It's the (illegal) economy, stupid: the ACC on organised crime

We all know how organised crime works, right?

Form a shadowy group (think the Japanese Yakuza, the Calabrian ‘Ndrangheta, the Sinaloa Cartel, an outlaw motorcycle gang – take your pick), preferably one shrouded in secrecy and ritual. Then, establish a reputation for violence and use it to become the underworld’s one-stop shop for something illegal (drugs or extortion are popular choices).

Only that’s not how organised crime works. At least, not entirely. That’s not how it has worked for some time now.

The release yesterday of the Australian Crime Commission’s (ACC) report on organised crime in Australia signals an important shift in the way the ACC explains and presents the problem to the Australian public. It highlights the role of individual entrepreneurs in meeting demand in international markets for illegal goods and services.

Make no mistake about it – criminal organisations are very real. But increasingly, “organised” criminal activity is being organised not by structured hierarchies with mythical codes of honour and silence, but rather by that supposedly most efficient of allocation mechanisms – the market.

Focusing on illegal markets

Think about the effects of global economic integration on legal economic activity in the modern era. Instead of one single company producing something, the production process becomes spread across different companies and countries. Individuals and groups specialise in parts of the supply chain. Intermediaries broker deals between parties in that supply chain. Those same patterns can be observed in illegal markets.

Wholesaler-retailer relationships are common, as with the Sicilian Mafia and Calabrian ‘Ndrangheta acting as distributors of Colombian cocaine. There are many examples of sub-contracting: groups with an established expertise in violence offer their services to other organisations: see, for example, Russian Mafiya groups forged in the tumultuous post-Soviet period. Third-party services to facilitate transactions are also well-known: if you’re negotiating with another gang, a third party can take hostages from each of you to reduce the risk of reneging.

The prominence of large bureaucratic criminal structures varies in different industries. In some, like human trafficking across Europe, you can see networks of individuals and small groups are connected by little more than a profit motive. Business is business, and the broad trends in the way we chase profits are the same regardless of whether someone makes a law against the product you’re selling.

The essence of the ACC’s report is that rather than targeting a specific organisation or industry, we need to think about the factors that help facilitate illegal markets: what the ACC refers to as enablers. Two good examples of such enablers are corruption and technology.

Why corruption and organised crime go hand-in-hand

The ACC’s last report on organised crime from 2011 contained just six brief mentions of corruption. Yesterday’s report focuses more directly on corruption as a major factor enabling illegal markets and organised crime, and rightly so.

Operating in an illegal market for a prolonged period of time requires being able to protect yourself from the authorities tasked with finding and prosecuting you. If you can’t protect yourself, you need to buy that protection from someone else. Otherwise, you go out of business.

The most direct and common way that those involved in criminal enterprise insure against being caught is to corrupt a public official. This is old news, and criminal organisations have long had an incentive to do this. As production chains in illegal markets become atomised, however – and demand for illegal goods and services is met not by one group, but by looser coalitions of smaller groups and individuals – then access to corrupt or corruptible public officials becomes a commodity in itself.

Those with the right contacts can specialise in producing protection for others – selling information that can be used to avoid investigation and prosecution. When you read news about outlaw motorcycle gangs allegedly corrupting or infiltrating police ranks, this doesn’t just mean that bikies have access to information, it means they’re able to sell it on to others. In the modern illegal economy, corruption (or more specifically, corrupt protection) can be considered a fundamental market in the production of almost any other illegal good or service.

Technological progress and productivity in illegal markets

Just as advances in communications and computer technology have provided substantial improvements for business and individuals engaged in legitimate economic activity, so too have they provided benefits for criminal enterprise.

Until recently, when Apple improved the iPhone’s encryption technology, it was often the case that if you worked for a big company and were given a company phone, it’d be a Blackberry. The encryption technology used in RIM’s Blackberry made it a popular choice because of the additional security it provided for users.

This security also gave rise to a new phenomenon: bikies with Blackberries. Using encrypted phones made it easier for Canadian outlaw motorcycle gangs to coordinate cannabis trafficking into the US because it was harder for law enforcement to spy on their communication. Bikies in Australia have found the Blackberry popular for the same reason.

ACC head John Lawler at the launch of yesterday’s report into organised crime, which may mark a turning point for how it is presented to the wider public. AAP/Dan Peled

Online fraud has also become an increasingly lucrative industry owing to the economies of scale involved. Spam a few hundred thousand email accounts, and even if you only have a success rate of 1-2%, there’s money to be made. As the Australian Competition and Consumer Commission’s report on scam activity in 2012 makes clear, the success rates are often much higher than this.

Another example of the way technology helps bring together disparate groups and individuals in illegal markets for pharmaceuticals (identified by the ACC as a growing problem). Through websites like Silk Road, consumers of illegal drugs can now order products online and take delivery at home. Of course, as in all illegal markets, you might not always get what you pay for.

The supply side is an even better example of the role of technology. In the grey and black markets for pharmaceuticals, real drugs that go missing from factories end up in the warehouses of illegitimate online pharmacies. They are then advertised to consumers via spam sent to mailing lists which are purchased online from hackers who have hacked company databases for contact details: for instance, when Sony was hacked in 2011 and over 24 million accounts were compromised.

Focus on the market, not the mob

The reframing of the problem of the ACC in yesterday’s report may seem like a minor issue, or a matter of rhetoric. It is not.

In the modern era, combating organised crime and corruption is as much about understanding the nature of the supply and demand for the goods and services being traded, and learning about the structure of those industries, as it is about targeting specific notorious criminal groups.

Mike Pottenger does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

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