Could Sticks Become Carrots? Money Laundering, Black Lists and Offshore Centres

We develop the assumption that lax financial regulation may be a strategic dependent variable for national policymakers seeking to maximize the net benefits produced by any public policy choice. Therefore, given the structural features and endowments of their own countries, policymakers may it find profitable to adopt financial regulations that attract capital of illicit origin (money laundering services) or destination (terrorism finance services), therefore choosing to be a NCCT jurisdiction. From a methodological point of view, we follow the classic intuitions of the new political economy, basing our work on three hypotheses: 1) the definition of regulatory policy is not independent, as in the conventional economics, but endogenous; 2) policy is not determined by maximizing a social welfare function but by taking into account the political cost-benefit payoff ; and 3) policymaker maximization is constrained and influenced by the structural framework, economic as well as institutional. We are also indebted to a strand of literature, usually associated with the ‘law and economics’ movement, which we deem to be strictly, though indirectly, related to the subject matter of our research, i.e. the literature on the competition in regulation. More specifically, we take the approach developed by authors that have tackled the issue in the “transaction cost economics” tradition and apply it in a novel area. The paper proceeds as follows. The second section provides a simple model to describe, through the policymaker payoff maximization, the relationships between specific country features and endowments, on the one hand, and lax financial regulations, on the other hand. Given that in the real world relatively lax regulation means a non-cooperative attitude in the international fight against money laundering, in the third section we empirically test the above theoretical relationship in the case of the NCCT jurisdictions and offshore centres. The policy consequences are discussed in the conclusive fourth section.