph 1.7, it is noticed that the highest risks of money laundering occur-
rence are found in Greece, Luxembourg, Germany, and Austria, while the lowest
risks of money laundering are found in Finland, Estonia, Slovenia, Lithuania, and
Bulgaria. Romania occupies a middle position in the top of the countries classified
based on the risk of money laundering (position 14/28).
Our results are in line with those of the study developed by the European
Commission (2013) within the ECOLEF Project (2013, p. 13) which also finds out
that in Luxembourg, Great Britain, and other Western countries of Europe there are
found the highest money laundering activities (expressed in absolute sizes of money
laundering). Among the reasons mentioned in this sense, the high rate of the finan-
cial market sophistication, the economic growth reflected as GDP/capita, but also
the cultural influences could be mentioned.
The Graph 1.8 shows the average value of the evolution of the risk of money
laundering in the European Union countries between 2012 and 2017. At the
European Union level, based on the adoption of measures for fighting against the
money laundering, the risk of money laundering indicated a decreasing trend, from
a maximum value of 4.73 registered in the year 2012 to a value of 4.52 in the year
2017. Referring to the position occupied by Romania, we have noticed that only in
2014 and 2015 the risk of money laundering was higher than the values existing in
the European Union; in all the other years this level of this risk was below that reg-
istered in the member countries.
The Graph 1.9 presents the low-enough variations of the risk of money launder-
ing on the four geograph quadrants of the European Union. The highest risk of
money laundering is found in the countries of the Southern Europe (5 points) fol-
lowed by the countries of the Western Europe (4.89 points). The countries of the
Northern Europe indicate at average, the lowest level of the risk of money launder-
ing (3.76 points).
1.3.4 R
elation Between Corruption, Shadow Economy,
and Money Laundering. Empirical Approaches
We propose, further on, to investigate the relation between corruption, shadow

economy, and money laundering based on the data available worldwide for the
period 2005–2015.
100
90
80
68 70 71
70 59 63
60 51 55
46 46 48 49
50
37 34
40 32 32
27 30 31
30 22
18 18
20 14 14 17
8 11
10 2 3 4
0
Luxembourg
France
Croatia
Malta
Greece
Denmark
Finland
Sweden
Netherlands
Germany
Hungary
United Kingdom
Austria
Ireland
Belgium
Estonia
Spain
Slovenia
Lithuania
Poland
Latvia
Italy
Romania
Average
Portugal
Slovakia
Czech Republic
Bulgaria
Cyprus
Source: own processing
Graph 1.1 Corruption in European Union countries, 2005–2015. (Source: own processing)
90
85 84
80
75
70 69 70 71 69 69 69
66
60 58
50
40
35 35 37 37 36
32 32 32 33 34
30 30
20
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EU Average Romania Average
Graph 1.2 Corruption trend in the European Union countries, 2005–2015
60
51
50
43
40
30
20 15
10
3
0
CEE North South West
Graph 1.3 Corruption in the European Union countries by regions, 2005–2015. (Source: own
processing)
Methodology
The level of the shadow economy is expressed in percentage as ratio of the level of
the shadow economy in the GDP according to the database provided by Medina and
Schneider (2018).
To calculate the level of corruption, we shall use the data offered by Transparency
International regarding the corruption perception index (CPI). In our study, the
level of corruption is calculated as position occupied in the top by a country of the
total 180 countries taken into account of the sample. The higher the position occu-
pied, the higher the corruption level is and, respectively, the lower the position in the
top, the lower the corruption level.
The level of the money laundering is determined using the Basel AML (Basel
Anti-Money Laundering index) which measures the risk of money laundering and
terrorism financing.
In order to study the relation between corruption, shadow economy and money
laundering, we have used the descriptive methods, the correlation coefficients, and
the regression analysis, and we have carried out the statistics tests necessary to
ensure results with high accuracy. The statistics processing are performed using the
SPSS statistic software.
Based on the specialized literature review, it can be concluded that rather the cor-
ruption deeds are influencing the level of the shadow economy. Intuitively, this is
correct because first, the bribery of the public officers occurs in order to avoid the
official economy (which requires the tax payments and, then, to ensure the unoffi-
cial functioning). Here is the formulation of the working hypothesis:
Hypothesis 1: An increase of the corruption level results in an increase of the
shadow economy.
Further on, an increasing level of the corruption is expected to result in an
increase of the risk of money laundering in the light of the fact that a poor control
of corruption in the state institutions, including at the level of the banking authori-
ties of surveillance leads to a high risk of not identifying the suspect transactions,
and thus, the risk of money laundering increases. The proposed working hypothesis
for analysis is:
Hypothesis 2: An increase of corruption results in an increase of the risk of money
laundering.
At the same time, the shadow activities generate large amounts of money which
requires a “laundering” stage so that to be able to introduce them within the legal
financial circuit (Cunder 2015; Pedneault 2009; Unger 2013). In conclusion, it is
expected that an increase of the shadow economy would result in an increase of the
risk of money laundering. Thus, we formulate the following working hypothesis:
Hypothesis 3: An increase of the money laundering rate leads to the increase of the
shadow economy.
To test the three working hypotheses for the beginning, we calculate the correlation
coefficients of corruption, shadow economy, and money laundering. From Table 1.5,
we find out that there is a medium to strong significantly statistically relation
(between 0.4 and 0.7), considering a significance threshold of 1%, between the
three facts. In other words, our results reveal that corruption, shadow economy, and
risk of money laundering represent facts strongly correlated in-between.
35% 32%
29%29%30%30%
30% 27%
26%26%
24%25%25%
25% 23%
22%
19%19% 20%
20% 18%
16%17%
15%
14%14%14%
15% 12%
13%
10%10%
8% 9%
10%
5%
0%
Graph 1.4 Shadow economy (% in GDP) in European Union countries, 2005–2015. (Source:
own processing)
30%
26%
25%
20%
20%
15% 13%
11%
10%
5%
0%
Graph 1.5 Shadow economy in the European Union countries by regions, 2005–2015. (Source:
own processing)
Testing hypothesis 1: An increase of the corruption level results in the increase of

the shadow economy.
The Graph 1.10 shows a correlated arrangement of the corruption and shadow
economy at an R squared = 0.456. In other words, a percentage of 45.6% of the
35
30 30
29 28
27 27
25 25 25 25
24 23
23
20 20 19
18 19 18 18 18
17 17 17 17
15
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Graph 1.6 Evolution of the shadow economy (% in GDP) in the European Union countries,
2005–2015. (Source: own processing)
shadow economy variation can be explained by the average corruption level of the
sample countries for the investigated period.
The regression coefficient of the shadow economy in relation with corruption is
positive (a value of 0.174) and significant at a significance threshold of 1%. Thus,
for an increase by one point of the corruption level, there is at average an increase
of the shadow economy by 0.174 points (Table 1.6). A close correlation between the
two variables (at a correlation coefficient of c = 0.675) can be also noticed.
Considering these results, we can conclude that the hypothesis 1 is accepted at
the level of our sample so that we can empirically document that an increase of cor-
ruption level results in an increase of the shadow economy.
Testing hypothesis 2: An increase of corruption level results in the increase of the
risk of money laundering.
Referring to the hypothesis 2 testing, the Graph 1.11 and Table 1.7 show a direct
significant influence of corruption on the risk of money laundering, at an R
squared = 0.431. Thus, a percentage of 43.1% of the variation of the risk of money
laundering can be explained by the corruption level, at average, in the sample coun-
tries for the investigated period. The regression coefficient of the risk of money
laundering in relation with the corruption is positive (value of 0.016) and significant
at a significance threshold of 1%. Also, the two variables are strongly correlated (at
a correlation coefficient c = 0.657).
In conclusion, we consider that the research hypothesis 2 is accepted (at a signifi-
cance threshold of 1%), respectively, at the level of the analysed sample. We found
out that the increase of the corruption level leads to the increase of the risk of money
laundering.
10
9
8
7 6 6
6 5 5 5 5 5 5 5 5 5 5 5 5 5 5
5 4 4 4 4 4 4 4
3 4 4 4 4
4 3
3
2
1
0
Italy
Spain
Malta
Latvia
France
Poland
Ireland
Austria
Greece
Finland
Croatia
Estonia
Cyprus
average
Sweden
Belgium
Slovenia
Hungary
Slovakia
Bulgaria
Denmark
Portugal
Romania
Germany
Lithuania
Luxembourg
Netherlands
Czech Republic
United Kingdom
Graph 1.7 Money laundering in the European Union countries, 2012–2017. (Source: own
processing)
Testing hypothesis 3: An increase of the level of money laundering leads to the

increase of the shadow economy.
The Graph 1.12 shows a correlated arrangement (at an average correlation coef-
ficient c = 0.446) of the risk of money laundering and shadow economy at an R
squared = 0.199. The regression coefficient of the risk of money laundering is posi-
tive (4.676) and statistically significant at a significance threshold of 1% (Table 1.8).
As a result, the research hypothesis 3 is accepted, which is an increase of the risk of
money laundering leads to an increase of the shadow economy.
In conclusion, we consider that investigation hypothesis 3 is accepted (at a sig-
nificance threshold of 1%), respectively, at the level of the analysed sample, and we
documented that an increase of the risk of money laundering leads to an increase of
the level of the shadow economy.
Conclusions, limitations, and investigation directions
The processing outlined in the present study clearly reveal the existence of a strong
positive relationship between corruption, shadow economy, and risk of money laun-
dering. All the three working hypotheses were accepted at a significance threshold
of 1%. In other words, our study reflects that at an increase of the shadow economy
level, an increase of corruption level lead to the increase of the risk of money laun-
dering, and, respectively, an increase of the level of money laundering leads to an
increase of the shadow economy.
We consider that the present study regarding the identifying some relations
between corruption and the three facts is only indicative and can be eventually used
as starting point for more detailed studies. We certainly invoke some limitations of
the study presented, among which such a limitation would be the usage of the vari-
able means. Therefore, a panel analysis (which takes into account the series of data
4.80
4.75
4.73 4.69
4.70
4.68
4.65 4.68
4.60 4.61
4.58 4.58
4.55 4.55
4.50 4.49 4.50
4.47 4.46
4.45
4.40
4.35
4.30
2012 2013 2014 2015 2016 2017
Graph 1.8 Evolution of money laundering in the European Union countries, 2012–2017. (Source:
own processing)
10
9
8
7
6
5.00 4.89
5 4.29 3.76
4
3
2
1
0
Graph 1.9 Money laundering in the European Union countries by regions, 2012–2017. (Source:
own processing)
followed in time and space) would much better catch these influences. Another
important limitation is represented by the fact that for the regression used, we did
not use control variables. Thus, to get a much higher accuracy of the results, it is
necessary that the relations between the three phenomena were analysed surprising
the moderating effects of more variables such as level of economic development,
tax pressure, public governance, etc.
1.4 Determinants of the Economic and Financial Crime
As seen on the previous chapters, the economic and financial crime is part of the
society being in a close connection with its evolution and growth. Regarding cor-
ruption, the study of Transparency International (2020) reveals that a quarter of the
African’ s population pays bribe for public services such as health care and educa-
tion. In this view, the chief of International Monetary Fund cited by Greenhalgh
(2016) says that 2% of global gross domestic product is annually paid in bribes
meaning about 1.5–2 trillion USD per year around the world. As for the size of
shadow economy, the gross domestic product of European countries is underre-
ported by 19% because of unrecorded shadow economy activities (Achim et al.
2019). According to estimates from Global Financial Integrity (2019), the illicit
financial flow over the 2006–2015 time periods gets to over 20% of developing
countries’ trade with advanced economies, on average.
Thus, despite all the efforts made to combat the level of economic and financial
crime, it remains a long-standing problem. Under these circumstances, the political
decision-makers need to aware the causes they may create incentives for engaging
in economic and financial crime activities, in order to adopt an effective fight.
Therefore, the economic and financial growth, the economic crisis, globalization,
the technical and scientific revolutions, the government policies, the law system, as
well as the social and cultural imprint contributed to the occurrence and growth of
the economic and financial crime throughout the time.
The issues concerning the economic and financial crimes as well as the explana-
tory factors are largely discussed in the specialized literature. The approaches may
be general (Durkheim 1974; Aniței and Lazăr 2016; Leția 2014), generally referring
to the causes of the economic and financial crime occurrence, or they may be spe-
cific (Tanzi 1998; Melé 2014; Duțulescu and Nișulescu-Ashrafzadeh 2016; Bucur
2011; Schneider and Williams 2013; Feld and Schneider 2010; Schneider and
Buehn 2016; Chong and López-de-Silanes 2015; Schwarz 2011), dealing separately
with the specific causes of certain forms of the economic and financial crime (cor-
ruption, shadow economy, money laundering, etc.).
As for the causes invoked by the general approaches regarding the economic and
financial crime identified in the specialized literature, we present further on, a syn-
thesis of some such causes:
• The study conducted by Aniței and Lazăr (2016, p. 16) reveals that the economic
growth and economic crisis are causing high social changes, stimulating the
criminals through the tide effect (created by suspending legislation and the time
elapsed until the promulgation of a new legislation). In this sense, a study con-
ducted by PricewaterhouseCoopers (2018) identified the existence of a close
relation between the economic development level of a country and the fraud
occurrence. It highlighted that in the developing countries, a percentage of 15%
of the investigated financial societies expect a significant increase of the sources
allocated to investments in order to find out the fraud during the following 2
years, compared to only 9% noticed in the developed countries.
• In a direct relationship with economic development, a higher level of technology

leads to a smaller size of economic and financial crime. Thus, the findings of
Bird and Zolt (2008), Elgin and Oyvat (2013), Immordino and Russo (2018),
Goel et al. (2012), Okunogbe and Pouliquen (2018), Slemrod (1990), and Suh
et al. (2018) also find a negative relationship between technologies and various
types of economic and financial crime. For instance, Slemrod (1990) and Bird
and Zolt (2008) find that higher technologies conduct to higher efficiencies in tax
administration systems further reducing the level of tax evasion. For European
countries, Immordino and Russo (2018) find that VAT evasion reduces as the
payments with debit and credit cards increase and with an increase of cash with-
drawals. Regarding tax collection, Okunogbe and Pouliquen (2018) find that
adopting high technology under the form of e-filing conducts towards collecting
double values of tax payments, and therefore the size of tax evasion decreases.
Moreover, Elgin and Oyvat (2013) find that investments in internet usage reduce
the size of the shadow economy. Regarding corruption as another form of finan-
cial crime, Slemrod (1990), Bird and Zolt (2008) and Goel et al. (2012) also find
that technologies reduce the level of corruption by reducing the face-to-face
interaction between taxpayers and taxing authorities. Regarding the prevention
of money laundering, various authors (Amoore and de Goede 2005; De Goede
2008; Levi and Wall 2004; Sadgali et al. 2019; Zoldi 2015) find that investments
in high technologies under the form of data mining, artificial intelligence,
machine learning and risk profiling tools are used to track the flow of illicit funds
in domains such as money laundering and terrorist financing, thus the money
laundering is reduced. In addition, Suh et al. (2018) find that investing in ethical
culture leads towards a reduction of occupation frauds in banks. However, there
are another studies who find that the use of modern technologies does not only
bring positive effects to the company but it has also attracted fraudsters and
Table 1.5 Correlation coefficients of corruption, shadow economy, and money laundering
Shadow Risk of money
Corruption economy laundering
Corruption Pearson 1 .675a .657a
correlation
Sig. (2-tailed) .000 .000
N 185 158 164
Shadow economy Pearson .675a 1 .446a
correlation
Sig. (2-tailed) .000 .000
N 158 158 143
Risk of money Pearson .657a .446a 1
laundering correlation
Sig. (2-tailed) .000 .000
N 164 143 164
a
The correlation is significant at a significance threshold of 1%
R2Linear = 0.456
60.00
shadow economy
40.00
20.00
.00
00 50.00 100.00 150.00 200.00

Corruption
Graph 1.10 Correlation between corruption and shadow economy. (Source: own processing)
Table 1.6 Regression of shadow economy depending on corruptiona

Unstandardized
coefficients Standardized coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 14.287 1.462 9.769 .000
Corruption .174 .015 .675 11.433 .000
a
Dependent variable: Shadow economy
c riminals to misuse the technology for financial benefits under the form of cyber-
crime (Ali et al. 2019;Gogolin 2010; McAfee 2018; Ryman-Tubb et al. 2018).
Thus, emerging high IT technologies greatly empowers criminals to misuse the
technology for financial frauds. This way, cybercriminals can use a number of
ways to commit crimes at a high distance, in another jurisdiction, hiding their
identities and beyond the reach of any prosecutor (Ali et al. 2019). Furthermore,
the cost of global cybercrime has increased from $445 billion in 2014 to $608
billion in 2017 (McAfee 2018). Moreover, credit card fraud causes significant
financial losses to merchants and banks. According to Robertson (2016), the
worldwide card fraud losses rose from $7.6 billion in 2010 to $21.81 billion in
2015, or 300% over 5 years. By 2020, global card fraud losses are expected to
reach $31.67 billion. The proceeds of this fraud are known to finance terrorism,
arms and drug crime (Ryman-Tubb et al. 2018).
2
9.00 R Linear = 0.431
8.00
Risk of money laundering
7.00
6.00
5.00
4.00
3.00
00 50.00 100.00 150.00 200.00

Corruption
Graph 1.11 Correlation between corruption and money laundering
Table 1.7 Regression of money laundering depending on corruptiona

Unstandardized
Model B Std. Error Beta t Sig.
1 (Constant) 4.623 .136 33.999 .000
Corruption .016 .001 .657 11.080 .000
a
Dependent variable: Risk of money laundering
• The globalization represents a factor encouraging the economic and financial

growth, as well (Leția 2014, p. 16). Under this context, it is highlighted the role
of the multinational as subjects of the economic-financial crime. The multina-
tional societies follow the maximization of their profits at any cost, so that the
differences of the legislation among the countries are used as “legal door to
illegalities”.
• The quality of regulations and the rule of laws (legislative system) are identified
in the investigations conducted by Bucur (2011, p. 12) as being responsible for
the growth of the economic and financial crime. The quality of regulations refers
to the ability of the government to formulate and implement solid policies and
regulatory acts allowing and promoting the private sector growth. On the other
hand, the rule of laws reflect the supremacy of the law which should result in the
balancing of the relations between it and the state (Puț 2015) or the extent to
which the population shows confidence and comply with the society rules, own-
1.4 Determinants of the Economic and Financial Crime 55
2
R Linear = 0.199
60.00
shadow economy
40.00
20.00
00
3.00 4.00 5.00 6.00 7.00 8.00 9.00

Graph 1.12 Correlation between shadow economy and money laundering. (Source: own
processing)
Table 1.8 Regression of shadow economy depending on the money launderinga

Unstandardized
Model B Std. error Beta t Sig.
(Constant) .136 4.738 .029 .977
Risk of money laundering 4.676 .789 .446 5.925 .000
a
Dependent variable: Shadow economy
ership rights, police and courts, as well as the probability of crime and
violence.
• The legislative system determines the engagement in committing economic-
financial crimes under the following circumstances: “existence of a judicial sys-
tem which is either incomplete or overwhelmed being constantly behind the
business environment; exploitation of some legislative gaps which could encour-
age the crimes committing; abundance of continuously changing regulatory acts,
making impossible the development of a correct economic activity even when
good faith is present; inconsistency of the international business criminal law
which is unclear and incomplete, stimulating the fraud committing; we refer here
to the differences between the legal and political regimes of the countries, too,
doubled by the existence of some contradictory regulations in banking, tax, com-
mercial fields as well as the legal treatment applied” (Bucur 2011, p. 12).
• The political factors may also play an important role to enhance the economic
and financial crime (Dumitriu 2017). For instance, individuals that developed
their activity at law edge or even by breaching it obtaining high profits created
then immunity and got power by “buying” political positions. Such politicians
initiated and supported unhealthy legislative initiatives which offered them
protection, but severely impacted the business environment weakening the

national economic power. Another example of economic and financial crimes
generated by the political factors is represented by the criminal actions of illegal
funding of the political parties, and most of the reasons aim at crimes of corrup-
tion or associated to other criminal activities (tax avoidance and money launder-
ing). The individuals holding political positions take advantage of their influence
and authority to obtain undue benefits for the party of which they are members.
Such undue benefits may occur as supply of funded goods or services as follows:
opinion poll, promotional stuff distributed during the election campaigns, food
products (sugar, oil, meat, etc.) or even other type (medicines, cell phones, etc.)
distributed to the voters as electoral bribery, artistic shows where singers or
bands are performing, ensuring transport means for the party members or voters
transport, etc. (Dumitriu 2017).
• The same study conducted by PricewaterhouseCoopers (2018) revealed the role
of the internal (managing) factors for the occurrence of economic crime. The
study identified that a percentage of 59% of the financial companies investigated
in the developing countries reported that the economic crimes are caused by
internal factors while this percentage is more reduced, namely, 39% for the
developed countries.
• According to some authors (Leția 2014), the banking and financial institution
soundness are in the front line of the fight against crimes in business, and this is
due to the fact that the amounts of money obtained from crime committing transit
through the accounts opened at the said institutions. In this sense, a significant
attention has to be paid to the transparency of the banking and financial sector, to
the monitoring of the transactions developed through the clients’ accounts, and
to banking surveillance.
• However, the psychology and sociology researchers from the judicial domain
(Durkheim 1974, Merton 1968, etc.) revealed the major role played by the cul-
tural factors in the fight against economic and financial crime. Thus, the sociolo-
gist Durkheim (1974) invoked regarding the occurrence of the crime fact, the
social and cultural factors in direct relation with the economic growth. Durkheim
introduced, for the first time, the term of anomy, as a consequence of the social
division. In his opinion, the anomy represents the dislocation and deterioration of
the collective conscience, morality diminution, and regulatory disorder. Thus,
during the periods of quick social changes, the basic norms suspend their func-
tionality, and the anomy condition leads to the increase of the criminal behav-
iour. Based on the same idea, Merton (1968) explains the anomy condition as the
difference between the social structure and the cultural one, explaining that the
society proposed to its members certain goals without providing them with the
necessary means to achieve them. The individuals being unable to achieve the
goals to which they aspired and which the society evaluates resort to abnormal
actions and illicit means.
• With the publication of Lynn and Vanhanen (2002) on IQ data for a large number
of countries in the world, researchers started to pay attention to the role of intel-
ligence in complying the law thus leading to a high institutional quality
(Rindermann 2008; Potrafke 2012). In relation to this, several authors have tried
to investigate the relationship between some components of economic and finan-
cial crime such as corruption (Potrafke 2012; and Lv 2017) or shadow economy
(Čiutienė et al. 2015; and Salahodjaev 2015). They find that a high IQ population
associates to less corruption and less shadow economy in those countries. For
instance, Salahodjaev (2015) provides empirical evidence for the claim that
intelligence is negatively associated with shadow economy. This is because intel-
ligence offers prerequisites for understanding and accepting the government
implements policies which is designed to reduce shadow economy. In the same
view, Čiutienė et al. (2015) find a dependence between human capital and the
power of the shadow economy for the case of Lithuania. Regarding other crime
such as money laundering, to our knowledge, there is only a descriptive study of
Lowe (2017) which argues for the need of predictive intelligence in the anti-
money laundering fight.
Based on the specialized literature review, a general presentation of the main
causes of corruption is provided below:
• Tanzi (1998) in his study conducted for the International Monetary Fund, he
started with the argument of Gary Beckel, laureate of Nobel prize for economy,
who stated that “if we abolish the state, we abolish corruption”, which in other
words means that corruption would be directly related to the magnitude of the
public sector. Tanzi (1998) is in contradiction with Beckel’s arguments with
obvious realities reflected by the list of countries as, for instance, Canada,
Denmark, the Netherlands, or Sweden where, at the same time, the level of cor-
ruption is low, but there is a high rate of the public sector (measured as percent-
age of the tax incomes or public expenses in the GDP). Tanzi considers that the
way in which the state operates to finalize its tasks and offer goods and public
services is much more important than the magnitude of the public sector. Thus,
Tanzi (1998) presents several direct and indirect causes of corruption, both being
related to the state functioning.
• Among the direct causes, mention should be made on:
–– Regulatory documents and authorizations (the way in which different autho-
rizations are obtained considering that they require much time and numerous
documents to be drafted and these issues are much diminished further to the
favours directly granted by the officials after they accepted the reception of a
compensation as bribery)
–– Issues associated to taxation (when the law is unwieldly and difficult to
understand by the tax payers, it could be interpreted in different ways so that
the tax payers often need consultancy, the tax inspectors salaries are low, the
corruption actions of the tax authorities are ignored, or when they are found
out the penalties are low etc.)
–– Decisions regarding the public expenses (referring to the allocation of the
investment projects to performers, the way in which the goods and services
are often purchased at prices lower than the market price, etc.);
–– Financing of the political parties from public funds.
–– Among the indirect causes, the following should be mentioned: quality of
bureaucracy, level of public sector salaries, institutional controls, regulations
and law transparency, penalization methods, etc.
• Domènec Melé, founder of Yese Business School University, made a classifica-
tion of the ten determining factors of corruption which he considers applicable to
a larger or smaller extent, to different cultural and geograph environments. These
factors can be grouped in four categories as follows (Melé 2014):
–– Personal factors (greed; degradation of personal ethic sensitivity, either
because of poor education level or of a negative experience of learning; lack
of civic feelings of the employees of either the public or private institutions
(for instance the politicians who get involved with the political life to achieve
their own goals and not because they have civic feelings); low level of con-
sciousness or lack of courage to report corrupted behaviour and the situations
leading to corruption)
–– Cultural factors (culture environment where corruption is excused by defen-
sive behaviours or even admiration shown to the criminals by statements like,
for instance “one should be clever enough to avoid tax payments” or by ratio-
nalizing some no moral false arguments of the type “everybody does it” “take
advantage of it as long as you can”, “life is short”; lack of transparency par-
ticularly at institutional level, but in other types of organizations, too)
–– Institutional factors (inefficient rules and controls; slow court trials)
–– Organizational factors (lack of moral criteria when somebody is promoted
merely for his/her loyalty shown to the person who holds control or holds a
responsibility position etc.; diminution or poor reaction against allegations of
corruption creating a favourable environment for corruption perpetuation)
• As for Romania, the study carried out by Duțulescu and Nișulescu-Ashrafzadeh
(2016) identified among the main causes of corruption, the low life standard
(compared to that of citizens from Western Europe), as well as the general con-
ception of people, which proves to be permissive enough referring to this fact.
Referring to the causes of shadow economy, some of them have been taken from
the specialized literature:
• A bibliometric approach regarding the determining factors of the shadow econ-
omy is carried out in the study conducted by Medina and Schneider (2018).
Based on the literature review, the authors identified 13 factors determining the
shadow economy, namely, 1. Tax burden; 2. Quality of institutions and corrup-
tion; 3. Quality of regulatory acts; 4. Quality of public services; 5. Tax morale;
6. Discouragement measures; 7. Growth rate of the official economy; 8.

Entrepreneurial level; 9. Unemployment rate; 10. Volume of the agriculture sec-
tor; 11. Utilization of cash in economy; 12. Rate of the labour force; and 13.
Economy growth (reflected by the GDP/capita or the economic growth rate).
• Tax burden, state regulatory act burden, attitude against the taxes or tax morale
(Kirchler 2007).
• Quality of regulatory acts and rule of law (legislative system); The studies con-
ducted by Johnson et al. (1997) and Enste and Schneider (2002) revealed results
similar to those previously mentioned. So, they identified that, besides the tax
pressure and tax morale, the level of economy regulation lead to higher levels of
the shadow economy. On the other hand, a high regulation level of labour market
or of goods market restricts the individual and entrepreneur’s freedom to act in
the formal economy.
• Quality of institutions and bureaucracy; Different studies revealed the impor-
tance of ensuring a high confidence level in the governing institution to ensure a
good state functioning (Kirchler 2007; Torgler and Schneider 2009; Torgler
2007; Park and Blenkinsopp 2011; Fritzen et al. 2014). The ineffective rate of
ensuring public goods generates a low confidence in the authorities and deter-
mines the individuals and entrepreneurs to undertake shadow activities in order
to obtain more benefits more quickly.
• Public governance, level of economic growth and happiness of a people (Achim
et al. 2018).
• Burden of taxes and social security contributions, quality of institutions, regula-
tions, services offered by public sector, official economy growth, independent
activities (the freelancers) (Schneider and Buehn 2016)
• In a study carried out in Serbia (a country where the shadow economy and cor-
ruption levels are high), on a representative sample constituted of 1250 compa-
nies and entrepreneurs the following main causes of shadow economy were
identified: unsuitable tax policy particularly in the labour field, ineffective and
selective labour force, high administrative burden in conducting businesses,
poor quality of regulations, high level of corruption and low level of tax morale,
low confidence in the state and public institutions, and existence of a high weight
of cash payments of transactions by total payments (Simonovic and Boskovic
2016). Among these causes, corruption is indicated as the fourth most important
cause of the shadow economy in Serbia (Simonovic and Boskovic 2016).
• It is also in Serbia that a comprehensive classification of the shadow economy
causes is carried out by Marinkovic (2005) quoted by (Simonovic and Boskovic
2016, p. 116) including: causes generated by the political and economic system,
causes generated by the local and regional specific features, causes generated by
traditions, culture, life style, historical heritage, (lack of social representations,
generalization of theft from state fortune), causes generated by the personal
characteristics of a people and the individual value system (for instance, inclina-
tion towards risk).
• Çule and Fulton (2009) noticed that the diminution of shadow economy and cor-
ruption is a complex fact implying the business culture, social expectations, and
political considerations, so it is not only about the legal issues for the amend-
ment of the tax regulations.
• Greed, as universal human motivation is considered an important component to
clear up the behaviour of laws compliance (Bucur 2011, p. 50).
• The study conducted by Jiménez et al. (2015) reveals the essential role of educa-
tion materialized in the stages when the entrepreneurs are trained and a suitable
mentality against entrepreneurialism is created. More precisely, their study indi-
cates that both secondary education and tertiary education have a much different
effect on the engagement in formal or informal entrepreneurial activity. Thus, the
formal entrepreneurialism is positively associated with the secondary and ter-
tiary education while the informal entrepreneurialism is negatively influenced
only by the tertiary education.
Referring to education, certain studies (Chan et al. 2000; Kasipillai et al. 2003)
found out that the decisions of the American respondents to comply with the tax
laws were firstly determined by their age and education. Likewise, the study con-
ducted by Kasipillai et al. (2003) evaluates the influence of the education on the tax
observance among the students of Malaysia. The statistics findings confirm the
prevalence of a relation between education and tax compliance. This relation is
generally consistent, particularly regarding the issues related to the general avoid-
ance and personal avoidance. An improvement of the personal compliance rate
among the students was noticed particularly among women after a semester of
attending preliminary course of taxation. However, certain studies (McGee 2008)
have not identified the level of education as playing a part in the tax attitude among
the countries of the sample.
• Several studies (Schneider and Williams 2013; Feld and Schneider 2010;
Schneider and Buehn 2016) certify a positive relation between independent eco-
nomic activities (physical entities authorized to develop economic activities) and
the level of the shadow economy. The higher the independent activity rate, the
higher the shadow economy activities. Theoretically, we expect that the indepen-
dent activities offered more freedom to entrepreneurs regarding the level and
structure of the declared economic activities. However, we noticed this factor as
one of the factors which is poorly enough proved in the specialized literature.
• Discouragement measures; The discouragement measures corresponding to the
financial crime consist of the policies for the prevention and fight against these
facts. The existence of an inefficient institutional and organization framework
which is not adapted to the current conditions and is unable to ensure a firm and
efficient response (for instance, because of the presence of parallelism, of a
reduced technical and information system, lack of strict specialization or low
level of human resource qualification) can generate the inefficiency of the adop-
tion of discouragement measures. Despite the strong focus on the discourage-
ment of the financial criminal activities through policies of fight against
corruption and shadow economy, there exist few studies about the effects of dis-
couragement. This is due to the data regarding the legal issues and the frequency
of controls which are not internationally available; including for the OECD
countries as such data are difficult to collect. Schneider and Buehn (2016) con-
sider that there are few empirical proofs demonstrating that the fines and penal-
ties do not exercise a negative impact on the shadow economy, but the risk of
detecting, subjectively perceived by the individuals, exercises a positive impact.
However, the results are often inconsistent, and the Granger causality tests indi-
cate that rather the dimension of the shadow economy can affect the discourage-
ment, instead that the discouragement reduced the shadow economy (Feld and
Schneider 2010; Schneider and Buehn 2016).
• The technical and scientific revolutions and online transaction growth led to the
occurrence of a new category of shadow economy that is the digital shadow
economy (Gaspareniene et al. 2016; Remeikiene et al. 2017). We consider the
study elaborated by Remeikiene et al. (2017) is interesting in the light of the
elaboration of a definition of the digital shadow economy as being represented as
illegal activities consisting of the supply of goods and digital services resulted at
the operation exceptionally performed in the digital space breaching the existing
regulations.
Referring to the causes identified in the literature regarding the engagement in
money laundering crimes, we present below some of such results:
• A study conducted by PricewaterhouseCoopers (2018) identified the existence of
a close relation between the economic growth level of a country and the money
laundering. Thus, in the developing countries, a percentage of 58% of the finan-
cial companies analysed (financial institutions, mutual funds, insurance compa-
nies, dealers, etc.) experienced the fight against the money laundering during the
last 2 years, compared to a lower percentage of 48% found the developing
countries.
• The tax pressure is identified in the specialized literature (Chong and López-de-
Silanes 2015; Schwarz 2011) as playing a determining role in the engagement of
money laundering crimes taking into account that the money laundering is often
carried out through tax havens.
• The quality of regulations regarding the money laundering crimes (Chong and
López-de-Silanes 2015; Schwarz 2011) together with the efficiency of the law
system reflected by the rule of law (Chong and López-de-Silanes 2015;
Vaithilingam and Nair 2009; Ardizzi et al. 2014) are having an important role on
the diminution of the money laundering fact.
• The probability of detecting the abnormal and suspect transactions is rendered
difficult by the level of business sophistication (Chong and López-de-Silanes
2015; McKenna 2017). Thus, the more sophisticated the business, the lower is
the probability of detecting the suspect transactions, and it leads to an increase of
the rate of engaging in money laundering operations.
• The money laundering is expected to decrease while adopting some stronger
audit and reporting standards (Vaithilingam and Nair 2009). It was found out
that by adopting some strong audit and reporting standards the risk of not detect-
ing the suspect transactions and consequently, the probability of getting engaged
in illegal activities like money laundering is reduced (Drezewski et al. 2012;
Vaithilingam and Nair 2009; Nikoloska and Simonovski 2012).
• A high level of the banking system soundness reflected by high transparency,
monitoring of the financial transactions and of the bank accounts, financial sur-
veillance represents the factors identified in the specialized literature as
determining factors of the money laundering diminution (Leția 2014, p. 113,
p. 131, p. 171; Vaithilingam and Nair 2009; Nikoloska and Simonovski 2012).
Thus, a poor banking surveillance could be an easy target that the money is laun-
dered without any suspicion. For instance, in the United States both the banks
and the non-banking financial institutions must report the financial transactions
exceeding 10,000 dollars a day as well as any suspect criminal activities. In
Romania, according to the regulations harmonized with the European Directives,
it is compulsory for the entities to report any cash deposition/withdrawal opera-
tions corresponding to the external transfers exceeding the equivalent of 10,000
EUR (National Office for Prevention and Control of Money Laundering 2004).
In conclusion, a better quality of the banking surveillance means a good sound-
ness of the banks, and thus, the channels of the money laundering operations are
reduced.
• Education is also mentioned as an important factor for the diminution of money
laundering (Favarel-Garrigues et al. 2007; McKenna 2017; Nikoloska and
Simonovski 2012; Isa et al. 2015; Lowe 2017). Thus, the financial and business
sophistication rate makes more difficult the detecting of suspect transactions
from the financial-banking system employees (McKenna 2017). To this aim, the
banks should elaborate criteria able to identify the suspect transactions related to
the money laundering (Favarel-Garrigues et al. 2007). In relation with this issue,
Nikoloska and Simonovski (2012) demonstrated the role of the bank employee
education to apply suitable criteria for identifying the suspect transactions and
for the money laundering prevention. Isa et al. (2015) followed the same idea and
concluded that human expertise is required to deal with a false alarm and to truly
evaluates whether the cases mentioned by the system really reflect a threat
regarding the risk of money laundering. Considering these issues, Lowe (2017)
dedicated a vast descriptive study to underline the necessity of a predictive intel-
ligence to support the programs for fighting against money laundering in the
financial sector.
Based on the specialized literature reviewing, we conclude that the determining
factors of the economic-financial crime can be classified taking into account their
action area (macro and micro factors) and their nature (economic, political, social,
and cultural factors) as follows:
(i) Determining factors at macro level:
• Economic factors: economic development, tax pressure, financial and bank-
ing system development, technical and scientific revolutions, technology,
digital economy
• Political and legal factors: public governance (reflected by the efficiency of

institutions, quality of regulations, rule of law, etc.)
• Social and cultural factors: attitude regarding the taxes or tax morale, cul-
ture, religion, education including intelligence, confidence;
(ii) Determining factors at micro level: corporate governance including also the
quality of financial audit and reporting.
Referring to the identification of the most important determining factors of the
economic-financial factors, based on the investigation of the results existing in the
literature and specialized practise we can draw a conclusion regarding the most
representative factors, namely, level of economic development, technology, tax pres-
sure, quality of public governance, banking system soundness, corporate gover-
nance, and social and cultural factors (attitude against taxes or tax morale, culture,
religion, confidence, intelligence). For these reasons we pay a special attention to
these factors regarding the definition of concepts, measuring instruments, empirical
statistics, and evidence of their influence on the economic and financial crime.
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Chapter 2
Economic and Political Determinants
of Economic and Financial Crime
2.1 Economic Development
As we have noticed at the investigation of the determining factors of the economic

and financial crime (in the previous Sect. 1.4), the level of the economic develop-
ment of a country represents one of the most important factors identified in the lit-
erature and practice.
A high living standard can result in a better compliance with the law, and, conse-
quently, the incentives for paying bribery and also the shadow and money launder-
ing activities are much reduced. Different studies (Husted 1999; Treisman 2000;
Paldam 2001, 2002; Kirchler 2007; De Rosa et al. 2010; Achim et al. 2018a) dem-
onstrate that the highest rates of illegal economic activities and the highest rates of
corruption are found in the developing and transition countries, while in the coun-
tries with high incomes there are found lower rates of corruption and shadow
economy.
2.1.1 Concept of Economic Development and Measuring Tools
The individuals’ living standard can be indicated in simple terms, by the economic
growth of a country. This can be expressed in different ways, the most used being:
gross domestic product (GDP) and gross national product (GNP) calculated by total
population or per capita. The gross domestic product represents the market value of
all the goods and final services produced within a certain period of time in an
economy.
At present, the GDP is used to a large extent worldwide as an indicator express-
ing the development level and prosperity of a nation. A higher economic growth is
correlated with a higher capacity of paying and collecting taxes as well as with a
74 2 Economic and Political Determinants of Economic and Financial Crime
relatively higher demand of public goods and services (Chelliah 1971). In accor-
dance with the approaches provided by Torgler and Schneider (2009), we shall use
the GDP indicator per capita as estimation of the economic growth of a country.
2.1.2 Economic Development and Corruption

2.1.2.1 Theoretical Approaches
A consistent category of studies (Husted 1999; Mauro 1995; Treisman 2000; Paldam
2001, 2002; Gundlach and Paldam 2009; De Rosa et al. 2010; Achim et al. 2018a)
shows that the countries with low incomes and, respectively, a low level of the eco-
nomic development face the highest levels of corruption. A high level of economic
development can lead to a better compliance with the laws, while a low level of it
may create the opportunity for corruption occurrence, as an expression of the popu-
lation disagreement regarding the supply of public goods and the state ability to
ensure the welfare. Husted (1999) stated that “because the level of economic devel-
opment is related to the general level of resource wealth, it is expected that corrup-
tion is much more frequent in less developed economies”. Additionally, Husted
noticed that financial satisfaction, the tax payment, and corruption are closely cor-
related. In a similar way, Torgler (2004) conclude that “if the financial situation of a
household is bad, the tax payments could be considered as a hard restriction of their
possibility set, which could result in the diminution of the tax honesty”. As a result,
for this reason, the bribery paid to avoid taxes is an expected fact.
In the same line, the studies conducted by Treisman (2000) and Paldam (2001,
2002) found out that the corruption is a defect determined by poverty (“poverty
disease”) which disappears when the country becomes richer. Goel and Ram (2013)
substantiated these findings and demonstrated that the economies in transition stage
show a higher level of corruption than the developed countries. Based on the analy-
sis of the bilateral causality between income and corruption, an empirical study
carried out by Gundlach and Paldam (2009) concluded that the long-term causality
relation shows itself completely from income to corruption and underlined that the
cross-country characteristics of the corruption from different countries can be
entirely explained by the cross-country income characteristics from different coun-
tries. Thus, De Rosa et al. (2010) found a strong correlation of 0.81 between GDP
and corruption level.
More recently, the panel study conducted by Achim, Borlea, and Anghelina
(2018b) for 185 countries over the period 2005–2014 identified a negative influence
of the economic development on the corruption level. This explains why the coun-
tries where the incomes are high are facing a low corruption level. The authors
revealed that the intensity of corruption diminution due to the increase of the GDP
per capita is more obvious in the developing countries than in the developed ones.
Some similar findings belong to Treisman (2000) and Paldam (2001, 2002) who
found that GDP coefficient values, from the models of the corruption evaluation, are
2.1 Economic Development 75
higher for the developing countries compared to the developed countries, ones con-
cluding that the poverty eradication could reduce the corruption.
However, there exist a second group of more restricted studies (Caselli and
Michaels 2013) who found a positive association between the economic growth rate
and corruption explaining that a high level of wealth could result in the increase of
the possibilities to get benefits increasing thus the corruption level.
A third group of studies (Huang 2016) did not find the existence of a significant
causality relation between corruption and the economic growth for most Asia-
Pacific countries. In the end, the authors concluded that, for these countries, the
anti-corruption policies used by the political makers to promote the economic
growth of a country could be inefficient.
2.1.2.2 Practical Approaches
Taking into account the inconsistent results found in the specialized literature
regarding the relation between the level of the economic growth and corruption, we
propose further on the investigation of such a relation within an empirical study.
Methodology
Based on the theory and specialized practice, we expect that the population of the
poorer countries is more inclined to bribe the public officers in order to obtain
immediate benefits. In conclusion we propose to test the following working
hypothesis:
Hypothesis 1: An increase of the level of the economic growth leads to the
decrease of the corruption level.
The level of the economic growth of a country is measured using the GDP/capita
(expressed in USD/capita). The data provide from the databases of the World Bank
Group (2020a).
Corruption is measured as the place occupied by the sample countries depending
on the value of the Corruption Perception Index (CPI) provided by Transparency
International (2020a). A high position held in the classification by countries reflects
a high corruption rate existing in the respective country.
The sample is represented by a number of 183 countries for which all the data
regarding two variables are available, and the period of analysis is comprised
between 2005 and 2018.
To this aim, we use the descriptive methods, the correlation coefficients, and the
regression analysis, and we carry out statistical tests necessary to ensure a high
accuracy of the results. The statistics processing is carried out using the SPSS sta-
tistic software.
Graph 2.1 shows a correlated arrangement of the two variables, for an R
squared = 0.476. This means that a percentage of 47.6% of the corruption variation
can be explained by the medium level of the financial satisfaction of the populations
from the sample countries for the period comprised between 2005 and 2018. The
correlation coefficient shown in Table 2.1 is negative, its value is −0.69 which indi-
cates a close indirect correlation between the two variables. In other words, a high
level of economic development is correlated with a low corruption level.
Table 2.2 indicates that the value of the regression coefficient of the GDP/capita
variable in relation with the corruption variable is negative (−0.002) and it is signifi-
cant at a significance threshold of 1%. It indicates that at an increase by a unit of the
GDP/capita there is obtained at average a diminution of the corruption level by
0.001 units.
The study no doubt reveals the existence of a significant influence of the level of the
economic development on the corruption level. The above study presents as limita-
tions, the non-use of some control variables. Thus, for obtaining a much higher
accuracy of the results, the relation between economic development and corruption
requires to be analysed caching the moderating effects of some control variables
such as tax pressure or institutional quality.
R2Linear = 0.476
200.00
150.00
Corruption
100.00
50.00
.00
00 20000.00 40000.00 60000.00 80000.00 100000.00 120000.00

GDP/capita
Graph 2.1 Correlation between GDP/capita and corruption

Table 2.1 Correlation coefficients between corruption and GDP/capita

Corruption GDP/capita
Corruption Pearson correlation 1 −.690**
Sig. (two-tailed) .000
N 185 183
GDP/capita Pearson correlation −.690** 1
N 183 183
**The correlation is significant at a significance threshold of 0.01 (two-tailed)
Table 2.2 Regression of corruption depending on the GDP/capita

Non-standardized
Constant 109.077 3.173 34.379 .000
GDP/capita −.002 .000 −.690 −12.830 .000
a
Dependent variable: corruption
2.1.3 Economic Development and Shadow Economy
Referring to the shadow economy, several studies confirm that a higher level of the
economic growth of a country generates a better capacity of tax payment and col-
lection and a higher demand of public goods and services (Chelliah 1971; Torgler
2004; Torgler and Schneider 2009). For instance, the study conducted by Torgler
(2004) indicates a strong relation between the financial satisfaction and tax pay-
ments. Torgler states that “if the financial situation of a household is bad, the tax
payments could be considered as a hard restriction of their possibility set, which
could result in the diminution of the tax honesty”. Therefore, there exist tendencies
to migrate towards the shadow activities.
Further on, based on the investigation of the results obtained by Schneider and
his collaborators in different studies (Alm et al. 2004; Medina and Schneider 2018;
Schneider and Klingmair 2004; Schneider 2015), the highest levels of the illegal
economic activities are found in the developing countries and countries in transition
stage. In Africa and South America, 41% of the economic activities are clandestine.
In Europe, in case of the economies under transition stage, the shadow economy is
estimated at 38%. The countries indicating the lowest level of the shadow economy
are Switzerland, the United States, and Austria, while Bolivia and Georgia are on
top position reaching a percentage of more than 66% (Kirchler 2007). These find-
ings are supported by the study conducted by Orviska and Hudson (2003), who
noticed that in developed countries, the tax fraud is estimated at 20% of the total
income, and in the developing countries the percentage is even higher. Similar
results were obtained even at the level of a country with different levels of growth
by regions. Thus, Brosio et al. (2002) investigate the tax frauds in different regions
of Italy and found out that in the poorer regions from the South of Italy the tax fraud
is significantly higher than in the richer northern regions. The authors explained that
the shadow economy and the tax non-compliance are possible expressions of the
population disagreement regarding the supply of public goods and failure of the
state to ensure the welfare.
In a study conducted by Achim, Borlea, Găban, and Cuceu (2018a) for the
European Union countries over the period between 2007 and 2013, the authors vali-
date the hypothesis according to which the richer a country is, the lower is the ten-
dency of the its citizens to get involved with shadow activities. The results have
been differentiated among the old member countries (EU 15) and the new ones from
the European Union (EU 13). The authors also found a higher impact of economic
development on the shadow economy in the old EU countries than in the new EU
countries. More exactly, a percent of 38% from the variation of shadow economies
of the old EU countries is explained by economic development of these countries,
while this percent is only 17% for the new EU countries. These results suggest that
the new EU countries have many more problems that cause them to slip into under-
ground activities other than poverty (institutional quality/regulation quality/rule of
law, etc.)
Further on, we propose the investigation of the relation between the level of the
economic development and that of the shadow economy.
Methodology
Further to the review of the specialized literature, it is expected that the population
of the poorer countries to be more inclined to obtain benefits from shadow activities
hidden from the authorities. In conclusion, we propose to test the following working
hypothesis
Hypothesis 1: An increase of the level of the economic development leads to the
diminution of the level of the shadow economy.
The level of economic development is measured using the GDP/capita indicator
(expressed as mean of the USD /capita). The data are taken over from the databases
of the World Bank Group (2020a, b).
The level of the shadow economy is measured as weight of the shadow economy
in the GDP using the database determined by Medina and Scheinder (2018).
The sample is represented by a number of 155 countries for which all the data are
available for the period of analysis comprised between 2005 and 2015.
As analysis method we shall use the descriptive methods, the correlation coeffi-
cients, and the regression analysis, and we carry out the statistical tests necessary to
ensure a high accuracy of the results. The statistics processing is carried out using
the SPSS software.
Graph 2.2 shows a correlated arrangement of the two variables, at an R
squared = 0.388. It means that, at average, a percentage of 38.8% of the shadow
economy variation can be explained by the level of the economic growth of the
sample countries between 2005 and 2015. The correlation coefficient indicated in
Table 2.3 is negative, with a value of −0.657, reflecting an indirect high relation
between the two variables at a significance threshold of 1%. The value of the regres-
sion coefficient of the level of economic development variable and its high signifi-
cance (Table 2.4) also provides clear signs of the existence of a significant negative
influence of the level of the economic development on the level of the shadow
economy.
The study presented is meant to represent only a start point for more advanced stud-
ies regarding the investigation of the influence of the level of the economic develop-
ment of a country on the level of the shadow economy. Thus, in order to obtain a
better accuracy of the results, the relation between the level of the economic devel-
opment of a country and the level of the shadow economy must be analysed catching
2
R Linear = 0.388
60.00
shadow economy
40.00
20.00
.00
.00 20000.00 40000.00 60000.00 80000.00 100000.00 12000.00

GDP/capita
Graph 2.2 Correlation between GDP/capita and shadow economy

Table 2.3 Correlation coefficients of the shadow economy with the GDP/capita
Shadow economy GDP/capita
Shadow economy Pearson correlation 1 −.657**
N 156 155
N 155 183
the moderating effects of some control variables such as the tax pressure or institu-
tional quality. All these together with the utilization of advanced techniques of data
analysis (panel type eventually) will result in a higher soundness of the results
obtained.
2.1.4 Economic Development and Money Laundering
The developing countries are much more vulnerable against money laundering
crimes because of the existing legislative gaps of the developing process of the
financial sector, of privatization, or of the creation of the securities market (see Kroll
(1994) regarding the discussions about money laundering in Bulgaria and the par-
ticular concerns related to the asset misappropriation of the private enterprises dur-
ing the transformation of the Bulgarian economy from a state-controlled economy
to a market economy).
The economic changes which took place in the former communist countries
from Eastern Europe created opportunities for money laundering by the unscrupu-
lous individuals based on a slow regulatory system referring to the instruments for
detecting, investigating, and tracking the money laundering operations (Schroeder
2001). Indeed, based on the engagement of most of the emerging markets in the
privatization process, the committing of money laundering crimes dramatically
enhanced (Schroeder 2001).
Also, in the emerging countries, there exist records regarding the increase of the
transborder transfers of cash to market with free agreements regarding the detection
and placement of cash as well as the increase of the investments of the groups of
organized crime in the field of real estate properties and businesses. Thus, consider-
ing these changes the emerging countries underwent to make the transition to the
market economy, the negative effects of the money laundering tend to be much
enhanced than that of the developed countries (McDowell 2001).
Table 2.4 Regression of shadow economy depending on the GDP/capitaa

Non-standardized
Constant 34.801 .903 38.551 .000
GDP/capita .000 .000 −.657 −10.789 .000
a
Dependent variable: shadow economy
We propose, further on, to investigate the causality relation between the level of the
economic growth and the rate of engagement in money laundering crimes.
Methodology
Based on the results identified in the specialized literature, we expect the population
of the poorer countries to be more inclined to get involved in money laundering
crimes to obtain immediate benefits. In conclusion, we propose to investigate the
following working hypothesis:
Hypothesis 1: An increase of the level of the economic development leads to the
diminution of the engagement rate in money laundering crimes.
The level of the economic development is measured using the GDP/capita indi-
cator (expressed as mean USD/capita). The data have been taken over from the
databases of the World Bank Group (2020a, b).
The level of the money laundering crime is determined using the Basel AML
indicator (Basel Anti-Money Laundering Index) which measures the risk of money
laundering and terrorism funding.
The sample is represented by a number of 162 countries, and the analysed period
is comprised between 2012 and 2017 for which all the data are available.
The analysis methods include the descriptive methods, correlation coefficients,
and regression analysis, and we carry out statistical tests necessary to ensure a high
accuracy of the results. The statistical processing is carried out using the statistical
SPSS software.
Graph 2.3 shows a correlated arrangement between the level of the GDP/capita and
the risk of money laundering at an R squared = 0.235. In other words, we notice that
at average, a percentage of 23.5% of the variation of the risk of money laundering
can be explained by the level of the economic growth. The correlation coefficient
indicated in Table 2.5 is negative, with a value of −0.485, which reflect an indirect
medium intense relation between the level of the economic development and the
risk of engagement in money laundering crimes. The value of the regression coef-
ficient of the economy development variable (Table 2.6) also reveals the existence of
a negative and significant influence of the level of the economic development on the
risk of money laundering.
2.2 Tax Pressure
The tax pressure also called tax burden is found among the most frequently men-
tioned causes of the economic and financial crimes. The specialized literature
reveals the role of the tax pressure on the economic and financial crime by the fact
that a high taxation rate may result in corruption actions of the public officers to
avoid the tax payment or by getting involved in shadow activities (Devereux and De
Mooij 2009; Dreher and Siemers 2009; Dreher and Schneider 2010; McGee 2012;
Schneider and Klinglmair 2004; Torgler and Schneider 2009).
It is assumed that the tax burden is related to the corruption taking into account
that the officer bribery is made by entrepreneurs to obtain some private gains such
as the avoidance of taxation and regulations or the winning of public contracts
(Fjeldstad 1996, 2003; Kaufman, 2010). As for the shadow activities, a significant
number of studies (Tanzi 1999; Schneider and Buehn 2012a, b; Schneider 2005;
Schneider and Buehn 2016) certify that the shadow economic activities enhance as
the real and charged tax burden increases. The increase of the total cost of the labour
force can stimulate the diminution of the income tax by means of migration to the
shadow economy.
2.2.1 General Approaches Regarding the Tax Pressure
2.2.1.1 Concept of Tax Pressure and Measuring Instruments
The tax pressure and the tax burden are concepts closely related to taxation. The
specialized literature identifies numerous definitions of the tax pressure such as:
• “Tax pressure or tax burden represents the total value of the tax paid by a certain
group of individuals, industry etc., particularly compared to what pay other
groups, industries”(Cambridge Dictionary 2020).
• “Tax pressure measures the answer to general economic and social questions
about the effect of the tax policy on the distribution of the incomes and wealth”
(Atrostic and Nunns 1991).
• “The tax pressure represents how overwhelming the taxes are, or in other words,
how big is the tax burden on the tax payers’ shoulders” (Tulai 2003, p. 287).
• The tax pressure represents “the intensity with which income is taken from phys-
ical and legal entities at the level of the whole society by means of taxation”
(Mara 2010, p. 148).
• “The tax pressure is an indicator of the measurement of the income share gained
from production which transit the budget through a compulsory and public
impairment process instead of letting them free and available for the private ini-
tiative” (Manolescu 1997, p. 69).
2.2 Tax Pressure 83
Table 2.5 Correlation coefficients of money laundering and GDP/capita

