Drug trafficking interferes with legal economic activity in many different ways, as do other types of crime. The consequences stem largely from the direct and indirect influences of the large amounts of money generated by the illicit trade, which must be legitimised, but also from the direct impact of losses to legitimate business and corruption associated with the drug trade.
The drug trade generates large sums of money that then need to be dealt with in some way, and a range of methods are used by those engaged in the market to integrate these financial flows into the licit economy to legitimise income and establish power and influence. Obtaining estimates of the extent and sources of illicit financial flows is challenging but, as indicated above, drug trafficking is a major contributor to these, estimated to account for about one-fifth of all crime proceeds and about half of all transnational organised crime proceeds in 2009 (UNODC, 2011a). The important contribution of the drug trade to illicit financial flows was also highlighted in a recent report looking at illicit trade in the EU (Savona and Riccardi, 2015). This estimated that illicit drug markets in the EU (heroin, cocaine, cannabis, amphetamines and ecstasy) accounted for one-quarter of the proceeds from all illicit retail markets.
An analysis of the cocaine trade carried out as part of the UNODC study yielded an estimated global value equivalent to EUR 61 billion (2) (USD 85 billion) in 2009, of which EUR 60 billion (USD 84 billion) was considered to be gross profit (3). The analysis sought to take account of what is known about the structure of the cocaine market and the impact of seizures, and the fact that many of those involved at the lower levels of trafficking organisations make very little, if any, profit, while a few at the higher echelons make huge sums. The cocaine market in Europe was estimated to be worth EUR 19.4 billion (USD 27.5 billion) overall in 2009, with 44 % of retail profits and 90 % of wholesale profits (or 55 % of total profits) being available for laundering, equivalent to EUR 10.8 billion (USD 15.1 billion). Not all of this would be laundered within Europe; the analysis suggested that about half would be laundered in the country in which it was generated and that some would flow out of the region (e.g. to the Caribbean or South America), but almost equivalent amounts would flow in (e.g. South American organised crime groups (OCGs) investing in property in Spain), so that net outflows from the region would be small (UNODC, 2011a).
If we assume that the figure of 44 % of retail profits being available for laundering holds for other European drug markets and apply it to our estimate of retail market size of about EUR 24 billion, this would suggest that something in the region of EUR 11 billion arising from the retail drug trade in the EU might be laundered annually. However, this is a crude estimate and needs to be treated with caution.
Fourteen businesses, including restaurants, nightclubs and bars, worth EUR 15 million were seized by Italian authorities investigating the money laundering activities of a mafia clan involved in a portfolio of crime including drug crime and extortion. The choice of businesses, which were all owned and managed at arm’s length from the criminals, further facilitated the criminality by providing locations for drug dealing. Drug dealers were paid for their criminal activities through ‘legitimate’ wages paid to family members employed as service staff that in fact came out of criminal funds. The scheme was discovered because the profits from the businesses declared to the tax authorities seemed unreasonable relative to the actual running costs.
Source: Europol (2015a).
The profits from the drugs trade generally need to be ‘laundered’ to make them appear legal before they can be used further. Money laundering schemes are often complex, involving the placement of the ‘dirty’ money into the financial system, transferring it internationally to increase the distance from the initial transaction in an attempt to obscure the audit trail and hamper detection efforts, and then returning the ‘clean’ money to the hands of the criminal in a manner that does not arouse suspicion. In many EU countries, prosecution for money laundering depends on linking the money to the predicate offence, i.e. the underlying criminality that generated the profits in the first place. Proving a link between suspicious funds and a specific predicate offence remains a key challenge for law enforcement. Drug offences account for 21 % of all predicate offences in the EU, the highest proportion of all crimes according to a survey of the Member States conducted by Europol — ahead of corruption/bribery (14 %), fraud and swindling/scams (11 %), and human trafficking/smuggling of migrants (10 %) (Europol, 2015a). A limited number of Member States have provisions for ‘unexplained wealth’, whereby the authorities can pursue civil forfeiture if they can prove that wealth has not been derived from a legitimate source. Indications of criminality, however, are normally required in order to achieve forfeiture. Such investigations require significant investment in order to be successful: a combination of specially trained officers and prosecutors, international cooperation and a degree of persistence. They can last several years in complex cases. The investigation of money laundering offences is a key priority in the EU Policy Cycle on Organised Crime; however, the efforts of investigators in this field are frustrated by a combination of the creativity of criminals, slow or inadequate international cooperation, and limited domestic legislation in this area.
A number of characteristics have been identified that make certain legitimate business sectors particularly attractive to money launderers. They tend to be cash intensive, territorially specific (as this facilitates control over the territory in which drug dealing may occur), low-tech and labour intensive. In addition, they often involve public administration or public subsidies (which provides opportunities for infiltration and corruption), small firms useful for their illicit activities, or activities subject to weak regulation. Thus, the legal business sectors most targeted for criminal investment are bars and restaurants (as illustrated in Case study 1), construction, wholesale and retail trade, especially of food and clothing, transportation, real estate activities and hotels (Savona and Riccardi, 2015).
