Transnational Organized Crime

Front matter

Heinrich-Boll-Stiftung and Regine Schönenberg (eds.)

Transnational Organized

Crime Analyses of a Global Challenge to Democracy

Contents

Preface | 9 l. Introduction | 1

Il. Transnational Issues of Organized Crime | 17 1. Money Laundering: Motives, Methods, Impact, and Countermeasures | 17 by Christine Jojarth 2. What Do a Tax Evader and a Money Launderer have in Common? The Role of Secrecy in the Financial Sector | 35 Interview with John Christensen 3. “People should not be punished for being honest!” | 41 Interview with Steffen Salvenmoser 4. Organized Crime in Cyberspace | 47 by Tatiana Tropina 5. Judicial and Social Conditions for the Containment of Organized Crime: A Best Practice Account | 61 by Edgardo Buscaglia

III. Regional Perspectives | 75 1. Introduction | 75

Preface

In June 2011, the Heinrich Böll Foundation hosted an international conference on transnational organized crime (TOC). It was the first time that the Foundation addressed the issue of transnational organized crime in such a comprehensive manner. The intention of this event was to raise awareness about the interdependency of international criminal structures, legal economic processes, and the respective political orders. A further aspect that was addressed was the interwovenness of drug, arms, human and organ trafficking, and money laundering.

With our conference we also intended to contribute toward overcoming the well-established stereotype of organized crime as being a marginal problem. And we tackled another dominant stereotype in Germany, namely that TOC only exists in other countries and that Germany is not much involved, affected, or responsible. The conference was a big success and well documented in the national and international media.

Organized crime is not a new phenomenon; however, it has become fatal for more and more people. Violence and the violation of human rights have become almost ordinary occurrences. Since democracy is one of the central concerns, it is important that TOC be recognized as a structural element of international relations. Internationally as well as nationally, the price that a society and its individuals must pay as a result of the infiltration of TOC should be much more transparent. The international conference was not meant to be a one-time event but the beginning of a deliberate process that links the policy field of (transnational) organized crime to the issue areas of our daily work - such as freedom, democracy, human rights, anti-racism, ecology, and gender equality. We should expect those in politics, media, and civil society - on a global scale - to focus on the problem and act rather than ignore it. Therefore, we are currently strengthening civil society engagement against TOC in various countries and are fostering networking and knowledge-exchange on the issue.

We are especially interested in the dialectics between committing and combating (transnational) organized crime. We are also interested in civil engagement as a means to protect civil, political, and economic life against infiltration by TOC. We want politicians and lawyers to assess those interdependencies with a new vision and assert their responsibilities within the context.

Transnational Organized Crime — Analyses of a Global Challenge to Democracy

Who shapes our current role models? And where does our general orientation come from? How can we define the fine line between a successful businessman earning millions a year through financial speculation on staple foods and a unscrupulous Mafia boss dealing with drugs and women? Who consumes such drugs and women, and who is involved in money laundering in our societies?

The answers are difficult and it is our responsibility to work them out! With this book we hope to contribute toward the responsible handling of the questions. Hopefully, many interested readers across the whole world will feel enriched by its offerings and will benefit from our having assembled so many authors to address transnational organized crime from many different countries and perspectives, to analyze it, and to elaborate on policy recommendations. Many thanks for their commitment.

This book was only possible thanks to the energy, the knowledge, and the networks of Regine Schénenberg; the engagement and the enthusiasm of Annette von Schönfeld, Head of the Heinrich Böll Foundation’s Regional Office for Mexico and Central America; the valuable contributions and interview skills of Verena Zoppei; and the efforts of Daniel Backhouse, who maintained the overview of all partners involved and contributed with his always reliable project management.

Berlin, January 2013

Barbara Unmüßig President of the Heinrich Böll Foundation l. Introduction

Today, transnational organized crime is an inherent feature of economic globalization and represents more than just the dark side of that development path. It is increasingly difficult to distinguish light from shadow in this context, and the fine line between legal and illegal forms of economic exchange is becoming increasingly blurred. There are networks operating in both legal and illegal sectors, depending on what brings them the greatest benefit. Currently, few experts can claim to have comprehensive knowledge and understanding of the laws and regulations governing the international flow of trade. International companies rely increasingly on intermediaries and arbitrage agencies for much of this trade, and thereby cede a certain amount of their overall responsibility for the specific circumstances of the international and local handling.

