It takes two to tango: international financial regulation and offshore centres
| Pages | 311-330 |
| Date | 01 October 2003 |
| DOI | https://doi.org/10.1108/13685200310809635 |
| Published date | 01 October 2003 |
| Author | Donato Masciandaro,Alessandro Portolano |
| Subject Matter | Accounting & finance |
It Takes Two to Tango: International Financial
Regulation and Oshore Centres
Donato Masciandaro and Alessandro Portolano
A RELATIONAL APPROACH TO
MONEY LAUNDERING
The role of oshore countries in international money
laundering schemes has long attracted the attention of
policy makers. Virtually all initiatives aimed at com-
bating money laundering, both at the domestic and
international level, tackle the issue.
1
Policy makers
are mainly concerned with two sources of costs stem-
ming from money laundering. First, the possibility of
laundering proceeds of crime aects the incentive of a
potential criminal. In a world where money of illicit
origins cannot be laundered, the possibility of linking
the capital to the crime reduces the ex ante incentive
of the criminal to commit the crime in the ®rst
place. At the margin, more crimes will be committed
if money laundering is possible. From this perspec-
tive, combating money laundering is equal, in the
aggregate, to combating predicate oences. Sec-
ondly, capitals that are laundered return to the legal
®nancial sector generating serious negative eects:
competition is distorted; the allocative eciency of
the market is undermined.
2
Policy makers concentrate their attention on the
negative eects of money laundering and on the
possibility that oshore centres might facilitate the
task of criminal organisations. Concerns are raised
by regulation adopted in oshore centres, that may
greatly contribute to launder money of illicit origins.
The main product oered by oshore centres to
potential money launderers are, for example, a
strict banking secrecy regime or rules that prevent
the identi®cation of bene®cial owners of accounts.
Discussions concerning these issues, however, often
take as a given the existence of some countries that
oer ®nancial services to organised crime. In other
words, the supply of money laundering services is
treated as an exogenous variable.
This paper takes a dierent perspective. The focus
will be on features of a given country that make it
more likely to enter the market for money launder-
ing services. With this regard, the approach will
argue that tax havens are structurally dierent from
other countries. More speci®cally, it will be argued
that:
(1) the utility function of countries that favour
money laundering is positively correlated to
the existence of criminal activities abroad;
(2) the utility function of such countries is not in¯u-
enced by the negative eects of criminal activity,
ie they do not bear the negative consequences of
that criminal activity.
This approach is consistent with a previous work
3
that
empirically veri®es the following hypotheses, which
re¯ect the above mentioned analytical postulates:
(a) tax havens do not have signi®cant internal
resources to oer on international markets. The
lack of such resources pushes them to generate
income through a lax supervisory regime;
(b) tax havens have features that make them less
attractive for criminal organisations.
The empirical results are consistent with the hypoth-
eses. More speci®cally, oshore centres tend to be
small, thus being less attractive to criminal organisa-
tions; they tend to be islands, which might make con-
trol against criminal in®ltrations easier; they tend to
rely on income generated by money laundering,
even though they are not necessarily acting in
circumstances of necessity.
The authors share with the work of Masciandaro
and Castelli the view that there may be features of
a given country that will naturally push it towards
the adoption of ®nancial regulation that may in fact
facilitate money laundering. They part company in
taking a relational approach, on the assumption that
it takes two to tango: this paper treats regulation
that can aect the ease with which money of dirty
origins is laundered as a product. Within this frame-
work, the authors focus on the relationship that is
established between a given oshore country and its
customers, ie criminal organisations. This paper is
less concerned with the main product oered by
oshore to potential launderers (for example, a
strict banking regime) and more concerned with
the features of the oshore that help to support the
exchange between oshore centres and criminal
Page 311
Journal of Money Laundering Control Ð Vol. 6 No. 4
Journalof Money Laundering Control
Vol.6, No. 4, 2003, pp. 311± 330
#HenryStewart Publications
ISSN1368-5201
organisations. These features may be of various
natures. Particular attention will be paid, however,
to the institutional environment, loosely de®ned.
