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

Lucia Dalla Pellegrina, Giorgio Di Maio, Donato Masciandaro () and Margherita Saraceno

No 444, Working Papers from University of Milano-Bicocca, Department of Economics

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 approach to a riskbased 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 such a trade-off. More specifically, deterrence is maximized, while accuracy is sacrificed. In this respect, the data suggest that Italian bankers are likely to “cry wolf”.

Keywords: Anti-Money Laundering; Suspicious Transaction Reporting; Standard of evidence; 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)
Pages: 29
Date: 2020-06, Revised 2021-02
New Economics Papers: this item is included in nep-law and nep-ore
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