Based on the establishment of imperfect dynamic game model of multiple node information sets, the paper analyzes the three equilibrium strategies of banking institutions (BIs) and employees (BEs) under Chinese government’s different anti-money laundering (AML) efforts: both free of AML, BIs involved in AML but BEs away from AML, and both engaged in AML. It finds that Chinese government’s AML effort will impact BIs’ AML choice, and BIs’ AML choice will affect BEs’ AML choice. Only with the effective cooperation among the government, BIs, and BEs can we achieve the AML equilibrium strategy of the two gaming parties.
With China’s growing economic strength and rising international status of RMB, CNY internationalization has become an inevitable trend. In September 29, 2013, China (Shanghai) Pilot Free Trade Zone was formally established, which effectively promotes the process of CNY internationalization. At the same time, China will face more tests and challenges on AML in the process of CNY internationalization. Therefore, AML legal regimes should be focused on to effectively combat the crime of money laundering and predicate offenses.
As a matter of fact, there are difficulties with implementation of AML regulations and one of the reasons is that BIs and BEs have some negative AML behaviors and even become money launderers. For example, On July 17, 2012, A US Senate held a hearing on the HSBC’ involving in money laundering, and pointed out that poor controls at the bank HSBC had failed to prevent effectively Mexican drug traffickers to launder billions of dollars in the United States in the past seven years. Then the New York state department of financial services (NYSDFS) revealed a money-laundering scandal that Standard Chartered bank through its New York branch jointed Iran’s government to hide about 60,000 illegal transactions with more than $250 billion for 9 years from 2001 to 2010. At the same time, “2010-China anti-money laundering report” pointed out that according to the ways of money laundering crime in our country, the bank account money laundering cases accounted for 66.3% of the total sample; according to money laundering crime involving industry in our country, banking industry money-laundering cases were the most and accounted for 75.4% of the total sample; according to the money laundering crime subject concentrated industry in our country, specific industry personnel or unit could engage in money laundering or help other criminals money laundering by taking advantage of their industry, and the cases involving in banking employees were most and accounted for 50%.
In order to combat money laundering crime and maintain integrity of financial institutions and stability of the financial system in our country, we are faced with significant theoretical and practical issues that how our government, BIs and BEs work together to build an effective AML system in the process of CNY internationalization. Base on this, this paper will focus on behaviors among regulators, BIs and BEs by the method of game theory and seek AML equilibrium strategy of gaming parties. In this paper, section 2 is the literature review, and section 3 analyzes the behaviors among our government, BIs and Bes by building the game model. Conclusion shall be reached in the last section.
CNY internationalization relies on strong economic fundamentals, high international credit standing and advanced banking system [
In order to reduce money laundering activities and improve the efficiency of AML regimes, scholars from all over the world have made some researches on the reasons for failure of AML regulations, the building of AML system, AML methods, the legal system construction, efficiency evaluation and so on. As for the reasons for failure of AML regulations, Veiga et al. [
From the perspective of the construction of AML system, Araujo [
Speaking of AML methods, Takats [
According to Hexin Hou [
Xu Tang et al. [
In conclusion, although the domestic and foreign scholars have done a lot of research on AML, the studies on the AML game relationship among BIs, BEs and regulators is almost blank in the context of the CNY internationalization. Based on the CNY internationalization, this paper analyses the AML equilibrium strategies of BIs and BEs under Chinese government’s different AML efforts. The topic has important theoretical and realistic significance.
To facilitate the modeling and analysis, firstly we make the following assumptions:
Assumption 1: BIs’ and BEs’ strategy space is the same: engaged in AML, free of AML.
Assumption 2: One BI only hires one BE.
Assumption 3: The strategy goal of BIs and BEs is to maximize their revenues.
Assumption 4: Whether BEs are involved in AML or not, BIs will pay them the same wages.
Assumption 5: The two gaming parties namely BIs and BEs have a clear knowledge of the strategy space and the profit function of his opponents in the game. They are both initiative and rational when choosing strategies.
Assumption 6: When RMB is fully internationalized, the profit of BIs engaged in RMB internationalization business is
(1) Based on the above assumptions, firstly we analyze the profit of BIs under different strategies.
