Transnational organized crime

Crime becomes transnational when its operations and organizational structures are not confined to the sovereign territory of a given state and are coordinated across borders.

Objects of transnational crime

A state, in an exercise of its sovereignty, determines what crimes are.  It may therefore happen that what is criminal in one state is legal in another.  Or a particular act may be a crime in both states but the penalties are not the same.  As transnational crime flourishes, a number of states may see the need for a transnational penal

UN Convention against transnational organized crime 2000

code to collectively combat the former.  This code can take the form of treaties or conventions.

It may be argued that transnational crime is not a recent phenomenon. If crime is as old as humanity, then the transnational character of ancient or pre-modern crime may have preceded the modern Westphalian state system.  Crime aimed for material gain is organized around a basic business model with two components—‘industrial supply chains’ and ‘financial supply chains’[1].  If needed, the organization becomes more complex.  More supply chains are built for redundancy to cope with disruption, say from law enforcers and competing criminal syndicates.  The criminal supply chain involves the procurement of inputs, production of illicit goods and services, and delivery of such products to final consumers.  If demand exists behind a particular political jurisdiction, then there are strong incentives to go beyond borders if returns are greater than operational costs and risks.  Logically, the oldest transnational organized crime is the smuggling of illicit products.  The examples that come to mind are cross-border transactions of slaves, women, and hallucinogens. 

Global cocaine flows, 2008

Slaves in ancient Egypt

Other analysts object that the analysis above suffers from a modernist bias.  The practices named above were not considered as crimes at the time.  Slaves and (prostituted) women were part of war booty and became commodities.  Hallucinogens and other exotic substances produced elsewhere were believed to have medicinal properties.  What however emerges here is the insight that practices which were licit in the past begun to be considered illegal across historical time. Identifying what is crime is not static; it is a dynamic process. 

Sex trade in the ancient world

A major reason was a change in social norms and beliefs and this change was not confined to a single state.  For instance,  slavery (and ‘white slavery) was legal and considered normal until it was condemned as barbaric and was banned altogether in the modern era.  Of course, banning did not mean that the practice stopped altogether.  Criminalization did not douse demand for slaves, imported prostitutes, and drugs.  Criminalization disrupts industrial (and financial—but more on this point later) supply chains of illicit goods.  It increases the prices of these products—a result which in turn heightens the incentives to supply them.  Criminalization does and could not dismantle cross-border industrial supply chains.  In fact, it encourages their retention and increase in number.

Production and distribution of illegal goods require financing given production and other operational costs.  If the supplier of illegal goods relies on his own funds (or those of his immediate circle of relatives and friends), the scale of production is limited.  As a result, he may be confined to a local market and cannot engage in trans-border operations.  For economies of scale to kick in and returns to rise, financing must likewise increase.  Such funds need not come from a single source.  Thus, the need for financial supply chains.

Consider slavery during its licit phase in human history.  Even then, there was intra-state slavery and cross-border slavery.  For both types of slavery, a single financier may not be able to fund all the operational aspects.  This is especially true for cross-border slave trading.  While slaves may be war booty, the slave trader has still to buy them in the slave markets.  He also needs to feed and house them to protect his investment.  Higher morbidity and mortality reduces his return on investment (ROI).  If he wants to serve a cross-border market, he must also fund transport of the slaves.  If he lacks enough funds, he will seek financial ‘partners’ to subsidize these other operations like transport, housing in destination markets, advertising and other costs of sales.  Even in this historical period, (pre-criminal) cross-border trade was organized and conducted through the establishment and maintenance of industrial and financial supply chains.

Trans-Atlantic slave trading

Did the business model change when the formerly licit practices were criminalized?  The short answer: No and yes.  Criminalization introduced additional risks to the now-criminal operation that were absent in the earlier period.  Consider white slavery.  In its licit phase, total costs consisted of costs of production and distribution and the risk of decreasing product quality due to morbidity and decrease in product supply because of diseases, accidents, and natural disasters.  However, the inventory of slaves may also fall due to escapes and the predation of other slave traders, raiders, etc.   To protect their property rights and ensure maximum returns, slave traders must spend accordingly.  Such expenditures may be in the form of bribes for  state agents and the employment of ‘specialists in violence’. 

