Economic and Organized Crime: Challenges for Criminal Justice

5. Ten Major Complications (cont'd)

5. Ten Major Complications (cont'd)

5.4 Who Done It?

Although the distinction between predatory, market-based and commercial crime should be offender-neutral, there is a stereotype with respect to the nature of the offender population associated with each type.

With predatory crime, the popular presumption is that most offences are the work of individuals or gangs which are regarded, and treated under law, as merely aggregations of individuals.

Offenders and Offences: The stereotypical Distinction
Offender Offence
Individual Predatory
Group Group Market-based
Enterprise Corporation Commercial

However the rise of market-based offences is inevitably associated in the public (and police) mind with “organized crime”. This involves applying to a group the notion that the whole is larger than the sum of the parts, and that it should be so treated in law. This view is used to argue for harsher punishments for members of an “organized crime” group and treating membership in proscribed organizations an offence per se . At that point, association rather than action becomes the crime.

Most predatory crimes are the work of individuals or ad hoc groups. Debate often confounds two quite distinct things - a criminal association and an association of criminals. Serious research has shown that, to the extent “organized crime” groups actually exist, they are not economic but political and social in nature. They form a kind of underground government to adjudicate disputes and allocate property rights. But once the rules are set, each individual member operates alone or in partnership with others, who may or not be members of the group. In the same vein, criminal markets are not based on hierarchical administrative structures operating on command to monopolize a market, but loose and ad hoc networks engaged in arms-length commercial transactions.

Model I Model II
Large "organizations" Individuals, small groups
Management hierarchy Arms-length ad hoc deals
Long-term planning Opportunistic
Huge profits Modest profits
Profits concentrated Profits widely dispersed
Infiltrate legal markets Most money stays on the street
Legal markets corrupted Most invested cash behaves legally

The concept of “corporate crime” is also problematic. Is it even possible for a corporate crime to exist independently of the actions of managers and executives? How can the When it comes to actually meting out punishment, there are even more problems. For an individual, apart from fines, the criminal justice system can mete out punishment in the form of loss of liberty or, in some places, loss of life. If a corporation is deprived of loss of liberty, its charter is suspended and it is almost inevitably driven to bankruptcy, a punishment that seems to fall as much on shareholders and creditors as on the executives whose decisions were responsible. If a corporation is deprived of life, in the sense of having its right to operate permanently repudiated, the same results clearly follow. Therefore, almost all corporate punishment takes the form of fines. But they, too, fall on the general shareholders who are powerless, and the executives who made the decisions that led to the charges are almost always indemnified.[26]

5.5 A Helping Hand?

There is another form of crime associated with corporations that seems, on the surface, easier to handle: the case where a corporation cooperates with career criminals to advance their joint interests. Take, for example, the case of hazardous wastes.

For many decades, hazardous wastes were handled just like ordinary garbage. But after major scandals in the 1970s, governments began to toughen up. For key sectors of the US economy like oil, chemicals and pharmaceuticals, this seemed like a major new regulatory burden. In fact, the regulatory structure was shaped largely to the demands of the chemical industries which were intent on two things - to make sure there would be no interruption of production, and to guarantee that their liability would be kept under control. They had help.[27]

The trick was to turn the wastes over to licensed disposal companies which would pick up the hazardous material, charging the producing corporations much more than the fee for ordinary garbage but less than the cost of proper disposal. Then they would haul it to a landfill site where the owner would sign off on the manifest. Ultimately, the hazardous waste might be buried with regular garbage, dumped in rivers or municipal sewer systems or stacked on vacant lots or buildings. At that point, the companies producing the waste were in the clear. If the material is ever discovered it may be very difficult if not impossible to trace it back to the company of origin and the disposal company could well have gone bankrupt and the principals vanished.[28]

5.6 Partners in Crime?

Not only are the borders between crime and aggressive commerce often blurred, in some cases explicitly criminal acts and inherently legal ones are embedded together in a matrix of economic activity to such a degree that the two, while theoretically distinct, are mutually interdependent.

Consider, for example, the situation in the garment trade in many urban centres in North America. Conditions reminiscent of sweatshops, long regarded as extinct in North America, reappeared in the 1980s. Typically they drew their labour from a number of sources: first time entrants into the labour force whose lack of documentary history facilitated income tax and social security charge evasion; moonlighters cheating unemployment insurance agencies; welfare recipients working for cash on the side; and illegal aliens in a state of debt-bondage to the gangs that brought them over. Since they often lacked collateral, they could not get working funds from the formal capital market. So some turned to loan sharks recycling money from drugs, gambling or other criminal sources. If New York experience is a general guide, these small shops might also have to pay extortion money to mob-run trucking firms which signed sweetheart contracts with the owners at the truckers' expense.

Thus taxes were evaded, social security charges unpaid, wages reduced, and regulations regarding working conditions brazenly ignored. What the workers lost in wages and benefits and the public sector in revenue turned up on the other side of the ledger as increased profit. Mobsters took their share in the form of usurious interest charges, payoffs from trucking companies, kickbacks from suppliers, extortion payments from manufacturers and the occasional extra like the privilege of putting the odd associate or relative on the payroll or the profits from alien smuggling operations. Meanwhile the output (strictly legal) was sold to respectable fashion companies and big department stores which had subcontracted to the sweatshops. These legitimate firms took their share in the form of increased corporate net income as a consequence of reduced supply costs. Without their active participation, none of the explicitly illegal earnings would have been possible.[29]

5.7 Subcontracting Responsibility

When such interrelations occur, it is often difficult for the justice system to allocate responsibility fairly. Seemingly respectable businesses maintain sufficient distance from the explicitly illegal acts from which they are clearly and consciously beneficiaries, so that they cannot be judged legally culpable.

