Organised Crime in European Businesses

Ernesto Savona, Michele Riccardi, Giulia Berlusconi, Ernesto U. Savona

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781138499478
• eBook ISBN: 9781317277538
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

The infiltration of organised crime in the legitimate economy has emerged as a transnational phenomenon. This book constitutes an unprecedented study of the involvement of criminal groups in the legitimate economy and their infiltration in legal businesses, and is the first to bridge the research gap between money laundering and organised crime. It analyses the main drivers of this process, explaining why, how and where infiltration happens.

Building on empirical evidence from the Netherlands, Slovenia, Spain, Sweden, the UK, Ireland, Italy, France and Finland, Organised Crime in European Businesses is divided into four parts. Part I explores the infiltration of legitimate businesses to conceal and facilitate illicit trafficking. Part II examines the infiltration of legitimate businesses to develop fraud schemes. Part III focuses on the infiltration of legitimate businesses to control the territory and influence policy makers. Part IV concludes by considering the research and policy implications in light of these findings.

Bringing together leading experts and detailed case studies, this book considers the infiltration of organised crime in legitimate business around Europe. It is an ideal resource for students and academics in the fields of criminology, economics and sociology, as well as private sector practitioners, public officials and policy makers.

1
Organised criminals and the legal economy

Giulia Berlusconi

The relationship between organised crime and the legal economy

The complex relationship between organised crime groups and the legal economy has been discussed by several authors (Anderson, 1979; Arlacchi, 1983, 2007; Catanzaro, 1986, 1988; Cressey, 1969; Fiorentini & Peltzman, 1995; Ianni & Reuss-Ianni, 1972).

Some authors argue that criminal organisations need to engage in legal activities because investment opportunities in the illegal markets are insufficient to reinvest the money accumulated with illicit activities. After a portion of the profits has been allocated to the organisation’s management costs, investment in other illegal activities is usually the first option for criminals (Barresi, 1999; Ruggiero, 1996, 2010). However, investment opportunities in illegal markets may be insufficient. Criminal organisations thus need to diversify their investments by engaging in legal activities, and the proceeds of illegal activities are laundered through investments in the legal economy (Catanzaro, 1988; Centorrino & Signorino, 1997).

Other authors suggest that infiltration of the legal economy is a constant feature of criminal organisations that diversify their investments between legal and illegal markets. Therefore, infiltration in the legal economy is not conditional upon a sufficient accumulation of profits from illegal activities; rather, it is a typical feature of organised crime (Fantò, 1999; Santino, 2006). Criminal organisations launder money of illicit origin, and they also reinvest money which has already been laundered. Once the money has been invested in the legal economy, organised crime groups act like other entrepreneurs by complying with the normal market rules (Edelhertz & Overcast, 1994).

The first interpretation is in favour of a chronological nexus between the presence of criminal organisations in illegal and legal markets, whereas the second interpretation envisages a two-way process. The literature suggests that the legal and illegal economy cannot be clearly separated. In fact, economic activities are distributed along a continuum whose extremes are criminal activities and completely legal ones (Ruggiero, 2008; Smith, 1975, 1980). Between these two extremes lie several other possible ways in which organised criminals engage in activities that are formally legal yet organised and managed illegally. The legal sectors in which criminal entrepreneurs operate, together with illegal activities, define the criminal economy as a whole (Becchi & Rey, 1994).

The organised crime and money laundering literature provides insights into the relationship between criminal organisations and the legal economy (e.g. Savona & Riccardi, 2015; van Duyne, von Lampe, van Dijck & Newell, 2005). These studies concern the complex relationship between legal and illegal markets, and the investments by criminal organisations in the legitimate economy. Attention has recently also been paid to infiltration by organised crime groups of legal businesses. Some scholars have focused on legal businesses and their exploitation by criminal organisations. This entails examining the drivers of – or the reasons for – infiltration, the locations and business sectors of the businesses targeted, the process of infiltration, and the strategies used to control and manage infiltrated businesses (Savona & Berlusconi, 2015).

Organised crime and legal businesses

The relationship between organised crime groups and legal businesses is a complex one. The involvement of organised criminals in the management of a legal company may vary; and the same applies to the level of direct control exercised over the business. On the one hand, legal businesses may be owned and directly managed by criminal entrepreneurs. On the other hand, organised criminals may create a partnership with the legal entrepreneur; and illegal and legal capital may coexist in financing the business activities (Di Bono, Cincimino, Riccardi & Berlusconi, 2015; Fantò, 1999; Sarno, 2015).

