Frank G. Madsen Queens’ College University of Cambridge International Monetary Flows of Non-Declared Origin



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Frank G. Madsen

Queens’ College

University of Cambridge


International Monetary Flows of Non-Declared Origin

This dissertation is submitted to the University of Cambridge

to Fulfil the Requirements for the Degree of Doctor of Philosophy

April 2008

Ambrogio Lorenzetti,
Effetti del Buon Governo


Siena, Palazzo Pubblico

Sala dei Nove

1337-1340
Declaration

This dissertation is the result of my own work and includes nothing,

which is the outcome of work done in collaboration.

Chapter 3, “Complexity, TOC and Terrorism”, was presented in an

embryonic form at the ISA conference in Chicago, USA, March 2007.

Chapter 4, “Organised Crime”, is the further elaboration of a chapter of the

same title published in 2007 in the Oxford Handbook on the United Nations

Statement of Length

The dissertation does not exceed the word limit of 80,000 words



Fieldwork

Thailand (money laundering); Indonesia and Burma (deforestation);

New York (US money supply);

Washington DC and Fort Worth, Texas (Organised Crime linked to terrorist funding);

Australia (Sydney, (APG) and Canberra (money laundering, South Pacific);

and Rome, Italy (Chinese organised crime).



Contact

Frank.Madsen@cantab.net

Abstract

Through an analysis of the presence and nature of international monetary flows of non-declared origin and their relation to deviant knowledge, the thesis determines that both terrorism and organised crime are nurtured by a constant trickle from minor sources rather than by large financial transfers; and that anti-money laundering provisions are misapplied, taken too far, too expensive, and incapable of demonstrating their effectiveness. In lieu of more traditional policy recommendations, the thesis develops a complexity-theory based intelligence function, capillary intelligence, to improve the present information-gathering systems and generate consistent and context-relevant intelligence for the consideration of policy-makers. The intelligence function takes into account also the concept of self-organised criticality. The thesis fully adheres to the principle that efficiently applied intelligence-led approaches for detection of organised crime are demonstrably superior to a “follow the money” approach.

An extended concept of deviant knowledge is developed and five methodological techniques employed: Complexity theory, network theory, self-organised criticality, scaling theory, and intelligence treatment. The thesis is multidisciplinary and calls on contributions from International Law, Economics, Criminal Justice Studies, and Governance and Ethics. Its approach is illustrative and fits Baudrillard’s 1981 methodological principles known as bricolage.

Using five methodologies and six major case studies, the thesis reaches four conclusions. First, the rapid expansion in the currency component of the US money supply (M1) has no domestic explanation and can best be explained by an increase in overseas illegal traffics of various sorts. Second, terrorism and major organised crime are, for a large part, nurtured by a constant trickle of funds originating from minor crime, such as, respectively, smuggling of tobacco product and retail fencing, and sale of counterfeit luxury goods. Third, calculation of the cost of the application of anti-money laundering shows these to be cost-inefficient, apart from being highly intrusive. The thesis’ calculations as well as prior literature makes it certain that such provisions, although inefficient, are enforced in a forceful exemplification of the deviant knowledge concept. Fourth, the thesis demonstrates the importance of organised crime in resource depletion and emphasises the nefarious consequences of such criminal behaviour, in particular as regards deforestation, since organised crime can apply the necessary pressure on the local population—in conjunction with extensive corruption of police or military personnel—and provide the managerial expertise to have the trees felled, transported internationally by ship and sold in another country often with false documentation as to the origins of the forest product.

In a final case study, the tragic concept of resource curse is considered, in casu the island of Bougainville, PNG.

Contents

Acknowledgements
Introduction

General Remarks

The Thesis Argument

Methodological Considerations

Taxonomical Considerations

A Main Case Study

A Road Map of the Thesis

The Centre



Chapter 1 Deviant Knowledge and Governance

1.0 Introduction

1.1 Foucault, Habermas

1.1.1. Michel Foucault

1.1.2. Jürgen Habermas

1.2 Governance

1.2.1. Transnational Economic Enterprises

1.3 Deviant Knowledge

1.3.1. Counter-Intuition

Chapter 2 Capital Movements, Globalisation, and Money Supply

2.0 Introduction

2.1 Globalisation and Crime

2.1.1 Foreign Direct Investment

2.1.2 International Trade

2.1.3 Gross Domestic Product, GDP

2.1.4 Population

2.2 Economics and Organised Crime

2.2.1 The Scope of the Problem

2.3 The Money Supply

2.3.1 Measuring Expatriate Currency

2.3.1 §1 The Shipments Proxy Method

2.3.1 §2 The Biometric Method

2.3.2 Evaluation of the Results

2.4 Errors and Omissions
Chapter 3 Complexity, TOC, and Terrorism

3.0 Introduction

3.1 Intelligence

3.2 Complexity: At the Edge of Chaos

3.3 Networks

3.4 The Sand Grain Complexity Representation

3.4.1 Notations & Rules

3.4.2 The Initial Situation

3.4.3 Initial Status Plus One Step: Reactions

3.4.4 The Global Event

3.4.5 Self-Organised Criticality

3.4.6 Practical Applications

3.4.7 Conclusions

Annexes to Chapter

1. Mustafa Setmariam Nasar

2. Nasar: Packets of Information


Chapter 4 Transnational Organised Crime

4.0 Introduction

4.1 History and Development of Concept of Organised Crime

4.2 Transnational and International Criminal Law

4.3 The 'Organised' in Organised Crime

4.3.1 The Management Talents of Organised Crime

4.4 Illicit Trafficking in Licit Product

4.4.1 Cigarettes Smuggling

4.4.2 Cigarette Smuggling and Organised Crime

4.4.3 Law Suits Against Multinational Tobacco Companies

4.4.4 Counterfeiting of Brand Cigarette Product

4.4.5 Cigarette Smuggling and Terrorism

4.4.6 WHO Framework Convention on Tobacco Control

4.4.7 Concluding Remarks

4.5 Organised Crime and Terrorism

4.6 Contemporary Debate and Future Trends


Chapter 5 Money Laundering

5.0 Introduction

5.1 Money Laundering: A Brief History

5.1.1. The United States

5.1.1 §1 Criminal Liability of the US Banking Community

5.1.1 §2 Correspondent Banks

5.1.2. The International Scene

5.1.2 §1 Thailand’s AMLO

5.1.2 §2 Thailand's AMLO and Illegal Logging

5.1.2 §3 The Asia/Pacific Group on Money Laundering

5.1.2 §4 HCBC Money Laundering in the United Arab Emirates

5.1.2 §5 The Russian Factor

5.2 Money Laundering and the South Pacific

5.2.1 Vanuatu

5.2.2 The Cook Islands

5.2.3 Western Samoa

5.2.4 Tonga

5.2.5 Niue

5.2.6 The Marshall Islands

5.2.7 Fiji Islands

5.2.8 Nauru

5.3 Money Laundering: Cost

5.3.1 Introduction

5.3.2 Cost of US Anti-Money Laundering Regime

5.4 Money Laundering: Effectiveness

5.5 Operation Green Quest

5.6 Money Laundering: Financing of Terrorism

5.6.1 Intellectual Property Crime

5.7 Summing Up

Annexes


1 Map of the South Pacific

2 US Inter-Agency Evaluation of Tax Havens and Money

Laundering

3 Money Laundering Regimes: Timeline


Chapter 6 Abuse of the Environment

6.0 Introduction

6.1 Illegal Logging: An Organised Criminal Activity?

6.1.1. Organised Crime

6.2 The Mechanism of the Trade

6.2.1. Transborder Trade

6.2.2. Corruption

6.3 Trafficking in Illicit Timber

6.4 Conflict Timber

6.4.1. Concept and Definition

6.5 Commodity Abuse and Conflict

6.5.1. Conflicts

6.5.1 §1 The Number, Length, and Character of

Commodity Abuse Conflicts

6.5.2. Commodity Abuse in Conflicts

6.5.3. Conflict for Commodity Abuse

6.5.3 §1 The Scope of the Problem

6.5.3 §2 Baluchistan

6.5.3 §3 Coltan

6.5.4. Conflict from Commodity Abuse

6.5.5. Resource Abuse and Security

6.6 Traffic in Arms and Illicit Logging


Chapter 7 Mineral Abuse: A Case Study in Bougainville

7.0 Introduction

7.1 Natural Resources

7.2 The Secession

7.3 Sarei v. Rio Tinto

Annexes


1. Timeline: Bougainville

2. Rio Tinto Corporate Structure

3. Sarei v. Rio Tinto: Iter

Chapter 8 Conclusions

APPENDICES
1 Abbreviations & Acronyms

2 FDI, Five-Year Totals. 12 European Countries

3 Five-Year Geometric Means of Growth in Trade

4 Trade as Percentage of GDP, 12 European Countries, 1950 - 2001

5 Trade as Percentage of GDP. 12 European Countries. 1950 – 2001

Acknowledgements

I would like to express my appreciation to my supervisor, Dr Kern Alexander of the University of Cambridge, for his patience with a student, who did not fit the common pattern, and to my second supervisor, Mr Daniel Fontanaud of the EU Commission, Brussels, Belgium (Direction Générale, Justice et Affaires Intérieures). To Professor Arthur Gibson for sharing his philosophical insights and for helping transforming what I thought was English into something closer to English. To Professor Imre Leader of Trinity College, Cambridge, for help and advice. To John T. Murray, formerly of the Australian Federal Police, for assistance, advice, hospitality at his home in Canberra, Australia, and for making me jettison any romantic ideas I might have harboured concerning the South Pacific. To Police Major General Krerkphong Pukprayura of the Royal Thai Police for guidance and, more importantly, for almost thirty years of friendship. My appreciation to Scott Ritter of the US Homeland Security Department and to Detective Scott Campbell of Fort Worth Police Department for a thorough initiation into the intricacies of organised retail and fencing crime. To Messrs. Jonathan I. Polk and Jeffrey B. Pruiksma of the Federal Reserve Bank of New York for their time and patience. To Denise Steward of Westlaw for teaching me the use of Westlaw's online services and for permitting me to use the Westlaw Online Law School facility. And finally to my wife, Bernadette Surya, for providing insights into Arabic and for putting up with me during my rather difficult life transition from corporate America to academia.