For BIs, when Chinese government’s AML effort is small and BEs and BIs are both involved in AML, the profit of BIs is as follows:
where:
When Chinese government’s AML effort is small and BEs are away from AML but BIs are involved in AML, the profit of BIs is as follows:
where:
When Chinese government’s AML effort is small and BEs are involved in AML but BIs are away from AML, the profit of BIs is as follows:
where:
When Chinese government’s AML effort is small and BEs and BIs are both away from AML, the profit of BIs is as follows:
When Chinese government’s AML effort is big and BEs and BIs are both involved in AML, the profit of BIs is as follows:
When Chinese government’s AML effort is big and BEs are away from AML but BIs are involved in AML, the profit of BIs is as follows:
When Chinese government’s AML effort is big and BEs are involved in AML but BIs are away from AML, the profit of BIs is as follows:
where:
When Chinese government’s AML effort is big and BEs and BIs are both away from AML, the profit of BIs is as follows:
The above, Equation (1) is equal to Equation (5), Equation (2) is equal to Equation (6), Equation (3) is equal to Equation (4), Equation (7) is equal to Equation (8), and
(2) Based on the above assumptions, further we analyze the profit of BEs under different strategies.
For BEs, when Chinese government’s AML effort is small and BEs and BIs are both involved in AML, the profit of BEs is as follows:
where:
When Chinese government’s AML effort is small and BEs are away from AML but BIs are involved in AML, the profit of BEs is as follows:
When Chinese government’s AML effort is small and BEs are involved in AML but BIs are away from AML, the profit of BEs is as follows:
When Chinese government’s AML effort is small and BEs and BIs are both away from AML, the profit of BEs is as follows:
Whether Chinese government’s AML effort is small or big, the profit of BEs will be not affected. That means when the Chinese government’s AML effort is big, the profit of BEs is the same as the above.
For BEs, the choice of their strategy depends on BIs’. If BIs choose AML, the rational BEs may choose AML or not. If BIs choose to be free of AML, BEs will make the same choice. Therefore, a rational BE should observe or speculate BI’s strategy before choosing his strategy.
For BIs, the choice of their strategy is influenced by BEs’ strategy and the punishment risk of their being away from AML. And the impact of the latter is larger than the former. Because the choice of BIs’ strategy faces the uncertain punishment risk without AML, we create a game party Chinese government which decides the punishment risk. Suppose the game party Chinese government’s strategy space is: its AML effort is small, or its AML effort is big. Thus we convert uncertainty of the punishment risk into the dummy game party’s choice. In this vein, BIs and BEs can’t be entirely sure of the Chinese government’s choice, but they can estimate the probability distribution based on the relevant information. So it is a dynamic game of complete but imperfect information. Because Chinese government is a dummy game party, its profit will not be considered. Through such a process, we can transform the two-person game into three-side dynamic game of imperfect information, and the extensive form game may be given as shown in
Now, we use the backward induction to analyze the game.
Firstly, we will analyze the optimal strategy of the BEs in the second stage. From
Secondly, we will discuss the optimal strategy of the BIs in the first stage. The choice of BIs’ strategy depends on the punishment risk of their being away from AML. Assume that the probability of Chinese government choosing big AML effort is
Therefore, when
There are three possibilities about the result of the game. Because
AML is BIs’ optimal strategy while being free of AML is BEs’ optimal strategy. That means that BIs and BEs reach the equilibrium of AML and non-anti-money laundering.
When Chinese government’s AML effort is small, being both free of AML is the game equilibrium of BIs and BEs, and the illegal behavior of money laundering cannot be cracked down on. When Chinese government’s AML effort is big, BIs will be engaged in AML and BEs will be away from AML, thus declining the effectiveness of combating illegal money laundering activities. When Chinese government’s AML effort is big, being engaged in AML is BIs’ and BEs’ optimal strategy, and the action of cracking down on illegal money laundering is effective. Chinese government’s AML effort will impact BIs’ AML choice, and BIs’ AML choice will affect BEs’ AML choice. Only if the government, BIs and BEs cooperate can we achieve the AML equilibrium strategy of the two gaming parties.
This research is sponsored by the National Social Science Foundation of China (NO. 12XJY028) and the Humanities and Social Sciences Foundation of the Ministry of Education, People’s Republic of China (NO. 11YJA790033).