A further source of uncertainty is the cultural specificity of concepts of legality and illegality, as well as their local implementation. In most parts of the world, ideas about the legitimacy of activities have a greater influence than written law; customary law plays at least as large a part as trade legislation, and the legitimacy of ensuring one’s own survival has an undisputed place alongside the state’s inability to guarantee just that.

The goods transported within the context of TOC are the same worldwide — arms, narcotics, people, as well as other goods, depending on the region: rare animals, plants, medicines, (toxic) waste, all types of counterfeit goods, and, in general, any goods that can be traded illegally because legal access to them is precluded by legislation or borders. In addition, global trends toward the homogenization of the norms governing the production of — and trade in - goods and access to capital, land, and natural resources create imbalances and injustices in accessing markets, which are then typically circumvented by means of corrupt practices.

The intermediary stages described above create gray areas, which are essential for the entire process to keep going, and which are entirely removed from any legal or democratic control. Since TOC involves huge sums of money, these gray areas are increasingly the place where direct influence is exercised over authorities and the political establishment. Thus, TOC becomes a direct threat to democratic decision-making structures. We maintain that the global economic system would be unable to survive without these gray areas, since it is geared exclusively toward

Transnational Organized Crime — Analyses of a Global Challenge to Democracy short-term profit rather than inclusive, sustainable development. The ends justify the means, and democratic decision-making structures, transparency, and civic participation disrupt both legal and illegal profit-seeking in equal measure.

These forces, which have long since escaped any kind of control, are now compounded by problems of legitimacy in our cultural sphere. This is, for example, true for speculating with staple foods, which, although it remains legal, is now regarded in most contexts as socially unacceptable. Seeking profit at the expense of the natural world is equally frowned upon, although it has not yet been fully defined and regulated by consumer law.

An understanding of the causes of the complex and growing dimensions of TOC in the context of the global market economy can be greatly facilitated by adopting a wide range of different perspectives and analyses. However, this will require a rejection of traditional considerations in terms of academic disciplines, professional responsibilities, and (party) political formulas in order to rise above such divisions and enter into a new dialogue.

This book offers contributions from 12 countries around the world authored by academics from a wide range of academic disciplines, representatives from civil society organizations, journalists, politicians and representatives from private industry, as well as activists. They offer 25 views on the causes, historical development, forms, and effects of TOC. Combined, we intend to construct a holistic picture that, among other things, shows:

e where and how organized crime can establish itself and spread within societies;

e how a globalized definition of legality or illegality does not necessarily correspond to local experiences, cultures, and traditions;

e how the worldwide social orientation toward the market as the sole regulatory force also promotes illegal money-making, while destroying other values of social life to such an extent that corrective social forces no longer exist;

+ that the concept of national sovereignty, and therefore also of national security and police forces, as well as national legislation, are pushed to their limits by TOC;

e that TOC is quick to exploit lucrative loopholes, particularly in connection with new technologies - and has long since learned how to benefit from this business until each loophole is discovered and closed.

Assessed from such multidisciplinary (e.g., political science, sociology, economy, history, law, criminology, anthropology) and cross-cultural perspectives, the interdependent complexity of TOC and global loss of social cohesion will hopefully become increasingly ascertainable to our readers and to us through a multi-facetted

|. Introduction network. Hence, we intend to initiate a debate on our thesis within that network and beyond.'

This book is divided into two parts. In the first part, authors from various academic and institutional backgrounds provide a view of some ofthe current global challenges posed by transnational organized crime. These range from money laundering, cybercrime, and inadequate reforms of the international justice system to the enormous difficulties in fighting corruption effectively.

This first part starts with Christine Jojarth of Stanford University, who analyzes the origins of money laundering, as well as the motives behind it and the methods employed. She also examines international instruments to combat money laundering — and their aims and effectiveness — from the perspective of industrialized and developing nations.

John Christensen, a Jersey-based tax expert, speaks in an interview about the role of tax havens, tax evasion, and the way corruption is deeply embedded in the international finance system.

