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

29 Pages Posted: 12 Jun 2020 Last revised: 16 Feb 2021

See all articles by Lucia Dalla Pellegrina

Lucia Dalla Pellegrina

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Giorgio Di Maio

University of Insubria - Department of Economics

Donato Masciandaro

Bocconi University - Department of Economics (ECO); Bocconi University - Department of Economics

Margherita Saraceno

University of Pavia - Department of Law

Date Written: June 11, 2020

Abstract

Excessive and useless reporting, called “crying wolf effect”, is a crucial shortcoming that any anti-money laundering (AML) design aims to address and fix. For this reason, in these years the AML policy has switched both in the US and in Europe from a rule- to a risk-based approach. This study investigates theoretically and empirically whether the risk-based approach delivers the expected results. The theoretical model shows that a tradeoff can emerge between accuracy – less type-I and type-II errors – and deterrence. The empirical analysis, conducted in the aftermath of the introduction of the risk-based approach confirms such a tradeoff in the case of Italy, where deterrence is maximized while sacrificing accuracy. In this respect, data suggest that Italian bankers are likely to act as crying wolves.

Keywords: Anti-Money Laundering; Suspicious Transaction Reporting; Standard of evidence; Type-I error; Type-II error; Deterrence; Italy

JEL Classification: G2, K2, K4

Suggested Citation

Dalla Pellegrina, Lucia and Di Maio, Giorgio and Masciandaro, Donato and Masciandaro, Donato and Saraceno, Margherita, Are Bankers "Crying Wolf"? The Risk-Based Approach in Money Laundering Regulation and its Effects (June 11, 2020). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 444, Available at SSRN: https://ssrn.com/abstract=3624673 or http://dx.doi.org/10.2139/ssrn.3624673

Lucia Dalla Pellegrina (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Giorgio Di Maio

University of Insubria - Department of Economics ( email )

Via Monte Generoso 71
Varese, 21 100
Italy

Donato Masciandaro

Bocconi University - Department of Economics ( email )

Via G. Roentgen 1 - 5E211
20136 Milan
Italy

Bocconi University - Department of Economics (ECO) ( email )

Via G. Roentgen 1 - 5E211
20136 Milan
Italy

Margherita Saraceno

University of Pavia - Department of Law ( email )

Pavia, I-27100

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