Strategic management, scenario analysis and competitive advantage analysis: New opportunities for anti-money laundering system reform

140 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance Strategic management, scenario analysis and competitive advantage analysis: New opportunities for anti-money laundering system reform Serhiy Lyeonov1, Yurii Bilan2, Olha Kuzmenko3, Olena Krukhmal4, László Vasa5 1 Sumy State University, Education and Research Institute of Business, Economics and Management, Economic Cybernetics Department, Ukraine, ORCID: 0000-0001-5639-3008, [email protected]; 2 Alexander Dubcek University of Trencin, Faculty of Social and Economic Relations, Slovakia, ORCID: 0000-00030268-009X, y[email protected]; 3 Sumy State University, Education and Research Institute of Business, Economics and Management, Economic Cybernetics Department, Ukraine, ORCID: 0000-0001-8520-2266, [email protected]; 4 Sumy State University, Education and Research Institute of Business, Economics and Management, Department of Fi - nancial Technologies and Entrepreneurship, Ukraine, ORCID: 0000-0001-9118-1713, [email protected]; 5 Széchenyi István University, Faculty of Economics, Hungary, ORCID: 0000-0002-3805-0244, [email protected] (corresponding author). Abstract: The article identifies and mathematically substantiates vectors of reforming the financial monitoring system based on the synergistic approach in the cross-country context by developing scenarios by selecting internal and external factors that stimulate money laundering. The key external and internal factors of the money laundering process intensification are indicated. Competitive advantages of the anti-money laundering processes, the achievement of which is possible in terms of key external and internal factors for activation of money laundering process are formed. The relationship between the key internal and external factors of money laundering intensification and competitive advantages by building a binary characteristic matrix is formed. The synergy effect made by the mutual influence of simultaneously acting internal and external factors – a quantitative feature of the further strategy of the financial monitoring system reforming in terms of cross-country analysis is calculated. An economic-mathematical model for evaluating and interpreting strategy for improving the financial monitoring system in terms of cross-country context based on integer optimization is developed. In the article, there is calculation of the number of competitive advantages received by each observed country, without considering the possible synergy effect of mutual influence of simultaneously acting internal and external factors on each other. Moreover, there is quantitative assessment of the synergy effect made by the emergence of additional competitive advantages due to a certain combination of simultaneous influence made by external and internal factors of the money laundering intensification. The “ideal” situation of the possibility of gaining all possible competitive advantages in reforming the financial monitoring system in terms of cross-country context by overcoming internal and external factors stimulating the money laundering is studied. The results of the cross-country analysis form a basis for the further formalization of the limits for quantitative evaluation of the developed strategies through a uniform distribution. Keywords: Economic growth, sustainable growth, economic development, reforming scenarios, competitive advantages, internal factors, external factors, financial monitoring, synergy effect. JEL Classification: G28, С10, С44, С49. E+M_2_2023_kniha.indb 140 24.5.2023 12:58:57 141 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance APA Style Citation: Lyeonov, S., Bilan, Y., Kuzmenko, O., Krukhmal, O., & Vasa, L. (2023). Strategic management, scenario analysis and competitive advantage analysis: New opportunities for anti-money laundering system reform. E&M Economics and Management, 26(2), 140–157. https://doi.org/10.15240/tul/001/2023-2-009 Introduction The development of economic relations, the emergence of new financial instruments, scientific and technological progress are among those factors that increase the risk of attracting cash flows to the shadow economy, create conditions for their laundering, and in some cases, find opportunities for corruption and organized crime. At the same time, the development of the financial monitoring system creates competitive advantages for developing the national economy and its sustainable growth. 