Operations and Functioning of Organized Crime Groups
At their core, legitimate enterprises and organized crime and racketeering enterprises seek to exchange their goods and services for financial resources, especially electronic cash (e.g., bank deposits). Alternatively, other financial resources may be received such as bulk cash or cryptocurrency, which may comprise an intermediate source of wealth before realization as electronic cash in a financial institution. Resources such as bulk cash and cryptocurrency are not immediately useful to liquidate certain obligations, including tax liabilities, limiting their ultimate exchange value. Few assets are more liquid than a checking account with JP Morgan Chase.
As an artificial illegal construct, there is no formal purpose to organized crime groups separate and apart from the pursuits of profitability, gains, and influence. In this sense, they are in the same family as legal fictions colloquially known as corporations. These entities function in ways that enhance their capacities of profitability and persistence. Usually, they don’t exist for the single big score, then dissolve. More often, they provide an alternative pathway to obtain financial (e.g., cash in the bank) and economic (e.g., real estate) resources, as well as to further ideological objectives (e.g., terrorism’s goal of subverting a given political regime).
Organized crime groups are real (i.e., informal associations in fact) like legitimate incorporated commercial enterprises (i.e., formal associations by operation of law). They have leadership, and they have coordination among disparate parts. They work toward absorbing others’ financial resources, obtaining others’ products and services, coercing others’ decision making, and so on. Organized crime groups exist to facilitate wrongdoing as defined by a given political regime (e.g., the U.S. statutory criminal laws). Often, their conduct is criminal (e.g., extortion) and/or tortious (e.g., unlawful interference with contractual relations). While they may form agreements with associates, competitors, and victims, they do not rely so much on formal contracts (notwithstanding mainstream and colloquial use of the term contract killing). Credible threats of extortion work way faster.
Organized crime traverses local, state, and national boundaries. It is a global phenomenon, using land, air, and sea as the physical pathways to profit, that is, the pathways are lawful, but the method may be unlawful. However, profitability is not the only concern: the U.S. national security issues are raised by the capacity of organized terrorist organizations such as the Taliban and Hezbollah to cross borders to obtain and launder financial funds through illicit means (e.g., drug trafficking, insider trading) (Lawfare (blog) 2019).
In brief, the operations of organized crime groups may be identified by the presence of one or more of the following types of objectives:
• To obtain cash (bulk and electronic, with the latter greatly exceeding in value the former)
• To obtain illicit goods and services and support black and gray markets (e.g., counterfeit goods, opioids)
• To distribute illicit goods and services (e.g., arms, support of terrorism)
• To invest in legitimate enterprises and clean illicit financial flows
The transactions supporting the accomplishment of these objectives are neither recorded accurately and completely in books and records nor examined independently and routinely by public auditors. Moreover, even the exhaustive and intrusive efforts of criminal investigators rarely result in any report resembling a fair and true accounting of transactional history of the enterprise. While the pursuit of objectives noted above would exclude legitimate commercial pursuits, overlap in operations and functionality between the organized crime group and the legitimate enterprise may be found in the examination of financial flows, with the former’s illicit and the latter’s licit.
Organized crime groups ultimately rely on the financial services industry to make financial resources available to their broad membership in the desired currency (usually, U.S. dollar accounts in a financial institution).
Money laundering is essentially concealing the taint of illicitly obtained funds (i.e., financial resources). It is a process resulting in the obscuring of the audit trail such that evidence disclosing the actual nature of the originating transactions (e.g., drug purchases, firearms sales) is not transparent. Briefly, money laundering is the intersecting criminal activity shared by legitimate actors behaving badly such as politicians hiding ill-gotten public funds and illegitimate actors pursuing unlawful objectives exclusively such as fully committed organized criminals. Whether the processes are acquiring public/private assets and financial resources, controlling/dampening law enforcement agency and regulator supervisory efforts, or capturing/influencing banks and similar financial institutions, the conduct of both organized criminals and corrupt politicians demonstrate shared values and use of common means and methods (United Nations Office on Drugs and Crime 2019).
Thus, the functioning of organized crime groups is similar to legitimate enterprises with respect to protection of financial resources. Whereas the legitimate enterprise has far greater tolerance of transparency within the rule of law, the illicit enterprise functions to further the goals of self-preservation and participant prosperity through tax secrecy and tax haven asset protection jurisdictions. Unsurprisingly, these jurisdictions also protect the so-called legitimate enterprises (e.g., the bank secrecy laws of former British Commonwealth colonies and dependencies protect licit as well as illicit transactional proceeds).
