Economic and Organized Crime: Challenges for Criminal Justice

6. The Alternatives

6. The Alternatives

Profit-driven crime is a serious problem but not always or solely a serious criminal justice problem. There may be other alternative approaches to increase compliance.

When a profit-driven crime like armed robbery, involving redistribution of existing wealth through force (actual or implied) or deceit, takes place, the act, the cost and the victim are easy to define; and standard methods of crime control will continue to take centre stage. But when a profit-driven crime (like trafficking in some restricted good or service or manipulation of the terms and conditions under which normal goods and services are produced and sold) takes place, it usually does so as part of a complex of other, legitimate business transactions. When a corporation peddles goods with deceptive product guarantees there may be difficult to distinguish between aggressive marketing and an explicit con-job.

When criminal activity and legitimate commerce act in mutually complementary ways, it is not always easy to bring the more guilty parties to justice. When an attempt is made to “solve” such crime problems, there is danger of setting off a host of unexpected social and economic consequences that may end up being more of a problem than the designated crime. When crimes involve apparently legitimate institutions used in an apparently illegitimate way, proceeding with traditional criminal justice methods that focus on bad individuals presents the additional danger of distracting attention from deeper causes, like the need for profound structural and regulatory reform. Because so many crimes of a market-based or commercial nature involve complex interrelations with the legitimate economy and can have profound, unintended and unexpected consequences, that it may be unwise to rely on the criminal justice system alone (or in some cases at all) for their resolution. There is serious need to consider alternative instruments.

There are three distinct levels at which alternative instruments can be directed.

Objective Level Alternative Instrument
General prevention Operating environment Regulatory system
Specific deterrence Specific enterprise Private financial system
Detect and prosecute Actual offences Tax system

These instruments can try to broadly prevent, by creating an environment that is not conducive to crime. In this case, they should aim to improve operating standards, levels of transparency and information flows among various institutions of the legitimate economy. This is one of the primary roles of the regulatory system.

They can try to narrowly deter by protecting a particular institution from actual incidents. In this case, they should aim to enhance operational security in the actual conduct of affairs. It is widely believed (though by no means proven) that one of the best techniques is to work with and through the private financial system. The theory is that it is easier to monitor the financial flows that result from crime than to watch out for forbidden transactions in goods and services that generate the flows.

Or they can try to detect and to deal with particular offences once they have been committed. In this case, the tax system has a powerful, often underutilized, role to play.

6.1 The Regulatory System

Clearly, the distinctions between these three are not absolute. Although the main function of the regulatory system, for example, will be to upgrade the overall environment by improving information flows, increasing transparency of transactions, assuring high standards of staff training, etc., it is sometimes called upon to help in the detection and prosecution of specific offences. However, expectations have to be tailored to the type of offence.

With a predatory crime, there is usually little the regulatory system has to offer. Prevention is almost entirely in the hands of private-sector institutions and individuals, while solving and prosecuting such crimes is mainly the preserve of the traditional law enforcement apparatus.

With a market-based crime, for the most part the regulatory system also has little to offer. Banned goods and services are traded on markets that run parallel to, but are institutionally distinct from, those that handle the products of the legal economy.

With a commercial crime, there is clear scope for the regulatory system to be of considerable use, since a commercial crime involves the provision of legal goods and services in illegal ways, at least some of which should be picked up routinely by the oversight apparatus of the regulatory system. But how that happens can be a matter of some concern.

In the US case, regulatory institutions function as deputies in the detection and prosecution of specific offences and offenders. Regulatory bodies ranging from the Securities Exchange Commission to the Post Office routinely initiate criminal investigations and bring criminal charges. Ludicrous though it seems, among the branches of the US government which have recently initiated money-laundering cases are the Departments of Agriculture and Education! But this is role for which the competence of the regulatory system is subject to much doubt. And there is a realistic fear that the more energy regulatory bodies put into attempts to enforce criminal law, the less they will have for their proper roles. This deputization process involves more than simply using criminal law enforcement for regulatory enforcement, something that is in itself of debatable merit. It involves subordinating the regulatory framework to the demands of criminal law enforcement. In that regard, working with economic regulators can scarcely be described as a bona fide alternative to the criminal justice process.

