No Country for Dirty Money? The Economic Footprint of Anti-Money Laundering Standards
Abstract
We provide the first comprehensive causal analysis of the economic footprint of international anti-money laundering (AML) standards. Leveraging the staggered timing of Financial Action Task Force (FATF) mutual evaluations as an exogenous shock, we find that strengthening AML policies has a mixed impact on international economic activity. While bilateral cross-border trade declines by 4% on average, this adverse effect is substantially reduced for countries whose AML policies become more harmonized with their trading partners. Furthermore, we find that these policies result in an 8% increase in foreign direct investments. FATF assessments also significantly increase the detection of money laundering cases by 31% but show no measurable impact on other illegal activities like drug trafficking, human trafficking, or fraud. Our findings highlight the tradeoff faced by anti-money laundering policies, and the benefits of coordinating global efforts to combat money laundering in order to minimize the associated costs AML compliance.