Business Financial Crime: Organised Crime

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Business Financial Crime Organised Crime
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What is Organized Crime?

• The major difference between corporate and
  organized crime is that corporate criminals are
  created from the opportunities available to them
  in companies organized around doing legitimate
  business.
• Whereas members of organized crime must be
  accomplished criminals before they enter such
  groups, which are organized around creating
  criminal opportunities.

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What is Organized Crime?

• Organised crime is a global problem that takes
  more than 500 billion a year out of the
  legitimate world economy
• The problem is so great that in 2000 the United
  Nations General Assembly passed the United
  Nations Convention against Transnational
  Organised Crime and its Protocols

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What is Organized Crime?

• The convention was signed by nearly 150 countries
• It deals with the major issues relating to
  organised crime eg money laundering, corruption
  and obstruction of justice.
• Adopting countries commit to passing laws and
  implementing controls to fight organised crime

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What is Organized Crime?

• The European Law Enforcement Organisation
  (Europol) fights organised crime across the EU
• In the USA the FBI is the primary organisation in
  this area
• The FBIs organised crime section contains 3
  units

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What is Organized Crime?

• La Cosa Nostra/Italian Organised Crime/Labour
  Racketeering Unit
• Eurasian Organised Crime Unit
• Asia/African Criminal Enterprise Unit

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What is Organized Crime?

• La Cosa Nostra/Italian Organised Crime/Labour
  Racketeering Unit
• Focuses on 3 designated areas of crime
• The American La Cosa Nostra
• Italian organised crime
• Labour racketeers
• These groups also include the Italian and
  Sicilian mafias

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What is Organized Crime?

• Eurasian Organised Crime Unit
• Focuses on crime groups which originate from or
  operate from within former Soviet block countries
  who operate within the US Africa and Europe.
• These groups include the so called Russian Mafia

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What is Organized Crime?

• Asian/African Criminal Enterprise Unit
• Focuses on crime groups whose members originate
  from East and South East Asia and African
  countries

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What is Organized Crime?

• Organized crime A continuing criminal enterprise
  that works rationally to profit from illicit
  activities that are often in great public demand.
  Its continuing existence is maintained through
  the use of force, threats, and/or corruption of
  public officials.

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La Cosa Nostra

• Has roots in mid 19C Sicily and started when
  Italy became a sovereign state
• The Sicilian mafia began around Palermo where a
  group of people including aristocrats and
  politicians lived
• Originally served a useful function protecting
  the large lemon and orange estates surrounding
  Palermo

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La Cosa Nostra

• Later during the Fascist period the mafia fell
  out of favour with the local government
• Under fear of jail many of its members fled to
  the USA
• During its early years in the USA around 1890 the
  mafia comprised various groups and gangs eg the
  Black Hand (1900) the Five Point Gang (1910 and
  1920s) and Al Capones crime syndicate in the
  1920s

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La Cosa Nostra

• After an internal war around 1930 La Cosa Nostra
  emerged as a single organisation under the
  leadership of Salvatore Maranzano
• Before he was murdered six months later he had
  defined LCNs organisational structure and its
  code of conduct

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La Cosa Nostra

• This structure was termed the five families
• The ruling Genovese family
• The other four in the LCN Commission were the
  Boanno, Colombo, Gambino and Luchesse
• It is believed that the Genovese family continues
  to run the most powerful LCN family today, across
  the USA

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La Cosa Nostra

• LCN Activities
• Drug trafficking, murder, assault, gambling,
  extortion, loan-sharking, labour racketeering,
  money laundering, arson, petrol bootlegging,
  infiltration of legitimate businesses, stock
  market manipulation and various other frauds

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La Cosa Nostra

• Labour Racketeering
• Is the domination manipulation and control of
  trade unions that affects related businesses and
  industries
• Research shows that a primary goal of this is to
  control the labour health, welfare and pension
  funds.
• For example the value of these funds for the
  International Brotherhood of Teamsters is about
  100 billion
• LCN control over the organisation was effectively
  removed after the 1988 Teamsters civil case

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La Cosa Nostra

• Gambling
• Always a mainstay of LCN
• Played a major part in creating and promoting Las
  Vegas
• Partly through the financing from such as the
  Teamsters funds
• With the introduction of strict state laws Las
  Vegas is now considered to be relatively free
  from LCN influence

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La Cosa Nostra

• Gambling
• The numbers game run by LCN is a type of
  lottery
• Gamblers try to guess 3 or 4 numbers derived from
  a financial figure published daily in the
  newspaper
• State lotteries reduced its influence
• But still a 5 billion a year industry in the US

