Money laundering is any activity aimed to hide the origin and/or the destination of a flow of money in order to reduce the probability of sanctions. In order to describe the economics of money laundering, the starting point is the definition of its microeconomic foundations, which are based on the existence of a rational actor who derives revenues from a criminal activity and from the assumption that his/her expected utility depends on four key elements: expected revenues, laundering costs, likelihood of being caught, and magnitude of the sanction.
The micro basis of the money laundering can explain its macroeconomic effects. Money laundering can function as a multiplier mechanism of the weight of the illegal sector in a given territory or country. In order to prevent and combat the polluting effects of money laundering, an effective regulation has to be designed, based on a correct incentives alignment between the supervisors and the financial intermediaries.