States, frauds, and the threat of transnational organized crime.

AuthorLevi, Michael
PositionGlobal Commerce

Fraud and corruption are very serious threats to some states and are harmful to all; however, this threat is seldom connected to transnational organized crime (TOC). We cannot examine social problems in a vacuum; we have to construct images of threats through the lens of the social and political threats posed by different aspects of crime and its organization. (1) Harm and threat are not just about their economic cost, but also about how different phenomena hurt our confidence that we can control our surroundings and our future expectations. This anxiety can affect entities such as nation states or even trans-state entities such as "Ummah Wahidah" the Islamic global community. The aim of this article is threefold: to disentangle the real and imagined threats of fraud, detail the involvement of transnational organized crime groups in fraud, and determine who or what can be reasonably described as threatened by these phenomena. This article rejects the implicit binary view that states are either threatened or not threatened, referring rather to a scale of threat to both states and different sectors within the state. This article critiques the value of Moisds Naim's concept of 'mafia state' to explaining and understanding fraud. (2)


Concerns about organized crime moving in on commerce are not new. (3) Such tropes date back to at least the 1950s and 1960s in the United States. (4) Past research has shown that though there was less of a moral panic about this "invasion" in the United Kingdom than there was in the United States, there were well organized bankruptcy fraudsters operating in the United Kingdom in the 1960s and at various times during the nineteenth century, including educated Germans who had migrated to London in search of employment and became "organized criminals" when this did not materialize. (5) Today the involvement of professional criminals in different forms of fraud varies. Experience and prejudice links Nigerians with crooked entrepreneurism, Romanians with skilled ATM fraud, and several parts of Eastern Europe, Russia, and China with cybercrime and, particularly in the case of China, online intellectual property theft. (6) We should not be surprised that the juxtaposition of technical education, social engineering skills, and poor economic prospects stimulates fraud and cybercrime, especially when the state is strong and encourages it, weak and cannot effectively suppress it, or even when its agents are active or passive participants.


In a recent Foreign Affairs article titled "Mafia States: Organized Crime Takes Office," Moises Naim, like Misha Glenny and many politicians and enforcement personnel, uses "organized crime" as a collective noun that has agency as well as identity, and that engages in a broad spread of illicit activities, not just drugs and extortion. It flourishes where the state is weak or where it is strong but venal. Naim's focus on kleptocratic states that have been taken over by TOC implies that TOC only occurs as an alien or concerted invasion. Alternative possibilities include a leadership that has deliberately organized itself to exploit opportunities in their environment illegally and where civil society bulwarks against monopolistic power may be absent.

Some critics counter that, rather than TOC being an alien import, American capitalism itself can operate like organized crime, in which the main threat of fraud and money laundering comes not from outsiders but from core institutions. (7) For fear of undermining public confidence in these institutions, however, actual prosecutions are reserved for marginal individuals who serve as signals to cease such behavior. This hypothesis is given some limited support by examples such as the role of major international banks in the manipulation of LIBOR rates, the laundering of drug money, and Iran sanctions evasions, as well as the deferred prosecution agreements with Wachovia Bank. (8) Even politically conservative thinkers might think it appropriate to describe the mortgage brokers and elite corporate financial engineers who triggered the global financial crisis of 2007 onwards as "organized crime," though only the former have been prosecuted. Although, in effect, such "pass the toxic parcel" subprime derivatives trades might be likened to Ponzi schemes, the Bernard Madoff $50 billion Ponzi scheme represented a more classical form of fraud. While it was very harmful to the individuals and investment groups he targeted, he did not threaten the United States or any other country. (9) Even with the initial prosecution of only three people, the Madoff case fitted the Palermo Convention definition of "organized crime," indicating how easily that threshold is crossed and the flexibility of a concept that covers everything from the Madoffs to the mafia. (10) But Madoff succeeded because he was not the mafia and was not associated with exotic criminal names. The cognitive logic seems to be that a criminal is someone who is not "one of us"; therefore, if they appear to be "one of us," they cannot really be criminals. "Organized crime" is therefore a label reserved for social outsiders.

We should also bear in mind that very large sums defrauded may not be financially material, in the accounting sense, to a state if the latter's gross domestic product (GDP) is significantly larger. By this logic, it is barely conceivable that a country belonging to the Organization for Economic Cooperation and Development would be threatened by fraud, especially TOC-generated fraud. But this begs the question, what percentage of the GDP obtained by crime--whether fraud or some other kind--should we consider as a threshold for threatening the state?

Sometimes it is the social and regulatory insiders that enable a fraud epidemic. For instance, Turks and Caicos had been under direct British governance from 2009 until November 2012 elections, following allegations of corruption involving property developments and the prime minister. Additionally, fraud gripped Antigua, where Allen Stanford located Stanford International after many of his Caribbean ventures were closed down, including a Montserrat bank. (11) Until 2004, elected leaders were from the Bird family, and for decades offered a congenial environment to many international fraudsters, though problems of control escalated due to the government's indebtedness to Stanford. (12) The consequences were severe. Antigua's GDP shrunk by 9.6 percent and the Central Bank of Antigua came under the control of the regional central bank, from which it required a loan equivalent to 3 percent of the country's GDP. Ultimately, Antigua needed a $118 million program supported by the International Monetary Fund. (13) But, in what way does it matter if the fraudsters are organized criminals, as conventionally defined, in contrast to the Madoffs or the Stanfords? It may matter because of our judgment, or prejudice, that the former may commit illegal acts that Madoff or Stanford probably would not, such as killing those who frustrate them or using a country or region as a haven along a drug trafficking route. Perhaps, organized crime is viewed as more harmful because those other illegal acts might affect our nonresident welfare more than would the malefactions of fraudsters. Yet...

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