Transnational Crime and Money Laundering: Effects on Global Trade
Neil Slough, Milwaukee Area Technical College
Extended Abstract
The changes in global environments that have facilitated growth in international trade are equal opportunity catalysts. Just as legitimate firms have been able to expand their operations internationally so to has organized crime. Moreover, growth of transnational crime has actually outpaced that of most industries. Generally ignored by international business research, transnational crime is a significant force throughout many regions of the world having its largest effect on the fragile economies of developing nations. This paper discusses the framework and scope of transnational crime and money laundering and discusses both the economic impact and enterprise risk factors that can be directly traced to these activities.
In 2001, The United Nations defined Transnational Organized Crime as the combination of two concepts, namely:
"Organized criminal group" shall mean a structured group of three or more persons, existing for a period of time and acting in concert with the aim of committing one or more serious crimes or offences established in accordance with this Convention, in order to obtain, directly or indirectly, a financial or other material benefit. "Serious crime" shall mean conduct constituting an offence punishable by a maximum deprivation of liberty of at least four years or a more serious penalty. "Structured group" shall mean a group that is not randomly formed for the immediate commission of an offence and that does not need to have formally defined roles for its members, continuity of its membership or a developed structure ....
[A]n offence is transnational in nature if. (a) It is committed in more than one state; (b) It is committed in one state but a substantial part of its preparation, planning, direction or control takes place in another state; (c) It is committed in one state but involves an organized criminal group that engages in criminal activities in more than one state; or (d) It is committed in one state but has substantial effects in another state.
While it’s description may be based on a 21st century definition, transnational organized crime is by no means a modern phenomenon tracing its roots back to the 13th Century BCE when groups of organized pirates from Mycenaean Greece threatened the shores of Egypt during the 19th dynasty reign of Vizier Ramesses I (Rogozinski, 1996). A thousand years later, Cilician pirates dominated the slave trade in ancient Rome circa 200 BCE. Almost two millennia later, the first major threat to the newly formed United States came from the Barbary Coast piracy of the late 1700’s (London, 2005).
Threats from transnational crime are in many ways greater in the modern world as criminal organizations have restructured themselves from rigid hierarchies to global networks and the nature of national borders has evolved into a system that impedes law enforcement while simultaneously advancing opportunities for criminal activity (Williams, 1997). One of the first industries to leverage the flexibilities of NAFTA was the illegal drug trade which by the early 1990s began rerouting heroin shipments from southwest Asia and cocaine from South America through Canada to their distribution in the United States (US Department of State, 1993). The profits from transnational crime are estimated at close to 1 trillion dollars which represents approximately 2% of Global GNI and 6% of all international trade (World Bank, 2007) spread across multiple illicit activities (see table 1).
Table 1
Primary Illicit Global Markets(in decreasing order of estimated market size)
Drug Trafficking
Arms Trafficking
Human Trafficking
Trafficking in Environmental Waste
Cigarette Smuggling
Wildlife and Animal Parts Trafficking
Illegal Logging
Human Smuggling
Art and Antique Smuggling
Gas and Oil Smuggling
Illegal Fishing
Illegal International Adoptions
Diamond Smuggling
Nuclear Smuggling
Organ, Human Tissue, and Body Part Trafficking
While the social cost of criminal activity can neither be ignored nor minimized, it is the profits and cash flow of these activities that is the focus of this study. The revenues from illicit activities must be re-circulated back into usable currency by laundering the money through financial institutions. In developing countries these laundering activities hinder economic development through numerous factors. These factors include
Direct Competition with Legitimate Businesses
One common method of money laundering involves mixing the profits from criminal activity with legal revenue through the use of front companies. These front companies, subsidized with illicit funds, have considerable advantage over legitimate competitors.
Encumbering Financial Institutions
Banks and other financial institutions that are depositories for illegal monies face challenges in operations not encountered by “clean” organization. Illegal monies are more likely to move in relation to law enforcement factors rather than to normal market factors such as interest rates. These unpredictable swings can result in severe liquidity problems for affected institutions.
Loss of Economic Control
In many small emerging economies illegal profits are larger than government expenditures thereby negating fiscal policy as an effective economic control mechanism. Monetary control is also impossible since currency demand is artificially controlled by illegal actors who are primarily driven to protect assets not to employ them to generate income.
Underinvestment in Infrastructure
Criminal activity reduces government tax revenue resulting in fewer funds available for infrastructure investment. Attempts to raise tax revenue by means of higher tax rates further dissuades legitimate investment while simultaneously encouraging an increase in tax evasion activities.
Negative Effects on Privatization Efforts
Transnational organized crime groups are often able to outbid legitimate investors in the purchase of previously state owned enterprises and large portions of entire industries. Once purchased, the enterprises themselves are employed for further laundering activities.
Increase in Financial Crime
The knowledge and experience with a nation’s financial institutions gained during laundering activities are often employed by criminal groups to extend their activities into financial areas through embezzlement, insider theft, financial and investment fraud, and insider trading.
Decrease in Institutional Confidence
Confidence in a host country’s financial system is a key determinant of FDI inflows into developing economies. Countries where the financial system is heavily infiltrated by criminal elements have reduced opportunities to attract legitimate investment.