Risk of money laundering GDP/capita
Risk of money laundering Pearson correlation 1 −.485**
N 164 162
N 162 183
**
The correlation is significant at a significance threshold of 0.01 (two-tailed)
In conclusion we consider that the tax pressure reflects the volume of taxes and
fees paid to the state budget and the way in which this volume is felt by the tax pay-
ers from the point of view of their wealth.
Referring to the measurement of the tax pressure, the specialized literature
(Corduneanu 1998) highlights two general approaches:
(a) Tax pressure in terms of flow, which represents the monetary amount of the tax
obligation which is charged in the income at individual, sectorial, or global
level.
2
9.00
R Linear = 0.235
8.00
7.00
6.00
5.00
4.00
3.00
.00 20000.00 40000.00 60000.00 80000.00 100000.00 120000.00

GDP/capita
Graph 2.3 Correlation between GDP/capita and money laundering

Table 2.6 Regression of money laundering depending on the GDP/capitaa

Non-standardized coefficients Standardized coefficients
Constant 6.324 .098 64.394 .000
GDP/capita −2.986E-005 .000 −.485 −7.017 .000
a
Dependent variable: risk of money laundering
(b) Tax pressure in terms of indicators, which reflects the ratios between the tax
flows and economic flows creating the income. In this case, the indicators show
the share of the national product taken over by the state and borne by the tax
payers.
In the specialized literature, for measuring the tax pressure, the tax pressure cal-
culation in terms of indicators, more exactly as taxation rate, is commonly used
(Tulai 2003, p. 287).The taxation rate can be at global level (national), at the level
of the economic entities, and at the level of the individual (physical entity tax payer).
According to Schneider et al. (2010), the measuring of the tax burden is not easy
to define because the taxation and social security systems are different among the
countries. According to Schneider et al. (2010), the tax burden can be estimated in
several ways:
(a) As tax incomes (% of the GDP).
( b) As total taxation rate (% of the commercial profits or of the turnover).
(c) As a global indicator of the tax freedom, sub-component of the economic free-
dom indicator, calculated by Heritage Foundation. The measurement of the tax
pressure starting with the tax freedom indicator is used by different authors
(Torgler 2002, 2004, 2007; Dreher and Schneider 2010; Torgler and Schneider
2009; Achim et al. 2018b), being considered a more complete method of tax
pressure assessment.
In conclusion, based on the specialized literature investigated and on the avail-
able data sources, the level of the tax pressure from a country can be measured by
means of the following indicators:
(a) Tax revenue (as % of GDP), where tax revenue refers to compulsory transfers to
the central government for public purposes. Certain compulsory transfers such
as fines, penalties, and most social security contributions are excluded. The data
are provided from the World Bank (2020a).
(b) Profit tax (as % of commercial profits) where profit tax is the amount of taxes
on profits paid by the business, using the databases of the World Bank (2020a).
(c) Labour tax and contributions (as % of commercial profits), where labour tax
and contributions is the amount of taxes and mandatory contributions on labour
paid by the business. The data are provided from the World Bank (2020a, b).
(d) Total tax and contribution rate (the taxes and contributions as percentage of the
commercial profit), which measures the amount of taxes and mandatory contri-
butions payable by businesses after accounting for allowable deductions and
2.2 Tax Pressure 85
exemptions as a share of commercial profits. Taxes withheld (such as personal

income tax) or collected and remitted to tax authorities (such as value-added
taxes, sales taxes, or goods and service taxes) are excluded. The data are pro-
vided from the World Bank (2020a).
(e) Tax wage (as % of the total labour cost), which measures that part of labour
costs which is taken in tax and social security contributions net of cash benefits.
The tax wage is defined as the ratio between the value of the taxes and social
security contributions, at average, by an employee without children, and the
corresponding total labour cost of employer. The indicator reflects the extent to
which the labour taxation discourages the labour force employment. This indi-
cator is provided by OECD (2020).
(f) Fiscal freedom variable using the database of Heritage Foundation (2020), as
calculation basis of the economic freedom indicator. It ranges from 0 to 100,
where 0 is the least fiscal freedom and 100 is the maximum degree of fiscal
freedom. A higher fiscal burden implies a lower degree of fiscal freedom. So,
the fiscal freedom consists of three quantitative factors, namely, (a) the top mar-
ginal tax rate on individual income, (b) the top marginal tax rate on corporate
income, and (c) the total tax burden as percentage of GDP (Heritage Foundation
2020). In scoring fiscal freedom, each of these numerical variables is weighted
equally as one third of the component. Thus, the fiscal freedom indicator is
calculated as follows (Heritage Foundation 2020):
Fiscal freedom ij = 100 − α ( Factorij ) , where

2

• Fiscal freedom represents the fiscal freedom1 of the country for each of the fac-
tors j.
• Factor ij represents the value of the factors j previously presented for the country
i (on a scale from 0 to 100).
• α is the coefficient established at the level of 0,03.
In our opinion, the measurement of the tax pressure as tax freedom indicator is
the most complete method of reflecting the tax pressure. Moreover, because this
indicator has minimum and maximum limits clearly defined (from 0 to 100), it pro-
vides a high comparability of the results obtained in different countries. In addition,
the fiscal freedom indicator has been used by various authors in their research
(Achim et al. 2018b; Dreher and Schneider 2010; Torgler and Schneider 2009) in
order to express the level of fiscal burden of a country.
2.2.1.2 Laffer Curve and Tax Avoidance
Even since 1776, Adam Smith stated that the high rates of taxes would destroy the
taxation base. Later on, the relation between tax pressure rate and incomes cashed
at the state budget was revealed by Laffer (2004) as Laffer curve. The theory devel-
oped by Laffer shows that the modifications of the taxation rates could have two
effects on the incomes: arithmetical effect and economic effect (Laffer 2004). The
arithmetical effect refers to the fact that when the tax rate decreases, also the tax
incomes (expressed by taxable income unit) will decrease. Otherwise, when the
taxation rate increases, the arithmetical effect will lead to an increase of the tax
incomes collected by taxable income unit. But, the economic effect recognizes the
existence of a positive impact of the taxation rate decrease on labour and production
and, thus, on the taxation base. On the other hand, the increase of the taxation will
have a reverse economic effect of penalization of the participation at the taxable
activities. Therefore, the arithmetical effect will always act the other way against the
economic effect. Consequently, when the economic and arithmetical effects of the
taxation rate modifications are combined, the consequences of the taxation rate
modification on the total tax incomes are no longer obvious enough.
In other words, the Laffer curve reflect that in case of a tax pressure increase, the
tax incomes show an increase up to a maximal point (M), after which the tax incomes
begin to decrease up to null values, if the tax pressure rate would reach the 100%
level (actually at a taxation of 100% of the incomes, any taxable activity would
disappear (see Fig. 2.1)). The tax pressure assumes certain limitations of tolerance
from the tax payers’ psychological and political limits (Mara 2010, p. 149). These
limits are imposed by the tax payers’ reactions as they can strongly oppose the
increase of the taxation rate and could react by tax avoidance, fraud, production
activity diminution, or even rebellion (Hoanță 2000, p. 165).
The Laffer curve represents a theoretical approach of the facts presented because
the exact definition of this M taxation threshold where the tax pressure is considered
excessive is difficult to provide. This threshold is varying depending on the territo-
rial and economic circumstances so that the tax system of a country will be placed
either to the left or to the right side of the M point (Mara 2010, p. 150).
The Laffer curve can be divided in two zones (Mara 2010, p. 150):
• Zone 1: the zone of the left side of M point (normal or admissible zone) where
the increase of the taxation share ensures the increase of tax cashing.
• Zone II: The zone of the right side of M point (inadmissible zone) where any
increase of the taxation rate leads to the diminution of tax cashing; this correla-
tion between the two ones becomes indirect.
As for the relation between the tax pressure and tax incomes as a Laffer curve,
the study conducted by Busato and Chiarini (2013) comes to strengthen these
results. Thus the authors mentioned analysed the relation between the tax policy, tax
avoidance, and shadow economy in a dynamic model of general equilibrium, and
their results provided solid arguments for a certain Laffer type parameter curve.
Referring to the analysis of the Laffer curve in some of the countries, certain
studies (Trabandt and Uhlig 2006; Trandafir and Brezeanu 2010) were directed to
such analysis. Trabandt and Uhlig (2006, pp. 1–69) analysed, by means of compari-
son, the Laffer curve for the United States as well as for the EU 15 countries. They
revealed that in the United States and EU 15 zone, the labour and capital are on the
left side of the Laffer curve, but the EU 15 economy is situated much closer to the
prohibited slopes than the United States. Also, they found out in the EU 15 econ-
2.2 Tax Pressure 87
omy, the slope of the Laffer curve is much flatter than in United States reasoned by
a much higher distortion in EU 15 zone.
For Romania, Trandafir and Brezeanu (2010) were preoccupied to build the
Laffer curve based on the tax incomes obtained in the period between 2000 and
2010. The results of the analysis indicate that the Laffer curve slope, throughout
both the whole period and by each year, placed the Romanian economy within the
inadmissible or prohibited zone. It means that an ever more important share of the
tax payers’ incomes is taken over by the state and the tax payers from the economy
restrain their taxable activities and, thus, the taxable base is reduced. It is also inter-
esting to know the result obtained by the authors regarding the identification of the
optimal taxable threshold during the investigated period, threshold which is carried
out at a taxation of 10.96% that corresponds to the maximum level of the real tax
incomes obtained.
2.2.1.3 Tax Pressure in European Union Countries
Further on, we propose to analyse the level of the tax pressure in the European
Union member states to identify certain indicators regarding the existence of a rela-
tion referring, on one hand, to the tax pressure and to corruption, shadow economy,
and money laundering, on the other hand.
Methodology
To highlight the tax pressure level within the European Union countries, we shall
use the available data about the tax pressure indicator calculated by Heritage
Foundation (2020). The tax pressure indicator varies from 0 to 100 where 0 reflects
the lowest level of the tax freedom and 100 is the maximum level of tax freedom.
The analysed period is 2005–2018 and aims at the European Union countries (28).
As for the methods, we used descriptive methods, comparison analysis, and
synthesis.
Graph 2.4 shows that, at average, the fiscal freedom in the European countries is
much varying from a minimum of 37 points (Denmark) to 87 points (Bulgaria).
Based on Graph 16 review, it can be concluded that for the analysed period, the
European countries showing the lowest level of the tax freedom are Denmark,
Sweden, Belgium, France, Austria, and the Netherlands with an indicator ranging
between 37 and 52 points. In opposition, the European countries with the lowest
level of the tax pressure are (in increasing order of the classification) Bulgaria,
Lithuania, Romania, Latvia, Slovakia, and Estonia where the tax pressure indicator
range is between 81 and 87 points. What we easily see analysing Graph 2.4, it is the
fact that the countries situated at the end part of the classification are from Central
and Eastern regions of Europe giving us a reason to further analyse the varying pres-
ence of the four quadrants as the European Union countries were distributed (see
Table 1.4 presenting the way in which this classification was done).
Fig. 2.1 Laffer curve.

(Source: Laffer (2004),
The Laffer Curve: Past, M
Present, and Future, The
Total tax incomes

Heritage Foundation)
T
0 a b c %
Tax pressure rate
Thus, Graph 2.5 indicates that the countries from Central and East Europe (CEE)
(former communist countries) show the highest values of the tax freedom (the tax
freedom indicator is about 78 points). They are followed by the countries from
Southern Europe where there is obtained an average tax freedom indicator of about
64 points. The countries having the lowest level of the tax freedom are those from
Northern Europe (47 points), followed by the countries from Western Europe (57
points).
Referring to the evolution of the fiscal freedom in the European Union countries,
it is noticed in Graph 2.6 that the average of tax freedom mean at the level of the
member states shows a slight increase until the year 2011 and, after this year, the
evolution is descending but, as a whole, we can see a general slightly ascending
trend. Romania shows levels of the tax freedom above the average value of the
European Union throughout the analysed period. Also, we notice that, during the
analysed period, the tax freedom systematically increased in Romania (from an
indicator of 70 points in 2005 to an indicator of 87 points in the period 2016–2018).
2.2.2 Tax Pressure and Corruption
It is assumed that the tax pressure is associated to corruption considering that the
entrepreneurs give bribery to the public officers in order to obtain some private
gains such as tax and regulations avoidance or assignment of public contracts
(Fjeldstad 1996, 2003; Kaufman 2010). However, the specialized literature provides
few and inconclusive results regarding the tax pressure influence on the corruption
level (Dreher and Siemers 2009; Dreher and Schneider 2010; McGee 2012).
In the specialized literature, we identified few studies (Dreher and Siemers 2009;
Dreher and Schneider 2010; McGee 2008, 2012; Achim et al. 2018b) dealing with
the investigation of the tax pressure influence on the corruption level, and the results
2.2 Tax Pressure 89
are inconsistent. For instance, Dreher and Siemers (2009) analysed the relation
between the restrictions regarding the access to capital using panel data for 112
countries during the period 1984 and 1999. They found out that higher restrictions
regarding the access to the capital involved a higher corruption level in the years
before 1993, but they reduced corruption during the following years.
Later on, Dreher and Schneider (2010) continued their study conducted on two
big data sample: a sample of cross data from 120 countries and a panel data sample
from 70 countries, both conducted over the 1994–2002 period. The authors obtained
results demonstrating that the corruption fact is much more emphasized in countries
with a lower tax burden contradicting, thus, the expectations. Analysing the percep-
tion of the tax avoidance and of corruption in Denmark, McGee (2008) showed that
the Danish population considers the tax avoidance to be extremely unfavourable
even if the taxation rate is one of the highest in the whole world, and, thus, this can
explain the low level of corruption existing in Denmark.
In a similar way McGee (2012) explained the situation in Armenia where it was
noticed that, although the tax burden is significantly lower than in most of the coun-
tries, the Armenian people do not oppose so much the tax avoidance which results
in a higher corruption level. Another similar paradox could be identified in China.
Here, different authors (Jiang and Nie 2014; Huang 2016) documented in empirical
studies the existence of the miracle of China, a country where the GDP continue to
increase on behalf of a prevalence of the government corruption. Other authors
(Kumar 2011) also noticed the abnormality of the emerging China which is charac-
terized by a low economy freedom and a high economic growth rate.
Another group of research studies (Graeff and Mehlkop 2003; Achim et al.
2018b) identifies a differentiated behaviour of the different economic variables
related to corruption, depending on the economic growth rate. Thus, Graeff and
Mehlkop (2003) found out that some aspects of the economic freedom discourage
corruption while some others don’t. However, the authors identified a strong rela-
tion between economic freedom and corruption, and this relation shows a different
intensity in the poor and, respectively, rich countries.
A similar study conducted by Achim, Borlea, and Anghelina (2018b) attempts to
complete the previous literature and to clarify whether the tax policy plays a role
regarding the level of corruption of a country. The present work investigates whether
the increase of the tax pressure leads to a higher level of corruption and whether
they are different in the developed countries compared to the developing countries.
To this aim, the authors used an analysis of panel data on a sample consisting of 185
countries in the period 2005–2014. The authors found different results regarding the
influence of the tax policy on the level of the corruption in the developed countries
and in the developing countries. As for the developed countries, they found out that,
based on a high institutional quality, a low level of the tax pressure leads to a low
level of corruption, which correspond to expectations. On the other hand, in the
developing countries which present a low institutional quality, a low level of tax
pressure enhances the corruption fact because of the low efficiency of the governing
and the people may easily avoid the law.
Graph 2.4 The fiscal freedom in the European Union countries 2005–2018. (Source: own
processing)
90
78
80
70 64
57
60
47
50
40
30
20
10
0
CEE South West North
Graph 2.5 The fiscal freedom by geographical zones in the European Union countries at average,
2005–2018. (Source: own processing)
Concluding, the research findings suggest that governments and policy-makers

need to acknowledge that the anti-corruption fight requires not only the right fiscal
policies but also the right way of implementing these policies, recognizing the role
of quality institutions, which need to prevail in any country.
2.2 Tax Pressure 91
100
88 86 86 87 86 87 87 88 87 87 87 87 87
80
70 67 67 67 67 67
64 64 65 65 65 66 66 67
60 62
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EU average Romania
Graph 2.6 Evolution of fiscal freedom in the European Union countries, in average, 2005–2018.
(Source: own processing)
Starting with these contradictory findings, the question arises whether a higher tax
burden creates opportunities for the officer bribery to avoid the taxes or to be
assigned public contracts. Intuitively, the bribery is paid to avoid tax payments or
the law regulations. In other words, the question arises whether the increase of the
tax pressure is associated or not to an increase of the corruption level. Also consid-
ering the results of the previous investigations, a research question arises whether
the relation between tax pressure and corruption is different among the countries
depending on their economic growth.
Study 1
Methodology
Based on the results found in the specialized literature, one may assume that a
higher level of tax pressure leads to public officer bribery to obtain certain tax ben-
efits. In conclusion, we propose to test the following working hypothesis:
Hypothesis 1: An increase of the tax pressure leads to an increase of the corrup-
tion level.
We shall measure the tax pressure using the fiscal freedom, provided by the data-
base of Heritage Foundation (2020). Fiscal freedom indicator ranges between 0 and
100 where 0 reflects the lowest level of the tax freedom and 100 is the maximum tax
freedom rate.
The level of corruption is measured as the place occupied by the sample coun-
tries depending on the score obtained by the Corruption Perception Index (CPI)
provided by Transparency International (2020b). An upper position in the top occu-
pied by a country regarding corruption represents a high level of corruption and
vice versa.
The sample is represented by 181 countries for which there are data available for
the two variables, and the analysis period is 2005–2018.
In order to investigate the relation between tax pressure and corruption, we used
the descriptive methods, the correlation coefficients, and the regression analysis,
and we carry out tests to ensure a high accuracy of the results. The statistical pro-
cessing is performed using the statistical SPSS software.
Graph 2.7 shows a correlated arrangement of the two variables, at an R
squared = 0.028. We see that only a small percentage of 2.8% can be explained at
average, by the variation of the tax freedom level assigned to the sample countries
for the period 2005–2015. The correlation coefficient reflected by Table 2.7 is posi-
tive, with a value of 0.167 indicating a positive reduced statistically significant cor-
relation between the two variables studied, at a significance threshold of 5%.
Table 2.8 shows that the value of the regression coefficient of the tax freedom
variable in relation with the corruption variable is positive (0.644) and significant at
a significance threshold of 5%. This indicate that when there is an increase of the tax
freedom by a point, it is found at average an increase of the corruption level by
0.644 points.
Conclusions, limitations, and research directions
The study reveals a positive weak enough relation between tax freedom and corrup-
tion. In other words, when there is an increase of the tax freedom (decreasing the tax
pressure), there is also an increase of the corruption level. The result is surprising
because it contradicts our expectations. Naturally, we would expect that the corrup-
tion level increased as a result of the tax pressure increase. Despite all these, similar
results are obtained in other studies such as Dreher and Siemers (2009), Dreher and
Schneider (2010), and McGee (2008, 2012). These studies also revealed a negative
influence of the tax pressure on the corruption level.
The above study limitations consist of the non-use of some control variables in
the analysis model of corruption depending on the tax pressure level. Thus, to obtain
a higher soundness of the results, it is required that the relation between the tax pres-
sure and the corruption level is analysed catching the moderating effects of more
control variables as, for instance, the economic growth rate, the public gover-
nance, etc.
Study 2
Methodology
The relation between the tax pressure and corruption level is further investigated
using two main control variables, for instance, the level of the economic growth and
the institutional quality. Consequently, it can be assumed that a higher tax pressure
could enhance the corruption facts. Thus, we formulated the following working
hypothesis and research questions:
Hypothesis 1.The increase of the tax pressure is associated to an increase of the
corruption level.
2.2 Tax Pressure 93
Research question 1. In what way does the relation between tax pressure and
corruption differ between countries depending on the economic growth?
The measurement of corruption and tax pressure is carried out as we established
in the previous study.
Selected control variables
• The level of the economic development is reflected by the GDP/capita, using the
World Bank database (World Bank 2020a).
• The institutional quality is measured with the government efficiency variable.
This indicator measures the perceptions of the quality of the public services and
their ability to produce and implement good policies and to provide public goods.
The indicator reflects the public governing performance on a scale ranging
between −2.5 (weak) and 2.5 (strong). The data source is collected from the
Worldwide Governance Indicators (World Bank 2020b).
Sample
The current study was conducted further to classify the developed countries and the
developing ones. This classification is based on the data provided by the World
Bank (2015) in the report referring to the “Country and Lending Groups” 2015,
where the countries are classified as countries with high incomes, countries with
average superior incomes, countries with average inferior incomes, and countries
with low incomes. Consequently, the World Bank (2015) classified the economies
with low and average incomes as “developing economies” and the countries with
high incomes as “developed countries”. Finally, the current study sample is formed
of 185 countries (49 developed countries and 136 developing countries) for which
all the required data are available.
To achieve the goal of this study, we substantiated the following multiple regres-
sion of the corruption level depending on the causal factors as follows:
Corruption = β 0 + β1 Tax pressure + β 2 Controls + ε where, (2.1)

We use a panel-type analysis on a sample consisting of 85 countries applied on
data corresponding to the period 2005–2014.
A first result is obtained after analysing the whole sample of countries. Thus, we
found out a negative influence of the tax pressure on the corruption level which is in
contradiction with our expectations. However, similar results were obtained by
other studies too, for instance, Dreher and Siemers (2009), Dreher and Schneider
(2010), and McGee (2008, 2012).
A second result is the identification of differentiated results when the influence
of the tax pressure on the corruption level is controlled by the economic growth rate
and the institutional quality. In this way, we noticed that, with the high institutional
quality characteristic for the developed countries, a higher tax pressure leads to a
higher level of corruption which corresponds to our expectations.
2
200.00 R Linear = 0.028
150.00
Corruption
100.00
50.00
.00
.00 20.00 40.00 60.00 80.00 100.00

Fiscal freedom
Graph 2.7 Correlation between corruption and fiscal freedom
Table 2.7 Correlation coefficients between corruption and fiscal freedom

Corruption Fiscal freedom
Corruption Pearson correlation 1 .167*
N 185 181
Fiscal freedom Pearson correlation .167* 1
N 181 181
Source: data own processing
**The correlation is significant at a significance threshold of 0,05 (two-tailed)
Table 2.8 Regression of corruption depending on the fiscal freedoma

Non-standardized
Constant 36.559 21.850 1.673 .096
Fiscal freedom .644 .284 0.167 2.271 .024
a
2.2 Tax Pressure 95
For the developing countries, we identified a strong and negative influence of the
tax pressure on the corruption level if this relation is controlled by a low institu-
tional quality. Thus, in the developing countries, the influence of a low institutional
quality enhances the negative role of the tax pressure on corruption. In these coun-
tries, a low tax pressure enhances corruption because it is rather a matter of low
governing efficiency where the subjects can easily avoid the laws. In conclusion, it
can be said that the relation between corruption and the tax pressure must be anal-
ysed in a multi-dimensional manner revealing with priority the moderating role of
the economic growth and of the institutional quality of a country. A third result
consists of the identification of some negative influences of the economic growth
rate of a country and of the institutional quality on the corruption level. This can
explain why the countries with high incomes and which are characterized by a high
quality of the state institutions show at the same time a low level of corruption. Our
results are supported by numerous studies referring to the influence of the economic
growth rate of a country (of the incomes per capita) on corruption level (Husted
1999; Treisman 2000; Paldam 2001, 2002; Gundlach and Paldam 2009; and De
Rosa et al. 2010) or referring to the influence of the institutional quality on corrup-
tion (Kirchler 2007; Torgler and Schneider 2009; Park and Blenkinsopp 2011;
Forson et al. 2017).
In conclusion, the influence of the tax pressure on the corruption level must be
analysed in correlation with other factors determining the corruption level such as
the level of the economic growth and the institutional quality. Our research reveals
the identification of some differentiated results of the tax policy influence on the
corruption level in the developing countries compared to the developing ones. For
the developed countries, we found out that, with high quality of the institutions, a
low tax pressure leads to a lower level of corruption which corresponds to our
expectations. In the developing countries which are facing on the contrary, a low
level of the institutional quality, a low tax pressure enhanced corruption because it
is rather a low governing efficiency and thus people can avoid the laws.
Our findings suggest that some tax policies can function in some countries but
not in the others and thus can explain the low efficiency of the different anti-
corruption policies which is particularly found in the countries with low incomes.
Thus the current investigation could have significant implications for the govern-
ments and the political decision-makers directing to the adoption of the best deci-
sions in the fight against corruption. The government bodies of the whole world
must become aware of the necessity to adopt differentiated tax policies depending
on the country development level characterized by different levels of the institu-
tional quality (bureaucracy, public service quality, their capacity to collect taxes, to
produce and implement efficient public policies, to provide public goods). A low tax
pressure can reduce corruption in the developed countries and can enhance it in the
developing countries depending on the existence of some different levels of govern-
ing efficiency. Thus, the governments and the decision-makers must know that the
fight against corruption requires not only correct tax policies, but there must be paid
a special attention to the method of these policies implementation and to the institu-
tional quality of each country. A detailed presentation of the study is found in the
work of Achim, Borlea, and Anghelina (2018b).
2.2.3 Tax Pressure and Shadow Economy
Most of the specialized literature works which dealt with the analysis of the taxation
system effects on the corporate behaviour reveal that the shadow economic activi-
ties are enhanced as the real and perceived tax pressure increases (Devereux and De
Mooij 2009; Frey and Weck-Hannemann 1984; Schneider and Klinglmair 2004;
Torgler and Schneider 2009).
The study of OECD (2009) also supports the hypothesis according to which the
high taxation rates lead to the identification of discrete locations of the profitable
investments made by the multinational companies. Sweden is a good example of a
state with high tax pressure and undesirable taxation effects. Between the years
1970–1980, the Swedish government adopted the most severe progressive taxation
system of the incomes among the industrialized countries, and the marginal taxation
rates for the largest category of employees were ranging between 80% and 90%.
The excessive tax pressure generated high levels of the tax avoidance (Agnell and
Persson 2000). The same findings are supported by Putniņš and Sauka (2015), in
their study conducted for the Baltic countries (Latvia, Estonia, and Lithuania). They
noticed that the discontent against the tax system and government provide a plau-
sible explanation of the shadow economy dimension of these countries.
The high taxation rates determine the migration of the investors to other coun-
tries which are “tax oasis” or “tax havens” to get a more favourable tax treatment,
and this issue is well known, too.
According to the OECD criteria (OECD 2009) a tax haven is characterized by
the absence or existence of a reduced number of taxes on the incomes, the lack of
transparency, the lack of an effective exchange of information, and lack of substan-
tial economic activities. Additionally, every country that fulfils the above-mentioned
criteria must commit to put in application the principles of transparency and
exchange of information for tax purposes. The economic analysts declared that
about 70% of the monetary mass of the world is run through the tax havens
(Buziernescu and Antonescu 2007).
Despite all these, there are studies which contradict the existence of a causality
relation between the tax pressure and the volume of the shadow economy (Friedman
et al. 2000; Kawano and Slemrod 2016; Achim et al. 2018a). Thus, Friedman et al.
(2000) evaluated the determining factors of the shadow activities in 169 countries
using data of the year 1990 and found out that the companies function unofficially,
not for avoiding the taxation but for reducing the regulatory and corruption burden.
The corruption, bureaucracy, and a weak judicial system are systematically associ-
ated to a higher level of the informal sector. Moreover, Dreher and Schneider (2010)
2.2 Tax Pressure 97
found out that the higher taxation rates even involve more restrained shadow activi-
ties. On the other side, Torgler and Schneider (2009) conclude on some “mixed
empirical proofs” identified in the specialized literature regarding the correlation
between tax burden and shadow economy. Likewise, the authors Torgler and
Schneider (2009), in their study conducted for 55 countries over the period
1990–1999, did not identify a significant statistical correlation between the tax bur-
den and the shadow economy. Also, Kawano and Slemrod (2016) identified a weak
relation between business taxation rates and the tax incomes collected further to
business, at least on short term, but it does not exclude a stronger relation on
long term.
Similarly, the study conducted by de Achim, Borlea, Găban, and Cuceu (2018a)
for the European Union countries referring to the period 2007–2013 did not identify
the tax pressure as a determining factor for the shadow economy. To obtain as com-
plete as possible estimations of the tax pressure, it was measured using three indica-
tors, respectively: (a) as total tax rate (as the percent of commercial profits); (b) as
tax revenue (as the percentage of GDP-TAX2); and (c) as fiscal freedom variable, a
subcomponent of the Heritage Foundation’s economic freedom index). The levels
of the shadow economy for the European Union member states are determined as
percentage of the GDP as they are determined by Schneider (2013) in the period
2007–2013. Other independent variables such as the wealth of a country, public
governance, or the individuals’ happiness are also included in the econometric
model of the shadow economy evaluation. Thus, similar with some previous studies
(Friedman et al. 2000; Dreher and Schneider 2010; Torgler and Schneider 2009;
Kawano and Slemrod 2016) the work of Achim, Borlea, Găban, and Cuceu (2018a)
did not find the expectation that an increase of tax pressure leads to an increase of
shadow economy, but rather opposite results. The explanation regarding these
results against the expectations could be found using different methods of measur-
ing the tax pressure for each country. Referring to this issue, Williams and Schneider
(2016) noticed that the tax and social security systems are vastly different among
countries and due to this reason the values could not be fully comparable.
In conclusion, we consider that there does not exist any unity of the results
obtained by the specialized studies regarding the existence of an influence of the tax
pressure on the shadow economy, and this relation must be analysed within a
national-specific framework using as much as possible variables to moderate the
effects.
We propose further on to investigate the relation between tax pressure and shadow
economy.
Methodology
Based on the results identified in the specialized literature, we expect that a higher
tax pressure level leads to higher stimulations for avoiding the tax legislation and,
consequently, a higher rate of engagement in shadow activities. In conclusion, we

propose the following working hypothesis:
Hypothesis 1: An increase of the public tax pressure leads to an increase of the
shadow economy.
We shall measure the tax pressure using the indicator represented by the fiscal
freedom. The higher the tax pressure is, the lower the tax freedom is. The source of
the data is represented by Heritage Foundation (2020).
The level of the shadow economy is determined as percentage of the GDP as
presented in the source offered by Medina and Shneider (2018).
We shall analyse the relation between the two variables using a sample consist-
ing of 157 countries for which all the data are available for the period 2005–2018.
To this aim, we use the descriptive methods, correlation coefficients, and regres-
sion analysis, and we carry out statistical tests necessary to ensure a high accuracy
of the results. The statistical processing is carried out using the statistical SPSS
software.
Graph 2.8 and Table 2.9 present a reduced correlation between the shadow econ-
omy and Fiscal freedom. The correlation coefficient is positive, with a value of
0.183, reflecting a poor correlation of the two variables, and the variation of the
shadow economy is explained by the fiscal freedom only at a percentage of 3%.
From Table 2.10 we find out that the value of the regression coefficient of the
fiscal freedom variable in relation with the shadow economy is positive (0.198) and
significant at a significance threshold of 5%. This reflects that an increase by one
point of the level of the tax freedom there is at average an increase of the shadow
economy level by 0.198 points.
The calculations mentioned above offer clear indications on the existence of a rela-
tion between tax freedom and shadow economy. With an increase of the fiscal free-
dom rate, there is an increase of the shadow economy. It means that at a decrease of
the tax pressure, the level of the shadow economy increases which contradicts the
expectations. Naturally, we would expect that the level of the shadow economy
increases as a result of the tax pressure increase. However, similar results are
obtained in other studies, too, for instance, Friedman et al. 2000, Kawano and
Slemrod (2016), and Achim, Borlea, Găban, and Cuceu (2018a).These findings do
not reveal a positive influence of the tax pressure on the level of the shadow econ-
omy, either it does not reveal any relation.
2.2.4 Tax Pressure and Money Laundering
The tax havens are considered the main way by means of which the companies
elaborate the tax optimization strategies to reduce the tax expenses. Taking into
considerations these issues, the companies constantly attempt to obtain tax benefits
2.2 Tax Pressure 99
and opportunities to protect their assets in offshore jurisdictions (Afrăsinei and

Carp 2018).
The studies conducted by Fuest and Riedel (2012), Janský and Kokeš (2015),
and Afrăsinei and Carp (2018) reveal that the entities which have connections with
the tax havens show higher profitability and pay lower taxes in comparison with the
other companies. Considering that the money laundering is often carried out through
tax havens to avoid tax payments, the tax pressure is considered a main activity to
fuel money laundering (Chong and López-de-Silanes 2015; Schwarz 2011;
Schlenther 2013).
We propose further on to analyse an eventual relation between tax pressure and

money laundering.
Methodology
Based on the investigations of the results provided by the specialized literature, we
expect that a higher level of the tax pressure from a country leads to higher stimula-
tion of the tax legislation avoidance, by getting engaged in money laundering opera-
tions (for instance, by means of tax havens). In conclusion, we propose the following
working hypothesis:
Hypothesis 1: An increase of the tax pressure leads to the increase of money
laundering volume.
We shall measure the tax pressure using the indicator represented by the fiscal
freedom. The higher the fiscal pressure is, the lower the fiscal freedom is. The source
of the data is represented by Heritage Foundation (2020).
The level of the money laundering is determined using the Basel AML indicator
(Basel Anti-Money Laundering Index) which measures the risk of money launder-
ing and terrorism funding.
The sample is represented by a number of 161 countries, and the analysed period
is 2012–2017; all the data are available for it.
To this aim, we use the descriptive methods, correlation coefficient, and regres-
sion analysis, and we carry out the statistical tests required to ensure a high accuracy
of the results. The statistical processing is carried out using the SPSS statistical
software.
Graph 2.9 and Table 2.11 show a reduced correlation between the risk of money
laundering and the tax freedom. A percentage of 7% of the variation of the risk of
money laundering is explained by the level of the tax pressure corresponding to the
data of the sample. The correlation coefficient is positive having the value of 0.266
which reflects a poor level of correlation between the two variables.
Table 2.12 shows that the value of the regression coefficient of the tax freedom
variable in relation with the risk of money laundering variable is positive (0.027)
and significant at a significance threshold of 1%.This indicates that an increase by

one point of the level of fiscal freedom results in, at average, an increase of the risk
of money laundering by 0.027 points.
The above calculations reveal a statistically significant influence of the fiscal pres-
sure on the risk of money laundering (at a threshold of 1%) explaining the variation
of the risk of money laundering in a percentage of 7%. The coefficient sign is a posi-
tive one, unexpected from the perspective of our expectations. In other words, our
results indicate that with an increase of the fiscal freedom rate (respectively, the
decrease of the tax pressure), the increase of the risk of money laundering occurs.
Naturally, we would expect that the risk of money laundering increases as a result
of the tax pressure increase.
Our study is meant to be only a starting point for more detailed investigations
regarding the identification of the explanatory factors about the money laundering
fact. Consequently, we are aware that there exist numerous limitations of our inves-
tigations which if known can open the way for obtaining much more reliable results.
One of the limitations of our investigation consists of the utilization of a data pro-
cessing methodology which is relatively simple, but it can be improved by using
panel-type studies. Another important limitation is the failure to use some important
2
R Linear = 0.034
60.00
Shadow economy
40.00
20.00
.00
40.00 60.00 80.00 100.00

Fiscal freedom
Graph 2.8 Correlation between the shadow economy and fiscal freedom
2.3 Public Governance 101
Table 2.9 Correlation coefficients between shadow economy and fiscal freedom
Shadow economy Fiscal freedom
Shadow economy Pearson correlation 1 .183*
N 158 157
Fiscal freedom Pearson correlation .183* 1
N 157 181
control variables when it investigated the influence of the tax pressure on some facts
belonging to the economic and financial crime domain, for instance, the level of the
economic growth, the institutional quality, etc. Similar studies (Achim et al. 2018b),
for instance, found out differentiated influences of the tax pressure on corruption in
the developed countries in comparison with those from the developing countries.
Being aware of these limitations, they could constitute in future a base for the elabo-
ration of some more detailed studies.
2.3 Public Governance
The public governance is identified as one of the most important causes of the eco-
nomic and financial crimes.
2.3.1 General Approaches Regarding the Public Governance
We shall try further on to define the public governance based on the investigations
of the concepts existing in the specialized literature, and we shall provide a presen-
tation of the measuring instruments used worldwide. Further on, the presentation of
some statistics of the public governance at the level of the European Union coun-
Table 2.10 Regression of the shadow economy depending on the Fiscal freedoma
Non-standardized
Constant 13.619 6.579 2.070 .040
Fiscal freedom .198 .086 .183 2.311 .022
a
Variable dependent: shadow economy
tries is relevant for the investigation step and then for the causality relation between
public governance and economic and financial crime.
2.3.1.1 Concept of Public Governance and the Measuring Instruments
The adhering of the European countries to the European Union raised the question
regarding the importance of the “best practices” in public governance as key ele-
ments for explaining the rate of compliance of the European Union member states
with the provisions required by the adhering process. For the beginning, the studies
were dedicated to issues such as the Europeanization, and further on they focused
on the public governing structures able to accelerate the Europeanization process
(Dimitrova 2002; Tosun 2014). Numerous projects launched by the European
Commission focused on the development of the public governance of the members
states and on the adoption of “good practices” even before the adhering (for the
community acquis adoption and implementation), as a priority to create the suitable
framework for putting into application the cohesion and convergence policies.
Goetz (2001) raised the question regarding the necessity of a massive restructuring
of the administration of the post-communist countries from Central and East Europe.
Lippert et al. (2001) considers that the key objective of “good governance” is not
to build a modern bureaucracy for the future member states but to allow these coun-
tries to act as efficient actors in the governance system on several levels. A year
later, Dimitrova (2002) underlined that the higher the administrative or government
capacity is, the better the European Union laws are implemented by the member
states. The lacks of some unitary norms of the European Union and the preferential
adoption of some administrative reforms lead to an enhanced variation of the suc-
cess regarding the consolidation of the administrative institutions.
In accordance with the recommendations of the European Commission and the
best available practices of the European Union member states, the golden rule is that
the lower the number of the institutions involved at different governance levels is
(sectoral and regional), the higher the governance efficiency is.
Numerous actors consider the “governance” concept as being very difficult to
define and quantify by means of a single indicator or of a combination of indicators
which could show all the governing dimensions (Andrews 2008; Kaufmann et al.
2010). However, the attempts of measuring the governance at public level shown by
the World Bank together with its experts in the field, namely, Kaufmann, Kraay, and
Masstruzii (2010), are remarkable. They tried to develop an indicator regarding the
public governance called within the World Governance Indicators (WGI). Such an
indicator is also used by numerous researchers who investigated the determining
causes of the shadow economy of different countries (Torgler and Schneider 2009;
Thießen 2010). The World Governance Indicators (WGI) provided by the World
Bank (2020b) summarize the opinion regarding the quality of governance provided
by a large number of enterprises and citizens within some aggregated and individual
governance indicators calculated for 215 economies since 1996 until now referring
to six dimensions of the governing as follows (World Bank 2020b):
2
9.00 R Linear = 0.071
8.00
Rosk of money laundering
7.00
6.00
5.00
4.00
3.00
40.00 60.00 80.00 100.00

Fiscal freedom
Graph 2.9 Correlation between money laundering and fiscal freedom
(a) Voice and responsibility (VA) which capture the freedom of expression, free-
dom of association, and freedom of press.
(b) Political stability and absence of violence (PV) evaluates the perception mea-
sured of the probability to destabilize or turn out the government.
(c) Governance efficiency (GE) captures the perceptions regarding the public ser-
vices to produce and implement the good policies and to supply public goods.
(d) The regulatory quality (RQ) captures the perceptions regarding the capacity of
the government to formulate and implement solid policies and regulations
which allow and promote the development of the private sector (also includes
the perception of tasks imposed by the excessive regulation).
Table 2.11 Correlation coefficients between money laundering and fiscal freedom
Risk of money laundering Fiscal freedom
Risk of money laundering Pearson correlation 1 .266**
N 164 161
Fiscal freedom Pearson correlation .266** 1
N 161 181
Table 2.12 Regression of money laundering depending on the Fiscal freedoma

Non-standardized
Constant 3.825 .604 6.338 .000
Fiscal freedom .027 .008 .266 3.483 .001
a
(e) Rule of law (RL) reflects the perception on the measure where the agents have
confidence and comply with the society laws, ownership rights, police and law
courts, and the crime and violence probability rate.
(f) Control of corruption (CC) reveals the perceptions on the measure where the
public power is exercised to obtain private gains.
Each component is calculated and reported on a scale from −2.5 (weak) to 2.5
(strong) related to the governance performance.
Various studies have showed the importance of a good functioning of the public
governance or of the state apparatus regarding the corruption and shadow economy
facts. The issues associated to the bureaucracy regulatory framework, law and order
observance, confidence rate, discouraging measures are stimulating the individuals’
involvement with corruption and shadow activities.
2.3.1.2 Public Governance in European Union Countries
Further on, we propose to investigate the quality of the public governance in the
European Union countries for the period 2005–2015. The present study will provide
us with clues about the links between the quality of governance and the phenomena
of economic and financial crime.
Methodology
To measure the public governance quality we shall appeal to its three dimensions,
as they are determined by the World Bank (2020b) within the World Governance
Indicators (WGI), namely, governance effectiveness, regulatory quality, and rule of
law. For each dimension the World Bank calculate scores ranging on a scale from
−2.5 (weak) to 2,5 (strong) referring to the governance performance.
The governance effectiveness indicator as it is reflected by the World Bank
(2020b) shows the perception of the population regarding the public service quality
and the independence rate against the political pressures formulated by the govern-
ment as well as the credibility of the commitment assumed by it regarding the adop-
tion of these policies.
Regulatory quality indicator catches the perception on the government capacity
to formulate and implement solid policies and regulations promoting and stimulat-
ing the private sector development (it also includes perception of the tax pressure
imposed by the excessive regulation).
Rule of law indicator as presented by the World Bank reflects the extent to which
the agents have confidence and observe the society rules and particularly the quality
of contract execution, ownership rights, police and law courts, and the probability
of crimes and violence.
The data sample consists of 28 European Union member states, and the analysis
period is 2005–2018. The methods used include descriptive methods, comparison,
analysis, and synthesis.
Graph 2.10 shows that for the analysed period, the lowest public governance effec-
tiveness was found in Romania (the only country of the European Union with a
negative score). This is followed by Bulgaria, Italy, and Greece. By contrast, the
most effective public governance is again found in the Northern countries (Finland,
Denmark, Sweden, and the Netherlands).
Graph 2.11 reflects the regulatory quality in the European Union countries. One
can be seen that among the European Union countries, Croatia seems to have the
lowest regulatory quality. It is closely followed by Romania and Bulgaria. By con-
trast, the highest regulatory quality is found in Denmark, Finland, the Netherlands,
and the United Kingdom.
Graph 2.12 shows that among the European Union countries with the lowest
confidence in the rule of law, there are Bulgaria, Romania, and Croatia. On the
opposite pole there are Finland, Denmark, Sweden, Austria, and the Netherlands.
There can be seen that the European Union countries belonging to the former
communist block shows very low levels of the public governance effectiveness and
low confidence in the rule of law. The explanations indicate the burden of the com-
munism heritage from these countries characterized by public governance which
still has much to learn until the achievement of the real values of democracy, and
this is also reflected by the low living standard of the population from these coun-
tries. Within the public bodies, the mechanisms of control play a significant role
both for the prevention and for the detection of corruption cases. Also, the member
countries must promote the increase of the public confidence in justice and admin-
istration and, last but least, the implication of the civil society in decision-making
processes. The declaration of the public officers’ fortune, the elaboration of norms
referring to the conflicts of interest, the enhancement of the role of the court of audit
for encouraging the anti-corruption reforms, the clear identification of the elected
officers for corruption deeds, the establishment of a clear harmonized definition at
the level of the European Union of the “public officer”, and the establishment of a
legal framework and well-regulated and transparent system of funding of the
political parties are only some of the anti-corruption measures identified by the
European Commission (2014).
Based on the analysis of the previous chapters, we also found out that the post-
communist countries present at the same time also the highest levels of the eco-
nomic and financial crime. Further on, we shall directly approach the relation
between the public governance and corruption, shadow economy, and money laun-
dering facts reflecting the reviewing of the specialized literature regarding this issue
but also of the conduct of some empirical studies.
2.3.2 Public Governance and Corruption
Different studies revealed the importance of ensuring a high rate of confidence in

the governing institutions to guarantee a good functioning of the state (Kirchler
2007; Torgler and Schneider 2009; Park and Blenkinsopp 2011; Fritzen et al. 2014).
Corruption and confidence are two important determining factors for the public
governance quality (Fritzen et al. 2014). A higher institutional quality of a state
determines that its citizens have a higher confidence in the state, and, consequently,
these will be less interested in cheating.
The government has a strong discretionary power regarding the allocation of
resources, and the bribery is paid to avoid the payment of taxes or to avoid the com-
pliance with the lawful regulations (Torgler and Schneider 2009). Consequently, the
societies showing a high rate of confidence in the state indicate at the same time a
more reduced level of corruption.
The confidence in the government or in the public services reflect the subjective
judgements of the citizens by means of which they consider that the government is
competent, reliable and honest and at the same time satisfies their needs (Park and
Blenkinsopp 2011). A low institutional quality determines a low confidence in the
government leading to search for methods to avoid the law (Kirchler 2007). One of
these methods is the bribery of the public officers to avoid the payment of taxes,
and, thus, corruption is enhanced. In this regard, the study carried out by Dreher
et al. (2009) for a sample consisting of 18 countries of OECD revealed that the
improvement of the institutional quality reduce corruption and shadow economy in
these countries.
Referring to the regulation of the business start-up in the study conducted by
Djankov et al. (2002) on a sample of 85 countries, they showed that the value of the
official costs of business start-up are very high in most countries. This obstacle can
be bypassed by the enterprises enhancing, thus, the corruption level. Djankov et al.
(2002) found out that in the countries where the regulations for the business start-up
are strong, the corruption level and the level of the shadow economy are higher than
in the countries where the regulations referring to the business start-up are weaker.
On the other hand, the studies conducted by Kirchler (2007), Torgler and
Schneider (2009), and Park and Blenkinsopp (2011) identified that a high institu-
tional quality generate low interest regarding the law avoidance and thus the corrup-
tion level is reduced. Moreover, the recent study conducted by Forson et al. (2017)
for a sample of more than 22 countries from sub-Saharan Africa for the period
1996–2013 found out that the efficiency of the governing and the quality of the
regulations are determining factors for corruption level. They concluded about the
existence of some complementary sources of corruption from the perspective of the
institutional inefficiency. Additionally, the study conducted by Forson et al. (2017)
identifies that the influence of the institutional quality on corruption is much higher
in the developing countries than in the developed ones. The excessive bureaucracy,
the lack of transparency, and the ambiguous and confusing legislation particularly
stir up a poor person who becomes more and more preoccupied by the officers cor-
ruption to obtain immediate benefits.
The role of the public governance regarding corruption constituted the object of our
researchers.
Methodology
Further to the investigation of the specialized literature and practice, we expect that
a low quality of the public governance consisting of an excessive bureaucracy, low
transparency, a dense and inconsistent regulatory system generate discontent among
the population who will appeal to the public officers bribery or obtain immediate
benefits. In conclusion, we propose to test the following working hypothesis:
Hypothesis 1: An increase of the public governance quality leads to a diminution
of corruption.
Corruption is measured as the place occupied by a country from the total coun-
tries included in the analysis (185), depending on the score obtained by the
Corruption Perception Index (CPI), provided by Transparency International
(2020b). A top position occupied by a country regarding the corruption level reflects
a high corruption level and vice versa.
The public governance will be measured as mean of the scores obtained by the
six governing dimensions as provided by the World Bank (2020b): voice and
2.5
1.5
0.5
0
Italy
Malta
Spain
Latvia
France
Ireland
Poland
Austria
Croatia
Cyprus
Finland
Greece
Estonia
Belgium
Bulgaria
Sweden
Hungary
Slovakia
Portugal
Slovenia
Denmark
Lithuania
Germany
Romania
Luxembourg
Netherlands
Czech Republic
United Kingdom
-0.5
Graph 2.10 Governance effectiveness in the European Union countries, 2005–2018. (Source:
own processing)
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
France
Poland
Ireland
Austria
Croatia
Cyprus
Finland
Greece
Estonia
Belgium
Bulgaria
Portugal
Sweden
Hungary
Slovenia
Slovakia
Romania
Lithuania
Germany
Denmark
Luxembourg
Netherlands
Malta
Spain
Latvia
United Kingdom
Czech Republic
Italy
Graph 2.11 Regulatory quality in the European Union countries, 2005–2018. (Source: own
processing)
responsibility, political stability and absence of violence, governance efficiency,

rule of law, and control of corruption. The global score of the public governance is
situated on a scale from −2.5 (weak) to 2.5 (strong) regarding the public governance
performance.
The sample is represented by a number of 185 countries, and the period of analy-
sis is for which all the data are available. To this aim we use the descriptive methods,
correlation coefficients, and regression analysis, and we carry out the statistical tests
necessary to ensure a high accuracy of the results. The statistical data processing is
carried out using the statistical SPSS software.
2.5
1.5
0.5
0
Italy
Spain
Malta
Latvia
Cyprus
France
Poland
Austria
Ireland
Greece
Finland
Estonia
Croaa
Sweden
Bulgaria
Slovakia
Belgium
Portugal
Hungary
Slovenia
Romania
Lithuania
Denmark
Germany
Netherlands
Luxembourg
-0.5
Czech Republic
United Kingdom
Graph 2.12 Rule of law in the European Union countries, 2005–2018. (Source: own
processing)

