The Illicit Underground Substance Economy: An RCMP Perspective

Tim G. Killam

As the officer in charge of the proceeds of crime program at RCMP Headquarters in Ottawa, this writer finds it approprithat these proceeds should be used to counteract the underground economy. At the same time, it is recognized that conventional drug and customs enforcement-seizing the commodity and laying substantive criminal charges-is also effective against the illicit drug, alcohol, and tobacco economy.

Background-proceeds of crime

The profits available from the traffic in illicit drugs represent a double-edged threat to the success of conventional enforcement measures: on the one hand, the potential for profit is a motivating factor for entrants into the drug trade; on the other, a criminal organization with accumulated financial resources is able to finance sophisticated import and distribution networks as well as to absorb periodic enforcement actions. Accordingly, the RCMP has been involved since 1981 in attacking the profits derived from the drug trade.

In that year, the force created anti-drug profiteering sections to work hand in hand with existing drug units across the country. The main difficulty with this type of enforcement at the time was that the only legislative instrument available to police was the section of the Criminal Code entitled "Possession of property obtained by crime" (now s. 354), which contained no provision for the seizure of real property or such intangibles as bank accounts.

In January 1989, proceeds of crime legislation was finally enacted in Canada. It created the dual offences of possessing and laundering crime proceeds for numerous "designated drug offences" as well as "enterprise crime offences." The 1989 law contained the provisions previously lacking for the restraint and seizure of property. Alcohol and tobacco smuggling were added as relevant offences under proceeds of crime legislation in September 1993.

One of the more significant developments in enforcement efforts to reclaim the profits of drug crime occurred in April 1992, when the solicitor general of Canada announced a $33 million grant for a five-year pilot of "integrated anti-drug profiteering units" (IADPUs). The objective of the IADPU initiative was to fight money laundering and organized drug trafficking by targeting the proceeds of drug kingpins. The purpose of the IADPUs located in Montreal, Toronto, and Vancouver was to conduct a true test of the effectiveness of our proceeds of crime legislation under conditions of adequate funding and resources. The IADPUs were to lead a coordinated approach, working with members of municipal and provincial police agencies and full-time justice department lawyers on site in existing RCMP anti-drug profiteering facilities. The funding also allowed for on-site Revenue Canada/Customs intelligence officers and full-time forensic accountants. The goal of the initiative was to provide "critical mass" to allow IADPU nvestigators ready access to the considerable legal, customs, and forensic resources the funding from Canada's Drug Strategy could provide.

In March 1994, the RCMP made submissions to Treasury Board for the funding of 348 positions for customs enforcement, 248 positions for customs smuggling enforcement, particularly of alcohol and tobacco, and a further 100 positions solely for customs proceeds enforcement. Most of the resources were concentrated in Ontario and Quebec, reflecting the origin of the initiative, which was principally motivated by the rampant tobacco smuggling then openly occurring throughout the country, but especially in the centre.

Finally, in April 1994 the Force expanded its anti-drug profiteering sections throughout Canada by forming proceeds of crime sections responsible, not only for drug proceeds investigations, but also for customs, excise, and enterprise crime proceeds of crime investigations. This put the total complement of proceeds of crime investigators in Canada at approximately 225.

Drugs

The RCMP has enjoyed considerable success with its drug proceeds of crime investigations. Between 1989 and 1993 inclusively, its ADP investigators seized over $107 million in assets, approximately $25 million of which was forfeited back to the Government of Canada. During the same period, nearly $14 million in fines in lieu of forfeiture was received into government coffers. ADP sections also made referrals to other jurisdictions totalling over $70 million, some of which was shared back with Canada upon forfeiture in that foreign jurisdiction.

The value of the drug trade in Canada has been estimated at $10 billion annually with a corresponding figure of approximately $300 billion for the United States. The estimates for Canada could very well be understated. These figures are extrapolated from bits of evidence like the following. On February 22, 1994, 5.4 metric tonnes of cocaine were seized off the coast of Nova Scotia, thus eliminating approximately 11 million gram doses. This seizure alone significantly affected health care costs, family violence, property crimes, and quality of life. Assuming that the cocaine was all destined for Canada, primarily the Quebec/Ontario market, we could reasonably expect that it would be diluted or "cut" at least once, thus making the total amount available for sale 10.8 metric tonnes. If sold for $25,000/kg, an extremely conservative estimate of the value of this shipment of cocaine would be $270 million (10,800 kg x $25K). The value of this same shipment if all sold in one-gram doses at $150, a low street price, ould be $1 billion, $650 million.

To carry the analogy farther, if we estimate that enforcement officials intercept less than 10 percent of all drugs, and even if this seizure of 11,000 kgs of cocaine was the only drug seizure for 1994, taking the worth of the cocaine at street value, namely $1 billion, $650 million, multiplied by 10 this would equal $16 billion, $500 million. Looking at this 1994 seizure and comparing the figures for all other drugs seized in Canada between 1988 and 1993 inclusively, the inescapable conclusion is surely that the annual underground drug economy in Canada is massive and probably underestimated at $10 billion.

Customs-alcohol and tobacco

As already stated, until September 1993 it was not an offence to possess or launder profits from smuggling tobacco and alcohol. Now the resources are in place under the umbrella of the RCMP proceeds of crime units to attack the profits from alcohol and tobacco smuggling. Police had also gained the complementary authority to lay charges and seize, restrain, and forfeit assets under the Criminal Code proceeds of crime provisions with regard to alcohol and tobacco smuggling. The force was now strategically positioned to attack this area of the underground economy.

To illustrate, we estimated that each member of the former anti-drug profiteering sections (presently proceeds of crime sections) who worked daily with the proceeds of crime legislation generated approximately $400,000 in revenue per year. With the additional 100 members enforcing proceeds of crime legislation under the Customs and Excise alcohol and tobacco program, revenues in the vicinity of $40 million per year could reasonably be anticipated.

The potential could be even greater when one considers reports like the one in 1994 about a single financial institution in the US which over a 15-month period had handled US $250 million in alleged tobacco smuggling profits destined for Canada. Forfeitures of assets in this type of range would make a noticeable dent in the underground economy as well as produce significant savings for the Government of Canada.

Some idea of the scope of the smuggling problem in the early 1990s is in order, even though that crisis, sustained by high Canadian taxes, later subsided somewhat. During 1992 alone, 3,179 persons were charged with customs and excise offences: this figure increased to 3,389 in 1993. In 1992, there were 505 liquor seizures with a retail value of $4.2 million, while in 1993 the figure rose to 631 liquor seizures having a retail value of $11.3 million. When it came to tobacco, the increases were more drastic: 3,461 tobacco seizures in 1992 with a retail value of $31.4 million, and 5,291 tobacco seizures in 1993 worth $53.5 million on the retail market.

In 1994, drastic cuts in federal and provincial tobacco taxes had the desired effect of curbing the smuggling frenzy. This indicates, if proof were needed, that smuggling organizations are adaptable and will switch to the commodity with the highest profit margin. Over the long haul, though, experience suggests that the most effective way to combat this kind of crime is to hit the offenders in their pocketbooks. The formation of customs and excise proceeds of crime investigative units has already gone a long way towards achieving these objectives.

The Underground Economy in the US: Some Criminal Justice and Legal Perspectives

Bruce Zagaris

Introduction

Globalization is exercising a dramatic impact on the US underground economy. Increasingly, this new perspective is enabling people who are active in this economy to exploit lacunae and differences in law among countries and successfully conduct their crimes undetected. By looking at selected areas of the underground economy and such activities as tax crime, contraband, trade crime, bribery, the smuggling of illegal aliens, and money laundering, we can distinguish some criminal justice and legal perspectives on trends in the US underground economy in an international context.

The underground economy, defined as all off-the-books and unregulated activity, is growing in the US, especially in cities with large immigrant populations like Los Angeles, Miami, and New York. --For background on the growth of the role of immigrants in the US underground economy, see Deborah Sontag, "Emigres in New York: Work Off the Books," in the New York Times, June 13, 1993, p. 1.Note --The ability to instantaneously transport people, capital, and ideas makes residents of the remotest parts of the world aware of opportunities in the rest of the world. Access to technology anywhere enables people to create and implement quiet and unobserved ways of amassing wealth, which is the prime function of the underground economy.

The "gray area phenomenon," which denotes the inability of sovereigns to control the conduct of non-state actors and non-governmental processes and organizations in certain areas within their borders, has shifted power from legitimate governments to new, half-political, half-criminal powers. The gray area phenomenon has added an increasingly important political dimension to the underground economy and the need to design mechanisms to control these groups.

