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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
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Law and Economics.

    Volume (Year): 30 (2010)
    Issue (Month): 3 (September)
    Pages: 244-252

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    Handle: RePEc:eee:irlaec:v:30:y:2010:i:3:p:244-252

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    Web page: http://www.elsevier.com/locate/irle

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    Keywords: Money laundering Policy competition Systems competition;

    References

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    1. Hans-Werner Sinn, 2002. "The New Systems Competition," NBER Working Papers 8747, National Bureau of Economic Research, Inc.
    2. Amedeo Argentiero & Michele Bagella & Francesco Busato, 2008. "Money laundering in a two sector model: using theory for measurement," CEIS Research Paper 128, Tor Vergata University, CEIS, revised 09 Sep 2008.
    3. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Tacit Collusion," IDEI Working Papers 186, Institut d'Économie Industrielle (IDEI), Toulouse.
    4. Edwin M. Truman & Peter Reuter, 2004. "Chasing Dirty Money: The Fight Against Anti-Money Laundering," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 381.
    5. Donato Masciandaro, 2005. "False and Reluctant Friends? National Money Laundering Regulation, International Compliance and Non-Cooperative Countries," European Journal of Law and Economics, Springer, vol. 20(1), pages 17-30, July.
    6. Ehrlich, Isaac, 1973. "Participation in Illegitimate Activities: A Theoretical and Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 521-65, May-June.
    7. Baumol, William J., 1996. "Entrepreneurship: Productive, unproductive, and destructive," Journal of Business Venturing, Elsevier, vol. 11(1), pages 3-22, January.
    8. Brigitte Unger & Gregory Rawlings, 2008. "Competing for criminal money," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 10(3), pages 331-352.
    9. B. Unger & J. Ferwerda, 2008. "Regulating Money Laundering and Tax Havens: The Role of Blacklisting," Working Papers 08-12, Utrecht School of Economics.
    10. Anderson, David A, 1999. "The Aggregate Burden of Crime," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 611-42, October.
    11. Daron Acemoglu, 1993. "Reward Structures and the Allocation of Talent," CEP Discussion Papers dp0143, Centre for Economic Performance, LSE.
    12. Elöd Takáts, 2007. "A Theory of "Crying Wolf"," IMF Working Papers 07/81, International Monetary Fund.
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    Cited by:
    1. repec:idb:brikps:81941 is not listed on IDEAS
    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.

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