Anti Money Laundering And Barriers To Trade

Over at Offsetting Behaviour, Eric Crampton despairs over the difficulty of executing arbitrage trades with respect to the US election.

For just $8.88 he could make a guaranteed return of ~10% by purchasing an InTrade Romney contract and a BetFair Obama contract.

He quotes the terms & conditions at Intrade which make it hard to deposit money in order to comply with anti-money laundering rules.

But anti-money laundering requirements are not just barriers to performing arbitrage on electoral events.

They function as barriers to actual country-to-country trade. Just think about how hard it would be for a developing country exporter to have all the correct documentation and paperwork to open a US bank account and receive payment for commodities on account. Essentially, incumbent commodities firms have an edge because they will be able to put deals together faster than an ostensibly cheaper developing country supplier.

Imposing greater “know your client” rules functions as a barrier to entry. If you can’t get an account set up in the first place because you’re starting up a business in the developing world, you’ll have to rely on more expensive banking services.

You might even skip the mainstream banking system altogether, relying on immigrant cash transfer networks.

There are so many second-order effects of anti-money laundering legislation. Making it harder to take advantage of goods arbitrage opportunities is just one I can think of.