The sharing of functionality and goals between such apparently disparate enterprises may be expected and explained as legitimate enterprises face an almost irresistible urge to conform to criminogenic pressures (Glebovskiy 2019, 443). Profits extracted from gray and black market participation may be significant. The overlap of functionality may be deemed somewhat unavoidable in far too many cases because so many of the tactics used by organized crime groups are successful (e.g., criminal proceeds are hidden, disguised, and later used without detection through opaque and misdirecting shell companies in secrecy jurisdiction). Intransparency benefits the legitimate as well as the illegitimate. Where resources are scarce, competitive pressures are great, and winner-take-all rules dominate, the functioning of the organized crime group resembles too much the functioning of the legitimate/quasi-legitimate enterprise (e.g., Enron).
International Tax Havens and Tax Secrecy Jurisdictions
Transnational organized crime like most crime is driven by the profit, gain, and influence motives. The opacity of international finance aids and abets the successful commission of transactional organized crime (World Customs Organization 2019). Layers upon layers of legal fictions (e.g., shell companies) located in multiple jurisdictions (e.g., Cyprus, Cayman Islands) formed and sustained by fee-seeking facilitators (e.g., lawyers, accountants, company formation agents) combine to create a nearly impenetrable (dark) web linking together illicit activities and corrupt individuals. In brief, it’s hard to know what’s going on in these closely held, far-flung corporate entities. Participants doing bad things tend not to flag their misconduct.
These shell companies are used to receive and distribute proceeds of illicit activities. Funds flow from the provision of illegal goods (e.g., drugs, firearms, counterfeit/gray market consumer items) and services (e.g., loan-sharking, human trafficking, bribery, and kickback schemes) to be laundered through the shell companies of tax haven and tax secrecy jurisdictions—the opacity allows the safe flow of large monetary sums, whether aggregated from frequent or big ticket transactions into and out of the shell. Within the shell, the financial resources are protected against incurious local governments and unknowing foreign governments. In a sense, some are paid not to see.
Moreover, with the advent and commercial viability of financial technology (fintech) electronic transfers are the norm, domestically and internationally. These are characterized by high amounts of debits and credits moving funds from place-to-place and depositary-to-depositary under a labyrinthine scheme of difficult to follow and difficult to attribute to any natural person organizing principles. The convoluted structure is by design and not a bug. The financial flows are much faster than the applied intelligence of criminal investigators can anticipate or even monitor, even with mutual legal assistance treaties.
Patently legitimate enterprises can hold and conceal cash and capital accounts of great magnitude. For example, reinsurance companies and other financial services providers such as hedge funds may accumulate financial resources without serious question and forensic examination. These financial service providers are often key businesses in tax havens and tax secrecy jurisdiction, providing license fees and other transfers of financial resources to otherwise revenue-starved governments and creating a veritable race to the bottom. Integrity may not pay for essential government services as well as reckless, amoral, and unethical regulatory oversight pays. Integrity is more expensive in the short- and medium terms than looking the other way. Perhaps the thinking goes—better to receive recurring streams of income from licensing fees and modest levels of taxes than to prohibit, detect, then fine. The jurisdiction may prefer a secure annual annuity than a lump sum; probity and punishment exacted against one financial institution may deter many others from on-shoring.
Of course, what’s going on in the offshore tax havens and secrecy jurisdictions is not limited to venues and islands difficult to locate on a map. The superstructure supporting organized crime and their extended associations in fact operate domestically in local banks, also. Deposits of criminal proceeds become routine. Secrecy is paramount by operation of law in many states of the United States (e.g., Delaware, Nevada). Financial flows across and into U.S. dollar accounts at money center banks (e.g., JP Morgan Chase, Citibank) are also routine. A superstructure that places financial and legal confidentiality and privacy objectives higher than a commitment to understand the substance of monetary transactions implicitly promotes unaccountable conduct, including organized crime activities, by undisclosed actors.
How organized crime groups accomplish their objectives is as much an issue centering on strategies as it is on tactics. The relationship between the government and these illicit private sector parties varies across jurisdictions, with opportunities distributed unevenly transnationally. Organized crime in the United States is similar to and different from organized crime in Japan: jurisdiction and attendant circumstances matter, offering disparate opportunity structures that transform in time. Organized crime in New York City in the 1960s is not equivalent in all material respects to organized crime in New York City in the 21st century.
