Effects of money laundering on the economy and banks

On 13 February 2018, the US Treasury's Financial Crimes Enforcement Network (FinCEN) found that ABLV Bank of Latvia "has institutionalized money laundering as a pillar of the bank's business practices" and proposed, under Section 311 of the USA PATRIOT Act, to bar it from US correspondent accounts.

The bank then faced "an abrupt wave of withdrawal of deposits and a lack of access to US dollar funding", in the European Central Bank's words, and could no longer pay in dollars.

On 23 February, the ECB declared ABLV failing or likely to fail; its release of 24 February added that the bank would be wound up under Latvian law.

FinCEN's finding described corruption and asset stripping proceeds moved through shell company accounts, a route listed among the methods and typologies of money laundering. A failed bank is one effect of money laundering; the others reach tax revenue, prices, investment and whole countries.

What are the effects of money laundering?

Money laundering turns criminal profit into money that can be spent, saved and invested in the open. UNODC's study of October 2011 found that "the most severe consequence of criminal funds is the further perpetuation and promotion of criminal activities."

The effects fall into five groups:

• Economy: lost tax revenue, honest firms undercut by front companies, distorted asset prices, unexplained swings in money demand and capital flows, and weaker investment and growth.
• Financial system: risks to the soundness of banks, deposit runs, lost access to correspondent banks and dollar funding, and criminal money mixed into legal transactions.
• Firms: a damaged reputation, complicity with the criminals who use them, penalties and, at the extreme, closure.
• Countries: grey listing by the FATF and the loss of foreign capital that follows it.
• Society: more crime, paid for by the last round, and organized crime that buys influence through investment and bribes.

A common exam question asks which option is not an adverse impact of money laundering on an economy. Faster growth, steadier exchange rates and stronger banks are the reverse of the effects above, so none of them belongs on the list.

How does money laundering affect the economy?

Table 1. Effects of money laundering on the economy, with the evidence (as of November 2026)

In an address to the FATF plenary on 10 February 1998, the IMF's managing director pointed out that money which has evaded tax must be disguised, and that laundered money must be kept from the tax authorities. Tax evasion and laundering travel together for that reason. In India the same untaxed income is often called black money, and tax fraud is the offense behind it.

Front companies show the effect on private business. UNODC warns that criminal funds invested in the legal economy can cause "distortions of the resource allocation" and the "crowding out" of licit sectors. Picture a restaurant (illustrative) funded with drug cash. It can charge less than the one next door, because its owners need receipts that explain the cash more than they need a profit.

On house prices, British Columbia's expert panel estimated in March 2019 that real estate money laundering had lifted prices in the province by 3.7 to 7.5 percent. The Cullen Commission's final report of June 2022 stopped short of calling laundering a significant cause of unaffordable housing.

The FATF's FAQ lists "inexplicable changes in money demand, prudential risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flows and exchange rates" among the consequences of unchecked laundering, the same channels the IMF named in 1998. For a central bank, money that moves for concealment makes money demand harder to read.

UNODC adds that these problems, together with damage to the reputation of local institutions, "can hamper investment and economic growth". An IMF working paper of June 1996 had already examined the channels through which laundering affects macroeconomic performance, with policy implications for exchange controls, bank supervision and tax evasion.

How much money is laundered, and why does nobody know exactly?

Nobody counts laundered money, because it is built to stay hidden. Each published number is an estimate, and the three most cited answer different questions.

• 2 to 5 percent of global GDP. The IMF's managing director offered this as a probable consensus range in the 1998 address. UNODC's money laundering page still gives it, as $800 billion to $2 trillion, and carries no year.
• US$1.6 trillion in 2009. UNODC's study of illicit financial flows estimated that about 2.7 percent of global GDP (2.1 to 4 percent) was available for laundering that year. It placed the best estimates at the lower end of the 1998 range and noted that counting tax and customs laundering would move results toward, and perhaps past, the upper end.
• Only a small share is recovered. The same study found that less than 1 percent, probably around 0.2 percent, of the crime proceeds that pass through the financial system ends up seized and frozen. Europol's 2016 asset recovery survey found 98.9 percent of estimated criminal profits in the EU left unconfiscated in 2010 to 2014: 2.2 percent was provisionally seized or frozen and 1.1 percent finally confiscated.

Yearly "losses" to financial crime that vendors publish come from their own surveys and models and measure something other than the amount laundered. No source measures the volume laundered in each country, which is why the ranking of money laundering countries scores risk instead.

What is the impact of money laundering on banks and the financial system?

ABLV is the extreme case. The ECB described it as Latvia's third largest lender, with EUR 2.67 billion in deposits and EUR 3.63 billion in assets at the end of the third quarter of 2017. After the run it lacked the funds to withstand outflows before the deposit guarantee fund could pay out. On the ECB's instruction, Latvia's Financial and Capital Markets Commission imposed a moratorium. The Single Resolution Board found resolution not in the public interest, and eligible deposits were protected up to €100,000.