6.2 The Role of the Private Financial System

Today, it is becoming increasingly popular across the world to attempt to recruit financial system employees as “front-line troops” in the “war” on money laundering. When banks and similar institutions hesitate to volunteer, requiring governments to conscript them, there are allegations that the banks are not merely “soft on crime”, but actively complicit with the “enemy”. They do not wish, so the accusation goes, to scare off such prime customers as criminals dripping filthy lucre. Not only is this characterization wrong - bankers generally are extremely frightened about the possibility of being caught in some big money-laundering scandal - it reflects, once more, the confusion generated by the failure to appreciate the fundamental differences between various forms of profit-driven crime.

Bank employees are expected, and are trained, to be on the alert for various forms of theft or fraud against an institution - bum checks, forged letters of credit, bogus collateral, diverted loans or counterfeit currency offered on deposit or in exchange. They also have to be on guard against insider abuse - theft or electronic-funds transfer fraud. This means that bank employees will be on the lookout for transactions resulting from predatory or commercial crimes in the normal course of business. In these cases, crime control and the financial institution's self-interest coincide.

However, with enterprise crimes, the bank is involved in quite a different way, as a depository or transferor of perfectly sound, if illegally earned, monetary instruments. Anti-money-laundering rules put the bank in a position of conflict of interest between its role as a profit-seeking institution and its new law enforcement obligations. Furthermore, unlike predatory crime directed against the financial institution, where a bad cheque or phony collateral can be subjected to appropriate scrutiny under standard banking practices, there is nothing to physically and objectively differentiate the deposits of drug dealer or used-car dealer.

On what basis can banking personnel make the required judgements as to “suspiciousness” and balance this against rights to privacy? The problem lies not just in the information requirements, and the way they have progressively escalated, but also in the very nature of the information and the bankers' role in providing it.[34]

These requirements began, first in the US and then elsewhere, with the Currency Transaction Report, a form that had to be filled out by financial institutions and their clients in the event of a large cash deposit (or withdrawal, but that was less problematic). This report detailed information about the depositor and the origins of the money. The second to become popular was the Suspicious Transaction Report which banks and other institutions had to fill in should a transaction exhibit certain characteristics that put it in the suspect category. The third, popular in the EC but recently rejected in the US, is a set of Know-Your-Client rules. These involve not so much exogenously required forms as a set of exogenously determined vetting procedures which in turn could lead to additional information passed on to law enforcement. Although one type of information requirement seems to flow logically into the next, in fact each represents a qualitative change in the relations between “banker” and client, and between financial institutions and the law enforcement apparatus.

Furthermore, these rules fly squarely in the face of modern banking trends - where more and more transactions are initiated and conducted by the client, where tabulation of deposit records is centralized, and where as much business as possible is being impersonalized. Once again, the profit-seeking (cost-reducing) interests of the financial institution put it at loggerheads with any desire to draft the financial sector into the front lines of the “war” on crime.

Not least, this is one area where technology clearly acts to facilitate criminal transactions. The advent of electronic purses with peer-to-peer transfer capacity, and the propensity for people to enter and leave countries, not with cash or travellers' cheques, but with debit cards, threatens to soon make the reporting apparatus now being carefully put in place, largely irrelevant.

As well, there are serious doubts whether the crime control approaches involving the financial sector in the war against crime are worth the cost. We lack the fact-based research on how much of a threat profit-driven crimes really pose.

6.3 The Role of the Fiscal System

Although also a part of the government regulatory apparatus, the fiscal system has an importance that is quite distinct. While the main role of the regulatory system is to change the general environment in which business takes place, the tax system can be used much more aggressively on a case-by-case basis. Still, there is a limit to the range of crimes against which the tax system is effective. Most commercial crimes take place in a way that embeds them in a matrix of legal economic activity, and the flows of illegally earned income will, as a rule, be subject to taxation. Tax evasion may take place, but it will be a secondary offence, and the tax code then acts to complement normal law enforcement measures.

The real power of the tax system comes in dealing with enterprise crime. All incomes earned, whether legally or illegally, are taxable. Both failure to pay and providing false information are potentially criminal offences. No peddler of child pornography is likely to either accurately report his chosen profession or declare the income from it. But it has been proven by practical experience that using the tax code is by far the most efficacious way to strip criminals of illegal income. It is better than the various provisions for criminal asset forfeiture; and it can accomplish most of what civil forfeiture procedures do without the same adverse effects on due process and civil liberties.