Legal entrepreneurs may be motivated to cooperate with the criminal organisation by the fear of retaliation; or they may actively decide to take part in illicit activities to obtain economic benefits. The members of the criminal organisation benefit from the relationship with legal entrepreneurs as well. This is particularly the case when the business activity of the criminal group is linked to the activities of the legal company, e.g. in the case of a licensed pharmacy used to sell illegal drugs (Bruinsma, Denkers & Alberts, 2015; Riccardi, Dugato, Polizzotti & Pecile, 2015; Sciarrone, 2009).

Besides passive cooperation motivated by the fear of retaliation, a form of active cooperation may result from an agreement between the legal entrepreneur and the members of a criminal organisation. Organised criminals generally approach collusive entrepreneurs whose businesses are of interest to them, and they offer them an opportunity to expand their businesses and increase the financial rewards. If the business owners consider cooperation with the criminal groups to be convenient, they are likely to facilitate the process of infiltration of their own companies (Berlusconi, 2015; Sciarrone, 2009).

Especially in the case of passive cooperation by the legal entrepreneur, extortion and coercion are typical methods of infiltration in legal markets. However, an analysis of case studies on criminal infiltration in legal businesses has revealed that the use of violence and threats, as well as corruption, is not common and generally involves Italian mafia groups (Savona & Berlusconi, 2015). In most case studies in which legal entrepreneurs are involved, the evidence suggests that they have been either collusive or unaware of the illicit activities conducted by the members of the criminal organisation (Berlusconi, 2015). For instance, Rönnblom, Skinnari and Korsell (2015) report a case in which the organised criminals pretended to acquire a business by signing the documents to change the board members, but never submitted them to the Companies Registration Office. As a consequence, the legal entrepreneur, who was unaware that the property had not been transferred, became a straw man for the criminal organisation in his own company (Berlusconi, 2015; Rönnblom et al., 2015).

An analysis of case studies on infiltrated businesses in Europe has shown that targeting businesses in economic difficulties facilitates the infiltration process, since the owners of the companies are eager to sell their shares before leading their business to bankruptcy (Berlusconi, 2015). Usury also multiplies the opportunities to infiltrate the private sector (Bertoni & Rossi, 1997). The lack of regulation of the financial system that provides an early warning system, low capitalisation of family-run companies, and the segmentation of the credit market are factors that make businesses with certain characteristics more vulnerable to financial crises and, therefore, vulnerable to organised crime. These companies are mainly small traders and service companies, craftsmen and small family firms (Bertoni & Rossi, 1997).

When these businesses are unable to obtain bank loans and are therefore in financial difficulties, criminal organisations may take the place of banks and offer their usurious loans. These loans enable the criminal groups to infiltrate the companies in difficulties until they can take them over (Ciconte, 2008). Despite evidence of the use of violence, threats, extortion or usury, in many cases the infiltration process seems to be quite straightforward in that it involves one member of the criminal group regularly starting a new business or acquiring an already-existing one from a legal entrepreneur. This process can be facilitated in some countries by the scant requirements needed to set up a company or the lack of regulation on the process of acquiring a business (Berlusconi, 2015).

Once infiltrated, businesses can be subject to different types of control and management. Shell companies, whose main purpose is the concealment of illegal activities, often do not perform any kind of productive activity, since the creation of wealth through the production and sale of goods or services is not one of the objectives for which they have been created (Catanzaro, 1988). As a consequence, they are characterised by no or minimum productive activities, which may result in low revenues (Transcrime, 2013). Low profits may also be due to the fact that infiltrated businesses often face economic difficulties, either because of a specific choice by organised criminals to target companies close to bankruptcy or as a consequence of bad management by the members of the criminal group (Di Bono et al., 2015).

Businesses infiltrated in order to commit frauds tend to present low levels of fixed assets, indicating that they are unlikely to invest the capital in buildings, machinery and other means of production (Di Bono et al., 2015; Schneider, 2004; Transcrime, 2013). By contrast, organised criminals prefer high levels of current assets and cash because they help them liquidate the business in the event of a law enforcement investigation and avoid the risk of asset confiscation. Should the criminals be aware of a financial investigation (e.g. thanks to a tip-off or some other disclosure), they may try to sell the company assets before these are seized by the judicial authority, and move the resulting liquidity to safer places (e.g. offshore bank accounts) (Catanzaro, 1988; Di Bono et al., 2015).

