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

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 theore...

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Bibliographic Details
Published in:Italian economic journal 2023-07, Vol.9 (2), p.587-615
Main Authors: dalla Pellegrina, Lucia, Di Maio, Giorgio, Masciandaro, Donato, Saraceno, Margherita
Format: Article
Language:English
Subjects:
Economic theory
Economics
Economics and Finance
European Integration
Research paper - Europe and Italy
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Summary: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.”
ISSN:2199-322X
2199-3238
DOI:10.1007/s40797-022-00195-2