Economic and Organized Crime: Challenges for Criminal Justice

4. Crime and Economic Welfare

4. Crime and Economic Welfare

This distinction is useful in clarifying another common source of confusion - does criminal activity increase or decrease national wealth? Some insist it is a pure negative, entailing losses to legitimate citizens plus the cost of operating the criminal justice and corrections system. Indeed, the standard procedure is to trot out reams of crime statistics lumping all offences together into some grand crime “rate” along with an estimated aggregate “loss” to society. Others argue that aggregate crime statistics are meaningless, given how widely the sub-components vary in nature and social consequence, and that certain types of crimes, judged in strictly economic terms, constitute a net benefit by generating new incomes to some citizens. (Indeed, some go further, arguing that much economic activity in the underground economy is actually good in so far as it challenges “bad” laws that retard economic development. ) [13]

The reality is that both sides are right, for they are talking about two quite different things.

Predatory crimes are crimes purely of redistribution of existing wealth . They do not generate new goods and services and therefore do not increase total income flows. Therefore, barring indirect consequences like the costs of increased security (which could be argued either way), their net effect on Gross National Product (GNP) is zero.

By contrast, market-based crimes involve the production and distribution of new goods and services . Judged in strictly economic terms, they should have a positive impact on GNP. Indeed, it is now standard procedure in many countries to try to estimate the value of underground transactions in both legal and illegal goods and services, provided they are based on consensual exchanges, and to add that value to their existing national income data to get a better picture of just how “well” their economies are doing.

Commercial crimes are more complex to judge. The essence of a commercial crime is to apply illegal methods to the production and distribution of legal goods and services that would otherwise be produced by someone else using legal methods. The supplier, for example, using illegal methods to reduce costs, does not gain at the expense of other suppliers or its own workers; it is a matter purely of redistribution. There is no net effect on the economy's total production of goods and services. The gains made by the supplier at the expense of customers by cutting quality or engaging in deceptive marketing, arguably the supply of goods and services conforming to what the customer thinks he or she is getting, are actually reduced. GNP, adjusted for the quality of goods, should fall in this case. On the other hand, it is remotely possible that, on occasion, the commission of a commercial offence helps expand the supply of goods and services. If, for example, the fraud takes the form of something like illegal disposal of hazardous wastes, with the result that costs to consumers are reduced at the expense of environmental degradation, depending on how the economic impact of the environmental damage is reckoned, the result could be an actual increase in GNP ­even though sensible environmental accounting would dispel any notion this represents a net gain in economic welfare.

Similarly, with social crime, the net effect depends entirely on how the measurement is done. If national income is estimated in the normal way, by examining total value of market transactions, then any production of new goods and services unambiguously increases society's total GNP and, with it, supposedly, economic welfare. [14] This is all the more true because in this case, unlike that of market-based crime, the new goods and services, being legal, can be directly measured. But if national income is measured in a broader way to take account of potential depreciation of human and ecological capital, there are unintended costs which should be subtracted. It is impossible to say a priori what the net effect will be.

In all cases, when assessing the overall economic effects of criminal acts, it is necessary to distinguish between the immediate impact of the act at the micro level, and the consequences of increased expenditure for policing, prosecution and correction at the macro level. If an economy is at full employment, arguably the diversion of resources into economically unproductive activity associated with crime control is a net loss. But if the economy has unemployed resources, increased expenditure on police, prosecution and imprisonment operates just like any other net injection of funds to produce a positive multiplier effect. Indeed, one of the reasons the US economy did not stumble badly in the post-Cold War period may be that increased expenditure for the prison-industrial complex more than offset reductions in what previously went to the military-industrial complex. Over the last decade, the military budget has fallen about US$50 billion, while the crime-control budget has risen by about $100 billion. Furthermore, that the US employs so many people in construction and maintenance of prisons, and jails such a large percentage of its economically active population, may itself account for the fact that the US unemployment rate is lower than that of other wealthy Western countries. [15]

4.1 Secondary Crimes

The existence of such distinctions which are clear in theory, though in practice less so, has important further implications in terms of just what secondary criminal acts are involved in their commission. Take as examples violence, money laundering, tax evasion and corruption.

Violence (actual or implied) plays a radically different role depending on the specific type of crime. In predatory acts, violence is a central instrument without which, in many cases, the principal act could not take place. Therefore, legitimate society is directly and deliberately threatened. By contrast, in market-based acts violence per se is not required - the transfers of money and goods are voluntary. Violence occurs mainly in an ancillary phase, in struggles between rival suppliers over the resulting profits. It is therefore a consequence of the fact that certain goods and services are illegal rather than being inherent in the act of serving the market per se .

With money laundering, there is also a difference. With all three types of crimes, it may be necessary for the criminal to, first, hide and, later, launder the money to evade detection and enjoy the proceeds. But, in the event the perpetrator is caught, the ultimate fate of the money is quite different.

Crime Violence Corruption Money Laundering Tax evasion
Predatory Normal Rare Rare None
Enterprise Sometimes Sometimes Frequent Frequent
Commercial None Frequent Sometimes Sometimes

With predatory offences, there are no “proceeds” in the normal sense, and therefore no presumption of forfeiture of the proceeds. Rather, there is property which must be restored to the victim. In market-based offences, there clearly are illicitly earned proceeds, with no victim to whom restitution is due. This is precisely the rationale for forfeiture laws. In commercial offences, there might be a mixture of both - there may be both fraudulently obtained property and illicit profits. Logically, they should be treated distinctly.