Graph 2.13 and Table 2.13 show an extremely close correlation between corruption
and public governance. Almost 87% of the corruption variation at the level of a
country is explained, at average, by the quality of the public governance of that
country. The correlation coefficient (c = −0.931) reflects an indirect and extremely
close relation between the two variables. Table 2.14 shows that an increase by one
point of the quality of the public governance leads to a decrease of the corruption
level by 50 units (respectively about 50 positions of the ranking top countries).
The results of the study confirm the investigation hypothesis previously established,
and we found out that an increase of the quality of the public governance leads to a
significant diminution of the corruption level.
Similar results are found in the specialized literature (Kirchler 2007; Dreher
et al. 2009; Torgler and Schneider 2009; Park and Blenkinsopp 2011; Fritzen et al.
2014) confirming thus an extremely closed relation between the two variables. A
low institutional quality determines a low confidence in governance leading to the
identification of methods to avoid the laws, for instance, by public officers’ bribery
to avoid the tax payment, and, thus, corruption is enhanced (Kirchler 2007). The
study conducted by Dreher et al. (2009) demonstrates that the improvement of the
institutional quality results in the diminution of the corruption level.
The above study, although provides results which are in line with those presented
in the specialized literature, presents some limitations regarding the techniques used
and the failure to include in the analysis some control variables (for instance, the
economic growth level). In this view, the study conducted by Forson et al. (2017) is
suggestive; it indicates that the influence of the institutional quality on corruption is
much stronger in the developing countries than in the developed ones. In conclu-
sion, a differentiated approach of the analysis by the two categories of countries
(developed and developing), the use of a more complex methodology of data pro-
cessing (for instance of panel type), as well as the utilization of some well-
substantiated control variables can determine a higher degree of soundness of the
results of this relation investigation.
2.3.3 Public Governance and Shadow Economy
The studies conducted by Torgler and Schneider (2009) demonstrate the importance
of the quality of the public governance on the level of the shadow economy. Also,
Torgler (2004) found out that the direct democratic rights and the local autonomy
have a significant positive effect on the dimensions of the shadow economy. In a
study carried out on a number of cross data available for 120 countries and panel
data for 70 countries for the period 1994–2002, Dreher and Schneider (2010) found
that an increase of the corruption indicator by one point results in the increase of the
level of the shadow economy (expressed as percentage of the GDP) by 1.5–3.5 points.
Reviewing different studies, Kirchler (2007) concluded that the shadow activi-
ties increase as the confidence in the public governance decreases, the tax morale is
deteriorated, and the legal regulations regarding the economic activities multiply.
The study conducted by Richardson (2006) shows that the confidence is negatively
correlated with the tax avoidance; consequently, a low level of confidence in the tax
authorities is correlated with the high levels of the tax avoidance. Also, the study
carried out by Kogler et al. (2013) confirms the role of the confidence and power as
important determining elements of the tax compliance rate and concluded that the
highest level of tax compliance and the lowest level of the tax avoidance are obtained
under the circumstances provided by high confidence and power in governance
activity. Thus, during the last years, the confidence in the government authorities as
well as the tax morale and the motivational issues have been investigated to identify
whether they influence on tax avoidance (Kogler et al. 2013; Prinz et al. 2014;
Antoci et al. 2014).
In the study elaborated by Achim, Borlea, Găban, and Cuceu (2018a) for the
European Union countries over the period 2007–2013, the quality of the public
governance is associated with a lower trend of engagement in shadow activities of
the EU member countries. The quality of the public governance was estimated using
the World Governance Indicators (WGI) provided by the World Bank (2020b), and
the magnitude of the shadow economy for the European Union member countries is
determined as percentage of the GDP as it was determined by Schneider (2013), for
the period 2007–2013. Referring to the influences of different components of the
public governance on the shadow economy (as they are reflected by the WGI gov-
ernance indicator elaborated by the World Bank), the study conducted by Achim,
Borlea, Găban, and Cuceu (2018a) showed that each of these components of public
governance negatively and significantly influences the shadow economy at the level
of the sample countries.
This study shows that, regarding the new members of the European Union, which
adhered after the May 1, 2004 (countries represented by EU 13), the influence of the
governance components on the shadow economy is a little bit weaker. Thus, the
impact of the components voice and responsibility (VA), political stability and
absence of violence (PS), governance effectiveness (GE), regulatory quality (RQ),
and rule of law (RL) on the shadow economy is negative but significant only at a
significance threshold of 5% and 10%. The influence of the control of corruption
(CC) on the shadow economy was found to be negative but statistically insignificant.
As a result, this factor seems to not be determining for the shadow economy in these
countries. However, the results obtained by Achim, Borlea, Găban, and Cuceu
(2018a) are somehow in line with the results obtained by Dreher and Schneider
(2010). The latter found proofs showing that this relation can be different among the
countries with high incomes and those with low incomes rate, and it is explained by
the different mechanisms which are prevailing in each category of country. By con-
necting to the results obtained by Achim, Borlea, Găban, and Cuceu (2018a),
because the new EU members present a GDP per capita three times smaller than the
old EU members (EU 15), the different mechanisms which characterize the coun-
tries with high incomes and those with low incomes mentioned by Dreher and
Schneider (2010) could be used as explanations of the different results obtained
regarding the impact of the corruption control on the shadow economy within the
two groups of countries (EU 15 and EU 13).
Further on, we propose to investigate a potential relation of causality existing

between the public governance and the shadow economy.
Methodology
Based on the results identified in the specialized literature, we expect that a low
quality of the state institution effectiveness, the lack of discouraging measures, and
the excessive bureaucracy generate the stimulation of the population to prefer to act
within the unofficial economy (shadow economy) rather than in the official one, as
the latter is perceived as being cumbersome and pressing. In conclusion, we propose
to test the following working hypothesis:
2
200.00 R Linear = 0.867
150.00
Corruption
100.00
50.00
.00
-3.00 -2.00 -1.00 .00 1.00 2.00

Public governance
Graph 2.13 Correlation between corruption and public governance

Table 2.13 Correlation coefficients between corruption and public governance

Corruption Public governance
N 185 185
Public governance Pearson correlation −.931** 1
N 185 185
**
The correlation is significant at a significance threshold of 0,01 (two-tailed)
Hypothesis 1: The increase of the public governance quality leads to a diminu-

tion of the level of the shadow economy.
six dimensions of the governance as provided by the World Bank (2020b): voice and
responsibility, political stability and absence of violence, governance effectiveness,
rule of law, and corruption control. The global score of the public governance is
situated on a scale from −2.5 (weak) to 2.5 (strong) regarding the public governance
performances.
The shadow economy is measured as percentage of the GDP using as data source
the information provided by Medina and Schneider (2018).
The sample is represented by 185 countries, and the analysis period is 2005–2015
for which all the data are available. To achieve this purpose, we use the descriptive
methods, correlation coefficients, and regression analysis, and we carry out statisti-
cal tests necessary to ensure a high accuracy of the results. The statistical processing
is carried out using the statistical SPSS software.
Graph 2.14 and Table 2.15 show the existence of an indirect strong enough correla-
tion between the quality of the public governance and the shadow economy. About
48% of the variation of the shadow economy level can be explained by the quality
of the public governance (R squared = 0.484).
Table 2.16 shows that the coefficient of the public governance variable is statisti-
cally negative and significant at a significance threshold of 1%. We found out that
the increase by a point of the quality of the public governance leads to the decrease
of the shadow economy, at average by 9.295 units (respectively, 9.295% of the GDP).
The results of our study confirm our working hypothesis concluding that the increase
of the quality of the public governance leads to the diminution of the level of the
shadow economy. Thus, a high regulatory level, a low confidence in the rule of law,
police, and justice, and a low rate of public goods and service generation represent
an important impulse for the involvement in shadow economy.
The results of the above-mentioned study are in line with the studies conducted
by Torgler (2005), Torgler and Schneider (2009), Dreher and Schneider (2010),
Kirchler (2007), and Achim, Borlea, Găban, and Cuceu (2018a) who similarly iden-
tified a significant negative influence of the quality of the public governance on the
level of the shadow economy.
The present study proposes to represent only a starting point for the investigation
of the relation between public governance and shadow economy. To obtain a high
accuracy of the results, it is required to use some control variables in the analysis
model of the shadow economy, for instance, the economic growth level, the tax
pressure, social and cultural variables, etc. Also, the utilization of more advanced
methodologies of analysis of the panel type of the data can ensure the result
soundness.
2.3.4 Public Governance and Money Laundering
The Organization for Security and Cooperation in Europe (OSCE) (2012) in the
declaration about the consolidation of good governance and fight against corrup-
tion, money laundering, and terrorism funding states that “the poor public gover-
nance is among the factors that contribute to the spreading of money laundering fact
and terrorism funding”. According to this declaration, it is once again confirmed the
OSCE commitment to “fight against the money laundering, terrorism funding, and
associated crimes, turning them into political priorities supported by suitable judi-
cial instruments, suitable financial, human, and institutional resources and, if
required, the utilization of some suitable instruments for their practical and efficient
implementation”.
Also, the specialized studies identified an important role of the legal, financial
infrastructure and law enforcement authorities (Peterson 2001, p.15) to fight against
money laundering acts. The provision of a suitable regulatory framework of the
money laundering (Chong and López-de-Silanes 2015; and Schwarz 2011) together
with the efficiency of the judicial system (Vaithilingam and Nair 2009, Ardizzi et al.
2014) are the factors with a significant impact on the diminution of the money laun-
dering crime.
Table 2.14 Corruption regression depending on the public governancea

Non-standardized
Constant 81.706 1.319 61.967 .000
Public governance −50.689 1.465 −.931 −34.612 .000
a
Further on, we propose to investigate an eventual causality relation between the

public governance and money laundering.
Methodology
Based on the results found in the specialized literature, we expect that the low qual-
ity of the state institution effectiveness, the lack of measures able to detect the sus-
pect transactions or of the discouraging measures, generated the stimulation of the
involvement in money laundering activities. In conclusion, we propose to test the
following working hypothesis:
Hypothesis 1: The increase of the quality of the public governance leads to the
diminution of the money laundering volume.
six dimensions of the governance as provided by the World Bank (2020b): voice and
responsibility, political stability and absence of violence, governance effectiveness,
rule of law, and control of corruption. The global indicator of the public governance
is situated on a scale from −2.5 (weak) to 2.5 (strong) regarding the public gover-
nance performances.
The level of money laundering is determined using the Basel AML (Basel Anti-
Money Laundering Index) indicator measuring the risk of money laundering and
terrorism funding, as it is provided by Basel Institute on Governance (2020).
The sample is represented by a number of 164 countries for which all the data
corresponding to the period 2015–2018 are available. To this aim, we use the
descriptive methods, correlation coefficients, and regression analysis, and we carry
out tests to ensure a high accuracy of the results. The statistical processing is per-
formed using the statistical SPSS software.
Graph 2.15 shows a reverse correlation between the quality of the public gover-
nance and the risk of money laundering. A percentage of 41.6% of the variation of
the risk of money laundering is explained by the quality of the public governance (R
square = 0.416). At a correlation coefficient of −0.645, the relation between the two
variables appears as being indirect and of medium to high intensity (Table 2.17).The
regression coefficient of the public governance variable is statistically significant at
a significance threshold of 1%. We find out that the increase of the quality of the
public governance leads to the diminution of the risk of money laundering by 0.845
points (Table 2.18).
The results of our study confirm the investigation hypothesis established, conclud-
ing that the increase of the quality of the public governance leads to a diminution of
the risk of involvement in the money laundering crimes. The results of the investiga-
tion mentioned above, are in line with the specialized literature (Chong and López-
de-Silanes 2015; Schwarz 2011; Vaithilingam and Nair 2009; Ardizzi et al. 2014)
2.4 Corporate Governance 115
about the documentation of a direct significant influence of the public governance

on the risk of money laundering.
2.4 Corporate Governance
2.4.1 Concept of Corporate Governance
As it is a highly topical issue, the theme of the corporate governance was largely
discussed in the specialized literature, particularly in the German and Anglo-Saxon
literature, and this is the reason for the diversity of the definitions:
• In the etymological point of view, the concept of governance comes from Old
Greek word “Kybernaien”, then from the Latin language “governance”, to desig-
nate the guiding of a boat on the sea.
• The Oxford Dictionary (2020) defines “governance” as action, manner or lead-
ing function, administration, management.
• The term “good governance” was mentioned for the first time in the year 1932 by
Berle and Means (1932), within the theory which they developed, theory which
constitutes, even today, the basis of the management systems.
• Tricker (1984), called by Cadbury as “father of corporate governance”, considers
that the essential elements of a good governance are company strategy, executive
management, responsibility, and surveillance.
• A very well-known definition is the one given by Shleifer and Vishny (1997)
according to which the corporate governance refers to the way in which the sup-
pliers of funds of a company ensure that they will receive the due benefits result-
ing further to the investment made.
• Strictly accounting approach of the concept of corporate governance belongs to
Law on Control and Transparency in Business (KonTraG 1998), which defines
the corporate governance as the regulatory action regarding the control and trans-
parency of the annual reports. The author considers that the administrator is
obliged to ensure the maintenance of suitable systems for the administration of
risk and internal control monitoring. Also, KonTraG (1998) insists on the obliga-
tion of the board of directors to report to the surveillance board the issues related
to funding, investments, and employment planning.
• An extended definition of the corporate governance is given by Ethical Investment
Research Services body which considers the corporate governance as being a set
of relations between the company management, executive directors, sharehold-
ers, and other stakeholders. For the shareholders this managing process can lead
to the increase of the confidence regarding the obtaining of fair profitability of
their investments. For the other parties, it can provide the certainty that the com-
pany activity is developed in a responsible manner in its relation with the society
and the environment (Maier 2005, p. 5).
R2 Linear = 0.484
60.00
Shadow economy
40.00
20.00
.00
–2.00 –1.00 .00 1.00 2.00

Public governance
Graph 2.14 Correlation between shadow economy and public governance
Table 2.15 Correlation coefficients between shadow economy and public governance
Shadow economy Public governance
N 156 156
N 156 185
Table 2.16 Regression of shadow economy depending on the public governancea

Non-standardize
coefficients Standardize coefficients
(Constant) 28.794 .696 41.347 .000
Public governance −9.295 .774 −.695 −12.008 .000
a
Dependent variable shadow economy
• According to the Organization for Cooperation and Economic Development

(OECD 2015), the corporate governance represents the system by means of
which the companies are directed and controlled. In details, it refers to the way
in which the rights and responsibilities are shared among the categories of par-
ticipants to the company activity like the board of directors, the managers, share-
holders, and other groups of stakeholders specifying, at the same time, the way
in which the decisions referring to the company activity are made, the way in
which the strategic objectives are defined which are the means to achieve the
objectives and the way of monitoring the financial performances. Thus, the con-
cept is considered as having two sides: the behavioural (referring to the way in
which the managers of a corporation, the shareholders, the employees, creditors,
and the suppliers the state and other group of stakeholders interact within the
general strategy of the company) and the normative one (referring to the set of
regulations corresponding to these relations and the behaviour described above –
commercial law of companies, law of securities and capital markets, law of
bankruptcy, competition law, requirements of the listing rule, etc.).
• The World Bank (2005) states that the corporate governance encompasses both
the determination of value-added by firms and the allocation of it among stake-
holders that have relationships with the firm. Under this definition, the objective
of a good corporate governance framework is to maximize the contribution of the
firm to the overall economy. In this case, corporate governance would include
the relationship between shareholders, creditors, and corporations; between
financial markets, institutions, and corporations; and between employees and
corporations. Under this definition, corporate governance could also encompass
corporate social responsibility pertaining to such issues as charitable contribu-
tions or environmental concerns.
• International Federation of Accountants (IFAC 2003) defines the corporate gov-
ernance as ensemble of practices of the board of directors and of the executive
management to ensure the strategic action directions, the achievement of the
proposed objectives, administration of risks, and responsible utilization of finan-
cial resources.
• The activity of the board of directors is generally supported by the technical
structures (committees) represented by the risk committee, the remuneration
committee, the nomination committee, and the audit committee. The risk com-
mittee is especially found within the credit institutions and is meant to support
the Board of Directors to evaluate to which extent the institution complies with
the coordinates of the level of the tolerance to risks established through the bank-
ing strategy. The control of significant risks to which the entity is exposed must
draw the attention on the risk assumption, permanently monitoring the risk of the
activity and the existing capital volume.
• Referring to the relation between corporate governance and corporative social
responsibility, the study conducted by Kolk and Pinkse (2010) on a sample of
250 companies concluded that more than half of the companies analysed allo-
cated a special section of corporate governance in their reports regarding the
corporative social responsibility. Finally, the authors conclude about the very
close relation between the concept of corporate governance and the corporative
social responsibility.
• In Romania, the concept of corporative governance is relatively recent; preoc-
cupations of the authors for this issue are found only in the works after 2008.
Thus, according to Morariu et al. (2008, p.182), the corporate governance repre-
sents the system by means of which the entities are governed and controlled. A
similar idea was issued by the authors Feleagă et al. (2011) who state that “the
corporate governance represents an ensemble of rules of the game” by means of
which the companies are internally administrated and supervised by the board of
directors to protect the interests of all the participants”.
–– Based on the above-mentioned definitions, we conclude that the corporate
governance is the system by means of which the companies are governed and
controlled to achieve the objectives of an economic entity.
2.4.2 Corporate Governance, Data Manipulation, and Fraud
The directors together with the financial manager are directly responsible for the
failure to observe the accounting regulations. In this sense, the existence of an audit
committee within the company is meant to assist the functioning of the board of
directors to achieve the objectives. Thus, the audit committee is meant to ensure that
the risks faced by the entity are identified by the management and the latter took
sufficient and solid enough measures to guarantee that the risks will not be material-
ized. In other words, the corporate governance as a system by which the economic
entities are governed and controlled is directly responsible of the true and fair value
of the financial state reflected in the accountancy.
2.4.2.1 E
arning Management or Creative Accounting – Instrument
of “Embellishment” of the Accounting Data
Because of the freedom which is assigned to the professional accountant, the data
included in the financial statements can be easily manipulated by the unscrupulous
practitioners of the accountancy profession in the so-called “creative accounting”
or “earning management”.
Thus, observing the letter, but not the spirit of law, by means of the creative
accountancy techniques, the values of different categories of asset, liability, equity,
income, and expense can be distorted to present favourable indicators of the finan-
cial performance. More exactly, assets, liabilities, equity, incomes, or expenses can
be manipulated in order to provide a favourable picture of the entity to the thirds.
Referring to the definition of creative accounting or earning management, there
are many approaches:
9.00 R2Linear = 0.416
8.00
7.00
6.00
5.00
4.00
3.00
-3.00 -2.00 -1.00 .00 1.00 2.00

Public governance
Graph 2.15 Correlation between public governance and money laundering
Table 2.17 Correlation coefficients between public governance and money laundering
Risk of money laundering Public governance a
Risk of money laundering Pearson correlation 1 −.645**
N 164 164
N 164 185
Table 2.18 Regression of the money laundering depending on the public governancea
Standardized
(Constant) 5.921 .069 85.240 .000
Public governance −.845 .079 −.645 −10.745 .000
a
• Griffith, American journalist, considers that: “All the enterprises hide their ben-
efits. The financial reportings published are based on records which have been
“adjusted” in a delicate manner or even substantially amended. The numbers
presented to the investors have been wholly modified to protect the guilty indi-
viduals. It represents the biggest scam since the Trojan Horse up to now. In fact,
this scam is legitimate and bears the name of creative accountancy” (quoted from
Feleagă and Malciu 2002, p.389).
• The practitioner position seems to be less incisive regarding this practice. In
quality of practitioner of the accounting profession, Jameson (1988) considers
that the accountancy process in its essence requires an operation with different
motivations and ideas. Based on this diversity, there occur manipulations, scams,
and falsification in case of some less scrupulous accountants. Jameson stated that
these creative accounting practices do not breach the accounting laws or stan-
dards, and, consequently, they comply with the letter of the law but not with its
spirit. Jameson thus declares the negative character of the creative accountancy
which distorts the financial results of the enterprise misguiding the users of the
accounting information.
• A very complete definition is provided by Naser (1993, p.59) who considers the
creative accountancy as a process by means of which:
• “The accounting numbers are manipulated and taking advantage of the flexibility
there are selected those practices of measurement and information that allow the
synthesis document transformation from what they should be in what the manag-
ers wish; and
• The transactions are structured in such a manner that they allow the production
of the accounting result wanted”.
• The creative accounting can be defined as an ensemble of methods aiming at
either the modification of the financial results, in order to maximize or minimize
it, or the presentation of the financial statements but the two do not exclude each
other. The accounting options have always existed available for the accountant,
and they do not involve creativity in the strict negative meaning of the word
(Stolowy 2009).
• A more complex view is reflected by the study conducted by Groșanu (2013)
who stated that “the creative accounting is the result of the flexibility existing
within the accounting regulations and which, if applied in good faith, allow
ensuring a fair and true picture of the financial position and of the performances
of the economic entity. Every user of the accounting information follows certain
interests, and the flexibility given by the accounting regulations is often used to
meet some private interests at the expense of the public interest.”
• On the other hand, Vladu et al. (2017) added that no scientific method would
allow anybody to find or to observe the absolute accounting truth.
• Earnings management occurs when managers use judgement in financial report-
ing and in structuring transactions to alter financial reports to either mislead
some stakeholders about the underlying economic performance of the company
or to influence contractual outcomes that depend on reported accounting num-
bers (Healy and Wahlen (1999, p. 368)).
The creative accounting techniques refer at the following issues, at least

(Achim 2008):
• Selection of methods, accounting policies, and options and their modification
• Utilization of estimations and accounting provisions
• Completion of artificial transactions to manipulate the values of the balance
sheet or to smoothen the result
• The time of selecting some transactions in a normal way leads to the modifica-
tion of the picture through the accounts
• Utilization of alternatives to recognize the elements of the financial position and
performances
The managers represent the most important category of stakeholders who would
like an increase of the company performances and, consequently, they would be
stimulated in the manipulation of the financial results with the aim of the appear-
ance of as high as possible profits.
More particularly when the managers’ remunerations are determined by the
magnitude of the accounting result (as incentives) then, they would be tempted to
become opportunist. So, they will try to find the best solutions to increase the prof-
its, and it is rarely when they appeal to the utilization of the flexibility and gaps of
the accounting regulations in order to present the financial statement of the com-
pany in a different manner from that which would result to the usual application of
the existing norms.
Another category of stakeholders interested in the application of creative accoun-
tancy technique is represented by the investors who want to obtain as high as pos-
sible profits in order to get a high volume of dividends.
2.4.2.2 Relation Between Creative Accounting and Fraud
From the point of view of those who are involved in the establishment, verification,
and control of the statements, the delimitation of the creative accountancy concept
from that of fraud is required as well as the clarification of the two concepts.
In accordance with the Cambridge Dictionary (2020), the word “fraud” is defined
as “the crime of getting money by deceiving people” or
“the crime of obtaining money or property by deceiving people”.
The International Standards on Auditing (ISA), through ISA 240, define the
financial fraud as “an intended action committed by one or more individuals from
the management, from the group of individuals who were assigned the governance
task, from employees or third parties which implies the use of scam to obtain an
illegal or unfair benefit” (International Federation of Accountants (IFAC) 2009).
The definition of the word “fraud” is also different from a country to another. In
general, the American definition includes in the creative accountancy the word
“fraud” placing it within the illegality area, while in the United Kingdom the cre-
ative accounting is not seen as an illegal issue but rather using flexibility in account-
ing; therefore it excludes the fraud. The flexibility allowed in the accounting is used
to the extent to which the company offers to the users a fair picture of the financial
statements so that they can make correct economic decisions such as the decision to
buy, to sell, or to keep the shares. However, this flexibility allowed by the account-
ing rules offer the managers the possibility to use the creative accounting. The use
of such techniques is carried out observing the law, but the problem is that they get
away from the basic objective of the accounting – namely, that of offering to the
users a fair and true value (picture) of the accounting statements.
Both the creative accounting and the fraud mainly occur during the times of
financial difficulties of the company and are meant to amend the truth. The creative
accountancy assumes the “embellishment” of the accounting data, process which is
not considered as being illegal, but it is certainly one which breaches the ethical
standards. Many times, the creative accounting and fraud are considered as being
synonyms, but there exist numerous differences. Fraud is made in bad faith by
means of which the law is breached – it has a negative character – while the creative
accountancy complies with law and not its spirit.
The creative accounting is legal, maybe even it could be a factor of achieving the
true and fair value in accounting, when it is applied with good faith (Groșanu 2013,
p. 33). On the other hand, the creative accounting could prove to be closer to the
fraud “if the loopholes of the regulations are used to obtain advantages of some
categories of users of the accounting information, to the detriment of others”
(Groșanu 2013, p. 33). In general, the specialized literature identifies two opinion
regarding the creative accounting, one by means of which it a priori has a negative
character and another through which the creative accounting is not necessarily a
negative thing; on the contrary it can contribute to the promotion of a fair picture.
The common denominator of the different approaches regarding the creative
accounting refers to present a distorted picture of the company, as being prosperous,
more attractive thus misguiding the investors and shareholders.
The similarities and differences between the creative accounting and fraud will
be schematically presented in Table 2.19.
As seen in the table above, the creative accounting is situated at the border
between legal and illegal matters, respectively, at the border between “legality and
moral fraud”, and “the step to fraud is small and many times invisible” (Groșanu
2013, p. 35).
2.4.2.3 R
ole of Audit in Detecting the Risk of Fraud Through
the Financial Statements
The big financial scandals that broke out worldwide were based on creative account-
ing practices combined with fraud and complicity with audit firms in order to cover
the problems faced by these entities. In certain situations, the large audit companies
were either accomplice or unable to detect the frauds and were considered guilty for
the financial losses caused to the companies subject to fraud and were punished to
pay compensations (Ball 2009, p. 277–300).
The International Standards on Auditing presents the main objectives of the

financial auditor as well as its responsibilities regarding the identification of the
financial frauds. However, ISA 240 specifies that throughout its mission, the auditor
must ensure that the risk of fraud will not influence significantly its opinion and
implicitly the quality of its mission (International Federation of Accountants
(IFAC) 2009).
ISA 240 presents the risk of fraud as a probability of fraudulent deeds at the
elaboration of the financial statements or at the level of the audited company patri-
mony. The same ISA 240 defines the financial fraud as an intended deed involving
the use of scams to obtain an unfair or illegal benefit from one or several individuals
from the company management, from the persons responsible with the governance,
from the employees, or from thirds (International Federation of Accountants (IFAC)
2009, p.166). Thus, we are able to consider that the financial auditors have an
extremely important role in discouraging the creative accounting.
According to the Institute of Internal Auditors, internal auditing is an indepen-
dent, objective assurance and consulting activity designed to add value and improve
an organization’s operations. It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effective-
ness of risk management, control, and governance processes (Coetzee and
Bruyn 2001).
The specialized literature confirmed the important role of the audit for the
engagement in manipulation techniques of the financial results. Thus, the study car-
ried out by Davidson and quoted by Vladu and Matiș (2010) concluded that the
“board of directors and the audit committees dominated by the non-executive mem-
bers are significantly associated with a lower possibility of administrating the salary
gains”. Last but not least, a more enhanced activity of the board of directors and of
the audit committee translated in a larger number of meetings can lead to a lower
rate of the creative accounting (Groșanu 2013).
Actually, the creative accounting practices occur when managers use their finan-
cial knowledge either to mislead certain stakeholders about the economic perfor-
mance of the company or to influence the contractual results that depend on the
reported accounting figures. In addition, when the remuneration of managers
depends on the financial performance of the company, it is in their interest to create
the illusion of high performance by resorting to creative accounting. There are many
companies that offer managers both direct compensation – represented by attractive
salaries and bonuses – and indirect, represented by prestige or promotions, which
are based on the financial performance of the company.
In order to find solutions to the remuneration of managers’ problem, the federal
agency, which supervises the application of the federal laws by the listed companies
and regulates the real estate transactions in the United States (US Securities and
Exchange Commission-SEC), made constant efforts in the field of regulating con-
trol in corporate governance and strengthening the internal control and audit func-
tion as palliative to this problem (Böckli 2005). The OECD regulations (2004)
about corporate governance make the following reference to management remu-
neration: An entity must present the remuneration policy of the Board members and
managers as well as information about the Board members, including their qualifi-
cations, the selection process, other company directorships and whether they are
regarded as independent by the board. Consequently, the corporate governance
codes of countries introduced serious parts meant to regulate the remuneration and
other bonuses for managers (Achim and Borlea 2013).
Cadbury report (1992) underlines the role of the audit committee as additional
mechanism for the protection of the shareholders’ interests to improve the responsi-
bility and transparency of the financial information and the internal control function
(Hsu and Wu 2014).
According to the OECD principles of corporate governance (2004), the corpo-
rate governance framework must ensure a disclosure accurate and in due time about
the financial statements, financial performance, company ownership, and perfor-
mance. To do it, the board has to establish an independent audit committee which is
able to ensure the integrity of the financial reporting and of the internal control
system including of the internal and external audit procedures. The audit committee
should include exclusively the non-executive directors and should consist of a suf-
ficient number of independent directors. The company must organize internal audits
to independently, periodically evaluate the reliability and efficiency of the system of
the risk management, internal control, and the practices of corporate governance.
The companies will include a statement of corporate governance titled “Comply or
Explain Statement” in the annual report in a distinct section. This statement will
comprise a self-evaluation about the way in which the “provisions that have to be
observed” are fulfilled as well as the measures adopted in order to observe the provi-
sions that have not been completely fulfilled.
For the case of Romania, the sections B and C of the Corporate Governance
Code provided by Bucharest Stock Exchange refer exactly to the issues related to
system of the risk administration and internal control and remuneration issues,
respectively.
2.4.2.4 Methods to Detect the Manipulation of the Financial Statements
The employees, the internal audit, the financial audit, and the managing staff are the
first who can identify the existence of a fraud besides the experts in the field. They
can identify the existence of the fraud by the simple fact that the reporting docu-
ments are submitted late, the behaviour of the individual committing the fraud, lack
of some goods, or the enrichment of some of the employees “overnight”. Besides
the methods of direct observation of the manipulation of the financial statements,
the specialized literature comprises statistical and mathematical methods which can
reveal the risk of the results manipulation through the financial statements.
The existence of the risk of fraud can be seen by means of a series of specific
indicators called in literature “red flags” (Robu and Robu 2013). Based on the red
flags indicators, the auditor can apply analytical procedures by means of which to
obtain proofs of the existence of fraud through the financial statements.
The fraud can always be disclosed because of the interconnections between the
components of the financial statements (income statement, cash flow statement, and
balance sheet). The investigation of fraud through the financial statements can be
done using some indicators for detecting accounting manipulations, indicators pro-
posed by Beneish (1999). Taking into account the analysis of certain financial ratios,
the specialized studies (Talab et al. 2017, p 289; Robu and Robu 2013; Hasan et al.
2017; Vladu et al. 2017) consider that a suitable tool to support the auditors in iden-
tifying the accounting fraud is M Score model elaborated by Beneish (1999).
The M score is a reliable tool to detect the fraud being built to support the audi-
tors in the process of detecting the risk of fraud in the financial statements. A com-
prehensive study of Talab et al. (2017) concludes that the M score elaborated by
Beneish and used to identify the possibility of accounting fraud is a reliable one. It
was demonstrated that the M score of Beneish is a popular and powerful instrument
for detecting the manipulation. The Beneish model is also known for its popularity,
simplicity, and reliability in detecting the fraud.
Despite its popularity, the most common techniques for measuring the manipula-
tion degree of the financial statements have not significantly changed during the last
30 years (proposed by Dechow et al. 1995, Vladu et al. 2017).
Presentation of M-Beneish model
Among the most well-known models of the evaluation of the manipulation degree
of the financial statements is the model elaborated by Professor Beneish (1999). The
M-Beneish model is a statistical model using the financial indicators calculated with
the accounting data of a specific company to verify the probability of manipulating
the results reported through the financial statements. The M-Beneish score is a prob-
abilistic model and as a result it cannot detect with an accuracy of 100% the compa-
nies which are manipulating their results. At the elaboration of the M score, Beneish
excluded from the sample the financial institutions. It means that the M score for the
fraud detection cannot be applied for the financial institutions (banks, insurance
companies). The model uses comparisons between the current and precedent year
(Beneish 1999).
At the elaboration of the M score, Beneish (1999) proposed a series of indicators
which can be used for the application of the analytical procedures to identify the
frauds from the financial statements, as follows:
1. Days Sales in Receivables Index (DSRI) represents the ratio between the period
of collecting receivables from one financial year to the previous one. As long as
there are no extreme changes of the crediting policy, it is expected that this
indicator has a linear structure. An increase in period of collecting receivables
may be a red flag for the manipulation of financial data.
DSRI = ( Net Receivables t / Salest ) / ( Net Receivables t −1 / Salest −1 )

2. Gross Margin Index (GMI) represents the ratio between the gross margin rate
registered by a year before the fraud notifying and the gross margin rate regis-
Table 2.19 Similarities and differences between creative accountancy and fraud
Creative accounting Fraud
Similarities 1. Intended actions
2. Distorts the truth
3. Occurs during times of financial difficulties
4. Creates advantages
Differences 1. Complying with the letter of the law 1. No complying
with the letter of
the law
2. No complying with the spirit of the law 2. No complying
with the spirit of
the law
3. Can be conducted in good faith (when the flexibility result 3. It is conducted
contributes to the achievement of a fair and true value) or with with bad faith
bad faith (some of the users of the information are
disadvantaged)
tered in the financial year when the fraud was notified. The reduction of Gross
margin ratio in the current year compared with the previous year represents a
negative signal for the future perspectives and reflects the fact that such compa-
nies are more engaged in result manipulation. Therefore, a GMI score greater
than 1 indicates that the gross margin ratios deteriorated, motivating the manage-
ment team to manipulate the numbers to look better than they might be other-
wise. A GMI score greater than 1 is an important red flag for any auditors and
accountants to show the degree of manipulation financial data.
GMI = ( Salest −1 − COGSt −1 ) / Salest −1 ] /[ ( Salest − COGSt ) / Salest  ,

where COGS is cost of goods sold (COGS) and it refers to the direct costs of pro-
ducing the goods sold by a company.
3. Asset Quality Index (AQI) is used to identify the eventual frauds at the company
level regarding the evaluation of the assets. It shows the modification of the
weight of other immobilized assets, except for the tangible ones, within the total
assets compared to the previous period. The higher the AQI value is, the higher
the possibility of manipulating the results is.
1 − ( Current Assetst + PP & E t + Securitiest ) / Total Assetst 

AQI = ,
1 − ( ( Current Assetst −1 + PP & E t −1 + Securitiest −1 ) / Total Assetst −1 ) 
 
where PP&E represents property plant and equipment (PPE)
4. Sales Growth Index (SGI) represents the ratio between the sales levels registered
throughout two consecutive periods of reporting. The increase of the sales is not
an indicator of the data manipulation; however, the companies which register

increase in sales are much more likely to engage in manipulations of results.
SGI = Salest / Salest −1
5. Depreciation Index (DEPI) represents the ratio of the depreciation rate in year
t-1 compared with the year t. The higher the value of the depreciation index indi-
cates that the rate at which assets are depreciated has slowed down, possible due
to increasing revision of the estimated lives of the tangible assets which finally
would lead to the increase of incomes.
DEPI =
( Depreciation / ( PP & E
t −1 t −1 + Depreciation t −1 ) )

( Depreciation / ( PP & E
t t + Depreciation t ) )

6. Sales General and Administrative Expenses Index (SGAI) measures the variation
of this type of expenses in relation with the sales level. The overheads may
include a series of incentives or bonuses for the managers. The existence of a
correlation between SGAI and sales is expected. A disproportionate increase of
this ratio reflects a negative signal about firms’ future prospects.
SGAI = ( SG & A Expense t / Salest ) / ( SG & A Expense t −1 / Sales t −1 )

7. Leverage Index (LVGI) measures the ratio between the total debt of an enterprise
and the total assets. The higher the ratio value is, the higher is the debt in relation
with the total assets. This variable is introduced to catch the incentives in the debt
contracts to manipulate the gains.
( Current Liabilitiest + Total Long Term Debt t ) / Total Assetst 

LVGI =
( Current Liabilitiest −1 + Total Long Term Debt t −1 ) / Total Assetst −1 

8. Total Accruals to Total Assets (TATA) describes the relation which is established
between the level of the total accruals (the change in working capital other than
cash and depreciation) and the level of the total assets. Accruals reflect the extent
to which managers make discretionary accounting choices to alter earnings.
Thus, a higher level of accruals associates with a higher likelihood of profit
manipulation. For the companies with risk of fraud, there can be noticed the
increase with the time of the percentage of the accruals as a result of the fraud on
the financial statements, which probably are determined by a series of fictitious
sales (Robu and Robu 2013).
( Income from Continuing Operationst − Cash Flows from Operationst )

TATA =
Total Assetst

In 1999, Professor Messod Beneish published the original variant of the score
function (M) which used eight financial indicators to detect the manipulation of the
results presented by the financial statements. The equation is the following:
M = –4.84 + 0.92 ∗ DSRI + 0.528 ∗ GMI + 0.404 ∗ AQI + 0.892 ∗ SGI +

0.115 ∗ DEPI – 0.172 ∗ SGAI + 4.679 ∗ TATA – 0.327 ∗ LVGI
Beneish further on modified the M score function eliminating some of the less
significant variables (SGAI, DEPI, and LVGI), obtaining a more simple equation
with five variables:
M = −6.065 + 0.823 ∗ DSRI + 0.906 ∗ GMI

+0.593 ∗ AQI + 0.717 ∗ SGI + 0.107 ∗ DEP
P
Values of the M score higher than −2.22 indicate a higher probability of manipu-
lating the gains.
An example of M-Beneish model for the Romanian economy is carried out in the
study conducted by Robu and Robu (2013), with the purpose to analyse and evalu-
ate the risk of fraud determined by the accounting manipulations starting from the
indicators proposed by Beneish. To this aim, the authors substantiated a function of
discrimination which explains 100% of the total variation of the risk of fraud shown
with the Beneish indicators. The function of discrimination elaborated by the
authors presents the following formula:
M − RiskFraud − Beneish = − 0.383 ∗ DSRI + 0.039 ∗ GMI − 0.325 ∗ AQI

+0.448 ∗ SGI + 0.273 ∗ DEPI
+0.915 ∗ SGAI + 0.478 ∗ LVGI − 0.153 ∗ TATA
For the function of discrimination M-Risk Fraud-Beneish elaborated for Romania

by Robu and Robu (2013), there are obtained three intervals of classification of the
companies by groups of risk:
1 . The interval [−2.841; −0.355] – zone free of risk of financial fraud – safe zone
2. The interval (−0.355; 0.313) – zone of uncertainty (grey zone) regarding the
occurrence of the risk of fraud and this is a case which assumes the application
of additional audit procedures
3. The interval [0.313; 2.453] – zone with risk of financial fraud where there exist
the use of tricks to misrepresent the company image or to reduce the transpar-
ency of the financial reports
2.4.3 Measuring Instruments of the Corporate Governance
2.4.3.1 International Approaches
Research centres and international rating agencies (Standards & Poor’s, Credit
Lyonnais Securities Asia (CLSA)) have developed a series of systems for measuring
corporate governance at the level of company, markets, or even countries, by grant-
ing ratings/scores.
For the elaboration of the corporate governance score, we consider as edifying
the methodology adopted by the Standards & Poor’s Rating Agency. This selection
is based on various specialized studies using the Standards & Poor’s methodology
as a basis for developing transparency scores for different markets (Doidge et al.
2007; Kusneciovs and Pal 2011; Desoky and Mousa 2012).
In order to assess corporate governance, Standards & Poor’s methodology fol-
lows two components:
• The country score is achieved by analysing the efficiency of the legal infrastruc-
ture for regulating and informing the market, on the quality of the corporate
governance of the company, in relation to the way in which external environment
acts, respectively, at the macroeconomic level.
• The score of the company is granted according to the effectiveness of the interac-
tion between managers, shareholders, and other stakeholders, at microeconomic
level.
For the most accurate assessment of the quality of corporate governance, both
microeconomic and macroeconomic components are important.
According to Standard & Poor’s, the score given to companies reflects the degree
to which the company adheres to internationally recognized corporate governance
standards, respectively, its codes and principles of good practice. In this regard,
Standard & Poor’s methodology developed in 2012 uses the system with a number
of 98 criteria regarding the attributes of corporate governance.
The establishment of the transparency score by Standard & Poor’s (T&D rank-
ing) is based on the investigation of 98 attributes of corporate governance, detailed
in three broad categories:
• Property structure, in relation to which, the following are analysed: transparency
of property structure; concentration and influence of the property structure on the
company and the relations with the shareholders when the analysis concerns
regularity of/access to information on the general meeting of shareholders; the
voting process and the way of meeting the shareholders; and property rights (28
attributes).
• Financial transparency and dissemination of information: quality and content of
information considered public; programming and access to information dissemi-
nation; and the independence and position of the company’s auditors (35
attributes);
• Governance structure and process in relation to which the following are anal-
ysed: governance structure and efficiency; the role and composition of manage-
ment; and the role and level of independence of the executive directors (35
attributes) (Standard and Poor’s 2012).
The results of the study conducted by Standard & Poor’s (2012) highlight the
high level of transparency of the markets in the United Kingdom and the United
States. Although these results do not specifically distinguish the Australian market
from the Asia-Pacific markets, the results of the Australian market reflect a high
level of transparency comparable to that of the United Kingdom and the United
States. Transparency scores recorded at the level of Europe and the developed coun-
tries of Asia are quite low and close to those recorded by the USA provided only by
the annual reports. Emerging markets in Asia and Latin America reflect a low level
of transparency of corporate governance, especially regarding the transparency of
directors and executive structures.
In the context of the financial crisis broke out in 2008, which has undermined the
confidence in corporate governance of companies, there are increasing concerns
about the development of these scores in an attempt to highlight the quality of the
corporate governance system as accurately as possible. Thus, the Standard & Poor’s
rating agency has developed the governance rating system by adding to it distinct
areas of interest, such as (Standard and Poor’s 2012):
• The managerial culture emphasizes whether the system of governance ensures
the interests of the stakeholders in a balanced way. In this sense, in the manage-
rial culture, excessive governance is considered an indicator of governance defi-
ciency. Alternatively, a governance that dominates the board of directors through
the control exercised by the general manager (CEO) is an indication of lack of
governance.
• Deviations/offenses of a legal/fiscal nature; it is pursued whether the company is
consistently in conflict with the law, and, in this regard, the number of fines or the
number of actions in court is highlighted.
• Communication, in relation to which the mode of communication with different
stakeholders is analysed and it is highlighted whether there are consistent con-
flicts of communication with them.
• The internal control that is assessed according to the number of deviations from
the standards/norms registered at different activity levels.
Finally, the corporate governance score relates to a four-tier scale, thus strong,
satisfactory, fair, and weak.
In the process of assessing the quality of corporate governance at the level of
countries around the world, the score of efficacy of corporate board calculated by
the World Economic Forum within the Global Competitiveness Index (GCI) is
extremely useful. This score is determined and reported annually as a global tool for
measuring national competitiveness for economies around the world and is an inte-
gral part of the Global Competitiveness Report. The score range between 1 (weak)
to 7 (good) thus reflecting the efficiency of corporate governance within national

economies.
As we can see from the previous chapter, the audit plays an extremely important
role in ensuring a real and transparent reporting of financial information, that is to
say, increasing the efficiency of the audit carried out in a company contributes sig-
nificantly to increasing the quality of corporate governance.
To demonstrate this relationship empirically, we calculated and plotted the cor-
relation between the two variables efficacy of corporate board and strength audit
and reports, using the scores reported by the World Economic Forum worldwide,
for the period 2006–2016.
Graph 2.16 shows an extremely close correlation (c = 0.887) between the effi-
cacy of corporate board and strength audit and reports. Moreover, approximately
78% of the variation in the quality of corporate governance is explained by the
quality of the audit carried out in the respective company (R2 = 0.787). A strong and
positive relationship between accounting standards and the quality of corporate
governance is also identified in the literature (Boța-Avram 2013; Wijayati et al.
2016). For example, Wijayati et al. (2016) explain this close correlation by the fact
that, in practice, strong accounting standards force companies to disclose informa-
tion in ways that generate transparent, accurate, and comparable financial informa-
tion, which leads to an increase in the quality of corporate governance by increasing
the transparency of information provided by the company to third parties.
We conducted the analyses with the purpose of substantiating the conclusion that
the quality of the audit represents, indeed, a very good estimator of the quality of
corporate governance. As a result, the scores calculated for strength audit and
reports by the World Economic Forum can also be successfully used as a proper tool
for assessing the quality of successful corporate governance.
2.4.3.2 National Approaches: Case of Romania
Once the beneficial practices of corporate governance have been understood and
assimilated in developed countries, the emerging countries, in their turn, feel the
need to adopt the “best practices” of corporate governance against a background of
changes required by the transition to a market economy.
The Bucharest Stock Exchange (BSE) carries out the first transactions only start-
ing with 1995. Thus, for the admission to the Stock Exchange, BSE created the Plus
Category (“transparency plus”) and adopted the first Corporate Governance Code
only in 2001. Listed companies would promote to the Plus Category only after they
had fully taken over the provisions of the Corporate Governance Code in their con-
stituent acts. This approach has not had the expected success, only one company
requesting promotion to the Plus Category.
In the following years, BSE created the Institute of Corporate Governance, which
is committed to educating listed issuers on promoting appropriate corporate gover-
nance standards and has been an active participant in discovering the best corporate
governance practices, contributing to the adoption of the White Charter on Corporate

Governance in the countries of South and East Europe.
In 2008, the Bucharest Stock Exchange revises the Corporate Governance Code,
and, in 2015, it is completely replaced by a new governance code that responds to
the changes in the legal framework in Europe and Romania as well as to the new
aspirations of the society and of the stakeholders regarding the obligations and con-
duct of companies.
The code has entered into force since the financial year 2016 and is applied vol-
untarily by the companies traded on the regulated market operated by
BSE. Companies that decided to adopt all or part of it have the obligation to submit
annually to BSE a declaration of compliance or non-compliance with the provisions
of the corporate governance code (the “Comply or Explain Statement”), specifying
recommendations that have been effectively implemented as well as the method of
implementation. The objective of the Corporate Governance Code of the Bucharest
Stock Exchange is to increase the confidence in the listed companies, by promoting
improved corporate governance standards in these companies. Good corporate gov-
ernance is a powerful instrument for strengthening market competitiveness.
The Bucharest Stock Exchange maintains a mechanism based on the “comply or
explain” principle, through which clear, accurate, and up-to-date information is
transmitted on the market regarding the compliance of the corporate governance
rules by the listed companies.
The companies shall include a corporate governance statement in the annual
report in a separate section, which shall include a self-assessment on how “the pro-
visions to be respected” are met, as well as the measures taken to comply with the
provisions that are not fully fulfilled.
The Corporate Governance Code of the Bucharest Stock Exchange is similar to
those adopted by other European Union member states and provides new compli-
ance recommendations, important for the executives and the boards of directors that
run the Romanian companies.
The Bucharest Stock Exchange considers the provisions of the code as having
supplementary character to other normative acts in Romania, applicable to compa-
nies traded on the regulated market (e.g. the law of commercial companies, the law
of accounting, the law on the capital market, etc.).
Elaboration of a corporate governance score for Romanian companies
(Achim and Borlea 2013)
In developing the corporate governance score, we rely on the Standard and Poor’s
methodology (which underpins corporate governance scores). For this purpose, we
will use as information base, the information contained in the “Comply or Explain”
statement, which the companies voluntarily report to the Bucharest Stock Exchange.
These statements are posted publicly on the company’s website.
According with Bucharest Stock Exchange Corporate Governance Code (2015)
within the “Comply or Explain Statement”, a number of 40 questions are presented,
structured in four sections, as follows:
Section A: Responsibilities
This section assesses the extent to which the role of the board of directors in a uni-
tary system and the role of the supervisory board/executive board in a dual system
are clearly defined and documented in the articles of incorporation, internal regula-
tions, and/or other similar documents. In this regard, there must be a clear delimita-
tion between the powers and duties of the general meeting of shareholders, the
board, and the executive management. The board shall meet with sufficient regular-
ity to ensure fulfilment of its tasks effectively. This section evaluates the extent to
which the composition of the Board and its committees has an appropriate balance
in terms of competence, experience, gender diversity, knowledge, and independence
of members, enabling them to perform effectively their duties and responsibilities.
It is recommended that the majority of non-executive members of the Board or of
the Supervisory Board to be independent.
Section A. Responsibilities includes 11 questions, synthetically presented as
follows:
A.1. All companies must have a board internal regulation that includes the terms of
reference/responsibilities of the board and the key management functions of the
company.
A.2. Provisions for conflict of interest management should be included in the board
regulation.
A.3. Board of directors or the supervisory board shall be composed of at least five
members.
A.4. Most members of the board of directors must have no executive function. At
least one member of the board of directors or the supervisory board must be
independent in the case of standard category companies.
A.5. Other relatively permanent professional commitments and obligations of a
member of the board, including executive and non-executive positions on the
board of non-profit companies and institutions, must be disclosed to potential
shareholders and investors before nomination and during his/her term of office.
A.6. Any member of the board must submit to the board information on any rela-
tionship with a shareholder who directly or indirectly holds shares representing
more than 5% of all voting rights. This obligation refers to any kind of relation
that may affect the member’s position on matters decided by the board.
A.7. Company must appoint a secretary of the board responsible for supporting the
activity of the board
A.8. Corporate governance statement shall inform whether a board evaluation has
been conducted under the leadership of the Chairman or of the nominating com-
mittee and, if so, shall summarize the key measures and changes resulting from
it. The company must have a policy/guide regarding the evaluation of the board,
including the purpose, criteria, and frequency of the evaluation process.
A.9. The corporate governance statement must contain information on the number
of meetings of the board and committees during the past year, the participation
of the directors (in person and in absentia), and a report of the board and commit-
tees on their activities.
A.10. The corporate governance statement must contain information on the exact
number of independent members of the board of directors or the supervisory
board.
A.11. The board of the premium tier companies must establish a nominating com-
mittee made up of non-executive members, which shall lead the procedure for
appointing new members to the board and make recommendations to the board.
Most members of the nominating committee must be independent.
Section B: Risk management system and internal control
This section evaluates the efficiency of the risk management system and internal
control. The board must establish the principles and modalities of approaching the
risk management system and internal control at the company level. The company
must organize internal audits in order to independently, periodically evaluate the
safety and efficiency of the internal risk management and control system and corpo-
rate governance practices. The board of directors or the supervisory board, as the
case may be, must set up an independent audit committee that can ensure the integ-
rity of the financial reporting and internal control system, including internal and
external audit procedures.
Section B: Risk management system and internal control includes 12 questions,
synthetically presented as follows:
B.1 Board must establish an audit committee in which at least one member must be
an independent non-executive director. Most members, including the chairman,
must have proven to have adequate qualification relevant to the functions and
responsibilities of the committee. At least one member of the audit committee
must have appropriate audit or accounting experience that can be proven.
B.2. Chairman of the audit committee must be an independent non-executive
member.
B.3. Within its responsibilities, the audit committee must carry out an annual evalu-
ation of the internal control system.
B.4. Evaluation should take into account the effectiveness and comprehensiveness
of the internal audit function, the degree of adequacy of the risk management and
internal control reports presented by the audit committee of the board, the
promptness and effectiveness with which the executive management solves the
deficiencies or weaknesses identified as a result of internal control, and the sub-
mission of relevant reports to the attention of the board.
B.5. Audit committee should evaluate conflicts of interest in relation to the transac-
tions of the company and its subsidiaries with related parties.
B.6. Audit committee must evaluate the efficiency of the internal control system and
the risk management system.
B.7. Audit committee should monitor the application of legal standards and gener-
ally accepted internal audit standards. The audit committee must receive and
evaluate the reports of the internal audit team.
B.8. Whenever the code mentions reports or analyses initiated by the audit commit-
tee, they must be followed by periodic (at least annually) or ad hoc reports that
are to be submitted to the council afterwards;
B.9. No shareholder may be granted preferential treatment over other shareholders

in connection with transactions and agreements concluded by the company with
shareholders and their affiliates,
B.10. The board must adopt a policy to ensure that any transaction of the company
with any of the companies with which it has close relationships, whose value is
equal to or greater than 5% of the company’s net assets (according to the latest
financial report) is approved by the Board following a mandatory opinion of the
Board ‘s audit committee and correctly disclosed to the shareholders and poten-
tial investors, to the extent to which these transactions fall within the category of
events that are subject to reporting requirements;
B.11. Internal audits must be performed by a structurally separate division (internal
audit department) within the company or by hiring an independent third-party
entity.
B.12. In order to ensure the fulfilment of the main functions of the internal audit
department, it must report functionally to the council through the audit commit-
tee. For administrative purposes and within the management’s obligations to
monitor and reduce risks, it must report directly to the general manager.
Section C: Just reward and motivation
This section refers to the remuneration policy for the non-executive and executive
members. The level of remuneration must be sufficient to attract, retain, and moti-
vate competent and experienced persons within the board of directors and executive
6.00
5.00
Efficacy of corporate board
4.00 R2Linear = 0.787
3.00
2.00
1.00
00
.00 2.00 4.00 6.00

Strenght audit and and reports
Graph 2.16 Correlation between efficacy of corporate board and strength audit and reports.
management. The board must ensure transparency regarding remuneration.

