Download Crying Wolf

Előd Takáts
International Monetary Fund
A Theory of “Crying Wolf”
The Economics of
Money Laundering Enforcement
The views expressed herein are those of the author and should not be
attributed to the IMF, its Executive Board, or its management.
Roadmap
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Money laundering
Related literature
Model and Analysis
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Information Laffer curve
Empirical evidence
Policy implications
General crying wolf problem
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Money Laundering
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Definition: illicit transfer
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Predicate crimes
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Traditional
Terrorism financing
Drug dealing, tax evasion, terrorism
Importance
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Funds moved: $0.6-1.5 trillion half through US
Harm: even larger
Revenues: 5-15%
Public interest
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Bank Reporting
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Reports
1) Rule based reports (standard)
2) Discretionary reports (new problem): SAR
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SAR (Suspicious Activity Report)
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Bank expertise and judgment
“Constructive ambiguity”
Bank’s incentive to report: fines
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Fines for false negatives
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Problem: Outline
Bank
monitor
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investigation
report
Government
Transaction
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Economics
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Building blocks:
1)
2)
3)
4)
5)
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Coarse communication
Coarse incentives (fines for false negatives)
Uncertainty
Dual task: monitor and report
No ex-post state verification
Policy implications
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Optimal fines (1-3) to avoid crying wolf
Reporting fees (4)
Increased harm, lower fines (2)
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# Prosecution
Information Laffer curve
F’
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F*
F**
Fines
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# Prosecution
Information Laffer curve
Fines
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Some Evidence
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Empirical predictions:
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Fines: increase
SAR: increase
Prosecution: Humped
shaped curve
Data consistent
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Prosecution
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Further Evidence
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FinCEN (April 2005) on ‘defensive filing’:
We estimate that if current filing trends continue, the
total number of Suspicious Activity Reports filed this
year will far surpass those filed in the previous years.
…it fuels our concern that financial institutions are
becoming increasingly convinced that the key to
avoiding regulatory and criminal scrutiny under the
Banking Secrecy Act is to file more reports,
regardless of whether the conduct or transaction
identified is suspicious. …
If this trend continues, consumers of the data - law
enforcement, regulatory agencies, and intelligence
agencies - will suffer.
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Policy Implications
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Decrease fines to stop crying wolf (Prop 2)
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Introduce reporting fees (Lemma 4)
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Lower nominal fines (OCC internal memo, 2005)
Centralize prosecution (Attorneys’ Manual, 2005)
‘Safe harbor’ for sound processes
Price externality of information dilution
Or longer reports: higher cost, less coarseness
New angle on Patriot Act (Lemma 8, 9)
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Fine increase: intuitive, but wrong reaction
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Discussion: Reporting
SAR reporting in 2000
number of reports / million population
1000
900
800
700
600
500
400
300
200
100
0
Aust ra lia
Be lgium
Fra nc e
J a pa n
Ne t he rla nds
S wit z e rla nd
Unit e d
Unit e d S t a t e s
Kingdom
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Conclusion
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Contribution
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Application: auditing
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First step: money laundering enforcement
Implementable policy recommendations
General crying wolf problem
Crying wolf and material transactions
General lesson
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Information= data + filtering
Crying wolf: filtering
Information age: abundant data, needed filtering
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