The explosion of free trade and economic integration throughout the world and especially in this hemisphere facilitates the international activities of the underground economy and requires more strategic global law enforcement policies to combat them. Unfortunately, our political leaders and academicians have not yet summoned the vision to even conceptualize a comprehensive strategy, let alone start recommending, negotiating, and implementing one. Criminal justice, international law, and international organization theory must be more creatively utilized if the US, other governments, and the world community generally are to contain and control the rising power of traditional and new forms of organized crime and other emanations of the underground economy.

We will begin here by tracing some of the underground economic sectors that are impacted by globalization and then canvass some of the international trends that will enable the world community to design and implement mechanisms to combat this economy. We will also be laying stress on the growing costs of the politicians' failure to act.

Sectors of the underground economy

Underground immigrants

Refugees symptomize the sickness of our times. As 1993 began, the numbers of people forced to leave their countries for fear of persecution and violence had risen to a total of 18.2 million, based on an average of nearly 10,000 new refugees a day. -- United Nations High Commission for Refugees, The State of the World's Refugees. The Challenge of Protection, 1 (1993).Note  -- "Non-refoulement" is the guarantee under international law that people shall not be forced to return to countries where their lives or freedom would be endangered because of "race, religion, nationality, membership of a particular social group or political opinion."

Non-refoulement can be implemented only through cooperation with governments, although extending protection under the terms of international agreements remains a non-political, humanitarian act. Since the climate of receptivity for refugees has cooled in many asylum countries, however, and since refugees are part of a complex stream of migration and often mingled with people who only need humanitarian aid, the US and other nations have refused to extend the principle of non-refoulement or begun limiting the principle's beneficiaries by characterizing them as economic refugees or illegal immigrants. -- Ibid. at 5-10.Note

The profits from smuggling aliens, since the going price is said to be between US $25,000 and $40,000, and the opportunity to use the smuggled aliens, whose families are normally able to pay only a small part of the smuggling cost, provide a powerful economic incentive to conduct this activity. Smuggled immigrants are forced to work seven days for meagre pay, endure dangerous conditions doing legitimate work, if they are fortunate, in such places as restaurants and garment factories. In many cases, smuggled immigrants are forced to engage in such criminal activities as drug and arms trafficking, smurfing-a form of money laundering-and prostitution.

In New York, law enforcement officials have determined that criminality among immigrants falls into patterns. Immigrant women from Latin America and Korea often work as prostitutes. Dominicans ply cocaine on the streets. Chinese and, to a lesser extent, Sicilians control the heroin trade. Nigerians engage in smuggling and fraud. The Russian mob operates bureaucracy schemes from Medicare fraud to evading taxes on oil distribution. Chinese operate gambling houses and smuggle other Chinese to the US.--  Ian Fisher, "A Window on Immigrant Crime in Jackson Heights: Drugs, Dirty Money and Prostitution," in the New York Times, June 17, 1993, p. B1.Note

Actually, the immigrant underground in New York City is mostly above ground. Its sidewalks bustle with at least 10,000 illegal vendors hawking handbags, perfume, and ties from briefcases and folding tables, the contemporary pushcarts: undercutting legitimate merchants, this group has sparked the most furious political controversy. On corners in Brooklyn and Queens, immigrant labourers gather daily to wait for construction and gardening work. In storefronts and basements, Chinese and Hispanic immigrants work at sewing machines, hot presses, and workbenches while sweatshops and illegal industrial homework, virtually nonexistent twenty years ago, continue to grow.

The New York mentality seems to support or at least tolerate the underground economy, preferring the pioneer discount environment. Increasingly, union-dominated industries like construction and apparel manufacturing are using immigrant subcontractors and workers to reduce labour costs. Illegal industrial homework such as sewing, knitting, and assembling goods for manufacturers has become a $1 billion industry. In the last few years apparel sweatshops, which numbered about 200 in the early 1970s, have grown to some 3,500 to 5,000. By the Census Bureau's conservative estimate, 400,000 illegal immigrants live in New York City-5 percent of the city's population-and 25,000 more arrive every year.

An important element of the underground economy is the law that criminalizes certain behaviour and forces immigrants underground. For instance, the Immigration Reform and Control Act of 1986, which was designed to curb the flow of illegals, has also had the effect of making these immigrants, often in collusion with other persons, engage in fraud to furnish the documents employers are supposed to demand before hiring.

Perhaps most significantly, while international law obligates the US to permit political asylees and refugees to reside there during periods of turmoil, the US government's application of its own law to such various groups as persons fleeing the Central American conflicts in El Salvador, Guatemala, and Honduras, and the violence in Haiti, is in contrast with its application of the same law to persons fleeing Cuba and Nicaragua during the war with the contras. These last groups were treated quite favourably and obtained asylum status with greater ease, thereby giving credence to charges that the US violates the international legal principle of non-discrimination when applying its laws and regulations to persons moving across its borders.--   The Movement of Persons Across Borders, Louis B. Sohn and Thomas Buergnethal, eds, 17 (1992).Note

Similarly, the arrest of undocumented juveniles on the US-Mexican border and their detention for months and even years makes criminals of thousands of refugees while they are deprived of the minimum freedoms of education, counsel, medical attention, and so forth. Other refugees have to remain underground to avoid detection and detention.--  For background, see, e.g., "Brutality Unchecked: Human Rights Abuses Along the Border with Mexico" (Americas Watch, May 1992); "Sealing Our Borders: The Human Tool" (American Friends Service Committee, February 1992); "US Congress Moves Towards the Establishment of Immigration Enforcement Review Commission Act for Monitoring Alleged Human Rights Abuses of the Border Patrol," in 10 Int'l Enforcement L. Rep. 391 (October 1993).Note

As long as the comparative quality of life is perceived as being substantially better in the US than in other source countries, the incentives for illegal migration will be present. The problems of illegal migration and the immigrant underground are unique in the US, given its enormous border area, high quality of life, and tradition of civil liberties.

Controls on illegal migration and the immigrant underground have in part emulated western Europe: imposing more enforcement requirements on transportation companies, -- See, e.g., "European Ministers Agree on Enforcement and Criminal Action on Illegal Migration," in 9 Int'l Enforcement L. Rep. 71 (February 1993: article on an agreement among 35 European countries to make transportation carriers liable to fines under new rules on the movement of illegal aliens); "Canada Proposes Law to Increase Penalization of Maritime Industry in Effort to Prevent Stowaways," in 9 Int'l Enforcement L. Rep. 70 (February 1993).Note -- attempting to expedite and deny frivolous asylum claims, -- See, e.g., "German Court Denies Ghanian Citizen Asylum Indicating Strict Enforcement of New Asylum Law," in 9 Int'l Enforcement L. Rep. 281 (July 1993).Note --  and limiting employment and welfare benefits for illegal immigrants.

An important arm of European policy for controlling illegal immigration has been agreements with source and transit countries whereby the latter will receive the migrants in return for technical and financial assistance and economic programs. -- See, e.g., "Germany and Poland Conclude Migration Enforcement Cooperation Agreement," in 9 Int'l Enforcement L. Rep. 204 (May 1993); Bertold Baer, "German-Bulgarian Cooperation against Illegal Migration Emulates Other German Agreements," in 8 Int'l Enforcement L. Rep. 414 (October 1992).Note --  France and many other European countries require people to carry identity cards: national police can ask anyone for proof of identity and immediately imprison persons who are unable to produce it. The enforcement of immigration controls through identity checks often results in the questioning of persons who appear foreign by their dress or actions. Illegal aliens and organized crime are countering these developments by the more sophisticated manufacture and use of faudulent travel documents.--   "Fraud in Travel Documents is Facilitated by Technological and Political Developments," in 8 Int'l Enforcement L. Rep. 174 (May 1992: discusses the use of electronic imaging and colour copies in the production of false passports and visas).Note

While the North American Free Trade Agreement does not specifically have as its intent to curb the flow of illegal migrants, many US policy makers have cited NAFTA as helping to provide more economic opportunities in Mexico and thereby dampening the migrants' motivation.--  See Philip L. Martin, Trade and Migration: NAFTA and Agriculture (1993).Note  -- These policy makers might consider more specific arrangements with other countries in the region that have traditionally furnished the bulk of the migrant flow. -- See the recommendations in Unauthorized Migration: An Economic Development Response: Report of the Commission for the Study of International Migration and Cooperative Economic Development, July 1990.Note -- Certainly, the end or at least substantial lessening of violence and civil war in Central America, combined with emerging democracy and free trade in that region, has assisted in reducing migration throughout the Americas.

The European Union countries are frustrating the problem of illegal migration regionally with a series of mechanisms that include the new European Police (EUROPOL), an intelligence system to watch illegal migrants, and the harmonization of policies on visas and other matters of immigration law. The transnational nature of illegal migration requires a more international and regional approach by the US as well.