Criminalization increases costs and risks.  Criminalization forces ‘black’ operations to go underground and requires more complex organizations to include ‘white’ (or front office) components.  Redundancy of industrial and supply chains is necessary to deal with possible disruption of operations.  Organized crime now faces a more powerful organized force—the state—that is (at face) devoted to the task of enforcing its penal code.  A state qua state is imbued with the authority to use the full extent of state power to combat crime.  Since authority is the legitimate use of power (including the use of force to discipline and punish ala Foucault 1975/1977), the state possesses (or is presumed to have) greater power vis-à-vis criminal groups. 

Foucault’s “Discipline and Punish”

However, law enforcers and politicians themselves can simply add to the roster of predators who cut returns on crime through various ways.  For instance, state agencies seize illegal drug caches only to sell them in similarly clandestine markets instead of presenting them in court as evidence.  With more predators, protection of property rights became more expensive.  Criminalization introduced new costs like fees for lawyers, accountants, money launderers, publicists and bribes for law enforcers, law makers, and arrested or imprisoned conferees (to ensure their tolerance or silence). 

The capacity of a state to enforce its laws is an important variable that affects the profitability of the criminal enterprise.  State capacity is understood to include material resources and the  resolve to combat crime.  Even if a state has adequate material assets, the willingness of state agents to fight crime can be eroded through threats and bribes.  This same is also true for private actors such as journalists. When organized crime becomes transnational, the variability of state capacity induces changes in the supply chains.  For industrial supply chains, it is better to locate procurement/production/processing operations in states with weak law enforcement capacity.  Logically, the richer economies presided over by stronger states are the targeted markets even as smaller markets elsewhere may likewise be served.

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[1] The generic concepts ‘industrial supply chains’ and ‘financial supply chains’ are from Lester Young, a professor in finance at the City University of Hong Kong.  Mapping industrial supply chains is relatively easier than delineating financial supply chains specially for criminal goods.

Crime and punishment

Crime was initially the province of biologists, sociologists and psychologists.  Biocriminologists believe that criminals are genetically predetermined. They maintain that the human body needs a stable amount of minerals and chemicals for normal brain functioning and growth.  Chemical and mineral imbalances lead to cognitive and learning deficits and these factors in turn are associated with antisocial behavior.

The application of psychology in the criminal and civil justice system is known as forensic psychology. Hugo Munsterberg (1863 – 1916), a German-American psychologist was the first to pioneer the application of criminal psychology in research and theories. His research extended to witness memory, false confessions, and the role of hypnosis in court.

Hans Eysenck

The late Hans J. Eysenck, a British psychologist, is known for his theory on personality and crime.  He proposed that crime is the result of interaction between environmental conditions and features of the nervous system.  Eysenck’s emphasis is on the genetic predisposition toward antisocial and criminal behavior. His followers believe that each criminal has a unique neurophysiological makeup that when mixed with a certain environment cannot  but result to crime.

If biology could explain criminality, then why is the majority of crime and violence in poor, underdeveloped neighborhoods? To ignore environmental and social aspects contributing to crime would be a mistake, according to sociologists.

William Glasser

The medical doctor and psychiatrist William Glasser contributed choice theory, which suggested among others, that the criminal is rational  when he decides to commit a crime. The variety of reasons in which one offends can be based on a variety of personal needs, including: greed, revenge, need, anger, lust, jealousy, thrills, and vanity.

Gary Backer

A political economy perspective was pioneered by Nobel laureate Gary Becker (1968), the maverick economist who first argued that an economic approach can be brought to bear on (at the time) non-traditional (usually thought to be sociological or psychological topics) such as racial discrimination, family life, and crime and punishment. Crime and punishment are by definition and practice opposing aspects of a dyad.  They define each other—a crime is that which must be punished and punishment is the appropriate sanction or remedy to crime.

The fundamental premise of a political economy perspective on crime and punishment is that crime is a rational human activity.  Sociologists, psychologists and criminologists have usually considered criminals as sociopaths and maladjusted individuals.  This may be true but not entirely true.  Using a political economy approach, criminals are regarded as rational actors.  As rational actors, they are guided by a rewards vs. costs calculus.  Criminals do crime because they obtain material and non-material (such as enhanced prestige or status within certain social circles) gains.   When somebody commits a crime, he believes that rewards are greater than costs.

