Regional externalities and direct effects of legislation against money laundering: a test on excess money balances in the five Andean countries
| Published date | 01 October 2004 |
| DOI | https://doi.org/10.1108/13685200410810056 |
| Date | 01 October 2004 |
| Pages | 347-366 |
| Author | Michele Bagella,Leonardo Becchetti,Massimo Lo Cicero |
| Subject Matter | Accounting & finance |
Regional Externalities and Direct Eects of
Legislation against Money Laundering: A Test on
Excess Money Balances in the Five Andean Countries
Michele Bagella, Leonardo Becchetti and Massimo Lo Cicero
INTRODUCTION
Money laundering
1
may generate serious costs for
the hosting countries (increased political corruption,
criminal in®ltration and crowding out of sound
®rms in the banking and in the industrial sector) as
well as negative externalities for the whole ®nancial
system.
2
For this reason, growing attention is being
paid to the role that the size of the illegal economy
and money laundering may play in the observed
asset volatility and in the recent surge in ®nancial
market instability.
3
Conventional wisdom assumes that, since money
laundering may create short-term bene®ts in terms
of higher capital in¯ows, insucient international
cooperation against money laundering creates a
typical free-riding problem. A country which adopts
a more relaxed attitude may attract an in¯ow of
regional illegal wealth to be laundered, thereby
generating severe negative externalities for their
neighbours. An eective coordination of regulation
and enforcement from neighbouring countries is
therefore fundamental to tackle this problem. This
paper tests the relevance of this hypothesis. It compares
the accomplishment of money laundering inter-
national recommendations in the Andean countries
and relates it to the existing typology of money laun-
dering techniques and to the dynamics of cash money
balances in these countries.
The paper is divided into four sections. The ®rst
section describes the methodology adopted by the
EEC-commissioned research team analysing anti-
money laundering legislation in the Andean countries.
It focuses on the cooperating relationship between the
EEC Central Research Unit (CRU) and the Local
Research Units (LRUs) in the Andean countries,
and on the reasons for the choice of the Financial
Action Task Force (FATF) 40 Recommendations
as a benchmark for the investigation. The second-
section illustrates the results of the comparative analy-
sis of anti-money laundering legislation in the ®ve
Andean Pact member states (Bolivia, Colombia,
Ecuador, Peru and Venezuela) between 1989 and
1999 emphasising dierences in FATF compliance in
time and across countries.
The third section analyses responses to a qualitative
questionnaire submitted to domestic ®nancial and
regulatory authorities. The questionnaire aimed to
identify the main money laundering channels adopted
in each country and to verify if a correspondence
exists between insucient compliance to FATF legis-
lation and the taxonomy of local money laundering
techniques.
The fourth and ®nal section tries to measure with an
econometric test the impact of the uneven FATF
compliance in the Andean countries on their excess
money balances. The methodology identi®es and
tests two dierent sources of eects: the degree of
compliance to FATF regulation per se and the individ-
ual country deviation from average regional com-
pliance as a measure of the externality eect
generated by the lack of international cooperation
against money laundering.
STRUCTURE AND METHODOLOGY OF
THE RESEARCH
The EEC-commissioned international research team
was composed of a Central Research Unit and ®ve
Local Research Units, one for each country. The
LRUs carried out ®eldwork by contacting local auth-
orities and institutions in order to collect legal and
economic information in areas and sectors involved
in the ®ght against money laundering.
4
The CRU asked each LRU to elaborate a detailed
report on the domestic legislation against money
laundering. These reports were revised by the CRU
which wrote a ®nal document on the basis of the infor-
mation contained in each country report. In a second
step of the research, the LRUs were asked to submit
a questionnaire to local ®nancial and regulatory auth-
orities for a qualitative estimation of the most import-
ant money laundering techniques adopted in each
country.
In its ®nal report the CRU developed, jointly with
Page 347
Journal of Money Laundering Control Ð Vol. 7 No. 4
Journalof Money Laundering Control
Vol.7, No. 4, 2004, pp. 347± 366
#HenryStewart Publications
ISSN1368-5201
the LRUs, a comparative analysis of the Andean
countries' anti-money laundering legislation with
respect to the exogenous benchmark represented by
the 40 Recommendations of the FATF. The com-
parison consisted of attributing a score to the relative
accomplishment for each of the recommendations
according to the greater/lesser degree of closeness of
domestic legislation to the FATF guidelines.
5
The choice of the FATF guidelines as a benchmark
is justi®ed by the characteristics of this organisation.
The FATF is an international institution which was
created in 1989 by 26 member states (belonging to
the G7 countries, to the Organisation for Economic
Co-operation and Development [OECD] and to the
European Union). It has neither a statute nor a consti-
tution and it rather operates as an informal group
based on consensus. Because of this, the 40 FATF
guidelines are not compulsory legal norms, although
the G7 mandated constitution of the group attaches
high relevance to them. These guidelines also have
`prudential, general and comprehensive' character
and are meant to be accepted by both member and
non-member countries.
6
In order to give some quantitative relevance to the
LRUs' assessment, the CRU de®ned a scale of com-
pliance with FATF recommendations which is illus-
trated in Table 1. The score covers dierent degrees
of anti-money laundering legislative eort ranging
from the absence of the norm incorporating the
FATF recommendation into domestic legislation to
the existence of an explicit regulation for its appli-
cation. Its limit, though, is the impossibility of verify-
ing the eective enforcement of the law and of the
related regulation.
COMPARATIVE RESULTS ON THE
ACCOMPLISHMENTS OF FATF
REGULATION IN THE ANDEAN
COUNTRIES
The details of country scores assigned in the year of the
inquiry (1999) for any of the 40 Recommendations are
Table 1: Scores for the evaluation of the Andean
countries accomplishment rates with the 40 FATF
Recommendations
Category Characteristics
I: insucient
(Score 0)
The norm incorporating the
FATF Recommendations into
domestic legislation does not
exist. There is no bill of law that
contemplates its creation.
L: low (Score 1) There is a bill of law that
contemplates the creation of the
norm. This should reveal the
willingness to enact the norm.
M: middle (Score 2) The norm exists but has to be
regulated in order to be
eectively applied.
H: high (Score 3) The norm exists and is
adequately regulated in the
domestic legal system.
Table 2: Synthesis of FATF accomplishment rates in the Andean countries with the 40 Recommendations
Area Bolivia Colombia Ecuador Peru Venezuela
Absolute score
General framework 8/9 8/9 9/9 8/9 9/9
Role of domestic legal systems against money laundering 12/12 11/12 9/12 12/12 12/12
Role of the ®nancial system against money laundering 52/69 64/69 53/69 41/69 68/69
Strengthening of international cooperation 24/30 26/30 25/30 20/30 20/30
All recommendations 96/120 109/120 97/120 81/120 108/120
Distance from the top score (per cent values)
General framework 11.12 11.12 0.00 11.12 0.00
Role of domestic legal systems against money laundering 0.00 8.34 25.00 0.00 0.00
Role of the ®nancial system against money laundering 24.64 7.25 23.19 40.58 1.45
Strengthening of international cooperation 20.00 13.34 16.67 33.34 33.34
All recommendations 20.00 9.17 19.17 32.50 10.00
Page 348
Bagella, Becchetti and Lo Cicero
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