The damage ran through four channels, and each reaches banks far from Riga:

• Integrity. The FATF calls a reputation for integrity "one of the most valuable assets of a financial institution". A bank that processes criminal funds easily "could be drawn into active complicity with criminals and become part of the criminal network itself".
• Funding. Deposits can leave as soon as a finding is public. ABLV's left within days.
• Correspondent access. A bank that loses its correspondent banking relationships cannot pay in dollars, which is exactly what the ECB said ABLV could no longer do.
• Soundness. The prudential risk the FATF lists follows from the first three, since deposits that can leave in days make a balance sheet fragile. Contamination, the FATF's other banking channel, means clean payments pass through the same accounts as criminal ones, so the bank's legal business carries the taint of what it failed to see.

Integrity and contamination risk show up first in a bank's own customer files, as a screening hit, an odd payment pattern or a risk rating that no longer fits. complead, formerly Sanction Scanner, puts screening, transaction monitoring, onboarding, fraud checks and investigations on one shared engine in its compliance platform, and each customer gets a single risk score from all of them.

The bank cases among the biggest money laundering scandals, from HSBC to TD Bank, ended in forfeitures and penalties. ABLV ended in a failing or likely to fail decision ten days after a US finding.

What happens to a country when the FATF grey lists it?

The FATF's grey list publicly names countries with strategic deficiencies in their AML and counter terrorist financing regimes. Listing costs money. An IMF working paper of May 2021 estimated that a country's capital inflows fall by 7.6 percent of GDP on average when it is grey listed, a reduction its abstract calls "large and statistically significant". The paper gives its authors' views, not the IMF's.

The FATF's FAQ gives the investor's side. It notes "a damping effect on foreign direct investment" when a country's business and financial sectors are seen to be under the control and influence of organized crime, and it names economies with growing or developing financial centers and weak controls as particularly vulnerable.

The list moves. In its statement of 30 October 2026, the FATF took four jurisdictions off increased monitoring: Monaco, the Democratic Republic of the Congo, Côte d'Ivoire and Bulgaria. The statement lists no new jurisdiction.

The same statement says enhanced due diligence is not called for on jurisdictions under increased monitoring, and that the FATF Standards "do not envisage derisking". A bank that cuts off a whole country turns a listing into the derisking the FATF warns against.

How does money laundering harm society?

On 3 September 2026 the FATF reported schemes that laundered more than EUR 500 million through underground banking and hawala within a few months, and that over 80 percent of the jurisdictions that reported name these systems among the main channels of professional laundering. It described the trade as professional "money laundering as a service".

Criminals who can buy laundering keep more of what they take. The FATF's FAQ states the consequence: "Laundering enables criminal activity to continue." Profit that survives pays for the next offense.

The same FAQ warns that organized crime can infiltrate financial institutions, take over large sectors of the economy by investing in them, and bribe public officials and even governments.

The cost lands on fraud victims whose money moves on, on taxpayers who make up the lost revenue and on businesses priced out by front companies.

What do these effects mean for your firm's checks?

Each effect above leaves its first traces in a firm's own files. These checks look for them:

1. Screen customers, their owners and counterparties for sanctions, PEP status and adverse media. Why: organized crime enters through owners and officials, and FinCEN found that ABLV had facilitated transactions for corrupt politically exposed persons.
2. Monitor payments with transaction monitoring rules built on the typologies of your sector. Why: the shell company flows in FinCEN's finding moved as payments, and payments are what monitoring reads.
3. Rescore country risk after each FATF statement and feed the change into your country risk rating. Why: the FATF asks for a risk based approach, so a country removed in October 2026 needs a fresh score.
4. Review correspondent relationships: ask each respondent bank how it screens and monitors, and whether other banks pay through its account with you. Why: correspondent access is the channel through which a finding against one bank reaches everyone who pays through it.
5. Ask for source of funds where a cash heavy business or a company with few staff moves large sums, and compare the answer with its filed accounts and its premises. Why: a front company crowding out honest competitors shows first in its account.
6. Report suspicion in a suspicious activity report. Why: when funds come from robbery, extortion, embezzlement or fraud, the FATF calls an investigation "frequently the only way to locate the stolen funds and restore them to the victims".
7. Keep the records of every check and decision. Why: an investigation that starts years later can follow the money only through what the firm kept.

What changed in 2026?

Three dated changes bear on the effects above:

• 3 September: the FATF's report on underground banking and hawala describes laundering sold as a professional service.
• 13 October: Bank of America received a $1.2 billion FinCEN penalty for failures to mitigate and report risks FinCEN treats as national security priorities, Chinese money laundering networks among them, and a $750 million civil money penalty from the OCC, now listed among the biggest AML fines.
• 30 October: the FATF removed four jurisdictions from increased monitoring and listed no new one.

Your own customer base decides which of these effects reach you. A correspondent book carries ABLV's risk. Property buyers and cash heavy businesses carry the price and crowding out effects. Customers in a country just removed from the grey list need a fresh rating. Start with the one that weighs most for your firm, and test whether your monitoring would show it before a regulator's finding shows it to everyone else.