Gambling in casinos, on fixed odds betting machines, or on horse racing, and lotteries are also ways used to legitimise funds. For example, small-denomination notes obtained from drug dealing can be fed into betting terminals and the winnings are returned with a ticket showing that cash has been received from gambling. Although a proportion of the original stake is lost, the remainder now has a legitimate provenance. In the case of lotteries, the money launderer buys winning tickets for more than the prize value and obtains a ‘clean’ bank cheque when the tickets are redeemed (Europol, 2015a). Insurance policies purchased with ‘dirty’ cash and then redeemed early, even if this incurs a penalty, are even harder to detect.
Purchases of high-value assets may be used for money laundering but also have other uses. For example, real estate properties may be purchased for money laundering purposes, providing a high return on investment or income, or used to facilitate the trade, providing sites for drug production or sales. Similarly, boats and cars may be useful for trafficking and as status symbols. The purchase of securities, such as bonds or stocks, may provide cover and an apparently legitimate reason for transfers, as well as ownership of legitimate businesses that may be used for money laundering or to facilitate drug trafficking (Schneider, 2012).
Trade-based money laundering, which involves using trade transactions to disguise the source of funds or move money around and which is particularly difficult to detect, is another vehicle for integrating illicit funds into the legal economy. Practices such as over- or under-invoicing for goods or services, or falsely describing them, are used to misrepresent the price, quantity and quality of goods traded, and transfer value from one party to another. Trade-based money laundering is thought to account for as much as 80 % of illicit financial flows from developing economies (FATF, 2006; PwC, 2015).
Successful money laundering often requires the involvement of professional enablers working in the financial and legal sectors, although the degree to which they are criminally complicit may vary; some will be fully aware of the illegal source of the money involved, whereas some will be indifferent and others simply negligent or incompetent in applying anti-money laundering measures. Activities that fall into this category include the services provided by individual professionals, for example the use of a solicitor to purchase property or other assets, but professional involvement may also take place at the corporate level. For example, major international banking organisations have been found negligent in their application of financial controls; in 2012, HSBC was fined for allowing drug cartels in Mexico and Colombia to launder large sums of money through their accounts (Mollenkamp, 2012; US Senate, 2012). The importance of continued vigilance by financial regulators is illustrated by other recent cases involving other banking groups that have failed to apply proper controls, leaving the banking system vulnerable to exploitation by drug trafficking groups (e.g. Young, 2014; Slater and Jones, 2015).
A recent investigation by French authorities into a drug trafficking network led to several arrests relating to the laundering of the group’s profits.
Money from the sale of cannabis was collected in France. The laundering process began with the transport of cash from Paris to Belgium, where it was used to buy gold. Thereafter, couriers (often Belgian students) acted as mules, transporting the gold to Dubai. In Dubai the gold was then made into jewellery, which was then sent to India to be sold on the gold market. The profits were finally shared between the OCGs and money launderers with the assistance of bankers with access to the financial system.
A key organiser admitted having laundered EUR 36 million since 2010 and sending 200 kg of gold from Belgium to India. The network collected about EUR 170 million per year.
Furthermore, the case revealed a connection between tax evasion and drug trafficking in a scheme designed to balance two illegal flows of cash. Cash coming directly from cannabis dealing in Paris was exchanged for sums secreted in Swiss bank accounts which tax evaders sought to access or repatriate. The cash profits from drug sales were handed over in plastic bags full of small dirty notes to individuals with hidden Swiss accounts. Equivalent amounts were debited from their secret Swiss accounts and further transferred through a complex network of shell companies which integrated funds through the purchase of high-value assets. In this way, the need to smuggle the proceeds of drugs across the French border was eliminated.
The transfer of money overseas, whether to pay for drugs or trafficking services or for investment or concealment, is achieved in a variety of ways. Examples using legal financial institutions include electronic transfers or depositing small amounts of cash (‘smurfing’), but informal money or value transfer systems (see Case study 2), such as the hawala, also known as hundi, system, are also used; and sometimes money is simply moved as hard cash. As controls in the regulated financial sector are tightened worldwide, the use of informal value transfer systems and cash smuggling for money laundering may become increasingly attractive (FATF, 2013).
