4. Corruption, Organized Crime, and Money Laundering

This section is a condensed version of Chap. 9 of Rose-Ackerman and Palifka (2016).

Di Gennaro and La Spina (2016: 2–8) review the literature on the topic.

In Mexico, for example, only 1–2% of violent crimes are prosecuted successfully (Feldab-Brown 2011).

For an excellent analysis of drug organizations as entrepreneurial, profit-maximizing firms that seek to develop brand loyalty see Wainwright (2016). The Organization of American States (2013a: 81) also argues that illegal drug providers seek profits, much like ordinary firms, but concludes (contradicting Wainwright) “…that they obey the dictates of money alone. They do not feel the need to maintain the prestige of a brand name, to promote their product in society, or to respect their clients. Their sole purpose and direction is to make a profit at any cost.” However, it is not obvious that such behavior would hurt profits; after all, it is commonplace among legal business firms.

In a study of thirty-one Latin American countries, the World Bank (2014) found that crime and security issues are more costly to businesses in large cities than in small cities; Amin (2010) found a similar result in Eastern Europe and Central Asia.

Olken and Barron (2009) document that Indonesian truckers either pay organized crime to allow them safe passage, or pay to travel in convoys protected by the military or the police.

See, for example, Feldab-Brown (2011). In Russia the same type of extortion payment is called a “roof” or “krysha” (Varese 2001).

Frazzica et al. (2016: 53–54) estimate that the Camorra in Southern Italy take 3–5% of the value of work, including both extortion and purchase of over-priced inputs.

Consult the websites of the Special Inspectors Generals for Iraq and Afghanistan: www.​SIGIR.​mil; www.​SIGAR.​mil (accessed June 25, 2016).

As Beare (1997: 158) writes: “…at the most sophisticated integrated level, the ability to corrupt enables one to control the definitions of what is or is not defined as corruption.”

In Afghanistan, for example, organized criminals have used bribery and kidnapping of customs officials to enable their smuggling activities. See Special Inspector General for Afghanistan Reconstruction (2014).

Some of the material in this section is derived from Rose-Ackerman and Palifka (2016), Chaps. 9 and 15.

Platt (2015) provides step-by-step examples of laundering schemes. He challenges the traditional model, arguing that it is too narrow, and proposes instead a non-linear (“enable, distance, and disguise”) model in which money laundering allows “disconnects” between the criminal and the crime, the crime and the property, or the criminal and the property. In either model, the financial sector may or may not play a prominent role.

Until recently, Switzerland did not require identification to deposit or access funds and was a popular destination for corrupt funds paid to or embezzled by the political leaders of various countries. Also in Europe, the island of Jersey has been the subject of criticism.

Note, for example, that the Panamanian firm Mossack Fonseca had a branch in Nevada. See Kirk Semple, Azam Ahmed, and Eric Lipton. “Panama Papers Leak Casts Light on a Law Firm Founded on Secrecy,” New York Times, April 6, 2016, http://​www.​nytimes.​com/​2016/​04/​07/​world/​americas/​panama-papers-leak-casts-light-on-a-law-firm-founded-on-secrecy.​html?​emc=​edit_​th_​20160407&​nl=​todaysheadlines&​nlid=​22635279&​_​r=​0 (accessed April 12, 2016). For a specific example of Delaware-registered shell companies used in an international money laundering scheme, see Chaikin and Sharman (2009: 75–77). Several US states offer discreet banking options; “…the U.S. is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities.” Jesse Drucker. “The World’s Favorite New Tax Haven Is the Unites States,” Bloomberg Businessweek January 26, 2016, http://​www.​bloomberg.​com/​news/​articles/​2016-01-27/​the-world-s-favorite-new-tax-haven-is-the-united-states (accessed January 27, 2016).

The Financial Action Task Force (2012: 119–120) defines PEPs as “… individuals who are or have been entrusted with prominent public functions…, for example, Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials”—not lower- or intermediary-level state employees. Financial institutions are required to monitor the accounts of PEPs for suspicious activity. Some countries require domestic PEPs to make public statements regarding their assets and income. Under Proclamation 7750 (Bush 2004), foreign PEPs may be denied visas for entry into the United States and are subject to having their assets frozen if they have engaged in corruption that interferes with US national (political or economic) interests. The Global Magnitsky Human Rights Accountability Act (https://​www.​hrw.​org/​news/​2017/​09/​13/​us-global-magnitsky-act; https://​www.​gpo.​gov/​fdsys/​pkg/​PLAW-114publ328/​html/​PLAW-114publ328.​htm) signed into law on December 23, 2106, expands the ability of the President to deny entry and freeze assets, but requires a (mostly unclassified) yearly report to Congress on those targeted under the act.

