Measuring Reputational Harm in Money Laundering Cases

Abstract

Most countries have adopted anti-money laundering laws during the last twenty years, but growing evidence shows widespread lapses in enforcement. Accordingly, scholars seek to understand what factors lead states to enforce these laws. One argument is that countries enforce these laws to protect against the reputational harm that involvement with money laundering could cause. Specifically, scholars argue that both states and financial institutions can experience reputational harm from association with money laundering, leading to decreased foreign investment as actors move their funds to safer jurisdictions. Although this theory is widely referenced, the literature lacks a convincing test of it. To test this, I have collected a new dataset of money laundering cases based on international news coverage. At the state level, I use the synthetic control method to test for changes in countries’ foreign portfolio investment following news of major money laundering cases in Switzerland, Panama, and Denmark. For financial institutions, I use the event study method to test whether the price of a financial institution’s security decreases following news of a money laundering investigation. For both states and financial institutions, I find no evidence that news of a money laundering case causes reputational harm. Thus, my findings call into question claims that actors enforce anti-money laundering laws to protect their reputations.

Keywords: money laundering, financial institutions, reputation, international cooperation, international political economy

JEL Classification: G15, G18, G21, G28, F61, F65