To Launder or Not to Launder: Modelling How the Value of Dirty Income Impacts the Marginal Deterrence of AML Policy

Abstract This paper develops a mathematical model of the criminal’s decision to launder money, in order to analyze the relationship between anti-money laundering (AML) policy and the incentive to commit crime. The model includes a measure of the value of dirty income for direct usage in consumption and investment, which is contrasted with the value of laundered money. The results demonstrate that increases in the strictness of AML policy cause criminals to shift away from laundering and towards spending dirty income directly. To the extent that dirty income provides a positive utility on the margin, deterrence effects from AML will be incomplete, as criminals are deterred from crime but not from laundering. Additionally, the value of dirty income is shown to present a confounding influence on the use of changes in money laundering volume to assess criminal welfare. These results suggest that efforts to improve AML regulations may be less effective at combating crime than previously supposed, and highlight the need for further research to understand how criminals use dirty income.