The "errors and omissions" (to paraphrase the IMF) in the following text are quite obviously not attributable in any form to these very helpful persons; furthermore, some of them would most certainly disagree with some of my conclusions, in particular those of chapters 2 (money supply) and 5 (money laundering).

Introduction

The Introduction to the thesis serves to present some general observations that form the intellectual framework for the work. These are followed by the thesis argument as well as related methodological and taxonomical considerations. After initial analysis of one of the most illustrative case studies, the Introduction ends by a road map to the work.


General Remarks

The title-page illustration of this thesis, Ambrogio Lorenzetti's Results of Good Governance, was chosen to emphasise, at the earliest possible opportunity, that subtending this thesis—notwithstanding a sometimes technical level of discussion and a consideration of the disquieting phenomenon of organised crime—are the identity and role of that most important societal virtue good governance. This virtue, however, is both the resultant and the cause of the exercise of other virtues; in other words, good governance is the expression, in political activity, of ethics and, concurrently, the cause of ethical virtues, in the case of the present thesis on international level.

Customary international law is the observance, in the interaction between states, of the ways in which a majority of states deal with each other. In the same way, Aristotle in the Nicomachean Ethics claims, in my view correctly, that ethics is the observance of the ways, in which a majority of citizens deal with each other in society, i.e. ethics is a resultant of politics (in the sense of the interaction of citizens) and at the same time its cause. It follows that normative ethics is, ipso facto, a contradiction in terms.

It is on this background that the thesis boldly and admittedly sceptically examines the costs of the latest criminal justice transient fashion, namely the attention given to money laundering, that it marvels at the continuance of supply interdiction efforts in the face of the continuous failure of such efforts, that it, counter-intuitively,1 investigates if the direction of monetary flows nourishing terrorism is East-West, as uniformly claimed by the authorities in the Occident, or rather West-East, and that it questions the "expatriate" use of currency, i.e. the use of currency outside of the issuing country. This introduces the main strand permeating the thesis, deviant knowledge,2 as a violation of the ethical concept outlined above. This thesis is collocated within the general area of global governance, which is the internationalisation of good governance as illustrated by Ambrogio Lorenzetti’s Results of Good Governance placed as title-page illustration. While it is clear that well-functioning international commercial and finance markets are indispensible for the well-being of the international system and thus for global governance, yet events over the last couple of decades have emphasised the nefarious nature of parts of the international financial markets, namely those parts one could term “international financial flows of non-declared origin”. This part of the international flows of monetary funds was therefore identified as a relevant subject area for inquiry.


The Thesis Argument

Based on the above considerations, the following thesis argument was therefore identified for consideration:


Through an analysis of the presence and nature of international monetary flows of non-declared origin and their relation to deviant knowledge
to determine that
both terrorism and organised crime are nurtured by a constant trickle from minor sources rather than by large financial transfers; and

anti-money laundering provisions are misapplied, taken too far, too expensive, and incapable of demonstrating their effectiveness.


In lieu of more traditional policy recommendations, the thesis develops a complexity-theory based intelligence function to improve the present information-gathering systems and generate consistent and context-relevant intelligence for the consideration of policy-makers. The thesis fully adheres to the principle that intelligence-led approaches for detection of organised crime are demonstrably superior to a “follow the money” approach.3
An extended concept of deviant knowledge has been developed to mean “embedded, insidious, inherent, demand-based conscious deviance in the application of knowledge”. It will be further discussed in chapter 1, Deviant Knowledge and Governance. Deviant knowledge refers, on a pragmatic level, to professionals (lawyers, accountants, etc.), who knowingly place their professional knowledge at the disposal of organised crime (or terrorists) in order to further or protect the criminal activities of these, and to government officials, including politicians, who insist on continuing a number of government programmes knowing that these are ineffective. Organised crime is thus anchored in deviant knowledge, which is embedded in and often pervades local culture.

In order to explore the thesis argument, above, five methodological techniques are employed: Complexity theory, network theory, self-organised criticality, scaling theory, and intelligence treatment. The thesis is multidisciplinary and calls on contributions from International Law (chapters 4-7), Economics (chapter 2), Criminal Justice Studies (chapter 4), and Governance and Ethics (chapter 1). Its approach is illustrative and fits with Baudrillard’s 1981 methodological principles known as bricolage.

The remaining part of the Introduction is structured as follows: After a further elaboration of some key terms, including a thorough presentation of the five methodological techniques, the last section of the Introduction presents the thesis, chapter by chapter.
Methodological Considerations

Apart from a theoretical consideration, above, of the subject matter, "International flows of monetary instruments of non-declared origin", I apply network, scaling, and complexity theory to the areas of organised crime and terrorism, which, to the best of my knowledge, never before has been attempted. Network theory helps us better perceive the structure and functioning of organised crime, while complexity theory, and in particular a concept of self-organising criticality, proposes a theoretical basis for a more efficient application of the so-called intelligence cycle. Scaling theory explicates the failure of not seeing the overall structure while looking at individual elements of the structure and, visa versa, of not appreciating the scale and importance of individual structural elements while examining the overall structure.

The title of this work, Internationa monetary flows of non-declared origin, is construed within the perspective of the following constraints. Many approaches to the subject-matter are both interesting and useful, spanning the spectrum from a political or an ethical to an economic appreciation of the phenomenon and its consequences on national, international, geo-strategic, and geo-financial levels; only some of these approaches will be considered in the following. For the present purposes, "funds" will be taken to mean monetary instruments whether in tangible or electronic form and "non-declared origin" will signify that the ownership and origin of the funds under consideration are deliberately being concealed, for whatever reason.

Complexity theory, which is also the subject of Section 3.2, will be treated at some length since it is of fundamental methodological importance to the thesis. The theory was developed from the 1970s as a main explicatory theory, first in the earth sciences, in particular biology, and later in economics; a thorough discussion of its theoretical underpinnings would, however, exceed the present work.4 For the present purposes the following characteristics of complexity theory are essential, though:
A system is considered complex if and only if it consists of a number of interacting elements and if the future result of the interaction of these elements cannot be predicted even from perfect knowledge of each element in the system.5
This view has linked complexity theory to the term perpetual novelty since the system throws up such novelties, one after another, although it also pauses in pseudo-stability, cf. below under self-organised criticality.

The concept—in a form further developed by Holland—reposes on the idea of clusters, i.e. a subset of elements making up an entity (a cluster) that is coherent and stable enough to serve as a building block for a further, larger cluster. This leads to the crucial and much discussed concept of emergence:


Building blocks at one level combining into new building blocks at a higher level. It seems to be one of the fundamental organizing principles of the world. It certainly seemed to appear in every complex adaptive system that you looked at.6
Examples of clusters are computer subroutines, government departments, and specialised cell tissue in an organism. The theory was first elaborated in biology, sc.
cells make tissues

tissues make organs

organs make organisms

organisms make ecosystems.7


The last step brought complexity theory from the biological to the social sciences sphere.

The term “complex” is often used, however, as a synonym for “large” or “opaque”. In this sense, for example, a database containing the social security numbers of the population of the United States is “complex”. On the definition used in complexity theory it is not, though, since the elements making up the system (the database) do not interact.

In the context of the present work, the theory is applied metaphorically to the subject matter.8 The theory quite obviously subtends the development of the capillary intelligence function in chapter 3, but not only. Complexity theory is essential, on this view, in understanding how very minor criminality, for example the possession of counterfeit cigarette tax stamps by Egyptians in New York (subsection 4.4.5), can provide clarity for one part of the funding mechanism for the 1993 World Trade Center bombing or how unsophisticated retail theft in Texas (section 5.5) may explain part of the surprising success of Hezbollah in the Lebanon. In fact, knowing everything knowable about these crimes would not have allowed one to draw relevant conclusions about the overall structure and scope of the activities.

