The Risk Based Approach in the New European Anti-Money Laundering Legislation: A Law and Economics View

Abstract:     
In 2005 the European Commission has adopted the so called Third Directive on Anti-Money Laundering (AML), which was to be implemented into the national laws at the latest in December 2007. The key feature that characterizes the Third Directive is the idea that the regulatory framework should be risk-based (RBA). The aim of the regulation is to elicit a high level of outcome in terms of AML effectiveness from self-interested financial institutions (Fis) who possess private information. But how to design the role of FIs and regulators, and their relationships, in order to increase the effectiveness of the AML rules?

In this paper we analyze the problem using a principal-agent framework to describe the AML setting when a RBA is applied, focusing on incentive problems arising in a three-layer hierarchy, which includes public authorities, financial institutions, and regulators.

Number of Pages in PDF File: 24

Keywords: Money Laundering, Regulation, Risk Based Approach, EU Third Money Laundering

JEL Classification: D82, G28, K42. L51

working papers series