Vulnerability to Money Laundering and Crime Deterrence: Evidence from Italy

Abstract

This paper examines the economy's vulnerability to money laundering in a given region. Assuming that criminals are rational investors who take into account risks and returns of both legal and illegal investments, we define vulnerability as a function of well-identified drivers. Proxies of these variables are used to empirically investigate the relationship between the institutional/economic characteristics of Italian provinces and their vulnerability to money laundering in the 2008-2013 period. We focus on the impact of the reporting of suspicious transactions to the Financial Intelligence Unit, by using instrumental variables to address endogeneity in the relationship between the number of reports made and our measure of vulnerability. Results highlight positive effects of the institutional policies adopted to fight money laundering, especially as far as the reporting of suspicious transactions is concerned. Further dimensions of local vulnerability are outlined: time-invariant heterogeneity across provinces, showing that certain areas are more systematically vulnerable because of persistent local features that cannot be individually identified; and idiosyncratic vulnerability, which pinpoints the fact that some provinces have been periodically subject to abnormally intense money-laundering activity.

Keywords: Money laundering, vulnerability, suspicious transaction reporting

JEL Classification: K14, K20, K42