Steffen Salvenmoser, legal expert at PricewaterhouseCoopers, offers an insider’s view of the company’s operations in Germany from the time of its establishment, and comments on the role of the private sector in preventing corrupt practices.

Tatiana Tropina provides an introduction to the growing field of online crime, also called cybercrime. Her contribution includes an examination of the way cyberspace can become both a medium for traditional organized crime and an eminent space for new forms of organized crime.

Finally, the legal expert and economist Edgardo Buscaglia describes possible best practices for the fight against organized crime. Taking as his basis the results of surveys carried out in many countries, the author analyzes the possibilities of transferring legal systems between countries and transforming international law into national law. The basic hypothesis is that legal reforms must be met with social approval and acceptance among the stakeholders of civil society if they are to be successful. Social support and monitoring must be complemented by strict financial controls that are able to identify and prosecute criminal economic activities.

In the second part of this book, contributions from Asia, Africa, Latin America, and Europe offer insights into the very different regional aspects of transnational organized crime, showing that, despite the diversity of local conditions and features, they have much in common and thus similar structures. The reasons for TOC gaining leeway in many regions of the world are deeply rooted in history and dependent on important historical moments favoring the evolution of new criminal structures. Detailed and well-described case studies allow readers from different backgrounds to understand thoroughly abstract terms describing transnational organized crime. We provide a kaleidoscope of vivid examples of the role

1 | See list with author’s profiles and contact details in the back of the book.

Transnational Organized Crime — Analyses of a Global Challenge to Democracy and deep-rootedness of organized crime in many societies of our world and make the case driven by that all these stories are connected by powerful processes of social transformation, invisible global economic flows and accompanying cross-effects.

Florian Kühn, Christoph Reuter, and Yama Torabi report from Afghanistan. With different methodological approaches, the political scientist Florian Kühn and the journalist Christoph Reuter consider the impact of the transformation of the Afghan state and its economy under foreign influence on the structures and routes of organized crime and the illegal economy. Yama Torabi, who heads the NGO Integrity Watch Afghanistan in Kabul, describes the connection between poorly controlled international funding and widespread corruption, and describes the community-based anticorruption monitoring sponsored by the NGO to address the situation.

The economist Arun Kumar describes many aspects of the Indian shadow economy (illicit economy) and the extent to which it permeates society. He makes a connection to the emergence of corrupt structures under British colonial rule.

The Nigerian criminologist Etannibi Alemika describes the activities of organized crime in West Africa and places these in relation to the regional conditions of poverty, weak institutions, civil conflicts, and political crises. Referring to empirical examples from Nigeria, the article deals with drug smuggling and human trafficking, money laundering, and terrorism. The author analyzes the effectiveness of legal and political measures, including international pressure, to put a stop to the organized criminal groups in the region. Charles Goredema from South Africa, head of the program against organized crime and money laundering at the Institute of Security Studies office in Cape Town, gives a fascinating insight into his daily work.

The contributions on Latin America are from Mexico and Brazil. The journalists José Reveles and Marco Lara Klahr deal with the impact of the growing presence of organized crime in Mexico. On the one hand, Reveles describes the official policy on combating drug trafficking and places the influence of TOC in the context of the socioeconomic conditions and the prospects for young people in the country. He also refers to the repressive policies that target social players in the country, under the pretext of combating the drug trade. Lara Klahr provides an insight into the interplay of extortion, violence, and impunity, and its impact on everyday life and social relations in the country.

Ingrid Spiller, who headed the Mexico office of the Heinrich Böll Foundation until mid-2012, reports on the difficult paths that Mexican civil society must take to define its own role in the efforts to create security and justice in a weak state that is permeated by criminal structures.

Ignacio Cano works at the Observatory on Violence at the University of Rio de Janeiro. He explains in his article the different structures of organized violence in Brazil, especially the fluctuating illegal power structures in Rio de Janeiro, where local gangs - be they drug cartels or hybrid militias, all of whom are deeply in-

|. Introduction volved in the drug trade in the city — work against any positive developments in marginal neighborhoods.