Shareholders must receive relevant information in order to understand the principles
applied by the company regarding the remuneration policy, which is based on the
fair reward and motivation for the members of the board and the general manager
(CEO) or the members of the executive board. A company must have a remunera-
tion policy and rules that define that policy. It should establish the form, structure,
and level of remuneration of the members of the board of directors, the general
manager, and, where appropriate, the members of the executive board.
Section C. Just reward and motivation comprises a single question formulated as:
C.1. Company must publish the remuneration policy on its website and include in
the annual report a statement regarding the implementation of the remuneration
policy during the annual period that is the subject of the analysis.
The remuneration policy of the management members should make reference to
the argumentation of the decisions regarding the remuneration detailing the compo-
nents of the remuneration of the executive management (such as salaries, annual
bonuses, long-term incentives related to the value of the shares, benefits in kind,
pensions, and others) and describe the purpose, principles, and assumptions under-
lying each component (including general performance criteria for any form of vari-
able remuneration).
Any essential change in the remuneration policy must be published in a timely
manner on the company’s website.
Section D: Adding value through investor relations
This section evaluates the extent to which the company communicates with inves-
tors. Thus, the extent to which the most important information in Romanian and
English reaches Romanian and foreign investors is evaluated. Also, companies must
make every effort to allow non-executive shareholders to attend general meetings,
including by using electronic means of communication, by encouraging the elec-
tronic voting system.
Section D. Adding value through investor relations comprises 16 questions, syn-
thetically presented as follows:
D.1. The company must organize an investor relations service – indicating to the
general public the person/persons responsible or the organizational unit. In addi-
tion to the information required by the legal provisions, the company must
include on its website a section dedicated to investor relations, in Romanian and
English, with all relevant information of interest to investors:
D.1.1. The main corporate regulations: the articles of incorporation and the pro-
cedures regarding the general meetings of the shareholders.
D.1.2. The professional CVs of the members of its governing bodies, other pro-
fessional commitments of the members of the board, including executive and
non-executive positions within the boards of directors of companies or non-
profit institutions.
D.1.3. Current reports and periodic reports (quarterly, half yearly and annual
reports) – at least those referred to in paragraph D.8 – including current
reports with detailed information regarding non-compliance with this code.
D.1.4. Information regarding the general meetings of the shareholders: the
agenda and the information materials; the procedure for electing the members
of the board; the arguments supporting the candidates’ proposals for election
to the board, together with their professional CVs; shareholder questions
regarding the items on the agenda and the company’s answers, including the
decisions adopted.
D.1.5. Information on corporate events, such as the payment of dividends and
other distributions to shareholders, or other events leading to the acquisition
or limitation of the rights of a shareholder, including the deadlines and prin-
ciples applied to these transactions. The respective information shall be pub-
lished within a time frame that shall allow investors to make investment
decisions.
D.1.6. Name and contact details of a person who shall be able to provide, upon
request, relevant information.
D.1.7. Company presentations (e.g. investor presentations, quarterly results pre-
sentations, etc.), financial statements (quarterly, half-yearly, yearly), audit
reports, and annual reports.
D.2. The company shall have a policy regarding the annual distribution of dividends
or other benefits to shareholders, proposed by the general manager or the execu-
tive board and adopted by the board, in the form of a set of guidelines that the
company intends to follow regarding the distribution of the net profit. The prin-
ciples of the annual distribution policy to shareholders shall be published on the
company’s website.
D.3. The company shall adopt a policy regarding forecasts, whether they are made
public or not. The forecasts refer to quantified conclusions of some studies aim-
ing at establishing the global impact of a number of factors over a future period
(so-called hypotheses): by its nature, this projection has a high level of uncer-
tainty, the actual results being able to differ significantly from the forecasts origi-
nally presented. The forecasting policy shall determine the frequency, the period
considered, and the content of the forecasts. If published, forecasts can only be
included in annual, half-yearly, or quarterly reports. The forecasting policy shall
be published on the company’s website.
D.4. The rules of the general meetings of the shareholders should not restrict the
participation of the shareholders in the general meetings and the exercise of their
rights. Amendments to the rules shall enter into force at the earliest, starting with
the next shareholders meeting.
D.5. External auditors shall be present at the general meeting of shareholders when
their reports are presented at these meetings.
D.6. The board shall present to the annual general meeting of the shareholders a
brief assessment on the internal control systems and significant risk manage-
ment, as well as opinions on issues subject to the decision of the general

meeting.
D.7. Any specialist, consultant, expert, or financial analyst may attend the share-
holders’ meeting on the basis of a prior invitation from the board. Accredited
journalists may also attend the general meeting of shareholders, unless the chair-
man of the board decides otherwise.
D.8. Quarterly and half-yearly financial reports shall include information in both
Romanian and English on key factors influencing changes in sales, operating
profit, net profit, and other relevant financial indicators, both from quarter to
quarter and from year to year.
D.9. A company shall organize at least two meetings/teleconferences with analysts
and investors each year. The information presented on these occasions shall be
published in the investor relations section of the company website on the date of
the meetings/teleconferences.
D.10. If a company supports different forms of artistic and cultural expression,
sports activities, and educational or scientific activities and considers that their
impact on the innovative character and competitiveness of the company is part of
its development mission and strategy, it shall publish the policy regarding its
activity in this area.
To each of the above questions, the companies must answer with YES/NO. If the
answer is NO, then they must EXPLAIN. In our attempt to develop a corporate
governance score, we shall award 1 point for each YES answer and 0 points for
answer NO.
The mathematical model of the corporate governance score is presented as a
summation of the scores accumulated by a company, for each of the four sections
investigated, as follows:
11 12 16
CG = ∑ Re sj + ∑Riskj + Re m + ∑Investj, where
j =1 j =1 j =1

• CG represents the value of the corporate governance score obtained by a
company.
• Resj represents the score obtained on the questions “j” related to Section
A. Responsibilities (0 or 1); Res represents the total score obtained by a company
in this field (between 0 and 11).
• Riskj represents the score obtained on the questions “j” of Section B. Risk man-
agement system and internal control (0 or 1); Risc represents the total score
obtained by a company in this field (between 0 and 12).
• Rem represents the score obtained by a company on Section C. Just reward and
motivation (between 0 and 1); Rem represents the total score obtained by a com-
pany in this field (between 0 and 1).
• Investj represents the score obtained on the questions “j” of Section D. Adding
value through investor relations (0 or 1); Investj represents the total score
obtained by a company in this field (between 0 and 16).
The minimum value of the governance score obtained by a company is 0 and the
maximum value is 40.
Using such an individual score, it can then be determined an average score of
corporate governance at the level of the Romanian companies, according to the
formula:
N
CGi
CG = ∑ , where
i =1 N
• CG represents the average value of the corporate governance score registered
for the Romanian companies.
• CGi represents the governance score achieved by each of the “i” companies
analysed.
• N represents the number of companies analysed (selected in the sample).
Using a score calculated according to a methodology similar to the one presented
above, the study by Achim and Borlea (2013) for the companies listed on the
Bucharest Stock Exchange highlighted the existence of an average degree of adop-
tion of the principles of good corporate practices in the percentage of about 60%,
related to the reports made at the end of 2012. At that time, with all the progress
made in this regard, many of the best practices of corporate governance of the
Romanian companies were well below the European average or even below the
average recorded for other emerging countries. The biggest problems were detected
in the following aspects:
• Transparency of the property structure, especially the transparency regarding the
Internal Regulation on the Functioning of the Company; only 38% of the anal-
ysed companies posted this document on their company website.
• Independence of the members of the board of directors; only 58% of the compa-
nies analysed have a sufficient number of independent members.
• Existence of advisory committees:
–– In just over half of the companies analysed, the board of directors uses the
support of advisory committees/commissions to examine specific topics. Only
a quarter of the companies analysed constitute a nominating committee within
the company. In the other cases, the nomination is made by the members in
office of the board of directors or by the shareholders.
–– Less than a half of the number of companies analysed have an audit
committee.
–– Regarding remuneration policy, only 38% of the total Romanian companies
have a remuneration committee made up exclusively of non-executive direc-
tors and only 36% of the companies analysed present the remuneration policy
of the company in the Corporate Governance Statute/Regulation on 2012.
Along with the adoption of the new Bucharest Stock Exchange Governance
Code, which entered into force on January 1, 2016, the concerns of companies
towards the adoption of best governance practices have become increasingly accen-
tuated, so now we estimate that the percentage of adoption of best practices is much
higher, compared to the 60% threshold calculated for 2012.
2.4.3.3 Corporate Governance in the European Union Countries
Next, we aim to investigate the quality of corporate governance in the countries of

the European Union for the period 2006–2016. The present study will provide us
with clues to the existence of links regarding the quality of corporate governance
and economic-financial crime.
Methodology
In order to be able to measure the quality of corporate governance in different coun-
tries, we will use two important indicators:
(a) Efficacy of corporate board
(b) Strength audit and reports
Both indicators are calculated and reported in the Global Competitiveness
Indicator (GCI), determined as a global tool for measuring national competitiveness
for economies around the world. This score is provided annually by the World
Economic Forum in the Global Competitiveness Report. Both indicators are
between level 1 (the weakest) and 7 (the best), thus reflecting the efficiency of cor-
porate governance within national economies.
The analysis period is 2006–2016 and covers the countries of the European
Union (28). The methods we use are descriptive methods, comparison, analysis, and
synthesis.
Graphs 2.17, 2.18, 2.19, and 2.20 show that the lowest levels of corporate gover-
nance including the lowest levels of audit efficiency are registered in the countries
of Central, Southern, and Eastern Europe. At the opposite end, the highest level of
corporate governance efficiency is located in the countries of Western and Northern
Europe. Romania ranks 23rd out of the 28 countries of the European Union anal-
ysed in terms of corporate governance quality and on the penultimate place, before
Italy, in terms of audit efficiency and reporting fidelity.
2.4.4 Corporate Governance and Corruption
Corporate governance is the system by which companies are run and controlled. It
basically refers to how the board of directors performs and how it determines the
company’s values. Effective corporate governance requires the adoption of relation-
ships in which board members (directors) are honest and open with each other. It is
also about the relationship between the directors, shareholders, managers, and audi-
tors whom the shareholders designate.
According to Transparency International (2020a), corruption is the abuse of
entrusted power for private gain. Thus, if the relations within the governance struc-
tures are not well founded by codes of good corporate practice and respected, there
is a possibility that they will give in to immediate favours, with major costs and risks
for the company and all those involved.
In this context, the occurrence of corruption is closely linked to the theory of the
agency (Achim and Borlea 2013). According to this theory, the shareholders who
are also the owners of the company or the principals delegate authority, in whole or
in part, to a mandatory (agent) for managing their own interests. For example, at the
company level, an agent relationship is established between owners (shareholders)
and managers, the former entrusting the management of their assets to the latter
(Clarke 2004). Similarly, creditors (bankers), as principals, entrust their capital
(they lend it), to shareholders and managers, as agents of the management of these
capitals.
According to the theory of the agency, the shareholders (the principals) expect
their mandatories (agents) to act and make decisions in their interest, of those who
have mandated. On the other hand, the agent cannot take only those decisions that
pursue only the interests of the principal (Padilla 2002). Such a conflict of interest
between owners and managers was first pointed out by Berle and Means (1932),
then by Adam Smith (1976), and then extensively developed by Jensen and Meckling
(1976). Specifically, the conflict of interest between the two parties lies in the
control-property separation, as highlighted by Davis et al. (1997). Here, the theory
of asymmetric information and moral hazard (Achim and Borlea 2013) comes into
play. Managers (insiders) have greater access to company information than share-
holders (from outside). A large number of studies have shown that managers, in
pursuit of their own personal interests, tend to hide relevant information to share-
holders (Arnold and de Lange 2004). For example, managers can increase reported
profits to get higher bonuses (Shuto 2007). However, what the management shows
is a distorted financial situation that incorporates manipulative actions. Such actions
may be directly related to the bribery of the persons requested to be involved in the
manipulation of financial data. An example in this regard is the fact that in order to
win a procurement contract, management and insiders may be tempted to pay bribes
to obtain facilitation in this direction. The problem of asymmetric information
makes it difficult to access real information by outside shareholders (outsiders).
Because, by its nature, the bribe is secret, managers can hide such transactions by
deceiving shareholders (from outside) (Wijayati et al. 2016). In the short run, both
the managers and the shareholders of a corporation could reap benefits from corrup-
tion. However, this cannot be maintained for a long term (Wijayati et al. 2016). In
this regard, Wu (2005) argues that bribery involves hidden costs, which can poten-
tially turn into future risks, such as legal costs, fines, and reputational damage.
At the empirical level, we have identified a limited attention given to the investi-
gation of the relationship between corporate governance and corruption, in the lit-
erature (Wijayati et al. 2016; Wu 2005; Rasheed and Yazdanifard 2013).
Thus, Wu (2005) identified a significant impact of corporate governance quality
on reducing the level of corruption at a country level. To measure the quality of
corporate governance, Wu (2005) referred to the role of the board of directors and
the quality of accounting regulations.
On the other hand, the study conducted by Wijayati et al. (2016) in emerging
countries in Southeast Asia (Indonesia, Malaysia, and Thailand) investigates four
elements of corporate governance that could reduce opportunities for corruption,
namely, shareholders’ rights, board of directors, accounting and auditing stan-
dards, and transparency. The study concludes that corporate governance mecha-
nisms can reduce opportunities for corruption.
In conclusion, effective corporate governance that ensures greater efficiency of
governance structures including high protection of minority investors will make the
company stronger, thus reducing the risks of corruption as well as the major costs
involved.
Below we will conduct an empirical study in order to investigate any possible influ-
ence of the quality of corporate governance on the level of corruption. In this sense,
we underlie the following research hypothesis:
Hypothesis: A high quality of corporate governance leads to a decrease in the
level of corruption.
Methodology
For our purpose we measure the quality of corporate governance using two indica-
tors, namely, efficacy of corporate board and strength audit and reports.
Both indicators are calculated and reported in the Global Competitiveness
Indicator (GCI), determined as a global instrument for measuring national
competitiveness for 185 worldwide economies. This score is annually provided by
the World Economic Forum (2020) in the Global Competitiveness Report. Both
indicators are between level 1 (the weakest) and 7 (the best), thus reflecting the level
of corporate governance efficiency existing in national economies and the efficiency
level of audit efficiency and reporting fidelity, respectively.
Corruption is measured as the rank occupied by the analysed countries according
to the score obtained by the Corruption Perception Index, provided by Transparency
International (2020b). A high position held by a country reflects a high level of cor-
ruption and vice versa.
The sample is represented by 152 countries, and the analysis period is 2006–2016,
for which data are available for all variables analysed.
For this purpose, we use the descriptive methods, the correlation coefficients,
and the regression analysis, and we carry out the statistical tests necessary to ensure
a high accuracy of the results.
Graph 2.21 and Table 2.20 show a mean, indirect connection of corruption with
corporate governance (c = −0.58; R2 = 0.337). The correlation is even closer
(c = −0.693; R2 = 0.48) when the quality of corporate governance is estimated
through the strength audit and reports (Graph 2.22 and Table 2.21).
Table 2.22 shows that the value of the regression coefficient of the efficacy of
corporate board variable in relation to the corruption variable is negative (−41.094)
and significant at a significance threshold of 1%. This reflects the fact that, at a one
point increase in the quality of corporate governance, a decrease in the level of cor-
ruption is achieved on average with 41.094 units (reflecting a decrease of approxi-
mately 41 positions in the hierarchy of countries affected by corruption). A similar
significant influence on corruption is also identified for the strength audit and report
variable (Table 2.23).
Conclusions and limits of the research
In conclusion, the test results of our hypothesis confirm the existence of a negative
and significant influence of the efficacy of corporate board on the level of corrup-
tion. These results are even more robust if we use the strength audit and report as an
estimator for the efficiency of corporate governance. The lack of use of control
variables as well as the non-use of more complex statistical methods for processing
data (e.g. the panel type) could be invoked as limits of this research and object for
improvements in other future studies.
2.4.5 Corporate Governance and Shadow Economy

Problems deriving from the agent theory regarding the conflict of interests between
the two parties (owners, on the one hand, and managers or agents, on the other hand)
can lead to information hiding, which is not in favour of certain interested parties,
which may slip even in carrying out shadow economic activities (undeclared work,
tax avoidance, etc.)
In the specialized literature, we have identified few studies that investigated the
relationship between governance mechanisms and shadow economy. Instead, we
identified numerous studies that investigated governance mechanisms in relation to
tax avoidance (Hanlon and Heitzman 2010; Kourdoumpalou 2016; Winnie 2016;
Van de Pilos 2017; Mappadang et al. 2018). Because, according to Schneider’s
approaches (Schneider 2013, 2015; Medina and Schneider 2018) regarding the defi-
nition and measurement of the shadow economy, tax avoidance is an important
component of the shadow economy, we can consider that such studies can be relied
upon, as in direct relation with the shadow economy.
In this regard, the study of Lanis and Richardson (2011), after conducting a
cross-section of 401 corporations, finds a relation between director composition and
tax aggressiveness. Similarly, the study conducted by Winnie (2016) on a number of
120 companies in the manufacturing industry listed on the Indonesian Stock
Exchange during 2010–2013 is very relevant. Thus, the authors find that the way of
compensation of managers, the audit committee, and the quality of the audit has an
influence on the amplitude of tax avoidance. Tax avoidance is determined using the
effective tax rate (ETR), which reflects the percentage in which taxes can be avoided
by the company compared to the applicable tax rate (Hanlon and Heitzman 2010).
More specifically, the conclusions of the study conducted by Winnie (2016) are
summarized as follows:
• Higher compensation of managers leads to higher level of tax avoidance.
• As regards the audit committee, the authors find that a higher number of mem-
bers within the audit committee is indirectly correlated with the level of tax
avoidance. Thus, the higher the number of members of the audit committee, the
more difficult it is for the company to do tax avoidance.
• The audit quality is found to have a negative effect on tax avoidance. The audit
quality is measured according to the size of the company performing the audit; it
is considered high if the audit is performed by a Big Four company, or medium-
low, if the audit is performed by a non-Big Four company. Entity benefits of a
greater confidence from the fiscal and public authorities if it ensures a high integ-
rity of the information presented in the financial statements. When the company
is audited by a reputable auditing company (of the Big Four), tax avoidance is
difficult to do. Such auditing companies have a high reputation and maintain the
confidence of stakeholders.
Also for Indonesia, Mappadang et al. (2018) identifies a positive relationship
between the number of the board members and tax avoidance. Thus, they find that
the higher the number of board members, the more they will allow managers to
maximize profits, including by avoiding taxation. In practice, the supervisory board
represents the interests of the shareholders, so they will be oriented towards obtain-
ing the highest profits for the shareholders, even if this will be achieved at the cost
of tax avoidance. On the other hand, the authors find a negative relationship between
the percentage of institutional investors and the volume of tax avoidance, in other
words the existence of institutional investors does not allow management to avoid
taxation.
For Greece, the study conducted by Kourdoumpalou (2016) shows that tax
avoidance is lower when the chairman of the board is also the owner of the com-
pany. A strong negative relationship is found between tax avoidance and equity
participation percentage of the owner and his family, on one hand, and between tax
avoidance and equity participation percentage held by the members of the board of
directors, on the other hand. The authors also find that remunerating the members of
the board of directors by profit distribution significantly reduces tax avoidance,
7
5.8 5.8
6 5.4 5.4 5.4 5.5 5.5 5.5 5.6
4.8 4.9 5.0 5.1 5.2 5.3
5 4.3 4.3 4.4 4.5 4.5 4.6 4.7 4.7
4.0 4.1 4.2 4.2 4.2
4
3
2
1
Italy
Spain
Latvia
Malta
Cyprus
Poland
France
Greece
Austria
Ireland
Estonia
Finland
Croaa
Sweden
Bulgaria
Slovakia
Belgium
Portugal
Slovenia
Hungary
Romania
Lithuania
Germany
Denmark
Netherlands
Luxembourg
Czech Republic
United Kingdom
Graph 2.17 Efficiency of corporate board in European Union countries, 2006–2016
6 5.7
5.41
5 4.57
4.37
1
West South North CEE
Graph 2.18 Efficiency of corporate board by geographical areas in European Union countries,
2006–2016
while tax avoidance is higher when the members of the board of directors are at the
same time employees of the company.
Regarding board independence but also other features, Khaola and Moez (2019),
after they analysed 105 European firms during the period 2005–2012, find that
board independence, board diversity, and CEO’s dual functions have a significant
and negative effect on the relationship between tax planning and firm value. However,
after analysing S&P 500 companies, Van de Pilos (2017) cannot statistically prove
that more independent directors on the board influence corporate tax avoidance.
Based on those investigated above, we can conclude that corporate governance
mechanisms can exercise incentives for engaging in shadow economic activities.
7 6.30
6.10
5.80 5.90 5.90 5.90 6.00 6.00
6 5.60 5.70 5.70 5.70
5.40
5.20 5.20
5.00 5.00 5.00
4.80 4.90 4.90 4.90 4.90
5 4.30 4.40
4.50 4.60
4.20
1
Italy
Spain
Latvia
Malta
Cyprus
Poland
France
Ireland
Austria
Greece
Estonia
Finland
Croa a
Sweden
Bulgaria
Slovakia
Belgium
Portugal
Slovenia
Hungary
Romania
Lithuania
Denmark
Germany
Netherlands
Luxembourg
Czech Republic
United Kingdom
Graph 2.19 Strength audit and reports in European Union countries, 2006–2016
6.03
6 5.76
5.00 4.86
5
1
West South North CEE
Graph 2.20 Strength audit and reports by geographical area, in the countries of the European
Union, 2006–2016, (Source: own processings)
Next, we will conduct an empirical study in order to investigate a possible influence

of the quality of corporate governance on the shadow economy level, starting from
the following research hypothesis:
Hypothesis: A high quality of corporate governance leads to a decrease in the
shadow economy level.
Methodology
The quality of corporate governance is measured with the help of the indicators
efficacy of corporate board and strength audit and reports which we referred to in
the previous chapter.
The level of the shadow economy is determined as a percentage in GDP, as pre-
sented in the source provided by Medina and Shneider (2018).
We analyse the relationship between the two variables using a sample of 138
countries for which all data are available at the level of the common period
2006–2015. As a methodology, we use the descriptive methods, the correlation
coefficients, and the regression analysis, and we carry out the statistical tests neces-
sary to ensure a high accuracy of the results.
Graph 2.23 and Table 2.24 show a mean, indirect connection of shadow economy
with corporate governance (c = −0.51; R2 = 0.260). The correlation is even closer
(c = −0.631; R2 = 0.398) when the quality of corporate governance is estimated
through strength audit and reports (Graph 2.24 and Table 2.25). In other words, a
percentage of 26% to 39.8% of the variation of the shadow economy is explained by
the variation of the quality of efficacy of corporate board and strength audit and
reports, respectively.
Table 2.26 shows that the value of the regression coefficient of the shadow econ-
omy in relation to the variable efficacy of corporate board is negative (−10.567) and
significant, at a significance threshold of 1%. This reflects the fact that, at an increase
of one point in the quality of efficacy of corporate board, there is a decrease of the
shadow economy with 10.567 units on average (reflecting a decline of the shadow
economy by 10.567% on average in total GDP). A significant influence on the
shadow economy is also identified for the variable strength audit and reports
(Table 2.27).
In conclusion, our hypothesis testing results confirm the existence of a negative and
significant influence of the quality of corporate governance on the level of the
shadow economy. Hypothesis testing results are even more robust if we use audit
quality as an estimator for corporate governance efficiency (the values of the cor-
relation coefficients and of R2 are slightly higher).
2.4.6 Corporate Governance and Money Laundering
Deficiencies of the governance system consisting of the existence of conflicts of

interest (e.g. when a credit institution has to decide the form under which it provides
financial services to a company whose officials are represented in the bank’s board
of directors), a deficient internal control system unable to detect the risks to which
the company is exposed, and the suspicious transactions in which it is involved are
often invoked as factors conducive to economic and financial crimes.
Even though there were no direct causes, among the factors that generated bank-
ruptcy and financial crisis in the early 2000s, many authors (cited by Achim et al.
2010) also mention factors related to accounting practices, such as the inability of
the accounting model to cope with these innovations, which allowed the occurrence
of certain off-balance sheet financial assets; issues regarding the recognition of
assets, determining the value of entities included in the scope of consolidation; and
the complexity of certain hybrid instruments that made it difficult to be properly
evaluated.
The research of Vaithilingam and Nair (2009) points out that the volume of
money laundering crimes would be reduced systematically if the country adopted
stronger audit and reporting standards. A strong audit and reporting standard would
reduce the risk of undetected suspicious transactions and therefore lead to a lower
possibility of engaging in illegal money laundering activities (Drezewski et al.
2012; Vaithilingam and Nair 2009; Nikoloska and Simonovski 2012).
The board of directors would usually receive aggregate reports from the manage-
ment regarding the entity’s transactions. Thus, the directors, who are not executive
managers at the same time, would not be able to discover or prevent on their own
any illegal action. Even the audit committee does not conduct audit investigations
alone, but it is related to external auditors. Identifying money laundering crimes in
companies (including banks) can be done through efficient mechanisms of corpo-
rate governance structures such as internal controls (including those regarding iden-
tity verification) and compliance with regulatory reporting requirements (such as
transaction thresholds). Also, the internal audit function can be extremely useful in
identifying money laundering crimes, and therefore the reporting line of internal
auditors should be taken into account (they should report, for example, to the audit
committee and not to the financial manager). Money laundering through front com-
panies, shell companies, and other company structures often uses both national and
foreign companies. Foreign entities are usually in jurisdictions with strong protec-
tion of secrecy, which makes it difficult to identify such operations.
In conclusion, there is sufficient evidence in the literature and practice that defi-
ciencies in the governance system facilitate the involvement in money launder-
ing crimes.
Identifying an influence of the quality of corporate governance on engaging in

money laundering crimes has also been the subject of our empirical research. In this
sense, we underlie the following research hypothesis:
Hypothesis: High quality of corporate governance leads to a decrease in the
volume of money laundering crimes.
2
200.00 R Linear = 0.337
150.00
Corruption
100.00
50.00
00
.00 1.00 2.00 3.00 4.00 5.00 6.00

Graph 2.21 Correlation between corruption and efficacy of corporate board
Table 2.20 Coefficients of correlation between corruption and efficacy of corporate board
Corruption Efficacy of corporate board
N 185 152
Efficacy of corporate board Pearson correlation −.580** 1
N 152 152
Methodology
Quality of corporate governance is measured with the help of the following indica-
tors: efficacy of corporate board and strength audit and reports, which we referred
to in the previous chapter.
The volume of money laundering crimes is measured using a risk of money laun-
dering under Anti-Money Laundering Risk Index (AML index).
200.00 R2Linear = 0.480
150.00
Corruption
100.00
50.00
.00
.00 2.00 4.00 6.00

Strenght audit and report
Graph 2.22 Correlation between corruption and strength audit and reports
Table 2.21 Coefficients of correlation between corruption and strength audit and reports
Corruption Strength audit and reports
N 185 152
Strength audit and reports Pearson correlation −.693** 1
N 152 152
The sample of countries is represented by a number of 144 countries for which

all necessary data were available.
For this purpose, we use the descriptive methods, the correlation coefficients,
and the regression analysis, and we carry out the statistical tests necessary to ensure
a high accuracy of the results.
Graph 2.25 shows a correlated arrangement of the money laundering risk and effi-
cacy of corporate board, at a R2 = 0.258. In other words, a percentage of 25.8% of
Table 2.22 Regression of corruption depending on efficacy of corporate boarda

Non-standardized Standardized
coefficients coefficients
Std.
Model B error Beta t Sig.
(Constant) 269.609 21.683 12.434 .000
Efficacy of corporate −41.094 4.708 −.580 −8.728 .000
board
a
Table 2.23 Regression of corruption depending on strength audit and reporta

Non-standardized
(Constant) 244.332 14.038 17.404 .000
Strength audit and report −35.390 3.006 −.693 −11.774 .000
a
the variation in money laundering risk can be explained by the efficacy of corporate
board in the assessed countries, for the period 2006–2016. The correlation coeffi-
cient reflected in Table 2.28 is negative, in the amount of −0.508, which reflects an
average degree of correlation of the two variables.
Table 2.29 shows that the value of the regression coefficient of the variable effi-
cacy of corporate board in relation to the money laundering risk is negative (of
−0.883) and significant at a significance threshold of 1%. This reflects the fact that,
at an increase of one point in the quality of efficacy of corporate board, an average
decrease in the risk of money laundering by 0.883 points is achieved.
In conclusion, the results of our hypothesis testing confirm a negative and signifi-
cant influence of the efficacy of corporate board on the risk of money laundering.
Hypothesis testing results are even more robust if we use audit quality as an esti-
mator for quality governance. Graph 2.26 shows that an even higher percentage, of
41%, of the variation of the money laundering risk can be explained by the quality
of the audit, compared with a percentage of 25.8% determined in relation to the
corporate governance in general. And the correlation coefficient reflects a stronger
link between the money laundering risk and the audit quality (c = −0.64) than
between the risk of money laundering and the quality of corporate governance
expressed (c = −0.508), which reflects an average degree of correlation of the two
variables (Table 2.30). Regarding regression results, Table 2.31 shows that at an
increase of one point in the efficiency of the strength audit and the reports, an aver-
age decrease in the level of money laundering risk is realized by 0.807 points (the
result is statistically significant at 1% significance threshold).

In conclusion, the research hypothesis established above is accepted, which means
that an increase in the quality of corporate governance at the microeconomic level
leads to a decrease in the volume of money laundering crimes committed in the
economy of the respective country.
2.5 Banking System Soundness
2.5.1 General Approaches

2.5.1.1 T
he Concept of Banking System Soundness and Measuring
Instruments
Because the banking system is the one that mediates the economic and financial
transactions carried out in economic activities, the specialized literature and prac-
tice record the importance of the banking system development in the prevention and
detection of economic and financial crimes.
In this regard, for example, the investigation of the bank failures that generated
the global financial crisis at the beginning of 2008, against the background of the
American crisis of high risk mortgages, leads to the identification of accounting
frauds and trading with privileged information, considered as important threats to
the US economy (Bucur 2011, p. 353).
Among the investigated entities are the Swiss bank U.B.S. and the major US
financial groups Morgan Stanley, Merrill Lynch, Bear Stearns, and Citigroup (Bucur
2011, p. 353). The biggest fraud that has ever taken place on the global financial
market was also committed in the same period. Through pyramid financial schemes
as the Caritas model, the American tycoon Bernard Madoff committed a fraud of 50
billion dollars.
Regarding the commitment of such large-scale fraud, the former managing direc-
tor of the International Monetary Fund – Dominique Strauss-Kahn – stated that “if
there was a stronger control by the US authorities, such schemes would be impos-
sible to put into practice”.
Regarding the bankruptcy of the Societe Generale Bank, a bank fraud amounting
to 4.9 billion Euros was identified, considered to be the biggest fraud in the history
of the banking industry (Bucur 2011, p. 353). This was committed by employees of
the bank who, benefiting from deficiencies in the risk control systems of the bank,
engaged in unauthorized transactions, fraud offenses, and unauthorized manipula-
tion of the bank’s computer system and abuse of trust (a detailed description of the
fraud system of the Societe Generale Bank of France is presented in the Bucur 2011
study, pp. 353–356).
Moises Naim, “Foreign Policy” magazine analyst, appreciated on February 20,
2008, the fact that “one of the paradoxes of the global financial crisis is the lack of
2.5 Banking System Soundness 153
transparency in the sense that information has rarely been as incomplete and diffi-
cult to interpret as it is now, especially due to the overuse and widespread use of
very sophisticated financial instruments, such as derivatives, which are difficult to
evaluate and their risk degree is difficult to estimate” (Bucur 2011, p. 353).
In Romania, the major bank failures (Bancorex, Dacia Felix, Banca Agricolă,
Bankoop, Columna, Credit Bank, etc.) have raised big problems regarding the cor-
porate governance, transparency, the existence of conflicts of interest, and the bad
management of a too large volume of non-performing loans, in other words, an
extremely low bank soundness.
All these issues highlight the importance of the banking system soundness in
reducing economic and financial crimes.
As regards the measuring of the banking system soundness, the specialized lit-
erature highlights numerous concerns in this regard.
• Bose et al. (2012) following the methodology proposed by Calomiris and Beim
(2001) evaluate the development of banking system through both indicators: the
depth and the efficiency of the banking sector. The depth of the banking sector is
determined on the basis of two indicators, namely, liquid liabilities and total
domestic credit provided by depository banks, both as percentages of GDP. These
indicators measure the lending volume of the banking system, and, thus, they are
considered suitable for capturing the depth of banking sectors (Levine and
Zervos 1998).
Then, the efficiency of the banking system is measured by Bose et al. (2012)
using four indicators: bank overhead costs, the net interest margin, the lending-
deposit rate spread, and the level of bank concentration. Finally, the overall quality
of a banking system is given by a composite indicator of the banking system devel-
opment obtained by aggregating the two scores presented above (assigned for both
depth and efficiency).
• On the other hand, Berdiev and Saunoris (2016) use three different measures for
measuring financial development, namely, demand for currency, credits granted
by the financial sector to the private sector, and credits granted by the financial
sector to the private sector and central administration. All three variables are
measured as a percentage of GDP.
• In national and international banking practice, banking rating systems are calcu-
lated and used for general assessment of global risk, such as the CAMEL model
(United States), the CAAMPL model (Romania), PERLAS (World Council of
Credit Unions WOCCU), SRUIF, etc. (Derviz and Podpiera 2008; Borlea 2009;
Rostami 2015).
For example, the CAAMPL system developed by the National Bank of Romania
and applied to the Romanian banks for assessing their soundness is based on the
evaluation of six components that uniformly and comprehensively reflect the per-
formance of a bank, in accordance with the banking legislation and regulations in
force, as follows: capital adequacy (C), shareholding quality (A), asset quality (A),
management (M), profitability (P), and liquidity (L).
R2Linear = 0.260
60.00
Shadow conomy
40.00
20.00
.00
3.00 3.50 4.00 4.50 5.00 5.50 6.00
Graph 2.23 Correlation between shadow economy and efficacy of corporate board
• In order to assess the performance and vulnerability of the financial system, we

note the steps taken by the International Monetary Fund, which has taken care to
establish and calculate the so-called Financial Soundness Indicators. In this
respect, a number of 52 indicators are calculated, which characterize and evalu-
ate different aspects related to the performance of the financial-banking system,
including capital adequacy, asset quality, liquidity, profitability, and risks related
to the financial-banking system (International Monetary Fund 2020). The down-
side of these assessments is that they do not offer a comprehensive measure of
Table 2.24 Correlation coefficients between shadow economy and efficacy of corporate board
Shadow economy Efficacy of corporate board
N 158 138
Efficacy of corporate board Pearson correlation −.510** 1
N 138 152
**
The correlation is significant at a significance threshold of 0.01 (two-tailed)
2
R Linear = 0.398
60.00
Shadow economy
40.00
20.00
00
2.00 3.00 4.00 5.00 6.00 7.00

Strenght audit and reports
Graph 2.24 Correlation between shadow economy and strength audit and reports
assessing the soundness of the banking financial system, but they only provide
analytical measures for evaluating certain specific components.
• Attention was also given to the elaboration of aggregate indicators by the World
Economic Forum (2020), in their efforts to develop Global Competitiveness
Indicators to characterize the world’s economies. To this end, in addition to many
other indicators, they also calculate an indicator called soundness of bank in dif-
ferent countries, in order to evaluate the soundness of the banking system. The
indicator is between level 1 (the weakest) and 7 (the best) thus reflecting the
soundness of the banking system within an economy. The advantage of such an
Table 2.25 Correlation coefficients between shadow economy and strength audit and reports
Shadow economy Strength audit and reports
N 158 138
Strength audit and reports Pearson correlation −.631** 1
N 138 152
Table 2.26 Regression of shadow economy depending on efficacy of corporate boarda

Non-standardized Standardized
coefficients coefficients
Std.
Model B error Beta t Sig.
(Constant) 76.573 7.056 10.852 .000
Efficacy of corporate −10.567 1.529 −.510 −6.912 .000
board
a
Table 2.27 Regression of shadow economy depending on strength audit and reportsa
Non-standardized
(Constant) 67.591 4.226 15.992 .000
Strength audit and reports −8.602 .906 −.631 −9.491 .000
a
aggregate measure is clearly superior to the other measures, because it offers an

overview of the soundness of the banking system and also the database is public
and generous (available for 137 countries) from 2006 to the present.
2.5.1.2 Banking System Soundness in European Union Countries
Next, we intend to investigate the soundness of the banking system in the countries
of the European Union for the period 2006–2016. The present study will provide us
with clues to the existence of links regarding the soundness of the banking system
and economic-financial crimes.
Methodology
The soundness of the banking system in different countries will be determined using
the scores calculated by the World Economic Forum (2020) in the Report on Global
Competitiveness, with regard to the soundness of bank indicator. The indicator
ranges between level 1 (the weakest) and 7 (the best), thus reflecting the various
levels of soundness of banking systems within an economy.
Union (28). As methods, we use descriptive methods, comparison, analysis, and
synthesis.
Graph 2.27 shows that the weak soundness of banking systems are registered in
Ireland, Slovenia, Greece, Romania, and Cyprus and the most solid ones are found
in Finland, Malta, Luxembourg, Sweden, and Slovakia. Romania ranks 25th out of
the 28 countries of the European Union analysed in terms of the banking system
soundness. According to the analysis by geographical areas (Graph 2.28), the coun-
tries of Central, South, and East of Europe have the weakest banking system (with
a score of about 5.18–5.19 points). At the opposite end, the most robust banking
systems are found in the countries of Northern Europe (score of 6.06 points) and
Western Europe (5.34 points).
2.5.2 Soundness of Banks and Corruption
The literature (Park 2012; Chen et al. 2015; Barry et al. 2016) highlights a very
close relationship between corruption and the performance of the banking system.
For example, the study conducted by Park (2012) in 76 countries highlights a sig-
nificant direct influence of corruption on problems arising in relation to non-
performing loans. Corruption distorts the correct allocation of banking sources from
good projects to bad projects, which leads to a decrease in the quality of private
investments and a decrease in the economic growth, respectively.
Corruption in the banking system can occur for several reasons, such as compa-
nies can bribe politicians (e.g. to obtain loans bypassing the loan evaluation and
analysis stages), banks can bribe politicians (e.g. to get regular tolerance), and so on
(see Munshi (1999) and Park (2012) for examples of the relationship between cor-
ruption and bank performance). Most likely, the final result will materialize in the
misdirection of financial sources from normal projects to inefficient projects, lead-
ing to an increase in the volume of non-performing loans.
The study conducted by Chen et al. (2015) analyses how corruption affects
banks’ risk-taking behaviour, in direct relation to the financial crises of the last
30 years. The analysis is performed for a number of 1200 banks from 35 emerging
economies for the period 2000–2012. The authors find clear evidence that high lev-
els of corruption increase risk-taking behaviour in banks. The study also provides
evidence for a better understanding of why crises have occurred more often in coun-
tries with higher levels of corruption (Laeven and Valencia 2013).
An interesting result is obtained by Barry et al. (2016), who investigated a pos-
sible relationship between corruption in the lending process and the ownership
structure of banks. The authors find that the corruption involved in the lending pro-
cess is higher when state-owned or family-owned banks offer a high proportion of
credits in the economy. A stronger regulatory environment, either through a stronger
supervisory regime or a higher quality of external audits, helps reduce corruption in
the case of bank lending, if it is induced by family-controlled property, but not if it
is induced by state-controlled property. Another interesting result of the authors is
that when banks are controlled by other banks, the level of corruption in lending is
reduced.
R2Linear = 0.258
9.00
8.00
Money laundering risk
7.00
6.00
5.00
4.00
3.00
.00 1.00 2.00 3.00 4.00 5.00 6.00

Graph 2.25 Correlation between money laundering and efficacy of corporate board
Table 2.28 Correlation coefficients between money laundering and efficacy of corporate board
Money laundering Efficacy of corporate
risk board
Money laundering risk Pearson 1 −.508**
correlation
N 164 144
Efficacy of corporate Pearson −.508** 1
board correlation
N 144 152
Next, we propose to investigate the existence of a link between the banking system
soundness and the involvement in corruption offenses, based on an empirical study,
starting from the following research hypothesis:
Table 2.29 Regression of money laundering depending on efficacy of corporate boarda

Non-standardized
(Constant) 9.899 .580 17.065 .000
Efficacy of corporate board −.883 .126 −.508 −7.032 .000
a
Dependent variable: money laundering risk
9.00 R2Linear = 0.410
8.00
Money laundering risk
7.00
6.00
5.00
4.00
3.00
.00 2.00 4.00 6.00

Strenght audit and reports
Graph 2.26 Correlation between money laundering and strength audit and reports
Hypothesis: A high quality of the soundness of the banking system leads to a

decrease in the level of corruption.
Methodology
We will determine the soundness of the banking system in different countries using
the scores calculated for the soundness of banks indicator, by the World Economic
Forum (2020) in the Global Competitiveness Report. The indicator ranges between
levels 1 (the weakest) and 7 (the best), thus reflecting the banking systems sound-
ness within an economy.
Corruption is measured as the rank occupied by the analysed countries according
to the score obtained by the Corruption Perception Index, provided by Transparency
Table 2.30 Correlation coefficients between money laundering and strength audit and reports
Money laundering Strength audit and
risk reports
Money laundering risk Pearson 1 −.640**
correlation
N 164 144
Strength audit and Pearson −.640** 1
reports correlation
N 144 152
International (2020b). A high position occupied by a country in the top referring to

the level of corruption reflects a high level of corruption and vice versa.
The sample is represented by 140 countries, for which data are available for the
two variables, and the analysis period is 2006–2016.
Graph 2.29 shows a correlated arrangement of the variables corruption and sound-
ness of banks, at a R2 = 0.251. In other words, a quarter of the variation in the vol-
ume of corruption can be explained by the soundness of the banking system. The
correlation coefficient reflected in Table 2.32 is negative, in the value of −0.501,
which reflects an inverse correlation of the two variables, at a medium intensity.
Table 2.33 shows that an increase with one point of the banking system quality
leads to a decrease of the level of corruption by 23.882 points, on average (a decrease
with approx. 24 positions in the hierarchy of the countries classified by the level of
corruption).
Our hypothesis testing results confirm that a high quality of the banking system
soundness leads to a decrease in the level of corruption. The robustness of the above
results can be achieved by using control variables as well as more complex data
processing methodologies (e.g. panel type).
2.5.3 Soundness of Banks and Shadow Economy
A number of studies analyses the relationship between the soundness of the banking
system and the shadow economy (Blackburn et al. 2010; Bose et al. 2012; Berdiev
and Saunoris 2016). Thus, in the study by Blackburn et al. (2010) the authors find
that the lower the stage of financial development, the higher the incidence of tax
Table 2.31 Regression of money laundering depending on strength audit and reportsa
Non-standardized
(Constantă) 9.585 .382 25.065 .000
Strength audit and reports −.807 .081 −.640 −9.925 .000
a
avoidance and the size of the shadow economy, respectively. Similarly, Bose et al.
(2012) investigates the relationship between banking development and the level of
shadow economy on a sample of 137 countries from 1995–2007. Their results show
that an improvement in the banking sector development is associated with a lower
level of the shadow economy. In addition, the authors consider that both the depth
and the efficiency of the banking sector matter in reducing the size of shadow
economies.
Similar results are obtained by Berdiev and Saunoris (2016), who analyse the
dynamic relationship between financial development and shadow economy, using
data for 161 countries from 1960–2009. The authors find that financial development
reduces the size of the shadow economy. In addition to the previous results, they
find some evidence of inverse causality between these variables; namely, a shock to
the shadow economy hinders financial development.
The degree of banking development can also be reflected by the percentage of
cash in circulation, in total money engaged in economy. In this regard, Birch (2015),
in his study, makes clear arguments that less money in circulation actually repre-
sents a higher level of the shadow economy. Thus, the author cites the chief cashier
of the Bank of England, who estimates that only about a quarter of the cash put into
circulation is used to buy and sell things. The difference is either shipped abroad,
outside the banking system (treasured), or used to support the shadow economy.
The United Nations Convention against Corruption (2004) provides measures
regarding the prevention and detection of transfers of proceeds of crime and of the
goods acquired illegally, respectively. In this regard, the regulation stipulates that
“each state party shall apply the appropriate and effective measures to prevent, with
the help of its regulatory and control bodies, the establishment of banks that have no
physical presence and are not affiliated with a regulated financial group”. In addi-
tion, it is stipulated that “states parties may require their financial institutions to
refuse to establish or pursue appropriate banking relationships with such institutions
and to avoid establishing relationships with foreign financial institutions that allow
the use of their accounts by banks that have no physical presence and which are not
affiliated with a regulated financial group”.
Below, we propose to investigate the existence of a connection between the sound-

ness of the banking system and the shadow economy, starting from the following
research hypothesis:
Hypothesis: A high quality of the banking system soundness leads to a decrease
in the level of the shadow economy.
Methodology
We will determine the soundness of the banking system in different countries using
Forum in the Global Competitiveness Report. The indicator ranges between levels
1 (the weakest) and 7 (the best), thus reflecting the soundness of the banking sys-
tems within an economy.
The level of the shadow economy is determined as a percentage in GDP, as pre-
sented in the source provided by Medina and Shneider (2018).
We will analyse the relationship between the two variables using a sample of 135
countries for which all data are available, for the common period 2006–2015.
Graph 2.30 shows a correlated arrangement of the variables shadow economy and
soundness of banks, at a R2 = 0.141. In other words, a percentage of 14.7% of the
variation in the level of shadow economy can be explained by the soundness of the
banking system. The correlation coefficient reflected in Table 2.34 is negative, in the
value of −0.384, which reflects a medium degree of correlation of the two variables.
Table 2.35 shows that at a one point increase in the quality of the banking system,
the average level of the shadow economy decreases by 4.995 points (which means a
decrease of about 5% of the level of the shadow economy in the volume of GDP).
The results of our research confirm the hypothesis that a high quality of the banking
system soundness leads to a decrease of the level of the shadow economy. The
robustness of the above results can be emphasized by the use of control variables as
well as more complex data processing methodologies (e.g. panel type).
2.5.4 Soundness of Banks and Money Laundering
In the stages carried out in the process of money laundering, banking institutions
represent the first point of contact of the criminals (Isa et al. 2015). Banking institu-
tions are the most commonly used money laundering instruments due to several
factors, including multiple services provided by financial institutions, such as
deposits, loans, and currency exchange (Idowu and Obasan 2012). With the help of
banking institutions, criminals transfer illegally sourced money to bank accounts in

the country or abroad, to receive a legal appearance. Therefore, the first step in the
money laundering process consists in placing the amounts of money provided by
illicit activities in the financial-banking system (by making deposits or purchasing
financial instruments that are subsequently collected).
In this context, a high level of transparency in the banking and financial sector, a
high degree of monitoring of financial transactions and bank accounts, and an ade-
quate financial supervision are factors identified in the specialized literature as hav-
ing a decisive role in reducing money laundering crimes (Leția 2014, p 113, p131.
p. 171; Vaithilingam and Nair 2009; Nikoloska and Simonovski 2012). Thus, a
weak banking supervision could be an easy target for money to be washed without
suspicion. In the United States, for example, both banks and non-bank financial
institutions must report financial transactions in excess of $ 10,000 per day, as well
as any suspected criminal activity. In conclusion, a higher quality of banking super-
vision means a good soundness of banks and diminishes the channels by which
money laundering crimes are committed.
At European Union level, the European Directives against money laundering
(Directive (EU) 2015/849, Directive 91/308 / EEC, Directive 91/308 / EEC,
Directive 2006/70 / EC) have taken over the 40 recommendations of the Financial
Action Task Force FATF-GAFI on information exchange, as well as between bank-
ing institutions and public authorities. In order to increase vigilance and mitigate the
risks arising from cash payments, persons trading goods should be covered by this
Directive to the extent that they make or receive cash payments of at least
EUR 10,000.
In Romania, the National Bank of Romania regulates, for credit institutions and
non-banking financial institutions, the minimum standards for their elaboration of
norms for knowing their clients, as an essential part of managing the risk of money
laundering and financing of terrorism.1 The norms for knowing the clients must
include at least the following elements (Art. 5, paragraph (2), National Bank of
Romania, Regulation no. 9/2008):
(a) A policy of customer acceptance, establishing at least the categories of clientele
that the institution aims to attract, the gradual acceptance procedures and the
hierarchical level of approval of customer acceptance depending on the degree
of risk associated with the category in which they are classified, and the types
of products and services that can be provided to each category of clientele
(b) Procedures for the identification and permanent monitoring of the clients for
their classification in the corresponding clientele category, respectively, for the
transition from one clientele category to another
(c) The content of standard measures, simplified measures, and additional mea-
sures, for knowing the client, for each of the categories of clientele and of prod-
ucts or transactions subject to these measures
1
Regulation No. 9 of July 3, 2008, Official Monitor, Part I 527 July 14, 2008, regarding the client’s
knowledge in order to prevent money laundering and terrorist financing
7 6 6
6 6 6
6 5 6 6 6 6 6
5 5 5 5 5 5
5 5 5 5 5 5 5 5
5 4
4 4
4
3
2
1
0
Italy
Spain
Malta
Latvia
Cyprus
Poland
France
Austria
Ireland
Greece
Finland
Estonia
Croaa
Sweden
Bulgaria
Slovakia
Belgium
Portugal
Slovenia
Hungary
Romania
Lithuania
Germany
Denmark
Netherlands
Luxembourg
Czech Republic
United Kingdom
Graph 2.27 Soundness of bank in European Union countries, 2006–2016
(d) Procedures for permanent monitoring of customer operations in order to detect

unusual and suspicious transactions
(e) Ways to approach transactions and clients in and/or from jurisdictions that do
not require the application of procedures for acquainting the client and keeping
records regarding it, equivalent to those provided in Law no. 656 (2002), with
the subsequent amendments and completions, and in the Government Decision
no. 594/2008, and in which their application is not supervised in a manner
equivalent to that regulated by the specified legislation
(f) Ways of drawing up and keeping the appropriate records, as well as establishing
access to them
(g) Procedures and measures to verify the implementation of the elaborated norms
and to evaluate their efficiency, including through external audit
(h) The standards for hiring and training programmes for personnel in the field of
knowing clients
(i) Internal reporting procedures and to the competent authorities
Institutions must ensure the continuous training of the staff, so that the persons
with responsibilities in the field of knowing clients are adequately trained in order
to prevent money laundering and terrorist financing.
Also, the supervision of bank accounts and customer transactions is an integral
part of the banking supervision process exercised by the banking supervisory
authorities of each country.2
2
In Romania, the Emergency Ordinance No. 99/2006 on credit institutions and capital adequacy
regulates the conditions of access to banking activity and its activity in the territory of Romania,
the prudential supervision of credit institutions and financial investment services companies, and
the supervision of payment systems and settlement systems for transactions with financial
instruments.
7
6.06
6
5.19 5.34
5.18
5
1
CEE Souh West North
Graph 2.28 Soundness of bank by geographical regions of the European Union, 2006–2016.
On the other hand, the United Nations Convention Against Corruption (2020)
states that each state shall establish a complete internal regime of regulation and
control of banks and non-banking financial institutions, with the purpose to discour-
age and detect all forms of money laundering. The regulation focuses on the require-
ments regarding the customer identification, the registration of operations, and the
declaration of suspicious operations.
Graph 2.29 Correlation 2
R Linear = 0.251
200.00
between corruption and
soundness of banks
150.00
Corruption
100.00
50.00
00
2.00 3.00 4.00 5.00 6.00 7.00

Soundness of bank
Table 2.32 Correlation coefficients between corruption and soundness of banks

Corruption Soundness of banks
N 185 140
Soundness of banks Pearson correlation −.501** 1
N 140 140
Table 2.33 Regression of corruption depending on the soundness of banksa

Non-standardized
(Constant) 193.569 17.402 11.123 .000
Soundness of banks −23.882 3.516 −.501 −6.792 .000
a
2
R Linear = 0.147
60.00
Shadow economy
40.00
20.00
00
2.00 3.00 4.00 5.00 6.00 7.00

Soundness of bank
Graph 2.30 Correlation between shadow economy and soundness of banks

Table 2.34 Correlation coefficients between shadow economy and soundness of banks
Shadow economy Soundness of banks
N 158 135
N 135 140
Table 2.35 Regression of shadow economy depending on soundness of banksa

Non-standardized
(Constant) 52.349 5.116 10.233 52.349
Soundness of banks −4.955 1.034 −.384 −4.793 −4.955
a
Table 2.36 Correlation coefficients between money laundering and soundness of banks
Money laundering risk Soundness of banks
Money laundering risk Pearson correlation 1 −.366**
N 164 131
N 131 140
Table 2.37 Regression of money laundering depending on the soundness of banksa

Non-standardized
(Constant) 7.951 .494 16.104 .000
Soundness of banks −.442 .099 −.366 −4.474 .000
a
9.00 R Linear = 0.134
between money laundering
and soundness of banks
8.00