The costs of committing a crime (from the viewpoint of the criminal as well as society) include the following:

• Cost of being detected
• Cost of being arrested
• Cost of being indicted
• Cost of being found guilty
• Cost of being punished

The costs of crime are qualified by legal due process, particularly by constitutional provisions that a person is presumed innocent until proven guilty beyond reasonable doubt, as well as the infirmities of the state’s authorities.  The detection of a crime (or a criminal) does not automatically lead to the arrest of the suspect.  In the same manner, the arrest of a suspect does not lead an indictment.  In the peculiar legalese of Filipino lawyers, for instance, there must be a finding of probable cause against a suspect so an information could be filed against her/him in court.  Even if indicted, a suspect is not automatically found guilty unless proven beyond reasonable during the court’s processes.  And a suspect pronounced guilty may not necessarily be punished.  Sentences could be suspended for a number of reasons including pleas for insanity or for health reasons.

Philippine police in training

The economic analysis of crime is also mindful of the costs of crime prevention and punishment as well as the costly impact of crime on society.  Becker believes that making a distinction between two tasks—crime prevention and apprehension of criminals (or police work) and punishment of criminals (through courts and penal systems)—is useful for analytical purposes.  The incidence of crime, crime prevention, apprehension and punishment of criminals imposes costs (or entails expenses) on society.  While it is desirable to cut the incidence of crime or increase the rate of punishment, society must spend more on law enforcement (for police, courts, and prisons).  If society does not have such other resources, it may have to accept a crime rate which may rise as population grows.

Filipino prisoners

Building on these earlier ideas, Becker notes that if (costly) apprehension does not automatically lead to (costly) punishment such as jailing, then cheaper punishment alternatives should be considered.  The payment of fines is the least costly mode of punishment and incarceration can be seen as a ‘fine’ since the criminal incurs foregone income.  Furthermore, fines as punishment for heinous crimes such as murder and rape are not morally and ethically acceptable.  Generally, that is.  In certain societies, however, a convicted killer may be set free provided a fine (called ‘blood money’) is paid to the victim’s relatives.  Nonetheless with these type of crimes, society must still decide on the resources to use for law enforcement and for punishment of criminals.

In a playfully inquisitive mode, Becker poses this question: Suppose you reduce the resources expended for crime prevention and apprehension of criminals and increase the severity of penalties, will the incidence of crime be reduced?  The reasoning behind the question is as follows.  Society may not have enough resources for both crime prevention and punishment of criminals.  It is must therefore make a decision where resources are to be concentrated.  However, it does not make sense to reduce resources for punishment of criminals and concentrate resources to prevent crime and capture criminals.  It leads to an absurd situation where society is saddled with a great number of criminals in police precincts but with inadequate courts and prisons.  However, increasing the severity of punishment may not ultimately redound to society’s good.  It will simply increase the incentive of the police (specially in weak states) to set suspects free in exchange for bribes or to actively arrest fall guys again for monetary gain.

The political economy of gain-oriented crime

I am guilty of frequently neglecting this blog for long stretches, for various reasons.  Even if a lot of interesting events are happening around me (like the impeachment of Chief Justice Renato Corona or Scarborough Shoal or the new executive order on mining), I did not blog as often as expected.  I felt I did not have anything to add to the public discourse.

My professional responsibilities often get in the way.  I have to teach my students, mark their exams and papers, and compute their final grades.

I am also a family man.

There were many instances where my creative juices did not flow.  I did not want to settle with so-so pieces.  I don’t want to just write; I want to write well.

I feel guilty for this neglect because readers had kept faith even while I am inactive.

To make up, I will start a series of blog entries on the political economy of crime.

What is crime?

For punsters, ‘crime’ is what criminals do.  The pun ‘begs’ the question: who are the criminals?  It may be better to see crime as what or how a state defines it—usually through its penal code.  In this sense, crime is a state-defined concept.  

I presented the draft of this paper in Pattaya last May.  My friend Decha from Thailand challenged me to imagine crime without a state defining it.   The best I could come up with?  A crime is committed when one inflicts physical, psychological, and economic harm on another (or others).  But more on this later.

For acts defined by the state, we are interested particularly in a large family of crimes which produces material (and non-material) gain.  These gainful crimes are further classified into two ‘ideal types’: ‘white-collar crimes’[1] and and ‘violent crimes’ usually associated with criminal organizations like the Mafia, Yakuza, Medellin drug cartel in Colombia, and the Chinese triads. 

Colombian soldiers and corpse of Pablo Escobar, boss of Medellin drug cartel

Yakuza gang members

For this reason, crimes of passion and other crimes that do not produce economic gain for the criminal are excluded from our analysis.  A crime passionel is usually committed by an individual (or possibly a few persons), does not require an organization much less a transnational one, and does not (usually) require premeditation.

