A Typology of Profit-Driven Crimes
2. The Typology
The working hypothesis is that profit-driven crimes can be divided provisionally into three categories: predatory, market-based, commercial.
First are crimes of a predatory nature that involve (with some overlap):
- redistribution of existing wealth;
- bilateral relations between victim and perpetrator;
- a non-business or purely fake business context;
- involuntary transfers that use force (or its threat), although deception may suffice;
- readily identifiable victims;
- transfers that take place in cash, physical goods, securities, or even information;
- losses that are simple to determine;
- an absence of any notion of fair market value;
- an unambiguous morality – someone has been wronged by someone else; and/or
- the need for restitution.
Predatory crimes can be further subdivided into those which victimize:
- private citizens;
- business institutions; or
- the public sector.
Possible examples, among many, include acts of:
- payment card fraud (against citizens);
- bank fraud (against businesses); and
- currency counterfeiting (against government).
Second are market-based crimes that involve (with some overlap):
- production and distribution of new goods and services that are inherently illegal;
- multilateral exchanges;
- a context that consists of an underground network;
- voluntary transfers;
- difficulty in defining victims;
- income to suppliers and expenditure by consumers;
- transfers that take place in cash or bank instruments or by barter of valuables;
- an implicit notion of fair market value;
- ambiguous and arbitrary morality; and/or
- confusion over how to treat "proceeds" in the absence of victims.
Market-based crimes can be further subdivided into those involving the evasion of:
- taxes; or
Regulations can be further subdivided into those affecting the terms of sales (e.g., price or rate regulations), those affecting to whom items are sold (e.g., prescriptions for certain drugs), and those affecting how much in total is allowed on the market regardless of to whom and at what terms (e.g., quotas on fisheries catches).
Prohibitions, too, can be subdivided into those dealing with absolute contraband (e.g. those dealing with explicitly prohibited substances – like recreational drugs) and relative contraband (e.g., those that become contraband because of how they were acquired – like stolen goods).
Possible examples, among many, include:
- loan-sharking (regulation evasion);
- smuggling CFCs (excise tax evasion); and
- trafficking in endangered wildlife (prohibition evasion).
Third are commercial crimes that involve (with some overlap):
- legal goods and services produced or distributed using illegal methods;
- multilateral exchanges;
- a context consisting of a normal business setting;
- superficially voluntary exchanges with a hidden, involuntary aspect;
- victims by virtue of the existence of fraud;
- income "earned" but unmerited by virtue of illegal method employed;
- transfers that overwhelmingly take place using normal bank instruments;
- some notion of unfair market value;
- unambiguous morality, in theory, because fraud is involved; and/or
- the need for restitution.
Commercial crimes can be further subdivided into those involving:
- fraud against suppliers of inputs;
- deception against customers of output; and
- externalization of costs at the expense of the larger society.
Possible examples, among many, involve:
- fraudulent bankruptcy (involves fraud against suppliers of inputs);
- telemarketing scams (involves deception against customers of output); and
- "midnight dumping" of toxic waste (involves the externalization of costs at the expense of the larger society).
One salient difference is the implications of each type of offence for national income and economic welfare. To understand this, it is vital to keep in mind the essential distinction between wealth and income. In economic terms, wealth refers to a stock of assets (physical, financial, even informational) that have been accumulated; and it is measured at a point in time. On the other hand, income refers to a flow of purchasing power accruing to an economic entity (e.g., firm, worker, or rentier) per unit time. The difference can be handily summed up by the fact that a bank account balance represents wealth, whereas the interest earned each day or month or year (depending on the convention selected) on the accumulated balance represents income. When income flows increase, the gross national product (GNP) rises. But there is no direct relationship between wealth and GNP. It is possible to have enormous amounts of accumulated wealth in an economy functioning on its knees. This distinction is central to what follows.
- Predatory crimes are crimes purely of redistribution of existing wealth. They do not generate new goods or services and therefore do not increase total income flows or have any direct effect on GNP.
- Market-based crimes, by contrast, involve the production and distribution of new goods and services, and therefore have a positive impact on GNP.
- Commercial crimes involve the application of illegal methods to the production and distribution of legal goods and services that would otherwise be produced by someone else using legal methods. Their impact on GNP depends on the subcategory into which they fall.
