The fight against money laundering: a public task?

The fight against money laundering and terrorist financing has shifted the traditional responsibility of security partly away from the public. Commercial entities like banks were asked to monitor their customers and report potential money launderers and terrorist financiers. This move is not illogical: the gatekeepers of the financial system might be better suited to distinguish regular from irregular financial behaviour. But the involvement of private parties has not been an undisputed success. The main problem is that these entities are serving the public good with private costs. The private parties have been pushed into compliance with threats of sentences for non-compliance. This external motivation is vulnerable to strategic behaviour. Just to prevent any claims of non-compliance, banks and other entities might start reporting way too much, eventually crippling the overall effectiveness of the policy. Without the right incentive structure for the parties involved, success cannot be guaranteed. This chapter suggests that supervisors can play an important role here, since they could have the knowledge and data required without the incentive problem.