Writing A Crime Report

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A Raging Bull Market in Organized Crime

“The Mafia isn’t part of the past, it’s part of the future.”

– Roberto Scarpinato, Sicilian prosecutor

Just how heavy is a million dollars cash?

If you’re trying to smuggle that kind of dough in old-school $100 bills, you’ll be lugging a little over 22 pounds. But if you’re rolling with banded, manicured bundles of the highest denomination euro notes (a cool €500), then the same amount only weighs you down by 3.5 pounds – and takes up a lot less space.

This is the kind of thing it’s good to know when you’re in the most profitable business in the world.

Ask a Wall Streeter to name a line of business that produces endless gushers of cash, and big oil probably comes to mind. The oil majors have certainly been known for record-busting profits these past few years. But the mafia’s profits are far bigger.

The mighty Exxon Mobil, for example, booked a profit of a little over $45 billion last year. That’s a whopping $10 billion per quarter or more. And yet, in comparison, the top three organized crime outfits in Italy – just the top three, mind you – more than doubled Exxon’s profit for the same calendar year.

And of course, where Exxon has to pay taxes, the mafia mostly avoids such hassles. So when you take the tax-free aspect into account, the mafia leaves big oil in the dust. And of course, the “big three” in Italy are just the tip of the iceberg. The powerful tentacles of organized crime extend all over the world...

Meet the Octopus

During my time at Oxford University in the mid-1990s, one of the best things about the experience was the speakers who came and talked to us. The Oxford Student Union (which has nothing to do with unions as Americans know them) would regularly bring in fascinating people to come and speak.

One of the speakers who made a real impression on me was a man named Brian Freemantle. An organized crime expert who has worked in more than 30 countries, Freemantle is the author of a book called The Octopus: Europe in the Grip of Organized Crime.

The book is nearly 15 years old now, and so many of the statistics are way out of date. But the basic outlines of the organized crime “octopus” Freemantle describes still hold true. And if Freemantle were to update his book with numbers for the new millennium, they would no doubt be mind-boggling.

As Freemantle writes in the opening pages of The Octopus,

Crime pays. It always has done. Not, of course, for the street people or the amateurs. They are swept up, like the disposable dross they are, as much victims as those upon whom they prey. The people for whom crime pays are the professionals, the men and women who operate it as a business, conducted through structures closely resembling legitimate multi-national corporations and conglomerates, their boardroom-like hierarchies serviced by accountants and financial advisors.

Freemantle then goes on to describe the eight tentacles (i.e. money-making activities) of the octopus: “the illegal arms trade, the illegal drugs trade, money-laundering, computer crime, prostitution and pornography, illegal immigration, terrorism, and fine art.”

One might think the octopus, too, has been hit hard by the global financial crisis (just like everyone else). One would be wrong though... instead, the crash of 2008 may turn out to be the biggest coup in decades for organized crime.

Cash in Hand

So why is the mafia set to wax, even as the whole world wanes? In a word, cash. We have all heard many times by now, in various guises and forms, that when times get hard, cash is king. And nobody keeps more cash on hand than the kings of crime...

Banks everywhere are afraid to lend their precious reserves. Fears of a fresh downturn, combined with the heightened credit risk of battered borrowers and toxic assets still weighing down bank balance sheets, have all but turned off the credit taps.

Many businesses, including well-run, profitable businesses that simply need access to capital in the normal course of operations, are suffering. At the same time, the most sophisticated players in the criminal underworld are sitting on tens of billions – no, make that hundreds of billions – and have a pressing need to launder those funds.

One of the most important tasks for any self-respecting crime boss is white washing the ill-gotten gains... turning “dirty” money into “clean.” This money laundering process is often handled by channeling funds through legitimate businesses. (I experienced this firsthand during my time in Olomouc, a charming little town in the Czech Republic, where the puzzling proliferation of clubs, restaurants and jewelry stores served mostly as mafia fronts.)

So now, with banks more or less out of the lending picture and businesses facing a dire need, the mafia has a once-in-a-generation opportunity to go “legit” on a bigger scale than ever.

