Ricerc@Sapienza

A strand of the literature on money laundering applies gravity specification to investigate illicit money flows (e.g. Walker 1999 and Walker and Unger, 2009 empirical applications to Australia and to the Netherlands). However, the existent literature presents several limitations not providing theoretical grounded justifications that gravity equations actually apply to illicit flows too and because of the lack of reliable data. We will test whether the theoretical frameworks provided by Anderson and van Wincoop (2003) for trade flows and Okawa and van Wincoop (2013) for asset flows are suitable for the assessment of illicit money flows. To this end, we perform a two-stage procedure: first, we apply the above theoretical frameworks to the actual bilateral trade and financial flows across countries worldwide by using the usual set of observable and unobservable country-time and country pairs controls. We model multilateral resistance terms alternatively as bilateral trade costs and as financial frictions/informational asymmetries. We use aggregate merchandise trade imports for 170 partner countries provided by UNSD Commodity Trade database and data on cross-border equity flows from IMF Coordinated Portfolio Investment Survey. Second, following Cassetta et al. (2014) experiment on Italian provinces, we use the studentized residuals of the above gravity estimates to identify unpredicted flows and build up a worldwide dataset anomalies of actual vs potential flows. Then, we rank countries measuring which places attract more funds than expected and test for the presence of significant correlations between anomalies and the set of standard measures and controls on illicit activity provided by the relevant literature.
We expect that geographic characteristics of source and destination countries matter for size and direction of dirty money flows and that substantial anomalies are linked to Offshore financial centres activity.