 

Blue-collar worker

 

In American English, ‘blue-collars’ are workers supplying manual labor in factories and the streets while ‘white-collars’ principally used their brains to work in offices.  Office workers (predominantly males at the time) dressed appropriately with a coat and the obligatory white shirt (with detachable white collars) plus tie.  White-collar workers steal and (on occasion) kill but they use guile and deception rather than threats and direct violence.  Lacking the presumed  ‘legality’ of white-collar criminals, violent criminals threaten or use force ‘earn’ illicit gains.  This is illustrated by the difference between a book-keeper who ‘cooks’ office accounts to skim off money and the street hood snatching a gold watch from a pedestrian.   The U.S. Congress defined white-collar crime as an illegal act or series of illegal acts committed by non-physical means and by concealment or guile, to obtain money or property, or to obtain business or personal advantage.

Modern version of detachable white collar

The idealized distinction between white-collar crime and ‘violent crime’ is simply that—an idealized one.  In reality, white-collar criminals may also threaten and use violence themselves or may employ strong-men to achieve their objectives.  And so-called ‘violent’ criminals can also deceive, dissemble, and use guile.  An example is the thief who slashes your bag or picks your pocket without you knowing it you are both in a bus or other means of public transport. In short, guile, deception, dissembling, threats, and direct violence are all in the criminal repertoire.

 It is hypothesized that as the scale of criminal operations increases, criminal organizations will have need for ‘front’ offices with white-collars and ‘back-room operations’ carried out by strongmen.  The criminal organization becomes a two-faced and a more complex one.

A special kind of white-collar crime is corporate crime which is criminal activity on behalf of a business organization.  They include crimes of fraud, concealment, and misrepresentation that continue to victimize all sorts of groups and individuals in society.  Corporate crime operations are not usually conducted by atomized individuals.  Corporate crime involve organizations especially when operations become transnational.  The skillful concealment of debts and losses by Enron’s executives led to the company’s bankruptcy, the dissolution of Arthur Andersen (at the time one of five largest accountancy partnerships in the world), loss of billions in dollars in pensions and stock prices sustained by employees and shareholders (not only in the US), and caused a crisis in confidence.  The event was reprised a year earlier with Worldcom with bigger losses.  While no criminal proceedings were initiated against Worldcom executives, many Enron executives were indicted for a variety of charges and sent to prison.

However, the jury is still apparently out if the massive sale of financial derivatives that led to the financial crises of 2007-2008 in the United States constitutes criminal fraud.  Picture this.  These new-fangled financial instruments were an amalgam of good and risky home mortgages.  This practice supposedly made good business sense since housing prices had been going up for quite a time.  As new instruments, the derivatives are sold in tranches—the good, the not so good, and the don’t bother.  These tranches are rated either by Moodys, Standard & Poor, or Fitch and the first tranche would rate AAA, the second BBB, and the ‘don’t bother’ may not be sold at all.  Since the last tranche is risky and will thus earn higher returns, the seller keeps them on its balance sheet.  Fraud is first committed by the seller’s non-disclosure of the risk surrounding such instruments to investors.  In fact, they actively promote the same as risk-free instruments.  However, sellers protect themselves against risk by buying insurance—again without informing the investors. 

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[1] The term white-collar crime was coined in the 1930s by Edwin Sutherland who defined it as crime committed by a person of respectability and high social status in the course of his occupation.

 

The political economy of electoral over-investment

This morning, I was invited by my good friend and colleague, Prof. Corina Gochoco-Bautista of the UP School of Economics (UPSE), and now senior economic advisor with the Asian Development Bank (ADB) to discuss a paper of  Prof. Alberto Simpser of the University of Chicago, a fellow political scientist who has degrees in economics and environmental science.

Boris Yeltsin

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I will not comment on Simpser’s formal model since I do not understand it fully. What I can promise is that I will carefully read the paper (and consult my neglected textbooks) at greater leisure so I may understand the model and could comment on it at great length later. Perhaps Albert should advise me re the texts necessary so I can grasp what Inada-like assumptions and Spense-style signaling are all about.

I see that Simpser’s model deviates from or modifies the usual marginal analysis usually done in neoclassical economics, which stipulates that investment in election manipulations would be done up to the point where the marginal benefits (or utility) would equal marginal costs and beyond that point, marginal costs would be greater than marginal benefits.  The singular insight is that the investment decision is arrived at by reckoning not only the direct but also the indirect benefits of electoral victory versus costs of securing victory.  And the benefits of such a deviation are quite apparent as the formal model helps Alberto arrive at his counter-intuitive insights re the benefits—thus the strong incentives—of electoral over-investment.