- If the offence involves defrauding a supplier by underpaying or not paying for
inputs, it simply redistributes income, leaving the total unchanged.
- If the offence involves cheating a customer who overpays for value not received, GNP, adjusted for the quality of goods, should fall – the customer will have to divert extra income into making up the shortfall in quality or quantity, therefore reducing that available for other expenditures.
- If the offence involves a firm cutting costs at the expense of a non-transacting party – the environment, for example – the same supply of goods and services becomes available to the market at a lower cost, or a larger supply at the same cost, in both cases actually increasing measured GNP. Although, obviously, sensible environmental accounting should factor out such a spurious increase.
- If the offence involves defrauding a supplier by underpaying or not paying for
This simple schema seems clear enough in theory. However, it requires some modifications and clarifications before it can be applied.
Rather than representing a static taxonomy of simple acts, the categorization suggested above tries to comprehend complex and interactive processes potentially subject to a variety of feedback mechanisms. Therefore, when actually applied, there may be some definitional ambiguities, operational complications, and special complexities deriving from the fact that crimes take place in an institutional context. More to the point, by breaking crimes down into a series of actions, it reveals how misleading standard terminology can be.
- Commercial crimes involve crimes by entrepreneurs or their firms in the process of preparing for or making market exchanges. On the other hand, predatory crimes are committed not just against individuals, but also against entrepreneurs or their firms (e.g., employee theft).
- A predatory offence may appear to take place through a business setting, but this is purely a front for a once-and-for-all or episodic transfer of wealth. A market-based offence is often confounded with a business – there is a huge literature premised on this false analogy. But in reality, because it deals with illegal commodities, a market-based offence must really be seen as occurring in the context of an underground network, even if that network is embedded within a legal business structure. On the other hand, a commercial offence involves the use of a genuine and on-going legitimate business to twist the terms of trade and therefore skew the distribution of income. Although the distinction seems clear in principle, in practice the two can shade into each other.
- It seems clear when a predatory offence takes place(e.g., a mugging). A market-based offence, too, is usually quite clear (e.g., someone sells a few grams of cocaine to an undercover police officer). But when the act falls into the commercial category, it is often difficult to determine if it is really a crime. Where does sharp business practice end and fraud begin? At what point does a high-pressure sales tactic become a confidence trick? At what point does effective advertising become deliberately deceptive? It is at least arguable that all advertising involves deception because people rarely need the goods being offered. In theory a telemarketing fraud involves conning people into paying for either inferior, misrepresented, or non-existent goods. But the instructions given to salesmen for bona fide companies using telemarketing techniques to sell genuine, good quality products involve such blatant manipulation to make an unwilling potential client say "yes," that it is really hard to see the distinction.
- This same ambiguity appears in securities cases, which also fall most logically into the commercial crime category. If the case involves falsifying a prospectus with completely fabricated sales figures or seeding an ore sample prior to announcing an issue of junior gold-mine shares, the fraud is clear. In fact, if the gold-mining company is purely bogus, the crime could even be classified as predatory in nature. However, that kind of clarity is rare. Most prospectuses are designed to excite rather than inform. If this is a crime, then the paddy wagons should be rolling almost non-stop between the financial districts of the big cities and the local jails.
- While both commercial and predatory crimes can involve elements of stealth and deception, there is a distinction. In those predatory cases where deception, rather than intimidation, is the primary tool, someone gains property at the expense of another by misrepresentation, with no pretence to an exchange of value. On the other hand, a fraudulent sales pitch involves gaining consent, albeit to unfair or duplicitous terms of exchange. In cases of straight con jobs, where there is no value at all transferred in exchange for income, the border becomes so fuzzy that it probably matters little which category is used. The judgement is a purely empirical one – did the offence take place within and as an extension of a genuine business context or was the apparent business simply a shell whose sole function was deception?
- The three subcategories of market-based crime are not absolutes. Some things could fit one or the other depending on the particular legal context. Gambling, for example, is sometimes banned completely. In some places it might be illegal only because it fails to collect taxes levied on legal gambling. In others, the problem is regulatory violation – the state permits gambling in state-licensed establishments only.