Finally, infiltrated companies – and particularly those used to launder the profits of illicit activities – generally show low levels of financial debts, indicating that they do not resort to banks and other financial institutions for loans to finance their activities (Di Bono et al., 2015; Transcrime, 2013). At the same time, criminal groups need to conceal the origin of the money used to finance the infiltrated businesses. Possible options include the creation of complex corporate schemes to account loans as debts towards companies of the same group, or towards subsidiaries, shareholders and parent companies. Debts to suppliers and other debts, in fact, may be used to conceal the injection of illicit proceeds into businesses controlled by criminal groups (Di Bono et al., 2015; Transcrime, 2013).

The drivers of criminal infiltration in legitimate businesses

Organised crime groups are induced to infiltrate legitimate businesses by several drivers. The maximisation of profit can coexist with other drivers, such as political, social and cultural motivations. The objective of organised criminals in the legal economy is, in fact, to maximise the benefits, which include benefits other than economic (Becker, 1968). A recent analysis of case studies on criminal infiltration of legal businesses in five European countries has helped identify several drivers of infiltration, including money laundering, profit through formally legal activities, profit through frauds, and concealment of illegal activities (Savona & Berlusconi, 2015).

Criminal groups may infiltrate legal businesses for more than one reason at a time; and different drivers of infiltration may intersect. For instance, the use of legal businesses to conceal illegal activities may lead criminals to use the same businesses to legitimise illicit profits (Riccardi, 2014; Transcrime, 2013; Wall & Bonino, 2015). A similar variety in the drivers of organised crime infiltration of legal businesses can also be found in the chapters of this book. At the same time, drivers of criminal infiltration are not necessarily all present at the same time; and depending on the specific situation, one may prevail over the others.

Organised crime groups active in the Netherlands, Sweden, and the United Kingdom have been found to infiltrate businesses mainly in order to commit frauds (Bruinsma et al., 2015; Rönnblom et al., 2015; Wall & Bonino, 2015). For instance, Swedish organised criminals use businesses to provide restaurants and small shops with untaxed alcohol and cigarettes. The fact that alcohol and tobacco are subject to excise tax enables large-scale tax fraud when the goods are imported legally and then resold to restaurants and kiosks without paying taxes. Having control over or running a business with a licence to import alcohol or tobacco is thus an opportunity to carry out excise tax fraud (CSD, 2015; Rönnblom et al., 2015).

Most of the Slovenian case studies have concerned legal businesses infiltrated to conceal illegal activities, mainly prostitution. These cases confirm the criminals’ interest in bars and night clubs with the purpose to perpetrate forced prostitution. The bars give the outward impression of legitimate businesses providing dance routines for their customers; meanwhile, forced prostitution occurs in the background. Evidence of human trafficking has also been found in connection with the provision of women to be employed in such bars (Meško et al., 2015; see also Chapter 4 in this book). On the contrary, evidence of infiltration to gain social consensus or to control the territory has not been found in Slovenia.

In Italy, some case studies have considered organised crime groups investing in legal business entities in order to maximise their social consensus and to control a particular market of the local economy. Organised criminals may decide to infiltrate businesses operating in sectors that provide goods and services to the population (e.g. education, health care) and create new jobs to promote a respectable image of themselves in contrast with that of mere criminals (Fantò, 1999; Ravenda, Argilés-Bosch & Valencia-Silva, 2015; Sciarrone, 2009). Italian mafias also infiltrate sectors with high territorial specificity (e.g. hotels and restaurants, gas and water supply, construction) to control an area physically and to create strategic collusive relationships with politicians and local entrepreneurs (Giampietri & Sarno, 2015; Riccardi, 2014; see also Chapter 8 in this book).

Organised crime groups may invest money in legal bu...

Table of contents

• Cover Page
• Fm-Chpater 1
• Half Title page
• Series page
• Title Page
• Copyright Page
• Contents
• Figures
• Tables
• Contributors
• Abbreviations
• Introduction
• 1 Organised criminals and the legal economy
• 2 Measuring organised crime infiltration in legal businesses
• Part I Infiltrating legitimate businesses to conceal and facilitate illicit trafficking
• Part II Infiltrating legitimate businesses to develop fraud schemes
• Part III Infiltrating legitimate businesses to control the territory and influence policy makers
• Part IV Research and policy implications
• Index