Journal of Finance and Bank Management

The Costs of Anti-Money Laundering Enforcements to Noncompliant Banks
Damion McIntosh

Abstract
Depository institutions’ noncompliance with their anti-money laundering (AML) legal obligations can threaten their safety and soundness, and also impair the integrity of the wider financial system. As a consequence, financial sector regulators apply formal enforcements against banks that are severely noncompliant. Although these enforcements are intended to curb and correct illegal behavior, they also pose certain costs to noncompliant banks. My findings show that noncompliant banks have significantly lower operating performance after a formal enforcement. This results from the operational costs to upgrade their AML compliance programs, and loss in profitability from ceasing the launder-facilitating activity. I also find that noncompliant banks have greater capital risk after enforcement, reasonably due to the increased demand on regulatory capital to support the operational risk exposed by noncompliance. There is no evidence that depositors discipline noncompliant banks, suggesting that bank regulators may be the only police of banks’ AML obligations. Despite the adverse effects of AML enforcements on bank earnings and capital, there is no evidence that these enforcements are related to bank failure. Collectively, declining operating performance and increasing capital risk are seemingly the only costs to noncompliant banks from formal AML enforcements.

Full Text: PDF     DOI: 10.15640/jfbm.v4n1a1