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COLUMNISTS

The International Drug Trade and Money Laundering

Valentin KATASONOV | 31.01.2014 | 00:00
 

As of January 1, 2014 Russia assumed the chairmanship of the Group of Eight (G8), an international club uniting the governments of Great Britain, Germany, Italy, Canada, Russia, the U.S., France and Japan. G8 participant countries account for 50% of the world GDP, 35% of world exports and 38% of imports.  The 40th G8 summit will take place June 4-5, 2014 in Sochi. Russia has proposed an agenda for the summit in which fighting the international drug trade is at the top of the list.

Money Laundering: The Link between the Drug Trade and Banks

The topic of the drug trade is extremely broad. As a rule, criminal organizations which engage in this trade work in four main areas: 

a) ensuring production, processing drugs and getting them to the wholesale distribution network; 

b) organizing the sales of drugs through the wholesale and retail networks, delivering them to end consumers and receiving cash for goods; 

c) legalizing the cash received, that is, «laundering» it by injecting it into the banking system and turning it into non-cash money; 

d) depositing the money into bank accounts in various sectors of the legal economy, completing the money laundering process. 

The activities of the drug trade presuppose its close interaction with banks which receive the dirty money. Sometimes the drug mafia uses banks without the banks' knowledge, but this is usually in the case when small amounts of cash are being injected into the banking system. In the case of significant sums and regular transactions, the drug mafia negotiates directly with bankers for long-term cooperation. During the last financial crisis a unique situation appeared: banks themselves started seeking contacts with the drug mafia and fighting to bring in «dirty» money as a means of saving themselves from bankruptcy…

The Concepts of «Dirty Money» and «Money Laundering»

The term «money laundering» was first used in the 1980s in the U.S. with regard to proceeds from the drug trade to mean transforming illegally obtained money into legal money. Many definitions for this concept have been proposed. In 1984, the U.S. President's Commission on Organized Crime used the following description: «'Money laundering' is the process of concealing the existence, illegal source, or illegal application of income and the disguise of that income to make it appear legitimate».

In international law, a detailed definition of the legalization («laundering») of income from criminal activities and a list of types and means of such legalization is contained in the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of December 19, 1988, which has greatly influenced the development of relevant legislation in Western countries.  The UN Vienna Convention of 1988 declared the laundering of money received from the illegal drug trade to be a crime, but the development of organized crime led to an increase in the income of criminal organizations from other kinds of criminal activities (human trafficking, prostitution, trafficking of human organs, the illegal weapons trade, extortion, secretly possessing radioactive or other especially dangerous substances, etc.). Some of this income also began to be laundered and invested in the legal economy.

European Council Convention No. 141 «On Laundering, Search, Seizure and Confiscation of the Proceeds from Crime» dated November 8, 1990 declared actions related to the laundering of money received not only from the drug trade, but also from other kinds of criminal activities, to be crimes. Article 6 of the Convention enumerates money laundering offenses. Differences in the legislation of individual countries lie mostly in the list of actions which the funds being legalized come from. In the laws of some countries, all proceeds received during the commission of any criminal violation is defined as «dirty» money; in others, only proceeds received as a result of such criminal violations is so defined; in yet others, even income connected with civil and administrative violations is considered «dirty». In a number of countries money received as bribes (corruption) also falls into the category of «dirty» money.

The Drug Trade Is the Main Supplier of Dirty Money to the Banking Sector

The most complete assessment of the proceeds of organized crime worldwide is contained in a United Nations Office on Drugs and Crime (UNODC) report published in late 2011 called Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes (1).

According to this report, all criminal proceeds worldwide for 2009 amounted to around $2.1 trillion, or 3.6% of the world GDP. The report contains a narrower estimate which includes only proceeds from transnational organized crime. In the report this means trafficking drugs, counterfeiting, human trafficking, trafficking in oil, wildlife, timber, fish, art and cultural property, gold, human organs and small and light weapons. Proceeds which in the authors' opinion are linked primarily to the national sector were not included in these estimates. These include proceeds from fraud, burglaries, theft, robberies, loan sharking or protection racketeering, etc. According to the report, proceeds from transnational organized crime came to approximately $875 billion, or 1.5% of the global GDP. Among the types of transnational criminal activity, the drug trade is in first place: according to the report, it accounts for at least half of all proceeds, that is, almost $450 billion, or 0.75% of the global GDP. The drug trade truly is a highly internationalized kind of organized crime: over 90 percent of all «merchandise» is consumed outside the countries where it is produced. 

Incidentally, in publications on the issue of the world drug trade, there are other assessments of drug trading volumes. The most conservative estimate is $400 billion, and the highest is $1.5 trillion. The figure for drug trade proceeds cited in the UNODC report is quite conservative. While the UN report states that the drug trade accounts for approximately half of all organized crime proceeds worldwide, other sources cite much higher figures - 70% and even higher (2).

Table 1.

