How much demand for money laundering services does drug selling create? Identifying the key parameters

The illegal drug trade is often, and plausibly, asserted to be the largest illegal market, globally and in many individual countries. It is also claimed that a large share of its revenues is laundered, though there are no estimates of that volume. We provide rough estimates of that proportion and its primary determinants.

This paper presents a model of a multi-tiered drug distribution network that is parameterized with data based on one typical, well-studied case, namely British Colombia's market for illegal opioids, supplemented by a corresponding economic interpretation of what determines the share of drug trade revenues that need to be laundered. Sensitivity with respect to key parameters is analyzed.

We suggest that less than half and perhaps no more than a quarter of revenues from established drug markets need laundering. Key parameters governing this proportion include the price mark-up across distribution levels, transaction volumes at each market level, and the capacity of market participants to spend cash on daily living expenses.

This model permits estimation of the scale of money laundering associated with a particular drug market. It suggests that there are limits on money laundering controls as a way of reducing drug supply - although money laundering investigations may still be an effective way to identify and investigate high-level drug traffickers.