1. Theoretical background Given the scientific literature, one should note that the general theoretical and practical issues of anti-money laundering and the impact of the financial monitoring system are studied in the works of many scientists. Researches in this area have different directions and reveal various aspects of the topic. Levchenko et al. (2019) investigate the risk of money laundering in developing and transition economies and the impact of the financial monitoring system on economic development. Levchenko et al. (2018) summarize the arguments and counterarguments in the scientific discussion on the main tools for the national economy de-shadowing, as well as offer theoretical and methodological principles to create the deshadowing strategy of the national economy. Lyulyov et al. (2021) identify drivers of the shadow economy in countries and substantia te the empirical relationship with the level of investment, economic growth, social and physi cal health of the population. According to Ginevicius et al. (2020a), Ginevicius et al. (2020b), Shpak et al. (2021) and Simovic (2021), the higher the level of national economic development, the lower the size of the shadow economy. The long-run analysis revealed that shadow economies negatively affected foreign direct investment inflows (Bayar et al., 2020; Bilan et al., 2020; Boyko et al., 2014). Ivanova and Kordos (2017) analyse the competitive advantages caused by the reduction of the shadow economy and the strengthening of the anti-money laundering policy. Tiutinyk and Mazurenko (2021) also study the country’s competitive advantages and determine the level of financial monitoring as an important factor in defining the favourable business environment, the level of protection of citizens’ rights, material well-being of the population. The relationship between factors of macroeconomic stability and state regulation effectiveness was studied by Roszko-Wójtowicz and Grzelak (2020). Bouchetara et al. (2020) analyse the role and tools of macroprudential policy. An important area of research is the study of the effectiveness of the different factors providing macroeconomic stability (Kobushko et al., 2021; Kohnova et al., 2019; Kosch & Szarucki, 2020; Oliinyk et al., 2019; Petroye et al., 2020; Thai et al., 2021; Tkachenko et al., 2019; Stradomska et al., 2019). An important area of research is to assess the role of the financial monitoring system for economic growth and strengthen other competitive advantages of the country (Batyk et al., 2020; Brychko et al., 2021; Glova et al., 2020; Kryvych & Goncharenko, 2020; Pakhnenko et al., 2021). Bernardelli et al. (2021) analyse the temporal stability of the relationship between institutions and economic growth and real economic convergence. Mujtaba et al. (2018) analyse the relationship between two important indices of business activity, namely: the degree of entrepreneurial activity regulation by the central system and the corruption in the country. Legenzova et al. (2019) use network analysis to assess the links of the global banking system. Country-specific factors of macroeconomic stability were studied by Telizhenko et al. (2019), Saeed and Shanan (2020), Piplica (2021), Plastun et al. (2018), Mierzejewska and Dziurski (2019), and Uddin et al. (2021). One should note that The Financial Action Task Force (FATF) (2021) carries out the evaluation of the anti-money laundering system in the country. The FATF methodology does not reflect the focus on the anti-money laundering results. Pol (2018) examines the FATF approach and notes the misuse of outcome E+M_2_2023_kniha.indb 141 24.5.2023 12:58:57 142 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance labels to outputs, as well as the methodology for assessing the anti-money laundering regime’s effectiveness. On the other hand, the positive impact of an effective anti-money laundering system contributes to overcoming the shadow economy and is manifested in the improvement of the country’s macroeconomics (Al-Tkhayneh et al., 2019; Juznik, 2021; Kuznetsova et al., 2018; Sysoyeva & Kleinschmidt, 2017; Vasilyeva et al., 2016). Competitive advantages are overcoming corruption, improving the investment climate, increasing economic activity, en suring and improving the legal environment, en suring sustainable social development, increasing the stability of the financial sector and others (Boronos et al., 2020; Chigrin & Pimonenko, 2014; Chukwu & Kasztelnik, 2021; Vasilyeva et al., 2020; Yelnikova & Barhaq, 2020). Studying approaches to assessing the effectiveness of the anti-money laundering system are represent