Unintended Consequences of Anti-Money-Laundering Regulations

Tighter money-laundering regulations in offshore financial havens may inadvertently spur incentives to launder money domestically. Our study exploits regulations targeting financially based money laundering in Caribbean jurisdictions to examine their impact on the creation of front companies and other money-laundering (ML) practices in U.S. counties. Predictions on the effects are ambiguous: stricter regulations could either increase domestic ML through substitution or decrease it by disrupting laundering networks. We find strong evidence of substitution. Counties with prior financial exposure to these jurisdictions experience a rise in business activities after regulatory tightening. The effect is greater in sectors at high risk of ML, while firms hire fewer workers and inflate revenues. Exposed counties also see higher shares of cash-based and misvalued real-estate transactions. Our work provides the first indirect evidence of real and financial unintended effects of foreign money-laundering regulations.