The effects of money laundering and terrorism on capital accumulation and consumption

Pages265-271
DOIhttps://doi.org/10.1108/13685200610681788
Publication Date01 Jul 2006
AuthorRicardo Azevedo Araujo
SubjectAccounting & finance
The effects of money laundering
and terrorism on capital
accumulation and consumption
Ricardo Azevedo Araujo
Catholic University of Brasilia, Brasilia, Brazil
Abstract
Purpose – The purpose of this paper is to study the impact of terrorist actions and money laundering
on capital accumulation and consumption.
Design/methodology/approach – The paper builds a general equilibrium model that considers the
existence of two representative agents: a terrorist and a worker. It departs from a formalization of
Linn’s findings about the connection between money laundering and terrorism. His results are
confirmed and extended.
Findings – The paper shows that the combat to money laundering is an effective way of preventing
terrorist actions. Besides it is found that these actions do not affect the optimal stock of capital goods
but have a negative impact on per capita consumption.
Originality/value – The paper confirms Linn’s findings concerning money laundering and
terrorism by using a formal approach. It also extends the model in order to study the impact of money
laundering and terrorism on capital accumulation and consumption.
Keywords Money laundering,Terrorism, Capital gains, Consumption
Paper type Research paper
1. Introduction
The relationship between macroeconomic policies and crime has been studied by a
number of authors (Burdett et al., 2003). In general these studies have shown that
economic issues such as distribution of income, poverty, capital accumulation,
unemployment and business cycles have effects on crime. According to Ehrlich (1996,
p. 43) the view that crimes and capital accumulation are related is not new and can be
dated back to Adam Smith who have observed that not only crime but also the demand
for protection from crime are both motivated by the accumulation of property.
Another line of research goes into the opposite direction and studies the impact of
criminal activities, such as corruption and money laundering on economic gro wth
(Araujo and Moreira, 2005). In general these studies show that if the effects of certain
types of crime, mainly those related to rent seeking and money laundering, are not
properly dealt with then they may damage the process of economic growth. Following
this line of investigation this paper focuses on the effects of money laundering and
terrorism on macroeconomic variables such as consumption and capital accumulation.
After September 11th it became more evident that terrorist actions could affect the
macroeconomic performance of a country through a number of mechanisms that range
from changes in economic expectations to physical destruction of productive capacity.
Besides, it has been found that terrorism is financed by a number of criminal
activities such as fraud of the welfare benefit program and traffic of drugs. According
to Linn (2005, p. 201):
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
Money
laundering and
terrorism
265
Journal of Money Laundering Control
Vol. 9 No. 3, 2006
pp. 265-271
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200610681788

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