The political scientist Regine Schonenberg hearkens back to her Amazonian laboratory where she has been doing research for decades. In her article she describes how organized crime draws on local traditions of informality that have been successively criminalized by legislation, and thus can also connect to established paternalistic loyalty structures. Due to political centralization and the sheer size of the region, the state is often absent and only one actor among many others, especially on the local level.

The state prosecutor Aurelio Rios describes in an interview the challenges in the proactive struggle of his institution for dialogue and civil rights in Brazil.

From the practitioner’s perspective, Wolfgang Hees shows alternatives to strong-arm policies on the local level, which usually go hand in hand with the criminalization of drug users, by giving examples for the reconstruction of local social structures.

We have two contributions from the Balkans: The political scientist Berit Bliesemann de Guevara explains how closely the constantly changing economic opportunities and the political and administrative structures are intertwined in Bosnia-Herzegovina. She also describes the collateral damage of foreign interventions.

The police officer Ivana MclIlwiane reports in an interview about the routes and practices of organ and stem-cell trafficking in Balkan countries. In this context she relates how the long-running war changed views of living without certain body parts, thus facilitating the spread of illegal practices in the medical sphere.

And, finally, articles concerning Italy, Germany and the European Union show that structures favouring the extension of organized crime are also imminent in Western European societies. Wolfgang Hetzer and Vincenzo Militello explore in their articles the political and legal views of the deficiencies of the European Union’s actions on TOC.

The articles by Claudio La Camera from the Museo della ndrangheta and by Lorenzo Bodrero, head of the FLARE organization, both from the “traditional” country of the Mafia - Italy — describe the opportunities and experiences connected with the way the interplay between state and civil society can seriously affect TOC by, for example, confiscating illegally acquired property in a targeted way and allocating it to other purposes. Moreover, Bodrero emphasizes the necessity of tackling the problem of TOC at the European level in a concerted effort.

It was important for us not to leave readers with the impression that TOC is something that exists only in distant and exotic parts of the world. For this reason the final regional contribution deals with Germany. In his detailed and critical description, the journalist and author Jiirgen Roth gives an insight into how organized crime operates, is perceived, and is combated in Germany; moreover, he points out the role that Germany plays in the international - and in particular European — network of criminal groups.

Transnational Organized Crime — Analyses of a Global Challenge to Democracy

To guide the reading of this volume, we advise our readers to observe the interwovenness between legal and illegal economic activities and the underlying normative conflicts regarding the legitimacy of action. It is this broader debate that makes TOC politically relevant.

Regine Schénenberg, Political Scientist, Free University, Berlin Annette von Schönfeld, Head of the Heinrich Böll Foundation’s Regional Office for Mexico and Central America by Christine Jojarth*

1.1 Introduction

Money laundering is big business. An estimated 2-5 percent of global gross domestic product — corresponding to $1.3-3.2 trillion in 2010 (Camdessus 1998; World Bank 2011') - are being laundered annually. Demand for money laundering is driven by the need to create a false legitimate appearance for funds that are tainted by their illegal origin or indented purpose. All sorts of underworld figures, such as drug traffickers, tax evaders, corrupt officials, and terrorists, feel this need out of fear that their money trail will lead to detection and confiscation.

To obfuscate their transactions, money launderers use an ever-widening range of methods to first conceal dirty money, then to convert it into other forms of assets, and finally to integrate the funds into the licit economy.

The threats posed by money laundering are just as diverse as the people and organizations engaging in it and the methods used. The most immediate threat is the undermining of efforts to combat crime and terrorism with negative consequences for a country’s security and political stability. More indirect, but by no means less severe, is the threat money laundering poses to economic development as a result of its distorting effect on investment decisions and competition.

It was only in the late 1980s that policy makers started to become aware of these threats and to discover the importance of “follow the money” and confiscation as a policing and a crime deterrence strategy. The United States was the first country to criminalize money laundering and the initiator of the internationaliza-

* Christine Jojarth teaches at Stanford University, USA, and is an expert on transnational organized crime.

1 | The United Nations Office on Drugs and Crimes estimates that around $1.6 trillion, or 2.7 percent of global GDP, was laundered in 2009 (UNODC 2011).

tion of these norms. Other Western nations followed suit and adopted a series of anti-money laundering measures that spread rapidly around the globe. The underlying institutional approach represented a novel way to foster international cooperation in terms of the type of actors involved, the legal form chosen for codifying the norms, and its treatment of state sovereignty.

