Globalization (2007)

Globalizing a Traditional Cottage Industry: International Criminal Organizations in a Global Economy

Michael Rolston




The Cali Cartel is a highly professional group that, although ruthless in dealings with its enemies, runs its business according to sound economic and management principles.

-- Phil Williams

Introduction

The ongoing shift of corporations moving from a national to global stage has largely forgotten, the resulting creation of a single market for the darker side of business: Transnational Criminal Organizations (TCO). The state has yielded significant authority over its sovereign domains and the result has been a power shift from the state to private actors. Transnational Corporations have become the symbol of a more globalized world; but, there are two other types of actors which are mentioned much less: illicit authority (TCO’s); and moral authority (non-governmental organizations).1 This paper will concentrate on the former and discuss how TCO’s operate in a global industry. We argue that Transnational Criminal Organizations are an economic based global industry that uses violence, corruption and cooperation to shape their political environment so that their need to compete in the market is diminished.

I. A Definition

There are just as many definitions as there are types of TCO’s. The United Nations draft convention against transnational organized crime defines them as, “group activities of three or more persons, with hierarchical links or personal relationships, which permit their leaders to earn profits or control territories or markets, internal or foreign, by means of violence, intimidation or corruption, both in furtherance of criminal activity and in order to infiltrate the legitimate economy.”2 The UN definition, like many law enforcement definitions, is too broad. It also neglects to take into account the cooperation that groups at the global level must use to expand into new markets. Fiorentini and Peltzema state five basic criteria that further refine the definition of the characteristics of a TCO:

(i) Economies of scale and exploitation of monopolistic prices on the supply of illegal goods and services, (ii) practice of violence against other legal and illegal business, (iii) criminal hierarchy with internationalization of negative externalities and management of portfolio of risky activities, (iv) avoidance of resources dissipation through competitive lobbying and corruption, (v) easier access to markets.3

Again, what is missing from this definition is the essential aspect of cooperation. What is key about this definition, however, is the economic aspect of TCO’s as profit maximizing units. For the purposes of this paper, we will define TCO’s as profit maximizing units of two or more people that attempt to exploit monopolistic prices on a global scale on the supply of illegal goods and services through violence against competing interests, corruption, and cooperation with their counterparts wherever a business advantage can be obtained. The realization of easier access to markets and risk sharing are essential benefits of their cooperation with other groups.

II. Transnational Criminal Organizations as a Global Industry

TCOs are a significant, but unmeasured, part of the global economy. Gross domestic product (GDP) does not measure their activities, but rather, they are part of the basic supply and demand structure.4 “To gain an accurate measure of the total demand for factors of production, of total marketable output or of total incomes generated, we should include [illegal] activities, whether or not we as individuals approve of them.”5 The concept of looking at economics for direction is very effective because it removes emotion and allows for a more scientific examination of the global business industry. From a political perspective, TCOs in the past were closer to the state model than of business, but the modern TCO is driven more by economics than politics.6 They simply circumvent state authority rather than negotiate with the state. This argument is often based on the parasitical nature of TCO’s and of the historical aspects of groups like the Chinese triads who were founded for a political purpose.7 The difference between modern TCO’s as opposed to the traditional territorial based criminal organizations is that they operate much more like a business. The Cali drug cartel is an excellent example of this. They have expanded their product range to encompass products with larger profit margins such as opium, and seek out new markets where their current products will yield larger returns.8 They resemble a senior management group of a Transnational Corporation that operates with sound economic and management practices rather than the gangsters of the past.9 TCO’s are clearly excellent examples of a profit based trans-national industry.

TCOs are significant due to their large influence in markets around the world. In the former Soviet Union, 1995 estimates, suggest that TCO’s controlled 35 percent of banks, 40 percent of private business, 60 percent of commerce, and 80 percent of joint ventures with foreign firms.10 To do business in the former Soviet Union, a business would have no choice but to interact with a TCO. In another case, the Chinese Triads are estimated to have made $2.5 billion from human trafficking into the United States between 1991 and 1994.11 Furthermore, the increase in profits from the globalization of the criminal industry during the past 10 years has grown from $85 billion US to $500 billion US, rivalling the profits from the oil industry.12 This gives TCO’s an enormous impact on the world economy and their roll as a transnational industry is easily underestimated.

