The Criminogenic Network and Role of Legitimate Financial Institutions
Organized crime is transnational in many material respects. The complexity and accessibility of the international financial system, including the deposit, transfer, and exchange of currencies for or with U.S. dollars, lends itself to concealment of the sources and uses of financial funds (Central Intelligence Agency 2008). Based on the estimates developed in 2009, at least 2.7 percent of global gross domestic product (GDP), equivalent to $1.6 trillion, of available criminal proceeds are laundered, with only an estimated 0.2 percent of such laundered proceeds seized and frozen by law enforcement (i.e., the interception rate) (United Nations Office on Drugs and Crime 2011, 7). These statistics suggest an enormous problem not adequately mitigated by financial institutions’ anti-money laundering tools and processes, and public sector regulators and law enforcement agencies charged with supervising and monitoring financial institutions.
Additionally, supply chains (e.g., sources of drugs, firearms, and humans for trafficking) are internationalized. Export-import is the rule. Distribution and logistical chains use all the traditional pathways (e.g., by air; by rail; by waterway; by road) called upon by legitimate commercial enterprises. The transactional circuit of organized crime (i.e., money to illicit goods and services to money) is akin to legitimate commerce; this empowers the attribute of organized crime concealment.
In fact, the bank secrecy regimes effective in many jurisdictions of the United States and the UK may be the primary pathways for money laundering notwithstanding self-promotion and hifalutin language by high government officials. The incentives to launder from the perspective of the financial institutions are great—much greater than a commitment to a robust enforcement and regulatory infrastructure that would negatively affect the capacity of the financial institutions’ highest priorities: (1) having control over money; (2) maintaining confidentiality between the institution and its customer (Young and Woodiwiss 2020, 23–24). In a sense, the problem of organized crime control via inspection and oversight over financial institutions and self-regulation has failed, with the role of the U.S. dollar and the exploitation of the U.S. and UK criminal law policies essential to preserving the ill-gotten capital of organized crime group leadership and the financial well-being of financial institutions. Money laundering may be mutually beneficial for financial institution and organized crime agents.
Conceptualizing the problem of global money laundering as a failure of domestic and international collaboration among financial intelligence units and the financial institutions, while seemingly incontrovertible, pays inadequate attention to the root cause. A symbiotic relationship between lawbreaker and custodian is not solvable as a problem of collaboration; it is a problem of misaligned interests and incentives. Impartial and independent inspection and oversight would seem to provide a more effective paradigm than a proposed global self-monitor of transactions among financial institutions.
As overseen by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), special measures may be required of financial institutions to address the risks of global money laundering. These focus on transaction analyses, beneficial ownership information, and conduit and correspondent accounts (U.S. Department of the Treasury 2011). The effectiveness of these measures is questionable, though the desirability of their adoption is a step toward remediation of the problem. Policy and law effectiveness are often evaluation based on criteria such as enforcement actions such that when enforcement actions increase the problem is purportedly en route to solution, but when enforcement actions decrease, the problem is prematurely deemed solved. This is a sort of “heads I win, tails you lose” evaluation process.
A better measure of progress would be to set up a system wherein all offshore transactions are accurately, completely, and timely registered under an independent, impartial audit or inspector general investigative global regime. This would generate significant, if not fatal, opposition due to, among other things, powerful preferences of the economic elite to preserve secrecy and liquidity of financial funds.
For example, the global nature not only of operating organized crime groups (i.e., conducting illicit sales of goods and services such as drugs, firearms, and gambling) but of investing in products such as privately issued bonds supported by the income from, among other sources, organized criminal activities, is readily demonstrable (Johnson 2020a). This mainstreaming of profit-seeking and passive (unearned) income maximation may fairly be deemed a distressing attribute of modern capital investment and finance. Capital seeks growth and protection independent of national borders.
Indeed, there is serious concern in the U.S. law enforcement about the underlying purposes, motivations, and effects of large investments in private equity and hedge funds (Lloyd 2020). Their usefulness for money laundering is due primarily to the large investments (e.g., millions of dollars is not unusual) and to their overall opacity (i.e., disclosure regimes are not robust in political economies such as the United States). The process of flows and stores of financial funds is intended to be covert and private—not transparent and supportive of any particular public interest.
Money laundering may be interpreted as a key mechanism in obtaining practice use of criminal proceeds (often) free of their unlawful origins. While the term money laundering is pejorative and the conduct is usually illegal under many jurisdictions, the predicate acts—creating financial transfers to and from dark venues and secretive jurisdictions—are not avoided by those with enough savings to justify the transaction costs. The ability to avoid taxation transforms an ordinary return on investment to alpha growth, the stuff of hedge, and private equity funds’ reason for existence.
Perhaps, the root of the organized crime and financial institution problem may be understood upon recognition that on the banks’ balance sheets, no distinction is made between lawfully and illicitly sourced funds (Raab 1984). If only dirty money were really muddy, slimy, and stinky… However, cash deposits comprise an essential ingredient of profitability for banks (and other commercial institutions), so there are explicit and implicit incentives to look the other way or at least not look too deeply into the depositors’ money-generating enterprises. With cost disincentives impairing the commitment and capacity of institutional compliance, whether internally within proprietary control systems or externally situated in independent contractor and regulatory regimes of inspection and oversight, and financial benefit incentives turbocharging amorality, if not immorality and indifference to rule of law, through focuses on share price, earnings per share, and accompanying bonuses for senior management, transnational organized economic crime has the unacknowledged structural advantage in the dominant political economies (e.g., the United States.).
Financial institutions may grease the wheels of legitimate commerce, but they also support the growth of illegitimate transactions. At heart, there is a conflict between the financial institutions’ need for profitability, gain, and influence and the publics’ need for protection from social harms incident to money laundering (e.g., loss of tax base supporting public expenditures, capital outflows). The proprietary network, especially where their elite constituents’ influence over public policy is great and the potential opposition is dispersed and unorganized, trumps the required real commitment to public inspection and oversight to control (illicit) financial flows.