As Giorgio Napolitano, the president of Italy – not to be confused with flashy Prime Minister Silvio Berlusconi – observed in May: “There’s a risk that Mafia organizations can profit from the current crisis by buying control of struggling businesses, infiltrating all regions of the country.”

A “risk?” More like a guarantee...

“The Mafia is ramping up its investing,” prosecutor Antonino Di Matteo tells Bloomberg. “The Mafia’s financial managers are trying to invest now, while the time is right, so that they can launder their fortunes once and for all.”

The Tony Soprano Full Employment Act

It isn’t just Europe where crime pays. In the United States, scores of less than savory characters are salivating at the new opportunities created by Washington.

We already know that the alphabet soup of acronyms dreamed up by Turbo Timmy Geithner and Helicopter Ben Bernanke are borderline criminal – TARP, TALF, PPIP and so on – but I’m talking straight-up Goodfellas type stuff here. For instance...

Two weeks or so ago, I sat next to a paving contractor in a local poker tournament. (Just as in Las Vegas, in Reno/Tahoe you can find a tourney on any given weekend.)

“Business is very good,” my fellow poker player reported. “Amazingly good actually. That stimulus cash is really starting to flow.” Apparently he was doing some heavy construction work on a nearby Indian reservation. Big road upgrades, courtesy of a check from Uncle Sam – and the backlog of work was piling up.

Now, I imagine this paving contractor’s business is probably 100% aboveboard and legit (even though he wears enough heavy gold to fall somewhere between Liberace and Mr. T). But if he wanted to cut a few corners, how hard could it be?

Or, heck, maybe he’s the victim in all this. Plenty of aboveboard businessmen in the construction trade wind up greasing a palm or two on their way to a finished project... sometimes it’s just what you gotta do...

The scale of opportunity, er, corruption, is bigger than one might think.

According to fraud consultant David Williams of the Deloitte Financial Services advisory, a whopping $50 billion worth of stimulus cash could be siphoned off the top for fraud (above and beyond the legally fraudulent activities of a venal and corrupt Congress).

"The rule of thumb typically,” Williams reports, “is that of the about $500 billion worth of money that's going to run through the procurement process, somewhere between 5% and 10% of that usually finds it way into potential problems.”

The FBI is aware of the danger. As FBI Director Robert Mueller recently warned, “These [economic stimulus] funds are inherently vulnerable to bribery, fraud, conflicts of interest, and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey.”

Of course, being aware of the danger and being able to do something about it are two different things...

Call it the Tony Soprano full employment act. With the government anxious to throw bales of taxpayer cash at “shovel ready” projects, the organized crime element will be standing by with a “shovel” too... “ready” to haul away veritable garbage trucks of loot.

Eyes Wide Open

So what can you and I do about this? Realistically, not very much. (Okay, let’s be honest... not a damn thing.)

But at the same time, I would rather go about my business with eyes wide open than eyes wide shut. The strong and growing presence of organized crime is something that ordinary citizens don’t have much day to day contact with (most of us anyway). But it is a reality we all pay for... like an extra form of goods and sales tax, paid to a de facto shadow government operating behind (and sometimes in direct cahoots with) the official one.

Think about the difference between undertaking a new business or investment venture in a low-corruption Western country, like the United States, versus a high-corruption “frontier market” country, where the rule of law is still only vaguely formed.

In the more advanced Western country, you can rest in peace knowing that the laws will be upheld and everything is completely above board. Right?

Not quite. That bit about the United States being “low-corruption” was a touch of sarcasm. As the global financial crisis continues to unfold, one of the side effects could be the gradual disappearance of the brightly drawn dividing line between high-corruption and low-corruption nation states.

This reality will make following conventional, business as usual, “eyes wide shut” investment advice all the more dangerous in the years ahead... just as it would be dangerous to open an import-export business in some far-flung outpost without having a clear handle on the risks present.

http://www.taipanpublishinggroup.com/taipan-daily-062209.html

About the Author

Justice Litle is Editorial Director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, editor of Taipan's Safe Haven Investor and Justice Litle’s Macro Trader.

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writing a crime report
writing a crime report
writing a crime report