These considerations lead to a further important concept in the thesis, sc. scaling theory. The Portuguese scholar de Sousa Santos notes that laws are maps and that maps distort by scale, projection, and symbolism. Scale distortion is of particular import: “Each scale reveals a phenomenon and distorts or hides others”.9 In this work, de Sousa Santos’ scaling theory is of import in two contexts. First, minor crime is regarded using a scale which does not allow a full appreciation. The “phenomenon” presented by the scale is the one corresponding to the scale—partly because society, in accordance with Foucault’s determination of the security apparatus (see “Foucault”, subsection 1.1.1), has decided that such crime to a large degree falls within the acceptable bandwidth, partly because prosecutorial officials skirt such criminality as being unsuited at providing notoriety. Second, de Sousa Santos applies his theory to local, national, and “world” law10 and thereby draws attention to the phenomenon of interlegality, i.e. not only are the three indicated layers of law all part of the legal conception of an individual, since they all act on the same social object, but also in the sense that discontinued legal systems, e.g. colonial law, continue to influence the legal conception: “Legal revocation is not social eradication”.11 Scaling theory in this, second, legal sense is crucial in the evaluation of events in Baluchistan (6.5.3.§2) and Bougainville (chapter 7).



Self-organised criticality is a notion developed by the physicist Per Bak.12 It denotes a situation in a rapidly developing system, where the system pauses in a pseudo-stable status, which can becomes highly unstable by a minor event. Self-organised criticality is exemplified in the board game in chapter 3. Applied to organised criminality, one might argue that every group or organisation is in a state of self-organised criticality: Any minor stimulus will render the group unstable. This stimulus can be external, e.g. the arrest or death of a member, or internal, e.g. a leadership challenge or a scission. The group will remain unstable until it, by itself, i.e. self-organised, finds a new equilibrium (criticality, i.e. pseudo-stability), which, however, is still critical. Self-organised criticality is linked to complexity theory on one side and to network theory on the other. Network theory has over the last decades grown and diversified. In the thesis are used the approach and terminology of Daniel Parrochia (Penser les réseaux, 2001), namely a coherent and ordered distribution in space of a plurality of relations. Criminal systems are examples of self-organised criticality because of tensions within the networks, between the networks, and between these and the socio-legal environment. The thesis also draws on the work done, in Physics, by Gustav Robert Kirchhoff in the 19th C. in particular the junction theorem (“current into a junction equals current out of the junction” i.e. flow conservation in each network vertex) and the loop equation (also known as his circuit rules: input minus work minus dispersal equals zero). I apply Kirchhoff to criminal networks, in particular narcotic drugs organisations, but only for illustrative purposes.

The last of the five methodologies to be discussed it that of intelligence, cf. section 3.1. At this point only a few general remarks will be proffered. Intelligence—and in particular intelligence-led policing—is increasingly being presented as a panacea for all law enforcement problems. Proper intelligence has to steer a delicate course between Scylla and Charybdis or between “following the leads” and “intelligence for the sake of intelligence”. In the former case, law enforcement wrongly believe that following specific information constitutes intelligence and in the latter that any large collection of information equals intelligence. With reference to the intelligence cycle, figure 3.1, in the former case, the cycle is never started, while in the second, the loop becomes infinite and never stops.

Also, one needs to emphasise that the establishment of intelligence organisation in the sphere of interior security is not without its dangers, since, apart from obvious concerns regarding the constitution and citizens’ privacy rights, history looms large, namely the danger that the databases be appropriated by an occupational force, cf. the Anschluss in Austria, whereby Interpol’s total systems, then in Vienna, were seized and misused by the Gestapo. See further discussion of intelligence matters in chapter 3.

Only the collection of information, which yields new information, is intelligence and only intelligence, which is either actionable or provides new insights for decision-makers, is proper intelligence. It is hardly necessary to adduce examples of the violation of these very simple rules, since the number of such violations is legion. Suffice it to point to the reported failure of the UK SOCA organisation, which was created among much media and institutional expectation (active from April 2006),13 a failure it shares with that of ARA (section 5.4), which it absorbed in April 2007.


Taxonomical Considerations

This thesis is resolutely multidisciplinary, since fully to appreciate the subject-matter this needs to be analysed from the vantage point of several academic fields, the most obvious of which are international law, international relations, and international economics.14 The research question considered in this study is the presence and role of international flows of monetary funds of non-declared origin in the financial system, examined on the background of and in relation to deviant knowledge. The thesis will draw on scaling theory (and related theories in chapter 3) to analyse the phenomenon of organised crime and similar phenomena as they relate to undeclared origin of financial flows. In doing so, it will argue that an at least tacit complicity exists between the actors in the—opaque—field and those, who are meant and claim they desire to interdict such flows.

The conceptual collocation of the subject-matter in the present context can best be illustrated by the use of a Venn diagram, Figure 1.0. This diagram is of importance because, in addition to providing a visual representation of the conceptual difficulties inherent in the subject-matter, it also functions to introduce the concept of aspect, which, while in some respects a subject of scaling theory, yet is very different. Scaling theory has as its object the larger and the smaller, while aspect is horizontal, being the angle, from which one decides to apprehend something. Obviously, one could have chosen other circles, e.g. municipal law instead of international law; but for the present purposes the international law circle has been retained, since major conceptual difficulties obtain in the interception between international criminal law and transnational crime. The concept of aspect, I now define as “the conceptual basis from which one decides to perceive a subject”. This concept circumscribes the two dimensions under which one perceives a given transnational criminal phenomenon, either by scaling theory (looking at the disparate, multiple, relatively minor criminal events or taking an overall view from a distance studying the flows involved); or by aspect, studying the phenomenon from its aspect of being organised criminality, of being transnational, or of being a violation of international law by custom or treaty.

The intersections of the three circles in this diagram depict four distinct areas of study as follows:


A. IL ∩ TC ∩ -OC. Crimes that are transnational and a violation of international law, yet not part of organised crime, e.g. a parental dispute over custody of a child, where one parent "snatches" the child in one country and transfers it to another.

B. IL ∩ OC ∩ -TC. Crimes that are organised and a violation of international law, but which do not cross borders, e.g. slave trade within a country; organised crime's involvement in modern slavery (ius cogens, but not transnational). See also Sarei v. Rio Tinto (United States Court of Appeals, Ninth Circuit, 7 August 2006, cf. chapter 7 of present work)

C. IL ∩ TC ∩ OC. Crimes that are transnational, organised, and a violation of international law, e.g. international drug trafficking by organised crime.

D. TC ∩ OC ∩ -IL. Crimes that are organised and transnational, but not violations of international law. E.g. the smuggling of genuine, but non-taxed tobacco products from one country to another.

(In the occasional use of set theory, -A signifies "non-A" and U refers to the universal domain).


In the parts of the following dealing with crime, intersections C and D will be at the centre of interest, although also intersection B will be touched upon, sc. in chapter 7 dealing with the island of Bougainville, Papua New Guinea.

The core significance of the thesis has become of generalised and specialist interest, since the terrorist attacks on the United States of America on 11 September, 2001, led to a heightened awareness of the complex linkages between corruption, organised crime, and terrorism, and the interrelationship between these and money laundering; as a result, the literature, scholarly and less scholarly, is by now immense and growing.



Figure 1.0. The intercepts between Organised Crime, Transnational Crime, and International Law15

Legend:

TC: Transnational Crime

OC: Organised Crime

IL: International Criminal Law


A Main Case Study

The thesis, in a very general way, uses an illustrative approach and introduces six case studies16 that will be further considered, below. At this stage the most central of these will be introduced.

The Ghali Organisation, cf. section 5.5, was investigated in Texas, United States. The organisation engaged in organised retail fencing, parts of the profits of which were transferred to the Middle East. The organisation was furthermore known to be connected to identified members of international terrorist organisations. This case study is of particular import to the thesis argument, because it illustrates a number of the key arguments. First, the individual crimes were too small in value terms to warrant federal prosecution, which, had it taken place, might have identified major characteristics of the workings of the organisation, namely, synchronically:


  • the extent of the crime throughout the United States;

  • the total annual criminal income from this crime, alone;

  • the identities of the ultimate receivers of large parts of the income;

  • the remarkable fact that so much income was generated through many, relatively small crimes. The image is that of many trickles from many taps: Not only will the flow continue if a couple of taps are closed down, but the taps can easily be reopened. It is to be emphasised that section 4.3 illustrates the same point but in a case without any political undertones, sc. that of Chinese organised crime in Italy;

and diachronically,

  • the crime and the corresponding income flow has been ongoing for some twenty years;

  • a more thorough consideration of the historical development and function of the organisation might have led to more proper sentencing based on the criminal facts, rather than—as was the case—on inappropriate money laundering provisions.17

The extent, scope, and functioning of the Ghali Organisation and similar organisations throughout the United States could have been disclosed quite early in their development by the national application of capillary intelligence procedures as outlined in chapter 3. This case study is therefore a pertinent example of (i) the importance of scaling theory in the study of organised crime and, (ii) an illustration of how the application of appropriately tuned intelligence procedures not only can play a pivotal role in discovering transnational organised crime with wide-ranging—and not initially perceptible—consequences, but might very well be the only relevant approach. Furthermore, since in the case at hand the relationship between minor street crime (retail theft and retail fencing) and financial support of international terrorism was not immediately deducible from the facts, only a complexity based intelligence treatment would have been efficient, cf. chapter 3.