Contraband

The most controversial contraband traffic in the US today is in illicit drugs and psychotropic substances. Most experts are agreed that the demand and the enormous profits generated by interdiction policies and overcriminalization continue to motivate the large industry that includes peasants who grow coca and poppy plants and such intermediaries as refiners, transporters, wholesale and street peddlers, money launderers, security guards, and so forth.

At one level, the world community has a comprehensive program to control illicit drug trafficking that targets four major areas: preventing and reducing the demand, controlling the supply, suppressing the traffic, and treating and rehabilitating the users. Much criticism has been directed at the failure of the US to devote enough resources to address the first and last of these targets: demand and user treatment. We in the US are actually repeating mistakes made back when the offending substance was alcohol. Some of the very changes in attitude from tolerance to intolerance that occurred in the decades leading up to national Prohibition in 1920 and the backlash against Prohibition that began after 1933 and ended with repeal are being echoed now.--  For an overview of US drug control policy, see David F. Musto, "Patterns in US Drug Abuse and Response," in Drug Policy in the Americas, Peter H. Smith, ed., 1992, pp. 29-44.Note  -- Like Prohibition, the Draconian US anti-drug laws incarcerate and criminalize large numers of people and fuel the rise of diverse organized crime groups, many of which have grown and diversified over the years. During the Reagan Administration's "War on Drugs," the militarization of the conflict involved enlisting the armed forces in interdiction. -- Bruce M. Bagley, " Myths of Militarization: Enlisting Armed forces in the War on Drugs," in Drug Policy in the Americas, op. cit., pp. 129-50. For background on the initial rationale for the militarization of the war on drugs, see Donald J. Mabry, "Narcotics and National Security," in The Latin American Narcotics Trade and US National Security, Donald J. Mabry, ed., 1989, pp. 3-10.Note

The Clinton administration has shifted the emphasis slightly from interdiction to demand reduction and treatment, although it has also shifted a lot of resources into law enforcement and tougher sentencing. While education has already influenced well-educated middle-and upper-class Americans to decrease drug use, it has not been as successful with the underclass and less educated. For the latter Americans, drug use and trafficking are ways of life and an economic alternative to the dearth of opportunities in their lives. These groups are prone simultaneously to a host of societal problems that include family breakups; violence at home, school, and on television; and poor role models, minimal educational opportunities, dilapidated housing, and insufficient medical care. Meanwhile, the drug component of the US underground economy is fortified by the intersection of drug and arms trafficking, growing gun violence, and the wholesale incarceration of Afro-Americans. Rather than augmenting resources tosolve their problems (e.g., drug prevention), the national, state, and local governments have generally cut such resources and continue to beef up prosecutions and sentences meted out to traffickers and even users.

As a result, foreign leaders such as the highly respected Colombian attorney general Gustavo de Greiff have explicitly advised the industrialized countries and particularly the US to provide more support to treatment, especially for the heavy users, mainly in the underclass, who consume the bulk of narcotics in the US. There are also calls for a more active government role in education, more controls on the trading of chemicals produced in industrialized countries that are needed for processing narcotics; more efficient means of obtaining judicial evidence against persons involved in the business, and more open sharing of evidence with courts in producing and consuming countries. -- Gustavo de Greiff, "The Coke King Compromise," in the Washington Post, March 13, 1994, p. C1.Note

Despite the bankruptcy of its drug control policies, the US continues to repeat its mistakes. The various legalization options deserve at least a thorough debate in a country that prides itself on its openness. One of the difficulties with US drug policy, especially as regards decriminalization, is that the current debate is muddled on both the popular and the scholarly planes. Such basic legalization details as which drugs should be covered and how regulation would replace prohibition are rarely set forth, which leaves both sides arguing in the dark. The debate often blurs even the basic distinction between the effects of drugs and the effects of drug control policies. -- Mark A.R. Kleiman and Aaron Saiger, "Taxes, Regulations, and Prohibitions: Reformulating the Legalization Debate," in Drug Policy in the Americas, op. cit., p. 223.Note

US influence in regional and even international drug policy due to its big-power status and anti-drug spending ensures that its bankrupt policy will continue worldwide. Increasingly, however, the European Union is seriously debating legalization while the Inter-American Drug Abuse Control Commission, pressed by governments such as Mexico's and Canada's, is supporting increased attention to the issues of demand, treatment, and alternative economic development in the supply countries.

Tax crimes

As the US federal and state governments recently raised their rates of tax and interest and penalties for non-payment of tax on top of the base broadening of prior years, there is evidence of growing non-compliance and associated criminal activity. Some types of non-compliance and evasion differ between the federal and state levels.

In California, tax evasion and its related underground activity are reportedly growing fast. Some of the reasons are acceptance of fraud and tax evasion as ways of doing business; lack of support for an efficient and aggressive educational system by Californian taxing authorities; the absence of police powers under current prosecution programs; inadequate criminal and civil penalties to curb tax fraud; and a lack of comprehensive tax legislation to restrict criminal activities. For background, see Bill Stall and Ralph Frammolino, "California Taxes," in the Los Angeles Times, October 26, 1993, p. 6B.Note

One example of a revision in law that could halt the theft of hundreds of millions of dollars a year, at 17 cents a gallon, is California's fuel vendor tax. The current law imposes the fuel vendor tax at the distributor level: some distributors collect the tax and never remit it to the state. Legislative proposals would impose the tax at the manufacturing level to drastically reduce the loss of tax revenue.

Fuel tax evasion is estimated to cost the State of California $50 million a year in lost revenue. Diesel fuel is an attractive target for evasion because 40 percent of its retail price consists in state and federal taxes. Potential profits from not paying tax on a truckload of black-market diesel can run as high as $3,450 as compared with a normal return for honest businesses of $75 to $375 on a truckload of taxed fuel. Where the tax is actually collected, some fly-by-night wholesalers simply disappear with their saddlebags full while others keep and use the money for six to nine months before finally remitting it to the state. -- "State Developments, California," in Daily Report for Executives, October 22, 1993, 203 d77.Note --  Diesel tax collection, meanwhile, is further complicated by the existence of approximately 91,000 businesses or individuals registered as diesel taxpayers, including 655 wholesalers, 3,062 retail service stations, and 17,000 interstate truckers. However, the state has only 24 terminals.--  IbidNote

Federal and state governments lose up to $1 billion annually from these evasions, though the Omnibus Budget Reconciliation Act of 1993 tightened enforcement by mandating collection at refinery terminals starting January 1, 1994. Some California legislators have proposed that the State of California harmonize its law with the federal law.

Another California compliance problem has involved unitary tax, especially as it concerns foreign-based multinationals. Unitary tax is a method of assessing tax on the international income of multinational corporations doing business in a state. The most prominent piece of litigation here has been the Barclays Bank case which challenges the unitary tax laws of California and is now pending in the US Supreme Court.

Meanwhile, tax evasion also continues at the US federal level. To understand the new pressures favouring evasion at the national level, we have to recall that the top rates of direct taxes on personal and corporate incomes were lowered decisively under the Reagan reforms but that many tax concessions were simultaneously cut back or eliminated. In fact, tax rates could be reduced without massive loss of revenue only by widening the tax base and closing tax loopholes. The goal was to produce a simpler tax system and one that would not allow inflation to automatically push taxpayers into higher tax brackets even though their real incomes were not rising. -- Aziz Ali Mohammed, "This Year's Tax Fashion: More Pain for Everyone; For East and West, The Bill is Due, and Getting Larger," in World Paper, September 1993 (Lexis-Nexis).Note

The initial tax reform proposals argued that the magic of lowering marginal tax rates would create such a surge of private enterprise that the resultant rise in economic activity and incomes would trickle down and produce as much revenue, if not more. An international ramification of the Reagan administration's tax reforms was the lowering of tax rates in a number of other countries as part of a necessary process of tax harmonization. Many policy makers recognized that the growing integration of the world economy, facilitated by ongoing revolutions in telecommunications and information technology, did not allow countries the luxury of maintaining radically different direct tax levels. Taxpayers, especially corporations operating transnationally, could arbitrage across separate tax jurisdictions to secure the best tax treatment and overall economic result.

Indeed, the movement even spread to developing countries, in part through the advocacy of "supply-side" economics by international financial instructions, which often made lowering direct tax rates an ingredient of their recipes for structural adjustment. Their influence assisted in lowering rates and simplifying tax arrangements generally in countries as diverse as Mexico, Ghana, India, and Morocco.

Meanwhile, the US tax reform wave crested and has undergone change during the Clinton administration, which has raised tax rates for individuals and corporations while continuing to reduce or eliminate tax deductions. Several factors have helped to stymie the drive for lower taxes. The first is the failure of the reforms to prevent a large revenue loss and consequent massive bulges in budget deficits and the associated burden of public-debt servicing. A second factor was the discovery that the lower levels of government-states, counties, and municipalities-were having to either impose higher taxes within their jurisdictions or else curtail essential public services in the face of reduced financial assistance from the federal level. In particular, the "balanced budget" constraint in the US applies extensively at sub-national levels to restrict available services and even the means of raising money. With direct tax rates frozen or rising sluggishly, an unfortunate recourse was had to higher indirect taxes on saes, which were generally perceived as regressive and tending to abet inequalities in society.

