Levi & Reuter (2006) - Money Laundering: A Review of the Economics of Crime
Key Insights
- Levi and Reuter critically review the evidence for AML effectiveness, questioning whether the massive global investment in AML compliance reduces crime.
- Foundational critique of AML regime effectiveness.
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Background
By 2006, the global AML industry was already vast — and almost entirely unevaluated. Levi and Reuter, criminologists with no stake in the compliance industry, asked the uncomfortable question: does any of this reduce crime? Their review of the economics of money laundering is the foundational skeptic's text of the AML regime.
The Evidence Problem
The paper begins with measurement: laundering volumes are estimated, not measured, and the estimates have wide error bands because they build on crime-proceeds research that is itself contested. The authors show how policy figures circulate without audit — the 2-5% of GDP range being the prime example — and how the absence of reliable baselines makes effectiveness claims unverifiable.
Deep Dive
Reviewing the mechanisms through which AML could work — deterrence of launderers, detection and disruption of laundering networks, raising costs of crime — the authors find the evidence thin. The paper trail approach (STRs and financial intelligence) assumes that disrupting laundering chokes criminal finance; the review finds little empirical support for the size of the effect, while documenting the compliance burden: banks bear costs that regulators neither measure nor offset. It is careful not to claim the regime is worthless; it claims, with precision, that it is unevaluated and that its costs are certain while its benefits are asserted.
Why It Matters
This review made "effectiveness" a required word in AML policy. Every subsequent evaluation study, every FATF effectiveness assessment, and the modern evidence-based compliance movement traces back to its demand: show the mechanism, measure the outcome.
Key Takeaways
- Demand baselines: effectiveness cannot be asserted without measurement of crime outcomes.
- Costs of compliance are real and borne privately; evaluate them against evidenced benefits.
- Disruption of laundering networks is a plausible mechanism; its magnitude remains an open research question.