Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies

46 Pages Posted: 7 Nov 2018 Last revised: 2 Aug 2019

See all articles by Pablo Slutzky

Pablo Slutzky

University of Maryland - Robert H. Smith School of Business

Mauricio Villamizar‐Villegas

Central Bank of Colombia

Tomas Williams

George Washington University

Date Written: July 31, 2019

Abstract

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

Slutzky, Pablo and Villamizar‐Villegas, Mauricio and Williams, Tomas, Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies (July 31, 2019). Available at SSRN: https://ssrn.com/abstract=3280294 or http://dx.doi.org/10.2139/ssrn.3280294

Pablo Slutzky (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Mauricio Villamizar‐Villegas

Central Bank of Colombia ( email )

Carrera 7 No. 14-78 Piso 11
Bogotá
Colombia

Tomas Williams

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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