Assessing the efficiency of the anti‐money laundering regulation: an incentive‐based approach
| Published date | 04 January 2008 |
| Pages | 67-75 |
| Date | 04 January 2008 |
| DOI | https://doi.org/10.1108/13685200810844505 |
| Author | Ricardo Azevedo Araujo |
Assessing the efficiency of the
anti-money laundering regulation:
an incentive-based approach
Ricardo Azevedo Araujo
Catholic University of Brasilia, Brazil
Abstract
Purpose – To assess the efficiency of the anti-money laundering regulation by using an
incentive-based approach.
Design/methodology/approach – It is designed a mechanism in which competent authority is the
principal and the financial institutions are the agents.
Findings – The analysis shows that despite the efforts of the authorities to combat money
laundering the efficiency of an incentive-based approach has been damaged by the existence of hidden
information related to the ability or willingness of banks to cope with money-laundering prevention.
Research limitations/implications – The contract approach adopted to assess the efficiency of
the regulation may highlight the efficiency properties of international schemes of combat against
money laundering. But, it is subject to limitations related to the hidden information.
Practical implications – This is a theoretical result that points out to the necessity of creating
financial intelligence units in order to concentrated the efforts of collecting information about the
willingness or ability of banks to cope with money laundering prevention.
Originality/value – The paper presents an attempt to apply an incentive theoretic approach to
evaluate the efficiency of a scheme of combating money laundering. Besides, it reveals the fragile
connections in the framework to combat money laundering.
Keywords Money laundering,Regulation
Paper type Research paper
1. Introduction
There is a consensus in the literature that financial institutions play a central role in
modern economies, by providing the necessary links to economic growth and stability
(Dewatripont and Tirole, 1994). Owing to the importance of the financial health of
banks, there is a worldwide consensus that financial institutions should be regulate d.
However, the focus of the regulation efforts is beyond the conventional solvency issue
since banks have been one of the most important channels of money laundering in the
last decades.
This issue cannot be ignored since the activities of money laundering can undermine
the health of the financial system through the erosion of credibility, which is a
fundamental concept in the modern financial economy. Besides, the money-laundering
activities has been widely used to finance illicit activities such as terrorism, traffic and
production of drugs. In this vein financial institutions play a central role in the war
against money laundering (Masciandaro, 2005). Recommendation 16 of FAFT requires
that “[i]f financial institutions suspect that funds are connected to criminal activity, they
should be permitted or required to report promptly their suspicious to the competent
authorities.” A great deal of confiscation of proceeds from illegal activities departs from
reports of suspicious activity by financial institutions and further investigations carried
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
Anti-money
laundering
regulation
67
Journal of Money Laundering Control
Vol. 11 No. 1, 2008
pp. 67-75
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200810844505
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