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Money Laundering as a Financial Sector Crime. A New Approach to Measurement, with an Application to Italy

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Author Info

  • Guerino Ardizzi

    ()
    (Market and Payment Systems Oversight Department, Bank of Italy, Italy)

  • Carmelo Petraglia

    ()
    (Department of Mathematics, Computer Science and Economics, University of Basilicata, Italy)

  • Massimiliano Piacenza

    ()
    (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)

  • Friedrich Schneider

    ()
    (Department of Economics, Johannes Kepler University of Linz, Austria)

  • Gilberto Turati

    ()
    (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)

Abstract

Anti–money laundering regulations have been centred on the “Know-Your-Customer” rule so far, overlooking the fact that criminal proceedings that need to be laundered are usually represented by cash. This is the first study aimed at providing an answer to the question of how much of cash deposited via an official financial institution can be traced back to criminal activities. The paper develops a new approach to measure money laundering and then proposes an application to Italy, a country where cash is still widely used in transactions and criminal activities generate significant proceeds to be laundered. In particular, we define a model of cash in-flows on current accounts and proxy money laundering with two indicators for the diffusion of criminal activities related to both illegal trafficking and extortion, controlling also for structural (legal) motivations to deposit cash, as well as the need to conceal proceeds from tax evasion. Using a panel of 91 Italian provinces observed over the period 2005-2008, we find that the amount of cash laundered is sizable, around 7% of GDP, 3/4 of which is due to illegal trafficking, while 1/4 is attributable to extortions. Furthermore, the incidence of “dirty money” coming from illegal trafficking is higher in the Centre-North than in the South, while the inverse is true for extortions. Results are useful to discuss policy initiatives to combat money laundering.

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File URL: http://eco83.econ.unito.it/RePEc/wp/m18.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino in its series Working papers with number 018.

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Length: 32 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:tur:wpapnw:018

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Keywords: Money laundering; Shadow economy; Banking regulation;

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References

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  1. Amedeo Argentiero & Michele Bagella & Francesco Busato, 2008. "Money laundering in a two-sector model: using theory for measurement," European Journal of Law and Economics, Springer, vol. 26(3), pages 341-359, December.
  2. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Gilberto Turati, 2012. "Measuring the underground economy with the currency demand approach: a reinterpretation of the methodology, with an application to Italy," Temi di discussione (Economic working papers) 864, Bank of Italy, Economic Research and International Relations Area.
  3. Malte Krueger & Charles Goodhart, 2001. "The Impact of Technology on Cash Usage," FMG Discussion Papers dp374, Financial Markets Group.
  4. Friedrich Schneider & Ursula Windischbauer, 2008. "Money laundering: some facts," European Journal of Law and Economics, Springer, vol. 26(3), pages 387-404, December.
  5. Walker John & Unger Brigitte, 2009. "Measuring Global Money Laundering: "The Walker Gravity Model"," Review of Law & Economics, De Gruyter, vol. 5(2), pages 821-853, December.
  6. Andreas Buehn & Friedrich Schneider, 2012. "Shadow economies around the world: novel insights, accepted knowledge, and new estimates," International Tax and Public Finance, Springer, vol. 19(1), pages 139-171, February.
  7. J. C. Sharman, 2010. "Shopping for Anonymous Shell Companies: An Audit Study of Anonymity and Crime in the International Financial System," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 127-40, Fall.
  8. Wagstaff, Adam & van Doorslaer, Eddy & Watanabe, Naoko, 2003. "On decomposing the causes of health sector inequalities with an application to malnutrition inequalities in Vietnam," Journal of Econometrics, Elsevier, vol. 112(1), pages 207-223, January.
  9. Raffaella Barone & Donato Masciandaro, 2011. "Organized crime, money laundering and legal economy: theory and simulations," European Journal of Law and Economics, Springer, vol. 32(1), pages 115-142, August.
  10. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  11. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
  12. Andrea Brandolini & Luigi Cannari & Giovanni D'Alessio & Ivan Faiella, 2004. "Household Wealth Distribution in Italy in the 1990s," Temi di discussione (Economic working papers) 530, Bank of Italy, Economic Research and International Relations Area.
  13. Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LP, vol. 7(3), pages 281-312, September.
  14. Benno Torgler & Friedrich Schneider, 2007. "The Impact of Tax Morale and Institutional Quality on the Shadow Economy," CREMA Working Paper Series 2007-01, Center for Research in Economics, Management and the Arts (CREMA).
  15. Johnson, Simon & McMillan, John & Woodruff, Christopher, 1999. "Why do Firms Hide? Bribes and Unofficial Activity After Communism," CEPR Discussion Papers 2105, C.E.P.R. Discussion Papers.
  16. Friedrich Schneider, 2010. "Turnover of organized crime and money laundering: some preliminary empirical findings," Public Choice, Springer, vol. 144(3), pages 473-486, September.
  17. Salvatore Capasso & Tullio Jappelli, 2011. "Financial Development and the Underground Economy," CSEF Working Papers 298, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  18. Alexeev, Michael & Janeba, Eckhard & Osborne, Stefan, 2004. "Taxation and evasion in the presence of extortion by organized crime," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 375-387, September.
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  1. How much money laundering is there in Italy?
    by Economic Logician in Economic Logic on 2013-03-21 14:28:00
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