Therefore, to sum up, this case study assists in illustrating several of the themes of the thesis, sc. the use of minor crime to nurture terrorism and organised crime; the inappropriate use of AML;18 the lack of the use of capillary intelligence procedures; and the importance of scaling theory. The case study, at least in part, substantiates several of the conclusions of the thesis, sc. (i) both terrorism and organised crime are to a large degree funded by accrued income from many, relatively minor crimes; and (ii) AML provisions and their implementation are inefficient in disclosing the crime—furthermore such provisions are often improperly applied, once the crime has been disclosed and investigated.
A Road Map of the Thesis

The thesis argument indicates deviant knowledge as a core concept of the thesis, since international monetary flows of non-declared origin are analysed as is their relation to deviant knowledge. Chapter 1 of the work examines deviant knowledge and governance. The juxtaposition of these concepts is not fortuitous; in fact, one important strand of deviant knowledge concerns the knowingly inefficient application of knowledge by governmental officials or politicians.

Chapter 2 points to the research of Loretta Napoleoni19 as a suitable starting point, being the work of an international economist. In a paper written for the Center for Contemporary Conflict at the Naval Postgraduate School in Monterey, California, USA,20 Napoleoni claims that the subject matter of this thesis, namely International flows of monetary instruments of non-declared origin, consists of three 'species,' sc. funds from capital flight, funds from criminality and funds linked to terrorism. It is notoriously difficult to evaluate the magnitude of the funds involved; nevertheless, Napoleoni proposes that each species consists of $500 x 10E9 per year and, thus, in total $1.5 x 10E12 p.a.21 The thesis will attempt to evaluate these claims, but it must be emphasised that since one is dealing in "dark numbers”, i.e. numbers that are thus obscure, not only because one does not know them, but because it is in the interest of the agents in the field that they remain unknown, one does encounter a series of difficulties of appreciation. In the shadow economy, it is a main purpose of economic actors to conceal not only their assets, but also their acts. Therefore, it is not possible to obtain information directly, but only by resorting to indirect methods. Furthermore, as will be pointed out below, observers, both scholars and practitioners, have been bandying around various estimates, which, euphemistically, would not be considered “robust” by economists. Although Napoleoni's work should be treated with care as it is speculative, one valuable question, however, she and a number of other scholars bring up is simply this: If these flows are interdependent with legitimate Western economies, is it possible or, indeed, advisable, to attempt to sever such links? One possible indicator might be the influence that the so-called Patriot Act22 may have had on the markets, and in particular in the currency markets.Error: Reference source not found The theory here, propounded inter alia by Loretta Napoleoni,23 is that the restrictions imposed by the USA Patriot Act have induced many, in particular illicit, actors in Asia and Africa to exchange the US dollar for the Euro as a means of wealth storage and as a means of trade settlement with a fall in the value of the dollar as a result.

Chapter 3 contains an attempt to apply complexity theory, flow theory, and self-organised criticality to the intelligence function and, through this, proposes a concept of functionality for application of the intelligence function to the investigation of and research into organised crime and terrorism.

Several scholars, in particular in Sociology, have argued that academic preoccupation with organised crime data, which are at best uncertain and always by their very nature fragmentary, is neither helpful nor warranted.24 Nevertheless, chapter 4 has organised crime as its subject in recognition of the fact that the influence of crime in a very large sense on the socio-economic texture of our societies is now of a scale that indicates it should no longer be ignored. This influence of crime, it should be noted, stretches from the possible exposure of children to the temptations of narcotic drugs—also in schools and leisure centres—to the sphere of geo-economics. Manuel Castells, in his recent, widely appreciated work on the information age,25 is a proponent of just such an approach, as he claims that since the phenomenon of global crime and of its impact on economies and societies are acknowledged and, although the phenomenon "is excluded from the social sciences because the underlying data are perceived to be based on sensationalism”, the phenomenon is a fundamental dimension of contemporary societies and must be based on available evidence such as it is.Error: Reference source not found This is the philosophy that underlies the following; on the one hand it is acknowledged that one works with incomplete data, on the other that the subject matter under discussion is of such socio-cultural import that one will have to proceed, even in near-darkness. After a more conventional consideration of organised crime paradigmata, chapter 4 concentrates on trafficking and management talent in acknowledgement of the fact that most if not all organised crime is profit oriented.

Much work has been done lately on the subject of money laundering; so to avoid duplication of effort, chapter 5, Money laundering, concentrates on two subjects. First is presented an overall view, i.e. the analysis of the process from the more simple predicate crimes to the more complicated, connected money laundering. This first part of chapter 5, analyses the so-called Operation Green Quest, i.e. organised retail and fencing crime. The relevant structural, spatio-temporal, and methodological characteristics of the criminal organisation in question, the so-called Ghali Organization, represent a unique opportunity for studying a criminal enterprise from its first, rather common, origin, viz. organised retail theft, through to its possible and, indeed, probable end, namely the financing of terrorism. Secondly, the question is raised, if the cost of AML, anti-money laundering, corresponds to the results obtained. The second part of the chapter examines two separate but at the same time, connected issues, sc. the cost-benefit ratio of anti-money laundering efforts and the very severe limitations on individual privacy rights, which is part of the overall cost that society pays for such efforts.

The origin of this thesis was a personal interest26 in "the money behind deforestation”, since one realised that behind that part of the illicit deforestation, which is commercial, there would appear to be very qualified managerial efforts. Although this personal interest remains vivid, relatively early on it became clear that it would perhaps not be very helpful or, indeed, useful, to examine only the financial aspects of deforestation, without seeing the latter in a larger context, first of all of climate change and, second, of conflict; these issues are the subjects of chapter 6.

The illicit traffic in timber is fully within ambit of organised crime, since only an organised, criminal effort can apply the necessary pressure on the local population—in conjunction with extensive corruption of police or military personnel—and provide the managerial expertise to have the trees felled, transported internationally by ship and sold in another country often with false documentation as to the origins of the forest product.



Climate change is linked to deforestation because deforested areas will further reinforce the malicious effects of climate change inter alia in the intensity and frequency of tempests, and by creating extensive soil erosion, which will lead to sand storms, land slides, etc. A more central concern—because it is clearly linked to the flows of finance—in the area of abuse of the environment in general and of deforestation in particular is resource-related conflict. Natural resource extraction in general and deforestation in particular have clear financial motives and the funds, thus generated, place natural resources centrally in relation to conflicts, internal and external, first as cause of internal conflict, i.e. conflict to determine control over the resources; secondly, as a lubricant for internal conflict, since funds generated by exercising control over natural resources or by rent-seeking from those, who do control such resources, are used to purchase arms and ammunition; and, finally, as a cause of international conflict, where serious environmental damage in one country leads to tension with a neighbouring country, e.g. deterioration of water quality or quantity in shared river systems caused by environmental abuse in one of the riparian states.

The final chapter in the thesis, chapter 7, is a case study, Mineral Abuse: A Case Study in Bougainville, which attempts to show the full depth of the so-called resource curse. The island of Bougainville, PNG, was selected, because it presents a number of specific issues that are relevant as background to chapter 6, in particular of the so-called resource curse. The focus of my analysis in this chapter remains the question of how a natural resource, in casu copper, which should have represented a clear comparative economic advantage for the small island province, developed into a curse, whilst causing the death of a large proportion of the population. The Bougainville chapter, in its role as case study, should be read in conjunction with chapter 6, since it presents an exemplum of how the possession of natural resources, in this case a rich subsoil, may effect devastating results on the population, either through warfare or, as here, because of ruthless exploitation ending in civil war.


The Centre

The French literary critic Maurice Blanchot (1955) postulates that every literary work must have a centre, which, however, does not need to be in the centre of the work. The centre of this thesis is figure 2.8.

Wēi jī


Chapter 1. Deviant Knowledge and Governance

1.0. Introduction

The Introduction presented the thesis, its argument, and some methodological and taxonomical considerations. This chapter serves to introduce some general remarks that form the intellectual framework for the work. After a brief presentation of the main theses of two seminal philosophers in the area, Foucault and Habermas, the chapter considers governance and deviant knowledge, which are two main concepts in the thesis.




