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MAFIA, CRISIS AND MONEY LAUNDERING (OR HOW WALL STREET IS FINANCED IN TIMES OF ECONOMIC TURMOIL)

In many instances, the money from drugs was the only liquid investment capital. (…) Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities… There were signs that some banks were rescued that way.

Antonio Maria Costa, 2009

Yes, that’s right. Amid one of the worst financial crises in recent history, the former executive director of the United Nations Office on Drugs and Crime (UNODC) declared to The Observer that drug money saved banks. How did this happen, and can it happen again?

Love story: organized crime and economic crisis

Historically, organized crime thrives in times of crisis. The despair of an uncertain future can often lead to a flourishing drug market, which the authorities do not have the means to combat. Crime families then establish their power and diversify their activities: in 1929, Al Capone offered food and clothes to the poverty-stricken population of Chicago, while Lucky Luciano was structuring the New York mafia and developing the cocaine business.

Even governments profited from their power: during WWII, the U.S. secret services requested help from the Italian American crime families to maintain order in the country. During the 1980s, the KGB and the Russian mafia worked together to hide Communist Party’s assets abroad, according to Robert Friedman. By the mid-1990s, $600 billion had left Russia, accentuating the country’s impoverishment. Despite the anti-money laundering (AML) and counter-terrorism financing (CTF) laws implemented by the Bush administration after 9/11, the Argentine debt default crisis the same year gave banks an excuse to look the other way.

But the most striking impacts of organized crime on the economy were revealed during the 2008 worldwide financial crisis. In a study published in August 2020, economists Marco Le Moglie and Giuseppe Sorrenti pointed out a 4% difference between post-2008 crisis performances in Italian provinces with a high presence of organized crime compared to those with a lower presence of it, which represents 241 newly founded businesses every year that are linked to mafia investments into Italy’s legal economy. The difference also varies between sectors highly infiltrated compared to those that are rarely infiltrated by the mafia. According to several experts, the latter siphons off 100 billion euros from Italy’s legal economy every year, which is equivalent to 7% of the country’s GDP (up to 16% for the most infiltrated regions!). In Greece, in 2012, Reuters reported that the illegal lending business involved between 5 and 10 billion euros each year – an amount 4 times bigger than in 2009 thanks to annual interest rates of 60% and more.

From 1997 to 2007, during the Spanish real estate boom, mafias from all over the world invested their dirty money in the Iberian construction sector. When the bubble burst, they profited again, buying up houses at a bargain price. The organized crime therefore seems to make billions out of any crisis. But how do they launder these billions?

Money laundering 101

If you have never watched the Sopranos, Breaking Bad or The Godfather, here are the 3 steps to launder your money:

  • 1. Illicit funds are directly deposited in banks, or after being smuggled out, then back into the country. A well-known technique among criminals is smurfing, which consists in splitting your entire profit into numerous small deposits on different accounts via multiple transactions in order to make it harder for the authorities to trace the money;
  • 2. “Layering” aims to separate illegal profits from their origin by shuffling the money around to create distance;
  • 3. Then comes “integration” with the use of seemingly legal transactions to hide ill-gotten gains and bring them back to the perpetrators as “clean” money.

Money laundering schemes include various techniques, such as the use of currency exchange, wire transfers, investments in mobile commodities such as gems and gold that can be easily moved to other jurisdictions, real estate, gambling, online auctions… The purpose of money laundering being flying under the radar, criminals must constantly innovate with new techniques, which makes it harder to detect them, especially when backed by tax haven laws. And yet, the biggest money launderers are not located in the Caiman islands or the Bahamas. They are in Wall Street, Lombard Street, Geneva…

In July 2020, an investigation conducted by the Financial Times revealed how bonds, many of which backed by the famous Calabrian mafia ‘Ndrangheta, were sold to Banca Generali, with consulting services from British accountancy group EY. These bonds were introduced by several boutique investment banks with offices in Mayfair, London. Let’s note, however, that the most heavily involved in the deal was a Geneva-based financial group… “About €1 billon of these private bonds were sold to international investors between 2015 and 2019. (…) [They] were created out of unpaid invoices to Italian public health authorities from companies providing them with medical services.” Which, according to EU law, leads to “guaranteed penalty interest rates”, hence making them attractive. The deals were not rated by any credit rating agency or traded in financial markets. One bond was even related to a ‘Ndrangheta-controlled refugee camp in Calabria.

