Money laundering: the unintended effects of international regulations

A new study by Fabrizio Colella, Assistant Professor at Università della Svizzera italiana, Keith E. Maskus and Alessandro Peri (University of Colorado Boulder) highlights unintended effects of anti-money-laundering (AML) regulations.

Analysing international and US data, the researchers found that stricter rules in the Caribbean tax havens reduced offshore links, but also led to an increase in money laundering in the United States itself. Criminal funds have poured into front companies with few employees and inflated revenues, as well as in real estate, where cash transactions and price distortions have increased.

Estimates suggest that the shift could result in a $14 billion increase in US business value, which is approximately 10% of the annual illegal drug market in the US. The impact has been particularly evident in counties classified as high-intensity drug-trafficking areas.

The study, published in The Economic Journal, thus shows the limits of unilateral crackdowns: strengthening controls in one country may simply shift illegal activity elsewhere. For this reason, the authors stress the importance of a coordinated international and cross-sectoral approach to combating money laundering.

Read the article in The Economic Journal