Expert Panel on Emerging Crimes: Hosted by the Department of Justice, Canada. In Ottawa, Ontario, Canada

3. Understanding and Measuring Criminal Financial Flows

The problem

There are many estimates available of the amount of money generated by illegal activity. For example, it is often claimed that the world drug trade generates an annual cash flow of US$500 billion, the single largest component of a World Gross Criminal Product of about $1.1 trillion. There are similar claims (from the IMF) that the amount of money laundered through the world’s financial institutions may be 2-5% of world GDP. Estimates of the amount looted from Russia alone, for example, hover around the $150 billion mark.

  • How are such numbers calculated?
  • Are they useful in formulating policy, for example on money laundering?
  • What alternative methodologies might give better results?

Here there was almost complete unanimity among the panelists, all of whom had plentiful experience working with and investigating the sources of data on criminal markets. Thoumi pointed out that the numbers are a form of “statistical pornography”, designed to excite and mislead.

He gave the example of cocaine revenues. Using typical supply side methods to find nothing more demanding than total export values requires the following in sequence:

  1. an estimate of acreage which is difficult because plants are often mixed up with other types;
  2. a guess about the average drug content of each plant, which is highly variable depending on age of the plant, frequency with which leaves are picked and delay before processing starts;
  3. assumptions about the quality of the chemists and the quality of the chemical inputs;
  4. a guess about cost of transportation, security, bribes etc.;
  5. estimates about seizures, net of the percentage of seizures that make their way back onto the market;
  6. export price data.

All of these require assumptions and/or pure guesses, and there is no reason to assume the resulting errors are random and therefore cancel out.

Furthermore he noted that certain specific numbers invented about the world criminal financial flows are even more dubious. He spent two days at IMF headquarters trying to find someone who could explain the basis of the 2-5% of world GDP figure, for example. Not only is there no real basis, but since no one can really estimate the denominator, world GDP, the entire exercise is nonsense.

At the same time Thoumi noted that the degree of accuracy required is often not that high – if there is impressionistic evidence that, for example, drug revenues are very significant compared to, say, legal foreign exchange earnings in a country, that is useful data even if the range of actual estimates is very broad. Second, it is often necessary to undertake a certain amount of quantitative research just to refute the sillier numbers floating around. The rule has been that when a more sober second look is taken, as in Peter Reuter’s analysis of world criminal financial flows or Thoumi’s own work on the Colombian balance of payments, it becomes very difficult to justify the grossly inflated numbers so widely circulated.

Van Duyne commented about the extreme unreliability of the FATF data on world criminal money flows. He suggested that any company that made annual accounts of that appalling level of accuracy would soon get a visit from the Serious Fraud Office. He explained the results of his examination of Dutch case files in search of what he called the “Loch Ness Monster of Money-Laundering”. The result was graphic. The sums seized were small with the assets held in quite mundane forms – there was not the slightest evidence of any great criminal empires attempting to stretch their control into and corrupt the legitimate economy. Criminals, he pointed out, mainly want to be left alone – they have no desire to share management responsibilities or power with upper-world types in grey suits.

That raised the issue of why those numbers exist. Partly it is because they give a veneer of certainty to a very uncertain business. Partly it is because they are linked to the acquisition of resources – the bigger the number attached to a problem the more resources a particular agency is likely to get to study and/or deal with it. Partly it is because of the public’s appetite for sensationalism. That is why the numbers put about are inevitably large, and why howls of official outrage follow attempts by more responsible researchers to ratchet them down.

Both Thoumi and van Duyne pointed out that the existence of financial secrecy havens, and their proliferation around the world, had been tolerated, perhaps even encouraged by the US during the Cold War. Van Duyne in particular noted their use for financing intelligence agency covert operations. Naylor has pointed to the spread of such havens for use in state-sponsored smuggling and embargo-busting operations. Clearly the most important users of such facilitates were legitimate corporations seeking to “avoid” taxes, and banks hoping to dodge exchange controls, interest rate restrictions, and reserve requirements. Now the Cold War is over; taxes are being cut; and financial transactions are liberalized and a “war on corruption” is being mounted. Now the havens are identified as facilitators of international financial crime.

Naylor raised the question of the efficacy of the anti-money laundering devices being put in place, mainly because of American pressure. Currency Transaction Reports are of no proven use, are piling up unexamined in US warehouses and have produced a cottage industry dedicated to evading them. Yet they are the least offensive of the reporting methods being put in place, for they are consistent from one person to another, ask for more or less objective information and put the financial institution in the position of being merely a passive conduit of objective information from a fully informed client to the government agency.

One level up are Suspicious Transaction Reports which require frequently underpaid and poorly educated bank staff to form a purely subjective opinion about a client, who is left in the dark that such a process is taking place. In such reports there is ample room for stereotype and prejudice. This is something Levi found in his analysis of British experience with STRs. Furthemore, in the process, the bank ceases to be a passive conduit for information, and becomes instead a police informant on a reactive basis.

Then, even more interventionist, come Know Your Client Rules. These force the bank to become proactive, in effect a private detective investigating not merely the client, who is kept unaware, but, to do the job properly, the client’s clients, and perhaps the client’s clients’ clients. And all of this, Naylor suggested, is useless and unnecessary.

This section ended with some exchanges on the use of proceeds of crime legislation as a tool for crime control. Naylor was critical of the criminalization of the otherwise mundane practice of banking. He also maintained that the benefits were not materializing and that crimes would continue to be solved the old-fashioned way, by police pounding the pavement, cultivating informants and on occasion just getting lucky. He criticised the American use of civil forfeiture and paid informants, and the corrupting practice of letting police keep forfeited proceeds. He claimed that there was nothing in proceeds of crime legislation that couldn’t be accomplished already with tax law, without the need for an artificial crime like money laundering.

There were several objections. Without criminalizing money laundering, some said, it would be impossible to punish those who handled the proceeds. It was impossible to use conspiracy to cover handling proceeds after the event. And using tax law would leave the criminal with part of the proceeds. Van Duyne disagreed. He suggested that there were ample laws prior to the creation of the money-laundering offense that be used for the same purposes – particularly laws governing inducement and handling stolen goods. In his opinion it was quite easy to apply those existing categories to those who handle the proceeds. Levi ventured the opinion that it is often difficult to link money to an underlying predicate offense which is what would be required to charge the money laundering with it.

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