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Are Bankers "Crying Wolf"? The Risk-Based Approach to Money-Laundering Regulation and its Effects

Author

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  • Lucia Dalla Pellegrina
  • Giorgio Di Maio
  • Donato Masciandaro
  • Margherita Saraceno

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 approach to a riskbased 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 such a trade-off. More specifically, deterrence is maximized, while accuracy is sacrificed. In this respect, the data suggest that Italian bankers are likely to “cry wolf”.

Suggested Citation

  • Lucia Dalla Pellegrina & Giorgio Di Maio & Donato Masciandaro & Margherita Saraceno, 2020. "Are Bankers "Crying Wolf"? The Risk-Based Approach to Money-Laundering Regulation and its Effects," Working Papers 444, University of Milano-Bicocca, Department of Economics, revised Feb 2021.
    • Handle: RePEc:mib:wpaper:444
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    References listed on IDEAS

    as
    1. Lucia dalla Pellegrina & Giorgio Di Maio & Donato Masciandaro & Margherita Saraceno, 2020. "Organized crime, suspicious transaction reporting and anti-money laundering regulation," Regional Studies, Taylor & Francis Journals, vol. 54(12), pages 1761-1775, December.
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    6. Mario Gara & Francesco Manaresi & Domenico J. Marchetti & Marco Marinucci, 2019. "The impact of anti-money laundering oversight on banks' suspicious transaction reporting: Evidence from Italy," Questioni di Economia e Finanza (Occasional Papers) 491, Bank of Italy, Economic Research and International Relations Area.
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    More about this item

    Keywords

    Anti-Money Laundering; Suspicious Transaction Reporting; Standard of evidence; 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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