    1. Foucault, Habermas

Two philosophers have been seminal in the conceptualisation of the issues under consideration in this thesis and, in particular, in the development of what, somewhat briefly, could be called the society – normativity27 – law nexus, Michel Foucault and Jürgen Habermas. The rest of this section will consider the contributions of the two thinkers that are of central relevance to the philosophical background of the thesis.
1.1.1. Michel Foucault

Foucault’s contribution to the development of conceptualisation within the subject area of this thesis is immense, but more precisely so the first three of his 1977-1978 lectures at the Collège de France in Paris.28

In a more general way, Foucault is preoccupied by the knowledge-power dyad, which he so forcefully introduced on the international academic scene in the late 1970s. Foucault examines how law, discipline, and security deal with space, the event, and normalisation. However, in the years preceding these lectures, he had developed the concept of bio-power, the set of mechanisms through which the basic biological features of the human species became the object of a political strategy, of a general strategy of power, or how from the beginning of the 18th C. modern Western societies took on board the fundamental biological fact that human beings are a species. The latter attitude is most evident in the consideration of the size of a population as being an allegedly linear expression of power (the larger the population, the more powerful the state). This attitude was supported by the mercantilists and resulted in important advances in medicine and public hygiene to reduce infant mortality, since it became a priority to keep individuals, be they undistinguished and indistinguishable elements of a mass, alive.29

Foucault now postulates that the penal order has traversed three stages. First, the legal or judicial system, an archaic form, which obtained in Europe from the Middle Ages until the 17th and 18th C. It consists in laying down a law, a punishment for breaking it, a coupling between the prohibited action, and the type of punishment, and a binary division between the permitted and the prohibited. Second, the disciplinary system:30 The culprit appears within the binary relationship between prohibited and permitted acts, but alongside a series of adjacent, detective, medical, and psychological techniques, which fall within the domain of surveillance. Even at the pre-lawbreaking stage, the criminal act is under surveillance (supervision, inspections, and controls). Finally, the security apparatus, in which the phenomenon (the crime) is set within a series of probable events, the reaction to the phenomenon is inserted in a calculation of cost, and, most importantly, instead of a binary relationship between the prohibited and the permitted, an average, considered optimal, is established on one hand, and, on the other, a bandwidth of the acceptable.

The security apparatus looks to the nature of things and relationships, and it sees its subject matter as what is rather than a transcendental value of what should be or what should have been. It is the latter that has proven fruitful in the interrelationship with International Relations Studies, including the emphasis on the relation between the cost of repression and the cost of delinquency, which, in particular on international level, is of extreme importance. Furthermore, while the disciplinary policy is centripetal, isolationist and protectionist, the apparatuses of security are centrifugal—they have a tendency to expand, new elements are constantly being added: Production, psychology, behaviour, the ways of doing things of producers, buyers, consumers, importers, and exporters, and the world market. Security therefore involves organising, or at the least allowing the development of ever-widening circuits. Discipline regulates everything, while security “lets things happen”, has an element of laissez-faire, which is indispensable to its functioning; in the crime area by establishing an average within a bandwidth.31 While law prohibits and discipline prescribes, security, without prohibiting or prescribing, but when necessary making use of prohibition and prescription as instruments, is a response to a reality in such a way that this response cancels out the reality to which it responds, by nullifying, limiting, checking, or regulating it.

In an interesting dialogue with and opposition to Hans Kelsen’s work, Foucault notes that, considering that “Every system of law is related to a system of norms”,32 one observes an important difference, sc. that in the disciplinary regime, the norm is established first and the normal in training (discipline) with relation to the norm. What could be brought into the norm, by training, was “normal”, what not, “abnormal”. In the security regime, on the other hand, the norm is established on the basis of the normal. In other words, the security regime considers reality and establishes several normal distributions—the norm is interplay between differential normalities. Thus, the normal comes first and the norm is deduced from it.


1.1.2. Jürgen Habermas

The German philosopher Jürgen Habermas has—alongside Emile Durkheim and Michel Foucault, but also Anthony Giddens—been extremely influential in forging the conceptual appreciations of the society—normativity—law nexus. The following is meant to provide a brief summary of his philosophy in this regard, while remaining acutely conscious that it can at best be a brief summary and that the nexus considered constitutes but a very minor—and late—aspect of his authorship.

Habermas has treated democracy and democratic theory from several aspects and, in considering the development of his thinking concerning normativity and law, it is imperative to emphasise that his central concern is “to provide a normative account of legitimate law”.33 Habermas’ path to the provision of such legitimacy of the law followed, initially at least, clearly counter-factual idealisations. It reposes on two key Habermasian concepts, namely, first, the discourse principle, which postulates that “A rule of action or of choice is justified, and thus valid, only if those affected by the rule or choice could accept it as reasonable discourse”. By applying the principle to the subject of moral discourse and legal-political discourse, he arrives at the second concept, namely the dialectic principle of universalisation, namely: “A [moral norm] is valid just in case the foreseeable consequences and side-effects of its general observance for the interests and value-orientations of each individual could be jointly accepted by all concerned without coercion” (in a sufficiently reasonable discourse).34 It should be emphasised that this requires not only that one seeks the input of others in forming one’s conscience, but that one gains their reasonable agreement. Since individuation, however, depends on socialisation, any system of morality must thus protect the integrity both of the individual and of the web of relationships and cultural forms, within which the individual operates.35

This, again, means that each individual must condition his or her judgment about the moral import of his or her values and interests on what all participants can freely accept. The pluralistic and pluri-cultural character of modern, Western society makes the prospect of legitimacy on these terms extremely unlikely. Habermas therefore claims that


the democratic principle should refer not to consensus, but rather to something like a warranted presumption of reasonableness … citizens may regard their laws as legitimate insofar as the democratic process, as it is institutionally organized and conducted, warrants the presumption that outcomes are reasonable products of a sufficiently inclusive process of opinion- and will formation.36

1.2. Governance

Times of systemic change in international governance arrangements are generally regarded as the most dangerous. In this context, one may wish to recall the fact that the Chinese written symbol for crisis consists of the two characters, which are placed as a sort of incipit to this chapter. Each character, however, singly constitutes a word and when used alone, the first means “danger”, the second “opportunity”.37

The apparently inexorable imposition of the globalisation phenomenon and the collapse of the Soviet Union, paired perhaps with the fear of existing and potential pandemics, have created a quasi-certainty that the world and its systemic governance structure are living through a major crisis, which, so it has been claimed, the existing world governance arrangements will not survive. If, indeed, the world is living through a governance crisis, then the question must be asked—to return to the notion of wisdom embedded in the Chinese symbol for crisis—if observers have unduly emphasised one aspect over the other, and in particular have concentrated on the undeniable danger inherent in change rather than on the, equally undeniable, opportunity offered by change. Be that as it may, the present thesis examines one of the arguments advanced in support of the view that globalisation represents a danger, viz. that the increase in trade, the astonishing advancements in information and communication technology, and the deregulation of the financial markets, have created the ideal conditions not only for an intensification of international trade, for more liquid, and therefore more efficient financial markets, and, perhaps, for better and deeper inter-cultural understanding, but also for economic actors, who wish to profit from these conditions of alleged openness to further their own nefarious purposes.

With the emphasis being on economic actors38 and on their nefarious acts, it seemed intuitively appealing to concentrate on the core preoccupations of such actors in a globalised world, sc. international flows of monetary funds. The “nefarious” acts and purposes of such actors suggested in and by themselves that such funds, by necessity, would be of non-declared origin. Although Combating the Financing of Terrorism (CFT) 39 programmes had been in existence prior to 11 September 2001, the terrorist attacks in New York and Arlington, United States, 40 led to the intensification of their application. This development showed that the presupposition that international flows of monetary funds for use in terrorism by necessity must be of non-declared origin, does not hold because some funds, used to further terrorist activity, have been proven to originate from perfectly legitimate—“declared”—sources. Notwithstanding this theoretical difficulty, which also sits ill with so-called money laundering studies41—on a theoretical as well as on a practical level—the term “non-declared origin” has been retained although a minority of terrorist funding does not conform to it since it is not the origin but the purpose, which is “non-declared”.


1.2.1. Transnational Economic Enterprises

In the present context, the astonishing growth and influence of so-called transnational enterprises (TNEs) is of core import on two levels. First, their diffusion across the planet, cosmopolitan ideology, and local and global socio-political influence have had immense influence on the way we look at ourselves and the world.42 Second, the development of TNEs, as an important part and to a certain degree one of the originating forces of globalisation, therefore plays an important model role in organised crime’s mimetic relationship to the surrounding world (Findlay, 1999, 2008; Auerbach 1953).

The Economic and Social Council of the United Nations proposed a definition of the term "transnational corporations" for the Code of Conduct for Transnational Corporations.43 The approach agreed upon was to specify the main characteristics of a transnational corporation, by defining it as an enterprise that (a) comprises entities in two or more countries, regardless of the legal form and fields of activity of those entities; (b) operates under a system of decision-making, permitting coherent policies and a common strategy through one or more decision-making centres; and (c) in which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of others and, in particular, to share knowledge, resources and responsibilities with the others. Panić44 points to the transnational enterprises, TNEs, as having played and, indeed, as playing a major role in the globalisation of the world economy: “The growth of transnationals in virtually every sector of modern economies, especially since the 1970s, has added a completely new dimension to global specialization and exchange”.45

Globalisation is considered in chapter 2, viz. if, indeed, globalisation exists in the sense of the liberalisation of financial markets and of the markets in goods and service, the effects of which have been made so much more intensive by the qualitatively and quantitatively remarkable developments in communication and data storage technology. But not only in the sphere of economics has globalisation had a transformative influence. An obvious example is the international distribution of phonographic and cinematographic products, which, on the one hand, is the response to globalised taste, while, on the other, also serves to create globalised taste.

