It’s the Illicit Economy, Stupid

Moisés Naím / Foreign Policy

I recently asked a Swiss banker, "How much harder is it for you to move $50 million and keep it hidden from authorities today than 10 years ago?" He smiled and replied: "The main difference is that now I charge more."

That’s discouraging. Apparently, the­ anti-money laundering laws that many governments enacted after Sept. 11, 2001, have changed little. Indeed, according to Edwin Truman and Peter Reuter’s study for the Institute for International Economics, in the United States, where these new protections are most stringent, money launderers face only a 5 percent chance of being convicted in any given year. Anywhere else, the chances are even less.

Laundered money is, of course, not the only illicit international trade that governments are unable to stop. Despite a long-standing war on drugs, the total size of the global drug trade probably doubled between 1992 and 2002. For most of the 1990s, an average of 500,000 people crossed illegally into the United States each year. The hope was that the border controls enacted after 9/11 would make that number drop. It hasn’t. Half a million people are still entering the country illegally every year. The same is true in Europe, where tighter immigration controls have failed to yield any significant reduction in illegal immigrants.

Governments have failed to stop a wide range of illegal commerce. Fifteen years ago, the trade in pirated goods was almost insignificant. Today, it is valued at $400 to $600 billion a year. No insurgency anywhere in the world seems to have much difficulty procuring the weapons it needs, which is one of the reasons that the illegal arms trade is worth $10 billion. International human trafficking comes to another $10 billion. Stolen art, according to Interpol, is worth $3 billion a year. In the last decade, all of these illegal international trades have grown in size and scope.

The explosion of money laundering offers a glimpse of the total size of the world’s illicit economy. Money laundering has grown at least tenfold since 1990, reaching $1 to $1.5 trillion today. Considering that legitimate global trade roughly doubled in the same period, from $5 to $10 trillion, it’s easy to see that the illicit economy is significant, vast, and surging.

Of course, smuggling, trafficking, and international crime have always existed. But this familiarity creates a dangerous complacency because it treats today’s illicit trades largely as irritants, rather than systemic threats. In the 1990s, revolutionary changes in politics and technology reduced the obstacles that distance, borders, and governments imposed on the international movement of goods, money, and people — legal and illegal. These changes allowed regional traffickers to become global traffickers. And, as the reach of criminal enterprises expanded, governments failed to keep up.

Now the criminals are only becoming more sophisticated. Because, as illicit industries become big business, they naturally adopt the strategic thinking of big businesses everywhere: diversify, politicize, and legitimize. First, like any normal corporation, traffickers diversify to reduce the risk of having all their revenues come from just one — in this case, illegal — enterprise. Second, traffickers spend vast sums to gain the support and protection of politicians and government officials. And third, they invest heavily in reputation-enhancing activities — churches, sports teams, art exhibits, social work, and media.

The intense diversification of groups engaged in illicit activities into legitimate businesses — the Moroccan human trafficker who doubles as a real-estate mogul in Spain, or the Russian arms smuggler who owns a bank in Cyprus — blurs the line that traditionally differentiates legal and illegal business activities. This blurring is further complicated by the close association that international criminal networks develop with politicians and bureaucrats at home and abroad. Indeed, in many instances, the relationships are so close that government officials replace the national interest with that of the criminal enterprise. For example, during most of the 1990s, Vladimiro Montesinos was in charge of Peru’s security, working closely with the U.S. Drug Enforcement Administration and the CIA. He is now on trial accused of heading major international trafficking rings in weapons, drugs, and money laundering. A.Q. Khan, the father of Pakistan’s atomic bomb, was selling nuclear technology to North Korea and Libya not to further his country’s national interest, but to line his own pockets.

All big businesses — especially those whose industries are heavily regulated — invest in lobbying or government relations. Why shouldn’t criminals do the same? Their "industry" is the most regulated of all — indeed it is banned! Therefore, the return on their investment in government influence and protection offers the highest returns.

The same applies to philanthropy. Successful businesses invest in club memberships, patronize the arts, and are coveted donors for charities. Wealthy criminals do, too. Walter C. Anderson, an American who was accused of hiding $450 million in offshore accounts to evade taxes, argued that the money went to his Panamanian foundation, which was devoted to advancing human rights, arms control, and family planning. Pablo Escobar Gaviria, the legendary Colombian drug kingpin, was the main funder of sports clubs and other charitable activities in Medellín.

Criminals have always tried to grow their businesses, influence politicians, gain social respectability, and buy into legitimate enterprises. The difference is that they are now able to do it on a scale and with consequences that are without precedent.