Don't Forget the Criminal Dimension of the Financial Crisis
ri...@math.missouri.edu
TUESDAY 23 DECEMBER 2008
Opinion
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Let's Not Conceal the Criminal Dimension of the Financial Crisis
Tuesday 16 December 2008
by: Jean-FranC'ois Gayraud and NoC+l Pons, Le Figaro
Deploring the imbrication of crime and criminal monies in the financial
system, authors Jean-FranC'ois Gayraud and NoC+l Pons quote Paul Newman's
character Henry Gondoff in "The Sting," "No sense in being a grifter if
it's the same as being a citizen." (Photo: Universal - Image courtesy
MPTV.net)
Jean-FranC'ois Gayraud, divisional commissioner of the National Police,
and NoC+l Pons, adviser at the Central Service for the Prevention of
Corruption, establish a connection between criminality and the financial
crisis.
No one contests that the subprime crisis has both structural (the
orgy of credit) and cyclical (the bursting of the real estate bubble in
the United States) dimensions. However, no one appears to see the
criminal aspects of this globalized financial crisis. A surprising
omission, since history teaches us that all financial crises "contain" a
criminal dimension, either by the intrusion of organized crime, or by the
repetition of criminal operations committed by normal market actors; and
sometimes also through the association of these two universes. In our
comments, we desire neither to reduce a systemic crisis to gangsterism,
nor to flush out any improbable scapegoats, but rather are concerned to
remind everyone that crime - whether organized or not - infiltrates
everywhere where money reigns, including the financial markets.
Also see below:
Economic Crisis and Criminality b"
Crime accompanies, amplifies and sometimes provokes financial crises.
Besides, how can one not be troubled by the strange public alert American
Attorney General Michael Mukasey launched in May 2008 on the growing
threat to national security represented by "organized crime's penetration
of the markets?"
Practically everyone seems to have obscured the fact that the Western
world has already lived through two big crises with a strong "criminal
smell" during the 1980-1990 period, also in a context of careless real
estate lending and market deregulation.
First of all, there were the savings and loan failures in the United
States during the 1980's, one of the worst financial disasters of the
twentieth century. Its cost to the American taxpayer has been estimated
at close to $500 billion, including interest. Had the American federal
government not intervened, the very heart of the American economy - and
by contagion, a part of the global economy - would have been put in
danger.
The source, at the epicenter of the disaster, was large-scale
criminal frauds conducted by executives at these savings and loans, along
with outside beneficiaries, sometimes even known Mafiosi. Seventy to 80
percent of these savings and loan bankruptcies were due to criminal
activity.
At the same time, Japan was experiencing a comparable crisis the
country has still not fully recovered from. In a context of easy money
and deregulation, banks shortsightedly lent to companies and
entrepreneurs "with a tang of Yakuza," the Japanese mafia. When banking
and real estate bubbles burst, the Japanese financial system found itself
battered, trapped by the masses of unrecoverable loans, estimated in 1998
at $600 billion. In 30 to 40 percent of cases, these "questionable loans"
proved, in fact, to be "mafia loans," hence impossible to recover.
The subprime crisis probably began with the multiplication of real
estate loans to beneficiaries unable to reimburse them. First of all,
basic scams affecting loan quality were in evidence. The second period
(securitization and insurance derivatives) gave rise to convoluted scams,
still caused by the attraction of bonuses and the very complexity of the
operations themselves. The fraud changed in nature; conflicts of interest
between rating agencies and banks, banks and insurance companies
multiplied along with appraisals and contracts. Above all, the burdensome
loans were leaving balance sheets. Veritable "gasworks," in which the
fictive was incorporated with the real, were set up. At the moment of
final reckoning, losses must be regularized: balance sheets manipulated
and accounting statements falsified. The specter of Enron reappears!
The third period, that of the passage through hedge funds and
investment banks, saw the subprime crisis intensify, grow and burst when
toxic products had been diffused worldwide.
