The determinant of money laundering: evidence from Italian regions

Abstract

Following the INTERPOL’s definition, money laundering is: “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”. Illegally obtained funds are laundered and moved around the world using front companies, intermediaries and other money transmitters. In this way, the illegal funds remain hidden and are integrated into the legal economy. Such type of crime undermines financial institutions’ and jurisdictions’ reputation, compromises investors’ trust in them, and therefore weakens the entire financial system. By using annual data for the Italian regions (NUTS-2) over the period 2008 to 2015, this work aims to investigate the determinants of money laundering in Italy. Given the high heterogeneity in terms of economic and institutional characteristics, as well as for the activity of organized crime in financial-related activities, Italy is a compelling case study. Our main findings reveal that in most of the Italian regions enforcement activities do exert significant deterrence on criminal behaviors: a negative relationship between enforcement and illegal trafficking of waste can be identified only for very high levels of enforcement efforts. Moreover, we find that the major determinants influencing the rate of money laundering differ between northern-central and southern regions, confirming the existence of a regional dualism. In particular, while in the northern-central area the crime rate is positively related to the level of corruption, the incidence of mafia-type crimes and negatively to the education attainment, in the southern regions money laundering is positively related to the size of the gaming and gambling sector.