7.00
6.00
5.00
4.00
3.00
2.00 3.00 4.00 5.00 6.00 7.00

Soundness of bank
The identification of an influence of the banking system soundness on the participa-

tion in money laundering crimes was also the object of our empirical research. In
this sense, we underlie the following research hypothesis:
Hypothesis: High quality of the banking system soundness leads to a decrease in
the volume of money laundering crimes.
Methodology
The volume of money laundering crimes is measured using the indicator Anti-
Money Laundering Risk Index (AML index).
The banking system soundness in different countries will be determined using
Forum (2020) in the Global Competitiveness Report. The indicator is between level
1 (the weakest) and 7 (the best), thus reflecting the banking system soundness within
an economy.
The sample of countries is represented by a number of 131 countries and the
analysis period is 2012–2016, for which all data were available. For this purpose,
we use the descriptive methods, the correlation coefficients, and the regression anal-
ysis, and we carry out the statistical tests necessary to ensure a high accuracy of the
results.
Graph 2.31 shows a correlated arrangement of the variables risk of money launder-
ing and soundness of banks, at a R2 = 0.134. In other words, a percentage of 13.4%
of the variation in risk of money laundering can be explained by the soundness of
the banking system. The correlation coefficient reflected in the table is negative, in
References 169
the amount of −0.3668, which reflects a medium degree of correlation of the two
variables (Table 2.36).
Table 2.37 shows that the value of the regression coefficient of the variable
soundness of banks in relation to the variable money laundering risk is negative
(−0.442) and significant at a significance threshold of 1%. This reflects the fact that,
with a one point increase in banking soundness, there is a decrease in the level of
money laundering risk by 0.442 points, on average.
Our hypothesis testing results confirm that a high quality of the banking system
soundness leads to a decrease in the volume of money laundering crimes. The
robustness of the above results can be emphasized by the use of control variables as
well as more complex data processing methodologies (e.g. panel type).
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https://www.unodc.org/unodc, United Nations Convention against Corruption
Chapter 3
Behavioural Determinants of Economic
and Financial Crime
3.1 Culture
Numerous recent studies are beginning to go beyond the explanations of a strictly

economic nature regarding the identification of the causes of economic phenomena,
paying more and more attention to the analysis of the impact of social values,
norms, and attitudes (Frey and Stutzer 2012; Halla 2010; Schneider and Klinglmair
2004; Torgler and Schneider 2009; Pickhardt and Prinz 2014). Thus, the term
behavioural economics has been developing more and more in the economic sci-
ences, lately. According with authors (Lin 2012), behavioural economics study “the
effects of psychological, cognitive, emotional, cultural and social factors on the
economic decisions of individuals and institutions and how those decisions vary
from those implied by classical theory”.
Various authors among non-economists believe that attitude and opportunity are
the main motivations for committing economic crimes. Such authors (Bucur 2011,
p. 49) consider that the employment of illicit activities of individuals is determined
by several main reasons, such as:
• Have a need or a purpose to reach.
• Have the necessary skills to commit crimes.
• Their values and attitudes allow them to realize that they will commit illicit acts
including criminal acts.
• Have the opportunity to commit crime.
Schmölders (1960, p. 38) considers that the starting point of any investigation of
the discipline exercised by citizens on their fiscal behaviour must be the way the
state is reflected in the minds of citizens. Awareness of the role of the state leads to
the civic and fiscal feelings of the citizens and to a fundamental attitude regarding
the issues of their condition. In this regard Kirchler (2007) offers broad explanations
regarding the economic psychology of taxpayers, how fiscal behaviour is reflected
178 3 Behavioural Determinants of Economic and Financial Crime
through social representations of tax obligations and their connection with individ-
ual, social, and societal attitudes and norms.
The concept of social representations used by Kirchler (2007, p. 49) when refer-
ring to taxpayer behaviour refers to “the whole integration framework of the multi-
tude of variables presented in literature as tax compliance determinants”.
At the societal level, these determinants refer to ethics, values, social norms, and
tax morale. Of course, the cultural impact of these determinants is obviously real-
ized. At the individual level, subjective knowledge, respectively, perceptions regard-
ing fiscal obligations and fiscal non-compliance, are part of social representations,
such as attitudes and behavioural intentions (Kirchler 2007, p. 49). Equity percep-
tions are also an important variable regarding fiscal non-compliance. Continuing the
same idea, studies by Ajzen (1991) and Fishbein and Ajzen (2010) analyse the atti-
tudes, norms of constraint, and control exercised over individual behaviour regard-
ing the choice of compliance and non-compliance options through the theory of
thought action and the theory of planned behaviour. Kirchler (2007) uses the con-
cept of social representations directly related to the concept of tax morale, intro-
duced by Schmölders (1960).
For some researchers (Bucur 2011, p. 50), greed, as a universal human motiva-
tion, is an important component in deciphering the behaviour of legal compliance.
Lewis (1978) considers that people’s attitudes, judgments, and behavioural
intentions are more affected by what they believe than what they are in reality.
Regarding the concept of “tax” and how this word is reflected in the minds of indi-
viduals, Schmölders (1960) conducted a study on German contributors to which he
asked the following question: “What do you think of when you hear the word
‘taxes’?” The results of the study reflect the fact that about 33% of the associations
were concerned with technical notions such as tax legislation, tax, etc., in 29% of
cases there were negative associations, and 10% of the respondents did not associate
taxes with anything. The more negative associations were found among self-
employed (41%) and the fewest among civil servants (23%).
Thus, it can be seen that the representations of taxation differ by groups of tax-
payers, depending on the form of payment, the level of income, or age. For example,
employees who receive their monthly salary in cash and net form (and who only
know scripturally the gross amount of the salary and the value of the related contri-
butions) are less aware of the payment of tax obligations, considering them own
money losses. These employees perceive taxes as an exchange between individuals
and government. On the other hand, the rich perceive the ratio of contributions and
benefits to be unequal or unfavourable to them, while poorer individuals perceive
this ratio as equal or favourable to them. In the study conducted by Schmölders
(1960), he asked the participants to indicate to what extent they agree with the
state’s decisions, noting, among other things, that the young subjects offered
answers with more negative connotations than the older subjects did.
Another form of social representation of fiscal behaviour refers to social norms.
According with Wenzel (2005) the social norms represent “the perceived frequency
or acceptance of tax fraud within a reference group”. If a taxpayer considers that the
non-compliance is widespread and constitutes an accepted social behaviour, then
3.1 Culture 179
that taxpayer will most likely not comply. A study conducted in Canada (cited by
Bucur 2011, p. 50) indicates that although 58% of the citizens considered that the
tax system was correct, 21% of them avoided paying taxes; the justification offered
by one of these participants is very interesting, namely: “Everyone else does. GST
(tax act) is stupid and if a law is stupid, I don’t see why it should not be violated.
Besides, I pay taxes that are too high”.
Numerous studies identify socio-cultural factors among the underlying causes of
corruption and shadow economy. For example, we mention the studies carried out
by Husted (1999), Davis and Ruhe (2003), Fisman and Miguel (2007), Barr and
Serra (2010), Halkos and Tzeremes (2011), Tong (2014), and Achim (2016) which
document the existence of a significant influence between culture and corruption.
Austwick and Berga (2016) investigate the causes of shadow economy in Latvia and
identified the cultural factor as one of the main causes of the high level of shadow
economy in this country. They concluded that because Latvia is a relatively young
country, its citizens are not yet accustomed to the culture of paying taxes.
Regarding the individual norms and the attitudes of the citizens, greed can be
invoked as an important component in deciphering the behaviour of legal compli-
ance (Bucur 2011, p. 50). Aspects of religion and how it influences the values of a
nation may also be responsible for the spread of corruption (Faleye 2013; North
et al. 2013).
Next we will investigate the definition of the concept of “culture” as well as the
concrete possibilities of evaluation, continuing with a presentation of the cultural
models existing at the level of the countries belonging to the European Union.
Finally, we will investigate the relationship between culture and corruption, and
shadow economy, respectively, as a review of the specialized literature, but also by
presenting case studies.
3.1.1 General Approaches Regarding Culture
3.1.1.1 Concept of Culture and Measuring Instruments
According to Hofstede (2011), culture is defined as “the collective mental program-

ming of the human mind that distinguishes one group of people from another”.
Aspects such as honesty, trust in authorities, trust in people, pride, relationship with
nature and the world, relationship with others, ability to do things properly, ways to
avoid uncertainty, orientation in time and space, and also the long-term and short-
term orientation are elements that characterize the culture of a nation and can deter-
mine the behaviour of individuals who carry out economic activities.
Trompenaars (1993) identifies among the cultural characteristics the following:
universalism and particularism, individualism and communitarianism, specific and
diffuse, neutral and affective, and achievement and attribution. For example, British
culture is universally oriented. The actions of the British are based on norms rather
than relations. At the opposite end, the Bulgarian culture is particularly oriented,
because the focus is on relationships, rather than norms, and personal contact is vital
to the success of a business. Like most people with a particularistic culture, they
believe that agreements can be modified at any time, depending on the situation. In
the Universalist culture, a contract is a law and must therefore be respected. On the
other hand, the British culture is a diffuse one, compared to the Bulgarian one,
which is a specific one. The differences are in the level and purpose of the involve-
ment of citizens in relation to other people. It is well known that the British are very
direct; they go directly to the subject. They have an active communication with a
new person, regardless of the prior information they have about that person. On the
opposite side, Bulgarian culture is a specific one; Bulgarians need to know as much
as possible about a person before an effective communication takes place. In this
context, for example, Elenkov and Fileva (2006) explain the bankruptcy of the
British company Rover in Bulgaria, due to the socio-cultural environment of the
host country, which differs significantly from that of the British. Investigating the
causes of this bankruptcy, among the determining factors are those related to the
socio-cultural differences, the British company not considering a priority to know
and assimilate the values and culture of the population of Bulgaria, which differs
essentially from those in the United Kingdom, in terms of universalism and particu-
larism, individualism and communitarianism, specific and diffuse, neutral and
affective, and achievement and attribution.
The studies carried out by Hofstede are extremely useful for understanding the
cultural dynamics of nations (Javidan et al. 2006). Hofstede’s cultural model con-
sists of six dimensions (Hofstede Center 2020):
1. Attitude towards social inequality or power distance (with the acronym PD).
This dimension expresses the degree to which the less powerful members of a
society accept and expect this power to be unevenly distributed. The fundamen-
tal issue here is how a society accepts inequalities between people. Individuals
belonging to societies with a high degree of power distance accept a hierarchical
order in which everyone has a place and no other justification is needed. In soci-
eties with short power distance, individuals strive to equalize the distribution of
power and require justifications for inequalities in power.
2. Attitude towards the community or individualism versus collectivism (with the
acronym IDV). The high score of such a dimension reflects the individualism that
can be defined as a preference for a weak social framework, in which individuals
are expected to care only for themselves and their immediate families. Its oppo-
site, collectivism, is a preference for a social framework closely linked to society,
where individuals can expect their relatives or members of a particular group to
take care of them in exchange for unquestionable loyalty. The position of a soci-
ety is reflected on this dimension if the self-image of the people is defined in
terms of “me” or “us”.
3. Attitude towards success or masculinity versus femininity (with the acronym
MAS). The masculinity part of this dimension represents a preference in society
for achievement, heroism, assertiveness, and material rewards for success. Such
a society is generally more competitive. Its opposite, femininity, means the
3.1 Culture 181
p reference for cooperation, modesty, care for the poor, and the quality of life,
and a female society is generally more consensus-oriented.
4. Attitude towards avoiding the unknown or uncertainty (acronym UAI). This
dimension expresses the degree to which members of a society feel uncomfort-
able with uncertainty and ambiguity. The fundamental issue here is how a soci-
ety perceives that the future can never be known: future must be controlled or let
it happen. Countries with strong UAI maintain rigid codes of belief and behav-
iour and are intolerant of unorthodox behaviours and ideas. Companies with a
low level of UAI maintain a more relaxed attitude in which practice matters more
than principles.
5 . Attitude towards the passing of time or long-term orientation (with the acronym
LTO). Each society must maintain links with its own past, while facing the chal-
lenges of the present and the future. Societies give priority to these two existen-
tial goals differently. Societies that have low scores of this dimension, for
example, prefer to maintain secular traditions and norms and look at social
change with suspicion. Societies with high scores on this dimension of culture
have a more pragmatic approach: they encourage hard work and efforts in mod-
ern education as a way to prepare for the future.
6 . Attitude towards controlling one’s own desires or indulgence and restraint (with
the acronym IND). Indulgence characterizes a society that allows the relatively
free expression of basic and natural human movements regarding the joy of life
and fun. Restraint characterizes a society that suppresses the satisfaction of
needs and regulates it through strict social norms.
Each dimension places a nation’s culture on a scale of 0–100. At the time of this
study, Hofstede’s model had been for a large number of countries (Hofstede
Center 2020).
3.1.1.2 Culture in European Union Countries
Next, we intend to analyse the cultural characteristics at the level of the European
Union countries, in order to identify certain indications on the existence of a con-
nection between culture, on one hand, and corruption phenomena and shadow econ-
omy, on the other.
Methodology
The cultural characteristics are highlighted using the Hofstede model with the six
cultural dimensions: power distance (PD), individualism versus collectivism (IDV),
masculinity versus femininity (MAS), uncertainty avoidance (UAI), long-term ori-
entation (LTO), and indulgence and restraint (IND). The sample of countries is
represented by the countries of the European Union (28). As methods, we use
descriptive methods, comparison, analysis, and synthesis.

Graph 3.1 shows that the societies with the shortest power distance are among the
countries of Northern and Western Europe, namely, Austria (11), Denmark (18),
Ireland (28), Sweden (31), and Finland (33). Societies with the highest power dis-
tance are among the former communist countries in Central and Eastern Europe,
Slovakia (100), Romania (90), Croatia (73), and Slovenia (71).
The countries with the highest levels of individualism are the United Kingdom
(89), Hungary and the Netherlands (80), Italy (76), and Belgium (75), and the most
collectivist societies are among the countries of Southern and Eastern Europe,
namely, Portugal (27), Slovenia (21), Bulgaria and Romania (30), and Croatia (33)
(Graph 3.2).
The most masculine societies in the European space are found in Slovakia (100),
Hungary (88), Austria (79), and Italy, and the most feminine are identified in Sweden
(5), Latvia, the Netherlands (14), and Denmark (16) (Graph 3.3).
The societies with the highest inclination to avoid the uncertainties, namely,
those that take the least risks are found in Greece (100), Portugal (99), Belgium
(94), and Poland (93), and those with the lowest risk aversion are found in Northern
Europe, that is, Denmark (23), Sweden (29), Great Britain (35), and Ireland (35)
(Graph 3.4).
The societies with a long-term orientation horizon are located in Germany (83),
Belgium, Lithuania, and Estonia (82), and those with a shorter horizon are Ireland
(24), Portugal (28), Denmark (35), and Finland (38) (Graph 3.5).
The most indulgent societies are found among the countries of Northern Europe,
namely, Sweden (78), Denmark (70), Great Britain (69), and Holland (68), and the
most detained are among the Baltic countries, namely, Latvia (13), Estonia (16), and
Lithuania (16) but also Bulgaria (16) and Romania (20) (Graph 3.6).
100
100 90
90
80 68 68 70 71
73
70 60 63 65
57 57
60 50
50 44 46
40 40 42
40 33 35 35 38
28 31
30 18
20 11
10
0
Romania
Denmark
Germany
Netherlands
Luxembourg
Greece
Portugal
Ireland
Sweden
Lithuania
Poland
Slovenia
Slovakia
United Kingdom
Estonia
Latvia
Italy
Belgium
France
Bulgaria
Croatia
Austria
Hungary
Spain
Czech Republic
Finland
Graph 3.1 Power distance (PD) in European Union countries. (Source: own processing)
3.1 Culture 183
100 89
90 74 75 76
80 80
80 67 70 70 71 71
70 63
58 60 60 60 60
60 51 52 55
50
40 33 35
27 27 30 30
30
20
10
0
Czech Republic
United Kingdom
Greece
Luxembourg
Portugal
Slovenia
Bulgaria
Romania
Croatia
Slovakia
Austria
Germany
Denmark
Netherlands
Cyprus
Malta
Spain
Estonia
Lithuania
Poland
Ireland
France
Sweden
Belgium
Hungary
Finland
Latvia
Italy
Graph 3.2 Individualism versus collectivism (IDV) in European Union countries. (Source: own
processing)
100
100 88
90 79
80 70
70 64 66 66 68
57 57
60 50 54
50 40 40 42 42 43
40 26 30
31
30 19 19
20 14 16
5 9
10
0
Denmark
Romania
Greece
Germany
France
Sweden
Portugal
Latvia
Ireland
Slovakia
Italy
Austria
Netherlands
Lithuania
Slovenia
Finland
Estonia
Cyprus
Croatia
Luxembourg
Poland
United Kingdom
Hungary
Bulgaria
Spain
Czech Republic
Malta
Belgium
Graph 3.3 Masculinism versus feminism (MAS) in European Union countries. (Source: own
processing)
3.1.2 Culture and Corruption
The most frequent representative factor to show the moral dimension of economic
behaviour is culture. Numerous studies document the existence of a significant
influence between culture and corruption (Husted 1999; Davis and Ruhe 2003;
Fisman and Miguel 2007; Barr and Serra 2010; Halkos and Tzeremes 2011; Tong
2014; Achim 2016).
Husted (1999) found that the phenomenon of corruption is significantly associ-
ated with the cultural phenomenon. He identified a cultural profile of a corrupt
99 100
100 90 93 94
85 86 86 88
90 80 82
75
80 70 70 74
65 65
70 59 60 63
60 51 53
50 35 35
40 29
30 23
20
10
0
Romania
Netherlands
Denmark
Slovakia
Bulgaria
Greece
Ireland
Latvia
France
Slovenia
Finland
Estonia
Germany
Lithuania
Italy
Portugal
Sweden
Croatia
Hungary
Cyprus
United Kingdom
Austria
Luxembourg
Czech Republic
Spain
Poland
Malta
Belgium
Graph 3.4 Uncertainty avoidance (UAI) in European Union countries. (Source: own
processing)
100
90 82 82 82 83
77
80
67 69 69 70
70 63 64
58 58 60 61
60 49 51 52
53
50 45 48
40 35 38 38
28
30 24
20
10
0
United Kingdom
Romania
Netherlands
Denmark
Germany
Greece
Bulgaria
Ireland
Portugal
Poland
Slovenia
Sweden
France
Slovakia
Lithuania
Cyprus
Croatia
Italy
Latvia
Estonia
Hungary
Belgium
Spain
Austria
Luxembourg
Malta
Finland
Czech Republic
Graph 3.5 Long-term orientation versus short-term orientation (LTO). (Source: own
processing)
country as being represented by the existence of a high power distance, a high mas-
culinity, and a high degree of uncertainty avoidance. Fisman and Miguel (2007)
investigated the relationship between culture and corruption in a study on violations
of parking regulations in New York by diplomats from over 149 countries. They
found out that diplomats from highly corrupt countries are more likely to break the
parking law than diplomats from less corrupt countries. They concluded that the
corruption phenomenon is partly a cultural phenomenon.
Davis and Ruhe (2003) also find that cultural dimensions of power distance and
masculinity versus femininity explain much of the variation in the level of corrup-
tion using a cross-sectional analysis conducted on a sample of 50 countries. In addi-
3.1 Culture 185
Graph 3.6 Indulgence versus restraint (IND) in European Union countries. (Source: own
processing)
tion, the authors identify individualism as a determining factor for the level of
corruption of countries. Similar results are obtained by Baughn et al. (2010) who
investigate the propensity of firms from 30 different countries to engage in interna-
tional bribery. They find that high power distance countries showed a somewhat
greater propensity for providing bribes in transactions with less-developed nations.
In addition, the study of Halkos and Tzeremes (2011) using a sample of 77 countries
found that a high power distance and higher collectivist values of a society are asso-
ciated with a higher level of corruption, but, in terms of masculinity, the results
indicate a “U” shape relationship that is not statistically significant.
Tong (2014) explored the relationship between corruption and cultural psychol-
ogy by examining the Chinese people. He identified that the negative experiences of
the individual in childhood (e.g. poverty, hunger) along with a collectivist agrarian
tradition are associated with a greater inclination towards corruption.
Relevant to the culture-corruption relationship is the study conducted by Barr
and Serra (2010). They conducted two experiments on bribery, in 2005 and 2007,
with the participation of students from Oxford University, belonging to two groups
of countries, one represented by the most strongly corrupt countries (a number of 33
countries) and the other group represented by the least corrupt countries (a number
of 22 countries) selected from all over the world. Both experiments have shown that
among students, culture significantly influences corruption, but not the same in the
case of graduates. Thus, the values and beliefs regarding the phenomenon of
corruption may be closely linked to the country of origin, but for immigrants, these
values and beliefs could be modified as a result of changing the context of action.
According to Hofstede Center (2020), the power distance (PD) refers to “the
degree to which less powerful members of a society accept and expect power to be
unevenly distributed”. A high level of power distance means a hierarchical order in
which everyone has a place and no justification is needed. In a culture with a high
power distance, the superiors offer favours to subordinates in exchange for their
loyalty, and corruption may arise as a result of nepotism and favouritism (Husted
1999). Different studies demonstrate a positive relationship between power distance
and corruption (Husted 1999; Davis and Ruhe 2003; Murdoch 2009; Halkos and
Tzeremes 2011; McLaughlin 2013; Tong 2014).
The cultural dimension individualism versus collectivism (IDV) refers to the
extent to which the decision of a person’s life is taken in the opinion of an individual
or a group (family or relatives). This refers to the extent to which people’s self-
image is defined in terms of me or us (Hofstede Center 2020). A high score of this
dimension indicates a strongly individualistic society in which the law is respected.
In countries such as the United States, the United Kingdom, and Australia, indi-
vidual initiative, competition, and democracy are highly valued (Davis and Ruhe
2003). It is to be expected that in a collectivist society, people will be inclined to
break the law in order to support their own groups, based on unquestionable loyalty.
Therefore, corruption can increase. Various studies show that as a society is less
individualistic (more collectivist, respectively), the level of corruption is higher
(Davis and Ruhe 2003; Murdoch 2009; Halkos and Tzeremes 2011; Tong 2014).
The cultural dimension, masculinism versus feminism (MAS), refers to a soci-
ety’s concern for achievements, heroism, assertiveness, and material rewards for
success (masculinity) or for cooperation, modesty, care of the weak, and quality of
life (femininity) (Hofstede 1980; Hofstede Center 2020). In a study on 42 countries,
Davis and Ruhe (2003) empirically identified a significant positive relationship
between masculinity and corruption. They concluded that in countries with the
highest score of masculinity, people prefer to receive money, titles, or other materi-
alistic rewards or social positions, so that the level of corruption increases.
In Venezuela, Gonzales-Fabre (1996, p. 60) found that a high level of corruption
is motivated by “personal accumulation of wealth”. Husted (1999) empirically iden-
tified a significant relationship between corruption and masculinity and associated
high corruption with high earnings, recognition, advancement, and workplace chal-
lenges. After investigating the explanations for the different levels of corruption in
countries such as Scandinavia and Africa, McLaughlin (2013) shows that some cul-
tural variables such as masculinity play a role in determining the level of corruption.
Thus, we can conclude that the preference for material rewards creates the appropri-
ate framework for extending corruption practices.
The cultural dimension, namely, uncertainty avoidance (UAI) expresses “the
degree to which the members of a society feel uncomfortable with the uncertainties
and the ambiguity” (Hofstede Center 2020). In a society with a high level of uncer-
tainty avoidance, corruption can be viewed as a mechanism for reducing uncer-
tainty, in order to achieve more certain and immediate results (Husted 1999).
Carrying out a comprehensive meta-analysis of the literature, Tong (2014) con-
cludes that “in countries with low UAI, such as China, the ambiguity and adaptabil-
ity of laws and regulations to meld on various situations make corruption more
likely”. Therefore, we expect that the higher the level of uncertainty avoidance, the
higher the level of corruption.
3.1 Culture 187
The cultural dimension long-term orientation versus short-term orientation

(LTO) refers to “how each society must maintain some links with its own past, while
facing the challenges of the present and future” (Hofstede Center 2020). This
dimension is called by Hofstede as “Confucian dynamism” to show that it refers to
a choice, coming from Confucius’ ideas of choosing two opposing poles: long-term
orientation versus short-term orientation. The first pole is a positive one and reflects
a dynamic and future-oriented mentality, while the second pole is a negative one and
presents a more static and tradition-oriented mentality (Fang 2003). Hofstede (1997)
characterized the long-term orientation by “persistence, ordering relations by status,
saving, and sense of shame” and the short-term orientation through “personal stabil-
ity, face protection, respect for tradition, and reciprocity of greetings, favours, and
gifts”. Under these circumstances, we can expect that the short-term orientation will
increase the need to ask for gifts and favours in order to reap immediate benefits.
Therefore, we expect that as the orientation of individuals is aimed at a shorter hori-
zon, the expected level of corruption is higher.
The cultural dimension indulgence versus restraint (IND) refers to the prefer-
ence of a society to allow relatively free satisfaction of basic and natural human
impulses in terms of the joy of life, as opposed to suppressing the satisfaction of
needs and regulating it through strict social norms (Hofstede Center 2020). A high
score of indulgence would mean a society that manifests its desire to realize its
impulses and desires in terms of joy of life and fun. This society really appreciates
free time and spends a lot of money in this direction. Individuals belonging to a
restrained company are restricted by social norms and break these norms for incen-
tives to demand and offer, even illicit private payments. In this context, we expect
that the more a society is restrained, the higher the level of corruption, and the more
indulgent a society is, the lower the level of corruption.
Corruption and Culture in European Union Countries
Next, we aim to analyse at a descriptive level the relation between the level of cor-
ruption and the cultural characteristics in the countries of the European Union, in
order to identify certain indications about the existence of a connection on culture
and corruption.
Methodology
Corruption is measured by the Corruption Perception Index (CPI) provided by
Transparency International (2020).
The cultural characteristics are highlighted using the Hofstede model with the
six cultural dimensions: power distance (PD), individualism versus collectivism
(IDV), masculinity versus femininity (MAS), uncertainty avoidance (UAI), long-
term orientation (LTO), and indulgence and restraint (IND). The sample of coun-
tries is represented by the countries of the European Union (28). As methods, we

use descriptive methods, comparison, analysis, and synthesis.
synthesis. We also intend to investigate a spatial approach to the analysis of the level
of corruption for the member countries of the European Union, also considering one
of the aims of this study, to investigate the influences of behavioural factors (culture,
religion, tax morale, happiness, etc.) on the phenomena of corruption and shadow
economy.
For this, we will use the classification of the countries belonging to the European
Union (28 countries) into the four regions of Europe, as provided by EuroVoc
(2020) (Table 1.4).
Graph 50 highlights at a descriptive level certain similarities between the level of
corruption and the power distance (PD) by geographical areas of the European
Union. Thus, the countries of Northern Europe have the lowest power distance score
(27.33, on average) and at the same time the lowest level of corruption (3.27, on
average). On the opposite side are the countries of Central and Eastern Europe that
have the highest levels of power distance (63.73, on average) and the highest levels
of corruption (52.86, on average). After the countries of Central and Eastern Europe,
the countries of Southern Europe record quite high levels of power distance (57.5,
on average) as well as high levels of corruption (42.86, on average).
It can be seen that the level of corruption and the level of power distance have a
growing evolution from North to South of Europe, as well as from West to East of
Europe (Graph 3.7).
Graph 3.8 reflects descriptive evidence regarding the levels of corruption com-
pared with the levels of individualism versus collectivism by geographical areas of
the European Union. It can be seen that the countries of Central and Eastern Europe
as well as the countries of Southern Europe have low levels of individualism (high
levels of collectivism, respectively), (50.91 and 47.25, respectively) and at the same
time the highest levels of corruption (52.88 and 42.88, respectively). On the other
side are the countries of Northern and Western Europe, with the highest levels of
individualism (69.33 and 70.88, respectively) and the lowest levels of corruption
(3.27 and 11.06, respectively). Similarly, as in the case of the power distance, we
also find for the dimension of individualism versus collectivism that the level of cor-
ruption and the level of cultural dimension individualism versus collectivism show
differentiated developments from the North to the South of Europe, as well as from
the West to the East of Europe.
Graph 3.9 reflects descriptive evidence on the levels of corruption compared to
the levels of masculinity versus femininity by geographical areas of the European
Union. Societies belonging to the countries of Northern Europe have the lowest
level of corruption (3.27) and at the same time have the lowest level of masculinity
(15.67) compared to the countries belonging to the other European geographical
regions. High levels of masculinity are also found in countries of Central and Eastern
3.1 Culture 189
70.00
63.73
57.50
60.00
52.88 51.27
50.00
42.86 40.00
40.00
34.53
27.33
30.00
20.00
11.06
10.00
3.27
0.00
CEE North South West Average EU
Corruption PD
Graph 3.7 Corruption and power distance (PD) by geographical areas of the European Union
80.00
69.33 70.88
70.00
58.62
60.00 52.88
50.91 47.25
50.00 42.86
40.00 34.53
30.00
20.00 11.06
10.00 3.27
0.00
Corruption IDV
Graph 3.8 Corruption and individualism versus collectivism (IDV) by geographical areas of the
European Union. (Source: own processing)
60.00 52.88 55.00

50.00
50.00 46.18 45.96
42.86
40.00 34.53
30.00
20.00 15.67
11.06
10.00 3.27
0.00
Corruption MAS
Graph 3.9 Corruption and masculinism versus feminism (MAS) by geographical areas of the
European Union
100.00
90.00
90.00
80.00 74.60
70.00 69.62
60.00 52.88 52.67
50.00
37.00 42.86 34.53
40.00
30.00
20.00
10.00 11.06
3.27
0.00
CEE North South West Eu Average
Coruption UAI
Graph 3.10 Corruption and uncertainty avoidance (UAI) by geographical areas of the European
Union. (Source: own processing)
Europe as well as those of Southern Europe (46.18 and 50, respectively), in parallel
with high levels of corruption (52.88 and 42.86).
Results contrary to those found in other European regions are found in the coun-
tries of Western Europe, where we find that there are quite high levels of masculinity
(55), against the background of a low level of corruption (11.06).
Graph 3.10 presents descriptive records regarding the levels of corruption com-
pared to the levels of uncertainty avoidance by geographical areas of the European
Union. Graph 3.10 shows that the lowest levels of corruption are found in the coun-
tries of the Northern and Western regions of Europe (3.27 and 11.06, respectively),
which are populated by societies with the lowest levels of uncertainty avoidance
(with scores of 37 and 52.67, respectively). Thus, as can be noted, corruption level
and uncertainty avoidance level also have growing evolutions from North to South
of Europe, as well as from West to East of Europe.
The descriptive evidences regarding the levels of corruption compared with the
levels of long-term orientation by geographical areas of the European Union are
reflected in Graph 3.11. The highest levels of corruption are found in the countries
of Central and Eastern Europe (with an average score of 52.88), companies that
present at the same time the highest scores of the long-term orientation, that is, a
predominant orientation on the long term. On the opposite side are the countries of
Northern Europe that present the lowest average level of corruption (3.27) against
the background of the lowest average score of the long-term orientation (42), i.e. a
predominantly short-term average orientation.
Graph 3.12 presents the graphical analysis of the average levels of corruption and
average scores on indulgence versus restraint for the European Union regions.
Similar results are noticed in this case too; more precisely the countries of the North
and West of Europe have significant differences compared to the countries of
Central, East, and South of Europe. Thus, the lowest levels of corruption are found
in the countries of Northern and Western Europe (3.27 and 11.06, respectively) in
parallel with very high indulgence scores that characterize the societies living in
these countries (68.33 and 64.33, respectively). On the other side are the countries
3.1 Culture 191
70.00 63.50
60.67 58.92
60.00 52.88
50.00 45.50
42.00 42.86
40.00 34.53
30.00
20.00
11.06
10.00 3.27
0.00
CEE North South West EU Average
Corruption LTO
Graph 3.11 Corruption and long-term orientation (LTO) by geographical areas of the European
Union. (Source: own processing)
80.00
68.33
70.00 64.33
60.00 52.88
50.00 42.86 42.58
39.25 34.53
40.00
30.00 26.30
20.00 11.06
10.00 3.27
0.00
Corruption IND
Graph 3.12 Corruption and indulgence versus restraint (IND) by geographical areas of the
European Union. (Source: own processing)
of Central and Eastern Europe, and those of Southern Europe, respectively, which
have the highest levels of corruption (52 and 42.86) and the lowest level of indul-
gence that characterizes the societies living in these regions (26.3 and 39.25,
respectively).
In this case, too, it is noticed a similar development of corruption and indulgence
versus restraint levels extending from the North to the South of Europe and from the
West to the East of Europe.
In conclusion, for most of the cultural components, there are similar evolutions
of corruption levels in the same directions and, at the same time, of the cultural
characteristics. More precisely, corruption levels are increasing from North to South
of Europe and from West to Central and East of Europe based on the cultural char-
acteristics determined by the six cultural dimensions of the Hofstede model.
Empirical Studies
This section aims to provide, in addition to the descriptive evidences that attest the
existence of a link between the level of corruption and the cultural dimensions of a
society, empirical evidence, in the form of empirical case studies. To this end, it is
exemplified the empirical study conducted by Achim (2016), which investigates a
possible role played by cultural factors in the level of corruption.
Methodology
For this purpose, the cultural dimensions of Hofstede’s model were used, and the
level of corruption worldwide was evaluated using the Corruption Perception Index
(CPI) as it is provided by Transparency International (2020). The study was con-
ducted for a sample of 98 countries, using the method of ordinary least squares
(OLS). Based on the review of the literature presented above, Achim (2016) formu-
lated the following working hypotheses:
Hypothesis 1. The cultural factors characterizing a society influence the level of
corruption:
Hypothesis 1.1. The greater the power distance, the higher the level of
corruption.
Hypothesis 1.2. The less individualistic (more collectivist) a society is, the higher
the level of corruption.
Hypothesis 1.3. The higher the masculinity of a society, the higher the level of
corruption.
Hypothesis 1.4. The higher the level of uncertainty avoidance, the higher the
level of corruption.
Hypothesis 1.5. The shorter the short-term orientation of a society, the higher
the level of corruption.
Hypothesis 1.6. The less indulgent a society is, the higher the level of
corruption.
In summary, the results of the study conducted by Achim (2016) are the following:
1. Firstly, Achim (2016) identifies three of the six main components of Hofstede’s
model as having a significant influence on corruption, namely, power distance
(PD), individualism-collectivism (IDV), and long-term orientation (LTO).
Statistical influences of cultural dimensions on masculinism-feminism (MAS),
uncertainty avoidance (IND), and indulgence versus restraint (IND) were
rejected by statistical tests.
2. Secondly, the results of this study show that the phenomenon of corruption is
explained by the power distance in proportion of 33.5%. A culture characterized
by a high level of power distance implies a higher level of corruption. This is a
hierarchical society, where the employees recognize the legitimate power of the
leader. In order to maintain the loyalty of subordinates, superiors may request
bribes as a prerequisite for asserting their position. The countries with the
3.1 Culture 193
greatest power distances are Malaysia (100), Saudi Arabia, Iraq, and Guatemala
(95), Russia (93), Albania, and Kuwait (90). The countries with the least power
distance are Austria (11), Denmark (18), New Zealand (22), and Norway (31).
Therefore, hypothesis 1.1 is accepted. Our results are supported by the findings
of Husted (1999), Davis and Ruhe (2003), Halkos and Tzeremes (2011),
McLaughlin (2013), and Tong (2014) who found a positive correlation between
the power distance and corruption.
3. Thirdly, individualism versus collectivism explains the variation of corruption in
proportion of 37%. The more collectivist a society is, the higher the level of cor-
ruption, and the more individualistic a society, the lower the level of corruption.
In a collectivist society, the network of friends and family creates lasting rela-
tionships that can stimulate corrupt behaviours. The countries with the highest
individualism score are the United States (91), Australia (90), the United
Kingdom (89), the Netherlands (80), New Zealand (79), and Denmark (74),
while the countries with the lowest score are Guatemala (6), Ecuador (8), Panama
(11), Venezuela (12), and Colombia (13). The results showed that hypothesis 1.2
is accepted, indicating that a less individualistic (more collectivist) society has a
higher level of corruption. These results are in line with those of Davis and Ruhe
(2003), Halkos and Tzeremes (2011), and Tong (2014), who underlined the main
role of collectivist society and social network in promoting corruption.
4. Another conclusion of the study identified that the orientation horizon of a soci-
ety (long-term orientation versus short-term orientation) may explain the level of
corruption in that country. But, this time, the proportion is slightly lower, 10.8%.
Also, it was found that the corruption phenomenon can increase in the case of a
shorter-term-oriented society, which supports hypothesis 1.5, and the tests have
confirmed the statistical significance of the results. This can be explained by the
fact that a shorter-term-oriented society has the need to make requests for favours
and gifts to get immediate benefits. A high score of long-term orientation versus
short-term orientation (LTO) indicates a longer-term orientation of this type of
society. A high score means that societies value tradition and long-term commit-
ments, while a low score reflects a willingness to accept change, which is not
hindered by tradition (Hofstede 1997). According to Hofstede’s cultural model,
countries with long-term orientations are South Korea (100), China (87), Japan
(88), Germany (83), Belgium, Lithuania, and Estonia (82), while Honduras (8),
Nigeria (13), and Ghana (4) are the most short-term-oriented countries. The
results of the study reflect a negative correlation between LTO and corruption
(c = −0.344), which is statistically significant (p < 0.01). The results reflect a
negative influence of LTO on corruption, which is statistically significant
(p < 0.001). The shorter the orientation, the higher the level of corruption. Thus,
corruption increases with short-term orientation, confirming our hypothesis.
However, for China, Tong (2014) found opposite results. He noted that long-term
prospects promote the importance of maintaining relationships that may involve
corrupt activities. But many generally valid theories are contradicted in the case
of China. For example, Teixeira et al. (2016, p. 71) and Jiang and Nie (2014)
spoke about the “miracle of China” of continuing to increase GDP under condi-
tions of increasing government corruption prevalence.
5. As for the hypotheses regarding the existence of correlations of the cultural
dimensions regarding masculinism-feminism (MAS), the uncertainty avoidance
(UAI), and indulgence versus restraint (IND), these were rejected by the statisti-
cal tests. Thus, as regards hypothesis 1.3, which examines the dimension of the
“MAS” culture, a high score of this dimension means a strongly masculine soci-
ety. The most masculine societies are found in Slovakia (100), Japan (95),
Hungary (88), and Austria (79), while the most feminine societies are found in
Sweden (5) and Latvia (9). All the results reject hypothesis 1.3, which means that
more masculine societies are not perceived as having a higher level of corruption
compared to more feminine societies. The variation of corruption according to
the dimension of masculinsim versus feminism is also very low (only 1.6%), also
reflecting an almost zero influence of this cultural dimension on the level of cor-
ruption. However, the results are consistent with those of Tong (2014) for China,
but contrary to those of Husted (1999) and Davis and Ruhe (2003) carried out in
50 and 42 countries, respectively.
Hypothesis 1.4 investigates whether the “UAI” level explains the level of corrup-
tion. A high level of “UAI” means high concern about avoiding uncertainties,
and, in this context, a high level of corruption is expected. Innovation can be
rejected in business, and safety is an important element in individual motivation
(Hofstede 1997). The average score for uncertainty avoidance is 63. The highest
uncertainty avoidance scores were recorded in Greece (100), Portugal (99),
Guatemala (99), Uruguay (99), and Belgium (94). The lowest notes of this
dimension are recorded in Singapore (8), Jamaica (13), Denmark (23), Sweden
(29), and Hong Kong (29). These countries have a low risk aversion and promote
innovative ideas of diversity. Results reflect a positive and very low correlation
coefficient (c = 0.048), which is not statistically significant. All these results do
not support hypothesis no. 1.4; therefore, uncertainty avoidance in a particular
society has failed to explain the level of corruption in this society. However, the
results are consistent with those of Davis and Ruhe (2003) but contradict the
results obtained by Husted (1999) or Tong (2014), who find that a high level of
uncertainty avoidance is correlated with a high level of corruption.
In conclusion, the main hypothesis is accepted (hypothesis 1). The cultural factors
characterizing a society influence the level of corruption, which reflects the fact
that cultural factors influence the level of corruption. About half of the level cor-
ruption in the analysed countries can be explained on the basis of national cul-
ture. These findings suggest that the cultural dimension of a nation may contribute
to explaining the level of corruption in each country. Therefore, the study con-
ducted by Achim (2016) can have significant social implications for the decision-
makers who are looking for ways to reduce the level of corruption, in order to
protect the national economy. Governments need to recognize the role of culture
and, by doing so, can make the most effective decisions in the process of reform-
ing anti-corruption policies.
3.1 Culture 195
3.1.3 Culture and Shadow Economy
Different studies have shown that certain components of spirituality, such as culture,
religion, or happiness, can influence people’s decision to work in the shadow
economy.
Thus, the empirical study conducted by Çule and Fulton (2009) highlights that
the reduction of the shadow economy and corruption is a complex phenomenon that
involves business culture, social expectations, and political considerations; there-
fore, it is not just about issues related to changing tax regulations. Austwick and
Berga (2016) investigated the causes of the shadow economy in Latvia and identi-
fied the culture factor among the main causes of the high level of shadow economy
in this country. They concluded that because Latvia is a relatively young country, its
citizens are not yet accustomed to the culture of paying taxes. Similarly, but without
empirical evidence, Petrakis (2014, p. 61) argues that the cultural context influences
the relationship between overtax and shadow economy. He explains that “when the
individualism is dominant, the society will tend to become more heavily involved in
illegal activities by not applying the disclosure of transactions”. He concludes that
the cultural phenomenon shapes the level of the shadow economy and lists among
the possible reasons for the expansion of an informal economy, the high degree of
uncertainty, the belief in the in-group collectivism, and the lack of future orientation
(Petrakis 2014, p. 61).
Related to cultural factors, studies investigating the determinants of debt pay-
ment are also included. Statistics show that trade payables are paid quicker by debt-
ors in Northern Europe than those in Southern Europe. The average debt recovery
period in Europe decreased from about 56 days in 2008 to 52 days in 2012, but the
results differ from country to country. In Northern Europe, the average debt collec-
tion is the lowest, namely, Finland (27 days), Norway (34 days), Estonia (35 days),
Sweden (35 days), and Denmark (37 days). In Southern Europe, the average dura-
tion is longer, for example, Spain (97 days), Italy (96 days), Portugal (90 days), and
Greece (80 days). The differences invoked are based on the cultural differences
between Northern and Southern Europe (European Commission 2012).
With reference to tax evasion in different countries, Torgler (2002), Kirchler
(2007), and Kogler et al. (2013) identified socio-cultural factors among the determi-
nants of the degree of tax compliance. A number of individual characteristics as
well as social behaviours and norms are tested for their relevance. Of particular
interest is the fact that religiosity, in general, and church attendance by individuals,
in particular, are associated with an increase in tax compliance (Prinz 2004; Torgler
2007), the same as patriotism (Konrad and Qari 2012) and other cultural factors
(Alm and Torgler 2006; Bame-Aldred et al. 2013; Richardson 2008; Torgler 2004;
Torgler and Schneider 2009; Tsakumis et al. 2007). The results identify a decrease
in the level of tax compliance vertically, as it descends from the North to the South
of Europe, and horizontally from the West to the East of Europe, respectively, and
the socio-cultural factors (mentioned above) are among the determinants for such
modification.
In relation to the influence of culture, especially the language spoken in eco-
nomic transactions, the studies conducted by Head (2003) and Helliwell (2000) find
that “two countries that speak the same language will perform two to three times
more exchanges than if they did not share a common language”. The same study
estimates that the volume of transactions is about 65% higher if countries have the
same border than if they do not have a common border. The existence of common
borders can facilitate money laundering, especially when money laundered is cash
(European Commission 2013, ECOLEF project p. 40).
The Hofstede Model of National Culture in Relation with the Shadow Economy.
Power distance (PD) as a dimension of culture was analysed in the literature
relating to the shadow economy (Buszko 2018; Dan 2015; Richardson 2008;
Tsakumis et al. 2007) and tax evasion (Richardson 2008). Their findings are not
conclusive in documenting a clear relationship between power distance and the
shadow economy. For instance, Tsakumis et al. (2007) investigate the influence of
national culture on the size of the shadow economy across 50 countries over the
period 2000–2002. They find that a large power distance leads to a larger shadow
economy. Similarly, a positive and statistically significant correlation coefficient
between power distance and the shadow economy is found by Buszko (2018) in his
study of 30 countries. However, Richardson (2008) and Dan (2015) do not confirm
this relationship. Regarding the methodology used, Richardson (2008) analyses the
relationship between some dimensions of culture and tax evasion using ordinary
least squares (OLS) regressions, based on data from 47 countries for the period
2002–2004 and after controlling for economic development. Later, Dan (2015) con-
ducts a study of 26 European member states for 2013, in which he calculates the
correlation coefficients between some dimensions of culture and the shadow econ-
omy. He finds a weak and positive correlation between power distance and the
shadow economy. A greater power distance is presumed to be associated with high
inequality between people who may perceive the tax system, and generally the laws
and regulations, as unfair. Therefore, in this environment, people seek to evade
income taxes (Richardson 2008) or generally to avoid rules.
Regarding another dimension of culture that focuses on individualistic or col-
lectivistic patterns (IDV), collectivistic countries are found to be more engaged in
shadow activities than individualistic countries (Richardson 2008; Tsakumis et al.
2007; Achim et al. 2019a). Negative correlation coefficients between individualism
and the shadow economy are also found by Dan (2015) and Buszko (2018). Indeed,
in a collectivistic society, people are inclined to violate the law in order to support
their own group out of unquestioning loyalty.
Regarding masculinity (MAS), another aspect of culture, some papers (Buszko
2018; Dan 2015; Richardson 2008; Tsakumis et al. 2007) document an impact on
the shadow economy, but they are not convincing regarding the sign of this influ-
ence. Other studies suggest (Hofstede 2001) or even empirically find (Tsakumis
et al. 2007) a negative impact of masculinity on the size of the shadow economy. For
instance, in a study conducted in more than 50 countries, Tsakumis et al. (2007) find
3.1 Culture 197
a negative impact of masculinity on the size of the shadow economy. Similar results
are obtained by Achim et al. (2019a) on a study conducted over 31 European coun-
tries. This influence is explained by starting with Hofstede’s study (2001, 319),
which also finds a significant negative correlation between masculinity and the
National Permissiveness Index. Thus, a highly masculine society is found to be less
permissive and focus more on punishment than a highly feminine society, which is
rather concerned with “correction and rehabilitation” (Tsakumis et al. 2007).
Following this view, Tsakumis et al. (2007) explain their results by the fact that a
highly masculine society seems to be “more conscious of its tax compliance obliga-
tions” (Tsakumis et al. 2007) which could explain the negative impact on the size of
the shadow economy. A similar negative impact of masculinity on the size of the
shadow economy is found by Richardson (2008), although it is statistically insig-
nificant. On the other part, other studies (Buszko 2018; Dan 2015) find positive
correlations between masculinity and the shadow economy. However, they have
some shortcomings due to using only correlation coefficients, rather than building
an econometric model of the shadow economy.
According to the Hofstede Center (2020), uncertainty avoidance (UAI) is another
dimension of people’s culture, measuring “the degree to which the members of a
society feel uncomfortable with uncertainty and ambiguity”. When high uncertainty-
avoidance cultures are presented with uncertain and ambiguous situations, it can
lead to higher levels of anxiety (Tsakumis et al. 2007). In these cultures, for instance,
corruption can be viewed as a mechanism to reduce uncertainty in order to obtain
more certain results (Husted 1999). Moreover, in high-UAI cultures, people tend to
consider tax systems too complex in nature and therefore evade taxes (Richardson
2008). In this view, it is reasonable to expect that in a high-UAI society, engaging in
the shadow economy can be viewed as a mechanism to reduce uncertainty and
ambiguity in a complex system and the law. The shadow economy is defined as the
“those economic activities which circumvent taxation, social security contributions,
or bureaucratic costs related to the compliance with regulation (e.g. wage and job
safety standards, statistical reporting)” (Schneider et al. 2015a, b). Thus, we expect
that the more people try to avoid the uncertainty caused by a variety of complex
taxes, the more the shadow economy expands. A positive relationship between UAI
and tax evasion is found by Tsakumis et al. (2007) and Richardson (2008). Similarly,
a positive correlation between UAI and the shadow economy are found by Dan
(2015) and Buszko (2018).
The orientation of a culture (LTO) may influence the incentives for the shadow
economy, because one of the most important characteristics of a long-term-oriented
culture is thrift and preparation for the future (Réthi 2012). Under these assump-
tions, we can expect that a short-term orientation might enhance the need to ask for
gifts and favours in order to obtain immediate benefits. Two studies (Dan 2015;
Réthi 2012) investigate this relationship, but their results are not convincing. Réthi’s
study is an extension of Tsakumis et al. (2007) and investigates the influence of a
culture’s orientation on the shadow economy using a sample of 57 countries over
the period 2008–2010. He finds a negative but not statistically significant influence
between long-term-oriented cultures and the size of the shadow economy. Several
years later, Dan (2015) analyses this relationship in 26 European Union member
states in 2013. He finds a positive correlation coefficient between long-term orienta-
tion and the size of the shadow economy.
Only two empirical studies (Dan 2015; Réthi 2012) analyse the relationship
between the level of indulgence (IND) and the size of the shadow economy, but the
results are not conclusive. People feel happier and healthier in an indulgent culture
than in a restrained one (Hofstede et al. 2010) and thus they feel comfortable with
their lives and are likely to act honestly and comply with the law. People in a
restrained culture are less happy with their lives, and thus they may break social
rules to avoid paying their obligations and to obtain higher benefits. The study of
Réthi (2012) finds a negative but statistically insignificant influence of indulgence
on the size of the shadow economy. Three years later, the study of Dan (2015) also
finds a negative correlation coefficient between the level of indulgence and the size
of the shadow economy in his study of 26 EU member states in 2013. The recent
study conducted by Achim et al. (2019a) over 31 European countries finds clear
evidence that a more indulgent society tends to have a smaller shadow economy.
Culture and Shadow Economy in European Union Countries
Below, we propose a descriptive analysis of the relation between the shadow econ-
omy and the cultural characteristics of the European Union countries in order to
offer certain indications on the existence of a connection between culture and
shadow economy.
Methodology
The shadow economy is measured as a percentage of GDP, and, in this respect, we
use the database provided by Medina and Schneider (2018).
The cultural characteristics are highlighted using the Hofstede model with the
six cultural dimensions: power distance (PD), individualism-collectivism (IDV),
masculinism vs. feminism (MAS), uncertainty avoidance (IND), long-term orienta-
tion (LTO), and indulgence versus restraint (IND). The sample of countries is rep-
resented by the countries of the European Union (28).
synthesis. We also intend to investigate a spatial approach to the analysis of corrup-
tion level in the EU member states, also considering one of the purposes of this
study that is to investigate the influences of behavioural factors (culture, religion,
tax morale, happiness, etc.) on the phenomena of corruption and shadow economy.
For this reason, we will use the classification of the EU countries (28 countries)
by the four regions of Europe, provided by EuroVoc (2020) (see the classification
presented in Sect. 1.3.1, Table 1.4).
3.1 Culture 199

Graph 3.13 shows a direct correlation between the shadow economy and the power
distance (PD). The higher the power distance, the higher the level of shadow econ-
omy. A percentage of 24.6% of the shadow economy variation can be explained by
the power distance (PD) cultural dimension. Graph 3.14 shows at a descriptive level
certain similarities between the level of shadow economy and the power distance
(PD) for different geographical areas of the European Union. Thus, the countries of
Western and Northern Europe have the lowest levels of shadow economy (9% and
14%, respectively), in parallel with the existence of reduced power distances (37
and 27, respectively).
On the opposite side are the countries of Central and Eastern Europe and those
of Southern Europe with the highest levels of shadow economy (23% and 22%,
respectively) and in parallel, the highest levels of power distances (63 and 57).
It can be seen that the level of the shadow economy and the level of power dis-
tances are growing in evolution from the North to the South of Europe, as well as
from the West to the East of Europe.
Graph 3.15 shows an indirect correlation between shadow economy and indi-
vidualism versus collectivism (IDV). The higher the degree of individualism, the
lower the level of shadow economy. A percentage of 29.8% of the shadow economy
variation can be explained by the cultural dimension individualism versus collectiv-
ism (IDV). Graph 3.16 shows from a descriptive point of view some similarities
between the level of shadow economy and that of individualism versus collectivism
(IDV) by different geographical areas of the European Union. Thus, the countries of
Western and Northern Europe have the lowest levels of shadow economy (9% and
14%, respectively), in parallel with the existence of high levels of individualism (76
and 69, respectively).
R Linear = 0.246
between shadow economy .35
and power distance (PD)
in European Union .30
Shadow economy
.25
.20
.15
.10
.05
.00 20.00 40.00 60.00 80.00 100.00

PD
70.00
25.00%
60.00
20.00%
50.00
15.00% 40.00
30.00
10.00%
20.00
5.00%
10.00
0.00% 0.00
CEE North South West Average EU CEE North South West Average EU
Shadow economy Power distance
Graph 3.14 Shadow economy and power distance (PD) by European Union regions. (Source:
own processing)
2
.35 R Linear = 0.298
.30
Shadow economy
.25
.20
.15
.10
.05
.00 20.00 40.00 60.00 80.00 100.00

IDV
Graph 3.15 Correlation between shadow economy and individualism versus collectivism (IDV)
in the European Union
3.1 Culture 201
80
25.00%
70
20.00% 60
50
15.00%
40
10.00% 30
20
5.00%
10
0.00% 0
CEE North South West Average EU CEE North South West Averaage
Shadow economy IDV
Graph 3.16 Shadow economy and individualism versus collectivism (IDV) by European Union
regions. (Source: own processing)
Graph 3.17 shows an indirect correlation between shadow economy and mascu-
linism versus feminism (MAS). The higher the degree of masculinity, the lower the
level of shadow economy. Only 4% of the variation in the shadow economy can be
explained by the cultural dimension of masculinism versus feminism (MAS). Graph
3.18 presents in parallel the level of shadow economy and the level of masculinism
versus feminism (MAS) that characterize the societies living in different geographi-
cal areas of the European Union. Thus, the countries of Western Europe have the
lowest levels of shadow economy (9%), together with the highest average level of
masculinity that characterizes the societies in these countries (55). However, at the
level of the other regions, we do not visually identify certain correlations between
the two phenomena.
Graph 3.19 shows a direct correlation between the shadow economy and the
uncertainty avoidance (UAI). The higher the degree of uncertainty avoidance, the
higher the level of shadow economy. A percentage of 21.3% of the shadow economy
variation can be explained by the cultural dimension uncertainty avoidance (UAI).
Graph 3.20 highlights numerous correlations between the levels of shadow econ-
omy in different geographical areas and the level of uncertainty avoidance (UAI)
that characterize the respective societies. Thus, the countries of Northern and
Western Europe have the lowest levels of shadow economy (14% and 9%, respec-
tively) and the highest level of uncertainty avoidance that characterizes the societies
in these countries (37 and 63). On the opposite side are the countries in Central and
Southern Europe, respectively, which have the highest levels of shadow economy
(23% and 22%, respectively) and, at the same time, the highest levels of uncertainty
avoidance.
Graph 3.21 shows a direct but very weak correlation between the shadow econ-
omy and the long-term orientation (LTO). As the long-term orientation of a society
grows, the higher the shadow economy level gets. Only a very small percentage of
2% of the shadow economy variation can be explained through the cultural dimen-
.35 R Linear = 0.040
between shadow economy
and masculinism versus
feminism (MAS) in the .30
European Union
.25
Shadow economy
.20
.15
.10
.05
.00 20.00 40.00 60.00 80.00 100.00

