Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies
48 Pages Posted: 7 Nov 2018 Last revised: 23 Mar 2019
Date Written: March 19, 2019
We explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of the SARLAFT system in Colombia in 2008, 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 decline after the implementation of the new AML policy. More importantly, this negative liquidity shock has consequences for credit in municipalities with little or nil drug trafficking. Banks that source their deposits from areas with high drug trafficking activity cut lending relative to banks that source their deposits from other areas. We show that this credit shortfall negatively impacted the real economy. 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 investment, sales, size, and profitability. Additionally, we observe a reduction in employment in small firms. Our results suggest that the implementation of the AML policy had a negative effect 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