Bank Secrecy, Illicit Money and Offshore Financial Centers
Pierre M. Picard
Centre de Recherche en Économie Appliquée (CREA); University of Manchester - School of Social Sciences; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Universite du Luxembourg
Patrice Pieretti
Universite du Luxembourg; Centre de Recherche en Économie Appliquée (CREA)
May 2009
Paolo Baffi Centre Research Paper No. 2009-45
Abstract:
International and national institutions regularly put pressure on offshore financial centers and their clients to enforce compliance with anti-money laundering regulations and that in spite of the existence of bank secrecy. This paper discusses the winners and losers of such policies. Surprisingly, aggregate proffits and tax revenues can increase under those policies. In addition, we show that offshore banks can be encouraged to comply with rigorous monitoring of the investor's identity and the origin of his/her funds when the pressure creates sufficiently high risk of reputational harm to this investor. Nevertheless, the effcient pressure policy is dichotomous in the sense that a social planner chooses zero pressure or the pressure that just entices offshore banks to comply. By contrast, the implementation of those pressure policies on an onshore institution may be inefficient. Finally, we show that deeper financial integration fosters compliance by the offshore center while it also gives better incentives for delegated organizations to effectively induce compliance.
Keywords: money laundering, offshore banking, compliance
JEL Classifications: F21, K42
Working Paper Series
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1411584