The Determinants of Money Laundering: Evidence from Italian Regions

According to the INTERPOL 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. This type of crime undermines the reputation of financial institutions and jurisdictions,, compromising investors’ trust in them, and therefore weakening 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 its high heterogeneity in terms of economic and institutional characteristics, as well as the activity of organized crime in financial-related activities, Italy is a compelling case study. Our main findings reveal that, in most Italian regions, enforcement activities do exert significant deterrence on criminal behaviors: a negative relationship between enforcement and money laundering can be identified only when there are 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 regional dualism. In particular, the crime rate in the northern-central area is positively related to the level of corruption and the incidence of mafia-type crimes, and negatively related to educational attainment; whereas in the southern regions, money laundering is positively related to the size of the gaming and gambling sector.