Cash, and its transfer between countries, plays an important role in drug markets for two main reasons. First, drug sales themselves generate large amounts of cash, generally in low-denomination notes. Large sums in this form are bulky so before such money can be spent by dealers it needs to be laundered such that it can be used without arousing suspicion. Hence, it is unsurprising that, in the EU, drug trafficking is the offence most commonly linked to the use of cash in money laundering schemes. Secondly, cash is useful within the laundering process because it is a bearer negotiable instrument, which means that it belongs to whoever has it and, unlike electronic transfers, it is hard to ascertain its source and impossible to know the intended beneficiary. Institutions subject to regulation may still be involved at some stage and cash is still the main trigger of suspicious transaction reports, making up a third of all reports (Europol, 2015a).
Cash may be physically smuggled between countries, often using methods similar to those used to transport drugs themselves, and cash smuggling is a specialist service. In return for a proportion of the amount to be smuggled (4), the smuggler guarantees the transfer and then uses various trafficking means to deliver the money to the required destination. Because of their smaller volume, high-value notes are important here and traffickers are prepared to spend significant proportions of their revenue to make the conversion. For instance, EUR 1 million in EUR 500 notes equates to just 2 000 notes weighing 2.2 kg, and would fit inside a small laptop bag. In comparison, the same amount of money in EUR 50 notes would weigh over 22 kg and occupy the space of a small suitcase (Soudijn and Reuter, 2015). This suggests that it is important to tighten controls on outgoing traffic to identify cash smugglers as well as incoming traffic for drugs and to review the continued issuing and controls on access to EUR 500 notes.
In some countries, informal value transfer schemes such as hawala (also known as hundi) may be of particular importance. For example, a recent report on the financial flows associated with the trade in Afghan opiates highlights the importance of these systems in this context, with an estimated 50–90 % of transactions in Afghanistan taking place through such systems (FATF, 2014). It is believed that in most cases payments from consumer countries are first transferred through the banking system to intermediate countries, such as Pakistan and the United Arab Emirates, from where the money is transmitted to Afghanistan via value transfer schemes.
The threats posed by modern OCGs are increasingly diverse. Some activities of OCGs are obviously criminal but others less so, such as the use of criminal acts to achieve unfair advantage in other areas. Some EU Member States have reported cases of criminals bribing public officials to allow them to win tenders for public contracts that provide opportunities for money laundering.
Another example of corrupt practice is provided by the tender process for a contract to provide transportation services for patients travelling to and from hospitals in a region of Scotland. A total of seven tenders were submitted from two separate companies that were associated with OCGs engaged in drug supply by both reputation and criminal intelligence reports. The two companies colluded in the process to provide the appearance of open competition and, for some unknown reason, there were no other applications from any competitors. In the absence of any serious alternative bidders, the contract was awarded, despite the efforts of law enforcement to intervene and prevent public money flowing into the hands of one of the criminally associated firms.
Sources: CSD (2010) and Murray (2016).
The drug trade has both direct and indirect impacts on businesses, many of which are easy to overlook. For example, open or street drug markets can negatively affect local businesses by reducing the attractiveness of the area to customers and the general public and lowering property values. A more specific example is the large amounts of electricity required for indoor cannabis plantations, which may be illegally diverted from electricity suppliers, reducing revenues and tax payments, and potentially increasing costs to legitimate customers (Ofgem, 2013). The illicit drug market also absorbs resources from the legal economy. Money spent on illicit drugs is denied to governments in taxes and to producers of other consumer goods.
Examples of cash smuggling attempts detected at European airports
Photo © German Customs (right), via Europol
The large proportion of illegal proceeds from the drug trade that is not reinvested in illegal activities but channelled back into the legal economy can also have negative impact (Unger, 2007). For example, the market for products or services can be distorted when business and investment decisions are made not on a commercial basis but to reduce the risk of detection or facilitate drug-related activities, thus undercutting legitimate businesses operating in the same field and effectively pricing them out of the market. Moreover, those involved in the drug trade may bring their criminal tactics into the legal businesses area, for example by rigging tendering processes (see Case study 3), or by using violence to obtain competitive advantage or discourage competition. There can also be an increase in corruption, especially when OCGs seek to use legitimate business to facilitate their activities, for example to get access to containers for drug shipments, and this has a knock-on effect on legitimate business as well as undermining the credibility of legal institutions (UNODC, 2011a).
The application of controls on illicit drugs that also have pharmaceutical uses and on precursor chemicals also poses a financial burden on legitimate businesses as well as the state. The diversion and thefts of these substances is another source of financial loss while counterfeiting and the illegal production of substances that are then sold on the black market may lead to reputational damage for legal producers.
(2) US dollar amounts have been converted to euros using 2009 exchange rates.
(3) Although, strictly speaking, this is not gross profit as no expenses were de-ducted. It should be noted that the methodology used in these estimates was different from that used in our estimates of the retail market, e.g. including wholesale activities, and is therefore not directly comparable.
(4) For example, in a study of smuggling between the Netherlands and Colombia this proportion has been estimated to be between 10 and 17 % (Soudijn and Reuter, 2015).