Strategies to avoid blacklisting: The case of statistics on money laundering

Abstract

Financial and legal entities (e.g. banks, casinos, notaries etc.) have to report money laundering suspicions. Countries’ engagement in fighting money laundering is evaluated–among others–with statistics on how often these suspicions are reported. Lack of compliance can result in economically harmful blacklisting. Nevertheless, these blacklists repeatedly become empty–in what is known as the emptying blacklist paradox. We develop a principal-agent model with intermediate agents and show that non-harmonized statistics can lead to strategic reporting to avoid blacklisting, and explain the emptying blacklist paradox. We recommend the harmonization of the standards to report suspicion of money laundering.