A shell company is an inactive company that has been established sometime in the past, and can be acquired in order to create the appearance of longevity or to obviate the sometimes onerous requirements involved in setting up a new company. See van der Does de Willebois (2011: 37–39).

See FATF 2012, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations, http://​www.​fatf-gafi.​org/​media/​fatf/​documents/​recommendations/​pdfs/​FATF_​Recommendations.​pdf.

The UNCAC is available at http://​www.​unodc.​org/​unodc/​en/​treaties/​CAC/​.

A summary of these efforts and their history is in Rose-Ackerman and Palifka (2016: 505–518).

Nathaniel Popper, “Can Bitcoin Conquer Argentina?” The New York Times April 29, 2015, http://​www.​nytimes.​com/​2015/​05/​03/​magazine/​how-bitcoin-is-disrupting-argentinas-economy.​html.

FATF, “Virtual Currencies: Key Definitions and Potential AML/CFT Risks,” June 2014, http://​www.​fatf-gafi.​org/​media/​fatf/​documents/​reports/​Virtual-currency-key-definitions-and-potential-aml-cft-risks.​pdf and FATF, “Virtual Currencies: Guidance for a Risk-based Approach,” June 2015, http://​www.​fatf-gafi.​org/​media/​fatf/​documents/​reports/​Guidance-RBA-Virtual-Currencies.​pdf.

Ibid., 32–35.

Ron Stodghill, “Oil, Cash and Corruption,” New York Times November 5, 2006, http://​www.​nytimes.​com/​2006/​11/​05/​business/​yourmoney/​05giffen.​html.

Comisión Internacional contra la Impunidad en Guatemala (CICIG), http://​www.​cicig.​org/​; UN, 2008, “Ten stories the world should hear more about,” http://​www.​un.​org/​en/​events/​tenstories/​08/​justice.​shtml (accessed June 19, 2016).

Thabata Molina, “Why It Took a UN Commission to Bring Down Corruption in Guatemala,” PanAm Post, November 5, 2015, http://​panampost.​com/​thabata-molina/​2015/​11/​05/​why-it-took-a-un-commission-to-bring-down-corruption-in-guatemala/​ (accessed November 5, 2015).

CICIG, “En Vigencia Extensión de Prórroga del Mandato de la CICIG.” http://​www.​cicig.​org/​index.​php?​page=​NOT_​059_​20170904.

Transparency International. 2014. “Exposing health sector corruption saves lives in Honduras.” March 28, 2014. http://​www.​transparency.​org/​news/​feature/​exposing_​health_​sector_​corruption_​saves_​lives_​in_​honduras (accessed June 19, 2016).

Consult the World Bank’s Office of Suspension and Debarment (2015) for a review of the office’s work.

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 1997: http://​www.​oecd.​org/​corruption/​oecdantibriberyc​onvention.​htm (accessed June 25, 2016). The US Foreign Corrupt Practices Act is at: https://​www.​justice.​gov/​criminal-fraud/​foreign-corrupt-practices-act.

The web site is: http://​www1.​worldbank.​org/​publicsector/​star_​site/​. See Dubois and Nowlan (2013).

StAR Corruption Cases Search Center, http://​star.​worldbank.​org/​corruption-cases/​assetrecovery/​ (accessed June 19, 2016).

IMF, 2011, “Technical Assistance on AML/CFT,” http://​www.​imf.​org/​external/​np/​leg/​amlcft/​eng/​aml3.​htm (accessed June 21, 2016).

“The Egmont Group of Financial Intelligence Units,” http://​www.​egmontgroup.​org/​about (accessed June 21, 2016).

Basel Institute on Governance, https://​www.​baselgovernance.​org/​ (accessed June 21, 2016).

The data are available at http://​datatopics.​worldbank.​org/​cpia/​cluster/​public-sector-management-and-institutions (accessed June 28, 2016).

Available at http://​www.​enterprisesurvey​s.​org/​ (accessed June 28, 2016).

Ernesto Schargrodsky, Universidad Torcuato Di Tella, Av. Figueroa Alcorta 7350, (C1428BIJ) Buenos Aires, Argentina, eschargr@utdt.edu.