Testing Anti-Money Laundering Laws: Evidence from Cryptocurrency Transactions

• In Event: Political Methodology Virtual Poster Session

Abstract

Money laundering creates massive international transfers of wealth and poses a significant international security risk due to its connection to organized crime and the illegal drug trade. The primary way that countries can combat money laundering -- anti-money laundering enforcement -- requires international coordination, since one country's lax enforcement enables criminals to continue laundering funds; however, one hindrance to achieving widespread international cooperation is the lack of reliable data with which to compare countries' enforcement. To address this problem, I collect a new dataset from a novel data source -- cryptocurrency transactions from over 60 cryptocurrency exchanges -- to measure cross-national enforcement of a new customer due diligence law for cryptocurrency. I use bunching estimation and instrumental variable estimation to measure how users adjust the amount of their crypto-to-fiat (government-issued) transactions to avoid a 1,000 dollar/euro threshold that triggers customer due diligence. I find significant evidence of suspicious activity (consistent with efforts to avoid due diligence screening) across exchanges, suggesting that both individuals and private sector businesses respond strategically to customer due diligence laws. I also find significant variation in cross-national levels of suspicious activity, suggesting that national laws do not serve as a good measure of how well countries address money laundering risk. Lastly, I find significant evidence of suspicious activity in exchanges in developed countries, suggesting that lax intermediary enforcement in developed countries is a major weakness in the international anti-money laundering regime.

Author

• Karen Nershi, Stanford University