Civil forfeitures are particularly popular in the US, and there is talk of introducing them in Britain as well as in Ontario. That should not occur without considerable debate. Civil forfeitures involve in rem procedures and, as the US Supreme Court has ruled repeatedly, property has no civil rights. However, it is impossible to label someone's car or home or bank account the proceeds of cocaine trafficking without at the same time tainting the owner with the same accusation. Even worse, this happens routinely in procedures where the burden of proof is reversed. And in the US, there is no obligation to file criminal charges in order to seize property deemed the “proceeds-of-crime”.

With tax law these kinds of dangers do not exist, for there is no need to stipulate the origin of the money. Everyone must pay their income taxes, or be subject to heavy penalties and back interest, and potentially jail terms. Most procedures, though, are civil; there is also no inherent problem of reversing the onus. The existence of unaccounted money is sufficient proof of failure to pay taxes. Furthermore, attacking illegal income through the tax code sends out an important message - everyone must pay their taxes, and if they fail to do so voluntarily, the state had tough means at its disposal to collect what is due.

There have been three main objections to reliance on the tax code for such purposes. One is that it legitimizes criminal activity. This is false. The law is clear - income taxes must be paid regardless of whether the source of the funds is legal or illegal. Furthermore, market-based crimes are driven, at least partially, by the search for profit. If the theory behind proceeds-of-crime approaches is correct, it does not matter who takes away the proceeds. The loss will remove both the motive (profit) and the means (working capital) for further crimes.

Another objection is that using tax proceeds will take away only a percentage of the net income, depending on the tax bracket. This objection, too, is easy to dismiss. Add in the penalties, back interest and fines, and a great deal more than just the amount given by the tax bracket disappears.

Finally, it is argued that by using tax instead of asset-forfeiture procedures, criminals would have the right to write off expenses. To this the response is, not only is that perfectly legitimate, but it is actually an advantage. It is legitimate because the income of enterprise criminals does not come from theft or fraud. As market-based entrepreneurs enterprise criminals do have costs; and it is net income or profit that they earn which motivates them, not what they have to spend as costs. On the one hand, failure to let them deduct costs subjects them to double punishment - they would have had to lay out money to cover costs and then pay taxes on that sum to the government. On the other hand, there are major advantages to crime control from letting market-based criminal entrepreneurs write off their costs. To do so, they must present details of their expenses - identifying the purposes for which it was spent and the beneficiaries. In effect, the criminal's profit-seeking instincts can be put to work to actually improve information on criminal markets and to map out criminal networks.

These advantages, it must be stressed, derive from the use of the tax code as a tax code. There is, unfortunately, another model that is much less worthy of emulation.

When the movement to ban alcohol and narcotics began in the US, it faced a Constitutional problem. Regulating such matters seemed, at first glance, beyond the powers of the federal government. Yet state-by-state variations in prohibition laws would have rendered them unworkable. However, the Supreme Court ruled that the federal government had the right to regulate anything that it had the right to tax. Hence, both early drug law and the alcohol regulations were written as revenue statutes. That meant primary responsibility for enforcement went to Treasury agents. Unlike practice in any other country deriving its institutions from British practice where the two functions are kept firmly apart, in the US the Internal Revenue Service (IRS) became at once a police force and a tax collection agency.[35]

This blurring of the distinction between tax and criminal code enforcement took another big step forward in the 1930s when the US government used charges of income tax evasion against Chicago kingpin Al Capone. The objective in this and similar future cases was not to grab the assets of mobsters and so deter them from further sins, or to cripple their “organizations” by taking away their working capital. Rather, it was simply to find something for which they could be tossed in jail.[36]

By so doing, the IRS put matters squarely in reverse. Instead of the threat of criminal sanction being used to enforce tax regulations, tax law was (and in the US continues to be) used to enforce the criminal code in proceedings in which the objective is to get the individual rather than his or her overdue taxes. Not only has that meant the IRS ties up resources in high-profile criminal cases instead of using them to generate tax revenues for general government purposes, it also means that using tax law to prosecute criminals indirectly for other offences sends out to the public the message that it is all right to cheat on taxes provided the money originates from legitimate sources.[37]

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