The Economics of Crime and Money Laundering: Does Anti-Money Laundering Policy Reduce Crime?

Joras Ferwerda 1
  • 1 Utrecht University School of Economics

Anti-money laundering policy has become a major issue in the Western world, especially in the United States after 9-11. Basically, all countries in the world are more or less forced to cooperate in the global fight against money laundering. In this paper, the criminalization of money laundering is modelled, assuming rational behavior of criminals, following the law and economics strand of the literature described as the economics of crime. The theoretical model shows that a) the probability of being caught for money laundering, b) the sentence for money laundering, c) the probability of being convicted for the predicate crime, and d) the transaction costs of money laundering are negatively related to the amount of crime. Under the assumption that these factors are all positively influenced by a stricter anti-money laundering policy, the hypothesis empirically tested in this paper is that anti-money laundering policy deters potential criminals from illegal behavior and therefore lowers the crime rate. Since the data on anti-money laundering policy used in the literature thus far is not all-embracing, a unique indicator is constructed using information from the mutual evaluation reports on money laundering of the FATF, IMF and World Bank. This unique dataset is used in an empirical estimation based on a Mundlak specification to test the effect of anti-money laundering policy on the crime rate. Among the four policy areas measured – the role of law, the institutional framework, the duties of the private sector in law enforcement, and international cooperation – the latter turned out to be the policy area that is associated with a lower crime rate. This result should be an extra incentive for countries and international organizations to continue their efforts to promote and develop international cooperation in the fight against money laundering.

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The Review of Law & Economics (RLE) is published in cooperation with the European Association of Law and Economics (EALE) and De Gruyter. The Review publishes theoretical and empirical interdisciplinary research in law and economics-related subjects. The Journal explores the various understandings that economic approaches shed on legal institutions.

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