Politically, the US has been targeting more tax revenue from multinational enterprises, which have been reputed not to pay their fair share of profits, either shifting their money to related enterprises in low-tax countries or arbitrarily saddling their US enterprises with the costs of their international operations, thereby reducing net US income and taxes owing in the US.

The result has been a series of laws and regulations in the transfer pricing area. These laws and regulations have dramatically increased the amount of record keeping and reporting the multinationals have to do, with requirements for maintaining very detailed records on how transfer pricing is figured, simultaneous filing of income tax returns, and the appointment of agents in the US where none already exist and who are able to receive summonses. All these new requirements are accompanied by severe economic penalties and loss of procedural rights for taxpayers failing to comply. Simultaneously, the procedural rights of the Internal Revenue Service have been substantially improved so that tax authorities are now able to demand information at a much earlier stage, extend the statute of limitations, prevent the introduction of foreign documents not made available to them immediately during an examination, and completely disregard records where the taxpayer has not furnished such information at the proper time.

In addition, the US tax authorities have concluded tax information exchange and related mutual assistance agreements with their foreign counterparts so that tax agents can obtain and verify information and documents concerning the multinationals quickly and directly.

Another taxpayer stratum affected by the tax compliance drive is the high net-worth US individual. Because US tax residents, i.e. US citizens or persons who are either permanent residents or present in the US for approximately 183 days during the year, must pay tax on their worldwide income, regardless of its source, more individuals are expatriating-formally surrendering their citizenship or permanent residency to avoid paying tax on their worldwide income. -- For background on the tax expatriate trend in the US and elsewhere, see Marshall J. Langer, The Tax Exile Report (2nd ed., 1993).Note  --  In 1993, 306 persons expatriated, up from 157 in 1992. -- "Americans Are Taking Capital Abroad to Avoid Taxes," in Tax Notes, March 7, 1994, p. 1307, citing an article by Bridgid McMenamin in Forbes, February 28, 1994, p. 55.Note --  These expatriates are motivated by more than the desire to minimize taxes. Many Americans are already living overseas and therefore have less contact and derive little or no benefit from Medicre, welfare, and the various services and benefits US tax residents actually living in the US receive. Sometimes, in fact, while people are travelling or living overseas, US citizenship can have adverse consequences. The US does have an anti-expatriation tax that enables the IRS to keep imposing income tax for ten years on persons leaving to avoid tax, but prosecutions have been few since proving tax-motivated intent is difficult.

Tax evasion is also connected with the larger problem of unrecorded transactions in the underground economy. Much of this economy involves activities that are illegal, such as trading in narcotics and arms and smuggling prohibited goods across national frontiers. The increasing sophistication and worldwide reach of these underground enterprises produce vast losses of tax revenue while forcing the state to spend heavily on prevention. --  Stall and Frammolino, op. cit.Note

Another type of US underground activity spawned by tax evasion has been work by undocumented domestic workers, babysitters, gardeners, labourers, and so on. The requirement that employers pay taxes and file various returns on any worker receiving more than $50 in a quarter has generated widespread non-compliance. Under the US tax code, every employer required to withhold tax on wages is liable for payment of such tax whether it is collected or not. Any responsible person, typically a corporate officer or employee who wilfully fails to withhold, account for, or pay tax withholdings to the government is liable to a penalty equal to 100 percent of such tax.--   Internal Revenue Code, 6672.Note  -- Civil and criminal penalties can be imposed if an employer wilfully fails to furnish or furnishes a false or fraudulent withholding statement to an employee.--  Internal Revenue Code, 6674 and 7204.Note

Failure to report and pay such taxes came to the public's attention at the start of the Clinton administration when it was found that the first two nominees for Attorney General, Zoe Baird and Kimba Wood, had failed on both counts. Ms. Baird had to withdraw and Woods's candidacy was withdrawn before it was submitted.--  For background, see Martha F. Davis, "Podium: No Papers, No Rights, No Safety," in the National L.J., February 22, 1993, p. 16.Note --  More recently, William Kennedy, a White House counsel and former law partner of Hillary Clinton, was also disciplined for failing to pay and report such taxes. These cases have become known collectively as "Nanny-gate." The sheer numbers of similar cases have resulted in proposed legislation (S 1231) to raise the threshold at which social security taxes must be paid for domestic workers to $620 annually, along with the national average wage.

The IRS has been working on various ways of targeting potential groups for audit through computerized mechanisms to detect various patterns and types of taxpayers who are not reporting transactions or otherwise evading taxes. The agency is also tackling non-compliance by expanding its Market Segment Specialization Program (MSSP) into dozens of new areas ranging from entertainment, mining, and construction to seafood purchasers, art dealers, bail bondsmen, and citrus growers. Concurrently, the IRS is developing comprehensive guides to avoid the use of manpower to conduct audits in nearly 90 industries. The Market Segment Program pinpoints both large industry segments and narrower subgroups.--  Rita L. Zeidner, "IRS Targets 90 Markets in Market Segment Specialization Program," in 62 Tax Notes, February 28, 1994, p. 1105.Note

Criminal prosecution of foreignnationals

A major problem contributing to the growth of the US underground economy has been rapid expansion in the extraterritorial application of criminal sanctions under US export legislation and the prosecution of foreign nationals using questionable law enforcement practices.--  For additional discussion of this issue, see Bruce Zagaris, "Can the World Ride the Bucking Bronco or Can an American Sheriff Only Find Happiness in a Warm Gun?": unpublished paper delivered to the DC Bar Association program on "The Expanding Extraterritorial Application of US Export Law: Regulation of Foreign Transactions and Criminal Prosecution of Foreign Nationals," April 4, 1994.Note  --  The criminalization of the purchase of non-arms goods and services because they will eventually reach embargoed countries such as Cuba, Iran, Iraq, and Libya has resulted in Byzantine laws and regulations that the two agencies responsible for them disagree about and enforce differently.

Most enforcement actions are instigated and driven by undercover informants who have usually been convicted of crimes and whose freedom depends on their "cooperation," meaning that unless they set up and help prosecute other individuals they will remain under US correctional supervision. Some informants are also given economic incentives that require them to help with arrests and successful prosecutions before they can receive all of their compensation. Accordingly, their interest lies in securing convictions rather than fairness and the integrity of the justice system.

The perception of fairness in the investigation of these cases has been compromised by the use of undercover sting operations in which the US Customs Service, working with informants, banks, and other agencies, arranges transactions and makes payments for purposes of entrapment. In at least eight cases during the early '90s, sting operations resulted in the arrest and prosecution of foreign individuals who had no prior criminal records. These cases follow several standard scenarios. Most of the subjects were lured into leaving their own countries under false pretences of engaging in business transactions only to be seized. In one case, a Cypriot national was arrested in a private plane after he had visited the Bahamas so that the US government could circumvent its extradition treaties with the Bahamas and Cyprus, bringing diplomatic protests from both governments. --  For a discussion of the Cypriot case, see "US Customs Agents' 'Sting' of Cypriot in the Bahamas and Costa Rican Court's Invalidation of US Extradtion Treaty Put Pressure on US Extradition Policy," in 9 Int'l Enforcement L. Rep. 58 (February 1993).Note

Another pattern has been for the foreign individuals, although successful businessmen with no criminal records whatsoever, to be denied bail and spend anywhere from three to 18 months in jail. When incarceration is combined with threats to bring additional criminal charges, foreign defendants usually plead guilty. Most cases that have gone to trial ended in speedy acquittal, sometimes even before the defence rose to present its case.

The US government's modus operandi in these cases has spawned a new sector of the underground economy. Overcriminalization, lack of jurisdictional restraint, and heavy-handed tactics have led to refusal by the Canadian government to even hold a hearing on one US extradition request, at least four civil lawsuits in the US, Canada, and Egypt, and the Inter-American Commission on Human Rights. The use of undercover sting operations against former high-level Polish officials and intensive media coverage of their trials resulted in the staging of anti-American demonstrations in Warsaw just before the Polish elections in September 1993 that helped to shift the parliamentary balance towards the socialists.--   John J. Fialka, "Customs Service's 'Stings' to Curtail Arms Sales Draw Blood (Its Own) as Cases Collapse in Court," in the Wall Street Journal, March 18, 1994, p. A12.Note

This unilateral, overzealous use of economic sanctions against a multitude of countries has made criminals out of many unknowing persons and driven underground many more. Only by exercising restraint in applying its extraterritorial jurisdiction, limiting the scope of investigations, selecting cases carefully, respecting the sovereignty of other countries, and paying attention to international human rights law, including the rule of law in the apprehension and pre-trial treatment of foreigners and fairness throughout the entire criminal justice process as it is applied to foreigners, will the US be able to limit the growing detrimental effects of the enforcement of its international export control policy from both a diplomatic and a criminal justice perspective. Because these cases involve large foreign and international legal components, the failure to cooperate closely with foreign governments will continue to have adverse short- and long-term consequences.

