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Dancing with the devil: Country size and the incentive to tolerate money laundering

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  • Gnutzmann, Hinnerk
  • McCarthy, Killian J.
  • Unger, Brigitte

Abstract

The incidence of money laundering, and the zeal with which international anti-money laundering (AML) policy is pursued, varies significantly from country to country, region to region. There are, however, quite substantial social costs associated with a policy of toleration, and this begs the question as to why such a variance should exist. In this paper we claim that, due to the globalisation of crime, if a single country should break the "chain of accountability", then it will provide a safe haven for criminals and attract the total financial proceeds of crime. Because smaller economies are best able to insulate themselves from the costs of crime, we argue that smaller countries bear only a tiny share of the total costs relative to the potential benefits of investment that money laundering offers, and so have a higher incentive to tolerate the practice compared to their larger neighbours. As such, we claim that the existence of a money laundering market is due to a policy of AML 'defection', and that the degree of 'defection' depends largely on the size of the country. We present a simple model of policy competition which formalises this intuition, and conclude by exploring a number of policy recommendations which flow from this.

Suggested Citation

  • Gnutzmann, Hinnerk & McCarthy, Killian J. & Unger, Brigitte, 2010. "Dancing with the devil: Country size and the incentive to tolerate money laundering," International Review of Law and Economics, Elsevier, vol. 30(3), pages 244-252, September.
    • Handle: RePEc:eee:irlaec:v:30:y:2010:i:3:p:244-252
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    Cited by:

    1. Roberto Dell’Anno & Majid Maddah, 2023. "Money laundering, corruption and socioeconomic development in Iran: an analysis by structural equation modeling," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 70(3), pages 395-417, September.
    2. Schwarz, Peter, 2011. "Money launderers and tax havens: Two sides of the same coin?," International Review of Law and Economics, Elsevier, vol. 31(1), pages 37-47, March.
    3. Joras Ferwerda & Ioana Sorina Deleanu & Brigitte Unger, 2019. "Strategies to avoid blacklisting: The case of statistics on money laundering," PLOS ONE, Public Library of Science, vol. 14(6), pages 1-13, June.
    4. Emma Galli & Ilde Rizzo & Carla Scaglioni, 2020. "Is transparency spatially determined? An empirical test for Italian municipalities," Applied Economics, Taylor & Francis Journals, vol. 52(58), pages 6372-6385, December.
    5. Olga Balakina & Angelo D’Andrea & Donato Masciandaro, 2017. "Bank secrecy in offshore centres and capital flows: Does blacklisting matter?," Review of Financial Economics, John Wiley & Sons, vol. 32(1), pages 30-57, January.
    6. Carmela D’Avino, 2023. "Money laundering and AML regulatory and judicial system regimes: investigation of FinCEN files," European Journal of Law and Economics, Springer, vol. 55(2), pages 195-223, April.
    7. Brigitte Unger, 2013. "Introduction," Chapters, in: Brigitte Unger & Daan van der Linde (ed.), Research Handbook on Money Laundering, chapter 1, pages 3-16, Edward Elgar Publishing.
    8. repec:idb:brikps:81941 is not listed on IDEAS
    9. Viktoriya Gonchar & Oleksandr Kalinin & Olena Khadzhynova & Killian J. McCarthy, 2022. "False Friends? On the Effect of Bureaucracy, Informality, Corruption and Conflict in Ukraine on Foreign and Domestic Acquisitions," JRFM, MDPI, vol. 15(4), pages 1-14, April.
    10. Gullo, Valentina & Montalbano, Pierluigi, 2022. "Financial transparency and anomalous portfolio investment flows: A gravity analysis," Journal of International Money and Finance, Elsevier, vol. 128(C).
    11. McCarthy, Killian J. & van Santen, Peter & Fiedler, Ingo, 2015. "Modeling the money launderer: Microtheoretical arguments on anti-money laundering policy," International Review of Law and Economics, Elsevier, vol. 43(C), pages 148-155.
    12. Valentina Gullo & Pierluigi Montalbano, 2018. "Where does “dirty” money go? A gravity analysis," Working Papers 5/18, Sapienza University of Rome, DISS.

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