The propagation of, in particular US, transnational enterprises across the planet has, however, had another, less known but rather important effect, which in shorthand is referred to as Faci, i.e. forensic accounting and corporate investigations. In order to appreciate and correctly report their financial status, transnational enterprises had to streamline the record-keeping of their domestic as well as non-domestic branches by imposing uniform accounting regulations throughout each individual transnational enterprise and by establishing world-wide auditing functions consisting of teams, who inspect and audit each branch office in an unending cycle according to the centrally determined accounting and auditing guidelines. In this way, commonly accepted and, indeed, commonly understandable, transparent accounting and auditing rules were slowly established around the world. Likewise, the use, based on the ultimate, central corporate authority, of corporate investigations imposed, step by step, US concepts of corporate governance around the world, e.g. in matters as disparate as the prevention of corruption of foreign officials and of sexual harassment.

This implementation was, as is only understandable, unequal both between countries and inside countries. Some countries more readily accepted principles of US corporate governance. For instance, by the establishment of so-called joint ventures (JVs) in the People’s Republic of China, the Chinese partner insisted from the beginning of such JVs on training by the US partner not only in technology but also in corporate governance.46 Similar partners in the Middle East did not make the same requests. But also within countries differences in adaptation of such governance systems are unequal: Service organisations and industries that are exposed to international markets and, indeed, to international corporate or trading partners, are much more prone to accept at least parts of US governance that entities that are not thus exposed.

The influence of transnational enterprises has also been experienced, over the last thirty years or so, on the level of national and international legislation, but not, however, as a simple, linear development, but rather in a kind of "zigzag" manner, in that transnational enterprises move to exploit opportunities created by deregulation and liberalisation and then, once invested, demand further deregulation and liberalisation.

Although world or, indeed, corporate governance on the one hand is not the primary subject matter of this thesis and, on the other, is too vast to be dealt with in any meaningful way in a shortened form, yet subsections of governance are of import in the context of an evaluation of the flows in and through financial systems of monetary funds of non-declared origin. There are two major issues that render the subject matter non-transparent and, as a consequence, call for its study to be based on indirect methods, i.e. methods that acknowledge a lack of directly observable data and that therefore are based partly on such quantitative and qualitative data as are, indeed, extant, but partly, and more importantly, on the study of the effects of the unobserved parts of the dataset. First, funds of non-declared origin are of non-declared origin because it is in the owners' interest that they should be so. Existing and proposed legislation could, at least in theory, alleviate this problem by establishing various forms of financial regulation. Secondly, however, the financial transactions of this nature, i.e. of funds of non-declared origin transiting the international financial system, constitute an immensely small part of daily financial transactions that are not only perfectly legitimate, but are also vital for the well-functioning of the international capitalist system, to which no alternative is immediately apparent. As it has been expressed in a well-formed quip, looking for illicit transactions in the international financial system is not at all like looking for a needle in a haystack, it is like looking for a needle in a needle stack.

The question could reasonably be asked why, in the first place, one would want to use time and limited resources on tracing such financial transactions? After all, whatever the origin of such funds, the crime or illegal or illicit action,47 which generated the funds, is prior in time to their being present in the international financial system, and it would make more sense to inquire into the fund-generating circumstances, be they illicit traffics of various kinds, criminal acts, tax evasion, or the exploitation by the ruler of the riches of his or her country.

Secondly, one might inquire if the efforts and costs put into so-called AML, i.e. anti-money laundering measures, are in any way commensurate not with the hoped-for results, but with the results actually obtained. When one compares the rather meagre results of a multi-billion dollar anti-money laundering programme in the United States with the vastly inferior financial and other efforts put into controlling the incoming sea-borne container traffic, which one would have thought much more dangerous from a societal point of view,48 it does become legitimate to ask if the funds disbursed for anti-money laundering measures are the most efficient allocation of homeland security funding and of investigative efforts. This leaves one with two core questions that, unfortunately, transcend the scope of the present work, sc. who interprets and represents a (global) public good and how is it represented to the public. It remains clear, however, that global public goods are not normally generated and delivered by the major players on today's globalised international scene, i.e. the transnational enterprises, but by public institutions such as governments, or regional or international organisations. One scholar in the field, M. Panić, claims that TNEs will not invest in public goods or, indeed, in global public goods, and uses law enforcement as an example of such a public good, which TNEs will not provide. Panić's example, however, rather serves to illustrate the complexities of globalisation since, on the one hand, one does intuitively share his opinion that law enforcement is a public good exclusively and intimately linked with concepts such as sovereignty and jurisdiction, while, on the other, TNEs have created private security, i.e. private police forces, in circumstances, where often the public services should have provided the service. TNEs also act as subcontractors to law enforcement in a large sense, e.g. in the prison system on national level and in operative as well as educative security on international level.49 In fact, there are today in the world more private than public police personnel.50

Thirdly, it could be argued that the influx of capital into the legitimate economy is positive whatever the origin of the funds, since they make the markets more liquid and therefore more competitive, and, as the emperor Vespasianus taught us, pecunia non olet.51


1.3. Deviant Knowledge

When governments—on national and international levels—insist on continuing or52 presupposing the efficacy of for example drug supply interdiction efforts, well knowing that use of assumptions about induction should inform them that such efforts will have no effect, these governmental decisions constitute uses of deviant knowledge. Deviant use of knowledge in this context can take at least two forms, either, as above, in the knowingly inefficient application of effort, or in ways in which legitimate uses of knowledge can be harnessed for criminal purposes through lawful economic activity. A relevantly typical example here is the use of highly skilled legal and accountancy advisers by criminals in particular in the money laundering phase. Wilful blindness can be classified a subset of deviant knowledge since if one decides not to avail oneself of a body of knowledge, which is implicit in the term "wilful”, then one must be aware of the existence of such knowledge and one must realise that by investigating one would gain access to it.Error: Reference source not found Willingly closing one's eyes to knowledge available and relevant to one's decision process is thus factually deviant application of knowledge.

The concept of deviant knowledge is formed from deviance studies. It should be distinguished from, indeed, it has hard boundaries towards medical deviance and deviant logic. In the aria of medical (psychiatric) deviance, the patient deviates from a norm, but does so under the impulsion of socio-psychological or hereditary stimuli and, although he or she may realise the impulsive non-normative nature of the act, can be said not to be able not to engage in it. This does not obtain for deviant knowledge. Likewise, deviant logic as developed by Susan Haack (Haack 1974), inter alia interrogates two-valued propositional and predicate calculi. My use of deviant knowledge does not encompass the questioning of so-called classical or Russellian logic. Instead, deviant knowledge refers to the deviant use of knowledge, typically by two sets of actions, (i) those of the liberal professions, who knowingly sell their knowledge set to organised crime or terrorist organisations; and (ii) those government officials, who sell their knowledge set to create an illusion of rule of law by implementing criminal justice programmes, for example supply-side narcotics enforcement and anti-money laundering, well-knowing that these are inefficient, intrusive, and expensive. For application of deviant knowledge in evaluating the criminal responsibility of US banking institutions, cf. 5.1.1.§1.

1.3.1. Counter-Intuition

“Counter-intuitive” is a much used or overused tag, which might not have been the subject of published research work before Arthur Gibson (2003). Although counter-intuition is applied also in mathematics, for example about Gödel’s proofs of the non-provability of the foundations of arithmetic (Gibson 2003, 16), the concept is perhaps best known from literary criticism. The birth of new literature is creative counter-intuition and its identity is not composed of that which it violates (Gibson 2007, 101). It is in analogy to the latter that I use the concept. The expectations of most observers, academic as well as lay, are that terrorism has been perpetrated and is being prepared for execution in the West and adequate funding therefore transferred to the West. To elaborate and test the inverse hypothesis is, therefore, counter-intuitive. Likewise, the US authorities have consistently claimed that the well-recognised presence of US dollar notes outside the issuing jurisdiction and the ensuing seigniorage accruing to the US Treasury are linked to the use of the US currency as a store of value and a means of exchange. To posit and test the hypothesis that the US dollar notes are, indeed, used as a means of exchange, but mostly in illegal commercial transactions, again constitutes counter-intuition. These are, in fact, the subjects of the following chapter.



Chapter 2



Funds seized at drug raid in Mexico, 11 August 2007

Capital Movements, Globalisation, and Money Supply
2.0. Introduction

This chapter examines the flows of monetary funds in the world abetted by a discussion of globalisation and it provides the basis for the more specialised treatment in chapters four to six. It therefore rolls out three main issues of import for the discussion, sc. globalisation and crime, the economics of organised crime, and, most importantly, the use of the expatriate dollar.

Giddens’ warning is noted in the chapter, namely that one should be careful not to perceive globalisation only in its economic aspects; nevertheless, because of the specificity of the thesis, this has to concentrate on economic globalisation. Spurred on by Naylor’s doubts that globalisation exists at all, in this chapter, the trade figures (imports and exports) for 12 European countries, chosen at random, are considered. In particular chart 2.3, trade (imports plus exports) as a percentage of GDP for the twelve countries, is persuasive in demonstrating a sharp increase in this ratio from 1954 to 2001.53

In a second part of the chapter it is noted, emphatically, that “the economics of crime and crime control are now squarely within global political discourse”—in this following the Australian criminologist Mark Findlay. Napoleoni’s work is considered and her challenge of a possible interrelationship between transnational organised crime and the money supply is taken up.

