Drug Money and Firms: The Unintended Consequences of Anti-Money Laundering Policies
44 Pages Posted: 7 Nov 2018 Last revised: 8 Dec 2018
Date Written: December 7, 2018
In this paper, we study the unintended consequences of anti-money laundering policies. We exploit the passage of a regulation in Colombia whose objective was to limit the introduction of resources coming from illegal activities, such as drug trafficking, into the financial system. We find that deposits into banks’ branches located in municipalities with high cocaine activity decline after the regulation, evidence of its effectiveness. We show that this funding shock has consequences for credit in municipalities with no drug trafficking activities. Banks that source their deposits from areas with high cocaine activity cut lending relative to banks that source their deposits from other areas. This shock has also consequences for the real economy. We use a confidential database on bank-firm credit relationships and find that, after the regulation, small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. In addition, the regulation reduced employment growth in small firms. Our results shed light on a novel negative side effect of the fight against money laundering on the real economy.
Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth
JEL Classification: K42, G18, G21
Suggested Citation: Suggested Citation