Describing the problem: money laundering

To understand how to design possible policies in combating money laundering (ML) all around the world, we must review the economic peculiarities of this criminal phenomenon, with classic demand and supply schedules.

The demand side

In recent years, particular emphasis has been placed on the study of ML because of its central role in the development of any crime that generates revenues. The conduct of any illegal activity may be subject to a special category of transaction costs, linked to the fact that the use of the relevant revenues increases the probability of discovery of the crime and therefore incrimination. Those transaction costs can be minimised through an effective laundering action, a means of concealment that separates financial flows from their illegal origin.

Therefore, from a microeconomic point of view, ML performs a peculiar financial function, responding to the overall demand for black finance services expressed by individuals or groups that have committed income-producing crimes. The microfoundations of ML allow us to shed light on its macroeconomic effects. In fact, if at the micro level the demand should be matched by an effective supply – see below – it is possible to show that ML, in a given economy with legal and illegal sectors, can play the role of multiplier of the volume of the economic endowments that are in the hands of the illegal agents.