A Theory of 'Crying Wolf': The Economics of Money Laundering Enforcement

56 Pages Posted: 12 Apr 2007

See all articles by Előd Takáts

Előd Takáts

Bank for International Settlements (BIS)

Date Written: April 2007

Abstract

The paper shows how excessive reporting, called crying wolf, can dilute the information value of reports. Excessive reporting is investigated by undertaking the first formal analysis of money laundering enforcement. Banks monitor transactions and report suspicious activity to government agencies, which use these reports to identify investigation targets. Banks face fines should they fail to report money laundering. However, excessive fines force banks to report transactions which are less suspicious. The empirical evidence is shown to be consistent with the model's predictions. The model is used to suggest implementable corrective policy measures, such as decreasing fines and introducing reporting fees.

Keywords: Money Laundering, USA Patriot Act, Disclosure, Auditing

JEL Classification: G28, K23, L51, M21

Suggested Citation

Takáts, Előd, A Theory of 'Crying Wolf': The Economics of Money Laundering Enforcement (April 2007). IMF Working Paper No. 07/81, Available at SSRN: https://ssrn.com/abstract=979035

Előd Takáts (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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