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

61 Pages Posted: 7 Nov 2018 Last revised: 1 Jun 2020

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: May 30, 2020

Abstract

We explore how anti-money laundering (AML) policies affect banks and credit provision to firms. For identification we exploit the enactment of a financial regulation in Colombia. Aimed at controlling the flow of money from drug trafficking into the financial system, we find that after implementation bank deposits in municipalities with high drug trafficking decline. This negative liquidity shock has consequences for credit in other municipalities. Banks sourcing their deposits from areas with high drug trafficking cut lending relative to other banks. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to sales, investment, and profitability. Furthermore, we use night-lights data to show that these results are not due to a reallocation of activity across firms nor between the formal and informal sectors. Our evidence uncovers a hidden to be considered when implementing AML 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 (May 30, 2020). 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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