- An offence involving trafficking in banned or regulated goods falls into the market-based category. But if the consensual transaction involves a legally-taxable commodity, the government appears as an aggrieved party. In this event, in addition to the market-based offence, there is something akin to a commercial one – the government, as a participant, has been cheated by the terms of exchange. However, for purposes of this typology, the fiscal offence is separate. The basic transaction is still a peer-to-peer consensual one involving willing and knowledgeable parties. The government appears
- There is a crucial distinction in this typology between direct (i.e., income) taxes and indirect (i.e., sales or excise) taxes. Evasion of an indirect tax, which falls on a commodity, shifts that commodity from a legal to an illegal good, and therefore creates a market-based offence. Evasion of income taxes has no such effect – income tax evasion is a completely separate category, properly dealt with in the income tax act and not the criminal code. A transaction can be perfectly proper in its own right, even if evasion of income taxes on the income generated by that transaction occurs.
- A commercial crime is defined as one in which an inherently legal product is supplied in some illegal way. At the heart of the definition is the presumed absence of fair market value. However "fair market value" is difficult, if not impossible, to define accurately: it boils down more to an ideological than an operational construct. Efforts to establish a clear meaning usually refer to neoclassical concepts of perfect competition which cannot, except under the most unrealistic assumptions, actually lead to a market-clearing general equilibrium. The theory of market behaviour that most closely approximates reality is not neoclassical but neo-Schumpterian. In this view, each firm attempts to introduce into the market-place an innovation to create a temporary monopoly, and with it, temporary monopoly profits. Over time others will try to move in to capture those high profits, with the result that competition wipes them out. If this is how markets behave, then "fair market value" is meaningless in the short run, which is, realistically, the only time horizon over which criminal transactions can be presumed to exist.
- In practice the contrast between predatory and market-based offences at times seems murky. Some predatory crimes, for example, require market-based ones to dispose of the merchandise or launder the proceeds. Nevertheless, such transactions are secondary. The primary act generating the money is unambiguously predatory because it involves an involuntary transfer of existing wealth. Thus, there are really two quite distinguishable offences - theft and fencing of stolen goods are distinct crimes not only under this typology but under existing statutes. Indeed, there is even a third level, washing the resulting cash. The matter becomes even clearer when the acts are put in sequence – first the predatory act to acquire, then the market-based one to dispose of the proceeds, then perhaps another market-based one to launder the money.
- Similarly, some market-based offences are committed in an environment punctuated by force or fraud. Sometimes (though probably much less often than stereotypes would suggest) drug dealers settle accounts at gunpoint and adulterate their merchandise before sale to final customers. But in the great majority of instances, the basic act is truly a consensual contract between supplier of and customer for new goods and services. If violence is employed, usually in disputes between dealers over division of profit, it constitutes a separate offence. However, currently, if a banned product like cocaine is cut with rat poison, unless the consumer actually dies, there is unlikely to be much law enforcement interest.
- Some offences may seem to fall into several categories at once. However this may be due to the fact that they involve a series of subsidiary acts, each of which may have distinct economic characteristics. So it is with currency counterfeiting. When phoney money is passed on the wholesale level to complicit underworld parties, perhaps in exchange for real currency at some deep discount or in exchange for drugs, the act seems to fit the market-based category – there is a consensual transaction in an illegal commodity. But when phoney money is passed to unwitting retail parties, it would involve a predatory offence. There is also a complication in defining the victims. The primary victim would seem to be the person who gets stuck with the counterfeit, with no compensation. But another is the government whose "intellectual property" has been infringed, whose capacity to circulate bona fide money is reduced to the extent the counterfeit has replaced it in circulation and whose security costs are driven up in an attempt to preclude further incidents.
- The same kind of pattern appears in credit-card fraud. Theft of a credit card, or of the number, is a clear case of a predatory offence. Sale of a stolen credit card is a market-based offence. Use of a stolen credit card, or number, is, once again, predatory. Indeed, it is possible to argue that when a merchant does a multiple run-through for the same sale, it is a commercial crime - on the surface this seems to constitute a twisting of the terms of trade in an otherwise legitimate business transaction. However, this is another instance where the frontier between a predatory and a commercial offence gets so blurred that the choice of category becomes arbitrary.
