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."

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

Di Maio G.;
2022

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."
https://doi.org/10.1007/s40797-022-00195-2
Anti-money laundering; Suspicious transaction reporting; Reporting test; Type-I error; Type-II error; Deterrence; Italy
dalla Pellegrina, L.; Di Maio, G.; Masciandaro, D.; Saraceno, M.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11383/2140052
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