Do More Suspicious Transaction Reports Lead to More Convictions for Money Laundering?

TL;DR

This study examines whether increasing suspicious transaction reports in the EU correlates with more convictions for money laundering, finding the relationship is likely spurious and not causal, with implications for anti-money laundering policies.

Contribution

It provides empirical analysis using fixed effects models to assess the link between suspicious reports and convictions, revealing the relationship is not causally robust.

Findings

Number of reports and convictions follow a sub-linear power law.

The relationship disappears when controlling for time in fixed effects models.

More reports do not necessarily lead to more convictions.

Abstract

Almost all countries in the world require banks to report suspicious transactions to national authorities. The reports are known as suspicious transaction or activity reports (we use the former term) and are intended to help authorities detect and prosecute money laundering. In this paper, we investigate the relationship between suspicious transaction reports and convictions for money laundering in the European Union. We use publicly available data from Europol, the World Bank, the International Monetary Fund, and the European Sourcebook of Crime and Criminal Justice Statistics. To analyze the data, we employ a log-transformation and fit pooled (i.e., ordinary least squares) and fixed effects regression models. The fixed effects models, in particular, allow us to control for unobserved country-specific confounders (e.g., different laws regarding when and how reports should be filed). Initial results indicate that the number of suspicious transaction reports and convictions for money laundering in a country follow a sub-linear power law. Thus, while more reports may lead to more convictions, their marginal effect decreases with their amount. The relationship is robust to control variables such as the size of shadow economies and police forces. However, when we include time as a control, the relationship disappears in the fixed effects models. This suggests that the relationship is spurious rather than causal, driven by cross-country differences and a common time trend. In turn, a country cannot, ceteris paribus and with statistical confidence, expect that an increase in suspicious transaction reports will drive an increase in convictions. Our results have important implications for international anti-money laundering efforts and policies. (...)