Bloody investment: misaligned incentives, money laundering and violence
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Bloody investment: misaligned incentives, money laundering and violence Vidal Romero 1,2,3 Accepted: 27 August 2020/ # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Money laundering is not a victimless crime. Under certain circumstances, it may lead to significant criminal violence. We analyze the specific case of money laundering in local economies. Criminal organizations invest dirty money in legal local businesses, which may lead to short-term improvements in the economy that benefit the population. Authorities with access to local information may (purposely) fail to report suspicious economic activities to specialized agencies in charge of money laundering because it is politically and economically convenient. The economic windfall generated from illicit money can eventually attract additional criminal organizations to the community, or may fragment the dominant criminal organization, endogenously increasing violence. The violence generated in no way compensates the previous economic growth. We develop theoretical insights on the conditions under which this mechanism exists, and empirically test its incidence and the magnitude of its effects, using Mexican municipalities as units of analysis. Keywords Money laundering . Violence . Criminal organizations . Corruption . Homicide
Introduction New and expensive office and apartment buildings that apparently surpass existing demand, exotic restaurants and bars, high-end retail stores at odds with their surroundings; these are common sights in communities ravaged by organized crime. Many know, or suspect, who the owners of these incongruous businesses are: locals whose * Vidal Romero [email protected]
1
Instituto Tecnologico Autonomo de Mexico (ITAM), Río Hondo 1, 01080 Mexico City, Mexico
2
Center for the Study of Security, Intelligence, and Governance, ITAM, Mexico City, Mexico
3
Latin America and Caribbean Centre, London School of Economics and Political Science (LSE), London WC2A 2AE, UK
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fortunes cannot be fully explained by legal means, or sometimes, criminals that blatantly operate in the open. Short-term, these investments may have some positive impact on local economies, and perversely, this incentivizes some politicians and citizens to accept the situation. Yet, it is a doomed equilibrium with multiple negative externalities, including a rise in violence related to illegal money laundering activities, and it is citizens who suffer the consequences the most. In this paper, we explain the conditions under which money laundering, at a given time, increases the likelihood of escalating criminal violence in the near future. In our explanation, we address the causal mechanism linking money laundering and violence, which considers the set of incentives that different authorities have to tolerate money laundering. The existing literature has identified the negative effects of money laundering upon corruption (Levi et al. 2007; Tupman et al. 2015), economic bubbles (Ferwerda 2013; Schneider 2004), and a
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