The Study On The Externalities And Its Internalization In Money Laundering And Anti-money Laundering

With the development of economic globalization and liberalization, money laundering becomes more and more rampant. International organizations and governments have intensified their work on anti-money laundering. Governments in different countries have established and improved their laws and mechanisms against money laundering activities, but money laundering remains a significant problem.The existence of externality reflects an ingrained contradiction of the human society, namely the inconsistency between private decision-making and social decision-making, also the private welfare and social welfare. By applying a cost-and-benefit analysis, it will be found that money laundering offenders maximize their own profits with the costs of others', but without undertaking any cost of their own, which is typical negative externality; financial institutions'anti-money laundering activities is beneficial to others and the society as a whole, but they cannot obtain any compensation, which is typical positive externality. Negative externality would lead to the excessive money laundering, while positive externality would lead to insufficient anti-money laundering. All in all, the existence of externality would result in the deviation of individual rationality from collective rationality,which reflects money laundering's and anti-money laundering's actuality exactly. Externality causes markets to be inefficient, so the Pareto Optimum Condition would be impossible to achieve. Therefore, cooperation of various parties is needed in order to restrict the externality producers'behaviors and internalize the related external effects. It is of greater theoretical and practical significance for China, when considering its weak financial supervision, to study the externality problem in money laundering and anti-money laundering in order to eliminate the external effects, improve the counter-money laundering framework and control money laundering crimes effectively.This paper combines logic analysis with mathematical analysis to study the negative externality in money laundering and the positive externality in anti-money laundering. Based on the externality theory, it aims at summarizing the behaviors of money laundering offenders and financial institutions, and then providing a comprehensive liberalization mechanism to control externality. To begin with, this paper elaborates the externality theory and discusses the definition and measurement for externality, as well as the methods to internalize it. Then it applies a cost-and-benefit analysis to explore the principles of externality from both private and social perspectives. After that, a normative analysis of the externality of money laundering and anti-money laundering is offered from feature, model and internalization methods aspects. Finally, policy suggestions are provided regarding China's reality.