How Money Laundering Affect Economic Development

THE N EGATIVE EFFECTS OF M ONEY LAUNDERING ON ECONOMIC D EVELOPMENT

Brent L. Bartlett International Economics Group Dewey Ballantine LLP For The Asian Development Bank Regional Technical Assistance Project No.5967 Countering Money Laundering in The Asian and Pacific Region

May 2002

Economic Research Report: The Negative Effects of Money Laundering on Economic Development By Brent L. Bartlett 1 May 2002 Summary I. II. Background The Financial Sector: Money Laundering Undermines Domestic Capital Formation A. B. C. Money laundering erodes financial institutions Money laundering weakens the financial sector's role in economic growth Anti-money-laundering reforms support financial institutions through enhanced financial prudence.

III.

The Real Sector: Money Laundering Depresses Growth A. B. C. Money laundering distorts investment and depresses productivity Money laundering facilitates corruption and crime at the expense of development Money laundering can increase the risk of macroeconomic instability

IV.

The External Sector: Money Laundering Diverts Capital Away from Development A. B. C. Outbound capital flows: facilitating illicit capital flight Inbound capital flows: depressing foreign investment Trade: distorting prices and content.

V.

Offshore Financial Centers: Money Laundering Hinders Their Development Role A. B. OFCs as an economic-development strategy Effect of money-laundering activity on OFC development

VI.

Conclusions

1

Brent L. Bartlett is an economist with Dewey Ballantine LLP.

SUMMARY

The negative economic effects of money laundering on economic development are difficult to quantify, yet it is clear that such activity damages the financial-sector institutions that are critical to economic growth, reduces productivity in the economy's real sector by diverting resources and encouraging crime and corruption, which slow economic growth, and can distort the economy's external sector—international trade and capital...