by many scholars around the world (Andrade & Loureiro, 2020; Jarošová & Noskievičová, 2019; Kozmenko et al., 2013; Mustafa et al., 2019; Petrushenko et al., 2018; Yarovenko et al., 2021). The scientists’ worldwide experience of studying the effectiveness of complicated systems was studied to build a model that takes into account the influence of various factors (Kasych & Vochozka, 2017; Kobushko et al., 2020; Koibichuk et al., 2021; Schwab & Zahidi, 2021; Shipko et al., 2020; Skrynnyk & Vasilyeva, 2020a; Skrynnyk & Vasilyeva, 2020b; Novikov, 2021; Syniavska et al., 2019). Although many scholars around the world are studying approaches to assessing the effectiveness of the anti-money laundering system, anti-terrorist financing and the proliferation of mass destruction weapons, this question remains open in terms of the impact made by the system effectiveness on the country’s economic and social development, the possibility of obtaining positive consequences for the economy and society. We believe that the study of vectors of the financial monitoring system reform in terms of cross-country context needs special attention. Assessment of the impact made by the system’s effectiveness on the country’s economic and social development allows for determining the degree of perfection of the system and the need for its reform, which has practical implications for practitioners. Thus, the hypothesis is that there is a relationship between key internal, external factors for the intensification of anti-money laundering based on FATF assessment and competitive advantages and, in consequence of this, economic and mathematical models regarding the interpretation of strategies for reforming the financial monitoring system in terms of cross-country context may be developed. This article aims to identify and mathematically substantiate vectors of reforming the financial monitoring system based on the synergistic approach in the cross-country context by developing scenarios by selecting internal and external factors that stimulate money laundering. 2. Research methodology Modelling of the competitive strategies Integer modelling of competitive strategies as a methodological ground for forming a basis for reforming the financial monitoring system in terms of cross-country analysis using a synergy approach by overcoming internal and external factors of money laundering involves the following stages: 1 Stage. Identification of the key external and internal factors of the money laundering process intensification. The indicators of technical compliance of the financial monitoring system in the country with the FATF recommendations are taken. According to the FATF methodology, factors are united into:  Group AML/CFT Policies and coordination: R1 – Assessing risks and applying a riskbased approach; R2 – National cooperation and coordination;  Group Money laundering and confiscation: R3 – Money laundering offence; R4 – Confiscation and provisional measures;  Group Terrorist financing and financing of proliferation: R5 – Terrorist financing offence; R6 – Targeted financial sanctions related to terrorism & terrorist financing; R7 – Targeted financial sanctions related to proliferation; R8 – Non-profit organisations;  Group Preventive measures: R9 – Financial institution secrecy laws; R10 – Customer due diligence; R11 – Record keeping; R12 – Politically exposed persons; R13 – Correspondent banking; R14 – Money or value transfer services; R15 – New technologies; R16 – Wire transfers; R17 – Reliance on third parties; R18 – Internal controls and foreign branches and subsidiaries; R19 – Higher-risk countries; E+M_2_2023_kniha.indb 142 24.5.2023 12:58:57 143 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance R20 – Reporting of suspicious transactions; R21 – Tipping-off and confidentiality; R22 – DNFBPs: Customer due diligence; R23 – DNFBPs: Other measures;  Group Transparency and beneficial ownership of legal persons and arrangements: R24 – Transparency and beneficial ownership of legal persons; R25 – Transparency and beneficial ownership of legal arrangements;  Group Powers and responsibilities of competent authorities and other institutional measures: R26 – Regulation and supervision of financial institutions; R27 – Powers of supervisors; R28 – Regulation and supervision of DNFBPs; R29 – Financial intelligence units; R30 – Responsibilities of law enforcement and investigative authorities; R31 – Powers of law enforcement and investigative authorities; R32 – Cash couriers; R33 – Statistics; R34 – Guidance and feedback; R35 – Sanctions;  Group International cooperation: R36 – International instruments; R37 – Mutual legal assistance; R38 – Mutual legal assistance: freezing and confiscation; R39 – Extradition; R40 – Other forms of international cooperation. 