No. 13 - Cash use and money laundering: An application to Italian data at bank-municipality level by Michele Giammatteo

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July 2019

JEL Classificazion: E26, E42, G28, K42.
Keywords: Money laundering, Crime, Risk-based approach, Cluster random effects.

The payment industry has undergone a radical turnaround as of late, but cash is still considered the king of the means of payment, especially with reference to the underground and illegal economy. This paper aims at (i) measuring the scale of anomalous (and hence potentially associated to unlawful activities) cash usage with reference to Italian banks and municipalities in 2015 and (ii) providing money laundering risk indicators accordingly. By relying on data on cash deposits at single bank branches and developing the methodology introduced in a previous study, we distinguish between legitimate and illegitimate cash flows: the former are those that can be explained on account of local socio-economic fundamentals, the latter are those that the same fundamentals cannot systematically account for. We derive municipal and provincial money laundering risk indicators, whose distribution is found to be consistent with the investigative evidence on Italy’s mafia-style criminal organisations and correlated with banks’ suspicious transaction reports and some local indicators of crime, which further validate our empirical findings. Indicators have a high potential operational relevance, since they may provide the authorities involved in the anti-money laundering system with an additional tool to carry out their activities on the basis of a robust risk-based approach.