In his 2009 interview with The Observer, Antonio Maria Costa also declared that connections between organized crime and financial institutions started out in the 1970s, when the mafia took an international dimension. Primarily in cash, transactions shifted to electronic transfers with dematerialized currency securities. But in the late 1980s authorities enforced surveillance and the criminals went back to cash, which has been a blessing for them and for the international banking system in the 2000s.

Indeed, from 2004 to 2007, Wachovia, since then owned by Wells Fargo, helped launder money from Mexican drug cartels by “failing to identify and stop illicit transactions”, which helped finance murderous drug war, Roberto Saviano reports in a 2012 New York Times tribune. In June of the same year, the U.S. Senate found out that HSBC had been making it easier for Mexican drug traffickers, Al Qaeda-related Saudi financiers, and Iranian bankers to circumvent US sanctions, and so for over a decade, for a total amount up to $7 billion.

“ABN Amro, Barclays, Credit Suisse, Lloyds, ING have reached expensive settlements with regulators after admitting to executing the transactions of clients in disreputable countries like Cuba, Iran, Libya, Myanmar and Sudan”, Robert Saviano also reported.

And yet, the subprime crisis made worldwide money laundering enter a whole new level: according to the IMF, between 2007 and 2009, western banks lost over $1’000 billion. Starting mid-2008, liquidity was cruelly making default to the banking system, with other banks unwilling to lend money to their most exposed colleagues. Fortunately for them, the organized crime was there, with tremendous quantities of cash ready to be lent and laundered. A study by Colombian economists Alejandro Gaviria and Daniel Mejia highlighted that 97.4% of Colombian drug traffic incomes had been laundered in the US and European banking circuits, or the equivalent of hundreds of billion dollars.

The UN later estimated that in 2009, $1.6 trillion had been laundered, of which about $580 billion related to drug trafficking and other forms of organized crime. In 2012, EU Anti-mafia Commission director Sonia Alfano affirmed ‘Ndrangheta had laundered 28 million euros within a few hours by acquiring an entire neighborhood in Belgium.

What about now? (Covid crimes)

Lockdowns, online services and – again – a fragilized world economy have delighted crime families all over the world, with new scams and money laundering opportunities. If the long-term effects on global economy and largest operations are yet to be revealed, experts say they already have evidence of mafia and cartels’ profits blossoming last year. The Bank for International Settlements (BIS) said:

Criminals are exploiting vulnerabilities opened up by the Covid-19 lockdown, increasing the risks of cyber-attacks, money laundering and terrorist financing. Authorities worldwide have responded by drawing financial institutions’ attention to these threats and by providing guidance on ways to improve cyber security and mitigate ML [money laundering] and TF [terrorist financing] risks. (…) In both areas, the official guidance underscores the trade-offs between expecting financial institutions to enhance or adjust their cyber resilience and AML frameworks and, on the other hand, avoiding imposing an excessive burden that could hinder financial institutions in delivering key financial services.

In a report for the U.S. Congress, the Federation of American Scientists (FAS) also said significant changes in the financial behavior of businesses, governments and people have increased ML and TF risks with actors innovating and taking advantage of recovery plans : “Increased availability of government funds may challenge authorities to identify fraudulent claims, as well as misappropriated and misdirected funds due to corruption.” Online banking activities and wide redistribution of assets due to financial volatility are harshening identification processes when governments are reprioritizing resources away from AML/CFT.

In an attempt to face these challenges, consulting groups are delivering advice to businesses via basic steps. Thus, PWC proposes focusing on customers, heighten risk awareness and strengthen AML systems, by deepening monitoring and reports. And still, how to implement it exactly, and will it be enough? Or will the banking system be once again saved by drugs money?

As the world is still fighting the pandemic, the organized crime is more present and dangerous than ever. The same way Al Capone was giving away food and clothes to the victims of the Great Depression, El Chapo 701, a legal association handled by the daughter of the famous drug lord, was offering covid aid packages to the most vulnerable Mexicans during the country’s lockdown. Just like the Italian Mafia was distributing food and medical supplies to those struggling. They are exploiting the failures of the system, as they did in 2008 by compensating the incapacity of governments to support their banks. Who are drugs and murders going to save this time?

Arthur Thévenin
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