Hiding Filthy Lucre in Plain Sight : Theory and Identification of Business-Based Money Laundering

Money laundering is the process of moving proceeds from illicit activities into the legal economy. We develop a monopolistic competition model incorporating a criminal enterprise which chooses between laundering through offshore financial investments or by acquiring legitimate establishments, called business-based money laundering (BBML). We use offshore accounts links to measure the exposure of U.S. counties to the evolution of anti-money-laundering regulations in Caribbean jurisdictions. We find that the number of business establishments grows significantly more in counties that are exposed to sharper financial scrutiny. Our theory implies that there must be greater growth in the number of BBML-established businesses. Overall, we provide the first empirical evidence of substitution between the two laundering channels