Transcript of Hinnerk Gnutzmann Killian McCarthy Brigitte Unger Dancing with the Devil A Micro-Theoretical Study...
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- Hinnerk Gnutzmann Killian McCarthy Brigitte Unger Dancing with
the Devil A Micro-Theoretical Study of Transnational Competition in
Money Laundering
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- Outline Policy Competition and AML Policy Sources of demand for
money laundering Incidence of social cost of laundering Focus on a
transnational setting: "Seychelles Strategy" Models of Masciandaro
and Portolano (2004) Unger and Rawlings (2005) Extension:
Competition with heterogenous cost Conclusion
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- The Case for AML Policy Crime is harmful and costly, reducing
it raises social welfare Means in a Beckerian framework Increasing
the duration of the penalty Increasing the risk of capture Reducing
the Profitability of Crime AML policy: focus on the latter two
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- AML and the Supply of Crime AML aims to prevent proceeds of
crime from being used in 'white' economy Consequences 'dirty' and
'clean' money are not perfect substitutes Criminals are willing to
pay to 'clean' their funds Adverse supply shock to criminals
Definition of ML for our purposes Service that converts 'dirty'
money to 'clean' state E.g. by masking source/destination of funds,
identity of owner
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- AML: The Transnational Dimension Unger and Rawlings (2005):
"Seychelles Strategy" Small island nations are incentivised to
lower financial transparency, and to attract the proceeds of crime.
The incidence of crime can be seperated from laundering profits
Small countries tend to get smaller shares of laundering crime
Adapt Sinn (2004) model on tax competition Core Analysis: N-country
Cournot game Identical countries Captures strategic interaction,
but not heterogeneity of social cost
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- AML: Transnational Effects II Masciandaro and Portolano (2004):
"Laxity Problem" Focus on trade-off of individual policy maker
Constant benefit per dollar laundered Costs International
reputatation Rise in crime/terrorism Incidence and severity of
international sanctions Framework: expected utility maximisation
Captures heterogeneity of countries, but not strategic
interaction
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- AML: This paper Derive demand for money laundering directly
Countries can profit from money laundering Strategic interaction
through N-country Cournot game In a transnational setting, adverse
shocks hit unequally Smaller countries less affected Capture
intutions in a simple model
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- Criminal Production Technology Without ML, criminal can recover
zero profit by assumption Profit-seeking production only takes
place if ML is possible ML is an essential input to crime
production Express this idea through a Leontief production
function: - Money Laundering as an input - "Labour" as a composite
input
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- Demand and Supply of Criminal Goods Constant Returns to Scale
Industry supply function: N countries, with world population share
s_i each Consumers' utility is quasilinear and identical Aggregate
(world) demand for crime by summation:
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- Crime and Money Laundering Policy World crime output: Direct
effect of laundering cost on crime Crime consumption in each
country proportional to population share (identical consumers)
Derived world demand for money laundering:
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- Why Compete for Criminal Money? Laundering is potentially very
profitable Funds only need to be 'relabeled' If stance in other
countries is strict, criminals have high WTP Price of Laundering:
Measure of how easily criminal and clean money can be substituted
Simplifying assumption: laundering reveneue enters SWF directly
Social cost of crime: proportional to quantity of crime Govnt only
considers social cost of domestic crime
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- Reaction Function Laundering Revenue Domestic crime cost
Reputation/ Diversion effects
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- Analogy to IO models Cournot competition with heterogenous cost
Smaller countries have lower marginal cost, produce more Q(Rest of
World) q Smaller country
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- Aggregate Crime/Money Laundering Nash Equilibrium: World Money
Laundering Output independent of size distribution in this class of
models Aggregation problem: Smaller countries launder more, but
reduce laundering by larger ones Instance of result from Varian and
Bergstrom (1984) Require "beggar-thy-neighbour" for
non-neutrality
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- Laundering: Transnational Dimension Laundering externality: too
much laundering takes place (with N>1 country) If AML policy in
one country is successful, others will increase their production
Reaction function downwards-sloping (strategic substitutes)
Aggregation Problem
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- Difficulty of AML policy Socially efficient quantity of crime
equals "cartel soluton" Difficulty of sustaining cartel under
heterogeneous cost (Scherer 1980) Co-ordination problems Small
countries have greater incentive to deviate Difficulty of
retalliation against low-cost firm (alleviated through
international sanctions)
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- Conclusion I Financial Transparency is a global public good Can
be undermined by a single country Containing criminal activity
"Lax" regulation corresponds to free-riding Need to understand the
incentives of policy- makers to be lax or strict
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- Conclusion II Incidence of crime can be separated from
laundering profits Asymmetric costs of laxness Small countries
benefit more Resembles Cournot competition with heterogeneous firms
Difficulty of sustaining co-operation Aggregation problem: Do LFRs
crowd out laundering elsewhere? Future research Other market
structures (especially Bertrand competition) Repeated game
effects