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    •

    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'Oréal, 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.