The major types of economically motivated crime also differ according to their fiscal implications. With predatory offences where both the basic act (misappropriation of resources) and the method by which it is carried out (force or fraud) are illegal, there are no fiscal implications. Income taxes are levied on net new income flows, not on redistribution of existing ones. Criminals who commit predatory offences should repay victims and perhaps incur fines in addition to, or instead of, prison terms. But logically they should not be expected to pay taxes on their ill-gotten gains, since the victim, to whom full restitution should be made, would end up being the one who bears the burden of the tax in the form of reduced funds available for restitution.

With market-based offences, where the basic act (the sale of explicitly banned goods or services) is illegal, but the method by which it is carried out (voluntary market exchange) is not, the fiscal implications are also unambiguous. Income taxes are legally due on the proceeds of the sale of any good or service, legal or illegal in nature. Failure to render such taxes to the fiscal authorities adds an additional layer of criminality over and above the basic offence. If the commodity sold is one that is taxed in legal markets, there may be yet another layer of fiscal offence from the failure to pay excise, sales and value-added taxes. This, of course, does not apply in the case of prohibited goods. And with regulated goods, it may or may not apply, depending on whether the goods were diverted to the black market directly from the supplier or after passing through the formal marketing chain.

With commercial offences, the situation is more complicated. Whether or not the offence has any fiscal implications depends on the precise instance and the precise type of tax.

If a commodity is subject to special excise taxes, evasion in itself constitutes the market-based offence. The commodity becomes contraband, which can be seized and destroyed. However, if a commodity is subject, not to excise, but only to sales or value-added taxes, evasion of those taxes constitutes a commercial offence. What is involved is the sale of a legal good or service by illegal means. The commodity is not in itself contraband.

Thus, three distinct fiscal offences are committed. The first, evasion of excise and other special taxes applicable to a particular commodity involves the conversion of that commodity into contraband. The fiscal offence and the market-based crime become synonymous. The second, the evasion of sales tax, involves a crime with respect to methods of production or distribution, and therefore converts a legal act into a commercial crime. The third, evasion of income tax, involves a crime with respect to the financial proceeds of acts of production or distribution. It applies mainly to market-based offences, though could be present in a commercial one as well.

These considerations indicate that the three types of crime imply three different types of responsibilities for the criminal justice system with respect to the resulting proceeds. With predatory offences, the role of the justice system is to find and restore to the proper owner misappropriated property, and nothing more. In enterprise offences, that role may consist of both finding and taxing hidden revenues, or of finding and forfeiting illegal profits - it would be illogical to attempt both. In commercial offences, that role may include all three - restoring misappropriated (fraudulently obtained) property, finding and taxing hidden revenues and/or finding and forfeiting misbegotten profits. In all cases, fines can be used as a form of punishment for the guilty party - they are quite distinct in logic and purpose from restitution, tax collection or forfeiture.

Finally comes corruption. Here, too, there is a big difference in the categories.

With the possible exception of drug trafficking, no criminal act has achieved greater notoriety of late than corruption. The struggle is led by transnational corporations worried not about the morality, but about the possibility their competitors might steal the edge, or that they might have to shell out, in bribes, the money they save from evading taxes. Politicians routinely rail against it in public, though how many continue to practice it in private is anyone's guess. New governments see the fight against corruption as an excellent means of discrediting the predecessor regime and purging the public service of old regime loyalists, therefore clearing the space for patronage appointments of their own supporters. The battle has been recently joined by international lending institutions whose main concern is that leakage of foreign exchange into the offshore retirement accounts of Third World officials will threaten the capacity of their countries to repay their foreign debts. Thus, for a variety of reasons, a powerful anti-corruption coalition has formed - albeit with corruption defined, implicitly or explicitly, as nothing more than the direct payment of bribes, likely its least insidious form.

Despite the fervour, in profit-driven crime, corruption (in the limited sense of cash payment for economic advantage) is usually not a primary offence. Predatory acts do not involve corruption per se. Nor, strictly speaking, do market-based offences, to the extent the market exchanges involve fair value and free transfer. However, corruption can occur as a secondary consequence of both when perpetrators attempt to subvert the law enforcement system to cover up their actions. Corruption may occur in certain types of commercial offences, when those seeking commercial advantage use it to bypass normal mechanisms for getting access to contracts or resources. Even then it is not likely to be the norm. Where corruption is pervasive is in social crimes, where it also takes a form particularly difficult to root out.

It is no mystery why in some countries economic regulations are so spottily enforced. Regulatory agencies quickly become captive of the industries they supposedly regulate. They become dependent on them for the primary information necessary to enforce the rules. Moreover, between regulator and regulated, there is usually a revolving door through which top personnel routinely come and go. (Perhaps the most notorious instance in recent years involved U.S. military contractors and the Pentagon. [16] ) But even more important, corporations subject to regulation are almost always heavy political donors. They, therefore, influence directly, through campaign contributions and lobbying of politicians, and indirectly, through information designed to mould public opinion, both the shape of regulatory legislation and the degree of enthusiasm with which it is enforced. Indeed, one of the major reasons why corporations do not face more criminal sanctions is not that they respect the need for workers' safety and the integrity of the environment so scrupulously, but because of their capacity to shape the regulatory context through a form of legalized influence peddling. [17]

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