Estimated proceeds from criminal activities in the U.S., billions of dollars (3)

 

1990

1995

2000

2010

Proceeds from the drug trade

 

97

69

64

64

Proceeds from other types of criminal activity*

112

137

160

236

Total proceeds from criminal activity*

209

206

224

300

Share of the drug trade in the total proceeds from criminal activity, %

46

33

29

21

Ratio of total proceeds from criminal activity to the GDP, %

3.6

2.8

2.3

2.0

Ratio of proceeds from the drug trade to the GDP, %

1.7

0.9

0.7

0.4

* Not counting proceeds resulting from tax violations.

The table above gives estimated proceeds from criminal activities in general and proceeds from the drug trade in the U.S. There the share of the drug trade in the total proceeds from criminal activity is lower than for the world in general. There is even a trend toward a relative reduction in the level of drug trade proceeds. But this means that in other parts of the world, especially on the periphery of world capitalism, figures for drug trade proceeds are higher than the world average. For example, in Afghanistan, which has now become the world's main supplier of drugs, proceeds from the production and export of drugs exceed 50% of the country's GDP. In America's neighbor Mexico, according to conservative estimates, drug trade proceeds come to 2-3% of the GDP. 

No other individual type of criminal activity even comes close to the drug trade in the absolute volume of proceeds or in profitability. For example, according to the estimates of the U.S. Federal Bureau of Investigation (FBI) the yearly proceeds from illegal human trafficking worldwide in the middle of the last decade equaled $9 billion. According to estimates from the World Wildlife Fund, the volume of illegal wildlife trafficking in the middle of the last decade equaled $6 billion, and the profit rate in this business was in second place after the drug trade, equaling between 500 and 1000 percent. 

Where «Dirty» Money Goes

What is the fate of the money received from criminal activities? Part of the dirty money stays in the «black» economy in the form of expenses for paying workers in the criminal sphere, paying for «merchandise» (drugs grown by farmers), weapons purchases, etc. The dirty money can flow from one sector of the «black» economy to another. For example, drug trade proceeds can be invested in the illegal weapons trade, prostitution, human trafficking, etc. However, most dirty money is laundered; this can be done either in the country where the money was received or outside of it. In the abovementioned UNODC report it is noted that over 3/4 of the dirty money received from all types of criminal activities and 2/3 of the dirty money received from transnational criminal activities is laundered.

Table 2.

Estimated worldwide proceeds from criminal activities and laundering of such proceeds, 2009 (4).

 

Proceeds received from all types of criminal activities

Proceeds received from cross-border types of criminal activities

 

(1)

(2)

All proceeds, trillions of dollars

2.1

0.9

Ratio of proceeds to the global GDP, %

3.6

1.5

Proceeds «laundered», trillions of dollars

1.6

0.6

Ratio of «laundered» proceeds to the global GDP, %

2.7

1.0

Ratio of «laundered» proceeds to all proceeds

3/4

2/3

Laundering of Cocaine Money

As for the level of the laundering of dirty money from the drug trade, estimates in the literature range from 60 to 80 percent. In the UNODC report this figure was cited at 62% for proceeds from the cocaine trade. It is worth noting that the level of the laundering of money from the wholesale cocaine trade was much higher than that for the retail trade: 92 and 46 percent respectively. 

This is not surprising. The proceeds for wholesale traders can come to millions and tens of millions of dollars; that kind of money needs to be invested in something, and for investments one needs «clean» money. The profits of individual retail traders are one or two orders of magnitude less. A significant part of these profits go toward personal use (if not from especially large purchases), and part returns to the «black» economy. Retail traders generally do not take a significant amount of their money out of the «black» economy; the dirty money remains in constant circulation there. 

The UNODC report cites some estimates related to the world cocaine business. An analysis of the figures shows that:

1) the great majority of drug use takes place outside the countries which produce these drugs; 

2) the great majority of the profits from this type of business forms outside of these countries;

3) a significant part of the money received from the drug trade is laundered outside the countries in which the drugs are consumed. 

According to the report, in 2009 the volume of retail sales of this type of drug equaled $85 billion, while the gross profits of traders (wholesale and retail) was $84 billion (i.e., direct costs for the production of cocaine were at the level of approximately $1 billion). The great majority of the gross profits were received in North America ($35 billion) and Western and Central Europe ($26 billion). In the places where cocaine is produced (South America, including countries of the Caribbean Basin) gross profits of $3.5 billion were received, i.e., 4 percent of the entire gross profits from worldwide trade in this type of drug. 

(1) Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes. United Nations Office on Drugs and Crime. Vienna, October 2011.
(2) For example, M. Glenny, an expert on international organized crime, estimates the share of the drug trade at 70%. 
(3) Peter Reuter. Chasing Dirty Money – the Fight against Money Laundering. - Washington 2004, p. 20; ONDCP, What America’s Users Spend on Illegal Drugs, Washington D.C., December 2001, p. 3. World Bank. World Development Indicators (WDI), 2011.
(4) The table was compiled using data from the report: Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes. United Nations Office on Drugs and Crime. Vienna, October 2011.
 
Tags: Afghanistan Latin America Middle East US
 

 
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Valentin KATASONOV

D.Sc. (Economics), Economist and the chairman of the S.F. Sharapov Russian Economic Society


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