Money laundering

One very important component of the underground economy is money laundering, an essential support service that enables criminals to enjoy the fruits of their crimes. The very nature of money laundering precludes US or international law enforcement agencies from knowing the actual amounts being put through the wash, but estimates in 1993 ran as high as $100 billion in the US and $300 billion worldwide.

Money laundering is a diverse and complex process. It involves three independent steps that may coincide: placement, as bulk cash proceeds are physically placed; layering, as the proceeds of criminal activity are separated from their origins by layers of complex financial transactions; and integration, when an apparently legitimate explanation and cover are provided for illicit proceeds which by this stage have been transformed into legitimate assets. ---   For background on money laundering and its phases, see Office of the Comptroller of the Currency, Money Laundering: A Banker's Guide to Avoiding Problems, 1-2 (June 1993).Note

Drug smuggling generates an enormous amount of income that attracts organized criminals and affords them great power. The civilian and military employees of the former Panamanian government of General Noriega are alleged to have amassed more than $300 million between 1985 and 1990 through their association with Chinese criminal smuggling organizations.--- Time, May 14, 1990, p. 70.Note  --  The methods of drug smuggling and its huge profits readily mesh in with such other organized criminal activities as alien smuggling. For instance, a recent study of Asian organized crime in the US reported that two thirds of the Chinese gangs were involved in both heroin and human contraband. -- "A Guerilla War on Alien Smuggling: Agenda for Action by the First Chinese Alien Smuggling Conference," cable report from the US Consulate General, Hong Kong [Hong Kong 011714], November 3, 1992.Note

The unprecedented amounts of cash and cash equivalents derived from narcotics will fuel generalized corruption as exemplified by the Bank of Credit and Commerce International (BCCI) and the rise of the new cocaine cartels. Recent technological advances and the rise of free trade are enabling organized crime groups to launch new criminal activities such as credit card fraud and move illegal goods, capital, and persons more easily within free trade areas where barriers have been removed without a complementary strengthening of law enforcement mechanisms.

The "global village" phenomenon that facilitates the movement of persons, funds, and commodities will continue to provide opportunities for new financial manipulations including secret and illegal control of banks, non-bank financial institutions, and other business organizations that have the ability to move money. We will also be seeing the use of new money laundering strategies such as illegal letters of credit, prime bank instrument fraud, phoney loans, and fraudulent stock transactions, all making international systems increasingly vulnerable to manipulation. All these developments put pressure on governments, international governmental organizations, and non-governmental organizations to strengthen anti-laundering and other measures for dismantling criminal organizations while not moving so fast that legitimate commerce, travel, and money movement are unreasonably constrained.

Organized crime groups and the gray area phenomenon undermine the economic base of the world and many of the world community's crucial political alliances. For instance, US economic interests at home and abroad suffer as the "bad guys" weaken international banking, undercut the export base of the US and other countries, and exacerbate the balance of payments problem as they shift US capital to illicit organizations.

The kind of money these criminals control buys them access to the highest echelons of executive power. They can also influence the judiciary in the prosecution and adjudication of criminal cases. The sub-regime of regulating international money movement is gathering a momentum of its own and expanding beyond mere narcotics trafficking.  --   For more discussion of international anti-laundering regulation from a US perspective, see Bruce Zagaris, "Dollar Diplomacy: International Enforcement of Money Movement and Related Matters -A United States Perspective," in 22 Geo. Wash. J. of Int'l L. & Economics, pp. 465-552 (1989)Note

Asset forfeiture laws are being ratified in several countries as a means of developing a set of rules by which governments and international organizations can cooperate in countering this massive criminal activity. Here, we will review some initiatives to regulate international money movement and criminalize a vital component of the underground economy.

Indeed, the US was among the first states to enact anti-laundering legislation.  --   For background on US anti-laundering laws, see Bruce Zagaris, "Dollar Diplomacy," op. cit., p. 465.Note    --  However, the most important anti-laundering law work has been done through intergovernmental organizations (IGOs). The United Nations, especially the United Nations Drug Program, Interpol, the Financial Action Task Force (FATF) of the G-7 Economic Summit, and the G-10 Committee of Central Bankers have all directed the application of anti-laundering laws. At the regional level, the European Union, the Council of Europe and its Laundering Convention, the Organization of American States, and the regional FATF branches have done important work. These IGOs have helped negotiate conventions, secure passage of model laws, regulations, and principles; they have assisted in training, auditing compliance with international conventions, and preparing and disseminating bulletins to notify law enforcement officials about new techniques and prblems.

Several international conventions oblige states to criminalize money laundering. What differs among countries is the norm of conduct required to criminalize participation in laundering. Some countries require the transgressor to understand or at least have knowledge of the crime, but some treaties and laws criminalize conduct that is merely negligent or careless. In all cases, there must be agreement to lift or override the right to financial secrecy. International conventions require governments to override secrecy rights whenever a government makes a request for evidence in connection with a criminal proceeding.

Anti-laundering laws accomplish their goals in part by creating an audit trail throughout the world as banks, financial institutions, and non-financial institutions are required to "know their customer," which means that they must obtain written identification from the customer and verify and record such information. A related aspect of the "know your customer" principle is the currency transaction report which obliges covered persons to transmit customer information to the competent authorities. Another principle is the duty of covered persons to identify and report "suspicious transactions." These obligations mark an attempt to privatize anti-laundering enforcement. Covered persons commit a crime themselves by failing to perform them. Even so, the private sector has complained of the burden of distinguishing legitimate from suspicious international dealings.

Another anti-laundering principle requires governments to trace, freeze, seize, confiscate, and ultimately forfeit illicit assets from crime.   --  For additional background, see Bruce Zagaris, "Constructing a Financial Enforcement Regime to Reallocate Assets from the 'Bad Guys' to the 'Good Guys,'" in Gray Area Phenomena Confronting the New World Disorder, Max G. Manwaring, ed., pp. 93-108 (1993).Note  --   The novelty of this principle and the legal and cultural differences among legal systems have impeded its uniform application. Some asset forfeiture laws include only criminal activity, while others will consider civil and administrative actions. Many countries cooperate with asset forfeiture provisions only when laws are derived from the penal code and some confine application to the proceeds and instrumentalities of crime.  --    For more background on the international aspects of asset forfeiture, see Bruce Zagaris and Elizabeth Kingma, "Asset Forfeiture: International and Foreign Laws," in 5 Emory J. Intl Law, 446 (1991).Note

Governments and international organizations are still struggling to achieve a proper balance between individual and property rights and the need for intrusive procedures to privatize law enforcement. The need to avoid undue interference with normal commerce and overburdening the private sector with costly administrative work must also be balanced against the privatization of enforcement.

The gray area phenomenon

The "gray area phenomenon" (GAP) has complicated and exacerbated the problems of the underground economy in the US. Exemplifying the growing role of international influences and the need for international solutions, the GAP is defined as the existence of threats to the stability of nation states by non-state actors and non-governmental processes and organizations.--   Edward G. Corr, introduction to Gray Area Phenomena, op cit., p. xiii, quoting Peter Lupsha, "The Gray Area Phenomenon: New Threats and Policy Dilemmas," unpublished paper presented at the High Intensity Crime/Low Intensity Conflict Conference, Chicago, Illinois, September 27-30, 1992, pp. 22-23.Note  --   It inhabits large regions or urban areas where control is in the hands of new half-political, half-criminal powers rather than legitimate governments.  --    Ibid., referring to Xavier Raufer, "Gray Areas: A New Security Threat," in Political Warfare (Spring 1992).Note  --   The GAP exists in many parts of Andean countries controlled by narco-traffickers ad/or terrorists. It exists in many parts of Afghanistan, especially its border with Pakistan. Throughout Russia and many post-Soviet countries, real control rests with the mafia.

In the US, the GAP exists where chunks of inner cities are controlled by gangs, narcotics traffickers, and ethnic organized crime. In Miami, for example, several apparent political assassinations of Haitian leaders have occurred in daylight after the funerals of Haitian political leaders who had themselves been assassinated.

