Three essays on financial regulations and remittances
Date
2022
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Publisher
University of Delaware
Abstract
In this dissertation, I study the anti-money laundering and counter-terrorism financing regulations (AML-CTF) and migrant remittances. ☐ First chapter explores the unintended consequences of Anti-money Laundering and Counter Terrorism Financing (AML-CTF) regulations on remittance services. Migrant workers predominantly use money transfer operators (MTOs) and banks to transfer money to their country of origin. However, banks are ceasing the provision of low-cost remittance services and closing MTOs’ accounts due to the strict enforcement of policies that exist to fight money laundering and financing of terrorism. Therefore, the AML policies could pose a significant challenge to the global objective of reducing remittance costs. My paper is the first to provide a rigorous causal investigation of the unintended consequences of AML/CTF enforcement on the cost and flow of remittances. Using the Remittance Price Worldwide, PwC’s KYC guide, and other supplementary datasets, my results show that AML regulations cause an increase in the total cost of remittances, with origin countries being the most affected. I also analyze the downstream effect on remittance flows and see a decrease in remittance outflows but no significant effect on inflows. The results show that AML/CTF regulations are unintentionally impacting migrant workers by eradicating safe ways to transfer money, as well as increasing transfer fees. Strict AML/CTF policies could lead to the financial exclusion of the poor and could force some of these transfers into unregulated markets. As a result, these policies could be counter-productive. ☐ Second chapter derives an applied theory model on the topic of remittances. I derive an equilibrium in the remittances market. I analyze not just the migrant’s decisions but also the decisions of the financial intermediaries. Financial intermediaries include banks and money transfer operators (MTOs). Senders maximize their own utility and the utility of the receiving households subject to the budget constraint. The comparative statics prove altruism as a motive and suggest that remittances increase with the increase in the wage of a remitter, and decrease with the increase in household income of those receiving remittances. Furthermore, migrant sends less when remitting cost increase. Remittances also increase with an increase in degree of altruism. Intermediaries take the demand for remittances from senders problem and use Cournot competition to determine the optimal volume of remittances sent. They compete on quantities and set them simultaneously. The comparative statics suggests that volume of remittances transferred by a bank or an MTO goes down when its cost increases, and volume increases when the cost of the competitor increases. There are several extensions to this model such as including remittance receivers, endogenizing migration, and allowing products to differentiate as well as cost curves. These models can guide empirical works on remittances. ☐ Third chapter focuses on the sudden increase in frequency and severity of penalties associated with money laundering and terrorism financing. Title III of Patriot Act spells out provisions of prevention, detection, and prosecution of international money laundering and terrorism financing. After the passage of Dodd-Frank Act in 2010, the number of AML penalties increased by 65 percent, with monetary value going from $161 million to more than $2.6 billion. I examine the financial burden imposed by stricter and more frequent financial crime enforcement actions that occurred after 2010 and compare that to 2001-2009 time period when the Patriot Act was initially passed. More specifically, I compare the financial performance of banking institutions located in counties inside and outside of high-risk money laundering and related financial crime areas (HIFCA). The data comes from the Statistics of Depository Institutions (SDI) by the Federal Deposit Insurance Corporation (FDIC).The results show that, after the increase in AML enforcement, institutions located in HIFCA see improved profitability as measured by return on assets and return on equity relative to the non-HIFCAs. If regulators indeed follow a risk-based approach then I would expect for HIFCA counties to experience higher burden of the high AML penalties and therefore see a decline in their financial performance. Improved profitability in the banks located inside HIFCA counties could be because those banks already had effective AML mechanisms in place. Also, the nature of fixed costs of regulations can explain how survivor banks were able to take advantage of the cost asymmetry to be more profitable.
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Keywords
AML regulations, Financial regulations, Migration, Remittances