MAS
25.00%
60
20.00% 50
15.00% 40
30
10.00%
20
5.00%
10
0.00% 0
CEE North South West EU average CEE North South West EU average
Shadow economy MAS
Graph 3.18 Shadow economy and masculinism versus feminism (MAS) by European Union
regions. (Source: own processing)
sion long-term orientation (LTO). Graph 3.22 shows descriptively the levels of
shadow economy in parallel with the levels recorded for the cultural dimension of
long-term orientation (LTO) in the four European regions. Some similarities
between the two phenomena can be seen in the countries of Central and Eastern
Europe, which have the highest levels of shadow economy (23%) and long-term
orientation (64.5). In the other regions, the similarities are less obvious.
Graph 3.23 highlights an indirect correlation between shadow economy and
indulgence versus restraint (IND). The higher the degree of indulgence, the lower
the shadow economy level. A significant percentage of the shadow economy varia-
tion (61.1%) can be explained by the cultural dimension of indulgence versus
restraint (IND). Graph 3.24 shows descriptively the levels of shadow economy in
3.1 Culture 203
.35 R Linear = 0.213
and uncertainty avoidance
(UAI) in the European .30
Union
.25
Shadow economy
.20
.15
.10
.05
20.00 40.00 60.00 80.00 100.00

UAI
100
25.00%
90
80
20.00%
70
60
15.00%
50
10.00% 40
30
5.00% 20
10
0.00% 0
CEE North South WestAverage EU CEE North South West Average EU
Shadow economy UAI
Graph 3.20 Shadow economy and uncertainty avoidance (UAI) by European Union regions.
parallel with the levels recorded for the cultural dimension of indulgence versus
restraint (IND) for different European regions.
Thus, the countries of Western and Northern Europe have the lowest levels of
shadow economy (9% and 14%, respectively) in parallel with the highest levels of
indulgence (58 and 68, respectively). On the opposite side are the countries of
Central and Eastern Europe and those of Southern Europe with the highest levels of
shadow economy (23% and 22% respectively) and the lowest levels of indulgence
(25 and 39), respectively.
Graph 3.21 Correlation .35

2
R Linear = 0.020
and long-term orientation .30
(LTO) in the European
Shadow economy
Union
.25
.20
.15
.10
.05
20.00 40.00 60.00 80.00
LTO
25.00%
70
20.00% 60
50
15.00%
40
10.00% 30
20
5.00%
10
0.00% 0
Shadow economy LTO
Graph 3.22 Shadow economy and long-term orientation (LTO) by European Union regions.
It can be seen that both the level of shadow economy and the level of indulgence
versus restraint record correlated movements from the North to the South of Europe,
as well as from the West to the East of Europe.
In conclusion, for the majority of the cultural components, we find the existence
of similar mutations in the same directions, of the levels of shadow economy, and,
in parallel, of the cultural characteristics. Specifically, the levels of shadow econ-
omy are increasing from North to South of Europe and from West to Central and
East of Europe, against similar mutations of cultural characteristics determined by
the six cultural dimensions of the Hofstede model.
3.1 Culture 205
Graph 3.23 Correlation .35

2
R Linear = 0.611
and indulgence versus
restraint (IND) in the .30
European Union
.25
Shadow economy
.20
.15
.10
.05
20.00 40.00 60.00 80.00

IND
25.00% 80
70
20.00%
60
15.00% 50
40
10.00%
30
20
5.00%
10
0.00% 0
Shadow economy IND
Graph 3.24 Shadow economy and indulgence versus restraint (IND) by European Union regions.
Culture and Shadow Economy: Empirical Approaches
Below, we propose to empirically investigate the influence of culture on the level of

shadow economy.
Methodology and data
Following the review of the specialized literature presented in the Sect. 3.1.3.1, we
propose to test the following working hypotheses:
Hypothesis 1. The cultural factors that characterize a society influence the shadow
economy level:
Hypothesis 1.1. A greater power distance leads to a larger shadow economy.
Hypothesis 1.2. A more collectivistic society tends to have a larger shadow

economy.
Hypothesis 1.3. Higher masculinity leads to a smaller shadow economy.
Hypothesis 1.4. A higher level of uncertainty avoidance leads to a larger shadow
economy.
Hypothesis 1.5. Short-term-oriented cultures tend to have a larger shadow
economy.
Hypothesis 1.6. A highly indulgent society leads to a smaller shadow economy.
In order to measure the shadow economy, we used the database provided by
Medina and Schneider (2018), in which the shadow economy is calculated as a
percentage of the official GDP over the period 2005–2015. According to Schneider
(2015) and Medina and Schneider (2018) when we refer to the shadow economy, we
only consider the activities that are hidden from the public authorities and less the
illegal activities, the domestic activities, or the informal activities.
Culture is measured using Hofstede’s cultural model, which comprises six
dimensions: attitude towards social inequality (power distance – PD); attitude
towards the community (individualism versus collectivism – IDV); attitude towards
success (masculinity towards femininity – MAS); attitude towards the unknown
(uncertainty avoidance – UAI); attitude towards the passage of time (long-term ori-
entation – LTO); and attitude towards controlling one’s own desires (indulgence and
restraint – IND). Each dimension places a nation’s culture on a scale of 0–100
(Hofstede Center 2020).
The present study investigates the relationship between culture and the shadow
economy. We will moderate the influences between culture and shadow economy by
using control variables widely used in the literature, such as the rule of law (Friedman
et al. 2000; Torgler and Schneider 2009; Dreher and Schneider 2010), degree of
economic development (Torgler and Schneider 2009; Williams 2014; Nastav and
Bojnec 2014; Achim et al. 2018), and tax burden (Schneider and Klinglmair 2004;
Putniņš and Sauka 2015).
As a data analysis methodology, we use a panel-type analysis, (short panel), for
a period of 11 years, 2005–2015. Data were obtained from 31 European countries
(Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Romania,
Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom) for each
year between 2005 and 2015. All variables vary in both time and space, except for
the cultural variable, which is a time-invariant regressor.
The result of the study reflects that the cultural factor reduces the level of the shadow
economy. The negative impact of culture on the shadow economy is persistent
throughout this analysis. The effect of the cultural level is negative, which corre-
sponds to the expectation that higher levels of culture are associated with lower
levels of shadow economy. The increase with one point of the level of culture leads
to a decrease of the shadow economy by up to 16%. Regarding the impact of culture
3.1 Culture 207
on the shadow economy, this is statistically significant when the cultural dimensions
of MAS, IDV, LTO, and IND are analysed and they are not significant (but with the
same negative sign) when analysing the dimensions of PD and UAI. Therefore, the
more a society is more masculine (and less feminine), more individualistic (and less
collectivist), oriented on a longer term (and less oriented on a short term), more
indulgent (and less restrained), the lower the level of the shadow economy.
Our findings reflect, first of all, that very masculine societies want to succeed,
operating in an official economy where citizens do not cheat or choose to work
“undeclared”. Our results are statistically significant, generally at a significance
level of 1%. The cultural dimension of masculinity versus the dimension of femi-
ninity (MAS) refers to the aspirations of a society for achievement, heroism, asser-
tiveness, and material rewards for success (masculinity) or for cooperation, modesty,
caring for the needy, and quality of life (femininity) (Hofstede 1980; Hofstede
Center 2020). We found that most masculine societies, which also face a low level
of shadow economy, are found in Slovakia (100), Austria (79), Switzerland (70), the
United Kingdom (66), and Ireland (68). On the contrary, very feminine societies
place more emphasis on relationships and are concerned with improving the quality
of life. In order to achieve this unique purpose, they easily go beyond rules and laws,
avoiding tax compliance and thus slipping into illegal economic activities. Such
feminist societies are met in Latvia (9), Lithuania (19), Slovenia (19), and Estonia
(30), where the level of shadow economy is one of the highest in Europe.
Second, we found that very individualistic societies are associated with a low
level of shadow economy. The results show a high level of significance at 1%. The
cultural dimension of individualism versus collectivism (IDV) refers to the extent to
which decisions about a person’s life are viewed by an individual or a group (family
or relatives) (Hofstede Center 2020). A high score of this dimension indicates an
extremely individualistic society in which the law is respected. Such individualistic
societies are found in the United Kingdom (89), the Netherlands (80), Belgium (75),
Denmark (74), and Sweden (71). The most collectivist European societies are found
in Bulgaria (30), Romania (30), Greece (35), and Croatia (33), countries that also
have the highest levels of shadow economy in Europe. Our results are similar to
those of Réthi (2012), who also found that high individualism is associated with a
low level of tax evasion among countries. Regarding the collective attitude, Baicu
and Hapenciuc (2016) highlight the role of family ties, which result in a low level of
trust in people outside the family sphere and in public institutions.
Third, we find that a society characterized by a longer-term orientation reduces
the shadow economy level, and the results are statistically significant at a signifi-
cance level of 5% and 10%. A society’s long-term orientation (LTO) means that
societies appreciate tradition and long-term commitments, while a low score reflects
a willingness to accept change that is not hindered by tradition (Hofstede 1997).
Such long-term oriented societies are found in Germany (83), Belgium (82), and the
Netherlands (67), countries with low levels of shadow economy. Short-term-
oriented societies, such as Poland (38), Greece (45), and Romania (52), are not
willing to comply with long-term commitments, violating the law in order to obtain
immediate benefits.
Fourth, the results of our study show that a more indulgent society is more likely
to act honestly, which is associated with a low level of shadow economy (the results
have a significance level of 1%). On the contrary, a more restrained society, where
people feel unhappy and uncomfortable with their lives, is more prone to deception
and shadow activities. The cultural dimension of indulgence versus restraint (IND)
refers to the preference of the society to allow a relatively free satisfaction of the
fundamental and natural urges of the joy of life, as opposed to suppressing the sat-
isfaction of needs and regulating it through strict social norms (Hofstede Center
2020). This dimension is somewhat related to the idea of “happiness”. Thus,
indulgent cultures will tend to focus more on individual happiness and well-being,
leisure time is more important, and there is greater freedom and personal control.
This is in contrast with restrained cultures where positive emotions are less freely
expressed and happiness, freedom, and leisure are not given the same importance.
A high score of indulgence versus restraint (IND) indicates a society with a high
level of indulgence and a restrained society. The countries with the highest score of
the IND dimension are Sweden (78), Denmark (70), the United Kingdom (69), the
Netherlands (68), Switzerland (66), and Austria (63), which give greater importance
to freedom of expression, personal control, and happiness, compared to countries
such as Latvia (13), Lithuania, Bulgaria, and Estonia (16), nations with more
restrained actions where there is a greater sense of powerlessness towards personal
destiny and manifestations of pessimism and cynicism. Similar findings are docu-
mented by Réthi (2012), who analysed 57 different countries and empirically con-
cluded that a society with a high degree of indulgence is associated with lower
levels of tax evasion and vice versa (a high degree of restraint is associated with
higher levels of tax evasion).
In conclusion, our study identifies that four of the six main components of
Hofstede’s cultural dimensions, namely, MAS, IDV, IND, and LTO, have a signifi-
cant and negative influence on the shadow economy. Thus, the possible reasons for
the expansion of the shadow economy are represented by a high degree of femi-
nism, a belief in group collectivism, more restraint, and the lack of a future orienta-
tion of a society. In other words, if we refer to post-communist countries (including
Romania), our empirical findings show that the legacies of communist culture such
as the collectivist approach oriented to group interests and feminist approaches that
place more emphasis on relationships than on the material side as well as a short-
term vision (for immediate gains, respectively) lead to a greater inclination towards
engaging in illegal economic activities. Also, a restrictive culture manifested by the
very low inclination to enjoy life and spend time with friends and loved ones, in
exchange for a stressful life spent just for work, generates dissatisfaction with their
own lives, which further represses the breaking of social rules for immediate bene-
fits. A large presentation of this study is described in the study of Achim et al.
(2019a).
Limits and directions of future research
The study presented above has some general limits, reflected by the small sample
size, which obliges us to interpret the results obtained with a certain reservation.
3.2 Religion 209
The biggest obstacle to expanding our sample was the low level of data available
regarding the shadow economy level. Also, the lack of more time periods for observ-
ing the cultural variable restricts the quality of the results. In future research, we
intend to test the robustness of the results obtained, starting from the limits pre-
sented above.
3.2 Religion
3.2.1 Conceptual Approaches Regarding Religion
Religion is the symbolic expression of a belief in the existence of an absolute reality

(the Sacred, the Supreme, God) on which man would depend. This trust is religious
belief. It allows man to orient themselves in the labyrinth of the great questions of
life and gives man a sense of their existence that transcends their biological life
(Paris and Bastarache 1995).
According to the Oxford Dictionary (2020), religion consists in “the faith and
worship of a superhuman control power, especially a personal God or gods”.
Religion is the belief in the supernatural, divine, or sacred and the moral code,
ritual practices, dogmas, values, and institutions associated with this faith. During
its development, religion took a huge number of forms in different cultures or peo-
ple. Social sciences usually use to designate religious groups, a typology based on
four categories: church, sect, denomination, and cult (Bersani 2005). Without want-
ing to go into details that go beyond the scope of this study, for the understanding of
these concepts, we believe that a clarification of the four terms is required.
Objectivity is a distinctive character of the church. The church is an institution
convinced that it holds the salvation or universal truth that a Saviour progenitor of
mankind has entrusted with it. The term of objectivity of the church is then reflected
by the fact that the legitimacy of the authority does not come from below but is
imposed from above. People are born in the church, and the church guarantees their
salvation through several rescue instruments, defends them, and is unique and
incontestable.
The sect is different from the church in the first place by the fact that adherence
to the sect is voluntary and consists of an initiation practice that leads to conversion
(e.g. Jehovah’s Witnesses, etc.). The sect generally adopts a radical critical attitude
towards the “world” including the state and the Church, as institutions compro-
mised by the evil of the world.
The denomination is the name given to sectarian religious organizations drawn
from Protestant and Reformed confessions. The basic feature that differentiates the
denomination of the sect is “the different significance given by denomination to the
principle of the unique legitimacy of the authority”. Thus, the sect considers that
there is only one way of salvation and that the social control it exercises over indi-
viduals comes from a sacred source, considered indisputable. On the other hand, the
denomination considers that there is not a single way of salvation, and, as a result,
the doctrine can adapt with suppleness to the changes of a pluralistic society of
nowadays.
The cult is a form of social and religious aggregation that has sufficient common
features with the denomination among which that the followers see their salvation
within the cult as one of the many possible features and do not see it as an exclusive
and unique way. As distinctive features, the cults present specific organizational
systems in the form of “agencies of symbolic goods and services”, meant to satisfy
various needs of the people. Secondly, these cults function as a central radial group
or structures, having a parent company and subsidiaries throughout the world. They
offer meditation techniques to improve the psychophysical life of the subjects (e.g.
Transcendental Meditation) or radically change their personality (the programme of
the Bhagwan Rajneesh movement).
In the religious studies, religion and culture always exist in a close relation:
studying religion cannot go without studying culture, and studying culture cannot
go without studying religion (Beyers 2017). In addition, religion is increasingly
acknowledged as a cultural dimension (Richardson 2008; Schneider et al. 2015b)
which affects economic outcomes in different ways (Heinemann and Schneider 2011).
3.2.2 Religion and Corruption
Numerous studies analyse the relationship between religion and corruption based
on the characteristics of each type of religion. Hierarchical religions such as
Catholicism, Orthodox Christianity, and Islam promote cultural attitudes associated
with respect for social hierarchy and official authority (Ko and Moon 2014). On the
other side, there are the individualistic religions such as Protestantism, which pro-
motes economic freedom, with less involvement of the government in the private
sector. Therefore, these categories of religions are less tolerant of corruption than
those in which hierarchical religions are dominant (Arvate et al. 2009; Ko and
Moon 2014).
Various studies show that religion influences the values of a nation, being respon-
sible for the spread of corruption (Faleye 2013; North et al. 2013). Corruption in
Nigeria (one of the most corrupt countries in the world) is mainly explained by
religious factors (Faleye 2013). The three major religions in Nigeria are Christianity,
Islam, and the traditional African religion. For example, Faleye (2013) points out
that the lack of Christian ethics in the educational curriculum is the cause of wide-
spread corruption in Nigeria. In his study, Faleye (2013) considers that religion is
responsible for corruption in Nigeria, and the way to combat it is addressed to reli-
gious leaders, who should be responsible for the doctrines propagated by their
organizations.
3.2 Religion 211
By using a large database that includes 207 countries, with 23 different religious
groups in the 1900s and 2000s, North et al. (2013) identifies that the phenomenon
of corruption is associated with the religious heritage of a country. They find that the
level of corruption is lowest in countries with Protestants and highest in Christian
Orthodox countries. Another group of study found no link between religion and cor-
ruption (Ko and Moon 2014; Dreher et al. 2007; Shadabi 2013). Following a study
on 64 countries around the world, Ko and Moon (2014) do not identify any argu-
ment that believers of hierarchical religions are more obedient to authority than
those of individualistic religions. In their study in over 100 countries, Dreher et al.
(2007) do not find any significant effect of religion on corruption. Shadabi (2013)
investigates the effect of religion on corruption in over 174 countries in 2010 and
documents that religion (Islam and Christianity in this case) has no significant effect
on corruption.
Based on the above findings, we can conclude that there are inconsistent results
regarding the influence of religion on the corruption phenomena. For these reasons,
we intend to carry out an empirical study to investigate the existence and intensity
of a possible influence of religion on the level of corruption.
Based on the review of the specialized literature presented in the Sect. 3.2.2.1, we
propose for testing the following working hypothesis:
Hypothesis. Increased level of religiosity is associated with a lower tendency
towards corruption.
The processing is applied to a sample of 148 countries. The level of corruption is
measured with the help of the Corruption Perception Index provided by Transparency
International (2020).
Regarding the dimension of the religion, to determine the degree of religiosity of
a nation, we use the World Value Survey (2020) data that covers 79 countries partici-
pating in the surveys for 2005–2009 and 2010–2014. Specifically, we use the
answers reported by those interviewed to question V9. The importance given in life:
Religion, which is formulated as follows:
For each of the following, indicate how important religion is in your life. You would say that
it is: very important, quite important, not very important and not important.
The World Value Survey reports an index that measures the importance of reli-
gion for each person. This index ranges from −100 which mean the smallest index,
to 100 points, the highest index. The higher the score, the greater the importance
given to religion for individuals belonging to a specific country.
The analysis is performed on a sample of over 76 countries for which data on
religion and corruption are available. As a method, we used multiple linear regres-
sion, using several control variables such as culture, tax morale, trust, and economic
development, elaborating the following model of corruption.
Table 3.1 presents the statistics and descriptive results of the linear regression analy-
sis, where corruption is a dependent variable, and the independent variables are
culture, tax morale, trust in state, religion, happiness, and economic development.
The results of Pearson correlation and linear regression indicate a positive rela-
tionship between religion and corruption, statistically significant at a significance
level of 1%. More than half of the level of corruption is explained by the religion of
individuals (Adj. R2 = 0.52). However, our results contradict the hypothesis formu-
lated; in other words, the identified results are quite opposite. If the level of religios-
ity increases, the level of corruption increases, and these findings are statistically
significant at a significance level of 1% (sig. (ANOVA) = 0.000).
The result is very interesting especially because it contradicts the fundamental
assumption that religion encourages high moral values of individuals. Thus, our
findings reflect opposite results. In fact, we can see that the least corrupt countries
in the world are Denmark, New Zealand, Sweden, Finland, and Norway, which have
the lowest level of religiosity. In these countries, about 30–35% of its citizens
believe that religion is very or quite important in their lives. On the other hand, a
high level of religiosity (about 96–98%) is found in the most corrupt countries in the
world such as Nigeria, Algeria, the Philippines, and Egypt. In Europe, two of the
most corrupt countries are Romania and Italy, at the same time having a fairly high
level of religiosity, of about 80%. Although our results contradict the theoretical
assumptions, they are supported by numerous empirical studies. For example,
Faleye (2013), trying to explain the paradox of Nigeria in which both high religios-
ity and high level of corruption are achieved equally, he argues that the Nigerian
people seem to be emotionally or spiritually satisfied with being religious and to
engage in a corrupt lifestyle. Investigating the link between corruption and religion
in Nigeria, Faleye presents some explanations of high corruption, consisting of pov-
erty, insecurity, and unemployment among young people, issues that are regarded as
the main keys to failed governance, which lead to feeding the Nigerian people with
religious fervour.
In conclusion, we have identified that, despite our expectations, a higher level of
religiosity is associated with a higher level of corruption. We can explain this by the
fact that, in the poor countries where the highest level of corruption is identified,
people suffer from poverty, unemployment, and insecurity, so that all these deter-
mine the existence of a corrupt lifestyle. Moreover, they feel the need to feed their
dishonesty and sins through religious activities, which brings them emotional or
spiritual satisfaction. A large presentation of this study is described in Borlea
et al. (2019).
3.2 Religion 213
Table 3.1 Descriptive statistics and corruption modelling

St. Regr. Std. Sig. (regr, Correlation
Variables Mean Dev. Coef. err. t-stat coef) coefficient
Dependent variable
Corruption 78.01 47,371
Independent variables
1. Culture
Power distance 64.06 20.828 0.792 0.273 2.902 0.005 0.585**
Individualism vs. 39.22 22.048 −0.551 0.243 −2.268 0.026 −0.613**
collectivism
Masculinism vs. 47.65 18.647 0.304 0.195 1.560 0.123 0.162
collectivism
Uncertainty avoidance 63.86 21.417 −0.058 0.177 −0.326 0.745 0.048
Long-time orientation 41.75 22.897 −0.655 0.189 −3.475 0.001 −0.344**
Indulgence vs. 48.22 22.907 −0.406 0.194 −2.100 0.039 −0.165
restraint
Regression equation characteristics
Adjusted R square = 0.52 F = 14.889 sig. (ANOVA) = 0.000 N = 77
2. Tax morale
Cheating on taxes 2.1179 ,80,158 16,687 46,832 1997 0,049 0,223*
3. Trust in state
Confidence in court 9.9655 36.709 −0.861 0.218 −3.956 0.000 −0.344**
Confidence in −5.71 36.876 0.737 0.396 1.863 0.068 0.046
government
Confidence in −19.45 39.624 −0.141 0.378 −0.374 0.710 −0.037
parliament
Adjusted R square = 0.199 F = 5.733 sig. (ANOVA) =0.002 N = 57
4. Religion
Religion importance 41.37 51.419 0.473 0.092 5.159 0.000 0493**
Adjusted R Square = 0.52 F = 26.612 sig. (ANOVA) = 0.000 N = 76
5. Happiness
Feeling of happiness 139.70 55.021 −0.090 0.108 −0.834 0.407 −0.95
Adjusted R square = −0.004 F = 0.695 sig. (ANOVA) = 0.407 N = 76
Subjective well-being 5.4410 1.327 −23.64 3.04 −7.75 0.000 −0.430**
6. Economic development
GDP/capita 5.7810 1.272 −22.386 5.766 −3.883 0.000 −0.288**
*, **, ***Significant at a significance threshold *p < 0.05; **p < 0.01; ***p < 0.001
3.2.3 Religion and Shadow Economy
Religion is increasingly acknowledged as a cultural dimension (Richardson 2008;

Schneider et al. 2015b) that affects economic outcomes in different ways (Heinemann
and Schneider 2011). Richardson (2008) has analysed, along with culture, the
impact of religion on the size of the shadow economy, and he finds that it is nega-
tive. Similar results are documented by Stack and Kposowa (2006), who find a
negative association between religiosity and deviant behaviour; thus the higher the
level of religiosity, the lower the risk of deviant behaviour. Similarly, Prinz (2004)
and Torgler (2007) identify that the degree of religiosity in general and in particular
the church attendance of individuals are associated with an increase in tax compli-
ance. Indeed, the basic assumption is that religious believers are more trustworthy
and thus more likely to act honestly because they are guided by God’s
commandments.
Religion provides an important basis for social integration and the prevention of
deviant behaviour (Stack and Kposowa 2006). Some religions discourage deviant
behaviour using threats of eternal damnation, time spent in purgatory, and so on
(Richardson 2008). In these views, religion may encourage high moral values, and
therefore religion is expected to have a negative influence on the size of the shadow
economy.
However, other studies find no influence of religion on the shadow economy
(Kanniainen and Pääkkönen 2010) or even document a clearly negative influence
(Heinemann and Schneider 2011; Schneider et al. 2015b). Their models of the
shadow economy do not include the influence of culture as related to religion, which
may be a real limitation in these findings. For instance, Kanniainen and Pääkkönen
(2010) investigate the influence of inherited culture or religion on the tax morality
of consumers and entrepreneurs and therefore on the shadow economy. They find
evidence of a negative link between the shadow economy and tax morale but not
significant evidence of the influence of religion on tax morale and the shadow econ-
omy. However, both Heinemann and Schneider (2011) and Schneider et al. (2015b)
found that countries with a higher share of nonreligious citizens have a smaller
shadow economy. Finally, they conclude that religiosity has a positive effect on the
size of the shadow economy. They explain this interesting result by the fact that
religious people consider their religious ethical duties a substitute for the legal pro-
tection of (informal) contracts. Thus higher religiosity may enhance the trustworthi-
ness of market participants rather than a legal contract, which may foster illegal
transactions. Similar results are also obtained by Achim et al. (2019a). Thus, on
their study conducted on 31 European countries, they find a positive and significant
influence of religiosity on the shadow economy. The results and explanations of
Heinemann and Schneider (2011) and Schneider et al. (2015b) are in line with the
studies on corruption by Faleye (2013) and North et al. (2013), which document that
religion influences a country’s values in terms of being responsible for widespread
3.2 Religion 215
corruption. For instance, Faleye, in his study on Nigeria, finds that high religiosity
is associated with a high level of corruption. He explains this paradox by the fact
that Nigerians appear to be emotionally or spiritually satisfied by being religious
and also conducting a corrupt lifestyle.
Moreover, religion provides an important basis for social integration (Richardson
2008; Stack and Kposowa 2006), which also characterizes collectivistic societies. In
this regard, some findings (Cohen et al. 2016) state a positive relationship between
religion and collectivistic societies. As discussed above, in a collectivistic society,
people are expected to be inclined to violate the law in order to support their own
group, based on unquestioning loyalty.
Another strand of studies investigates the influence of different types on religions
on the level of shadow economy. Thus, the study by Heinemann and Schneider
(2011) has empirically emphasized that different types of religions influence the
level of informal transactions. They found that countries dominated by Islam or
Eastern religions are associated with lower levels of shadow economy compared to
Christian countries. Similar results were obtained by two Islamic researchers
(Murtuza and Ghazanfar 1998), who examined religious literature and emphasized
that Muslims have a duty to God to contribute to the poor. On the other hand,
Gronbacher (1998) and Schansberg (1998) concluded that Catholic religious litera-
ture allows for tax evasion in certain situations, a view that competes with that of
Crowe’s (1944) study.
Countries dominated by Islam, Muslim, or Protestant religions are associated
with lower levels of shadow economy compared to Christian countries (Murtuza
and Ghazanfar 1998; Mutașcu 2012; Heinemann and Schneider 2011). On the other
side, the study of Kanniainen and Pääkkönen (2010) found no significant evidence
of the influence of the Catholic or Protestant religion on tax morale and shadow
economy.
Below, we propose to investigate the influence of religion on the shadow economy

in an empirical study.
formulate the following working hypothesis to be tested:
Hypothesis. A high degree of religiosity reduces the inclination to engage in illegal
economic activities and the level of shadow economy.
To measure the shadow economy, we used the database provided by Medina and
Schneider (2018), where the shadow economy is calculated as a percentage of the
official GDP, between 2005 and 2015.
As regards the dimension of religion, in order to determine the degree of religios-
ity of a nation, we use World Value Survey data covering 79 countries that partici-
pated in the surveys for the 2005–2009 and 2010–2014 periods (World Value Survey
2020). We analysed the answers to the following two questions:
(a) V9 The importance given in life: Religion, which is formulated as follows:
For each of the following, indicate how important religion is in your life. You would say that
it is: very important, quite important, not very important, not important.
The World Value Survey reports an index that measures the importance of reli-
gion for each person. This index ranges from −100, which means the smallest index,
to 100 points, the highest index. The higher the score, the greater the importance
given to religion by individuals belonging to a specific country. We assign the RIR
symbol to the variable religion expressed by the answer given to question V9.
(b) V152/V192: How important is God in your life? (V152 applies to the 2010–
2014 waves and V192 applies to the 2005–2009 waves), formulated as follows:
How important is God in your life? Use this scale to indicate: 10 means “very
important” and 1 means “not at all important”. Thus, the higher the score, the
higher the importance of God in people’s lives.
We assign the RIG symbol to the variable religion expressed by the answer given
to question V152/V192.
The present study investigates the relationship between religion and the shadow
economy. As with other studies, we moderated the influence between religion and
shadow economy through control variables widely used in the literature, such as
institutional quality (Friedman et al. 2000; Torgler and Schneider 2009; Dreher and
Schneider 2010), corruption (Thießen 2010; Fugazza and Jacques 2004), economic
development (Torgler and Schneider 2009; Williams 2014; Nastav and Bojnec
2014; Achim et al. 2018), tax freedom, or tax evasion (Schneider and Klinglmair
2004; Putniņš and Sauka 2015).
We apply a panel-type data analysis methodology, using a short panel applied
over an 11-years period, 2005–2015. Data were obtained from 31 European coun-
tries (Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, The Netherlands, Norway, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, United
Kingdom) for each year between 2005 and 2015. All variables vary in both time and
space, except for the cultural variable, which is a time-invariant regressor.
Our results reflect a positive and statistically significant impact of religion on the
shadow economy, using both RIR and RIG estimators. Our results are very interest-
ing, because they contradict the expectations and the hypothesis formulated.
The assumptions from which we started would be that religion encourages high
moral values of individuals who are not compatible with fraud and theft. Rationally,
we would expect religious individuals to be more trustworthy and thus more likely
to act honestly, because they are led by God’s commandments in their lives (be
moral, do not steal, be correct, etc.). In fact, our results reveal the opposite results,
3.2 Religion 217
namely, that a higher degree of religiosity is associated with a higher level of shadow
economy. More specifically, it has been found that an increase of one point in the
level of religiosity leads to an increase of up to 15% in the level of shadow economy.
Even if the results obtained are not the ones expected, the reality confirms them.
Thus, the most religious people are identified in Turkey, followed by Romania,
Cyprus, and Poland, countries that also record the highest levels of shadow econ-
omy in Europe. At the opposite end, the European countries with the least religious
peoples are Sweden, Norway, the Netherlands, Spain, and Germany, which are also
facing the lowest level of shadow economy in the sample analysed.
Our results are similar to those of Schneider et al. (2015b) who also found that a
higher level of religiosity leads to an increase in the size of the shadow economy.
Schneider et al. (2015b) explain this result by the fact that “religion and its ethical
constraints on trading partners can provide a substitute for the legal protection of
(informal) contracts”. At the same time, Faleye (2013), trying to explain the paradox
of Nigeria, where both a high degree of religiosity and a high level of corruption are
encountered, argues that the Nigerian people seem to be fulfilled emotionally or
spiritually by being religious in the conditions under which they adopt a corrupt
lifestyle.
The findings of our research are similar to those obtained by Schneider et al.
(2015b) who also found that in general the degree of religiosity increases the size of
the shadow economy. However, returning to our results, the positive impact of reli-
gion reflects at least one interesting aspect and thus requires further examination.
Thus, we can see that the highest levels of shadow economy are generally identified
among the poorer countries (such as Turkey, Romania, and Bulgaria), where many
people suffer from poverty, unemployment, and insecurity. Therefore, they can
choose to obtain immediate benefits through activities that are hidden from public
authorities and avoid paying taxes. Further, they may feel the need to alleviate their
dishonesty and sins through religion, thus becoming emotionally or spiritually ful-
filled. On the contrary, in rich countries (such as Sweden, Norway, the Netherlands,
Spain, Germany, and France) people have no reason to feed on any kind of dishon-
esty or sin through religion, because their lives are more comfortable, government
policies are more effective, and people are happier and richer, and therefore they do
not feel compelled to violate regulations and laws.
In conclusion, our results show that the degree of religiosity of the people is
strongly correlated with high levels of shadow economy. Thus, we can see that the
highest levels of shadow economy are generally identified among the highly reli-
gious countries (such as Turkey, Romania, and Bulgaria), countries that have low
incomes at the same time, and many people suffer from poverty, unemployment,
and insecurity. Therefore, they can choose to reap immediate benefits through activ-
ities hidden from public authorities and avoid paying taxes. Moreover, they may feel
the need to alleviate their dishonesty and sin through religion, thus becoming emo-
tionally and spiritually fulfilled. In these countries, on the basis of low trust in gov-
ernment policies, religion offers much more confidence than the authorities. Thus, a
higher degree of religiosity may represent a much better lever to increase the level
of trust of market participants than the use of legal contracts, which, of course,
favours illegal economic transactions. On the contrary, in high-income countries

(such as Sweden, Norway, the Netherlands, Spain, Germany, and France) people are
happier and richer, their lives are more comfortable, and government policies are
more effective. Therefore, they are more likely to comply with the law. Consequently,
for these countries, religion is not so important and is not regarded as a way of
avoiding an unhappy life and escaping suffering, as is the case with the countries
presented above. This explains the low degree of religiosity of the Nordic countries,
correlated with lower levels of shadow economy among the European countries. A
large presentation of this study is described in the study of Achim et al. (2019a).
3.3 Tax Morale
3.3.1 Conceptual Approaches on Tax Morale
There is an extensive literature investigating whether values, social norms, and atti-
tudes differ across countries and whether these differences have measurable effects
on tax morale and tax compliance behaviour (Alm and Torgler 2006; Kirchler 2007;
Kogler et al. 2013; Bătrâncea et al. 2017). Different cultures imply different level of
tax compliance due to the different levels of tax morale. Thus, the intrinsic motiva-
tion for individuals to pay taxes which is the definition of “tax morale” differs across
countries (Alm and Torgler 2006). Thus, following Hofstede (2011), the studies of
Achim (2016) and Borlea et al. (2019) evidence that honesty, trust in authorities,
trust in people, pride, and relationship with nature and the world are considered
behavioural determinants for the economic and financial crime acts such as
corruption.
Schmölders (1960) introduces the term of tax morale as representing the feelings
of civic and fiscal awareness among citizens or taxpayers and the intrinsic motiva-
tion to pay taxes. Referring to tax morale, fiscal behaviour, and corruption, Torgler
(2007) recalls that these practices came from ancient Egypt. Here, the Pharaohs
tried to reduce corruption among the tax collectors called scribes, offering them
high salaries, in order to be less tempted to engage in corrupt behaviour together
with taxpayers.
The specialized literature emphasizes that the attitude regarding taxes or tax
morale is decisive for the inclination towards carrying out illicit activities.
Tax morale reflects the attitude of individuals towards the payment of taxes and
the intrinsic motivation to comply, respectively. Tax morale is considered to be
another key determinant of corruption or shadow economy phenomena. The lower
the degree of tax morale, the individuals are less likely to obey the law and therefore
more inclined to cheat.
3.3 Tax Morale 219
3.3.2 Tax Morale and Corruption
Tax morale is closely linked to the efficiency of the public sector in delivering pub-
lic goods. Taxpayers tend to honestly pay their taxes if they receive, instead, public
services of good quality. In general, higher tax morale is positively correlated with
the degree of fiscal compliance. Higher tax morale and tax compliance reduce
incentives to cheat by avoiding taxes and adopting undeclared work (Kirchler 2007;
Torgler 2004; Alm and Torgler 2006)
Various studies show that as tax morale decreases, most of the individuals are
less likely to obey the law and, therefore, more likely to cheat. Therefore, due to the
lack of the rule of law and the responsibility of the government, the level of corrup-
tion increases (Abed and Gupta 2002; Torgler 2004). In this context, countries with
a high level of democracy are countries that present at the same time the highest
level of tax morale, the highest level of tax compliance, and the most stable eco-
nomic environments without corruption practices. Nichita and Bătrâncea (2012)
found a simple explanation of this thing, namely, that “democracy encourages social
responsibility, which is required for the emergence of tax morale”.
Although we have identified sufficient evidence in the literature on the relationship

between tax morale and corruption, we intend to document this in an empiri-
cal study.
formulate the following working hypothesis:
Hypothesis. Increased tax morale is associated with a lower tendency towards cor-
ruption acts.
The level of corruption is measured by the Corruption Perception Index provided by
Transparency International (2020).
To measure the tax morale, we use data from the World Value Survey study cov-
ering 79 countries who participated in the surveys for the periods 2005–2009 and
2010–2014. Specifically, we use the answers reported by those interviewed with
question V201 Justifiable: Cheating on taxes, if there is an opportunity, and are
worded as follows:
Please tell me, for each of the following statements, if you think it can always be justified,
never justified or something in between: (...). Tax cheating, if there is an opportunity (from
“never justified” – 1 point and “always justified” – 10 points), (on a scale from 1 to 10
points).
The average values for each country are determined. These are between 1 point
representing the lowest levels of tax morale, up to 4 points, which means the highest
value of tax morale. The higher the values of this indicator, the higher the tendency
to cheat on taxes, and, consequently, the level of tax morale is reduced.
The analysis is performed on a sample of 77 countries for which data on tax
morale and corruption are available.
As a method, we used multiple linear regression. The relationship between cor-
ruption and tax morale is moderated by the help of socio-cultural variables such as
religion, trust in government, happiness, as well as with economic variables such
as wealth.
Table 3.1 presented in Sect. 3.2.2.2 shows the statistics and descriptive results of the
linear regression analysis, when corruption is a dependent variable, and the inde-
pendent variables are culture, tax morale, trust in government, religion, happiness,
and wealth (financial satisfaction).
The data of the final sample are composed of 77 countries, for which data on tax
morale and level of corruption are available. The average in the sample regarding
tax cheating is 2.11 points, on a scale between 1 and 4, from the lowest level to the
highest level of cheating. We identified a positive correlation between tax cheating
and corruption (c = 0.223), which means that a higher tendency to cheat on taxes (or
lower levels of tax morale) is associated with a higher level of corruption. The
Pearson correlation is significant at a significance level of 5%. Following the analy-
sis of the linear regression, the variation of corruption is explained by cheating on
taxes only in a percentage of 3.8%. The regression coefficient of the variable cheat-
ing on taxes is identified as positive and statistically significant at the 5% level of
significance, which means that as there is a tendency to cheat on taxes (or, as the tax
morale diminishes), the tendency to engage in corruption activities is higher. In
conclusion, the hypothesis formulated above is validated. Similar results are
obtained for a large number of transition countries around the world, by Torgler
(2007). A large presentation of this study is described in Borlea et al. (2019).
3.3.3 Tax Morale and Shadow Economy
The relationship between tax morale and the phenomena of shadow economy or tax
avoidance has been extensively investigated in the specialized literature. One of the
most comprehensive and old studies on the ethics of tax evasion was conducted by
Crowe (1944), a Catholic priest who studied philosophical and religious literature
(mostly Catholic). He identified the existence of three main situations regarding the
ethics of tax evasion over the centuries. Thus, tax evasion has been identified as
“never ethical”, “always ethical”, or “ethical only in certain facts and
circumstances”.
3.4 Trust in the State 221
Two philosophical studies of the tax evasion ethics from a Jewish perspective
(Cohn 1998; Tamari 1998) concluded that tax evasion is never or almost never ethi-
cal according to Jewish literature. A third Jewish study by McGee and Cohn (2006)
found that although Jewish literature was firm against tax evasion for ethical rea-
sons, the Jews who were questioned were more flexible about this issue. An empiri-
cal study by McGee (2006) on the view of Mormons on these issues found that
many Mormons were also more flexible on this subject than religious literature
would suggest.
Several philosophical studies have concluded that tax evasion could be ethical in
certain situations. Pennock (1998) concluded that tax evasion was found to be ethi-
cal in cases where the tax-collecting country was engaged in an unfair war. Morales
(1998) considered that the duty of man to feed his family was far more important
than feeding the state chests.
McGee (2008) conducted a large literature review based on empirical studies on
tax evasion ethics. He pointed out that such studies are numerous and performed for
various countries such as Argentina, Armenia, Bosnia and Herzegovina, China,
Germany Guatemala, Hong Kong, Macao, Poland, Romania, Slovakia, Thailand,
and Ukraine. All of these studies concluded that tax evasion can be ethically justi-
fied in certain situations, although some arguments were stronger than others.
Torgler’s study (2003) reaches the same conclusion, using a different methodology.
McGee (2008) conducted an extensive empirical study comprising 8465 respon-
dents from six countries in Latin America and the United States, examining their
views on tax cheating. The question was whether the respondent would cheat on
taxes if they had the opportunity to do so. Responses were reported on a 10-point
Likert scale. The results of McGee’s (2008) study indicate that some individuals
will cheat on taxes if they have the opportunity, but many will not. Results vary by
country, gender, age, and religion. The level of education was not identified as hav-
ing a role in the fiscal attitude for the countries in the sample.
3.4 Trust in the State
Various studies (Kirchler 2007; Torgler 2007) highlight the importance of ensuring
high confidence in government institutions as a basic condition of ensuring a good
functioning of the state and further reducing the economic-financial crimes.
3.4.1 General Approach on Trust in the State
Trust in the state or government or in public services reflects the subjective judg-
ments of citizens, based on their experience, in which they believe that the govern-
ment is competent, reliable, and honest when it also meets their needs (Park and
Blenkinsopp 2011).
In the relationship between trust and tax compliance, it is interesting to discuss

the slippery slope model (Kirchler 2007; Kogler et al. 2013; Bătrâncea et al. 2017).
This model addresses tax compliance through a prism of three dimensions: (i) trust
in tax authorities, (ii) power of tax authorities, and (iii) tax compliance. The tax
compliance is supposed to be influenced by the confidence and power of the author-
ities: if both confidence and power are at the minimum levels, the degree of tax
compliance is assumed to be low. Taxpayers act selfishly wanting to maximize prof-
its by avoiding taxes. However, if the confidence in the authorities increases, the
level of tax compliance will also increase. Moreover, if the power of the authorities
increases, the degree of tax compliance is expected to increase.
The slippery slope model explains the advantages of trust in authorities and vol-
untary compliance versus exercising the power of the authorities and forced compli-
ance. In this regard, Kramer (2009) considers that the efficiency of the state and in
particular of the tax authorities depends on the feelings of obligation of the indi-
viduals towards the community, the availability of compliance with the regulations,
and the availability of voluntary submission to the tax authorities. If the authorities
were to always explain and justify their actions, their activity of coordinating public
services would be greatly diminished (Kirchler 2007). Thus, trust is an important
factor in understanding the sources of civic commitment to cooperation with author-
ities and compliance.
The slippery slope model emphasizes the attitude of the tax authorities towards
taxpayers and the type of interaction between the two entities, in order to ensure a
positive, friendly fiscal climate that will focus on voluntary compliance at the
expense of forced compliance. Voluntary compliance cannot be achieved in any
form if the relationship between tax authority and taxpayer is of the “police-
offender” type rather than “client-service” type. The first approach creates a climate
of persecution and prosecution aimed at circumventing the law and increasing indi-
vidual benefits. This approach based on control and fines can reduce the motivation
to engage in the very behaviour that such monitoring intends to ensure (Kramer
1999, p. 591), being not only inefficient in terms of collecting a small amount of
state taxes but also destructive. Thus, well-intentioned citizens may not trust the
control and exaggerated constraints, and therefore they feel impelled to cheat on
taxes (Kirchler 2007, p. 206).
In contrast to the “police-offender” type approach, the “client-service” approach
will create a climate of cooperation and trust in which the taxpayer will change his
or her social representations and will focus on increasing the collective benefits of
paying taxes.
Thus, trust in authorities and power of authorities, as defined in the slippery slope
framework, increase tax compliance intentions and mitigate intended tax evasion
across societies that differ in economic, sociodemographic, political, and cultural
backgrounds. The influence of different scenarios of trust and power within differ-
ent cultures on the level of tax compliance is analysed for a number of four cultures
and countries (Austria, Hungary, Romania, and Russia) in the study of Kogler et al.
(2013) and later, for 44 cultures and countries, in the study of Bătrâncea et al. (2017).
3.4 Trust in the State 223
3.4.2 Trust and Corruption
Low trust in government is associated with identifying ways to circumvent the law
(Kirchler 2007). Therefore, trust influences the institutional performance, but also
the institutional performance generates a certain trust from the public (Uslaner
2002, 2013; Morris and Klesner 2010). The government has a strong discretionary
power over the allocation of resources, and the bribe is paid to avoid paying taxes or
regulations (Torgler and Schneider 2009); therefore societies with high confidence
in state institutions have a low level of corruption.
Trust and corruption refer to different views of human nature, being complemen-
tary. Confidence relates to an optimistic view of the world, where confident people
believe that the world is a good place and that they can do it even better (Uslaner
2002, 2013). On the other side, corruption is based on a pessimistic and destructive
view: “We steal because we value << quality food >>” (Uslaner 2002).
Below, we propose to investigate the relationship between the trust in the state and
the level of corruption within an empirical study.
Based on the review of the specialized literature presented in the Sect. 3.4.2.1, we
formulate the following working hypothesis:
Hypothesis. Increased trust in the state is associated with a lower tendency towards
corruption.
The level of corruption is measured with the help of the Corruption Perception
Index provided by Transparency International (2020).
In order to measure trust in the governance system, we use the data provided by
the World Value Survey, for 58 countries, during 2005–2009 and 2010–2014. To
measure this confidence, the answers to the three questions are evaluated: V114
Trust: Courts; V115 Trust: Government (in the capital of your nation); V117 Trust:
Parliament. All three questions are formulated as follows:
I am going to name a number of organizations. Can you tell me how much confidence you
have in each of them: high confidence, enough confidence, not too much confidence or not
at all? The Government (in the capital of your nation), the Courts and the Parliament.
A score is determined for each dimension of governance. It ranges from a mini-

mum of −100 points, representing the lowest score, to 100 points, which means the
highest score. Higher values correspond to a high level of trust in each component
of governance.
The study is conducted for a number of 57 countries, for which both trust and
corruption data are available.
The relationship between corruption and trust is moderated with the help of other
socio-cultural variables such as religion, confidence in the state, happiness, as well
as wealth.
Table 3.1 presented in Sect. 3.2.2.2 shows the statistics and descriptive results of
linear regression analysis, when corruption is a dependent variable, and the
independent variables are culture, tax morale, trust in the state, religion, happiness,
and wealth.
The hypothesis formulated above examines the relationship between trust and
corruption. The results underline that trust in the system of governance, measured
as trust in the courts, government, and parliament, has a strong impact on the level
of corruption. Higher trust in government results in a lower level of corruption, and
this relationship is statistically significant at a significance level of 1% (sig.
ANOVA = 0.002), supporting hypothesis no. 3 (Table 3.1). About 20% of the varia-
tion in the level of corruption is explained by the level of trust in the governance
system (Adj. R = 0.199). Analysing these three estimators of trust in the governance
system (trust in the courts, government, and parliament), we find that trust in the
courts is the most important dimension of trust in the governance system. Only for
this dimension of confidence, both the correlation coefficients and the regression
coefficients are statistically significant, at a significance level of 1%. Our findings
are consistent with other results found by Uslaner (2002, 2013), Torgler (2007), and
Graeff and Svendsen (2013), who also find that trust is an important determinant of
the level of corruption. A large presentation of this study is described in Borlea
et al. (2019).
3.4.3 Trust and Shadow Economy
Analysing numerous specialized studies, Kirchler (2007) concluded that the shadow
economy increases as confidence in government decreases, tax morale deteriorates,
and official regulations on economic activities multiply. D’Hernoncourt and Méon’s
(2012) study also identifies a negative relationship between the size of the shadow
economy and confidence, at the level of a sample of 66 countries, comprising both
developed and developing countries (Graph 3.25). The influence is analysed by
using a set of economic, political, and institutional control variables.
Richardson’s study (2006) shows that trust is negatively correlated with tax eva-
sion. Therefore, low confidence in tax authorities is correlated with high levels of
tax evasion. Similar results are reported by Wintrobe (2001), who conclude that
increased confidence should reduce tax evasion, which is also supported by Torgler’s
(2003) findings according to which confidence is positively associated with tax
morale. Also, the study of Kogler et al. (2013) confirms the role of confidence and
3.5 Happiness 225
power as important determinants of the degree of tax compliance and notes that the
highest level of compliance and the lowest level of tax evasion are achieved under
the existence of high levels of confidence in government and power. Moreover,
Torgler and Schneider (2009) reported that an increase in tax morale leads to a
reduction in the size of the shadow economy. These findings suggest that if the
shadow economy is a form of tax evasion, then we should expect its size to be
adversely affected by confidence.
3.5 Happiness
Graph 3.25 Shadow economy and trust. (Source: D’Hernoncourt and Méon (2012))
The importance of focusing attention on mental well-being rather than material

wealth and, therefore, measuring a nation’s emotional prosperity, rather than its
economic prosperity, is highlighted by Stiglitz et al. (2010). Within these approaches,
Oswald (2010), a member of the Stiglitz Commission, argues that, through research-
ing emotional prosperity, many behavioural acts in economic life will be better
explained. For example, Frey and Stutzer (2012) find that happiness plays a major
role in many important economic decisions, such as work behaviour, investment
behaviour, consumer behaviour, or political behaviour. Consequently, we will anal-
yse this subject below, in relation to the phenomena of economic and financial crime
(corruption, shadow economy, money laundering, etc.).
3.5.1 Conceptual Approaches on Happiness
According to Cambridge Dictionary (2020), happiness is “the feeling of being

pleased or happy”. Happiness is a good mental state, being characterized by positive
or pleasant emotions, from gratitude to intense joy.
When the relationship between happiness and behaviour is analysed, Lane
(2017) find that happiness is driven by particular behavioural tendencies such as
interpersonal behaviour (selfishness, trust, and reciprocity) and individual behav-
iour (risk and time preferences). In particular, happiness negatively correlates with
selfishness and positively correlates with trust. Regarding individual behaviour,
happiness affects time preferences by reducing impatience.
The state of happiness of individuals is the subject of wide debates in the special-
ized literature, being approached from different angles: philosophical, psychologi-
cal, biological, and religious. Over three decades ago, Robinson and Shaver (1991)
identified more than 347,000 specialized psychological studies in the field of happi-
ness. In various specialized studies, the happiness of individuals is expressed
through various indicators such as quality of life, positive emotions, subjective well-
being, life satisfaction, high quality of life, years of happy life, mental health, etc. In
the literature, many approaches have generated confusion about how people evalu-
ate their own lives using the concepts of happiness, satisfaction, or well-being. For
example, Veenhoven (1991) and Proto and Rustichini (2013) do not distinguish
between happiness and satisfaction. Lane (2000) theoretically tries to distinguish
between these concepts, but he does not use this distinction in his research.
Staubli et al. (2014) consider well-being as the scientific term devoted to the
phenomenon of happiness. Most researchers claim that well-being includes two
components: life satisfaction (as a cognitive component) and happiness (as an affec-
tive component). These two components are strongly correlated, and probably this
is why many researchers have assumed that the two variables measure the same
thing. Following Frey and Stutzer (2012) and Leung et al. (2011), Mureșan et al.
(2019) use the terms “happiness”, “life satisfaction”, and “well-being”
interchangeably.
When it comes to measuring the prosperity of a country, the spiritual and emo-
tional side is becoming more and more important. Stiglitz et al. (2010), laureate of
the Nobel Prize for Economics, emphasizes the importance of measuring the emo-
tional prosperity of a nation, rather than its economic prosperity, focusing on mental
well-being rather than material wealth, and proposes the calculation of a National
3.5 Happiness 227
Happiness Index (GNH – gross national happiness), as an alternative to gross

domestic product.
The author also argues for the need for such an indicator and that the countries
with the happiest citizens are not necessarily the richest in the world. For example,
19% of Bhutan’s population lives below the poverty line, but at the same time 96%
of the citizens say they are happy or very happy. Bhutan is still the only country in
the world that calculates a gross national happiness (GNH) as an alternative to gross
domestic product. The central principles of GNH are sustainable and equitable
socio-economic development, conservation of the environment, and conservation
and promotion of culture and good governance (Centre for Bhutan Studies and
GNH Research 2015). Although Bhutan is a country still struggling to meet the
basic needs of individuals, they have chosen to measure the development of their
country by using happiness as a priority and not economic development calculated
using GDP.
Worldwide there are numerous organizations concerned with assessing the level
of people happiness, such as Happiness Research Institute, New Economics
Foundation (NEF), World Value Survey, etc.
3.5.2 A
ssessment of Happiness in the European Union
Countries
In order to assess the happiness in the European countries, we use the database pro-
vided by New Economics Foundation (2020), regarding the report of New
Economics Foundation (2016) which report the experienced well-being (from 0
(worst) to 10 (best possible life)) and happy life years (the number of happy years
lived by a person).
The happiest people in the European Union in terms of well-being are Denmark,
the Netherlands, Sweden, Finland, and Austria, and the most unhappy are Malta,
Bulgaria, Latvia, Hungary, Portugal, and Romania (Graph 3.26). In terms of the
number of happy life years lived on average, by people, the first in the European
Union is Sweden (57.4 years) followed by Norway (57.1 years) and the Netherlands
(57 years), and the least happy years are lived by the people of Bulgaria (24 years),
Hungary (29 years), Romania (30 years), Latvia (31 years), and Portugal (32 years)
(Graph 3.27).
In general, it can be seen that the Nordic peoples are the happiest people in the
European Union, while the most unhappy people are identified in the countries in
transition, in Central and Eastern Europe.
10
9
7.8
8 7.3 7.4 7.5 7.5
7.0 7.1 7.3
6.7 6.8 6.9
7 6.4 6.4
6.1 6.1 6.2 6.2
5.6 5.8 5.8
6 5.1 5.1
4.7 4.7 4.9 4.9
5 4.2
3.8
4
3
2
1
0
Graph 3.26 Happiness (well-being) in European Union countries
70
60 57 57
54 54 55
52
48 48 49 50 50
50 45
42 43 43
38 39 40 41 41
40 35 36
31 32 33
29 30
30 24
20
10
0
Graph 3.27 Happiness (happy life years) in European Union countries. (Source: own
processing)
3.5.3 Happiness and Corruption
Corruption and subjective well-being are of concern to academics, governments,

and policy-makers. This relationship being are widely analysed in literature (Arvin
and Lew 2012; Anderson 2016; Borlea et al. 2019; Florida 2010; Leon et al. 2013;
Li and An 2020; Rothstein 2010; Helliwell 2003; Helliwell and Huang 2008; Tay
et al. 2014) and start from the fact that in the minds of citizens, the quality of gov-
3.5 Happiness 229
ernance and happiness positively correlate (Helliwell 2003; Helliwell and Huang
2008; Veenhoven 2010).
A big strand of these studies highlights the role of corruption on the level of
human happiness (Arvin and Lew 2012; Helliwell 2003; Helliwell and Huang 2008;
Leon et al. 2013; Tay et al. 2014; Achim et al. 2019b; Li and An 2020) or only con-
cludes about a positive correlation between corruption and happiness
(Anderson 2016).
There are only few papers which focus on the influence of people happiness on
the level of corruption (Rothstein 2010; Florida 2010; Borlea et al. 2019). Thus,
Rothstein (2010) theoretically analysed this relationship between corruption and
happiness in relation with social trust and the welfare state. Trying to find causal
mechanisms, Rothstein (2010) put the followings research questions: “Why coun-
tries with large and mostly universal welfare state programs also have low levels of
corruption, a high degree of social trust, and high levels of happiness and social
well-being?; And vice versa, why countries with smaller welfare systems tend to be
higher on corruption, have lower levels of social trust, and lower levels of social
well-being?” Rothstein (2010) concluded that countries with low levels of corrup-
tion also face high levels of happiness and social well-being and the causality of this
relationship could be found using a “social mechanism” approach.
In order to find what makes countries corrupt, the study of Florida (2010) reveals
that corrupt nations tend to have lower levels of happiness and life satisfaction. He
finds that corruption (measured with Corruption Perception Index (CPI)) is highly
correlated (c = 0.67) with overall life satisfaction. Consequently, Florida concludes
that for combating corruption the nations must deal with the broader and much
harder challenges of economic development related to social values (human capital,
social tolerance and attitudes towards racial and ethnic minorities, skills, etc.).
Corrupt countries have more traditional economic structures based on resource
extraction or manufacturing and thus lower material living standards and lower lev-
els of happiness. As a result, they are more likely to be intolerant. When these less
developed countries begin to emerge towards the knowledge-based economies, then
they will begin to leverage their knowledge, skills, and human capital to raise their
levels of economic output and life satisfaction. As a consequence of all these things,
finally the fight against corruption will be won.
For the reasons presented above, we aim at covering such a gap in the literature, by
investigating the influence of the state of happiness (or simply, of happiness) on the
level of corruption. In this regard, we want to test the following working hypothesis:
Hypothesis. Increased people happiness conducts to a lower propensity towards
corruption.