As a global industry, TCO’s compete with various forces, reminiscent of multinational corporations. They sometimes operate as singular units; however, the TCO’s also interact through their industry as a singular industry (see diagram below), or as multiple joint associations. The primary cleavage is between the state and TCO’s; national and intergovernmental law enforcement attempts to create barriers of operation, but its success has been limited in curtailing the rise in TCOs growth. This is often characterised by violence, as in the Medellin cartel and the Colombian Government, but in most cases TCOs simply attempt to circumvent the State. Cleavages often erupt between different TCO’s regarding market share, prestige and profits. This tends to be an internal industry dispute; for example between the Cali cartel and the Medellin cartel. International and local media can dramatically affect the operations of TCO’s through investigative journalism. This was evident by the murder of two newspaper editors in Russia in 2003 who were investigating organized crime.13 Another force affecting TCO’s is legitimate corporations. Legitimate and illegitimate corporations are required to perform significant interactions together. Quite often TCO’s (as an illegitimate corporation)

must launder money through legitimate corporations. While other forces interact and restrict TCO’s, these are the primary four actors. Although, Guerrilla groups in Colombia represented a significant challenge to TCOs, this was a geographically isolated problem. One area that has the potential to cause significant problems for TCOs in the future is supranational state formation or a global governance structure. While currently these systems are relatively powerless, perhaps the European Union is the only powerful supranational institution (or conceivably it is considered intergovernmental depending on perspective), which represents a serious future threat to TCOs. It has, for example, delayed Bulgaria’s entrance into the European Union until early 2007 due to the strong role of criminal organizations in that country. Whether this delay was symbolic or predictive of a tough new line on TCO is unclear at this time.

III. The Internal Power Structure

The power structure within a TCO resembles a traditional legitimate corporation but also uses significant outsourcing (or subsidiaries). The TCO is based on a “vertical structure where the principal extracts some rents.”14 This allows one or two people to control vast enterprises. For example the Chinese Triads in Hong Kong have over thirty sub-groups under one umbrella organization.15 Viano suggests that there are three main levels of TCO’s. First the Primitive level, which have a leader and few members and engage in theft, and hooliganism type of crimes. This type of criminal organization is not a TCO on its own, but it is the bottom level of TCO’s power, the blue collar criminal. Second, the intermediate level is a transitional stage that would have several sub-groupings. It often has 50 or more members who are fighters, secret agents, executers, bodyguards etc. This group uses corruption and represents many of the organized criminal groups of the past. The final group uses different management levels, like a transnational corporation and engages in a command and control supervisory position over other levels. This grouping operates at the international level and the top echelon sets policy direction for the overall organization.16

IV. Creating a Competitive Advantage

Through their interactions, TCO’s must create barriers to entry and a competitive advantage in order to maximize their profits. This parallels legitimate corporations and reflects the extent to which a legitimate corporation, such as Standard Oil, would restrict access to other market players – the reason it was broken up by US anti-trust legislation. TCO’s attempt to reduce their need to compete with the same barriers but may use different tactics in some cases. We argue that the transnational criminal industry uses violence, corruption, and cooperation to reduce their need to compete in the global market place.

The traditional image that is conjured when people envision organized criminal groups is violent street thugs. The TCO’s are no different in the fact that they use violence, but the scope and capacity to which they use violence has changed. They use violence to protect and expand their turf, thereby protecting and expanding their profits.17 While they still use the lone enforcer, some groups are capable of immense violence. The Medellin Cartel in Colombia was an example of one group that was willing to use their significant violent resources. At one point during the Cartel’s life, they decimated the Colombian Judiciary, and the levels of violence were so high, it approached conditions of a civil war.18 No one is exempt from the violence with all levels of business, government, media and individuals being targets. The use and the threat of violence are effective tools that TCO’s use to shape their markets. This keeps competition from state and legitimate business from infringing on their profits.

The second weapon that TCO’s use to shape their market is corruption against the state and legitimate business. Corruption has been a successful tool in keeping law enforcement agencies from reducing profits. The Sicilian Mafia “has had very close links with the Christian Democratic Party and has infiltrated government at the local, regional and, to a degree, national levels.”19 This gives TCO’s the ability to penetrate markets with relatively low transaction costs, while, allowing them to exploit these markets unregulated. While the Sicilian Mafia is a textbook example of this tactic, corruption is used as a main tool throughout the TCO industry. The Cali Cartel, as opposed to their former Medellin counterparts, had used corruption extensively in Colombia to remain relatively untouched by law enforcement.

Corruption can also be an effective tool for TCO’s with legitimate business. Kelly suggests that the TCO’s build a coercive monopoly; therefore, using corruption to keep legitimate business away from areas that TCO’s want to operate, can be very effective.20 Corruption can also help for money laundering aspects of TCO’s business where they need the help of legitimate business to conceal their profits.

The final weapon that TCO’s can use to shape their political environment is cooperation with other TCO’s. Cooperation is one of the main differences between the mafia of the past and the TCO. Industry cooperation has dramatically re-shaped the way criminal organizations, both local and transnational, operate. It’s a far cry from the gangsters of Chicago. Davis suggests that TCO’s “are now more likely to collaborate with other criminal groups from different countries or ethnic backgrounds to extend or facilitate their activities abroad.”21 Similar to their legitimate counterparts, TCO’s have recognized the advantages to linking up with other groups to gain knowledge, experience, distribution and marketing.22 The result is extensive interlinking groups covering the globe in both loose associations and more concrete industry associations. Claire Sterling alleges a “pax mafiosa” of sorts among the major crime syndicates around the world making for a global web of crime syndicates.23 Cooperation is key for a TCO to succeed and expand from a national crime organization to the transnational nature.

