Illegal Markets and the Economics of Organized Crime

Martin Bouchard, Chris Wilkins, Martin Bouchard, Chris Wilkins

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781317987505
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book showcases recent advances in the theoretical and empirical understanding of the economic aspects of organised crime and illegal markets. It provides new insights into defining and quantifying the influence of organised crime by drawing on innovative approaches to studying criminal networks and organisations such as the Hells Angels. The book includes analysis of the structure of illegal drug markets from international leaders in the field. Finally the text includes empirical case studies of the diverse markets where organised crime is currently active including the illegal market for crystal methamphetamine in Australia, tiger products in China and the falcon and fur trades in Russia.

This book was based on a special issue of Global Crime.

What is a criminal organization and why does the law care?

Philip A. Curry and Steeve Mongrain

Department of Economics, Simon Eraser University

Introduction

In the United States in 1967, a presidential report on organized crime was commissioned. In 1970, the Organized Crime Control Act was passed. A significant component of this act was the Racketeer Influenced and Corrupt Organizations Act (RICO). RICO was designed to target individuals or organizations engaged in a pattern of racketeering, defined as a minimum of two connected criminal acts within a ten-year period. It did so by allowing prosecutors to define a series of distinct crimes as a single offence, thereby avoiding many procedural, evidentiary and jurisdictional problems associated with prosecuting multiple offences together. RICO allows for rather severe penalties to be imposed. The maximum penalty for a single RICO conviction is twenty years imprisonment (which is increased to life imprisonment if any of the predicate charges permit it, such as murder) and a fine of $250,000 or twice the proceeds of the offence. In addition, RICO allows for the forfeiture of all the proceeds of crime.

The majority of states (45 at the time of writing) also have laws devoted to criminal organizations.¹ Of those 45, 25 have provisions to impose additional penalties for crimes committed by members of gangs.² Often, such provisions entail the automatic upgrading of the class of misdemeanor or felony.³ A summary of the other types of legislation can be found in Appendix A.

The current legislation in Canada targeting criminal organizations was introduced in 1997 and revised in 2001. The Criminal Code of Canada defines a criminal organization as ‘a group, however organized, that (a) is composed of three or more persons in or outside Canada; and (b) has as one of its main purposes or main activities the facilitation or commission of one or more serious offences that, if committed, would likely result in the direct or indirect receipt of a material benefit, including a financial benefit, by the group or by any of the persons who constitute the group. It does not include a group of persons that forms randomly for the immediate commission of a single offence’.⁴ The incremental penalty for being a member of a gang while committing a crime is no more than 14 years imprisonment.⁵

While prosecutors have had some success in convicting criminals under RICO, criticism of it is not hard to find. One particular criticism is that RICO is very vague in its definition of a criminal ‘enterprise’.⁶ In particular, legitimate organizations, such as corporations, labor unions and government offices come under the purview of RICO. While prosecutors have found this useful in combating white-collar crime, it is not obvious that RICO is the best tool for this venture.

RICO was influential in the design of Canadian legislation.⁷ As is evident from the Canadian definition of a criminal organization above, Canada attempted to remove much of the vagueness found in RICO. One could argue that the Canadian definition has caused as many problems as it has solved, however. Currently, Canada has been unable to convict criminal members of the Hells Angels as members of a gang, primarily because they cannot prove that the commission of crimes is a primary reason for the group.⁸

How then, should the law define a criminal organization? It is perhaps not surprising that this has been a difficult issue to resolve given the many different types of criminal organizations that exist. Some are social institutions that also participate in crime, and may range in size from a small group of neighborhood youth to the Hells Angels. Some organizations are culture- or ‘family’-based, which may be very loosely organized, or may exhibit many of the features of legitimate businesses, such as La Cosa Nostra or the Italian Mafia.⁹ Should the law distinguish between these different types of organizations, perhaps punishing them differentially? Or should it take the stance that a criminal organization is a criminal organization, independent of its structure?

In order to answer these questions, we turn to the economic theory of punishment to establish why society would want to punish criminal organizations differently than independent criminals. We find that many of the reasons stem from the impact that criminal organizations have on markets (either illegal markets or metaphorical markets from crime) and from the use of violence. In other words, we feel that criminal organizations should be defined according to their presence in illegal markets and not according to the structure of their network. Interestingly, these findings are very reminiscent of Schelling’s work that was influential in the design of RICO.¹⁰

Schelling’s work has been criticized in the criminological literature as promoting a misconception of criminal organizations.¹¹ The source of this criticism is Schelling’s assumption that criminal organizations must necessarily be large-scale, highly organized groups that form in order to achieve monopoly power in the markets in which they operate. While this criticism is correct in that criminal organizations clearly come in all forms and so are not all large-scale or structured like a business, we feel it is misguided in that there does not appear to be any reason to treat those organizations that do not achieve market power or use excessive violence any differently than independent criminals. In other words, whether a criminal organization should receive enhanced sentencing should hinge on the attainment of market power, no matter how structured the organization is, and even if that was not an initial goal of the group.