A proposed strategy and theory of engagement for the GAP applies the paradigm that endeavours to understand and operate successfully in "uncomfortable" low-intensity conflict (LIC) situations. In such conflicts, the adversaries' strength depends largely on the existence of "gray areas" where governments cannot govern. The paradigm for coping with these phenomena is based on the underlying premise that the outcome of such conflict is not primarily determined through the skilful manipulation of violence by the police and military. Rather, a holistic approach is required so that the outcome will be determined by (1) the legitimacy of the government, (2) unity of effort, (3) the type and consistency of support for the targeted government, (4) the ability to reduce outside aid to the insurgents or traffickers, (5) intelligence (or action against subversion), and (6) the discipline and capabilities of the government forces.  --  Stephen Sloan, introduction to Low-Intensity Conflict: Old Threats in New World, Edwin G. Corr and Stephen Sloan, eds, p. 12 (1992).Note

Although the GAP is particularly problematical for many of the weaker nation states caught in the spiral of international disorder, the US is also vulnerable. The large and relatively well-off US market acts as a magnet for criminals dealing in illegal aliens, narcotics, arms, stolen art, plutonium, and prostitutes. And once they have made money, the US economy remains a magnet for laundering it.

Part of the problem of the current world order and a contributing factor to the US underground economy emanates from gray areas out of states' control. Some destructive groups in the mostly non-industrialized, non-democratic Southern world oppose all things Northern and have embarked on a fundamentalist jihad against "McWorld," a term for integrationist modern society. The new "bad guys" include terrorists, insurgents, drug traffickers, rogue states, neo-Luddite ecoterrorists, xenophobes, and fundamentalists  --   . For background, see Scott B. MacDonald, "The New 'Bad Guys': Exploring the Parameters of the Violent New World Order," in Gray Area Phenomena, op. cit., pp. 33-62.Note  --   Although the US will need diverse responses to effectively neutralize the new "bad guys," clearly the lacunae in the international economic and legal systems, combined with the big, porous US border and the ease with which the new technology can instantaneously transfer information, money, people, and goods, leave the US and is neighbours increasingly vulnerable and require a much bolder response than hitherto.

Until now, the bulk of resources to combat the new "bad guys" has come from unilateral US programs. To the extent that the US participates in multilateral programs, these programs tend to be concentrated on a highly specific dimension of a problem. For example, most US resources for international criminal cooperation in this hemisphere are directed to the drug area, where the US has provided significant financing for the operations of the Inter-American Drug Abuse Control Commission of the Organization of American States and the International Drug Enforcement Conference (IDEC), an initiative to institutionalize regional cooperation by high-level drug law enforcement officials from Western Hemisphere countries.

IDEC was first convened in 1983 as an outgrowth of the International Drug Enforcement Alumni Association (IDEA), a group of Drug Enforcement Administration (DEA) international training courses. Its principal objective is to share drug-related intelligence and develop an operational strategy that can be used against international drug traffickers. The DEA's Administrator is the permanent co-president of the conference. IDEC funding comes largely from the DEA and International Narcotics Matters, US Department of State.

Another regional anti-drug initiative is the Joint Intelligence Coordination Center (JICC), a generic term that describes an individual centre. When a JICC is connected with the El Paso Intelligence Center (EPIC), it becomes part of the Sentry network. The JICC/Sentry program is a successful and cost-effective mechanism in the arena of counter-narcotics information gathering. It provides information about movements of private aircraft and vessels and persons suspected of involvement in narcotics trafficking to law enforcement agencies involved in counter-narcotics activities.

An integrated approach to the underground economy

Some global interactions are initiated and sustained entirely or almost entirely by nation states. Other interactions, such as those initiated by organized criminal groups, involve private persons. One prerequisite for successfully combatting organized criminals is to view the law enforcement community as an actor in a world politics paradigm and contrast it with the state-centric paradigm in which only nation states have significantly more active roles.

If the US and other nation states are to succeed in their campaigns against the underground economy, countries confronting problems of traditional and emerging new criminal groups must become more sensitive to a paradigm in which organizations other than nation states are accorded power. A successful effort will entail a more innovative use of existing and new bilateral and multilateral mechanisms as well as more uniformity in national actions so that law enforcement officials can be as mobile and efficient as organized criminals. Already, law enforcement officials suffer from their lack of the close-knit family ties that facilitate the operations of criminal groups.

A fully supported "international regime" for anti-laundering and financial enforcement would permit national governments as well as intergovernmental organizations (IGOs), international non-governmental organizations (INGOs), and non-governmental organizations (NGOs) to make more effective use of limited resources. "International regime" is a specialized term that originated with international organization theory in the early 1970s   --  For an early discussion of "international regimes," see Robert Keohane and Joseph Nye, "Transnational Relations and World Politics," in International Organization 25, no. 3 (1971), later enlarged and published as a book by Harvard University Press in 1972.Note   --  to cover phenomena that involve mostly governmental actors but affect non-governmental actors in such diverse areas as international trade, For a discussion of international regimes and international trade,  --   see Jack A. Finlayson and Mark. W. Zacher, "The GATT and the regulation of trade barriers: regime dynamics and unctions," in International Regimes, Stephen D. Krasner, ed., pp. 274-314.Note  --    money, and oceans.  --   See, e.g., Robert Keohane and Joseph Nye, Power and Independence, 1977, pp. 63-164.Note    --  A regime may be formal-for example, the General Agreement on Tariffs and Trade   --  Finlayson and Zacher, op. cit.Note -or informal, the regime being merely inferred from the actions of the states involved.   --  An example of an informal regime in international criminal cooperation would be the deportation of certain individuals wanted for crimes and the permission of neighbouring countries to allow "hot pursuit" on their territory. Such informal cooperation has occurred among the Benelux countries and between the US and Mexico and their border states (e.g., Sonora and Arizona).Note

The purpose of international regimes is to regulate and control certain transnational relations and activities by devising appropriate procedures, rules, and institutions. In fact, international regimes have been defined as "norms, rules, and procedures agreed to in order to regulate an issue area." Participants in international regimes will benefit through explicit or tacit cooperation based on such shared concerns as reducing narcotics supply and demand, reducing the power of organized criminal groups, combatting money laundering, and so forth. Since international regimes incarnate specific objectives, they are considered to be more fluid in nature and more likely to undergo evolutionary changes than regular intergovernmental organizations (IGOs).

Unilateralism is inadequate in the post-Cold War world. In response to changed circumstances, the Bush administration diverged from its predecessor's unilateralism and increasingly emphasized collective strategies and problem solving as its term progressed. The Clinton administration appears to be pursuing a systematic strategy that has been called "assertive multilateralism"  --    Viron P. Vaky, "The Organization of American States and Multilateralism in the Americas," in The Future of the Organization of American States 7 (1993).Note

The US has the resources in both the private and public sectors to exercise leadership in conceptualizing, proposing, and implementing institutions and structures that are capable of overcoming the power of organized criminal groups-both the old-line traditional groups and the newer groups in narcotics and arms trafficking. Rather than trying to impose policies on other countries, the US should first try to develop a multilateral consensus and then assume the leadership without which regional organizations will not be able to handle problems like the underground economy.

The role of the Organization of American States in promoting cooperative enforcement in the region should be accentuated. Traditionally, the Inter-American Juridical Committee has helped with the preparation of international criminal cooperation conventions. In 1985, the Inter-American Drug Abuse Control Commission (CICAD) was established and has succeeded in providing training for officials, securing the passage of model anti-laundering legislation, and providing other cooperative mechanisms.

International criminal cooperation within the OAS has a long and successful history that has included uniform legislation and conventions for cooperation in broad as well as technical crime matters. To provide stronger regional cooperation against crime and technical assistance to the smaller and weaker countries, the region should have a regional mechanism, the Americas Committee on Crime Problems (ACCP). Similar to the European Committee on Crime Problems under the aegis of the Council of Europe, the ACCP would be established by the OAS justice ministers with a small secretariat. Initially, OAS member states would voluntarily second officials as staff. The ACCP would deal with a vast array of crime problems that affect the Americas, proposing draft conventions and uniform legislation, helping with uniform data, providing technical assistance, and generally supporting the efforts of national governments and other international organizations like Interpol and the UN. The ACCP would also mobilize and ooperate with international non-governmental organizations such as the International Penal Law Association and the Association of Chiefs of Police, and national non-governmental organizations such as judicial, police, criminal justice, bar, banking, and accounting organizations.

The US, other governments, INGOs, and NGOs should actively explore and stimulate the design and establishment of mechanisms and institutions to combat in more comprehensive and integrated ways the growing underground economy and organized crime on both the world and regional levels while the opportunity still exists.

Understanding the Mafia: The Business of Organized Crime

John Burton

Introduction

There has been a long debate, dating back into the 19th Century, about the exact nature of the Mafia. How is it organized? What is the extent of organization involved-for example, in terms of geography, vertical integration, horizontal collusion...? And what business or businesses are so organized? Here, we will be looking at such questions from the perspective of business economics and strategic management analysis.

