Bank Secrecy, Illicit Money and Offshore Financial Centers
International and national institutions regularly put pressure on offshore Financial centers and their clients to enforce compliance with anti-money laundering regulations and that in spite of the existence of bank secrecy. This paper discusses the winners and losers of such policies. Surprisingly, aggregate profits and tax revenues can increase under those policies. In addition, we show that o¤shore banks can be encouraged to comply with rigorous monitoring of the investor's identity and the origin of his/her funds when the pressure creates su¢ ciently high risk of reputational harm to this investor. Nevertheless, the efficient pressure policy is dichotomous in the sense that a social planner chooses zero pressure or the pressure that just entices o¤shore banks to comply. By contrast, the imple- mentation of those pressure policies on an onshore institution may be ine¢ cient. Finally, we show that deeper financial integration fosters compliance by the offshore center while it also gives better incentives for delegated organizations to effectively induce compliance.
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