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

48 Pages Posted: 7 Nov 2018

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: March 19, 2019

Abstract

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

Slutzky, Pablo and Villamizar‐Villegas, Mauricio and Williams, Tomas, Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies (March 19, 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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