Money Laundering Regulation and Bank Compliance Costs: What Do Your Customers Know? Economics and the Italian Experience
| Published date | 01 April 2001 |
| DOI | https://doi.org/10.1108/eb027299 |
| Pages | 133-145 |
| Date | 01 April 2001 |
| Author | Donato Masciandaro,Umberto Filotto |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 5 No. 2
Money Laundering Regulation and Bank Compliance
Costs:
What Do Your Customers Know?
Economics and the Italian Experience
Donato Masciandaro and Umberto Filotto
INTRODUCTION
The objective of this paper is to illustrate the link
between the effectiveness of the anti-money launder-
ing regulations and the characteristics of the com-
pliance costs involved for banks. The work is set
out as follows. The next section describes the
economic framework, which starts with the assump-
tion that intermediaries have an advantage in terms of
information and then demonstrates, by means of a
principal-agent model, how this advantage can
produce collective gains in the war against money
laundering only if the regulations take the problem
of compliance costs into due consideration.
Based on the economic results, the following
section presents empirical evidence, comprising a
survey conducted in conjunction with an Italian
bank with branches in 11 out of Italy's 20 regions,
on how banks perceive the relationship of customers
to the obligations imposed by the anti-money
laundering regulations. The survey provides a
better understanding of the nature and extent of
compliance costs within banking operations. The
final section contains the concluding remarks.
THE ECONOMIC ANALYSIS
In our analysis, we examined the case of unaware
intermediaries, ie respectable banks, through whose
countless transactions, both deposits and withdrawals,
third parties may attempt money laundering man-
oeuvres. Money laundering manoeuvres, however,
if in fact the intermediaries are honest and above
board, can leave traces and constitute anomalies in
banking and financial accounts, for which the autho-
rities find it efficient to request the banks to
collaborate.
The more effective this collaboration, the lower the
money laundering risk will be.
While the central theme vis-a-vis corrupted inter-
mediates is one of
deterrence,
the principal effects in
terms of money laundering risk, given the existence
of anti-money laundering regulations designed to
obtain the collaboration of honest intermediaries,
the success of these regulations will depend on how
acceptable they are to those intermediaries. In this
case,
the existence of national anti-money laundering
regulations lets us overlook the individual territory of
analysis in the economic framework.
The initial hypothesis is that any form of regula-
tion tends to alter the structure of the incentives,
and thus the conduct, of the intermediaries. The
effectiveness of regulation thus depends on the ability
to influence the decision making of bank employees
in the proper direction.
The term 'acceptability', in other words, can indi-
cate an issue which is central to all banking and finan-
cial regulation, and thus for anti-money laundering:
when influencing the structures of the incentives of
intermediaries, it must avoid producing conduct on
their part which is not effective, or is even counter-
productive, in terms of the effectiveness of the regu-
lation. A decline in regulatory effectiveness results in
the growth of money laundering risk.
The possibility that the regulation generates
counterproductive effects dependent on the degree
to which it is accepted by the regulated intermediaries
is a general phenomenon, given the existence at least
of regulation-related compliance costs, ie the charges
arising from the very existence of rules and
regulations, which produce risks of avoidance.
As the cost of regulation rises, the level of its
acceptability to intermediaries declines, which
implies an alteration in the structure of incentives
and conduct, thus distorting the objectives of regula-
tion. The bottom line is that, for each regulation
system to be effective, it must possess a sufficient
level of acceptability to the regulated intermediaries.
The costs of anti-money laundering regulation must
be weighed against the gains expected from regula-
tion, so that the final net result is a decrease of
money laundering risk.
A distinction must be made, however, between
expected gains at the system level and expected
gains for the individual agents, for both the regula-
tion aimed at defining the honest intermediary as
agent and for that aimed at deterring criminal interme-
diaries.
Journal of Money Laundering Control
Vol 5 No 2, 2001.pp 133-145
© Henry Stewart Publications
ISSN 1368-5201
Page 133
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