The motives, methods, impact, and countermeasures related to money laundering will all be discussed in turn in this chapter. The goal is to provide an overview’ of these four central aspects of money laundering and to build a foundation for the other chapters in this part of the book.

1.2 Motives

While the legal concept and criminalization of money laundering is a fairly recent invention, the motives for engaging in this practice date back a long time.

Throughout history, people deployed a variety of tactics to ensure that enjoying the proceeds from their criminal activities would not lead to prosecution and the confiscation of their assets. A villager who had stolen his neighbor’s cow most likely did not keep it. Instead, he led it out of the village to sell it or to exchange it for some other livestock in order to disassociate himself from the theft. He might even have felt the necessity to fabricate a story about an unexpected inheritance to create a seemingly legitimate rationale for the sudden increase in his wealth.

Back then, as much as today, the extent to which criminals feel a need to deploy techniques to conceal their loot, to convert it into other forms of assets, and to create a legitimate appearance depends directly on the extent to which they face a real risk of detection and sanctions by law enforcement officials or by their community. In the absence of criminalization and effective sanctions, money laundering is nonexistent, simply because criminals feel no need to turn on the “washing machine” when they know that they can enjoy their loot with impunity.?

Over the past decades, a widening range of practices have been outlawed and moved toward the top of law enforcement priorities. This development led to an increase in the diversity of individuals and organizations that resort to money laundering as a means to evade these control efforts.‘ Initially, money laundering was most relevant to networks engaged in blue-collar crime - in particular drug

2 | Fora more in-depth discussion see Jojarth (2009).

3 | Guatemala’s President, Otto Pérez Molina, is thus correct when arguing that by decriminalizing drug trafficking, one would largely get rid of money laundering (Economist 2012). 4 | Another reason for this increase is of purely definitorial nature. Money laundering is a derivate crime, that is, itis predicated on other criminal endeavors. The list of predicate offenses for money laundering has expanded significantly over the past two decades so that today, the crime of money laundering is associated with most serious offenses.

traffickers? — as they were in the spotlight of law enforcement. In the context of this book, the most important “newcomers” to the money laundering scene were corrupt government officials, sanction busters, and terrorists.

In the 1990s, international corruption gained significantly in salience. Corruption scandals like those involving the former Philippine President Ferdinand E. Marcos‘ or Nigeria’s former military ruler Sani Abacha’ propelled Western leaders into action. They established national and international? regulations, making it considerably harder for companies to bribe foreign officials. Until then, many Western companies had openly declared how much they had paid in “facilitation fees” to win overseas contracts, as such payments were not only deemed legal in their home countries but often even made tax deductible.’ The introduction of these new regulations forced companies to either compete fairly or to turn to techniques to conceal the flow of bribes. Similarly, corrupt government officials started to engage in money laundering in order to reduce the risk of having their (overseas) assets seized."

Sanction busters present another type of money launderers of particular relevance to the democracy focus of this book. The end of the Cold War enabled the United Nations to agree on the imposition of economic sanctions much more frequently than in the past. This increase in the frequency and geographic reach of international sanctions strengthened the need for sanction busters to device schemes that would obfuscate their dealings with a quarantined state or group and thereby boosted the demand for money laundering. The trend toward smart sanctions, and in particular targeted financial sanctions, has accentuated the

5 | In fact, the legal concept of money laundering was initially exclusively tied to gains from the illicit drugs business. See United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 (Article 3 paragraph 1) or FATF (1990). Over the past two decades, the list of so-called predicate offenses for money laundering has been - and continues to be - expanded with the effect that it now encompasses most categories of serious offenses. See Interpretative Notes to Recommendation 3 of the FATF Recommendations of 2012.

6 | Marcos and his associates are alleged to have illicitly accumulated an estimated $5- $10 billion through a variety of corrupt schemes (World Bank 2010).

7 | Abacha, together with his family and accomplices, allegedly siphoned off $4 billion from his poor country (Olson 2002).

8 | For example, OECD Anti-Bribery Convention of 1997; United Nations Convention against Transnational Organized Crime of 2000; United Nations Convention against Corruption of 2005.