2 Stage. Formation of competitive advantages of the anti-money laundering processes, the achievement of which is possible in terms of key external and internal factors for activation of money laundering process: KP1 – Overcoming corruption, KP2 – Improving investment climate, KP3 – Increasing economic activity – ensuring and improving the legal environment, KP5 – Ensuring sustainable social development, KP6 – Increasing the stability of the financial sector, the sources of information in terms of which are respectively: Corruption Perceptions Index (Transparency International, 2021), A Global Foreign Direct Investment Country Attractiveness Index (Riadh, 2020), Ease of Doing Business Index (World Bank, 2021), World Justice Project Rule of Law Index (World Justice Project, 2021), Economic Wellbeing Index (Kowalski & Veit, 2020). 3 Stage. It is proposed to form a sample of 42 countries based on countries that are assessed by all the above criteria. The list of countries includes: Italy, Denmark, United Kingdom, Spain, Sweden, Belgium, China, Canada, the USA, Singapore, Korea, United Arab Emirates, Ukraine, New Zeland, Australia, Botswana, Burkina-Faso, Cambodia, the Czech Republic, Dominican Republic, Ethiopia, Finland, Greece, Honduras, Hungary, Jordan, Madagascar, Mali, Mauritania, Mauritius, Mexico, Morocco, Nicaragua, Norway, Pakistan, Peru, Philippines,Russian Federation, Tunisia, Turkey, Uganda, and Uruguay. 4 Stage. Formalizing the relationship between key internal and external factors of money laundering process activation and competitive advantages by building a matrix of binary characteristics (Tab. 1). A report on progress in addressing the technical compliance deficiencies identified in the FATF assessment of their measures to combat money laundering and terrorist financing was analysed, and weaknesses that do not allow to achieve certain competitive advantages were identified to build a matrix of binary characteristics for each country. Elements in the matrix of binary characteristics of internal and external factors to activate the money laundering process, providing competitive advantages, presented in Tab. 1, are formalized in the form of the following formula: aij = [ 1, if i-factor provides j-competitive advantage 0, if i-factor does not provide j-competitive advantage (1) where: aij – binary indicator, which corresponds to the intersection of the i-factor (internal or external) regarding activation of the money laundering process and the j-competitive advantage. (2) where: Sgj – the sum of binary indicators in terms of internal and external factors to activate the money laundering process in terms of g-group; Ng – the number of external or internal factors intensifying the money laundering process in terms of g-group; Ngs – ordinal number of the indicator in total, which begins the sequential calculation of the g-group indicators. E+M_2_2023_kniha.indb 143 24.5.2023 12:58:58 144 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance 5 Stage. Development of economic and mathematical models regarding complete evaluation and interpretation of strategies for reforming the financial monitoring system in terms of cross-country context based on integer optimization. The synergy effect of mutual influence made by simultaneously acting internal and external factors is calculated to implement this stage. These are quantitative features of further strategy to reform the financial monitoring system in terms of cross-country analysis, and strategy formalization: rapid, moderately fast, slow and neutral adaptability to external factors. Quantifying the strategy to reform the financial monitoring system in terms of cross-country analysis, there is a need for some intermediate calculations – steps to summarize the binary indicators presented in Tab. 1. Step 5.1: Calculation of the number of competitive advantages received by each observed Factors intensifying the money laundering process Competitive advantages KP1 KP2 KP3 KP4 KP5 KP6 AML/CFT Policies and coordination R1 a11 a12 a13 a14 a15 a16 R2 a21 a22 a23 a24 a25 a26 Total Sg11 Sg12 Sg13 Sg14 Sg15 Sg16 Money laundering and confiscation R3 a31 a32 a33 a34 a35 a36 R4 a41 a42 a43 a44 a45 a46 Total Sg21 Sg22 Sg23 Sg24 Sg25 Sg26 Terrorist financing and financing of proliferation R5 a51 a52 a53 a54 a55 a56 ………………… R8 a81 a82 a83 a84 a85 a86 Total Sg31 Sg32 Sg33 Sg34 Sg35 Sg36 