2007, Edited by Bjorn Lomborg; Chapter 3: Money Laundering
Problem addressed/Chapter authored by: Donato Masciandaro
Summary and Commentary:
Competitors, keep it clean! No blows below the belt!
ML, as the chapter calls it, is the criminal practice of engaging in financial transactions in order to conceal the identity, source, and/or destination of money, by colluding intermediaries or lax intermediaries ("honest but inefficient in protecting their integrity") in offshore financial centers (OFC's) and the banking and financial industry. It responds to the overall demand for "black" financial services expressed by individuals or groups that have committed income-producing crimes. It can act as a multiplier of illegal revenues. It is "a rather complex operation."
It is different from the financing of terrorism, which is "money dirtying."
Estimates of the amount of laundered money, globally, range from 2-32% of total world GDP. In 2005, 1.038 trillion dollars are estimated to have been laundered, from the drug trade alone. Total GDP now is something like 47T dollars, so 32 percent of that is 15.54 trillion dollars. Wow.
Masciandaro puts the estimate at 3.8T, or 9% of the world economy.
If this were like Robin Hood, or the Lottery, or maybe even Native American casinos, where the money flowed to the poor or for education or a historically disadvantaged group, maybe it wouldn't be much of a problem. And I guess we don't actually know. But the author makes the assumption that it's a public bad, taking a conservative view, and uses some research and an equation with some baseline assumptions to show that reducing the multiplier effect through anti-money-laundering regulations will result in the cost of money-laundering going up from 25% to 60%. He admits his proposal is based on the modern theory of financial regulation, not the traditional theory of regulation, in which regulatory effort can be either irrelevant or unproductive.
In short, he calculates a benefit/cost ratio of 3.16. The cost cannot exceed the total value of world banking profits, which in 2004 was 0.53 trillion US dollars.
He points out some realities: Some countries are predisposed to adopting lax regulations because the externalities of criminal activity do not affect them. The future in addressing this issue revolves around two things: Information and Incentives. There are 4 categories of actors on this issue: Bankers/the public, Criminals, Policy-makers, and Losers (those who bear the costs of black money). I'm not sure why he lumps bankers and the public together. Getting a firmer grip on the real Benefits and Costs of this issue seems necessary.
It became more of an issue after 9-11. It'll be interesting to see what happens.
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