The level of corruption is measured with the help of the Corruption Perception
Index provided by Transparency International (2020).
In terms of measuring happiness, we use two data sources, as follows:
(a) Data provided by the World Value Survey (2020) for the periods 2005–2009 and
2010–2014, for 79 countries. The World Value Survey calculates the indicator
of a feeling of happiness ranging from 0 points, representing the lowest score of
the feeling of happiness, to 200 points, representing the highest score of the feel-
ing of happiness. Higher values correspond to a higher level of happiness for a
nation. Question V10 highlights the indicator of the feeling of happiness and is
formulated as follows:
All things considered, you would say that you are: very happy; quite happy; not very happy;
unhappy; and no answer.
(b) Data provided by the New Economics Foundation (2020), Happy Planet Index
(the 2016 report), which covers 151 countries. In our research, we use the well-
being (subjective well-being) component of the Happy Planet Index, because
the other two dimensions of the overall happiness score, the life expectancy and
the ecological footprint, respectively, can change the subjective nature of the
happiness dimension of individuals. The score for well-being ranges from 0 to
10 (where 0 is the most unwanted life and 10 is the most desirable life of a
person).
The relationship between corruption and happiness is moderated by the help of
other socio-cultural variables such as religion, confidence in the state, tax morale, as
well as wealth.
Graphs 3.28 and 3.29 show an inverse correlation between corruption and happi-
ness, and this connection is much stronger when happiness is expressed by the vari-
able subjective well-being.
Table 3.1 presented in Sect. 3.2.2.2 presents the statistics and descriptive results
of the linear regression analysis, where corruption is a dependent variable, and the
independent variables are culture, tax morale, trust in government, religion, happi-
ness, and financial satisfaction.
The final sample of data comprises 76 countries for which all happiness and cor-
ruption information is available.
When we use as a proxy for happiness of individuals the variable feeling of hap-
piness, the results of our research do not find a significant influence between happi-
ness and corruption. The data sample comprises 76 countries, for which all data are
available.
However, when subjective well-being is used as a proxy for happiness, we iden-
tify a significant and negative influence of happiness on corruption. In this case, the
final sample is much larger and consists of 129 countries for which both categories
of data are available. We can explain these different results obtained by using the
3.5 Happiness 231
Graph 3.28 Correlation 200.00

2
R Linear = 0.320
subjective well-being
150.00
Corruption
100.00
50.00
.00
3.00 4.00 5.00 6.00 7.00 8.00

Subjective well-being
200.00 R Linear = 0.009
feeling of happiness.
150.00
Corruption
100.00
50.00
.00
.00 50.00 100.00 150.00 200.00

Feeling of happiness
two happiness estimators, by the different volumes of the two samples. The data
volume is much larger in the second case, so in this case, we can consider that there
is a higher representativeness of the data. However, in both cases, a negative sign
coefficient is found, which means that a higher level of happiness of individuals is
correlated with a lower level of corruption. The subjective well-being comes to
explain 32% of the variation of corruption, and the influence is statistically signifi-
cant at a significance level of 1%. The bivariate correlation coefficient comes to
support a negative and significant correlation between subjective well-being and
corruption (c = −0.43). We can conclude that the hypothesis formulated is accepted

when happiness is estimated with the help of the variable well-being. Some similar
studies indirectly support these findings. For example, Schneider and Klinglmair
(2004) and Halla (2010) find that the happiness of individuals influences the shadow
economy. On the other hand, the shadow economy and corruption are interdepen-
dent (Dreher and Schneider 2010). We have not identified in the literature any study
that investigated the influence of happiness or subjective well-being on the level of
corruption. Thus, our conclusions come to cover such a gap in the literature regard-
ing a possible link between happiness and corruption. A large presentation of this
study is described in Borlea et al. (2019).
3.5.4 Happiness and Shadow Economy
Attempts to identify a causal relationship between the happiness or subjective well-

being of individuals and the size of the shadow economy begin with Frey and
Stutzer’s (2012) bibliometric study, which emphasizes that the extent of happiness
can influence many important economic decisions such as work behaviour, inclina-
tion towards consumption, investment behaviour, and political behaviour. Kahneman
et al. (1999, 2006) and Goossens et al. (2007) also focused on attempts to adjust
GDP by the happiness component. Some authors (Voicu 2012) appreciate that psy-
chological factors related to human nature are considered among the most important
determinants of the shadow economy.
If the welfare and the state of satisfaction of the people are more pronounced,
they are more inclined to pay the taxes they owe to the state. Thus, tax morale and
tax compliance are directly linked to tax evasion and illegal economic activities.
The concept of tax morale was introduced by Schmölders (1960) and refers to the
feelings of civic and fiscal awareness among citizens or taxpayers and to the intrin-
sic motivation to pay taxes. Tax compliance is the extent to which taxpayers respect
or do not respect the tax rules of their country, with regard to the declaration of
income and the timely payment of due taxes (OECD 2012). The economic literature
has recently emphasized the importance of moral considerations or social norms in
explaining compliance behaviour with regard to illegal economic activities. In addi-
tion, Halla (2010) analysed the correlation between the intrinsic motivation of tax
compliance (tax morale) and compliance behaviour (tax compliance), the relation-
ship between attitude and behaviour. However, his research does not provide evi-
dence for the existence of a relationship between the degree of happiness of the
population and the level of the shadow economy, and, therefore, the need for a better
understanding of this relationship remains open.
In the context of studying the relationship between happiness and the level of
shadow economy, we must mention the concerns regarding the study of the relation-
ship between happiness and tax morale. In this regard, the study of Akay et al.
3.5 Happiness 233
(2012) highlights that there are some such concerns in the literature. Moreover, the
bibliometric study developed by Antoci et al. (2014) identified even fewer concerns
that explicitly attempt to formalize and incorporate these two variables into a theo-
retical model. Lubian and Zarri (2011), in the 2004 survey of households in Italy,
found empirical evidence that tax morale is a new determinant of happiness.
According to their findings, tax cheating, as a synonym for tax evasion, is associated
with lower levels of subjective well-being than fiscal honesty and shows that hon-
esty and tax cheating have different significant hedonic consequences. These results
are in agreement with the empirical and laboratory findings from the neurological
and economic studies of Harbaugh et al. (2007) and Coricelli et al. (2014). The find-
ings of Coricelli et al. (2014) regarding the people who are cheating on taxes are the
following: “People not only feel anxiety because of the monetary perspective of a
risky decision, but also because of the moral implications associated with the risk of
public exposure”. The dynamics of tax morale and tax evasion are expressed differ-
ently in a heterogeneous behavioural society and result from the repeated interac-
tions of the three types of taxpayers (cheaters, honest citizens, and punishers)
(Antoci et al. 2014).
Related to the relationship between happiness and the level of taxation, Akay
et al. (2012) attempt to investigate the extent to which labour taxation (income and
wage taxes) affects the subjective well-being of individuals through the use of a
panel study of the population of German origin, for the period 1985–2010. Their
findings refer to the fact that people become happier when they pay taxes.
On the other hand, there are many studies that have tried to identify how happi-
ness, especially the degree of happiness and contentment, is a determining factor for
tax morale or the willingness of citizens to pay their taxes. Torgler (2004) analyses
tax morale in several Asian countries and, for the first time, empirically tests the
influence of happiness in some Asian countries, such as India and the Philippines,
where many citizens have a low standard of living. Compared to the other two vari-
ables considered in the study, namely, financial satisfaction and satisfaction, it is
found that the happiness variable has the greatest marginal effects on tax morale. A
similar study is carried out later by Tekeli (2011) in Japan and Turkey, aiming to
identify whether happier people are more inclined to report taxes honestly. This
time, the results are inconsistent because, in all cases, the variable happiness does
not significantly affect the tax morale.
Even though the concerns regarding the analysis of the relationship between
happiness and tax morale are rather few (as seen above Torgler (2004) and Tekeli
(2011)), the relationship between tax morale and the shadow economy is more
strongly investigated in the literature: Weck (1983) and Torgler (2005) for Latin
America; Alm and Torgler (2006) for the United States and Europe; Alm et al.
(2006) for several countries in transition; Torgler and Schneider (2009) in 57 coun-
tries worldwide; Torgler et al. (2010) for different countries around the world;
Barone and Mocetti (2011) for Italy; and Halla (2010) for European countries,
OECD countries, but also for the United States and Australia. Most of these studies
found a significant negative effect of tax morale on the size of the shadow economy.
Based on the above findings, we can assume the following causal relationships:
human happiness determines tax morale, tax morale determines the degree of tax
compliance, and the degree of tax compliance determines the shadow economy. In
conclusion, we ask ourselves whether happier people are more likely to report more
honestly, and therefore the size of shadow activities is reduced.
Numerous studies (Schneider and Klinglmair 2004; Bergheim 2007; Thießen
2010; Voicu 2012; Achim et al. 2018) have directly investigated the relationship
between happiness and the size of the shadow economy and have concluded that
there is a negative correlation between them, suggesting that happier people are
more likely to act honestly, thus leading to a diminution of the size of shadow
economy.
Bergheim (2007) identifies the indicator of “reduced shadow economy”, as rank-
ing seven of the first ten indicators that measure the happiness of a society. Later,
Thießen (2010), in a study for OECD countries, found happiness as one of the three
main factors that influence the shadow economy, along with corruption and life
satisfaction. From a quantitative point of view, Schneider and Klinglmair (2004)
found that in countries where people are happy, the shadow economy represents
between 8.6% and 18.7% of the reported GDP, while in countries where people are
unhappy, the shadow economy amounts to over 25% of the reported GDP. For the
countries of the European Union space, Achim et al. (2018) found that as the people
are happier, the more they are prone to more honest actions, resulting in a reduction
in the shadow economy. They find that the happiness variable is responsible for a
70% variation in the level of the shadow economy (ceteris paribus). The level of
happiness of individuals is measured using the variable subjective well-being, as
provided by the Happy Planet Index, and the analysis period is 2008–2013.
Next, we want to investigate the influence of happiness on the shadow economy,

using two estimators for the variable happiness, namely, subjective well-being and
happy life years.
Based on the review of the specialized literature presented at Sect. 3.5.4.1, we pro-
pose to test the following working hypothesis:
Hypothesis. A high level of happiness reduces the level of shadow economy.
To measure the shadow economy, we used the database developed by Medina
and Schneider (2018), where the shadow economy is calculated as a percentage of
the official GDP, between 2005 and 2015.
Regarding the assessment of the level of happiness of individuals, we have used
two indicators, namely:
(a) Well-being (subjective well-being). The data was provided by the New
Economics Foundation (2020), according to the report for Happy Planet Index
References 235
2016. This measure of subjective well-being is often used as an indicator of how

people’s lives are valued as a whole (New Economics Foundation 2020). The
well-being score ranges from 0 to 10 (where 0 is the worst possible life and 10
is the most desirable life of an individual).
( b) Happy life years. The data was provided by the New Economics Foundation
(2020), within the Happy Planet Index. The indicator reflects the average life
expectancy of years lived happily by a people.
The present study investigates the relationship between happiness and the
shadow economy. As with other studies, we moderated the influence between hap-
piness and the shadow economy by controlling variables widely used in the litera-
ture as determinants for the level of shadow economy, such as institutional quality
(Friedman et al. 2000; Torgler and Schneider 2009; Dreher and Schneider 2010),
corruption (Thießen 2010; Fugazza and Jacques 2004), economic development
(Torgler and Schneider 2009; Williams 2014; Nastav and Bojnec 2014; Achim et al.
2018), tax freedom, or tax burden (Schneider and Klinglmair 2004; Putniņš and
Sauka 2015).
We used the panel data analysis methodology for 31 European countries over the
period 2005–2015.
Graphs 3.30 and 3.31 show that a negative correlation can be found between the
shadow economy and the variable happiness measured either as subjective well-
being or as happy life years. About 66% of the variation in the shadow economy is
explained by the happiness of individuals.
The statistical results identify a negative influence of the happiness level on the
shadow economy, at a significance level of 1%, regardless of how happiness is
expressed. We found that if people are happier, the more likely they are to pay taxes
and work legally, so the level of the shadow economy decreases. The happiest peo-
ple in Europe, from the perspective of the highest number of happy life years, are
Switzerland (59.3 happy years), Iceland (58 happy years), Sweden (57.4 happy
years), Norway (57.1 happy years), and the Netherlands (57 happy years). The high-
est subjective well-being score is recorded in Denmark (7.8), Norway (7.6), the
Netherlands, Switzerland, and Sweden (7.5), and Finland (7.4). The most unhappy
peoples were identified in the countries of transition in Central and Eastern Europe,
especially in Bulgaria, Latvia, Lithuania, Hungary, Estonia, and Romania. As
regards these findings, Djankov et al. (2016), trying to explain the happiness differ-
ences of the peoples of Eastern Europe, found that people from the transition coun-
tries are indeed less happy compared to other European peoples and argue that the
difference in happiness of individuals is explained by the way citizens of post-
communist countries perceive their governments. It was found that an increase of
well-being with 1 point (on a scale from 0 [the worst life possible] to 10 [the most
desirable life]) leads to a decrease in the size of the shadow economy of as much as
.35 R Linear = 0.656
and subjective well-being
.30
.25
Shadow economy
.20
.15
.10
.05
3.00 4.00 5.00 6.00 7.00 8.00

Well-being
.35 R Linear = 0.667
and happy life years.
(Source: own processing) .30
.25
Shadow economy
.20
.15
.10
.05
20.00 30.00 40.00 50.00 60.00

Happy life years
4.681 percent of GDP. To express this in economic terms, in Germany, this would
mean a decrease in the size of the shadow economy of approximately USD 158 bil-
lion – about the size of Hungary’s GDP and slightly below that of Romania, Portugal,
and Greece (Achim et al. 2019a).
Similar results are obtained by Achim et al. (2018), Schneider and Klinglmair
(2004), Bergheim (2007), and Thießen (2010) who also show a negative influence
of happiness on the size of the shadow economy.
References 237
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Chapter 4
Effects of Economic and Financial Crimes.
Ways of Fighting Against
4.1 Effects of Economic and Financial Crime
The effects of economic-financial crime are so diverse; thus they can be classified
by their nature into economic-financial effects, social effects, and political effects.
4.1.1 Economic and Financial Effects
4.1.1.1 “Sand the Wheels” Theory
An important strand in the literature supports the “sand the wheels” theory, docu-
menting the negative influence of economic and financial crime upon the economy,
under the various forms: on economic and sustainable development, on the state
budget, and on business performance. Whatever its shape, corruption always comes
at someone’s expense, and it often leads to weaker institutions, less prosperity,
denial of basic services, less employment and more environmental disasters
(Johnson 2018).
(a) Negative effects on the state budget
According to the statement of the Secretary-General of the United Nations,
António Guterres, on the International Anti-Corruption Day, December 9 (quoted
by Johnson 2018), the annual costs of international corruption amount to $ 3.6 bil-
lion in the form of bribery and stolen money, which money harms the state budget
one way or another.
Specialized studies reflect the negative impact of corruption on the efficiency of
fiscal policy (Fjeldstad 1996, 2003; Kaufman 2010; Ivanyna et al. 2010). In this
regard, Kaufman (2010) found a strong relationship between corruption and fiscal
deficits in industrialized countries. He also found that the phenomenon of c orruption
246 4 Effects of Economic and Financial Crimes. Ways of Fighting Against
reduces tax revenues, increases public spending, and affects productivity, competi-
tiveness, and economic growth. In the same view, Ivanyna et al. (2010) find that an
increase in the level of corruption leads to a decrease in state revenues and impedes
economic growth.
Tax avoidance leads to a negative impact on the economy materialized in the
reduction of state revenues. The state needs these revenues to support public invest-
ments and other expenses necessary for the functioning of state institutions, to sup-
port the development of the national economy and to ensure the health care,
education, protection, and safety of citizens. A reduction of state revenues will lead
to a reduction of its financial power necessary to ensure the normal functioning of
state institutions and authorities. The effects of tax avoidance will be felt by both
taxpayers who honestly pay their obligations and those who avoid their payment.
If we refer to the shadow economy and money laundering, these are directly
related to tax avoidance, that is, both of them have as main purpose the prejudice of
budgetary revenues. Thus, by definition “the shadow economy includes those pro-
ductive and legal activities, but which are deliberately hidden by public authorities,
in order to avoid: (a) payment of income, value added or other taxes; (b) payment of
social insurance contributions (...)” (Torgler and Schneider 2009; Schneider 2011,
2013). On the other hand, according to the literature and specialized practice (Leția
2014, p. 40), the money laundering crime is “a result crime that is always accompa-
nied by other means crimes that circumscribe the sphere of economic crime: tax
avoidance, corruption, banking crimes, fraud”.
Thus, the study conducted by Schneider and Buehn (2012a) estimates that a
percentage of 29.4% and 13.1%, respectively, of the shadow economy volume is
due to the avoidance of payment of indirect taxes (such as VAT) and personal income
tax, respectively. Analysing the results obtained by Schneider and Buehn (2012a, b),
the study carried out by Reimers (2014) estimates that at EU 28 level, tax avoidance
amounts to 1.5% percent in GDP, which represents an amount of unpaid taxes of 4%
in the total tax revenues. In absolute values, this percentage would correspond to a
sum of 211 billion Euros of tax revenues that harmed the budget of the Member
States during the analysis period 1999–2010.
(b) Negative effects on economic and sustainable development
Numerous studies have suggested that the level of corruption has a negative
effect on economic development, being an impediment to increasing investments
(Mauro 1995; Paldam 2001, 2002), absorption of European funds (Achim and
Borlea 2015), business development and performance (De Rosa et al. 2010; Achim
2017), and, finally, economic growth (World Bank 2009).
An important component in the literature emphasizes the destructive role of cor-
ruption on economic growth. Thus, the World Bank (2009) identified corruption as
one of the biggest obstacles to economic growth, social development and poverty
reduction. Various studies have shown that high-income countries face a low level
of corruption. Husted (1999) argued that “because the level of development is linked
to the general level of human resources, corruption is expected to be more wide-
spread in less developed economies”.
4.1 Effects of Economic and Financial Crime 247
De Rosa et al. (2010) calculated a correlation of 0.81 between GDP per capita
and the level of corruption. Similarly, Treisman (2000) and Paldam (2001, 2002)
have argued that the phenomenon of corruption is a poverty determined defect,
which disappears when the country gets richer. Gundlach and Paldam (2009), after
empirical analysis of the bilateral causality between the incomes of a country and
corruption, concluded that a long-term causal relationship is achieved entirely from
income towards corruption, and the level of corruption at country level can be fully
explained by the income level.
Similar findings were obtained by Achim, Borlea, and Miron (2017). This study
investigated how corruption and shadow economy affect economic development in
the countries of the European Union, between 2005 and 2014. They found that
about one fifth of the EU’s GDP is lost because of the shadow economy. Bulgaria,
Romania, Hungary, Estonia, Greece, and Italy have proven to have the highest level
of corruption and shadow economy. Thus, the Nordic countries, such as Denmark,
Finland, Sweden, the Netherlands, and then Austria and Luxembourg, were found
to have the lowest level of corruption. Descriptive statistics of this study showed the
countries with the highest levels of corruption, and shadow economy are among the
low-income countries, which are mainly post-communist countries. Regarding the
influence of corruption and shadow economy on economic growth, the authors
identified a strongly negative influence. This means that an increase in the level of
corruption and shadow economy is negatively affecting the economic growth.
In the same view, the study of Hoinaru et al. (2020) conducted on 185 countries
for the 2005–2015 time period finds that corruption and shadow economy are
poverty-driven diseases and they highly characterize low-income countries. Thus,
they find that higher levels of corruption and shadow economy are correlated with
lower levels of economic and sustainable development.
Also, specialized studies (Jurj-Todoran and Șaguna 2016, p. 438; Stancu and
Recea 2009) highlight negative effects of money laundering on foreign investments
and in general on economic development. Thus, the study carried out by Stancu and
Recea (2009) at the level of the United States, Russia, Romania, and other 11
European countries identified a negative relation between the volume of money
laundering and the growth rate of GDP. Also, the authors found that a 23.7% per-
centage of the variation in the GDP growth rate is explained by the variation in the
volume of money laundering. On the other hand, countries where money laundering
is carried out by organized criminal groups show distrust from foreign investors, so
that even foreign financial institutions can decide to limit their dealings with institu-
tions in such countries (Jurj-Todoran and Șaguna 2016, p. 438).
(c) Negative effects on business development and performance
Corruption negatively affects business development and performance (Aidt
2010; Anoruo and Braha 2005; De Rosa et al. 2010; Achim 2017). Thus, in a large
survey conducted by De Rosa et al. (2010) regarding 11,000 companies from 28
developed and in-transition countries, it was found that the fiscal bribe granted to
avoid bureaucratic requirements was not considered as the best option for higher
productivity, and, therefore, corruption has negative consequences on the perfor-
mance of the company.
In a study of a sample of 185 countries for the period 2012–2015, Achim (2017)
investigated the influence of corruption on business development. Business devel-
opment was estimated using three indicators: (1) ease of doing business index; (2)
the rate of entrepreneurship; and (3) market capitalization. The empirical findings of
this study show that the level of corruption has significantly reduced business devel-
opment, being a major obstacle to economic growth. The influence of corruption on
business development is highest when using the ease of doing business index. This
is significantly higher for developing countries compared to developed countries.
The findings underline that the phenomenon of corruption arises as a result of pov-
erty, significantly impeding business development. Another interesting finding is
the behaviour regarding corruption of large companies listed on capital markets.
This study found a significant influence of corruption on the performance of large
companies, but corruption persists for this category of companies regardless of
income patterns. It was also found that the level of institutional quality plays an
important role in reducing corruption, thus contributing to the development of
business.
Several studies have associated shadow economy (or informal sector) with low
productivity and economic development. For example, the shadow economy has
lower levels in high-income countries, while in low-income African economies, it
reaches 70% of GDP (Kirchler 2007).
As far as money laundering crimes are concerned, they can hinder the purpose of
investments and thus lead to reduced productivity. Money laundered, other than
those engaged in financial flows, are placed in the so-called “sterile investments”
(Jurj-Todoran and Șaguna 2016, p. 435) consisting of real estate, art objects, or
luxury goods. These investments do not create added value for the economy, but
their purpose is rather to “dodge the control and detection of money derived from
crime” (Jurj-Todoran and Șaguna 2016, p 435).
(d) Negative effects on poverty and social inequality
Specialized literature (Gupta et al. 2002; European Parliament 2015) highlights
the existence of a correlation between high levels of corruption and high levels of
social inequality and poverty, respectively.
Low-income households and businesses tend to pay bribes in a higher proportion
from total incomes compared to middle- and high-income households. Thus, acts of
corruption act as a regressive tax, since these low-income households have to allo-
cate for bribes a higher amount of their income compared to the wealthy (Chetwynd
et al. 2003; Bhargava and Bolongaita 2004). In this regard, the study carried out by
Razafindrakoto and Roubaud (2010) highlights that the poor are often more prone
to corruption practices during their interactions with public institutions. On the
whole, corruption affects the economic development of a country and is very likely
to increase income inequality and disproportionately affect the poor (European
Parliament 2015).
(e) Negative effects on the soundness of financial-banking institutions
The financial-banking system plays an important role in economic-financial
crimes, especially in money laundering and corruption. Thus, the financial-banking
sector is used by the money laundering offenders as a mean of laundering the money
coming from illegal transactions, through the financial-banking services offered
(instruments on the capital market, deposit-bank loans, checks, transfers, or service
on the insurance market).
Money laundering crimes through financial-banking systems erode the financial
institutions and the trust granted to them, in the following ways (Jurj-Tudoran and
Șaguna 2016, p. 429):
• Increasing the probability of fraud of clients receiving financial-banking services
as a result of the corruption of bank officials or even managers of such institu-
tions. They can work with money laundering criminals to facilitate laundering of
money from crime, which increases the risk regarding the security and trust of
the contaminated financial institution.
• Operational risks arising from criminal activities of money laundering, risks that
may even lead to the bankruptcy of the respective bank. It is the bankruptcy case
of many banks, presenting as an example The First Internet Bank and Baring
Bank, where bankruptcy was caused by money laundering crimes and high-level
corruption (McDowel 2001 quoted by Jurj-Tudoran and Șaguna 2016, p. 429).
Increasing operational risk in this form can lead to an increase in reputational
risk, resulting in additional imaging costs and a general reduction in customer
confidence.
• Extending the erosion of the financial-banking sector to a high level that also
involves the political factor can lead to the weakening of the financial trust and
reputation of a country, with major government costs to regain the lost
reputation.
4.1.1.2 “Grease the Wheels” Theory
However, there is another strand in the literature supporting the “grease the wheels”
theory (Beck and Maher 1986; Caselli and Michaels 2013; Jiang and Nie 2014;
Hoinaru et al. 2020). These opposed findings document the positive effect of eco-
nomic and financial crime upon the economic and sustainable development of coun-
tries. Such studies have identified that corruption acts can help companies avoid
legal regulations, thus generating growth for the company (Beck and Maher 1986;
Caselli and Michaels 2013; Jiang and Nie 2014). They explained that high levels of
wealth could lead to increased opportunities for government officials to reap bene-
fits thereby increasing corruption (Caselli and Michaels 2013).
Similar results were obtained empirically by Jiang and Nie (2014) in China.
They have empirically documented the miracle in China of ensuring continued
GDP growth against the background of the prevalence of government corruption.
By conducting a comprehensive study on Chinese firms for the period 1999–2007,
Jiang and Nie (2014) found that corruption acts have a positive effect on the
profitability of firms, but only for those with private capital. For these companies,
corruption can help them avoid legal regulations thus increasing their profitability.
The authors concluded that, in countries with weak governance, corruption can
encourage resource allocation, thus increasing productivity. Some similar results
were reported by Beck and Maher (1986), who found that, in the absence of sanc-
tions for taking bribes, supplying companies would be indifferent to bribing or mak-
ing offers for institutions. Thus, corruption can be used as a way to get a higher price
for business opportunities.
Hamra (2000) also emphasized the preference for corruption in international
trade transactions and its benefits. Regarding this issue, Baughn et al. (2010) find
that bribery in international business transactions can be seen as a function of not
only the demand for such bribes in different countries, but the supply, or willingness
to provide bribes by multinational firms. In addition, the company firms from almost
all the major exporting countries appear to be more prone to provide bribes when
conducting business in low-income countries compared with the OECD countries.
In the same view of “grease the wheels”, Zaman and Goschin (2015) pointed out
that shadow economy, especially in corrupt countries, is an important buffer for
solving many problems such as high unemployment, future use of black money in
the official economy, and local efficient use of public goods, based on market prin-
ciples, when goods are used by a limited number of beneficiaries (private beneficia-
ries/ local public beneficiaries), who pay differentiated voluntary contributions.
Sahakyan and Stiegert (2014) obtained some nuanced results, finding that the
relationship between corruption and business performance depends on the activity
size, company age, and number of competitors. They have found empirically that
big, young businesses, and those with few competitors are statistically more inclined
to perceive corruption as a favourable factor for increasing business performance.
Also, the level of education achieved by managers reduces the probability of con-
sidering corruption as a favourable factor.
Similarly, the study of Hoinaru et al. (2020) conducted on 185 countries for the
2005–2015 time period finds evidence that corruption can be also seen as a way to
circumvent the law in order to achieve higher economic benefits and thereby to
increase economic development. Thus, for low-income countries, where the gover-
nance is weaker than in high-income countries, corruption and shadow economy
may help firms to avoid government regulations, to solve many economic problems,
and thus, they “grease the wheels”.
4.1.2 Social Effects
A. Effects on the volume and quality of public services

As we have seen above, economic-financial crime affects the state budget by
significantly reducing budget revenues. Consequently, government programs can no
longer be carried out in good conditions, generating negative effects on the volume
as well as on the quality of public services in terms of public health, education,
national security, etc.
For a certain level of budgetary income, countries with a high level of corruption
reach lower levels of literacy, higher mortality rates, and, overall, achieve poorer
human development outcomes (Ndikumana 2006; European Parliament 2015).
The healthcare sector is one of the sectors amenable to corruption risk. In this
sector, corruption appears as informal payments to obtain a differentiated treatment,
but it also refers to issues such as privileged access and dual practice,1 incorrect
marketing, purchase and certification of medical devices, and purchase and authori-
zation of medicines (European Commission 2017).
Corruption can lead to loss of confidence in public services, e.g. corrupt educa-
tion systems can cause parents to withdraw their children from school (Kaufmann
2010; UNESCO 2009). The effects of corruption in the provision of public services
can be felt differentially by the two sexes. Thus, if women are not able to generate
income, they are particularly more vulnerable to shortcomings resulting from public
services compared to men (Transparency International 2020).
B. Corruption and effects on public health
Corruption can have a destructive role, ultimately, on the population health. At a
first view, this relationship seems a little unclear, but the realities and empirical
studies of such a connection clarify this connection. A high level of corruption is
associated with low transparency, bribery for obtaining contracts, jobs or services,
while violating the laws and norms, which may create dissatisfaction to people or
even cause immense harm to society.
The study of Ambraseys and Bilham (2011) finds that 83% of all deaths caused
by the collapse of buildings following earthquakes over the last 30 years have
occurred in countries that are excessively corrupt. Important evidence regarding the
destructive role of corruption on people’s lives is reflected by the numerous fires
that kill people as a result of granting illegal operating permits. We can mention, for
example, a situation that occurred recently in Romania, where, the fire produced at
a nightclub (called Colectiv) in October 2015 killed 64 people and injured others
147 people. This huge accident created a mass movement of Romanians against this
painful situation, under the logo “corruption kills”. The Romanian government at
that time was perceived as a symbol of corruption and had to resign (Freedom House
Romania 2015; Odobescu 2015). But the case of Romania is not an isolated one.
Throughout the world, there have been many similar cases, the Kiss nightclub fire
in Brazil that killed 230 people in 2013; the night club fire from Rhode Island, in the
United States (2003) that killed 100 people; and the Wuwang club fire in Shenzhen,
China in 2008 that killed 14 people and injured 498 others; and examples can con-
tinue (OMICS International 2014).
B.1. Corruption and physical health
Regarding the connection between corruption and population health, there are
numerous studies that investigate the influence of corruption on health, when health
Dual practice refers to doctors working in both public and private medical institutions.
1
is expressed as a perception of healthcare provided in the form of medical satisfac-

tion (Azfar and Gurgur 2008; Souliotis et al. 2016; Habibov 2016).
However, we have identified very few empirical studies that show a clear influ-
ence of corruption on physical health when the latter is expressed not as a percep-
tion, but rather as a fact, for example, in the form of life expectancy or population
mortality. We can mention here the study of Hanf et al. (2011), who found that a
decrease in the corruption perception index (CPI) by one point is associated with an
increase of 0.0644 in the mortality rate in children under 5 years. Based on these
findings, they conclude that more than 140,000 annual deaths in children could be
indirectly attributed to corruption. Similarly, for developing countries, the study of
Fielding (2011) finds that improving political rights leads to higher levels of
healthcare.
Some studies provide evidence of the influence of the level of corruption on
physical health, using as a moderating factor the economic development level
(Atanasova et al. 2015; Achim et al. 2019). For instance, Atanasova et al. (2015)
found that out-of-pocket payments are used by patients and healthcare providers “as
means of covering poor quality of services, compensating for low remuneration of
medical staff and receiving adequate care”. Intuitively, as a result of not using these
bribes, the services received and the attention of the health personnel could suffer
from a poor quality and, thus, could create dissatisfaction for the population.
Atanasova et al. (2015) underline the role of “low remuneration” on the relationship
between corruption and health.
The study of Achim, Borlea and Văidean (2019) investigates the influence of
corruption on the physical health of population under the moderating role of eco-
nomic development and cultural framework. They conduct the analysis upon a sam-
ple of 185 countries divided in two samples of countries, namely high-income
countries (54 countries) and low-income countries, respectively (131 countries), for
the period 2005–2017. Physical health is measured using data provided from World
Bank (2020) regarding the following indicators:
1. Mortality rate, under 5 (per 1000 live births) (Mortality_rate_under_5) reflects
the probability per 1000 that a newborn baby will die before reaching the age of
five, if subject to age-specific mortality rates of the specified year.
2. Life expectancy (LE) reflects the average number of years an infant born in that
country is expected to live if prevailing patterns of age-specific mortality rates at
the time of birth in the country stay the same throughout the infant’s life. Life
expectancy is commonly used as an overall indicator of the standard of health in
a country.
3. Infant mortality rate/Mortality rate, under 1 (per 1000 live births) (Mortality_
rate_under_1) shows the number of infants dying before reaching 1 year of age,
per 1000 live births in a given year.
The study of Achim, Borlea, and Văidean (2019) provides clear evidence that the
level of corruption significantly affects physical health (expressed as life expectancy
and mortality rate) under the moderating role of economic development and cultural
framework. In addition, a high level of corruption more deeply affects the physical
health of population in low-income countries than in high-income countries.
B.2. Corruption and mental health
If we refer to the other component of population health, namely, mental health
(well-being), few studies have been identified in the literature that investigate the
relationship between corruption and happiness or life satisfaction, and the results
are quite contradictory (Bjørnskov et al. 2008; Graham 2011; Arvin and Lew 2012,
2014; Achim et al. 2019).
Thus, some studies (Bjørnskov et al. 2008; Graham 2011) have not identified any
relationship between the level of corruption and the level of mental health. On the
other hand, other studies (Arvin and Lew 2014) document the existence of such a
relationship. Thus, Bjørnskov et al. (2008) investigated a wide range of life satisfac-
tion determinants, using a sample of over 70 countries, but did not identify corrup-
tion (along with other institutional components, such as press freedom) among the
significant factors of life satisfaction. Some similar results were found by Graham
(2011) for Latin American countries, which also did not identify corruption as a
possible determinant of happiness. Graham claims that “the people of Afghanistan,
for example, are just as happy as Americans in Latin America and have 20% more
chances to smile in a day than Cubans”, and the explanation is only a matter of
adaptation.
On the other hand, the study of Arvin and Lew (2014) carried out at worldwide
level between the period 1996–2010 partially contradicts the conclusions of Graham
(2011). Arvin and Lew empirically point out that acts of corruption reduce happi-
ness, but only for high-income countries. As for low-income countries, they docu-
ment that happiness is not correlated with corruption.
Similar findings with Arvin and Lew (2014) are found by the study of Achim,
Borlea and Văidean (2019). They investigate the influence of corruption on mental
health on a sample of 185 countries in the period 2005–2017. The level of happiness
is measured by using the database of World Happiness Report 2019 on Happiness
index (Happiness) (Helliwell et al. 2019) determined with the answers to the fol-
lowing question: “Please imagine a ladder, with steps numbered from 0 at the bot-
tom to 10 at the top. The top of the ladder represents the best possible life for you,
and the bottom of the ladder represents the worst possible life for you. On which
step of the ladder would you say you personally feel you stand at this time?”
The study of Achim, Borlea, and Văidean (2019) provides clear evidence that the
level of corruption significantly affects both physical health (expressed as life
expectancy and mortality rate) and mental health (expressed by happiness), under
the moderating role of economic development and cultural framework. When the
authors estimate the results on subsamples of countries (high-income and low-
income countries), they find that a high level of corruption more deeply affects the
physical health of population in low-income countries than in high-income coun-
tries. On the other hand, mental health is more pronouncedly affected by corruption
in high-income countries than in low-income countries.
To demonstrate the association between corruption and health, we plot them

against each other for the whole sample (Graph 4.1). Graph 4.1 suggests a positive
Mortality_rate versus Corruption (with least squares fit)

250
Y = -2.55 + 0.459X
200
150
Mortality_rate
100
50
-50
0 20 40 60 80 100 120 140 160 180
Corruption
LE versus Corruption (with least squares fit)

85
Y = 80.2 - 0.115X
80
75
70
65
LE
60
55
50
45
40
0 20 40 60 80 100 120 140 160 180
Corruption
Happiness versus Corruption (with least squares fit)
9
Y = 6.70 - 0.0146X
6
Happiness
2
0 20 40 60 80 100 120 140 160 180
Corruption
Graph 4.1 Plot of corruption against health variables. (Source: Achim, Borlea and Văidean
(2019). Corruption and health outcomes within an economic and cultural framework, European
Journal of Health Economics, 1–13)
correlation with mortality rate under the age of 5 (Mortality_rate). There’s a nega-
tive correlation between corruption and Life expectancy (LE) and Happiness
(Happiness), respectively. It may be observed that higher levels of corruption cor-
relate with lower levels of health proxies where health outcomes are expressed as
mortality rate under 5, life expectancy, and happiness.
4.1.3 Political Effects
The study carried out by Transparency International (2017), based on responses

received from 162,136 adults, found that policemen and government elected offi-
cials are the most corrupt entities identified. The same study highlights the fact that
the majority of respondents (57%) do not consider that governments are proceeding
correctly in the fight against corruption.
In this sense, the specialized literature documents the existence of a negative
relationship between corruption and trust in public institutions, and more generally
trust in the political system. Citizens who do not trust public institutions are more
likely to accept bribes and less likely to get involved in politics. Corruption can be
both a cause and an effect of the lack of confidence and decrease of legitimacy of
the state in the eyes of the population (Anderson and Tverdova 2016; Clausen et al.
2011; European Parliament 2015).
In this context, there are studies that attest the influence of corruption on the
political stability and the likelihood of political conflicts (Mauro 1998; Le Billon
2003; World Bank 2011).
The effects of the economic and financial crimes at the political level can be
reflected in the distortions of the application of the rule of law, when political regu-
lations and decisions are adopted in order to favour criminals situated at a high
political level. All these undermine the people’s trust in public governance and the
rule of law, with effects on the stability of governance. Similarly, with regard to
money laundering crimes, the European Commission (2013, p. 44) study on
ECOLEF 2013 states that the existence of money laundering practices can lead to
the taking over of the political power with effects on the country’s reputation.
4.2 B
odies and Initiatives to Prevent, Control,
and Investigate the Economic and Financial Crime
4.2.1 B
odies for Preventing and Fighting Against Economic
and Financial Crime
There are many bodies in the world that work to establish and implement unitary
policies to fight against economic-financial crime, among which the most important
ones are presented below.
1. The United Nations Office on Drugs and Crime (UNODC) is a global leader in
the fight against drugs and international crime and is also the most important
United Nations program on terrorism. This body was established in 1997 through
the merger between the United Nations Drug Control Programme and the Centre
for International Crime Prevention. UNODC operates in all regions of the world
through an extensive network of offices.
The United Nations Office on Drugs and Crime is mandated to assist Member
States in the fight against drugs, crime, and terrorism. In the Millennium Declaration,
UN member states decided to intensify efforts to combat transnational crime in all
dimensions, increase the instruments for implementing the commitment to counter-
act the global drug issue, and take concerted measures against international
terrorism.
The three pillars of UNODC’s work program are:
• Technical cooperation projects, based on domains for increasing the capacity of
the Member States to counteract drugs, crime, and illicit terrorism.
• Research and analytical activities to increase knowledge of and understanding of
drug and crime issues as well as to develop the database for political and opera-
tional decisions.
• Normative work to assist states in the ratification and implementation of relevant
international treaties, development of national legislation on drugs, crime and
terrorism and provision of secretarial services for the governing bodies, and
those provided for in the Treaties.
2. The Financial Action Task Force on Money Laundering or Groupe d’action
financière (FATF - GAFI) was established in 1989 with the aim of establishing
standards and policies to combat money laundering and financing of terrorism at
international level. The FATF/GAFI has prepared 40 recommendations in the
field of money laundering and terrorism financing that are implemented in the
countries of the world through national bodies for preventing and combating
economic and financial crime.
3. The European Anti-Fraud Office (OLAF) works within the European Commission
with the purpose of investigating cases of budget fraud of the European Union
and acts of corruption and elaborates anti-fraud policies. OLAF contributes to
coordinating the cooperation of the Member States against fraud.
4. The European Police Office (EUROPOL) is the European Union’s law enforce-
ment agency, whose main purpose is to create a safer Europe and to ensure the
safety and well-being of its citizens. The Agency supports the European Union
member countries in their fight against serious crime and terrorism committed
internationally, which present significant threats to the Union’s internal security.
The biggest security threats are caused by terrorism; drug dealing and money
laundering activities at international level; organized fraud; counterfeiting of
Euro banknotes; and illegal entry of persons.
5. European Court of Auditors checks how the European Union funds are managed
and helps to improve it. To this end, the body audits EU revenue and expendi-
ture; verifies all persons and organizations that manage EU funds; reports suspi-
4.2 Bodies and Initiatives to Prevent, Control, and Investigate the Economic… 257
cions of fraud, corruption, or other illegal activities to the European Anti-Fraud

Office (OLAF); formulates findings and recommendations; and submits them to
the European Commission and national governments.
4.2.2 M
easures to Prevent and Fight Against Economic
and Financial Crime
4.2.2.1 Preventive Measures
In line with the prevention of economic-financial crimes at national and interna-

tional level, specific measures have been adopted according to the type of crimes
referred to.
Regarding corruption, the United Nations Convention against Corruption (2003)2
laid the foundations for international cooperation on the detection and sanctioning
of corruption.
Under this agreement, the Member States must adopt coordinated policies to
prevent corruption and to designate one or more organizations with a role to coordi-
nate and oversee their implementation. Such policies involve measures such as
transparent procurement systems, merit-based public services, access to informa-
tion, involvement of civil society in the fight against corruption, an independent
justice, public audit procedures, and measures to combat money laundering.
Regarding the measures to combat tax fraud, the report of the European
Parliament (2013) on the fight against fraud, evasion, and tax havens (2013/2060
(INI)) refers to the provisions of the OECD (2013) in the report entitled “Addressing
Base Erosion and Profit Shifting” – BEPS and invokes the fact that the division of
fiscal jurisdiction has not kept pace with the changing business environment. For
that purpose, the Commission and the Member States need to play a more active
role in substantiating international standards based on the principles of transpar-
ency, exchange of information, and abolition of harmful tax measures.
The OECD/G20 BEPS Action Plan within the OECD / G20 requests for 15 key
actions to provide governments with domestic and international instruments to fight
tax evasion while ensuring that the taxation of profits is realized where economic
activities generate profit and where value is created. The 15 BEPS actions are as
follows (OECD 2019):
Action 1: Addressing the fiscal challenges of the digital economy;
Action 2: Neutralization of mismatch effects in hybrid contracts;
Action 3: Develop efficient rules for foreign controlled companies;
Action 4: Limiting the erosion of the base on interest deduction and other financial
payments;
The United Nations Convention against Corruption, in force since December 14, 2005,
2
Action 5: Fighting against harmful tax practices more efficiently, taking into account
transparency and substance;
Action 6: Preventing the granting of benefitswithin some contracts under inappro-
priate conditions;
Action 7: Preventing the artificial avoidance of the permanent headquarters state;
Actions 8–10: Aligning the results of transfer pricing with value creation;
Action 11: BEPS measuring and monitoring;
Action 12: Mandatory reporting regulations;
Action 13: Documentation on transfer pricing and country-level reporting;
Action 14: Efficiency of dispute settlement mechanisms;
Action 15: Develop a multilateral instrument for modifying bilateral tax treaties.
Fraud prevention and detection, at the level of the European Union funds, is
among the main objectives of OLAF. Thus, the European Commission’s anti-fraud
strategies implemented through OLAF include the prevention and detection of
frauds and irregularities through the Commission’s internal control processes,
applicable at all levels of management. All entities managing EU funds have a legal
obligation to prevent irregularities and fraud affecting the EU budget. Practically,
the Commission, the Member States, and other partners responsible for execution
are required to implement internal management and control procedures designed to
prevent and detect irregularities, errors, and fraud (European Commission 2011)
(COM 2011 376, SEC (2011) 791).
In line with preventing and combating money laundering and terrorism financ-
ing, the FATF - GAFI recommendations request for measures to be taken by finan-
cial institutions and by non-financial activities and professions in line with
identifying clients and keeping records, reporting suspicious transactions, and ways
of fulfilling obligations, other measures designed to prevent money laundering and
terrorism financing, regulation, and supervision, establishing competent authorities,
their competences and resources, transparency of legal entities, and legal arrange-
ments (FATF 2012).
Approaching the way control is performed by control bodies is extremely impor-
tant so to ensure a high tax compliance of the taxpayer. In this regard, Kirchler
(2007) assigns an important value to the economic psychology of fiscal behaviour
by developing the so-called slippery slope model: trust in authorities and voluntary
compliance (“service-client” approach) versus authority power and forced compli-
ance (“police-offender” approach).
Thus, the “police-offender” approach generates a climate of persecution and
criminal prosecution, resulting in reduced availability for cooperation and consider-
ation of obtaining individual profit. Thus, supervision based on control and penal-
ties “could reduce the motivation of individuals to engage in the very behaviour that
such monitoring is intended to ensure” (Kramer 2009; Kirchler 2007 p. 206).
Regarding the cooperation within the organizations, Cialdini (1996) notes that “the
monitoring and surveillance systems convey to the employees the fact that they are
not credible, gaining instead distrust and resentment. When people are forced to
comply, they can be reticent, so even honest employees could try to trick or sabotage
monitoring systems.” Applying these principles in fiscal behaviour, the “police-

offender” approach can lead to a reduction in trust in authorities so that even well-
intentioned citizens can be determined to cheat on taxes. In such a hostile climate,
if the authorities have the expertise and legitimate power, they may require compli-
ance. Thus, if taxpayers who are not willing to pay their tax obligations are threat-
ened with controls and penalties, they have two alternatives: the alternative of
paying the obligations or the alternative of obtaining a potential benefit from not
paying taxes that is a potential cost of detection and fines. If the power of the author-
ities to control and fine is reduced, taxpayers will most likely avoid paying taxes
(Kirchler 2007, p. 206).
On the other hand, the “service-client” approach generates a change in the repre-
sentations of the taxpayers and the assessment of the taxation and stimulates the
confidence and the creation of a friendly, cooperative climate. The transparency and
neutrality of the procedures, the credibility of tax authorities, and the polite and
respectful treatment of taxpayers have the effect of increasing the degree of volun-
tary fiscal compliance (Kirchler 2007, p. 206). In this case, the taxpayers perceive
the payment of state taxes as a civil debt, thus cooperating with the control bodies
for the benefit of the community.
The “slippery slope” model appears as the resultant of the manifestation of power
and confidence of the control bodies, the result of which is the degree of fiscal com-
pliance. If the confidence and power perceived by the citizens in the control bodies
are at high levels, the result is an increase of the degree of fiscal compliance.
However, if confidence and power reach an intermediate level, monitoring and con-
trols are perceived as signals of the “police-offender” attitude from the control bod-
ies, thus generating even more distrust from taxpayers. (Kirchler 2007, p. 206).
The “slippery slope” model and the psychological approach of controls exercised
by control bodies represent a modern track that requires knowledge and applicabil-
ity, as part of the overall demarche to prevent and fight against economic and finan-
cial crime at the level of a state.
4.2.2.2 Punitive Measures
Measures to fight against economic-financial crime at a punitive level require, as a

matter of priority, the adoption of an adequate legislative framework regarding the
elaboration of clear, concise, and stable legislation regarding the punishment of
economic-financial crime offenses. Also, the effective application of punitive mea-
sures requires a solid administrative apparatus and a complex and operational infor-
mation system.
As regards corruption, by signing the United Nations Convention on Corruption,
States Parties must punish bribes (both giving and taking bribes of civil servants) as
well as misappropriation of public funds, obstruction of justice and concealment,
conversion, or transfer of criminal income.
The acts that the states should take into account in punishing corruption acts
refer to the acceptance of an undue advantage by foreign and international civil
servants, influence peddling, abuse of power, illicit enrichment, bribery and misap-
propriation within or between private sector entities, money laundering, and con-
cealment of illicit assets.
At European Union level, the European Commission through OLAF implements
sanctions of a financial and/or administrative nature, including exclusion from EU
funding in the event of serious irregularities, fraud, or corruption. To this end, the
Commission will examine whether the sanctions applied by the Member States in
accordance with the national rules are sufficiently effective, proportionate, and dis-
suasive, ensuring, at the same time, fair competition conditions throughout the
European Union (European Commission 2011) (COM (2011) 376, SEC (2011) 791).
In order to ensure the implementation of the European Union policy on the pro-
tection of financial interests of the Union, the EU Directive 2017/1371 of the
European Parliament and of the Council on combating fraud directed against the
financial interests of the Union by means of criminal law aims to supplement the
protection of the Union’s financial interests through administrative and civil law as
the case may be, avoiding, at the same time, inconsistencies both within each of
these areas of law and between them (European Parliament 2017a).
Table 4.1 gives an approximate and comparative picture of the situations existing
in the Member States regarding fraud sanctions.
Regarding money laundering, the GAFI-FATF recommendations require that
each country should take those measures that would enable the laundering of money
to be incriminated on the basis of the 1988 United Nations Convention Against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna
Convention) and the 2000 United Nations Convention on Transnational Organized
Crime (Palermo Convention).
4.2.2.3 International Cooperation Measures
In regard to corruption facts, by signing the United Nations Convention on

