Dirty Money: How Banks Influence Financial Crime

By Pacelli, Joseph, Janet Gao, Jan Schneemeier, and Yufeng Wu.

Bank employees face discretion in investigating and reporting money laundering activities via suspicious activity reports (SARs), a primary tool to combat financial crimes. We investigate the incentives banks face to initiate SARs and the implications for criminal activity. Our theoretical and empirical analyses document that banks with more profit-seeking pressure adopt lax reporting policies to attract criminal customers, ultimately leading to more suspicious activity reports. A structural estimation approach helps us uncover the relation between bank profitability, reporting stringency, and the demand from criminal customers. Our results also suggest an assortative matching between lax banks and criminal clientele.

Boston, MA: Harvard Business School, 2021. 61p.,