Competing for criminal money

To compete for criminal money by means of high levels of bank secrecy has been a tempting strategy for countries to attract globally mobile funds. We show in a model that this 'Seychelles strategy' can increase national output, in particular, if a country takes first movement leadership in the competition game. If all countries try to do the same, there will be a race to the bottom and a supranational authority like the Financial Action Task Force (FATF) must intervene. However, there are also some intrinsic barriers to the Seychelles strategy. Among others, criminal capital might crowd out legal capital and money laundering might increase crime. Our findings suggest that countries have created niches for money laundering. Small countries can free ride for a while, but will eventually face external sanctions and internal crime problems.