Maurice Blanchot, in L’Espace littéraire, from 1955, observes that every text needs a centre, but that the centre does not have to be in the physical centre of the text. In this thesis, one might argue that Chart 2.8 constitutes its centre. The chart shows decisively that the ratio between the currency component of M1 (physical money, cf. Appendix 1) and M2 (i.e. M1 plus all time-related deposits, cf. Appendix 1) behaves just as one would expect from 1950 to 1985, that is that it diminishes as cash is used less and less in the American economy being replaced by credit cards, direct debit, repayment of increased mortgage obligations, etc. From 1986, however, the ratio, inexplicably, increases. The most important of the results of the research is that the increase in US money supply cannot be explained by domestic use, at all, but only by an export of US dollar notes and that—contrary to the affirmations of the US Federal Reserve—such notes to a large degree are explainable by their use to settle illicit traffics.

The chapter serves to illustrate, in particular, the use of the expatriate dollar for the settlement of illicit traffics of various kinds on the background of deviant knowledge. A cross reference between this chapter and subsections 6.2.1 and 6.2.2 will show where some of the expatriate notes are brought into use, sc. in the corruption payments of $200,000 per shipment of merbau (a Malay-Indonesian hardwood used in particular for flooring).

The economist referred to in chapter 1, Loretta Napoleoni,Error: Reference source not found claims that one of the most far-reaching and damaging effects of the deregulation of markets, in particular the financial markets, has been, first, the creation of the new economy of terror, i.e. that part of the international economic system run primarily by armed organisations to self-finance the armed struggle and, secondly, "the merging of the new economics of terror with the international illegal and criminal economy”. If we term the total amount of funds in the international flows of non-declared origin MS, MCF the part of MS, which originates from capital flight, MCR the part of criminal origin, and MTE the part, which is connected with the so-called new economy of terror, Error: Reference source not found then a first, central dynamic of the flows under consideration can be depicted as:
MS = MCF + MCR + MTE
It is clear that one needs, initially, to raise a question of logic regarding Napoleoni's taxonomy, as she claims, based on her own, non-published calculations, that one third of the funds in the new economy of terror (MTE) is of legal and two thirds of illegal origin. It is not evident why the latter two thirds should be included in a separate category, rather than be counted within MCR, funds of criminal origin, if one is to consider the origin of the funds, rather than their potential use.

In order to determine if globalisation has led also to globalisation of crime,54 two questions impose themselves: (i) what is meant by globalisation and (ii) does globalisation exist and, if so, in what does it consist. According to the OECD, economic globalisation can be measured in four ways: (i) international trade as a percentage of GDP, (ii) FDI (foreign direct investment), (iii) activity of MNEs,55 and (iv) production and international distribution of technology.56

Panić57 notes with regard to globalisation that: "There is little agreement about the meaning of the term, even less agreement about the processes that bring globalization about, and no agreement at all about its effects”. Nevertheless, most scholars agree that the term is in some way linked to the economy. For example Clark,58 who in 1997 reviewed the then available literature, concluded that “the vast majority of globalization theorists present it as a characteristic of economic activity”.59

Some scholars, e.g. Robin Thomas Naylor,60 do not believe that there has been an economic globalisation measured as international trade61 (global imports and exports) versus world GDP. They furthermore doubt that the technological development has had a major influence on illegality compared, say, with the development of the steam engine and the telegraph. A third issue connected with an alleged globalisation is hotly disputed, viz. the unequal distribution throughout the world of its benefits, if benefits there are. This discussion, although of obvious import, lies outside the perimeters of the present thesis and will not be evaluated. Rather, this chapter will examine the main competing claims, i.e. the sceptical view that there is no globalisation, and the more radical view that an important change, primarily but not only economic, whereby economies around the world are becoming intertwined and interdependent, is taking place.

It is important to emphasise that the concepts touched upon above are not synonyms for another hotly disputed term, the Gross Criminal Product, GCP, but that they are much wider. In fact, GCP may constitute only one third of the funds of non-declared origin, with which the present work is concerned.62 It is presumably not possible, at our present state of knowledge, to evaluate the so-called GCP in any meaningful manner. The chapter will, nevertheless, approach this problem by examining, as a starting point, the claims made by one scholar, sc. the economist Napoleoni.

If globalisation exists, if one of its major characteristics is the expansion—and interdependence—of international trade, and if transnational crime follows in its footsteps,63 it is logical to presume that such international illegality consists in international traffics of various kinds, in arms, humans, drugs, etc. Such traffics necessitate payment settlement in order to be completed and, therefore, a means of payment, which necessarily must be easy to transport, non-traceable, and highly liquid, i.e. easily acceptable almost globally. The US currency has, traditionally, played this role, although the Yen, the Swiss Franc, and the Deutsche Mark (prior to its replacement by the Euro in 2002) have also played a role in the settlement of international criminal transactions, albeit minimal when compared with the usage of the US currency. The almost monopolistic status of the US dollar as the preferred means of settlement of international criminal traffics may be somewhat threatened by the creation of the European Union currency, the Euro. A report from January 2005 questioned central bankers from around the world: two thirds of these explained that they, over the preceding two years (January 2003 – January 2005), had been buying Euros and selling US dollars.64 The same report makes reference to a number of experts, who believe that the Euro will replace the dollar as the currency of reference, a role the US dollar has played since the Second World War. To some degree this might be reinforced by examination of the photograph placed by way of an illustration at the beginning of this chapter. This depicts funds seized at an illicit drugs enforcement action in Mexico on 11 August, 2007. Although the vast majority of the seized notes are US currency, one does note, in the foreground, stacks of Euros. In particular the €500 note is vulnerable to use in the settlement of illegal trade: it is, however, surprising to find these € notes so far from Europe and in the very backyard of the USA. Finally, the French daily newspaper Le Monde claimed that the Euro might have replaced the US dollar as currency of reference on 20 September 2007, the day the Euro broke through the barrier of €1.00 = $1.40.65 Nevertheless, the US dollar is still believed66 to be the trafficker’s currency par excellence, inter alia because the decision-makers in the so-called Euro zone are viscerally opposed to the use of the Euro outside the zone.67 It is self-evident that to measure the use of the US currency for the settlement of international criminal traffics, is not possible. Nevertheless, as a proxy, albeit admittedly not a very precise one, the chapter will attempt to examine the important question of expatriate US currency, i.e. US currency circulating in the world outside the USA.

The photography, referred to above, sc. of the seizure of funds at an illicit drugs enforcement action in Mexico on 11 August, 2007, in an exemplary way exemplifies two main concepts discussed in this thesis, (i) deviant knowledge and (ii) network theory. Deviant knowledge because the seized funds clearly show the use of US dollar notes for illicit trafficking, an idea not officially entertained by the US authorities; network theory because of the obvious malfunctioning of a part of the network, cf. section 3.3 for a furthermore discussion of this seizure and its illustrative value in the context of this thesis.
2.1. Globalisation and Crime

As noted in the introduction to this chapter, there is no agreement about the term globalisation, although most scholars concur that the term is in some way linked to the economy and, as Clark (1977) concluded, they often present globalisation as a characteristic of economic activity”.68 Anthony Giddens reviewed the status of the discussion in 1999, from his presuppositional viewpoint. He observed on this occasion that there seemed to be two sets of opinions, those who maintain that there have been no major changes and that therefore the discussion of globalisation was just that, a discussion, and those with a more radical view, sc. that “the current world economy has no parallel in earlier times”.69 Giddens accepted the latter point of view, but warned that it would be a mistake to see the phenomenon almost solely in economic terms: “Globalization is political, technological and cultural, as well as economic”.Error: Reference source not found The world-wide distribution of technological innovations, from the computer chip itself to more and more sophisticated hand-held communication and data storage devices not to mention the conception and implementation of a world-wide geostationary positioning system, GPS, seems to make any discussion of the existence or otherwise of a technological globalisation superfluous. The existence of a globalising influence on cultural phenomena is difficult to substantiate with hard proof, although for example the world-wide recognition of non-verbal trademarks, so-called logos,70 is a persuasive element, as is the world-wide distribution of musical and cinematographic creations. One only needs to think of the logo used by the sports equipment company, Nike, which is immediately recognised in every part of the world, to see the point. Furthermore, the political repercussions of the alleged globalisation may, according to Giddens, be discernable in the resurgence of local nationalisms as “a response to globalizing tendencies, as the hold of older nation-states weakens”.Error: Reference source not found It is far from certain that Giddens is right on this point. One would suggest that an alternative explanation suits the circumstances better, sc. the movement from the centre to the periphery and from the periphery to the centre to use an expression from Dante Alighieri, who observed this

contrariwise, but complementary movement:71
Dal centro al cerchio, e sí dal cerchio al centro

