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CU Boulder economist Alessandro Peri finds that when authorities cracked down on offshore money laundering, criminals redirected that money into domestic businesses and properties

Economists traditionally focus on economic indicators such as growth, inflation and trade—not on organized crime. Yet a recent�� co-authored by��Alessandro Peri, an economist and associate professor in the �Թ��� of Colorado Boulder Department of Economics, dives deep into the economics of money laundering, exploring how international regulations meant to tamp down the practice in one part of the world can inadvertently cause it to take hold in different areas and in different ways.

Peri says his interest in money laundering was sparked in 2018 after attending a presentation on the topic. He also notes that his interest in the phenomenon of riciclaggio di denaro—Italian for money laundering—was partly shaped by his father, who worked for Guarda di Finanza, the Italian tax enforcement agency tasked with fighting financial crimes.

“I have always been fascinated by the phenomenon,” says Peri, whose research focuses on the macroeconomic implications of economic policy and legislative changes. “Specifically, on the process through which illicit profits—from drugs, counterfeit goods or other illegal activities—find their way into legitimate businesses and the real economy.”

CU Boulder economist Alessandro Peri and his research colleagues find that international regulations meant to tamp down money laundering in one part of the world can inadvertently cause it to take hold in different areas and in different ways.

To understand money laundering, Peri says it’s important to grasp its purpose. Criminal enterprises—from drug cartels to counterfeit goods networks—generate mountains of “dirty” cash that needs to find its way into the legitimate economy. Traditionally, banks were the preferred channel to make “dirty” money look “clean.”

In their research, Peri and his co-authors take a step further and explore the question: What happens when governments make it harder for criminals to hide illegal money in offshore banks? The answer, they discovered, is that criminals don’t stop laundering money. They often just switch to other methods and re-channel dirty funds from offshore financial account to domestic activities (such as local businesses) in the United States, a process they call “money laundering leakage.”

“If you target only one channel, the money leaks into others,” Peri explains. “It’s like squeezing a balloon.”

Tightening regulations

To address this question, the authors focused on a tightening in anti-money-laundering regulations that in 2009 involved Caribbean nations, historically considered havens for both tax evasion and money laundering. Peri says both of those activities exploit weak oversight, but their economic impacts differ, as stricter tax enforcement may reduce domestic investment, given that firms can no longer save on taxes, whereas tighter laundering controls can cause criminals to look for new domestic channels to “clean” their illicit gains.

Facing international pressure, Peri says Caribbean countries formed the Caribbean Financial Action Task Force, and from 2008 to 2015 underwent a mutual evaluation process aimed at curbing money laundering activities by strengthening oversight of financial institutions and enforcing compliance across jurisdictions.

“Passing laws is not enough. Enforcement of the law is just as important, and over time these countries did a really good job of that,” Peri says. As a result, laundering operations via financial havens became more difficult and expensive.

At the same time, Peri and his co-authors document how that action resulted in unintended consequences, by providing indirect evidence of a re-channeling of these offshore laundering operations into the United States.

Measuring the impact

How do you study an activity designed to be invisible?

Peri’s team employed some creative methods, including using information uncovered by investigative journalists in the��—which documented financial linkages between U.S. localities and Caribbean jurisdictions—to determine which counties had stronger exposure to the regulatory changes happening in the Caribbean jurisdictions.

The researchers then used county-level data from U.S. Bureau of Labor Statistics from 2004 to 2015 to look at patterns in business activities. In U.S. counties with stronger financial connections to Caribbean jurisdictions, Peri and his co-authors were able to determine that there was a measurable uptick in business establishments—particularly small, cash-intensive firms. Peri says such businesses often exhibit telltale signs of “front companies”: few employees, unusual revenue patterns and operations in cash-intensive businesses such as liquor stores, laundromats, florists, restaurants and car dealerships.

Additionally, Peri says he and his colleagues found that cash-based real estate purchases increased—another common way criminals use to clean illegal money. “Someone seeking to clean criminal proceeds may purchase a home and quickly resell,” he says.

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“If a crook were to launder money, they wouldn’t buy a multi-million-dollar company (like Apple), as they would get detected. They’d buy a car wash, which makes it much less likely to get audited,” says CU Boulder researcher Alessandro Peri about money laundering. (Photo: Jason Leung/Unsplash)

“This started as a theory paper, but in the end, we were able to provide some indirect evidence of how offshore AML (anti-money laundering) efforts impacted money laundering (in the U.S.) and its impact on local economies,” he says.

Notably, the evidence suggests a more pronounced increase in the use of front companies in high-intensity drug-trafficking areas, suggesting a link between local illicit economies and laundering demand, Peri says.

Ultimately, laundering decisions hinge on a cost-benefit analysis, Peri says, as criminals weigh the risk of detection against the need to legitimize funds.

“If a crook were to launder money, they wouldn’t buy a multi-million-dollar company (like Apple), as they would get detected,” he says. “They’d buy a car wash, which makes it much less likely to get audited.”

He says the smartest operations focus on diversification—buying a handful of businesses across sectors and locations rather than concentrating their operations in one sector.

“Hypothetically, if they went out and bought every restaurant in Boulder, they would probably get detected and audited,” Peri explains. “But if they buy just a few restaurants, as well as some florists and auto dealerships to diversify their operations, it likely reduces their risk of getting caught. That’s what we believe is at the heart of this process of diversification.”

The scale of the challenge

In pop culture, money laundering is portrayed as a shadowy process involving suitcases full of cash and offshore accounts. From Scarface��to Breaking Bad, the trope is familiar: illicit profits transformed into legitimate wealth through clever schemes.

Peri says those cinematic dramas don’t do justice to how sophisticated modern money laundering schemes have become or the scope of such operations today. The United Nations Office on Drugs and Crime estimates that money laundering is a trillion-dollar problem, accounting for nearly 5% of global gross domestic product (GDP) annually. That’s roughly equivalent to the entire economic output of Germany, he notes.

What’s more, Peri says money laundering isn’t just a criminal issue—it’s an economic one. He says that by injecting illicit funds into legitimate markets, money laundering can distort local markets, misallocate resources and crowd out legitimate firms. For example, when illicit funds flood into real estate, housing prices can soar, pricing out ordinary families.

“Are these firms creating jobs? Yes,” he notes. “But at what cost to the local economies? The answer is unclear and requires further research.”

The scope of the challenge is daunting, Peri says, and the field of money laundering is evolving. In addition to traditional channels for cleaning currency, he says he believes criminal organizations engaged in money laundering are now purchasing cryptocurrencies like Bitcoin and engaging in complex trading schemes that can add layers of opacity to their operations.

“We just scratched the surface,” he says of what his research uncovered. “There are always new methods.”

A call for vigilance

What should governments do about money laundering?

Peri’s paper stops short of prescribing detailed enforcement strategies, but he says his research does underscore two imperatives. First, domestic agencies including financial regulators, tax authorities and law enforcement must collaborate, and international agencies must harmonize standards. Second, Peri says targeting one channel is insufficient, so efforts must span financial systems, real estate and emerging technologies such as cryptocurrencies.

Peri draws an analogy to climate policy, which is also a research focus of his. Just as carbon emissions shift to countries with lax regulations, he says dirty money flows to jurisdictions—or sectors—where oversight is weakest.

“Partial measures create leakage,” he warns. “To be effective, enforcement must be coordinated across financial and non-financial channels, and across borders.”

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