Fighting Organized Crime by Targeting their Revenue: Screening, Mafias, and Public Funds

Abstract

Abstract Repressive policies to fight criminal organizations are often met with a violent response from criminal groups. Are non-repressive strategies more effective? Targeting criminal revenues can be a powerful tool if the threat of investigation is credible and if criminals are unable to displace their activity to avoid controls. We study an Italian policy designed to tackle mafia misappropriation of public funds by screening companies applying for subsidies over 150,000 Euros. Using all subsidies to firms co-financed by the European Union from 2008 to 2015, we find that a group of firms starts self-selecting below the threshold immediately after its introduction. Those firms are concentrated in mafia-affected cities, are lower performing, operate in typical mafia sectors, and have balance sheet indicators of money laundering. While avoiding violence, non-repressive strategies might have different unintended consequences: criminal organizations react with an immediate strategic displacement which reduces states’ capacity to detect them, highlighting the importance of designing policies that anticipate the sophistication of criminal organizations.