9 | For example, Germany only barred this practice in 1997, in response to the OECD’s 1996 Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials.

10 | For a recent example of an overseas asset freeze involving an allegedly corrupt official, see Teodoro Nguema Obiang Mangue, a son and likely successor of Equatorial Guinea’s incumbent President (BBC 2012; Silverstein 2011).

importance of money laundering further (Cortright et al. 2002). For example, Swiss authorities accuse associates of Syria’s President Bashar al-Assad of trying to launder the more than $50 millions Syria’s first family holds in Switzerland in an attempt to circumvent international sanctions and the freezing of their assets (NZZ 2012)."

Already before - and with an even greater sense of urgency after — the terrorist attacks of September 11, 2001, the United States and many other countries and international organizations increased their efforts to disrupt the flow of money to terrorist organizations.’ Within the same month of the attacks, the United Nations Security Council adopted resolution 1373, which requires all member states to freeze funds and assets controlled by people or entities with links to terrorism.” This and other initiatives targeting terrorists’ soft financial belly made money laundering“ essential for terrorists to continue their operations.

In sum, every individual or organization - including criminals, corrupt government officials, sanction busters, and terrorists— with a reason to fear detection and forfeiture has a motive to engage in money laundering. The broader the scope of criminalization and the stronger the law enforcement offensive, the harder these wrongdoers will try to launder their assets.

1.3 Methods

Penal codes and law enforcement efforts determine the categories of individuals and organizations that will resort to money laundering and the intensity with which they will do so, as discussed in the previous section. In addition, policing strategies also shape the methods criminals will deploy in order to evade detection and forfeiture. Not unlike air in a balloon, money laundering adjusts to those areas with the lowest pressure. When policing initially focused on the banking sector, money launderers shifted to the insurance industry. When anti-money laundering (AML) efforts were broadened to include the insurance sector, crimi-

11 | The overwhelming majority of the $1.5 bn Bashar al-Assad has allegedly amassed for his family and his close associates is kept in countries that have not adopted economic sanctions against his regime, notably Russia and China (Inman 2012).

12 | For example, the International Convention for the Suppression of the Financing of Terrorism of December 1999 (entered into force on April 2002); Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act) of October 2001.

13 | United Nations Security Council Resolution 1373 of September 28, 2001, Paragraph 1(c).

14 | Nb., in contrast to most other money launderers, terrorists resort to money laundering primarily in an effort to conceal the intended illegitimate purpose of their assets while the origin of those assets is often legitimate, for example, donations to charitable organizations (Greenberg 2002; Naim 2005; United States General Accounting Office 2003).

nals intensified laundering operations in real estate. The cat-and-mouse game continues, and money laundering keeps expanding into ever more sectors. In the process, criminals and their intermediaries have invented a myriad of different money laundering schemes. All these various schemes have in common that they seek to disassociate funds from their dirty origins (or purposes) and to create a false legitimate appearance through a series of transactions that are usually categorized into three distinct stages: placement, layering, and integration (cf. Zagaris 1992). This categorization serves primarily as a heuristic tool and does not represent some fixed “natural law”: Not all money laundering transactions run through all three stages, and additional layers of complexity are sometimes added. These transactions are usually, but not necessarily, carried out involving a number of different countries.

During the placement stage, money launderers deposit their illicit cash into bank accounts, usually in the same country where the illicit profits were generated. They typically break up their funds into smaller amounts so that each individual deposit remains below the designated threshold level,!° above which financial institutions are required to perform customer due diligence.” Money launderers will likely involve a number of trusted people and companies to make these deposits on their behalf over the course of some time.

The purpose of the second stage — the layering or moving stage - is to disassociate the “dirty” money from its source or intended purpose. Money launderers seek to achieve this through a complex series of financial transactions, such as the wiring of funds through a globally scattered network of bank accounts.

In the third and final stage - integration — the launderer integrates the processed funds and inserts them into the legitimate economy. Any legal investment vehicle (in the broadest sense) that generates some financial return — even if that return is smaller than the initial investment — can serve this purpose. The harder it is for outsiders to verify the declared sums spent on or earned from that enterprise, the better suited it is for money laundering purposes.