Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies
46 Pages Posted: 7 Nov 2018 Last revised: 2 Aug 2019
Date Written: July 31, 2019
We explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of a system in Colombia aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity declined after the implementation of the new AML policy. More importantly, this negative liquidity shock had consequences for credit in municipalities with little or no drug trafficking. Banks that sourced their deposits from areas with high drug trafficking activity cut lending relative to banks that sourced their deposits from other areas, negatively impacting employment and number of firms. Additionally, using a proprietary database containing data on bank-firm credit relationships, we show that small firms that relied on credit from affected banks experience a negative shock to sales, investment, and profitability. Last, we use night lights data to show that these results are not due to a reallocation of activity across firms or to a move to the informal economy. Our results shed light on a hidden cost in the fight against money laundering that should be taken into account in the implementation of these policies.
Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth
JEL Classification: K42, G18, G21
Suggested Citation: Suggested Citation