This problem has been highlighted recently by attention paid to tobacco smuggling. Canada, it appears, was shocked to discover that its major tobacco producers deliberately set up subsidiaries abroad to link up with career smugglers who would bring cigarettes back into Canada to be sold on the black market and therefore expand total tobacco sales in the face of steadily rising taxes. Yet, since World War II cigarettes have been the most widely smuggled commodity on the planet. To this day one cigarette out of every three entering world trade disappears from sight. In total about 300 billion cigarettes per year are sold illegally. Tobacco companies ship en masse to what are euphemistically called “free-trade” centres and sell the cigarettes, often on credit, to wholesalers. They in turn hire or sell to career smugglers who move the merchandise into the target country, along with loads of whiskey, weapons, electronics and American brand-name jeans. In the countries of destination, the tobacco companies arrange for local advertising and marketing companies to handle the arrival of the merchandise in order to create an extra layer of insulation. Since any sensible smuggler wants a two-way flow of cargo, on the return leg the small boats or planes typically carry everything from cocaine to illegal immigrants. Yet to this day it is difficult to make a criminal case against the companies because they are not the ones who do the actual smuggling

5.8 Unintended Consequences of Crime-fighting

Where a particular criminal activity can be isolated, law enforcement action may produce unexpected and costly feedbacks that might generate more crimes than they solve. These can be especially difficult to handle when they manifest themselves on an international scale as with international trade in Jamaican ganga in the 1980s. If ganga farmers were driven out of business. They would move en masse into the urban slums, swelling an already enormous problem of urban crime that threatened Jamaica's social stability as well as tourism, the most important source of legal foreign exchange. Banks and the country's exchange reserves could be depleted sufficiently to drastically reduce imports of capital equipment necessary for economic growth. Consequently, loans extended to Jamaica by both Western commercial banks and international development agencies might have gone into default, and exports from other countries to Jamaica might drop precipitously.[30] In this not-purely-hypothetical example, what started as a resolution of a straightforward criminal justice problem developed into a full-fledged international social and economic crisis.

5.9 Diverting Attention

Not least of the problems associated with these more complex forms of profit-driven crime is the fact that treating them essentially as criminal justice issues may give a false impression of the real nature of a problem. Take the example of the recent savings and loan (S&L) bank crisis in the US where attention paid to a handful of crooks diverted attention away from the real issues - a combination of serious structural malaise and profound weaknesses in the regulatory apparatus.

Historically created to use local savings to finance local housing development particularly in small-town America, during the mid-to-late 1970s the S&L associations got into trouble. Population growth slowed, industrial depression blighted many small communities in the northeast, and interest rates began to shoot up. As other institutions began offering high and rising interest rates, the S&Ls were drained of deposits to which they had to respond by bidding up the deposit rate, while their loans, almost all in the form of long-term residential mortgages, yielded very low returns. Then came “deregulation” to complete the disaster.[31]

The US federal government decided that the solution lay in freeing the S&Ls to speculate in stocks, play the junk bond market and pump money into commercial real estate areas in the South and West. Simultaneously, it opened the door to the takeover of the industry by individuals who turned out to include corporate raiders, real estate sharks and bank fraud artists plus a smattering of gun-runners.[32]

Every species of bank job figured in the action. There were bust-outs in which insiders would siphon the money off into phony loans to confederates, and then vanish. There were cash-for-dirt deals, land flips, linked financing schemes, nominee loans and more. These all became standard operating techniques in which turned into the most expensive financial debacle in history. The cost to the taxpayer for bailing out the system was US$325 billion.

In the wake of the collapse, public attention was riveted on high-profile prosecutions of a few individual crooked financiers and developers. It was claimed that fraud figured in nearly 75% of the hundreds of S&Ls that had failed. But the crooks who were prosecuted accounted directly for only a few tens of millions of the hundreds of billions “missing”. It would have been extremely difficult to recover the rest since it was not criminality but regulatory failure which permitted  the uncontrolled lending and wild speculation and the beneficiaries included legitimate borrowers, mainly real estate developers and construction tycoons, who were operating within fuzzy and selectively enforced laws.

In environmental crime as well, a weak regulatory environment was the critical factor. The failure of the regulatory apparatus to keep activities under surveillance led previously legitimate business people to, first, cut the occasional corner, then, once their confidence and their greed grew, to make violations the norm rather than the exception.[33]

5.10 Whose Law? Whose Order?

Ideally, criminal justice should punish the perpetrator and give aid and comfort to the victim. The problem with dealing with complex profit-driven crimes is that law can be easily captured by one side in a commercial dispute and used, not for economic redress but for economic advancement. History is full of examples.

In the late 20th Century intellectual property has become a critical battleground.  An example is the controversy over the Napster, the program, widely diffused over the Internet, that permitted easy downloading of music or videos onto a writeable CD? On the one hand, corporations insisted this was “piracy” that would ruin their business. On the other hand, certain artists and writers used this and similar technology to by­pass the usual commercial channels and deal directly with their audiences. Is the Napster an instrument of property crime against corporate intermediaries or a commercial innovation that will aid communication between artists and audiences? Is that the kind of decision the criminal justice system should be called upon to make?

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