Often, legitimate businesses and organized crime groups are contrasted and compared. Whatever their similarities, organized crime groups are not averse to using violent means to accomplish their goals, whereas such a tactic by a legitimate business would attract the attention of police and comprise an undesirable means and method to obtain profit and gain (Croall 2010, 342). Legitimate business cannot saliently commit extortion. Clandestine organized crime groups, where responsibility and command-and-control are distributed without demonstrable attribution to a formal hierarchy of chain of command, do commit extortionate and violent acts evident in streets and households worldwide.
However, organized criminal activities, whether exposed and mediated by the mechanisms of the rule of law (e.g., the criminal investigator and public prosecutor) or undetected by these mechanisms and falsely assumed non existent, are mediated through means and methods designed to accomplish criminal objectives. Generally, the organized crime group engages in the following actions:
1. Conduct, including plans, designed to facilitate illicit ends such as the sale of drugs and firearms proscribed by law. This set of conduct is well known by the public through depictions of fact and promotion of myth in mass media and specialized scholarship.
2. Conduct, including plans, composed of illicit means such as the bribery of public officials to effectuate corrupt private and public decision- and policy making. This set of conduct is less understood as absence or rarity of evidence is wrongfully inferred by the public (and disseminated by mass media and specialized scholarship) as evidence of absence, that is, a false negative.
The overarching goal is secrecy. The objectives are criminal, and the means and methods are unlawful.
Where rule of law is less aggressively applied with respect to some transfers of financial resources (e.g., political campaign contributions and independent expenditures in support of public policies in the United States) than others (e.g., payments to child pornographers), the implementation of rule of law creates its own domains of priorities, knowledge, and ignorance. What is publicly known about the drug cartels in Mexico dwarfs what is publicly known about deal-making in the U.S. Congress, where the knowledge seeker merely focuses on traditional indicia of organized crime influence such as criminal convictions. Thus, the success of organized crime groups depends on minimizing and (re)directing that which gets investigated and prosecuted.
This is not to suggest that official statistics about organized crime are invariably useless, but they omit and exclude many actual predicate acts that would comprise organized criminal conduct if investigated and prosecuted (cf. false negatives). The rates of error and bias are not empirically and impartially quantifiable through commonly accepted measures of validity and reliability. Adopting the presumption that these errors and biases even out over the long-term (i.e., they are random) is not satisfactory. In fact, the assumptions of randomness and full and fair disclosure of reliable estimates of (transnational) organized economic crime by official sources are problematic, given the opportunity structures at work (e.g., pay to play barriers to entry).
The effectiveness of methods is not an issue that may be firmly fixed as a set of tactics or playbook the same across jurisdictions and temporal intervals. Things change gradually or otherwise—attendant circumstances give rise to the methodology or ways in which criminal means and objectives are realized in practice, leading to the following useful categories to be considered in the discussion of means to ends:
• Methods reputedly under sovereignty-supported organized crime (e.g., does the government implicitly support organized economic crime through its failure to control or punish such activity?)
• Methods reputedly independent of sovereignty support (e.g., does the government demonstrate a willingness and capacity to limit and sanction organized economic crime?)
• Methods focused on specific criminal acts (e.g., are acts comprising extortion, gambling, prostitution, drugs, human trafficking, firearms trafficking fully investigated and prosecuted from origin to beneficiary?)
Organized criminals don’t seek to maximize their utility from wrongful conduct; they seek to commit actions that are unlikely to be detected and punished seriously. The subjective willingness and capacity to act extralegally depends on the relevant governments’ enforcement of law and regulation.
While it might have been simpler in the past to confine organized crime to notorious crime families, the extent of criminal activities requiring the participation of actors located across the globe should not be underestimated. The value of counterfeit goods seizures, including footwear, wallets, electronics equipment, apparel, and jewelry, at the U.S. borders was estimated at $1.4 billion during the fiscal year 2018 (U.S. Immigration and Customs Enforcement 2019). The supply chain is structured, often apparently legitimate but actually illicit, and hard to isolate (beyond a reasonable doubt) (U.S. Attorney’s Office Central District of California 2019). These illegal activities implicate domestic and international fraud and other crimes to be conceived as a dynamic, non stationary web of interlocking and interacting processes thwarting transparency and accountability by design.