Gravity Models of Trade-based Money Laundering

Several attempts have been made in the economics literature to measure money
laundering. However, the adequacy of these models is difficult to assess, as money
laundering takes place secretly and, hence, goes unobserved. An exception is tradebased
money laundering (TBML), a special form of trade abuse that has been
discovered only recently. TBML refers to criminal proceeds that are transferred
around the world using fake invoices that under- or overvalue imports and exports.
This article is a first attempt to test well-known prototype models proposed by
Walker and Unger to predict illicit money laundering flows and to apply traditional
gravity models borrowed from international trade theory. To do so, we use a dataset
of Zdanowicz of TBML flows from the US to 199 countries. Our test rejects the
specifications of the Walker and Unger prototype models, at least for TBML. The
traditional gravity model that we present here can indeed explain TBML flows
worldwide in a plausible manner. An important determinant is licit trade, the mass in
which TBML is hidden. Furthermore, our results suggest that criminals use TBML in
order to escape the stricter anti money laundering regulations of financial markets.