The rest of this paper is organized as follows. In the next section, we examine the economic theory of punishments and highlight the finding that punishment should depend on the social harm imposed and the probability of conviction. We then examine how criminal organizations may differ from independent criminals in these regards. In the final section, we consider how these differences can be used to construct a definition of a criminal organization and conclude.

Economic analysis of punishment

There exists a large literature within economics focusing on crime and deterrence.¹² In particular, much attention has been paid to the choice of punishment. To begin with, it is not socially optimal to have all punishments set at the maximum possible (such as the death penalty). If rape, say, were punished with the death penalty, then rapists would have incentive to kill their victims in order to reduce their chance of being caught. Further, if punishments were the same for all crimes, then criminals might have incentive to switch out of less serious crimes to more serious ones. This is known as the concept of marginal deterrence.¹³ From this standpoint, and given that there are many possible crimes, economic theory states that expected punishments¹⁴ should be an increasing function of the social harm caused by the criminal act.

Further, there may be some crimes that enhance economic efficiency when committed. Polinsky and Shavell¹⁵ consider a social welfare function that includes the benefits to criminals. In this case, efficiency requires that crimes be committed only when the criminal’s benefit outweighs the social harm (which includes the cost of policing and punishment). They argue that optimal punishments entail setting the expected punishment exactly equal to the harm caused. When this is done, rational individuals choose to commit an illegal act if and only if their benefit outweighs the social harm.

Although the main focus of our analysis, deterrence should not be the only consideration in the design of punishments, particularly in the case of imprisonment. The incapacitation of likely offenders, their potential rehabilitation and retributive justice (or ‘just desert’) are three other important factors.¹⁶ Interestingly, the inclusion of incapacitation concerns has little impact on our analysis. For example, offence severity has been shown to be a useful predictor of recidivism.¹⁷ Consequently, offences that cause greater social harm should also be given longer sentences when incapacitation is the objective. Moreover, there exist many practical considerations over and above these ‘idealistic concerns’. Laws are generally the outcome of very complex and messy political processes that can often lead to distortions away from what is socially optimal. While these factors are very important in the real world, we wish to abstract from them in order to consider the normative question of whether criminal organizations should receive greater penalties than individual criminals and under what circumstances.

To this end, consider the following simple model of optimal punishment, with deterrence as the objective.¹⁸ First, denote by g the benefit to an individual (or to a group of individuals) from an illegal act. Let this benefit be randomly drawn (and be known to the potential criminal before the act is committed) from the probability density function z (g) with associated cumulative density function Z (g). Let the penalty associated with this illegal activity be denoted by s, ¹⁹ and let π denote the probability of detection and conviction. Let the cost of sanctioning be given by c(s), where c′(s) > 0. While π is presumably a function of many things, most notably government expenditure on policing, we shall consider it to be exogenously fixed. This is not an unreasonable assumption if, for example, policing efforts are general in the sense that a large police force affects the probability of conviction for a multitude of different crimes simultaneously. Since our simple model considers only a single criminal act, and since the determination of the size of the police force should depend on consideration of all crimes, one can consider π as simply fixed.²⁰ However, we will later consider how the probability of conviction can be influenced by criminal organizations. Finally, h represents the social harm caused by a given offence.

If criminals are risk neutral, they will commit a crime when g ≥ πs. The probability that this is the case is 1 – Z(πs). While the assumption of risk neutrality may seem extreme, it actually has little effect on our results. The introduction of either risk preference or risk aversion certainly affects the optimal level of punishment, but not the result that it is increasing in social harm. Interestingly, there appears to be evidence that criminals are on average less concerned with risk.²¹ If social welfare does not include the benefits to criminal,²² the social optimum is found by solving:

The solution thus entails setting the punishment s* such that πz (πs*)h = ć(s*). Punishment is used to the point that the marginal benefit of a reduction in criminal activity equals the marginal cost of punishment. Some illegal acts (those for which the criminal’s gains are very high) are simply not worth deterring because it is too costly to do so. Further, as π decreases, one can see that the optimal punishment increases.

This simple model, as well as the above story of marginal deterrence, gives rise to two key results of the economic theory of punishment: criminal acts committed by an organized group should be penalized to a greater degree if either: (1) the social harm from the act is greater; or (2) the probability of conviction is lower. We now examine these two possibilities.

Social harm

We first examine the social harm stemming from criminal acts and consider if and when such harm may be greater when said acts are committed by criminal organizations rather than independent criminals. It is worth mentioning that this analysis holds such things as the act itself and criminal history constant. If members of criminal organizations commi...