4
The search is for features in the legal system as well
as for speci®c rules that help to sustain the relation
that oshore and criminal organisations establish,
thus determining the ultimate success of some
oshore centres over others.
Looking at the determinants of success in the com-
petition among oshore countries, it is hoped, will
help identify which countries are actively involved
in money laundering. This might in turn allow draw-
ing a line between oshore centres that are merely
aiming at oering better quality ®nancial services
and oshore centres that aim at attracting capitals of
illicit origin, thus imposing signi®cant costs over
other countries. Grasping the factors that determine
the success of some countries in the race to the
bottom might also prove useful for policy makers
in devising the most appropriate countermeasures.
Attention is focused on countries that try to attract
proceeds of crime through the oer of ®nancial
services to criminal organisations abroad, without
addressing the broader question of the possible role
of oshore centres in generating and facilitating
international ®nancial crises.
5
The perspective here is evolutionist.
6
Some factors
may put a given country in an advantageous position
over other countries. These factors, however, need
not necessarily be the result of a conscious choice
by the country, whatever `conscious' means when
referred to a country. They need merely prove
useful, in an ex post perspective, in the competition
with other countries. The competitive advantage of
a country might also be ascribed to the accidents of
history, to geographical factors, or even to sheer
chance. For example, the language spoken in the
country might obviously play a role in the choice
made by criminal organisations. An evolutionist
approach implies that while there will be a great
degree of functional convergence, dierent countries
may choose dierent strategies to the same end.
Solutions are likely to be diverse.
At the same time, the possibility of a `conscious'
choice by a country is not excluded.
7
With this
regard, the paper makes a simplifying assumption.
A single oshore centre is often considered as a
unitary decision agent, a black box that behaves
rationally in order to maximise pro®ts through the
oer of ®nancial money laundering services. The
assumption, albeit naive, is coherent with the goal
of the paper, that is to say, an evaluation of the
dynamics of competition among oshore centres.
However, an eort will sometimes be made to shed
some light on the black box, in order to look at the
possible role of interest groups within the oshore
centre. Further research may try to write a thorough
`public choice' history of the confrontation that is
expected to take place in the political arena within
each oshore country.
The authors are indebted to a body of literature
that they deem to be strictly, although indirectly,
related to the subject matter of the research, ie the
literature on the competition for corporate charters
among the American states that compose the
Union. More speci®cally, the models developed by
authors that have tackled the issue in the `transaction
cost economics' tradition, most notably Roberta
Romano,
8
are applied.
To be sure, the situation examined here is not
directly comparable with the one examined by
American corporate law scholars. The most obvious
dierence is that competition among the 50
US states takes place under the eye of federal
authorities, namely the federal government and the
Supreme Court. Especially the latter has shown
remarkable attention to the need to reduce the
externalities produced by the states.
9
On the other
hand the results of a lively debate Ð dating back
almost 30 years Ð permit fundamental insights
even in the current context. The results of such a
strand of literature help to develop a theoretical fra-
mework of analysis whose application to the subject
with which this paper is concerned appears promis-
ing. The circumstance that competition among
states takes place in completely dierent environ-
ments Ð be it the USA, the European Union, or
the international market for money laundering ser-
vices Ð does not obliterate the idea that competition
is likely to respond to the same logic.
10
Indeed, what started out in the mid-1970s as a
purely theoretical debate,
11
evolved over the years
into a feast of empirical studies.
12
Measuring the
impact of competition on the value of listed compa-
nies allows testing the validity of the theoretical con-
clusions. Despite the sometimes mixed evidence, that
literature has gained a solid hold on the dynamics of
competition among jurisdictions. More speci®cally,
there appears to be a certain degree of consensus on
when and why competition will evolve into a race
to the bottom or to the top. Empirical research
on competition among oshore countries will be
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Masciandaro and Portolano
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