Corruption, States Parties are obliged to support each other in cross-border criminal
matters. This includes, for example, collecting and transferring evidence of corrup-
tion for use in court.
Regarding money laundering, combating this scourge requires cooperation
between governments and financial-banking institutions in many areas such as
(Leția 2014, p. 63–81):
• Uniformization, unification, and harmonization of national legislation by apply-
ing universal legal norms
• Exchange of information within banking groups as well as between banking
institutions and public authorities in accordance with the Directive 2005/60 / EC
of the European Parliament and of the Council of 26 October 2005 on the preven-
tion of the use of the financial system for money laundering and terrorism
financing
Table 4.1 Sanctions on fraud in the Member States of the European Union
EU Member
No. State Sanction
1. Austria Imprisonment up to 3 to 5 years and fines up to twice the value of tax
evasion
2. Belgium Imprisonment from 1 month to 5 years and fine
3. Bulgaria Imprisonment from 1 to 10 years
4. Czech Imprisonment up to 2 years
Republic
5. Cyprus Imprisonment up to 3 to 5 years and / or a fine of max.5125.8 Euro
6. Denmark Imprisonment up to 1.2 years, 8 years in serious cases
7. Estonia Imprisonment up to 3 to 5 years
8. Finland Imprisonment from 14 days up to 2 years, respectively up to 4 years in
serious cases
9. France Imprisonment up to 5 years and a fine of 375,000 Euros, maximum 7 years
and a fine of 750,000 Euros in serious cases
10. Germany Imprisonment up to 5 years or fine
11. Greece Imprisonment from 10 days to 5 years
12. Ireland Imprisonment up to 5 years
13. Italy Imprisonment from 6 months to 6 years and a fine from 51 Euro to 1.032
Euro
14. Latvia Imprisonment up to 5 years or preventive arrest or service for the benefit of
the community or a fine of up to 60 minimum monthly salaries (approx.
17,074 Euro)
15. Lithuania Services for the benefit of the community with a fine, or restrictions on
freedom, or arrest, or imprisonment for up to 3 years, up to 8 years in
serious cases
16. Luxemburg Imprisonment from 1 month to 1 year or a fine from 500 Euro to 30,000
Euro
17. Malta Imprisonment from 1 month to 2 years and possibly payment of a fine
from 2329 Euro to 34,940 Euro
18. Great Britain Imprisonment up to 10 years and / or fine or both.
19. Netherlands Imprisonment up to 10 years or a fine of up to 76,000 Euro
20. Poland Imprisonment from 3 months to 5 years
21. Portugal Imprisonment up to 3 years or fine.
22. Romania Imprisonment from 6 months to 12 years
23. Slovakia Imprisonment up to 5 years
24. Slovenia Imprisonment from 3 months to 5 years, fine
25. Spain Imprisonment from 6 months to 3 years
26. Sweden Imprisonment up to 2 years
27. Hungary Imprisonment up to 2 to 5 years
Source: European Parliament (2012) regarding European Parliament and Council Directive pro-
posal on combating fraud against the European Union’s financial interests through criminal law,
Brussels, 11.7.2012 COM(2012) 363 final 2012/0193 (COD), replaced by European Parliament
(2017a) regarding Directive (EU) 2017/1371 of the European Parliament and of the Council of 5
July 2017 on combating fraud directed against the financial interests of the Union by means of
criminal law
• Fiscal measures aimed at diminishing the interest of offenders for money laun-
dering (regarding the exchange of information in the tax area including tax
amnesty)
In line with international cooperation, the GAFI-FATF recommendations refer to
Mutual Legal Assistance in relation to money laundering and terrorism financing
investigations, criminal prosecution, and related proceduresand requests, among
other things, for countries to provide mutual legal assistance as far as possible even
when the crime is not incriminated in the legislation of both countries. The GAFI-
FATF recommendations also require that countries should ensure that their compe-
tent authorities provide the highest level of international cooperation to their foreign
partners, thereby encouraging other forms of cooperation than legal ones so that
Information Sharing is allowed unconditionally (FATF 2012).
The international cooperation measures at the level of the financial systems are
implemented with the help of the European System of Financial Supervision (ESFS),
an integrated network of integrated supervisory authorities at national and European
Union level, comprising three European supervisory authorities, the European
Banking Authority (EBA), the European Insurance and Occupational Pensions
Authority, and the European Securities and Markets Authority, respectively.
At the European Union level, the European Commission through OLAF will
ensure the proper implementation of relevant international conventions and rules on
anti-fraud policies, with particular emphasis on the United Nations Convention
against Corruption (UNCAC), the Council of Europe’s instruments (GRECO), and
the OECD and G20 standards and recommendations (European Commission 2011)
(COM (2011) 376, SEC (2011) 791).
4.2.2.4 Asset Recovery Measures
Regarding corruption, a major innovation of the United Nations Convention is the

right to recover stolen state assets. The provisions of UNCAC provide a framework,
both in civil and criminal matters, for the pursuit and return of funds obtained
through corrupt activities.
In line with the recovery of assets involved in money laundering and terrorism
financing offenses, the GAFI-FATF recommendations provide for insurance and
confiscation measures, asking the countries to take measures to allow the competent
authorities to confiscate the washed goods, the profits obtained from money laun-
dering, the instruments used or intended to commit any money laundering crime, or
goods of appropriate value, without prejudice to the rights of a third party of good
faith (FATF 2012).
At European Union level, the European Commission through OLAF refers to the
recovery of unjustifiably paid funds. In this regard, the Commission states that in the
case of shared management, Member States are primarily responsible for investigat-
ing irregularities and fraud and for recovering unjustifiably paid funds, and in the
case of direct management, the Commission services must issue recovery orders
without delay, as a resultof OLAF investigations (European Commission 2011)

(COM (2011) 376, SEC (2011) 791).
A fiscal measure often used in the fiscal policies of the Member States is fiscal
amnesty, in order to fight against tax havens with the ultimate aim of repatriating
assets placed abroad (Leția 2014, p. 77).
As regards the acts of money laundering and terrorism financing, the Fiscal
Amnesty Program and the repatriation of assets elaborated by FATF (2012) regulate
the fiscal amnesty as a measure to prevent money laundering, to increase the taxpay-
ers’ compliance and as a measure of recovering assets illegally engaged in money
laundering. However, in the Report of the European Parliament (2017b) regarding
the investigation on money laundering, avoiding tax burdens and tax avoidance
(2017/2013 (INI)), it is noted that “some Member States have frequently resorted to
tax amnesties to regularize undeclared assets held offshore,which covered possible
illegally acquired assets and prevented appropriate investigations of money launder-
ing in their jurisdictions”. (European Parliament 2017b)
The reduction of economic-financial crime is an important goal of the legislative
and economic policy of the European Union, and each member country is obliged
to contribute, through internal measures, to the reduction of this scourge. However,
in practical life things are much more complicated compared to theory. One of these
reasons is the emergence, in practical life, of increasingly complex fraud mecha-
nisms on which national and international laws must systematically adapt.
4.2.3 J udicial Expertise: Specific Technical Procedure Used

in the Process of Economic and Financial Crime
Investigation
4.2.3.1 The Concept of Accounting Expertise
Accounting expertise is a research activity carried out by a specialist, who is an

expert, in order to establish a professional opinion on a particular issue or situation
investigated.
By the nature and content of the fact, circumstance, issue, situation, cause, or liti-
gation being investigated, the expertise can be technical, civil navigation, commod-
ity expertise, medical, philatelic, graphological, forensic, accounting, etc.
Expertise, as a means of proof, is defined in multiple variations of form but
essentially with the same content.
According to the accounting rules regarding accounting expertises (For Romania,
Professional Standard no. 35-Accounting expertises 2014), accounting expertises
represent means of proof that can be used in solving cases that require strict spe-
cialty knowledge from people who have the capacity of accounting expert.
4.2.3.2 Judicial Accounting Expertise
Definition and Forms
Judicial accounting expertise is a means of probation in court, regarding the inves-

tigation and clarification of certain facts or circumstances of economic-financial
nature indicated by the judicial bodies. The accounting expertise is entrusted by the
judicial bodies to some specialists to ascertain and evaluate certain facts, which the
judges could not procure or assess themselves.
In order to clarify some economic and financial phenomena, the court uses
accounting expertise at the request of the parties or ex officio.
Unlike the technical, medical, or forensic expertise, which usually refers to the
investigation of a single issue, such as determining the value of a building, deter-
mining the causes of death of a person, attesting the authenticity of an act, of a sig-
nature, etc., the object of the accounting expertise refers to the research of a set of
accounting documents, normative acts, and economic-financial issues in order to
achieve the targeted purpose. The very points established by the legal bodies to
which the expert must respond are characterized by plurality and diversity.
In terms of procedural regulations, the judicial accounting expertise is classified
in criminal expertise and civil expertise.
Judicial Accounting Expertise Versus Financial Control
Regarding the relationship between financial control and judicial accounting exper-
tise, we emphasize that both processes have the role of obeying the legality and
protecting the heritage. The common elements of accounting expertise and financial
control are the following:
• They both have the role of protecting the heritage and obeying the financial and
management legality.
• Their main source of data is the accounting information system.
• They use similar methodologies.
• The accounting expertise uses and analyses the conclusions of the financial con-
trol to assess the existence and extent of the damage; therefore the two activities
complement each other to establish the truth subject to judgment (Borlea and
Achim 2017, p. 139)
A relevant presentation of the differences between financial control and account-
ing expertise is shown in Table 4.2.
Objectives of Judicial Accounting Expertise
The accounting expertise is disposed by the criminal prosecution body or by the

court upon request or ex officio, to find out the truth in case of a situation.
Table 4.2 Differences between financial control and judicial accounting expertise
Financial control Judicial accounting expertise
Follows the management of assets and values as Seeks to clarify unknown aspects of asset and
well as the integrity of the heritage value management as well as heritage
integrity
It may also have a permanent character It has an occasional character
It is exercised both by internal control bodies It is exercised by the accounting expert, an
and by external control bodies, i.e. outside the independent person
controlled entity
Uses methods and techniques specific to Uses specific accounting expertise techniques
financial control
Uses the data provided by accounting Uses and analyses the conclusions of financial
control to specify the existence and extent of
the damage
Source: Ionescu (2011, p.39)
The objectives of the accounting expertise are represented by a series of ques-

tions to which the expert must answer in a reasoned way, on a legal basis. The ques-
tions are formulated by the criminal prosecution body or by the court and are
limited, in terms of content and period, to facts and circumstances that generated the
dispute in question.
The objectives of the accounting expertise must be formulated by the court in a
concise manner, without equivocation and without asking the accounting expert or
the appointed accounting experts to rule on the legal framing of the facts subject to
judgement.3
Examples of objectives included in the judicial accounting expertise can be rep-
resented by the following (Borlea and Achim 2017, p. 139):
• Identifying the correctness of the execution of the contractual obligations.
• Correct reflection of economic operations in accounting.
• Aspects related to the manifestation of abusive clauses in bank contracts.
• Correctness of the tax base preparation.
• Correctness of establishing the quantities of products delivered between the par-
ties in dispute, of the calculation of penalties, what has been paid and what is due
to be paid etc.
• Assessing the damages related to deficiencies in the assets of an economic agent,
the nature of the act that generated the damage and establishing the liability.
• In commercial cases, experts are appointed to examine calculations, records, and
commercial registers.
• In criminal cases, experts are appointed, for example, to control the management
of insolvent entities or the bad-faith administrators of some companies.
Item 3521.2. paragraph ii of the Professional Norm 35 Accounting expertise

3
In criminal cases involving damages, the objectives related to ascertaining the

possible guilt of the persons who generated the material damages go beyond the
scope of the accounting expertise, those being objectives of a criminal investigation.
Thus, the judicial accounting expertise refers only to the economic-financial side of
the facts and circumstances and the judicial side is exclusively within the compe-
tence of the judicial bodies (Borlea and Achim 2017, p. 140).
The objectives (questions) formulated by the accounting expert are established
and recorded in writing in the “conclusion” given by the court or in the “ordinance”
given by the criminal investigation bodies.
There are situations when the objectives are formulated incorrectly. For example,
these may require the accounting expert to ascertain the guilt of the persons who
caused certain material damages or may require them to present legal assessments
on certain facts, issues that are beyond the competence of the accounting expert, as
they are not an investigating body.
In criminal cases, setting the objectives to which the experts will respond is car-
ried out in two stages:
• The proof is approved and the objectives are established in principle, the expert
is appointed and a summary analysis of the file is performed by the appointed
accounting expert.
• The objectives formulated in principle are then discussed by the parties and the
expert, being informed that they have the right to make observations and to
request modifications and completions of the objectives, in the presence of the
parties and of the accounting expert.
The accounting expertise strictly solves the objectives or issues indicated in the
act where its execution was arranged and only for the period established. If neces-
sary, the objectives of the accounting expertise can be extended, but only with the
approval of the body that ordered it to be performed (Borlea and Achim 2017,
p. 140).
Also, sometimes the objectives of an accounting expertise can be considered by
the expert as insufficiently explicit, which makes it difficult to work on expertise,
thus creating some confusion about what to do. In these cases, the accounting expert
may request the body that ordered the expertise (the courts or the criminal investiga-
tion bodies) to put into writing the issues that must form the object of the expertise
or extend those initially formulated, arguing this exigency. For example, in order to
clarify the objectives formulated for solving, the accounting expert may request to
the body that has ordered the expertise, a prior execution of some technical, grapho-
logical expertise by specialists. The expert can extend or complete the objectives of
the expertise only with the approval of the body that ordered the expertise. Also, the
accounting expert cannot answer questions that have not been asked or that exceed
their competences.
4.2.3.3 Extrajudicial or Amicable Accounting Expertise
The extrajudicial or amicable accounting expertises are those carried out outside
legal proceedings, and they serve for preliminary substantiation of legal actions,
substantiation of decisions, conciliation of commercial or business transactions,
challenge of administrative control acts, etc. They do not have the quality of evi-
dence in court.
The judicial practice demonstrates that many of the accounting expertises formu-
lated by the judicial bodies for clarifying the economic-financial factual status are a
result of the deficiencies in the system of documents and records of the economic
entity, which is part of the civil or criminal case before the court.
Also, in cases of contesting imputation decisions for establishing material liabilities,
the individual concerned will have the right to request the accounting expertise to be
performed, as a means of substantiating the challenge, and of defence under legal condi-
tions, if the individual declares themselves wronged. This expertise can be a means of
proof for the final decision of imputation, establishing the material responsibility, after
the challenge, by administrative means. The practice confirms situations in which the
managements of economic agents issue very easily imputation decisions and establish
material liabilities based on data from documents and records that are held improperly,
with errors and inaccuracies or which contain data that are not in conformity with the
legal reality and norms. This procedure proves the unsubstantiating of the imputation
decision and the passing of the effort to solve such situations from the level of the man-
agement of economic agents concerned to the investigative and judicial bodies.
The use of accounting expertise as a means of substantiating the imputation deci-
sion, found by administrative means, contributes to the increase of the exigency of
the financial-accounting apparatus and of the management of economic agents in
line with raising the quality of the information system based on documents and
records, preserving the integrity of the patrimony and respect for legality. At the
same time, this process removes any trace of subjectivism or inaccuracy with regard
to the establishing of material liabilities.
The extrajudicial amicable accounting expertise can also be used to certify finan-
cial statements of economic entities. These analyses and financial-accounting certi-
fications on the situation of the assets of an economic agent and its possibilities to
generate profit and to be profitable are the reliable evidence for third parties (other
economic agents) in order to enter into commercial relations. These extrajudicial
accounting expertises prevent the creation of commercial relationships with entities
for which there are major risks regarding the precarious financial status of the entity
or the risk of imminent bankruptcy.
The extrajudicial expertise is urgently demanded by the plenary manifestation of
free initiative under market economy conditions, being an efficient way of high special-
ized assistance of any business that wants to be safe from risks and assured of success.
Under the new economy conditions that raise more and more theoretical, legal,
and methodological issues regarding the economic-financial phenomena, the
accounting expertise is extremely useful for accounting technicians, shareholders,
depositors, creditors, magistrates, lawyers, tax authorities, as well as for business-
men in general.
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Links
http://www.unodc.org/, United Nations Office on Drugs and Crime (United Nations Drug Control
Programme and the Centre for International Crime Prevention).
http://www.fatf-gafi.org/about/, Financial Action Task Force on Money Laundering (FATF).
https://ec.europa.eu/anti-fraud/, The European Anti-Fraud Office (OLAF).
https://www.europol.europa.eu/, The European Police Office (EUROPOL)
https://www.eca.europa.eu/, European Court of Auditors
http://www.fatf-gafi.org/about/, Financial Action Task Force on Money Laundering (FATF).
https://www.ifac.org/, International Federation of Accountants (IFAC).
https://www.worldbank.org/, World Bank.
https://www.weforum.org/, World Economic Forum.
http://www.onpcsb.ro/, National Office for Prevention and Control of Money Laundering.
Index
A B
Accounting expertise Bank employee education, 62
accounting rules, 263 Bank failures, 153
multiple variations, 263 Bank Secrecy Act, 20
nature and content, 263 Banking and financial sector, 163
research activity, 263 Banking surveillance, 62
Anti-corruption policies, 75, 95 Banking system, 152
Anti-Money Laundering Risk Index (AML Banking system soundness, 62
index), 149, 168 economic and financial crimes, 153
Asset Quality Index (AQI), 126 EU countries
Asset recovery measures analysis, 156, 157
Fiscal Amnesty Program, 263 World Economic Forum, 156
fiscal measures, 263 measurement
GAFI-FATF recommendations, 262 financial soundness indicators, 154
legislative and economic policy, 263 GCI, 155
OLAF, 262 global risk assessment, 153
tax burdens and tax avoidance, 263 legislation and regulations, 153
UNCAC provisions, 262 the depth, 153
Audits the net interest margin, 153
committee, 124 variables, 153
efficiency, 131 Banking/financial institution soundness, 56
financial knowledge, 123 Bankruptcy, 152, 180
fraud and complicity, 122 Bankruptcy and financial crisis, 148
IFAC, 123 Banks soundness and corruption
internal auditing, 123 practical approaches
International Standards on Auditing, analysis, 160
123 correlation coefficients, 160, 166
OECD regulations, 123 hypothesis, 158
prestige/promotions, 123 indicators, 159
remuneration, 123 limitations, 160
risk of fraud, 123 regression, 160, 166
roles of, 123 theoretical approaches, 157
Organized Crime 20, https://doi.org/10.1007/978-3-030-51780-9
274 Index
Banks soundness and shadow economy C

practical approaches CAAMPL model, 153
AML index, 168 CAMEL model, 153
analysis, 162, 168 Cash effective tax rate (CETR), 35
correlation coefficients, 162, 167, 168 Causes of corruption
hypothesis, 162, 168 cultural factors, 58
indicators, 162 institutional factors, 58
limitations, 162, 169 low life standard, 58
regression coefficients, 162, 167, 169 organizational factors, 58
theoretical approaches, 162–164 personal factors, 58
circulation, 161 political parties financing, 58
financial development, 161 public expenses decisions, 58
limitations, 160 public sector, 57
United Nations Convention against regulatory documents and
Corruption, 161 authorizations, 57
Base erosion and profit shifting taxation issues, 57
(BEPS), 16, 257 Causes of shadow economy
Basel Anti-Money Laundering (AML), 37, comprehensive classification, 59
38, 43, 81 diminution, 59
Basel Institute on Governance, 37 greed, 60
Behavioural economics institutions and bureaucracy quality, 59
culture (see Culture) political and economic system, 59
happiness (see Happiness) public governance, 59
religion (see Religion) regulatory acts quality, 59
tax morale (see Tax morale) rule of law, 59
trust in state/government/public services social security contributions, 59
(see Trust morale) tax burden, 59
Bibliometric approach, 58 tax policy, 59
Blacklisted/hidden crime, 5 Client-service approach, 222
Bribery, 8 Concepts
Bucharest Stock Exchange (BSE), 124 culture, 179–181
adding value, investor relations, 136–139 happiness, 226
code supplementary character, 132 religion, 209, 210
Corporate Governance Code, 132 social representations, 178
Institute of Corporate Governance, 131 tax, 178
mechanism, 132 Consumer behaviour, 226
Plus Category, 131 Control of corruption, 31
regulated market, 132 Corporate governance
remuneration policy, 135, 136 audit committee, 118
responsibilities, 133, 134 audits, 122–124
risk management system/internal control, data manipulation, 124, 125
134, 135 definitions, 115, 117, 118
Business crimes, 4, 5 earning management, 118–121 (see also
Business criminals, 2 Creative accounting)
Business development and performance EU countries
corruption, 248 analysis, 140
fiscal bribe, 247 audit efficiency, 140, 145
indicators, 248 GCI, 140
money laundering crimes, 248 indicators, 140
shadow economy, 248 fraud vs. creative accounting, 121–122
Index 275
independent directors, 124 Corruption

measuring instruments companies attitude, 8
BSE, 131–132 criteria, 8
Standards & Poor’s deeds, 8
methodology, 129–131 definition, 7, 8
OECD principles, 124 disruptions, 8
Romanian companies, 139 forms, 8
Corporate governance and corruption measurement
practical approaches control of corruption, 31
analysis, 142 CPI, 31
correlation coefficients, 143, 149, 150 GCB, 31
CPI, 142 irregular payments and bribery, 31
hypothesis, 142 Transparency International, 31
indicators, 142 private benefits, 8
limitations, 143 and shadow economy, 179
regression coefficients, 143, 151 Corruption-culture relationship
theoretical approaches economic behaviour, 183
board members relationship, 140 empirical case studies
control-property separation, 141 CPI, 192
elements, 142 IDV, 193
governance structures, 141 IND, 194
mandatories (agents), 141 LTO vs. short-term orientation,
manipulative actions, 141 193, 194
quality, 142 MAS, 194
shareholders, 141 OLS, 192
Corporate governance and money PD, 192, 193
laundering society influence, 192
practical approaches UAI, 194
AML index, 150 in European Union countries
correlation coefficients, 151, 158, 160 analysis period, 188
hypothesis, 148, 151 characteristics, 187
indicators, 149 classification, 188
limitations, 152 CPI, 187
regression coefficients, 151, 159, 161 IDV, 188, 189
theoretical approaches, 147, 148 IND, 190, 191
Corporate governance and shadow economy LTO, 190, 191
practical approaches MAS, 188–190
correlation coefficients, 147, 154, 155 PD, 188, 189
hypothesis, 146 UAI, 190
indicators, 147 IDV, 186
limitations, 147 IND, 187
regression coefficients, 147, 156 individualism, 185
theoretical approaches LTO vs. short-term orientation, 187
agent theory, 143 MAS, 186
audit committee, 144 masculinity, 185
audit quality, 144 PD, 185, 186
board independence, 145 profile, 183
board members, 144 UAI, 186
incentives, 145 values and beliefs, 185
measurement, 143 violations of parking regulations, 184
tax aggressiveness, 144 Corruption Perception Index (CPI), 31, 38, 39,
tax avoidance, 144 45, 75, 91, 107, 187, 192, 211, 219,
Corporate Governance Code, 132 223, 229, 230
276 Index
Corruption/shadow economy/money Criminalization, 20

laundering relationships Criminology, 2
activities, 30 Cross-country income characteristics, 74
authorities, 30 Cultural factors, 56
collected data, 28 Culture
complex model, 27 awareness, 177
control variables, 28 characteristics, 179
controversial relations, 29 concept, 179–181
corrupted practices, 28 and corruption, 179, 183–187
dark money, 29 corruption and shadow economy, 179
differentiation, 30 definition, 179
direct and indirect relations, 27 employment, 177
documentary evidence, 27 equity perceptions, 178
economic and financial crime, 26 in European Union countries
economic/regional development, 28 IDV, 183
elements, 29 IND, 185
empirical approaches LTO vs. short-term orientation,
Basel AML, 46 184, 187
control, 46 MAS, 183
correlated arrangement, 47 methodology, 181
correlation coefficients, 46, 52 PD, 182
CPI, 45 UAI, 184
deeds, 46 and measuring instruments, 179–181
hypothesis 1, 46–48 and shadow economy (see Shadow
hypothesis 2, 46, 48 economy-culture relationship)
hypothesis 3, 46, 49 social norms, 178
limitations, 49, 50 social values, norms and attitudes, 177
ratios, 45 societal level, 178
regression coefficient, 48, 49, 53–55 Currency demand approach, 33, 34
significance threshold, 49 Cyber-attacks, 7
empirical findings, 27 Cybernetics attacks, 7
empirical issues, 27
empirical relations, 27
gambling, 29 D
international level, 29 Dark money, 29
low incomes, 28 Days Sales in Receivables Index (DSRI), 125
negative relations, 28, 29 Debt payment, 195
positive relation, 27 Depreciation Index (DEPI), 127
public officials, 27 Determinants, 178, 195, 196, 218, 224, 225,
reverse influence, 29 232, 233, 235
social interests, 28 Determinants, economic/financial crime
tax avoidance, 30 banking/financial institution soundness, 56
Cost of goods sold (COGS), 126 cultural factors, 56
Creative accounting economic growth and economic
approaches, 118 crisis, 51, 52
asset categories, 118 globalization, 54
definition, 118 incentives, 51
managers’ remunerations, 121 intelligence, 57
process, 120 internal (managing) factors, 56
stakeholders, 121 issues, 51
techniques, 121 legislative system, 55
Criminal behaviour, 56 long-standing problem, 51
Criminality, 3, 4 political factors, 56
Index 277
regulation quality, 54 “Sand the Wheels” theory, 245–249

Deviant behaviour, 214 Economic and financial transactions, 152
Discouragement measures, 60 Economic and social field, 7
Domestic activities, 206 Economic and sustainable development
Double entry bookkeeping, 14 bilateral causality, 247
corruption, 246
money laundering, 247
E poverty-driven economy, 247
Economic and financial crime shadow economy, 247
characteristic, 2 Economic crime, 1
classic/common, 2 Economic criminals, 2
corruption (see Corruption) Economic development, 73, 206, 216, 235
deeds, 3 Economic development and corruption
definition, 5 practical approaches
determinants (see Determinants, economic/ correlation coefficients, 76, 77
financial crime) GDP/capita, 75
economic and social changes, 2 limitations, 76
economic criminals, 2 regression coefficients, 76, 77
features variables, 75
crime direction, 6 working hypothesis, 75
crime frequency, 6 theoretical approaches, 74, 75
intensity, 6 Economic development and money laundering
volume/extent, 5 practical approaches
fields Basel AML indicator, 81
commercial, 6 correlation coefficients, 81, 83
companies, 7 descriptive methods, 81
economic/social, 7 GDP/capita, 81
financial and banking, 6 hypothesis, 81
informatics, 7 regression coefficients, 84
forms, 3, 4, 6 variables, 81
history, 1 theoretical approaches, 80
legal facts, 3 Economic development and shadow economy
macro-criminality, 4 practical approaches
macro level determining factors, 62 correlation coefficients, 79, 80
micro-criminality, 5 descriptive methods, 78
micro level determining factors, 63 GDP/capita indicator, 78
money laundering (see Money laundering) hypothesis, 78
shadow economy (see Shadow economy) limitations, 79
social fact, 3 variables, 79
Sutherland’s learnings, 2 theoretical approaches, 77, 78
tax avoidance (see Tax avoidance) Economic-financial crimes, 221
white collar criminality, 1 Economic freedom, 89
Economic and financial crime index Economic freedom indicator, 84
assessment Economic growth and economic crisis, 51
Basel AML indicator, 38 Economic growth level, 61
components, 38 Economic prosperity, 225, 226
CPI, 38, 39 Economic variables, 220
CSL, 39 Effective tax rate (ETR), 35, 144
database, 38 Efficacy of corporate board, 131, 142, 143
normalization, 39 Entrepreneurialism, 60
normalized corruption, 39, 40 Entrepreneurs, 60
Economic and financial effects Ethical Investment Research Services, 115
“Grease the Wheels” theory, 249–250 European Anti-Fraud Office (OLAF), 256, 257
278 Index
European Banking Authority (EBA), 262 Financial Action Task Force on Money
European Commission through OLAF, Laundering (FATF), 20
260, 262 Financial Action Task Force on Money
European Commission’s anti-fraud, 258 Laundering or Groupe d’action
European Court of Auditors, 256 financière (FATF - GAFI), 256
European Directives against money Financial-banking system, 154, 163
laundering, 62, 163 Financial-banking system employees, 62
European Police Office (EUROPOL), 256 Financial-banking system, money laundering
European supervisory authorities, 262 clients fraud, 249
European System of Financial Supervision erosion, 249
(ESFS), 262 operational risks, 249
European Union countries, corruption Financial crime index (CSL), 39
classifications, 41, 43 Financial crisis, 152
CPI, 41 Financial institution services, 162
descriptive statistics, 41 Financial Integrity Group, 37
diminution, 41 Financial satisfaction, 74
higher efficiency, 41 Financial scandals, 122
level analysis, 41 Financial Soundness Indicators, 154
public sector, 41 Fiscal bribe, 247
trends, 45 Fiscal corruption, 27
variation, 41 Fiscal freedom variable, 85
European Union countries, money laundering Fiscal policy, 245
activities, 43 Fraud
AML index, 43 creative accountancy, 121
analysis, 43 definition, 121
low-enough variations, 44 embellishment, 122
risk, 43 financial, 121
risk evolution, 44 Fraud vs. creative accounting
European Union countries, shadow economy denominator, 122
activities, 43 embellishment, 122
CEE, 42 flexibility, 121
database, 42 loopholes, 122
descriptive methods, 42 similarities and differences, 122, 126
evolution, 48
GDP, 42
levels, 42 G
regions, 42, 47 GAFI-FATF recommendations, 260, 262
variation, 42 Gambling (casinos, horse racing), 26
European Union policy, 260 General avoidance, 60
Europeanization, 102 Global Barometer, 9
Extrajudicial/amicable accounting expertise Global Competitiveness Index (GCI), 130
commercial relationships, 267 Global Competitiveness Indicators (GCI),
economic agents issues, 267 142, 155
economy conditions, 267 Global Competitiveness Report, 159
financial statements certification, 267 Global corruption barometer (GCB), 31
imputation decisions, 267 Global Financial Integrity, 51
judicial bodies, 267 Global financial market, 152
legal proceedings, 267 Globalization, 54
plenary manifestation, 267 Good governance, 102, 115
Governance effectiveness (GE), 104, 110
Governance system, 224
F Government efficiency, 93
False loans/loans returned, 24 Granger causality tests, 61
Fictitious loans, 24 “Grease the wheels” theory
Financial-accounting apparatus, 267 bribes, 250
Index 279
business performance, 250 taxation, 233

corruption, 250 welfare, 232
economic benefits, 250 Happy life years, 234–236
GDP growth, 249 Happy Planet Index, 227, 230, 234, 235
positive effect, 249 Hofstede’s cultural model, 180, 192, 193,
shadow economy, 250 206, 208
Gross domestic product (GDP), 73, 194, 198,
206, 215, 227, 232, 234, 236
Gross Margin Index (GMI), 125 I
Gross national happiness (GNH), 227 Illegal deeds (crimes), 5
Gross national product (GNP), 73 Illegal economic activities, 73, 77
GST (tax act), 179 Illegal tax avoidance (tax evasion/tax fraud)
definition, 17
economic documents, 17
H excise duties, 18, 19
Happiness fraud techniques, 18
and behaviour, 226 frequent fraud methods, 18
characterization, 226 profit tax, 17
components, 226 tax payer passing, 19
concepts, 226 tax type/fee, 17
and corruption (see Happiness-corruption Incentives, 73
relationship) Independent activity rate, 60
economic prosperity, 226 Independent economic activities, 60
GNH, 227 Individual behaviour, 226
in European Union countries, 227, 228 Individualism vs. collectivism (IDV), 180,
individual behaviour, 226 181, 183, 186, 188, 189, 193, 196,
interpersonal behaviour, 226 199–201, 207
mental well-being, 225 Indulgence vs. restraint (IND), 181, 185, 187,
and satisfaction, 226 190, 191, 194, 198, 202–205, 208
and shadow economy (see Happiness- Indulgent society, 208
shadow economy relationship) Informal activities, 206
Happiness-corruption relationship Information Sharing, 262
academics, 228 Institutional quality, 93, 95, 216, 235
CPI, 229 Integration, 23
data sources, 230 Intelligence, 57
governments, 228 Internal (managing) factors, 56
Happy Planet Index, 230 Internal auditing, 123
inverse correlation, 230, 232 Internal Revenue Service, 20
methodology and data, 230 International Cooperation measures
policy-makers, 228 cross-border criminal matters, 260
positive correlation, 229 EBA, 262
social mechanism approach, 229 ESFS, 262
social trust, 229 financial-banking institutions, 260
social well-being, 229 G20 standards and recommendations, 262
welfare state, 229 GAFI-FATF recommendations, 262
World Value Survey, 230 OLAF, 262
Happiness-shadow economy relationship International Federation of Accountants
corruption and life satisfaction, 234 (IFAC), 121
economic decisions, 232 International Monetary Fund (IMF),
financial satisfaction and satisfaction, 233 37, 57, 152
happy life years, 234–236 International Standards on Auditing
moral considerations/social norms, 232 (ISA), 121
subjective well-being, 234–236 Interpersonal behaviour, 226
tax morale, 233 Investment behaviour, 226, 232
280 Index
J M
Judged crime, 5 Masculinity vs. femininity (MAS), 180, 181,
Judicial accounting expertise 183, 186, 188–190, 194, 196, 197,
definition, 264 201, 202, 207
vs. financial control, 264, 265 M-Beneish score model
objectives, 264–266 AQI, 126
parties/ex officio, 264 comparisons, 125
research, 264 DEPI, 127
types, 264 DSR, 125
financial statements, 125, 128
GMI, 125
K intervals of classification, 128
Knowledge-based economies, 229 LVGI, 127
M-Risk Fraud-Beneish, 128
probabilistic, 125
L Romanian economy, 128
Labour tax, 84 SGAI, 127
Laffer curve SGI, 126
analysis, 86 TATA, 127
arithmetical effect, 86 variables, 128
definition, 85 Mental health (well-being)
economic effect, 86 adaptation, 253
limitations, 86 correlation, 255
tax payers, 87 corruption, 253
tax pressure vs. tax incomes, 86 economic development and cultural
theoretical approach, 86 framework, 253
zones, 86 happiness index, 253
Layering/stratification, 22, 23 happiness/life satisfaction, 253
Legal compliance, 179 Money launderers, 21
Legal tax avoidance (tax optimization) Money laundering, 196
definition, 15 Al Capone, 20
multinational companies, 16 Bank Secrecy Act, 20
OECD, 16 behaviours
OECD/G20 Inclusive Framework on concealment/disguise, 21
BEPS, 16 participation, 22
offshore companies, 16 property acquisition/possession, 22
regulations, 15 circuit, 23
tax concessions/beneficial provisions, complex transactions, 21
16 criminal organizations, 23
Tax Justice Network, 16 definitions, 20, 21
tax payer action, 15 economic crime domain, 21
tax-free zones, 16 European Directives, 22
Legislative gaps, 80 financial system use, 21
Legislative system, 54 illegal transfer, 21
Leverage Index (LVGI), 127 illegally procreated sources, 20
Life expectancy (LE), 252, 255 measurement
Life satisfaction, 226 AML indicators, 38
Linear regression analysis, 224, 230 Basel Institute on Governance, 37
Long-term causality relation, 74 domains, 37
Long-term orientation (LTO), 181, 190, 191, economic model, 36
197, 198, 201, 202, 204, 207 estimated percentage, 36
Long-term orientation (LTO) vs. short-term evaluation model, 36
orientation, 187, 193, 194 gain estimation, 36
Index 281
illegal activities engagement, 37 P

indicators, 37 Passing of time/LTO, 181
risk, 36 PERLAS, 153
task, 35 Personal avoidance, 60
methods Physical health
external operation utilization, 25 economic development and cultural
false loans/loans returned, 24 framework, 252–253
gambling, 26 economic development/cultural
informal system utilization, 25 framework, 252
non-profit organization utilization, 26 health personnel, 252
offshore destinations utilization, 24 infant mortality rate, 252
shell company, 24 influence, 252
stock market investment/ LE, 252
transactions, 25, 26 life expectancy/population mortality, 252
through bank accounts, 23, 24 medical satisfaction, 252
Money Laundering Control Act of mortality rate, 252
1986, 20 Physical input methods, 34
other methods, 26 PIECEMEAL process, 22
property conversion/transfer, 21 Police-offender approach, 258
stages Police-offender type, 222
integration, 23 Political and economic system, 59
layering/stratification, 22, 23 Political behaviour, 226, 232
placement, 22 Political effects
terrorist financing, 20 corruption, 255
UNODC, 20 corruption and trust, 255
Watergate Scandal, 20 economic and financial crimes, 255
Mutual Legal Assistance, 262 legitimacy, 255
Transparency International, 255
Political factors, 56
N Political stability and absence of violence
National account system, 11 (PS), 110
National accountancy, 33 Population disagreement, 74
National Bank of Romania Power distance (PD), 180–182, 185, 186, 188,
regulations, 163–165 189, 192, 193, 196, 199, 200
National Happiness Index, 227 Powerlessness, 208
National Permissiveness Index, 197 Predictive intelligence, 62
Neutrality of term (code 1), 9 Prevention and controlling bodies
Nominal GNP, 33 establish/implement unitary policies, 255
Non-bank financial institutions, 163 European Court of Auditors, 256
Non-profit organizations, 26 EUROPOL, 256
FATF - GAFI, 256
OLAF, 256
O UNODC, 256
Obligation, 133 Preventive measures
Observed economy, 13 actions, 257
OECD countries, 60–61 BEPS, 257
OECD/G20 BEPS Action Plan, 257 EU budget, 258
Offences, 21 FATF - GAFI, 258
Official GNP, 33 high tax compliance, 258
OLAF investigations, 263 monitoring and surveillance systems, 258
Online transaction growth, 61 OCED provisions, 257
Ordinary least squares (OLS), 192, 196 OECD/G20 BEPS Action Plan, 257
Out-of-pocket payments, 252 OLAF, 258
282 Index
Preventive measures (cont.) hypothesis, 114

police-offender approach, 258 institution effectiveness, 114
service-client approach, 259 limitations, 114
slippery slope model, 259 regression coefficients, 119
tax obligations, 259 theoretical approaches, 113
UNCAC, 257 Public governance and shadow economy
Privatization, 80 practical approaches
Profit tax, 84 analysis, 112
Property plant and equipment (PPE), 126 control variables, 113
Property structure, 129 correlation coefficients, 112, 116
Protestantism, 210 dimensions, 112
Public authorities, 217 GDP, 112
Public governance hypothesis, 112
best practices, 102 institution effectiveness, 111
dimensions, 102 regression coefficients, 112, 116
economic and financial crimes, 101 theoretical approaches
efficiency, 102 components, 110
European Commission, 102 direct democratic rights, 109
European Union countries EU members, 110
communism heritage, 105 high confidence and power, 110
data samples, 105 lower trend engagement, 110
decision-making processes, 105 tax morale, 110
governance effectiveness, 104, 105, 107 Public health and corruption
quality, 104 mental health, 253–255
regulatory quality, 104, 105, 108 physical health, 251–253
rule of law, 105, 108 Public officer, 105
good practices, 102 Public services, 51
governance system, 102 Punitive measures
indicators, 102 adequate legislative framework, 259
investigations, 101 corruption acts, 259
state apparatus, 104 effective application, 259
Public governance and corruption European Union policy, 260
analysis, 108 GAFI-FATF recommendations, 260
business start-up regulation, 106 Member States, fraud sanctions, 260, 261
correlation coefficients, 109, 112 OLAF, 260
dimensions, 107 States Parties, 259
diminution, 109
discretionary power, 106
governing institutions, 106 Q
hypothesis, 107 Quality of regulations, 61
institutional inefficiency, 106, 107
institutional quality, 106, 109
law avoidance, 106 R
limitations, 109 Racketeering, 29
public services, 106 Real crime, 5
regression coefficients, 113 Registered crime, 5
well-substantiated control variables, 109 Regulatory documents and authorizations, 57
Public governance and money laundering Regulatory quality (RQ), 104, 110
practical approaches Religion
analysis, 114 church, 209
Basel AML indicators, 114 concepts, 209, 210
correlation coefficients, 114, 119 and corruption (see Religion-corruption
dimensions, 114 relationship)
Index 283
cult, 210 characteristics

denomination, 209, 210 neutrality of term (code 1), 9
sect, 209 positive judgement (code 3), 9
and shadow economy (see Religion- practices deliberately occult (code 2), 9
shadow economy relationship) complex fact, 9
Religion-corruption relationship components, 10, 12
characteristics, 210 databases, 13
database, 211 definition, 9
descriptive statistics, 212, 213 economy, 12
in Nigeria, 210 illegal activities, 11, 12
individualistic, 211 illegal/domestic/informal activities, 13
methodology and data, 211 informal unobserved services, 12
Pearson correlation and linear initiatives, 12
regression, 212 lawful activities, 13
Protestantism, 210 measurement
World Value Survey, 211 challenges, 32
Religion-shadow economy relationship currency demand approach, 33, 34
database, 215 direct methods, 32, 33
deviant behaviour, 214 indirect methods, 33
high-income countries, 218 model approach, 34, 35
market participants, 214 physical input methods, 34
methodology and data, 215 transactions approach, 33
panel-type data analysis, 216 monetary/non-monetary transactions, 10
poorer countries, 217 own households, good production, 11
public authorities, 217 productive and lawful activities, 12
rich countries, 217 semantic and conceptual point, 10
RIR and RIG estimators, 216 and tax morale, 220, 221
RIR symbol, 216 taxonomy, 10
social integration, 214, 215 and trust, 224, 225
tax morality, 214 underground activities, 11
trading partners, 217 Shadow economy-culture relationship
types, 215 data analysis methodology, 206
World Value Survey, 215, 216 debt payment, 195
Risk management system and internal in European Union countries
control, 134 characteristics, 198
Rule of law (RL), 54, 110 classification, 198
corruption level, 198
descriptive analysis, 198
S GDP percentage, 198
Sales General and Administrative Expenses IDV, 199–201
Index (SGAI), 127 IND, 202–205
Sales Growth Index (SGI), 126 LTO, 201, 202, 204
“Sand the wheels” theory MAS, 201, 202
business development and PD, 199, 200
performance, 245–246 UAI, 201, 203
economic and sustainable IDV, 196, 207
development, 245–246 IND, 198, 208
economic-financial crime influence, 245 individualism, 195
financial-banking system, 248 individualistic societies, 207
poverty and social inequality, 248 indulgent society, 208
state budget, 245–246 limits and directions, 208, 209
Service-client approach, 259 LTO, 197, 198, 207
Shadow economy, 179 MAS, 196, 197, 207
284 Index
Shadow economy-culture relationship (cont.) T

money laundering, 196 Tax and social security systems, 97
OLS regressions, 196 Taxation rate, 84
PD, 196 Tax attitude, 60
political considerations, 195 Tax authorities, 222
social expectations, 195 Tax avoidance, 220
society influence, 205, 206 deeds, 14, 15
tax compliance, 195 definition, 14
tax evasion, 195 deliberate and intended practice, 15
UAI, 197 identified/non-identified, 14
Shell company, 24 illegal, 17–19
Slippery slope model, 222, 258, 259 legal, 19
Slow regulatory system, 80 legal/tax optimization, 15–16
Social effects measurement
public health and corruption, 251 CETR, 35
public services volume and quality, ETR, 35
250, 251 relationships, 14
Social inequality, 180, 206 Romanian legal norms, 19
Social integration, 215 shadow economy, 13, 15
Social mechanism approach, 229 tax Law 241/2005, 14
Social norms, 178 tax payers, 19
Social representation taxed entity, 19
fiscal behaviour, 178 Tax cheating, 219, 220, 233
Social structure, 56 Tax compliance, 178, 195, 197, 207, 214, 218,
Social values, 229 219, 222, 225, 232, 234
Social well-being, 229 Tax diminution, 28
Societal level, 178 Tax evasion, 195, 215, 216, 220, 221, 233
Society influence, 205, 206 Tax freedom, 216
Socio-cultural environment, 180 Tax freedom indicator, 84
Socio-cultural variables, 220, 224, 230 Tax-free zones, 16
Standards & Poor’s methodology Tax Justice Network, 16
categories, 129 Tax morale, 232–234
components, 129 attitude, 218
criteria, 129 civic and fiscal awareness, 218
financial crisis, 130 concept, 232
governance rating system, 130 and corruption (see Tax morale-corruption
transparency level, 130 relationship)
Standards & Poor’s Rating Agency, 129 definition, 218
State budget scribes, 218
budgetary revenues, 246 and shadow economy, 220, 221
decreased tax revenues, 246 and tax compliance, 218, 232
financial power reduction, 246 and tax evasion, 233
fiscal policy, 245 Tax morale-corruption relationship
international corruption, 245 democracy, 219
money laundering, 246 methodology and data, 219
shadow economy, 246 multiple linear regression, 220
tax avoidance, 246 Pearson correlation, 220
State-owned/family-owned banks, 157 public sector, 219
Sterile investments, 248 rule of law and responsibility, 219
Stock market investment/transactions, 25, 26 statistics and descriptive results, 220
Street crime, 1 tax cheating, 219, 220
Stronger audit and reporting standards, 61 and tax compliance, 219
Subjective well-being, 230–236 taxpayers, 219
Index 285
World Value Survey, 219 limitations, 98

Tax morality, 214 regression coefficients, 98, 101
Tax obligations, 178 tax legislation, 97
Tax payers, 87 theoretical approaches
and tax authority, 222 causality relation, 96
and type of interaction, 222 EU countries, 97
economic psychology, 177 independent variables, 97
groups, 178 indicators, 97
non-compliance, 178 mixed empirical proofs, 97
types, 233 OECD criteria, 96
Tax policies, 95 OECD study, 96
Tax pressure, 61 tax avoidance, 96
European Union countries taxation rates, 96
CEE, 88 taxation system effects, 96
classification, 87 Tax pressure/burden
fiscal freedom, 87, 90 bribery, 82
indicator, 87 definitions, 82
tax freedom mean, 88 economic and financial crime, 82
Tax pressure and corruption Laffer curve, 85–87
bribery, 88 measurement, 83, 84
practical approaches tax freedom indicator, 84, 85
bribery, 91 taxation, 82
contradiction, 93 taxes and fees paid, 83
control variables, 92, 93 Tax regulations, 195
correlation coefficients, 92, 94 Tax revenue, 84
CPI, 91 Tax wage, 85
developed countries classification, 93 Technical and information system, 60
economic growth, 91 Technical and scientific revolutions, 61
fiscal freedom, 91 Terrorism funding, 22, 113
hypothesis, 91, 92 Threat indicator, 36
institutional quality, 93, 95 Time-invariant regressor, 216
limitations, 92 Total Accruals to Total Assets (TATA), 127
multiple regression, 93 Transparency International, 8, 9, 45, 51
panel-type analysis, 93 Trust-corruption relationship, 223, 224
regression coefficients, 92, 94 Trust morale
tax freedom, 92 client-service approach, 222
tax policies, 95 and corruption, 223, 224
theoretical approaches, 88–90 police-offender type, 222
Tax pressure and money laundering power of authorities, 222
practical approaches and shadow economy, 224, 225
analysis, 99 slippery slope model, 222
Basel AML indicator, 99 tax authorities, 222
correlation coefficients, 99, 103 and tax compliance, 222
fiscal freedom, 99 trust in authorities, 222
fiscal pressure, 100
hypothesis, 99
limitations, 100 U
regression coefficients, 99, 104 Uncertainty avoidance (UAI), 181, 184, 186,
theoretical approaches, 98, 99 190, 194, 197, 201, 203
Tax pressure and shadow economy Undeclared work, 12
practical approaches Underground activities, 12
analysis, 98 Underground economy, 10
correlation coefficients, 98, 101 United Nation Organization for Fight Against
fiscal freedom, 98 Drugs and Terrorism (UNODC), 20
286 Index
United Nations Convention against Corruption VAT reimbursement, 26

(UNCAC), 161, 257, 262 Virtual currencies, 6
United Nations Convention on Corruption, Voice and responsibility (VA), 110
States Parties, 259, 260
United Nations Office on Drugs and Crime
(UNODC), 256 W
Unobserved economy, 11, 12 Watergate Scandal, 20
Unreported incomes from business, 12 White collar criminality, 1
US Securities and Exchange Commission- White-collar crimes, 3
SEC), 123 Work behaviour, 226, 232
World Economic Forum, 31, 131, 156
World Governance Indicators (WGI), 31,
V 102, 104
Value-added tax (VAT), 18 World Value Survey, 211, 215, 216, 219,
VAT evasion, 52 223, 230

Economic and Financial Crime Corruption Shadow Economy and Money Laundering by Monica Violeta Achim Sorin Nicolae Borlea (Z

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Economic and Financial Crime Corruption Shadow Economy and Money Laundering by Monica Violeta Achim Sorin Nicolae Borlea (Z

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Studies of Organized Crime 20

More information about this series at http://www.springer.com/series/6564

Economic and Financial

A valuable, accessible and up-to-date resource for academic scholars in economics,

1 Economic and Financial Crime: Theoretical and Methodological

2.1.4 Economic Development and Money Laundering ���������������� 80

3.5.2 Assessment of Happiness in the European

Monica Violeta Achim is affiliated to Babeş-Bolyai University, Faculty of

Sorin Nicolae Borlea is affiliated to two Romanian universities as follows:

Graph 1.1 Corruption in European Union countries, 2005–2015.

Graph 2.5 The fiscal freedom by geographical zones in the European

Graph 3.1 Power distance (PD) in European Union countries.

Graph 3.21 Correlation between shadow economy and

Table 1.1 Terms used to designate “another” economy than

Table 2.13 Correlation coefficients between corruption and public

Table 2.36 Correlation coefficients between money laundering

1.1 Theoretical Approaches

and based on the investigation of the criminal activities of 70 companies belonging

so they adjust to the society changes (Merton 1968). In an ever-changing society,

1.1.1.2 Concept of the Economic and Financial Crime

e­ vasion, robbery, selling of controlled substances, and abuses of economic aid

conditions, assume corruption deeds at a higher level, crimes of money launder-

1.1.1.4 Forms of the Economic and Financial Crime

wood, metal etc.; utilization of dummy companies particularly in case of com-

1.1.2 Theoretical Approaches Regarding Corruption

1.1.3 Theoretical Approaches Regarding Shadow Economy

Table 1.2 Taxonomy of shadow economy activity types

Table 1.3 Delimitation of “observed” economy from the “unobserved” one

Non-observed economy Observed economy

Deficiencies in the basic data

1.1.4 Theoretical Approaches Regarding the Tax Avoidance

identified (observed) and non-identified (non-observed), the study conducted by

(f) Escaping from the financial, fiscal, or customs controls by failure to

B. Illegal tax avoidance (tax evasion/tax fraud)

• Failure to calculate the excise duties corresponding to the modifications of the

1.1.5 Theoretical Approaches of Money Laundering

In a synthetic definition, the money laundering represents the make-up process of

• The money laundering represents the conversion or transfer of property, knowing

such property is derived from criminal activity or from an act of participation

Movement of cash from its

Purchase real The separation of illegal

Integrating illicit Material assets

Source: Own processing

Fig. 1.1 Money laundering circuit. (Source: own processing)

1.2 Measuring Instruments

1.2.1 Corruption Measurement

An important source regarding the corruption measurement is the one offered by

Fig. 1.2 Relation between

Source : authors’ s processing

1.2.2 Shadow Economy Measurement

1.2.3 Money Laundering Measurement

This indicator is based on 14 aggregated indicators collected from sources available

1.2.4 Assessing an Economic and Financial Crime Index

We propose further on a courageous and innovative endeavour to measure the vol-

Yi = Xi _ n = [ Xi − Xmin ] / [ Xmax − Xmin ] ,

Ci _ n = ( Cmax − Ci ) / ( Cmax − Cmin ) ,

Si _ n = ( Si − Smin ) / ( Smax − Smin )

Li _ n = ( Li − Lmin ) / ( Lmax − Lmin )

1.3 Practical Approaches

1.3.1 Corruption in the European Union countries

1.3.2 Shadow Economy in the European Union Countries

Table 1.4 Classification of EU countries by regions

1.3.3 Money Laundering in the European Union Countries

1 Economic and Financial Crime: Theoretical and Methodological

2.1.4 Economic Development and Money Laundering �� 80

3.5.2 Assessment of Happiness in the European

1.1 Theoretical Approaches

1.1.1.2 Concept of the Economic and Financial Crime

e vasion, robbery, selling of controlled substances, and abuses of economic aid

1.1.1.4 Forms of the Economic and Financial Crime

1.1.2 Theoretical Approaches Regarding Corruption

1.1.3 Theoretical Approaches Regarding Shadow Economy

1.1.4 Theoretical Approaches Regarding the Tax Avoidance

1.1.5 Theoretical Approaches of Money Laundering

1.2 Measuring Instruments

1.2.1 Corruption Measurement

1.2.2 Shadow Economy Measurement

1.2.3 Money Laundering Measurement

1.2.4 Assessing an Economic and Financial Crime Index

1.3 Practical Approaches

1.3.1 Corruption in the European Union countries

1.3.2 Shadow Economy in the European Union Countries

1.3.3 Money Laundering in the European Union Countries

1.4 Determinants of the Economic and Financial Crime

2.1 Economic Development

2.1.1 Concept of Economic Development and Measuring Tools

2.1.2 Economic Development and Corruption

2.1.2.2 Practical Approaches

2.1.3 Economic Development and Shadow Economy

2.1.3.1 Theoretical Approaches

2.1.3.2 Practical Approaches

2.1.4 Economic Development and Money Laundering

2.1.4.1 Theoretical Approaches

2.1.4.2 Practical Approaches

2.2 Tax Pressure

2.2.1 General Approaches Regarding the Tax Pressure

2.2.1.1 Concept of Tax Pressure and Measuring Instruments

2.2.1.2 Laffer Curve and Tax Avoidance

2.2.1.3 Tax Pressure in European Union Countries

2.2.2 Tax Pressure and Corruption

2.2.2.1 Theoretical Approaches

2.2.2.2 Practical Approaches

2.2.3 Tax Pressure and Shadow Economy

2.2.3.1 Theoretical Approaches

2.2.3.2 Practical Approaches