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La Cosa Nostra

• Loan Sharking
• Money lent at sky high rates
• Interest called the vig added each week at the
  rate of 3 to 5 percent
• For example a loan of 10,000 would need interest
  to be paid each week of 400
• Equivalent to 300 per annum
• No partial payment of principal is accepted

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Structure

• LCN are structured in hierarchical fashion
  reflecting various levels of power and
  specialization, with a national ruling body known
  as the Commission.
• At the top of each of the five families is a
  boss.
• Beneath the boss is a counselor and an
  under-boss.
• Beneath the under-boss are the capos or
  lieutenants.
• Below the lieutenants are the soldiers or made
  men of which there are 2 levels picciotto and
  sgarrista
• At the bottom are the associates

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Structure

• Membership at sgarrista level in the family
  entitles the member to run his own rackets using
  the familys connections and status.
• Corporate model A formal hierarchy in which the
  day-to-day activities of the organization are
  planned and coordinated at the top and carried
  out by subordinates.
• The feudal model of the LCN views it as a loose
  connection of criminal groups held together by
  kinship and patronage .

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Figure 15.1 Hierarchical Structure of a Typical
Organized Crime Family
Adapted from US President's Commission on
Organized Crime, 1986, p. 469.
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Funds Flow

• The Sgarrista pass a cut of 50 to 70 of their
  takings to the capo
• The money flows from the capo to the Boss
• The capo normally gives the boss between 10 and
  40 of what he has received from the soldiers
• The underboss may receive a proportion
• The boss has absolute authority

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Continuity

• Organized crime is like a mature corporation in
  that it continues to operate beyond the lifetime
  of its individual members.

Membership

• LCN is restricted to males of Italian descent of
  proven criminal expertise.

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Criminality

• Most of organized crimes income is derived from
  supplying the public with goods and services not
  available in the legitimate market, such as
  drugs, gambling, and prostitution.

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Organized Crime in the United States

• Most organized crime scholars believe that the
  phenomenon is a normal product of the competitive
  and free-wheeling nature of American society.
• The Tammany Society began as a fraternal and
  patriotic society, bust soon evolved into a
  corrupt political machine consisting mostly of
  ethnic Irishmen.

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The Russian Mafiya

• The Russian Mafiya is a catch-all phrase for a
  group of organized gangs that many experts
  consider to be the most serious organized crime
  threat in the world today.

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The Russian Mafiya

• ROC has existed since at least the 17th century
  and that it became firmly entrenched in Russian
  society in the 1920s.
• ROC is the biggest factor threatening Russias
  democratisation, economic development, and
  security.
• Russian organized crime developed in with the
  influx of Russian immigrants in the 1980s.

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The Russian Mafiya

• When the Soviet Union collapsed in 1991 ROC
  joined eg-KGB agents displace military officers
  and corrupt officials in controlling newly
  privatised companies
• The result was an enormous movement of money and
  power into the hand of organised crime
• The ROC moved to western countries

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The Russian Mafiya

• The FBI lists the 8 most prevalent crimes
  committed by ROC as health care fraud, securities
  and investment fraud, money laundering, drug
  trafficking, extortion auto theft and interstate
  movement of stolen property
• It is estimated that ROC syndicates exceed 1
  million soldiers

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The Russian Mafiya

• The power of ROC is evidenced by intelligence
  estimates that indicate that the majority of all
  Russian businesses and banks, as well as dozens
  of stock exchanges and government enterprises are
  controlled by the ROC syndicates
• Major links with Colombian and Mexican drug
  cartels

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The Russian Mafiya

• Much more ruthless than LCN being blamed for
  killing more than a dozen Russian journalists
• Computer crime is a major area of activity
• Department of Defense attacks
• Superhacker 99
• Credit card thefts
• Denial of service attacks
• Citibank attack

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The Japanese Yakuza

• Japanese organized crime (JOC) groups are
  probably oldest and largest in the world.
• The official Japanese term for organized
  criminals is Boryokudan, but they are more
  commonly referred to as yakuza.
• Members of the JOC groups are recruited from the
  two outcast groups in Japanese society.

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The Japanese Yakuza
(???)

• The burakumin
• Japanese born Koreans
• The Yakuza are not shadowy underworld figures,
  their affiliations are proudly displayed on
  insignia worn on their clothes and on their
  offices and buildings, and they publish their own
  newsletter.