When TCO’s stop cooperating they begin to experience significant operational problems and their enemies are quick to react. The Medellin Cartel lost power, profits and ultimately any potential when their partnership with the Cali Cartel collapsed.24 Furthermore, when TCO’s attempt to expand into other markets, they may run into significant difficulties with groups, both local and transnational, that are already operating in that market. This situation can easily lead to violence in a protectionist attempt by other stakeholders. Polanyi argues that protectionism is based on land, labour, and money; the former two being local and the latter national in character.25 In the globalized world, land and labour becomes the domain of local organized criminal groups; while with the shift in money from the national to the transnational allows TCO’s control the financial strings. This creates the need for cooperation at both levels for TCO’s attempting to gain market access.

Cooperation also offers protection and risk management for TCO’s who are expanding or operating in other regions. The Colombian Cartels were forced together by attacks from Guerrilla organizations, which frequently kidnapped Cartel leaders’ family for ransom.26 This allowed the leaders to leverage their resources and protection abilities to keep their families safe. Furthermore, the joint ventures among TCO’s allow for various types of risk management. By using local groups through sub-contracting agreements, the TCO’s operations are largely concealed from law enforcement officials.27 It also puts the end of the distribution chain risk, arguably the most susceptible to intervention by law enforcement, on to another party other than the TCO.

Another benefit from cooperation is trading, allowing for greater market penetration. In one particular law enforcement action, links were found between the Cali Cartel and Sicilian Mafia; “one explanation for this was that the Sicilian Mafia was helping the Colombians break into the New York heroin market in return for franchise arrangements on cocaine in Europe.”28 What this has shown is that TCO’s use many types of business cooperation from joint ventures and franchise agreements to loose agreements and sub-contracting in order to reduce their need to compete in their market.

V. Conclusion

Although TCO’s are not usually thought of as part of an international industry; nor are they often referred to as changing due to globalization, we have argued that transnational criminal organizations are an industry that operates extraterritorially with many of the same means, and goals, as legitimate business. We have also argued that TCO’s shape their political environment through violence, corruption and cooperation in order to reduce their need to compete. The growing profits from the TCO industry have been largely unchecked and unregulated creating a financial market the size of the oil market. Without the capabilities of a global institution, or even a strong intergovernmental law enforcement agency, this industry will continue to grow at substantial rates. The leaders of TCO’s have taken full advantage of the declining power of the state, enjoying a growing market that is easier to penetrate. The declining state has led to a dramatic increase in private authority. Even the global capable of the U.S. military cannot restrain the power of global actors like TCOs.

Endnotes

1 Rodney Bruce Hall, “Private authority: Non-State Actors and Global Governance,” Harvard International Review, 27.2 (Summer 2005): 69.

2Draft united Nations Convention Against Transnational Organized Crime, option 2 article 1

3 Fiorentini and Peltzema in Nuno Garoupa, “The Economics of Organized Crime and Optimal Law Enforcement,” December 1997, 3

4 R. Lipsey, et. al, Economics, 9 th Canadian Ed. Don Mills: Addison-Wesley Publishers Ltd, 1997, 491.

5 Ibid

6 Phil Williams, “Transnational Criminal Organisations and International Security,” In In Athena’s Camp: Preparing for Conflict in the Information Age, 315

7 Susan Strange, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge: Cambridge University Press, 2004, 111.

8 Williams, Transnational Criminal Organisations, 322

9 Williams, Transnational Criminal Organisations, 324

10 Strange, The Retreat of the State, 112

11 Strange, The Retreat of the State, 114

12 I Davis, et. al, “Organised Crime, Corruption and Illicit Arms Trafficking in an Enlarged EU: Challenges and Perspectives,” Saferworld Arms & Security Programme. December 2001, 15

13 Myers, Steven Lee, “World Briefing – Europe: Russia: Newspaper Editor Killed,” The New York Times, October 11, 2003.

14 Garoupa, “The Economics of Organized Crime”, 7

15 Williams, Transnational Criminal Organisations, 324

16 E. Viano, ed, Global Organized Crime and International Security, Vermont: Ashgate Publishing Co, 1999, 65.

17 Williams, Transnational Criminal Organisations, 329

18 Williams, Transnational Criminal Organisations, 330

19 Williams, Transnational Criminal Organisations, 331

20 Kelly in Williams, Transnational Criminal Organisations, 331

21 Davis, “Organised Crime, Corruption and Illicit Arms Trafficking”, 13

22 Williams, Transnational Criminal Organisations, 327

23 Sterling in Strange, The Retreat of the State, 113

24 Williams, Transnational Criminal Organisations, 323

25 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our time, Boston: Beacon Press, 2001, 213.

26 Williams, Transnational Criminal Organisations, 321

27 Davis, “Organised Crime, Corruption and Illicit Arms Trafficking”, 14.

28 Williams, Transnational Criminal Organisations, 325

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