Alberto’s paper on the political economy of electoral over-investment is a welcomed addition to the literature and it singularly calls our attention to important political economy consequences of elections beyond just the identity of the victors. His two-pronged argument: that the conduct and results of elections—for instance, whether they are manipulated, and how decisively they are won—shape the subsequent behavior of a wide range of actors, including citizens, politicians, political parties, election campaign financiers, business elites, bureaucrats, and organizations; and that, in turn, these effects (which he deconstructed into direct and indirect effects, with the latter being the more interesting ones) creates incentives for parties and governments to over-invest in elections—is (quite) persuasive.  Election over-investment is understood to mean the expenditure of resources and efforts beyond the point that these can contribute to electoral success.

At first glance, over-investment is irrational since the expenditure of scarce resources beyond what is necessary to secure victory seems a waste. However, consideration of the payback that subsequently accrues to the winner will make us realize that over-investment is rational after all.Simpser insightfully points out that an overwhelming victory can shape the incentives of actors in ways that favor the winning party or coalition—discouraging defections and challenges and enhancing its bargaining power while in office.

On the other hand, a narrow victory may stimulate exactly the opposite.A fraudulently-obtained mandate can foster a general feeling that opposing the victor is a useless exercise. Thus, challenges are deterred and bureaucrats and allies are whipped into line.In the main, a large electoral margin today can both increase the value of incumbency over the course of a party’s term in office, and it can also deter challenges in a subsequent election, increasing the party’s chances of holding on to power for an additional term.These benefits provide strong reasons to over-invest in elections—manifested in the form of increased campaign spending, propaganda in media (esp. electronic), the excessive use of electoral manipulation (i.e. beyond the point sufficient for victory), the blatant use of electoral manipulation (when secrecy is what intuition would dictate), the use of physical intimidation and harassment of rivals, the modification of laws for partisan gain, and the capture of institutions such as the courts or the election bodies themselves.

Flag of the Russian Federation

Can Simpser’s analysis be tempered or nuanced a bit? He does mention scope conditions such as institutional settings. Where the rule of law is relatively strong, this limits the degree to which the returns to electoral over-investment are sensitive to the distribution of power. Thus the indirect effects are stronger in weakly-institutionalized jurisdictions. He also includes the impact of international pressures and the resources available to the incumbent.

However, I can add other more specific considerations. A key variable is the capacity of a political party to impose organizational discipline, which is obviously an indicator of the level of the party’s institutionalization.For instance, will these incentives for over-investment exist or be weakened when party discipline is weak or non-existent or if the capacity (or appetite) to sanction defectors or steel the resolve of the wavering and weak-kneed members is limited? When even if a party wins narrowly, the ruling coalition will get swollen after the elections by a flood of turn-coats attracted by the goodies only an incumbent party can dispense to its members and fellow travellers?

The crucial variable here is the fate of the defector. Will he be punished if the incumbent wins the electoral contest, especially if the margin of victory is quite huge? Or will he still be welcome into the post-election coalition albeit with lesser rewards.I guess the incentives for over-investment under these circumstances will palliated only by the capacity of the incumbent party leaders to ensure bigger rewards to those who kept the faith and still ensure enough largesse for the defectors to support the ruling party’s agenda, public-regarding or otherwise ( as Simpser has noted).

Vladimir Putin

How will it be affected by the existence of term limits on party standard bearers in presidential systems? I argue that these incentives will be at full play if the standard bearer does not face term limits. I also argue that they will be mitigated a bit if the standard bearer cannot stand for re-election. To the extent however that the outgoing head of government is interested to get a sympathetic party member get the highest post, then the incentives to over-invest still exist even if there are term limits to the presidency. And the incentives remain to be strong for party members who stand for sub-presidential posts.

The additional devices that Simpser resorts to—the case study of post-Soviet electoral politics that compares Putin and Yeltsin–strengthens his case.  The notion of an “electoral enhancement trap,” in which an initially powerful incumbent party further entrenches its hold on power and discretion by electoral over-investment together with the identification of both a low and high equilibrium state—is definitely an inspired one.  And it correctly leads to the conclusion that exogenous shocks to either of the scope conditions—concentration of power in the hands of government and state discretion—could undermine the low equilibrium state.

Boris Yeltsin