Preventive measures R9 a91 a92 a93 a94 a95 a96 ………………… R23 a231 a232 a233 a234 a235 a236 Total Sg41 Sg42 Sg43 Sg44 Sg45 Sg46 Transparency and beneficial ownership of legal persons and arrangements R24 a241 a242 a243 a244 a245 a246 R25 a251 a252 a253 a254 a255 a256 Total Sg51 Sg52 Sg53 Sg54 Sg55 Sg56 Powers and responsibilities of competent authorities and other institutional measures R26 a261 a262 a263 a264 a265 a266 ………………… R35 a351 a352 a353 a354 a355 a356 Total Sg61 Sg62 Sg63 Sg64 Sg65 Sg66 International cooperation R36 a361 a362 a363 a364 a365 a366 ………………… R40 a401 a402 a403 a404 a405 a406 Total Sg71 Sg72 Sg73 Sg74 Sg75 Sg76 Total S1S2S3S4S5S6 Source: own Tab. 1: Matrix of binary characteristics of internal and external factors for money laundering process activation, providing competitive advantages E+M_2_2023_kniha.indb 144 24.5.2023 12:58:59 145 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance country, without considering the possible synergy effect of mutual influence of simultaneously acting internal and external factors on each other as a set: Step 5.2: Quantitative assessment of the synergy effect made by the emergence of additional competitive advantages due to a certain combination of simultaneous influence made by external and internal factors of the money laundering intensification. A synergy effect occurs if the sum of binary indicators within each competitive advantage without considering the synergy effect is at least level 2; and we calculate the additional effect when exceeding level 1. We use a mathematical ratio that contains a combination of integer and a maximum of two functions to record a quantitative assessment of the synergy effect of additional competitive advantages due to a combination of simultaneous influence of both external and internal factors for money laundering activation: (4) Step 5.3: Quantitative assessment of the synergy effect regarding the emergence of additional competitive advantages by exceeding the sum of binary indicators within each competitive advantage of thresholds 10, 20 and 30: Step 5.4: The last step to form the relationship between key internal and external factors for intensification of money laundering and competitive advantages by building the matrix of binary characteristics as an integrated absolute quantitative assessment of scenarios for reforming the financial monitoring system in terms of cross-country analysis (SR) provides for an additive convolution of the above components [Formulas (1–5)] by forming the following mathematics: 6 Stage. A study of the “ideal” situation of the possibility to gain all possible competitive advantages within the financial monitoring system reforming in terms of cross-country context by overcoming internal and external factors stimulating the money laundering process. This stage is implemented by forming the maximum possible situation, characterized by the unit (3) where: Zj – binary indicator, acquiring a single value, if it is possible to obtain the j-competitive advantage by overcoming the external or internal factor for money laundering intensification, and zero level otherwise. (5) (6) E+M_2_2023_kniha.indb 145 24.5.2023 12:59:00 146 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance levels of binary values in terms of compliance of all considered internal and external factors to all potential competitive advantages (Tab. 2). Thus, given the “ideal” situation, the elements of Formula (6) acquire the following values: – the last line of Tab. 2; will have individual values; take zero values in terms of all six competitive advantages; – quantification of the synergy effect of additional competiti ve advantages due to exceeding the threshold level 2 for each group of internal Factors intensifying the money laundering process Competitive advantages KP1 KP2 KP3 KP4 KP5 KP6 AML/CFT Policies and coordination R1 111101 R2 111111 Total 222212 Money laundering and confiscation R3 100110 R4 110110 Total 210220 Terrorist financing and financing of proliferation R5 100110 … ……………… R8 111010 Total 411340 Preventive measures R9 011111 … ……………… R23 111111 Total 9 12 10 9 14 14 Transparency and beneficial ownership of legal persons and arrangements R24 101111 R25 101111 Total 202222 Powers and responsibilities of competent authorities and other institutional measures R26 000111 … ……………… R35 100101 Total 722987 International cooperation R36 111111 … ……………… R40 100110 Total 511551 Total 31 19 18 32 36 26 Source: own Tab. 2: Determining the “ideal” situation of the possibility to gain all potential competitiveadvantageswithinthefinancialmonitoringsystemreforming