We will confine our attention specifically to criminal enterprises that go under the general label of the "Mafia" or "Cosa Nostra" ("Our Affair") in North America and Italy-specifically, Sicily. The Mafia/Cosa Nostra, of course, represent particular branded versions of a more general species of organized criminal enterprise that includes the Yakuza in Japan, the Triads in the Chinese diaspora, yardie gangs in Jamaica and the UK, the so-called cocaine cartels of Colombia, and other Italian crime organizations such as the Camorra of Naples. All of these criminal enterprises share certain similarities, but they also exhibit differences. For brevity's sake we have stuck to the manifestation of organized crime that we think we all know from the "Godfather" films and other popular entertainments.

In the sections that follow, we will first develop two highly opposed "polar" views of the nature of the Mafia as a business enterprise that have emerged over recent decades. A third section presents Gambetta's recent and important analysis of the Mafia. The paper then proceeds with some personal reflections drawing specifically on strategic management analysis and business economics. This alternative perspective takes issue with some parts of Gambetta's analysis, but only marginally, as its primary purpose is to make a positive addition to his analytical framework. A final section offers some concluding thoughts on this long debate about the nature of the Mafia business organization.

There is a fundamental disagreement among various authorities about the degree of organization-local/national/international-of the Cosa Nostra that extends to alternative diagnoses of what their business is fundamentally about. We will call these two poles of thinking about the Mafia the "octopus view" and the "disorganized crime" hypothesis.

The octopus view

This view emanates from various sources all of which concur in the proposition that the contemporary Mafia exhibits a high degree of national-indeed, in some versions, international-coordination. It came into prominence in the US in the early 1950s as a result of the work of a Senate committee on interstate crime chaired by Senator Kefauver. The Kefauver Committee concluded that there was an octopus-like coordination of such crime in America under the aegis of the Mafia:

There is a nationwide crime syndicate known as the Mafia, whose tentacles are found in many large cities. It has international ramifications which appear most clearly in connection with the narcotics traffic.... Its leaders are usually found in control in the most lucrative rackets in our cities. There are indications of a centralized direction and control of these rackets.  --   US Senate Special Committee to Investigate Crime in Interstate Commerce (the Kefauver Committee), 82nd Congress, Third Progress Report: Washington, DC, Government Printing Office, 1951, p. 147.Note

Such conclusions were reaffirmed by the McClellan Committee of the US Congress in 1962   --  Gambling and Organized Crime: Washington, DC, US Congress, 1962.Note  --   and then again by the 1967 President's Commission on Law Enforcement. The latter likened the Mafia to big businesses in the formal economy:

Organized crime...involves thousands of criminals working with structures as complex as those of any large corporations.... The actions are not impulsive but rather the result of intricate conspiracies carried out over many years and aimed at gaining control over whole fields of activity to amass huge profits.  --    President's Commission on Law Enforcement and the Administration of Justice, Task Force Report: Organized Crime: Washington, DC, US Government Printing Office, 1967, p. 1.Note

This depiction makes the US Mafia sound like a multidivisional corporation complete with a long-range strategic plan and market share goals for each division. Yet others have taken the view that the Mafia is not mainly a national crime syndicate-the Kefauver position-but rather a global business organization. For example, Judge Giusto Sciacchitano of the anti-Mafia pool in Sicily which undertook the "maxi trial" of 464 alleged mafiosi in Palermo during 1984-1987 has concluded that the Mafia is

global, unitary, rigidly regimented and vertically structured, governed from the top down by a cupola with absolute powers.... It is only now that we can see this globality, but it is always there.   --  Quoted from an interview reported in Sterling (1990), p. 282. The book is a highly readable account of the "octopus" Mafia view.Note

With this vision of the Mafia in mind, let us now turn to the opposite pole of thought, which I have labelled the "disorganized crime hypothesis."

The disorganized crime hypothesis

Although the conventional wisdom in postwar American law enforcement circles has inclined strongly to the octopus view of the Cosa Nostra, this position has not been without its detractors, even including a few within those very circles. Indeed, it is reported that no less a figure than J. Edgar Hoover would hear no talk of the existence of a national crime syndicate and that the FBI under his direction was prevented from even looking for one!  --   Sterling (1990), p. 237.Note

When economists first started to apply their analytical tools to the study of crime in the late 1960s and early 1970s, however, the tendency was to accept the orthodox "octopus" view espoused by earlier inquiries into these matters (e.g., Schelling, 1967; Buchanan, 1973). Schelling's theoretical analysis of organized crime in particular was based on a view of the Mafia consistent with the octopus idea: a centralized, monopolistic organization operating in both illegal markets (e.g., gambling, narcotics) and the business of extortion.

A defect of these initial theoretical forays was that, like the governmental inquiries they followed, they lacked a solid basis in terms of serious management and economic research into the realities of organized crime as a business.

It does not need to be stressed that there are "certain problems" with undertaking such empirical research in this particular business arena. In the early 1980s, however, a detailed empirical study of certain organized crime activities was conducted by an economist named Reuter (1983). This study of the operations of the numbers, illicit bookmaking, and loan sharking businesses in New York City marked an important step in throwing considerable doubt on conventional wisdom about the business of the Cosa Nostra.

Surprisingly, Reuter was unable to find evidence in these three settings that could sustain the contention that markets were being monopolized or centrally controlled as argued in the octopus view. He was led to conclude that, while there are doubtless incentives to create a dominant group in any setting where violence is involved, there are a number of other economic factors that tend to undermine monopolies in the underworld economy and keep them local, fragmented, and underintegrated as compared with legitimate industries. This is one facet of the disorganized crime hypothesis-the contention that supposedly very organized crime activities are actually typified by fragmentation as compared with their "above-ground" counterparts.   --   An important precursor of the same general position, but from a more sociological perspective, who concluded that the Mafia was a largely non-organized entity was Hess (1973).Note

Reuter did not deny that the Mafia had a monopoly face, though in a business area that conventional wisdom had largely ignored:

The evidence supports a claim that the Mafia has a monopoly on dispute settlement services [for illicit enterprises]. No person who is not a Mafia member may sell such services in New York City. Reuter (1983), p. 171.Note

We will return to this matter in our discussion of Gambetta's analysis. It must suffice to note at this point that by the end of the 1980s a considerable rift of opinion had opened up concerning the nature of organized crime. On the one hand, there were those who portrayed the Mafia as a national or international regime directed like a global business in the formal economy. At the other extreme were those who dismissed this view as primarily a product of sensationalism on the part of politicians, prosecutors, the press, and empire-building law enforcement bureaucrats.   --   E.g., Woodiwiss (1993).Note

The Mafia as the industry of private protection

Gambetta's 1993 contribution to Mafia studies is fascinating and important on a number of counts.   --  As the title of his book implies, Gambetta concentrates on the Sicilian Mafia, but it also contains many comparisons with both the American Cosa Nostra and other mainland Italian equivalents of Sicilian crime firms.Note

First, it stands as the most extensive and scholarly inquiry to date into the business organization and structuring of Sicilian Mafia activities including, for example, detailed case analysis of Mafia operations in the Palermo wholesale fish, fruit, and vegetable markets and public construction projects in the Mezzogiorno.

Secondly, although a sociologist by profession, Gambetta was led to conclude from his researches that in order to understand the Mafia it is necessary to adopt a thoroughgoing industrial economics approach to the entity, which he defines as "a specific economic enterprise, an industry which produces, promotes, and sells private protection."  --   Gambetta (1993), p. 1.Note

His analysis follows Reuter's in placing the enforcement of agreements and dispute resolution, conducted in environments where trust is "scarce and fragile," at centre stage for an understanding of the Mafia's essential nature. That is, he views the private protection services offered by Mafia families as genuine services responding to real demand, rather than as a phoney product covering up barefaced extortion, as Schelling did.   --  Gambetta is not claiming that recourse to the Mafia is an optimal means of settling market transactions, only that it is a rational device in the absence of clear criminal and civil laws-as in western Sicily between 1812 and 1860 with the abolition of feudal law.Note

Justice cannot be done here to Gambetta's lucid and subtle dissection of the workings of both protection firms ("families") and the private protection industry in Sicily. Drawing heavily on mafiosi testimony to judicial investigators, we will concentrate on his findings that are of crucial relevance to the opposing views already presented. These, in summary, are as follows. The Mafia is not a centrally controlled industry, but rather a brand name for licensed operators in the private protection industry.

     •     This industry is made up of many individual separate firms that numbered 105 in Sicily as a whole-18 in Palermo alone-in the late 1980s.

     •     Membership in each protection firm is small, typically smaller than 100, and may be as small as two persons.

     •     Since the late 1950s there have been attempts to form tentative provincial cartels composed of three geographically contiguous "families" apiece, coordinated by the commissione (or cupola).   --  There may have also been an attempt to establish a mechanism for "family" coordination above the provincial level towards the end of the 1970s with the formation of a tentative commissione interprovinciale. It is not clear whether this ever worked.Note

     •     The primary purpose of the commissione was to regulate the use of violence within families-and only subsequently between them.

