Dirty Money: How Banks Influence Financial Crime

Bank employees face discretion in investigating and reporting money laundering activities via suspicious activity reports (SARs), a primary tool to combat financial crimes. We investigate the incentives banks face to initiate SARs and the implications for criminal activity. We document that banks facing profit pressure adopt more lax compliance policies, despite facing heightened regulatory risk. These policies admit more criminal customers and lead to higher SAR volume. A structural estimation approach helps us uncover the relation between bank profitability, reporting stringency, and the demand from criminal customers. Our results also suggest an assortative matching between lax banks and criminal clientele.

Keywords: Banks; Risk-taking Incentives; Deposit Competition; Government Policy and Regulation; FinCEN; Money Laundering

JEL Classification: G21; G28; K42

Suggested Citation: Suggested Citation

Gao, Janet and Pacelli, Joseph and Schneemeier, Jan and Wu, Yufeng, Dirty Money: How Banks Influence Financial Crime (October 30, 2020). Available at SSRN: https://ssrn.com/abstract=3722342 or http://dx.doi.org/10.2139/ssrn.3722342