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Are Bankers “Crying Wolf”? Type I, Type II Errors and Deterrence in Anti-Money Laundering: The Italian Case

Author

Listed:
  • Lucia Pellegrina

    (University of Milano-Bicocca)

  • Giorgio Maio

    (University of Insubria)

  • Donato Masciandaro

    (Bocconi University and SUERF)

  • Margherita Saraceno

    (University of Pavia)

Abstract

Excessive and useless reporting, called the “crying wolf effect,” is a crucial shortcoming that any anti-money laundering (AML) design aims to address. For this reason, in recent years, AML policies in both the US and Europe have switched from a rule-based to a risk-based approach. This study theoretically and empirically investigates whether the risk-based approach delivers the expected results. The theoretical model shows that a trade-off can emerge between accuracy (fewer type-I and type-II errors) and deterrence. The empirical analysis, conducted after the risk-based approach was introduced in Italy, confirms this trade-off. More specifically, deterrence seems a priority, whereas accuracy is sacrificed. In this respect, the data suggest that Italian bankers are likely to “cry wolf.”

Suggested Citation

  • Lucia Pellegrina & Giorgio Maio & Donato Masciandaro & Margherita Saraceno, 2023. "Are Bankers “Crying Wolf”? Type I, Type II Errors and Deterrence in Anti-Money Laundering: The Italian Case," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(2), pages 587-615, July.
    • Handle: RePEc:spr:italej:v:9:y:2023:i:2:d:10.1007_s40797-022-00195-2
    DOI: 10.1007/s40797-022-00195-2
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Anti-money laundering; Suspicious transaction reporting; Reporting test; Type-I error; Type-II error; Deterrence; Italy;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • K2 - Law and Economics - - Regulation and Business Law
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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