Gravity Models of Trade-Based Money Laundering

Abstract

Several attempts have been made in the economics literature to measure money laundering. However, the adequacy of these models is difficult to assess, as money laundering takes place secretly and, hence, goes unobserved. An exception is tradebased money laundering (TBML), a special form of trade abuse that has been discovered only recently. TBML refers to criminal proceeds that are transferred around the world using fake invoices that under-or overvalue imports and exports. This article is a first attempt to test well-known prototype models proposed by Walker and Unger to predict illicit money laundering flows and to apply traditional gravity models borrowed from international trade theory. To do so, we use a dataset of Zdanowicz of TBML flows from the US to 199 countries. Our test rejects the specifications of the Walker and Unger prototype models, at least for TBML. The traditional gravity model that we present here can indeed explain TBML flows worldwide in a plausible manner. An important determinant is licit trade, the mass in which TBML is hidden. Furthermore, our results suggest that criminals use TBML in order to escape the stricter anti money laundering regulations of financial markets.

The Global Waste Trafficking and Its Correlates

“…The empirical test relies on a statistical model inspired by the gravity models commonly used in international trade studies (Greaney & Kiyota, 2020; Kabir et al, 2017; Yotov et al, 2016). Besides international trade, the gravity model has proved to be a useful framework in which to explain various illegal cross-border relations, as human trafficking (Akee et al, 2014), trade-based money laundering (Ferwerda et al, 2013; Walker & Unger, 2009), suspicious bank transfers (Cassetta et al, 2014), and firearm trafficking (Kahane, 2013). We also rely on this class of models as a workable empirical strategy to control for characteristics of both importing and exporting countries as well as for relational factors.…”

A review of money laundering literature: the state of research in key areas

“…Numerous researchers have since focused on quantifying the amount of money being laundered and how it is being laundered (Ardizzi et al, 2014, Argentiero et al, 2008, Barone and Masciandaro, 2011, Barone and Schneider, 2018, Biagioli, 2008, Ferwerda et al, 2013, Hassan and Schneider, 2016a, Hassan and Schneider, 2016b, Medina and Schneider, 2018, Schneider and Enste, 2000, Schneider, 2010, Schott, 2006, Unger, 2013, Unger and Hertog, 2012, Walker and Unger, 2009, Zdanowicz, 2004b, Zdanowicz, 2009. Researchers have used a variety of methods including the use of case studies, proxy variables and economic models.…”

“…Overall, the literature has focused on attempting to detect money laundering being undertaken through the use of real estate, international trade and high-value portable goods among others as exhibited by Figure 2. Ferwerda et al (2013), Zdanowicz (2009) and Unger (2013) directed attention towards detection of money laundering being undertaken through real estate and trade. Turner and Irwin (2018) found opportunities provided by technological innovations such as bitcoin to launder money and suggested ways to detect it.…”

Who are our owners? Exploring the ownership links of businesses to identify illicit financial flows

“…All money laundering techniques are aimed at layering, that is, putting distance between the dirty proceeds and their origin and beneficial owners (Levi, 2014). Among existing layering possibilities, the employment of legal firms as shell entities is a common modus operandi, especially when these firms are set up in countries with low corporate transparency requirements that do not offer full disclosure of corporate owners and do not guarantee cooperation and information exchange with foreign authorities (Ferwerda et al, 2013; Tax Justice Network, 2018; Van der Does de Willebois et al, 2011).…”

“…Nowadays, gravity models have become the 'workhorse of applied international economics' because they allow the characteristics of both origin and destination countries to be modelled (Eichengreen and Irwin, 1998). The empirical results obtained with the model have generally been judged as very good (Deardorff, 1998;Ferwerda et al, 2013). The gravity model is inspired by Newton's universal law of gravity, which asserts that the attraction between two objects (F) depends on the mass of those objects (m i and m j ), the inverse of their squared distance (r 2 ) and the gravitational constant (G):…”