Cash for Criminals

April 7th, 2011

Financial incentives are used in almost every context where the public good is at odds with individual utility.  As I poured over my tax returns last weekend I discovered that other than the fact that the U.S. tax system is massively complicated, it is also the perfect example of financial incentives gone awry.  As an economist, I feel fairly strongly that I should be mathematically and logically competent to do my taxes the old fashioned way—with pen and paper.  I had to repeat that method to the “second look” guy at H&R Block about 13 times, who didn’t seem to be willing to comprehend that anyone doesn’t use software.  The truth is that the U.S. tax system has become so overburdened with its own clever incentive system, that it fails to produce outcomes because no one really understands it and as a result it can’t change behavior.

Other examples of financial incentives are better.  They range from cash payments for reporting a crime or a suspicious person to development programs which pay for women to graduate from high school.  Some countries, looking to expand their population, have given cash rewards to women to get pregnant, and others have paid young women not to.  The UN has tried to use financial incentives to save the dugong, the reputed mermaid of seafarers’ lore, amid concerns it could become extinct within 40 years.  These programs have little to nothing in common—except that they are all quite effective.

Now the government of Mexico is trying something unusual, even for the world of financial incentives.  This week Mexico announced it would “reward people who report suspected money laundering, under a program that will allow them to get up to one-quarter of any illicit funds or property seized….Under the new plan, people can file reports in person, by telephone or by e-mail. The exact percentage of individual rewards will be determined case by case by a special committee.”

President Felipe Calderon has put forward a few other ambitious reforms recently, including rules which would bar cash purchases of real estate and limit cash purchases of items like cars and planes with a price tag that exceeds $10,000.  In June Mexico announced it would on cash deposits and withdrawals made in American dollars.  Under the new rules “Mexicans with bank accounts can deposit as much as $4,000 in cash per month, but Mexicans without accounts can exchange only $300 a day up to $1,500 a month.”

These rules may be effective, but I am most optimistic about the financial incentive program.  Of course, there are problems.  As with any type of incentivized crime reporting, there is a strong motivation for people to lie, exaggerate, or (most likely) make a claim based on little to information, in the hopes of getting it right.  Moreover, it is unlikely to do much good in the upper circles of the Mexican cartels, where those trusted enough to be privy to financial secrets are also trusted enough not to go to the police, regardless of the compensation.  There will probably be physical risks to those who do come forward, which may be a strong enough disincentive.

Despite these underlying issues, I think this program has promise.  Even more importantly, it shows yet another example of President Calderon’s intensity and seriousness of purpose when it comes to fighting money laundering in his country.  Even if these ambitious initiatives do not work, we should applaud his innovation and the administration’s continued courage.


Written by Ann Hollingshead

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