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

44 Pages Posted: 7 Nov 2018 Last revised: 8 Dec 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: December 7, 2018

Abstract

In this paper, we study the unintended consequences of anti-money laundering policies. We exploit the passage of a regulation in Colombia whose objective was to limit the introduction of resources coming from illegal activities, such as drug trafficking, into the financial system. We find that deposits into banks’ branches located in municipalities with high cocaine activity decline after the regulation, evidence of its effectiveness. We show that this funding shock has consequences for credit in municipalities with no drug trafficking activities. Banks that source their deposits from areas with high cocaine activity cut lending relative to banks that source their deposits from other areas. This shock has also consequences for the real economy. We use a confidential database on bank-firm credit relationships and find that, after the regulation, small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. In addition, the regulation reduced employment growth in small firms. Our results shed light on a novel negative side effect of the fight against money laundering 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 Firms: The Unintended Consequences of Anti-Money Laundering Policies (December 7, 2018). 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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