Are Bankers “Crying Wolf”? Type I, Type II Errors and Deterrence in Anti-Money Laundering: The Italian Case

Lucia Pellegrina (), Giorgio Maio (), Donato Masciandaro () and Margherita Saraceno ()
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Lucia Pellegrina: University of Milano-Bicocca
Giorgio Maio: University of Insubria
Margherita Saraceno: University of Pavia

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2023, vol. 9, issue 2, No 7, 587-615

Abstract: 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 to a risk-based 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 this trade-off. More specifically, deterrence seems a priority, whereas accuracy is sacrificed. In this respect, the data suggest that Italian bankers are likely to “cry wolf.”

Keywords: Anti-money laundering; Suspicious transaction reporting; Reporting test; Type-I error; Type-II error; Deterrence; Italy (search for similar items in EconPapers)
JEL-codes: G2 K2 K4 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s40797-022-00195-2

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