     •     Interloper and breakaway protection firms do exist, and their number may have risen sharply in the late 1980s, even though established firms are clearly "not easily displaced" by those seeking to pirate their protection business. Gambetta (1993), p. 255.Note

     •     Mafia families in Sicily and North America are separate and independent: linkages do exist, but they are weak.

The mass of evidence accumulated by Gambetta constitutes a clear refutation of the alarming view of the Mafia as a centrally coordinated global octopus organization. Rather, the Sicilian Mafia presents a picture of a rather fragmented and not entirely stable industry. Tentative attempts to create localized territorial market-sharing agreements have been made since the end of the 1950s, but even these rather loose arrangements sometimes break down-for example, as a result of the so-called "first Mafia war" of 1961-1963 that led to their suspension until the end of the 1960s.

Just to judge from the numbers of small firms in the Sicilian protection industry, as Gambetta concludes (p. 104):

The possibility that the Mafia in Sicily would ever become a single centralized protection monopoly covering the entire region (let alone other parts of the world) is negated by this simple evidence alone.

Superficially, the opportunities for effective market centralization of protection services in the US are rosier than in Sicily, as the number of "families" is much smaller-24 in America as a whole, five of them located in New York-and their territorial jurisdictions are larger. However, this would be to ignore the competition in this market, actual and potential, from youth gangs, biker gangs, prison-based gangs like the Black Guerrillas and Nuestra Familia, and others who might have the capability to service a demand for protection from illicit businesses.

The Mafia family as a firm: a strategic management perspective

At the same time, Gambetta's powerful study has strongly promoted the idea of understanding the Mafia in business and industrial terms. This approach raises a number of issues. Our purpose in this section is to address some of these, drawing on the standard framework of strategic management analysis used for companies operating in the above-ground economy.

Core competencies and the Mafia firm

Hamel and Prahalad (1990) argue that successful firms in the formal economy are typically based on a small set of core competencies from which they develop an evolving array of products over time. Now Gambetta's analysis might seem to suggest that he views the Mafia as a single-product enterprise founded on a single core competency-an acquired reputation in the protection business:

Mafiosi are first and foremost entrepreneurs in one particular commodity-protection-and this is what distinguishes them from simply criminals, simply entrepreneurs, or criminal entrepreneurs." Gambetta (1993), p. 19.Note

As Gambetta's description of the resources involved in the successful Mafia firm makes clear, however, other core competencies involved typically include intelligence gathering, capacity for violence, and the ability to operate clandestine networks and dealings. This array of competencies has applications in criminal business activities other than private protection. We should expect the dynamic Mafia firm to develop and diversify into such other business arenas in response to its perception of the relative risks and returns in both their core product area and these alternative lines of business. In short, while the Mafia's quintessence qua Mafia may be protection, a durably successful enterprise of this kind is likely to end up in a much broader array of business activities. Henry Ford may have hit his stride with the Model T, but Ford today is a multinational engaged in a wide array of differing product and geographical markets.

Industry threats and opportunities in the underworld economy

This point is reinforced when we consider the fact that the Mafia firm, no less than its above-ground counterpart, has to deal with changing patterns of consumer demand, varying stages in the industrial cycle, and alterations in the regulatory framework. The dynamic criminal enterprise needs to vary its activities to reflect this varying pattern of threats and opportunities.

The US Mafia responded with alacrity to the opportunities for considerable profits from bootlegging that surfaced with the 1919 passage of the Volstead Act. Similarly, the 1933 repeal of Prohibition sent these crime firms in search of new activities, notably, as it turned out, prostitution and labour racketeering.  --    Tyler (1962), p. 152; Rubin (1973), p. 165.Note

As Gambetta himself points out, there are great difficulties with bequeathing and/or selling the property rights in a Mafia-type protection firm, not least because its corporate renown heavily depends on that of its owner-manager, the "capo" or "don."   -- Gambetta (1993), pp. 58-65.Note   --   Moreover, in both the US and Sicily the private protection business would seem to be in the maturity phase of its industrial cycle, while simultaneously in both settings there would appear to be increasing competition from non-Mafia interloper gangs  --  . Reuter (1983), Gambetta (1993).Note

For all of the foregoing reasons, I would anticipate that successful Mafia enterprises would be unlikely to survive in the long run as purely Mafia firms in Gambetta's sense of producing a single product-protection-in one market. The strategic management perspective we are using here suggests that, to the contrary, we should expect to see these criminal firms embark on deliberate diversification strategies of both the related and unrelated variety. The specific diversification profile that emerges over time will, of course, reflect the complex of threats and opportunities, risks and returns perceived in various possible avenues of development.

Recent diversification strategies of the Sicilian Mafia

This general point emerges clearly in the diversification strategies chosen by Sicilian Mafia firms in recent decades-a matter about which much is now known as a result of the Mafia prosecutions that have been going on since the early 1980s.

In the 1950s and 1960s, Sicilian Mafiosi were involved in the illicit drug trade, though only to a relatively minor extent. The estimated five-fold growth in narcotics demand in the period 1970-1985 offered them a new avenue for profitable diversification, with the consequence that

in the late 1970s...the Sicilian Mafia became a major force in the world heroin trade. By the early 1980s, its families were supplying an estimated 80 percent of the market in New York, using morphine base from Asia treated in clandestine laboratories in and around Palermo. The Economist (1993), p. 22.Note

Arlacchi (1986) estimated that the net profit of only four Palermo families from this trade in the single year 1982 was in the order of US $750 million. However, this spate of "narcodollars" is probably subsiding: police in both the US and Italy estimate that the Sicilian Mafia has lost market share in the global heroin trade to new entrants and may now being supplying only 5 percent of the US illicit market in this commodity.

An alternative diversification path has apparently come to the rescue, however. Italian government and European Commission handouts to southern Italy have grown enormously, and so has Mafia involvement in rigged tendering for the resulting public contracts. Some claim that this is now the Sicilian Mafia's single largest source of funds. Ibid., p. 26.Note So it appears that the Mafia is not simply, as commonly claimed, "a state within the state": it is also now a "redistributive state within the redistributive state"!

Conclusion: towards a "networking" view of organized crime

Law enforcement, government, and academic circles have long pondered the nature of organized crime. Essentially-drawing on Williamson's (1975) terminology-debate has revolved around whether organized crime is best understood as a hierarchical system of coordination or an arena of fragmented market relations: the octopus view vs the disorganized crime view.

We will speculate that depicting the issue in terms of opposites has detracked the debate on Mafia business organization. Strategic management analysis of legitimate business has revealed the existence of a large volume of business arrangements between the polar extremes of marketplaces and hierarchies: "networks," as Thorelli calls them.   --  There are some complexities in Thorelli's analysis that need not detain us here; for a critique and alternative diagnosis of collaborative business arrangements, see Burton (1994).Note  --   These collaborative arrangements do not easily fit into the orthodox markets/hierarchies framework now dominant in the social sciences and industrial organization theory. Classic examples of such collaborative business relationships include the kieretsu of Japan; formal joint venture franchising agreements; coproduction arrangements, and coordinated supply-chain ties built on long-standing relationships between firms and their suppliers-e.g., the Benetton-supplier network in Italy.

The strategic management analyst would see that much of the "organization" in organized crime is best understood in terms of this networking mode of business rather than the markets/hierarchies paradigm. Gambetta's remark that "Mafiosi pursue lifelong contracts and establish organic bonds with their customers"   --  Gambetta (1993), p. 56.Note  --    depicts a style of firm-customer relationships that typifies networking. Similarly, the linkages between the Sicilian and American Mafia fall very much into the category of informal, collaborative business arrangements based on relational exchange, trust, and personal contact.

There is much evidence that the use of collaborative business arrangements has expanded greatly in the above-ground economy over the past decade, particularly among international industries. It is interesting to note that some authorities now detect the same trend developing in global organized crime, with evidence, for example, of growing links between the Triads, the Mafia, and Colombian cartels.   --   See "Worldwide Cooperation Among Organized Crime Elements Growing,", in Atlantic Outlook, no. 57, November 5, 1993: London, US Embassy, US Information Service.Note   --  This does not mean, however, that the octopus view of worldwide organized crime as the underworld equivalent of a corporate transnational behemoth in the formal world economy is the reality after all. Rather, the octopus becomes an image of the networking model that has always, it is argued here, pervaded the real business of organized crime.

References

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Burton, J. (1994), Collaboration vs Competition?: Birmingham, UK, University of Birmingham, Department of Commerce.

The Economist (1993), "The Sicilian Mafia: A State within the State," April 24, 1993, pp. 21-26.

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