- The same holds true for intellectual property crime, only one step further. The sale of goods using fake brand names, for instance, or of bootleg videocassettes and software, involves both a predatory component (i.e., the misappropriation of intellectual capital, a form of wealth), a market-based one (i.e., the sale of illegal goods), and a commercial one (i.e., the misrepresentation of the product if it is sold as if it were the genuine article and at the same high price). What is interesting here are the various layers involved. One person or group commits the predatory offence of manufacturing something based on stolen intellectual property; another markets the product through underground channels to, in most cases, fully knowledgeable distributors; the third sells it to an (often) unsuspecting public. While each layer has committed a distinct offence in terms of this typology, they are all essential to each other’s existence.
- Whether an act like prostitution is predatory or market-based can depend on the exact circumstances surrounding it. Normally, prostitution is a market-based phenomena – there are willing sellers and willing buyers engaged in a (quasi-illegal) consensual exchange. But clearly if the person supplying the sex is held in some sort of physical or debt bondage, the pimp or owner, rather than the provider of the service, appears on the supply side of the market equation. In this case, there is a willing customer and a willing seller, but the transfer of goods or services cannot be said to be consensual because they are, in a sense, stolen from a non-consenting third party. Nonetheless the typology still applies – there occur simultaneously distinct market-based and predatory acts.
- A different type of complexity can occur in cases that span all three categories. Loansharking at first seems like a commercial crime – it involves a legal service, the lending of money, on illegal terms. However, it is often argued that the usurious interest rates are only possible to the extent that intimidation stands behind them, making the repayments smack of extortion, a clearly predatory offence. Yet normally the clients are fully aware of the terms on which the loan is negotiated – rarely can it be argued that someone is forced to borrow from a loan shark, and if that person is so forced it is not the loan shark that does the forcing. This suggests a clear case of a market-based, regulation-evading crime. Ultimately, in such a case, the matter comes down, not to a theoretical, but an empirical issue. Are most instances of usury accompanied by the threat of force, do they involve duplicity in getting the client to accept the terms, or are the negotiations perfectly open, in which case extremely high interest rates might reflect higher risks and "market imperfections"? (See Appendix II.)
- Although certain crimes might fall neatly into one category, they nonetheless take place through radically different types of operational networks and distributional chains. Bear gall-bladders, for example, start with poachers, are traded to underground traffickers who may also deal in drugs or guns, are turned over to smugglers, and are eventually sold overtly in perfectly respectable Chinese traditional pharmacies. Guns, however, start with legal suppliers, licensed dealers or gun-shows, and enter black market chains to be sold covertly on the street. Jewellery, by contrast to both, starts in a legal manufacturing operation (even though the materials may be smuggled) and is traded through regular channels (though often with no paper), to be sold through apparently respectable shops (with the jeweller either making the client a cash deal or selling the item for full price and him/herself pocketing the tax money). Whatever the institutional mechanics, application of the typology permits isolation of the essential core actions.
- On the other hand, many crimes that fall into quite different categories, may in fact, take place within a common milieu and be mutually supportive. Take for example, the sweatshop. Although it is (once again) on the decline in North America, during its 1980s upsurge, business drew its labour force from moonlighters, social security cheats, and illegal aliens, used capital from loan sharks who might have been recycling money from drugs or illegal gambling, depended on transportation by companies owned by mobsters who used their control for labour racketeering and extortion, yet ultimately sold its output to respectable retail chains. Predatory, market, and commercial crimes were all involved in maintaining inventories and healthy profit margins in "legitimate" business. (This is examined in greater detail in Appendix III.)
The upshot of all the qualifications and clarifications is that the categories cannot be expected to apply in a rigid and deterministic fashion. Nonetheless, such a typology, which disaggregates the concept of profit-driven crime into subcategories that better capture their essential qualities, can help improve understanding of the economic consequences, and perhaps point towards means by which they can be addressed other than the traditional justice system.
In the following section, a preliminary effort is made to classify many of the major profit-driven offences (those seemingly of most public concern) – with one important clarification. There are many subsidiary and secondary crimes associated with primary offences. The analysis restricts itself to the primary – the acquisition of illegal income or wealth, without regard to the use of money laundering techniques to hide it, of corruption to protect it, or of tax evasion to increase the net return. Wherever possible, in tables 2 to 4 that follow, terms are used that reflect popular rather than strict legal usage. As the long list of clarifications and ambiguities noted above made clear, the categories are not written in stone.
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