Fighting Organized Crime by Targeting their Revenue: Screening, Mafias and Public Funds

Abstract

Repressive policies to fight criminal organizations are often met with a violent response
from criminal groups. Are non-repressive strategies more effective? Targeting criminal revenues
can be a powerful tool if the threat of investigation is credible and if criminals are unable to
displace their activity to avoid controls. We study an Italian policy designed to tackle mafia
misappropriation of public funds by screening companies applying for subsidies over 150,000
Euros. Using all subsidies to firms co-financed by the European Union from 2008 to 2015, we find
that a group of firms starts self-selecting below the threshold immediately after its introduction.
Those firms are concentrated in mafia-affected cities, are lower performing, operate in typical
mafia sectors and have balance sheet indicators of money laundering. While avoiding violence,
non-repressive strategies might have different unintended consequences: criminal organizations
react with an immediate strategic displacement which reduces states’ capacity to detect them,
highlighting the importance of designing policies that anticipate the sophistication of criminal
organizations.