A Pact with the Devil: When Countries Turn to Dirty Money

• In Event: Latin America in a world of high financial volatility

Abstract

At times countries that are financially constrained, for one reason or another, resort to illicit capital flows. In particular, this occurs when a licit lender (lender of last resort, or LLR) is not available to rescue a country or alleviate its financial troubles. This paper examines cases where countries allegedly have resorted to illicit capital flows to alleviate financial distress. Examples include countries severely exposed to exogenous shocks (e.g., Caribbean), countries with serious sovereign risk (e.g., Latin America in the 1980s and Argentina post 2001-2002), war-torn or failed states (e.g., Afghanistan), countries penalized by international sanctions (e.g., Iran), and finally countries with very poor or degenerating governing institutions (e.g., Venezuela). The illicit activities this study considers include money laundering (from a variety of predicated crimes), drug trafficking, and tax evasion (mainly through trade mispricing). The primary goal of this paper is to create a macro financial model that can identify recipient states of illicit capital flows.

Authors

• Monica Arruda de Almeida, Georgetown University

• Maria Elisa Farias, Universidad Diego Portales