Frenzied speculation generates other kinds of montage: money
laundering, given the omnipresence of the structures installed in tax
havens and the total absence of transparency that reigns there;
manipulation of the news in order to create a call for new investors who
will feed the machine once the situation has begun to deteriorate. Then,
market speculation of the churning variety (ramping position-taking, late
trading, leveling and so many other scams) arise during the
recapitalizations of bank, near-bank and insurance companies by using
short sales. And, in the end, games designed to "assist" competitors'
fall by artificially depressing their stock price, which creates serious
problems for the collective. To conclude, let us remember a famous retort
from the film, "The Sting": "No sense in being a grifter if it's the same
as being a citizen."
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Translation: Truthout French language editor Leslie Thatcher.
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Economic Crisis and Criminality
Monday 15 December 2008
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by: Bertrand Monnet and Philippe Very, Les Echos
While it constitutes a major risk for business, the present crisis
represents a dangerous opportunity for organized crime. From Japanese
Yakuzas to Mexican cartels, criminal organizations have one single
objective. Their profits arise, of course, from the development of the
criminal economy, but also from a growing penetration of the legal
economy which the present conjuncture risks accelerating.
The criminal economy developed by these organizations rests on two
essential activities: production and predation. That which they are
generally known for consists of producing all kinds of illicit substances
and developing innumerable traffics: drugs, weapons, cigarettes, human
beings, animals, organs, waste, art objects ... In parallel, organized
crime is a discreet but constant predator on governments, companies and
individuals by the practice of extortion, theft, fraud, kidnapping for
ransom, piracy, counterfeiting and large-scale hacking into public
markets.
This criminal economy generates significant income. According to the
Italian anti-mafia justice department, the gross revenues of the
transalpine mafia alone are close to 100 billion Euros a year, or the
equivalent of seven percent of Italy's GDP and more than the gross
revenues of the L'Orial, EADS and Danone companies together.
Such revenue assures that, on top of being the engines of the
criminal economy, mafias, gangs and cartels are heavyweight actors in the
legal economy. Their first act in that regard is to cause interference in
global finance by laundering part of these criminal funds through
injection into the international financial system. The UN deems that the
volume of money laundered this way every year in the whole world
represents from two to five percent of gross world product, or $800
billion to $2 trillion.
However, organized crime does not launder for pleasure, but to invest
a part of those laundered funds in the legal economy to meet two
objectives: territorial domination and enrichment. Controlling a business
allows a mafia to distribute wealth in the form of jobs or purchases and
consequently, to ultimately place whole regions under economic
dependency. But investing in the legal economy allows organized crime
above all to benefit from the growth of the businesses it controls and
the profitability of its holdings, just like any other investor.
The present crisis risks enlarging organized crime's access to the
legal economy. In a context of rarefaction of investments, the funds
resulting from money laundering are, in fact, mechanically more
interesting than ever. The legal and ethical resistance to pressure from
questionable investors risks decreasing, in emerging countries as well as
in the heart of the OECD. This is all the more likely, given that
organized crime's investment capacities are enormous: even if one
cautiously estimated that the mafias invest only half the sums the UN
estimates they launder, their average investment capacity would broadly
exceed that of the biggest sovereign fund in the world ...
In this context, it is essential that the initiatives the
international community takes to deal with the crisis itself be coupled
with concrete actions aimed at limiting its collateral effects.
Certainly, the Financial Action Task Force (FATF)'s pursuit of the battle
against money laundering figures among the recommendations issued by the
G-20 during the Washington summit. But to curb the criminal penetration
of the legal economy requires - today more than ever - action not only
with respect to criminal funds' money laundering, but also, action
upstream against their creation, by trying to dry up the sources of dirty
money. In the face of the updraft the present crisis constitutes for
enormous criminal funds, the international community must therefore
protect the global community by fighting against organized crime itself
with the same energy it has deployed against terrorism since September
11. Otherwise, the crisis could transform dirty money into an economic
bomb.
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Bertrand Monnet and Philippe Very are professors at Edhec and researchers
at the Edhec Institute for the Management of Criminal Risks (Imarisc).
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Translation: Truthout French language editor Leslie Thatcher.
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