in terms of cross-country context by overcoming internal and external factors stimulating the money laundering process E+M_2_2023_kniha.indb 146 24.5.2023 12:59:01 147 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance and external factors separately and are: 5 (for KP1), 1 (for KP2), 2 (for KP3 and KP6), 4 (for KP4 and KP5); quantitative assessment of the synergy effect of the additional competitive advantages by exceeding the sum of binary indicators within each competitive advantage of thresholds at the levels 10, 20 and 30: takes a unit value only for KP4 and KP5, and takes a unit value only for three competitive advantages KP1, KP4, KP5. Thus, considering these quantitative values in Formula (6) in the case of an “ideal” situation, the integrated absolute quantitative assessment of scenarios to reform the financial monitoring system in terms of cross-country analysis (SR) takes the value of 197 units. 7 Stage. Calculation of integrated relative quantitative assessment (VSR) of scenarios to reform the financial monitoring system in terms of cross-country analysis by formalizing the relationship of key internal and external factors for the intensification of the money laundering process and competitive advantages. It is necessary to weigh the absolute estimate [Formula (6)] on the value SR for the “ideal” situation, i.e., 197 units: (7) 8 Stage. Qualitative interpretation of the relative quantitative assessment of strategies to reform the financial monitoring system: rapid, moderately fast, slow and neutral adaptability to external factors. The “ideal” situation of gaining all possible competitive advantages within reforming the financial monitoring system in terms of crosscountry context by overcoming internal and external factors stimulating the money laundering process is studied. The implementation of this stage involves the formalization of the maximum possible situation, characterized by the unit levels of binary values in terms of compliance of all considered internal and external factors to all potential competitive advantages. The strategy of rapid adaptability demonstrates the country’s acquisition of certain competitive advantages while achieving compliance of internal and external factors for intensifying the money laundering process with specific FATF recommendations. The strategy of neutral adaptability indicates the inconsistency of the technical features in the monitoring system with the FATF recommendations and demonstrates the lack of competitive advantage. Strategies for moderately fast and slow adaptability are intermediate. We use a uniform distribution of the possible range of values from zero to one to determine the lower and upper limits of strategies for reforming the financial monitoring system in terms of cross-country context (Tab. 3). Implementing the integer modelling of competitive strategies as a methodological ground to form a basis for reforming the financial monitoring system in terms of cross-country analysis using synergy approach by overcoming internal and external factors for money laundering, we consider the matrix of input binary values on the example of Italy (Tab. 4). Strategy Lower limit of possible values Upper limit of possible values Neutral adaptability to external factors 0.00 0.25 Slow adaptability to external factors 0.25 0.50 Moderately rapid adaptability to external factors 0.50 0.75 Rapid adaptability to external factors 0.75 1.00 Source: own Tab. 3: Qualitative interpretation of the relative quantitative assessment of strategies forreformingthefinancialmonitoringsystemintermsofcross-country context E+M_2_2023_kniha.indb 147 24.5.2023 12:59:02 148 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance Factors intensifying the money laundering process Competitive advantages KP1 KP2 KP3 KP4 KP5 KP6 R1 111101 R2 111000 R3 100110 R4 110110 R5 100100 R6 100110 R7 000010 R8 001010 R9 011111 R10 100111 R11 111011 R12 010010 R13 011000 R14 011010 R15 011011 R16 011011 R17 011111 R18 100001 R19 011000 R20 100111 R21 111010 R22 110111 R23 111110 R24 101111 R25 101111 R26 000111 R27 000111 R28 000111 R29 100111 R30 100110 R31 100110 R32 100111 R33 111001 R34 111110 R35 100101 Tab. 4: Matrix of binary characteristics of internal and external factors for activating the money laundering process, providing competitive advantages for Italy – Part 1 E+M_2_2023_kniha.indb 148 24.5.2023 12:59:02 155 2023, volume 26, issue 2, pp. 140–157, DOI: 10.15240/tul/001/2023-2-009 Finance Kosch, O., & Szarucki, M. 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