Do Warnings Change Behavior? Money-laundering, Grey-listing by the FATF, and Cross-border Financial Flows

Guillermo Lagarda and Paulina Verastegui Lira

No 14581, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: Does Financial Action Task Force (FATF) grey-listing disrupt cross-border financial flows? The answer is not obvious. Grey-listing imposes no formal transaction restrictions, yet it can trigger compliance responses by financial institutions facing heightened regulatory risk and the prospect of future blacklisting. Identification is further complicated by anticipation, as firms may adjust during the evaluation process, attenuating observed changes at the time of designation. We combine banking transactions, balance-of-payments capital flows, and foreign-exchange data with complementary identification strategies to isolate the incremental impact of formal grey-listing. To address high-dimensional confounding and separate medium-run adjustments from announcement-driven dynamics, we pair Double Debiased Machine Learning estimates in a fixed-effects panel with a Regression Discontinuity in Time design that exploits the sharp publication timing of FATF decisions. Across approaches, grey-listing produces economically meaningful contractions in inflows: banking and capital inflows fall by 1.3--2.6 percent of quarterly GDP, while outflow responses are smaller and less robust. Regression discontinuity estimates corroborate these results, showing a 1.2--1.4 percentage point drop in inflows at the listing cutoff. Delisting triggers only partial recovery (40--70 percent), consistent with persistent frictions in correspondent banking relationships.

Keywords: FATF grey-listing; International Financial Regulation; Compliance; Correspondent banking (search for similar items in EconPapers)
JEL-codes: C14 F21 F36 F38 G15 (search for similar items in EconPapers)
Date: 2026-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://publications.iadb.org/publications/english ... -Financial-Flows.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:14581

DOI: 10.18235/0014029

Access Statistics for this paper

More papers in IDB Publications (Working Papers) from Inter-American Development Bank Contact information at EDIRC.
Bibliographic data for series maintained by Felipe Herrera Library ().