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Money Laundering

• Involves practices that hide the connection
  between the sources of funds and their legitimate
  use
• For organised crime it means disguising the
  source of illegally gained money and making
  appear to have come from legitimate sources.
• The laundering process washes dirty money to
  make it appear clean

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Three Step Money Laundering Process

• Placement phase
• The money launderer introduces illegally obtained
  profits into the financial system
• The main objective here is to get the money into
  the system in a way that cannot be traced to an
  illegal source

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Three Step Money Laundering Process

• Layering phase
• The money launderer uses complicated sets of
  transactions to move the money around the
  financial system and further distance it from its
  original illegal source
• The main objective is to destroy any audit trail
  that could trace the original placement

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Three Step Money Laundering Process

• Integration phase
• The launderer moves the money a final time into
  accounts under his legal control to make it
  appear they arrived from a legal source

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Three Step Money Laundering Process

• Placement methods
• Smurfing multitude of small deposits in
  different bank accounts. Below the limit for
  reporting purposes
• Cash smuggling aim to relocate cash across
  international borders where it is less regulated
• Negotiable instruments purchased, bundled and
  sold to a money laundering specialist
• Cash exchange for negotiable goods eg buying
  diamonds which are more easily stored and moved
  across borders

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Three Step Money Laundering Process

• Placement methods
• Cash value insurance policies single premium
  policies that have a cash value are then used as
  security to borrow against or cashed in.
  Multiple policies across many insurance companies
  could be used
• Corporate bank accounts Involves placing money
  in legitimate businesses or charities that
  normally collect large amounts of cash. In many
  cases these are shell companies
• Buy a bank ownership permits the money
  launderer to deposit large sums without reports
  being made to the authorities

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Three Step Money Laundering Process

• Layering methods the object to destroy the
  audit trail
• Informal Value Transfer System money transfer
  systems that operate outside the normal financial
  system. Some systems date back thousands of
  years. Used for legitimate and illegitimate
  purposes. Based on codes and very simple to
  arrange
• Tax havens and offshore banks Includes
  countries whose controls are good but whose
  banking officials are easily corrupted. The more
  countries the money is moved through the more
  difficult it becomes to trace. Cayman Islands is
  the 5th largest financial centre in the world but
  is only a tiny group of small islands

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Three Step Money Laundering Process

• Layering methods
• Bank secrecy laws Some countries have protected
  money launderers this way which makes it
  impossible to investigate their account holders
• Off-shore trusts transferring ownership of a
  company to an off-shore trust. In some
  jurisdictions these are administered by
  unregulated trust companies that can obscure the
  financial ownership trail. Sometimes use flee
  provisions that instruct trustees to move the
  trusts in the event of investigation
• Shell corporations using bearer share
  certificates in off-shore havens which do not
  require company records

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Three Step Money Laundering Process

• Layering methods
• Walking accounts where deposits when made are
  immediately transferred to an account in another
  jurisdiction and so on through a long trail which
  becomes increasingly difficult to follow.
• Financial intermediaries Corrupt influential
  professionals

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Three Step Money Laundering Process

• Integration methods - In this final stage the
  money launderer puts the money to personal use
• Off-shore credit cards used to withdraw money
  from a bank account and pay bills
• Off-shore consulting fees money launderers pay
  themselves generous consulting fees from
  companies they control
• Corporate loans money launderers borrow money
  from off-shore companies they control
• Property sold at inflated prices to companies
  they own for cash

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Three Step Money Laundering Process

• Integration methods
• Under the table cash deals money launderers
  purchase property or other valuable assets
  including companies at below market value. Cash
  is paid to make up the difference to market value
• Legitimate business money paid in as sale and
  then declared as company revenue and taxed as
  legitimate earnings

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Theories about the Causes of Organized Crime

• Some argue that we create our own organized crime
  problem by creating laws that prevent members of
  the public from acquiring goods and services they
  desire and demand.
• Early theories of organized crime relied on the
  anomie/strain tradition
• Anomie lack of the usual social or ethical
  standards in a group .

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Theories about the Causes of Organized Crime

• Ethnic succession theory Upon arrival in a new
  country, each ethnic group was faced with
  prejudicial and discriminatory attitudes that
  denied them legitimate means to success.
• Organized crime affords those who commit it the
  rewards for relatively little risk.
• In the USA almost all mob members live in
  neighbourhoods where they were constantly
  surrounded by criminals and criminal values.

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Theories about the Causes of Organized Crime

• It would not be too much of a stretch to posit
  that many men attracted to the outlaw lifestyle
  are predatory psychopaths and sociopaths.
• There is no reason to assume that the rank and
  file gangster is any different in background and
  personal characteristics than the ordinary
  unaffiliated street criminal, or the street
  criminal affiliated with ad hoc criminal gangs.