 Clean Money, High Costs?No 1422, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Abstract: A cornerstone of the law-and-finance literature is that stronger institutions reduce financial intermediation costs. Using global data on cross-border payment costs, I show this relationship can reverse in heavily regulated sectors. Anti-money laundering risks have larger cost effects in advanced economies with strong enforcement than in developing countries with weak enforcement, despite the former having lower underlying risks. This counterintuitive pattern reflects strong institutions operating through two channels: Directly reducing costs through risk mitigation and forcing risk-based pricing that eliminates cross-subsidization. The net results demonstrate that traditional studies can miss heterogeneity by not controlling for risk levels: Strong institutions benefit low-risk jurisdictions but force high-risk ones to pay higher costs for their risk profiles. Policy implications favor improving enforcement and lowering risks rather than treating these as substitutes. The findings have implications for emerging payment rails, such as regulated payment stablecoins, which face similar AML requirements. Keywords: Cross-border payments; Anti-money laundering; Institutional quality; Law enforcement; Compliance costs; Competitive forces; Risk-based pricing; Regulated payment stablecoins (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1422 Access Statistics for this paper More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC. |
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