movesi l'acqua in un ritondo vaso,

secondo ch'è percosso fuori o dentro (:)72
In a wider context, this gives rise to considerations of the movement from the centre to the circumference, and from the circumference to the centre. This dual movement is not restricted to organised crime and one can observe the same movement both as regards globalisation in a "world" context and in a more regional one. For instance in the second half of the twentieth century, which saw the creation of the European Union, one notices, on the one hand, a strong force of concentration (sc. in a central administration), and, on the other, a clear revival of regional identities and cultural values (the Basque and the Breton cultures, for example, including their languages). In the wider globalisation the same phenomenon obtains, i.e. at the same time the intensification of the local and of the global. A full discussion of this fascinating subject unfortunately lies outside the scope of the present work, with the exception of the globalisation and at the same time very territorial aspects of organised crime.73 Adrian Hastings notes that
It is precisely the evil of nationalism, when it is fully blown, to deny both the divisibility of sovereignty and the reality of a plurality of loyalties and identities within a healthy world. What we should rather look for are ways of ensuring that movements, at present so clamant, towards both ever larger and ever smaller units of power (for instance the EC on one hand, and independent Scotland on the other) do not undermine either the diversity of local ethnicities or the sense of far wider communions.74
Amartya Sen75 takes up a similar point in Identity and Violence, sc. that society consists of a large number of “collectivities” (the term is used in a broad sense) and that one and the same person can belong to many such collectivities at the same time, without any inner contradiction. One obviously must agree with both Hastings and Sen, while concurrently sounding two warnings: (i) if belonging to one or more specific collectivities becomes an alienating experience, then the societal consequences may be considerable as, indeed, more directly (ii) if the purpose and operation of one or more of such collectivities are at odds with the general values of the society of which they are part. In the former case the resultant will be societal unrest of various sorts, while in the latter the very survival of society in that particular form will be in danger. This concurrent centripetal and centrifugal action has been described by a neologism, glocal.

International crime represents both a cultural and a political exemplification of the internal logic of globalisation; if, as the present writer, one perceives international organised crime as a reflection of society and international society, then there is nothing particularly strange in this phenomenon, which obtains in complete parallel with globalisation, viz. that organised crime at one and the same time extends its reach, internationally, and concurrently strengthens its local grip. Most, albeit not all crime on international level has economic gain as its purpose and therefore, in a large sense, is linked with the economy. Likewise, so-called globalisation is mainly economic as observed by the OECD: 76


The term “globalisation” has been widely used to describe the increasing internationalisation of financial markets and of markets for goods and services. Globalisation refers above all to a dynamic and multidimensional process of economic integration whereby national resources become more and more internationally mobile while national economies become increasingly interdependent.
In the following subsection, economic globalisation will therefore be substantiated as a necessary background to the following section, Economics and Organised Crime.

Economic globalisation can, undoubtedly, be measured in many ways, but several aspects of international economy seem to offer themselves up as potential proxies for the phenomenon, sc. foreign direct investment (FDI), international trade, and the gross domestic product.


2.1.1. Foreign Direct Investment

FDI may consist in the creation or expansion of a subsidiary in another country, but may also be the investment in an already existing corporation. FDI, however, involves not only transfer of resources, but also control over the subsidiary, which is generally defined as the possession of a minimum of ten percent of the ordinary shares or stock held for a minimum of one year.77 Conversely, according to US collection of statistics methodology, a US company is considered foreign-owned if ten percent or more of its stock is held by a foreign company.78 This definition obviously gives rise to the interesting situation that a US multinational enterprise, i.e. incorporated in the United States, for statistical reasons can be considered a foreign-owned company, viz. if more than ten percent of its stock is held by a foreign company. FDI thus involves transnational control and, although it is easy to forget, transnational risk and since investments in general seek security and profit in that order, over time the sheer existence of FDI is a proxy for economic internationalisation and FDI volatility a proxy for confidence in the international political economy. Since the progression or otherwise of foreign direct investment flows therefore constitutes a major element in the appreciation of economic internationalisation—and therefore globalisation—as well as a gauge of the status of international political economy, Appendix 2 indicates quinquennial totals of FDI flows to avoid peaks for individual years and instead permit a longer-term view of the data.79 Twelve European countries have been chosen to constitute the “sample”.80 Chart 2.1, below, illustrates FDI flows, i.e. the sum of inflows and outflows, for Sweden, the United Kingdom, and for the sample. Foreign direct investment is one of a number of proxies for globalisation and the chart clearly portrays the amazing growth in FDI. The results for the 12 European countries, which constitute the sample, are indicated on the chart as are those of two of the twelve countries, chosen totally at random, in order to show that the overall growth is generated by the totality of the countries in the sample and not by one or two economic "locomotives”. The geometric mean of the quinquennial growth figures is 76.9%, i.e. in average each five-year period from 1970 to 2005 shows a 76.9% growth on the preceding five-year period. Although the sample is limited to Europe and while much of the FDI growth observed will have been between European countries or between European countries and the United States, i.e. intra-Western investment, the growth nevertheless shows a clear economic interdependency between the countries sending and receiving FDI.


Chart 2.1. FDI 5-Year Totals. 12 European Countries; Sweden; UK



Underlying dataset: UNCTAD (WIR 2008)81

2.1.2 International Trade

As trade restrictions have been progressively abolished after the Second World War through negotiations in the framework of GATT and its successor, WTO, one would expect international trade to expand. The year-on-year growth in trade as percentage of GDP for 12 European countries is indicated in Appendix 4.



Chart 2.2, below, illustrates the quinquennial growth in trade for the 12-country sample as a whole for the years 1955 to 2003. There is a healthy expansion of growth of international trade from 1955 to 1970 of a few percentage points over growth rates of preceding five-year period. Then an important expansion from 1970 to 1975, followed by an overall contraction in the growth rate until 2000, and a renewed expansion from 2000 to 2003. 82


Growth rates in trade in chart 2.2 are based on totals of trade figures in Appendix 4. Underlying dataset is from UNCTAD (2005)
Trade should, however, be seen in parallel with foreign direct investment since the latter implies overseas investment and thus “overseas production”, whereby the internal market in the host country is supplied from within the country. Such intra-host country supply will not only not be reflected in international trade statistics, but will also have a negative impact on same as previous international exports to the host country will no longer take place.

A persuasive element in an evaluation of the existence or otherwise of globalisation is the part trade plays in the creation of GDP. Appendix 4 shows the year-to-year trade (imports + exports) figures as a percentage of GDP for twelve European countries and Chart 2.3, below, shows trade as a percentage of GDP for the twelve European countries in question, but as quinquennial geometric means.




The table shows a very strong expansion of international trade measured as a percentage of GDP of the twelve countries, which constitute the sample, and is therefore another core indicator of that expanding interdependency, which is one of the leading characteristics of globalisation.
2.1.3. Gross Domestic Product, GDP

The growth in the gross domestic product in itself, i.e. irrespective of international trade, might be used as a further proxy for globalisation. Chart 2.4 illustrates the development of GDP in the 12 European ‘sample’ countries and in the world in so-called international dollars.83 Although the development of the GDP in the 12 European countries is somewhat slower than that of World GDP, yet the very robust overall expansion may be attributable to the liberalisation of financial markets—and subsequent cross-border investment, inter alia via foreign direct investment—and deregulation of trade.




Chart 2.4

(Source: Maddison (2006, 439-441) and underlying dataset.

1990 International Geary-Khamis dollars x 10E6Error: Reference source not found )
2.1.4. Population

Population growth84 is, as such, not an indicator of globalisation, but chart 2.5 has been adduced to show that the observed, continuous growth in foreign direct investment, growth in international trade when measured against GDP, and, in particular, growth in GDP are not ascribable to population growth, as the latter is much less important than the former three. In other words, the population growth rate in itself is obviously not sufficient to explain the expansion in FDI, GDP, and international trade.


Source: Maddison (2006), vol. 2, Table 1a


2.2 Economics and Organised Crime

On the empirical level, the term the Economics of Crime typically refers to the question of the profits that organised crime may generate and on the theoretical level to the much more substantive question of organised crime as an economic actor. Among scholars there is an ongoing, rather heated debate between those who think that the profits of crime are over-estimated, e.g. Besozzi (1999),85 and those who take a more alarmist view of the role of ‘criminal’ profits in the world economy, e.g. Fabre (1999).86 A second debate has as its main opponents those who—apart from the profits of crime—are worried about the reach of crime, i.e. crime as a global phenomenon. For example, on the one hand consider Jean Ziegler87 and Louise Shelley,88 and, on the other, a minority of scholars, who are very critical of the issue of organised crime in general and transnational organised crime in particular. The latter argue that the phenomenon is being exaggerated by the law enforcement community with a view to obtain increased budget allocations and by the political class as a means of gaining democratic consensus for societal control mechanisms, which otherwise would not have been acceptable. They point to two main areas, which they see as representative, sc. the “militarization” of interior security and the growing influence of International Law on public national policy. These scholars are perhaps best represented by David Nelken89 and Maria Luisa Cesoni.90 However, when evaluating these arguments, one needs to keep in mind Giddens’ general definition of Modernisation as “a capitalist system of commodity production, industrialism, developed state surveillance techniques, and militarised order”.91 One might therefore ask if control mechanisms, militarization, and so forth, are organic reactions to the complexities of modern and post-modern society rather than conscious designs on the part of government officials or the political class.

As regards the more crucial problem and consequent analysis of the function of organised crime as an economic actor92 or as organised crime in the international economy, Mark Findlay quite rightly observes that93

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