“It’s simple really: at Asymmetrica we have never seen any illicit traffic that did not entail corruption. There is always at least one corrupt official. Usually there are several, all along the supply and distribution chains.”
Corruption is what makes transnational criminal organizations enduring. The effective disruption of transnational crime is largely dependent on the success of anticorruption efforts.21
Corruption, activist Sarah Chayes argues, poisons the well, erodes governance, and engenders extremism. Profound corruption in post–Soviet Eastern Europe has left many young people there longing for the return of dictatorship, which would at least deliver some social justice and rule of law.22 Chayes points out that the World Bank is coming to the conclusion that if your goal is to help the people,23 it is sometimes better to work around the government and engage the target populations directly—or, in some cases, not to do anything, particularly if the government is oppressive and/or corrupt (the two frequently go together) and working with them would only harm the people one is trying to help.
In any form, corruption generates tremendous distortions on both the business environment and governance, causing citizens to lose access to basic goods and services and faith in their government. Roads and schools go unbuilt; laws are not adhered to; cops act like criminals; honest businesses cannot compete, and they go out of business; public trust in government erodes; and instability—or even violent extremism—ensues. People also die as a result: “… child mortality rates in countries with high levels of corruption are about one third higher than in countries with low corruption, infant mortality rates are almost twice as high and student dropout rates are five times as high.”24
Numbers on the monetary loss due to corruption vary, but are alarming. A 2002 African Union study estimated that 25 percent of the GDP of African states, amounting to US$148 billion, is lost to corruption every year.25 If even 10 percent of that were recovered through anticorruption programs, it would free up US$14.8 billion for poverty reduction. Other studies paint a bleaker picture of accelerating illicit financial flows (corruption plus tax evasion) pouring out of Africa. One estimates that US$814 billion was lost between 1970 and 2010, with one-quarter of that (US$202 billion) lost from 2005 to 2010. Whereas US$17 billion illicitly flowed out of Africa annually in the 1990s, this has risen to US$50 billion per year since 2000, with the continent’s greater economic growth.26
The impact on the lives of millions of citizens is palpable. Angola, for instance, is one of Africa’s biggest oil producers, but about one-third of its annual revenue mysteriously disappears from state coffers, while three-quarters of the population live in abject poverty, and it remains one of the most undeveloped countries on earth.27 The reason for this is that the impact of corruption compounds over time. Insofar as, without corruption, money would have flowed into good development investments, these investments would have paid dividends (education does this, and so do infrastructure, health care, child nutrition, and various other things). So corruption slows growth, and this slowing compounds over time. If, for example, a country has 20 years with average growth of 1 percent and, without corruption, would have had average growth of 5 percent, then it is true that, over those 20 years, without corruption the country would have had 56 percent (and in the last year 117 percent) more gross national income. The really staggering question is: Where would Africa and its states be today if they had been allowed to develop without the headwind of corruption since 1960? Chances are that they would have gross national incomes five or six times larger, on average.28 The United States is not immune either. “The US health care programs Medicare and Medicaid estimate that 5 to 10 percent of their annual budget is wasted as a result of corruption.”29
Foreign aid, particularly for security in the age of the Global War on Terror, creates an incentive for corruption and oppression. The regime receiving aid (from, say, the United States) has an incentive to close the democratic options for representative leaders to its people: the regime will portray itself (to both its people and the countries giving it financial aid) as the only viable option against fearsome extremists and terrorists. I concur with Chayes that the existence of the extremists is also good for the government: it justifies oppressive controls and the need for foreign aid, trapping people between the predations of a corrupt and oppressive government and the violence of extremists claiming to combat it.30 In her years in Afghanistan and elsewhere, Chayes cited evidence that “several of these governments had deliberately targeted their repression against the most thoughtful, reasoned and moderate leadership over the years, while covertly facilitating militant groups to serve as ogres to scare people.”31
Traditional Western thinking, she argues, is that security needs to be established before the project of good governance can be tackled. But since poor governance causes insecurity, violence cannot be addressed without reducing corruption.32 I agree that there are three main ways “acutely corrupt governance”33 is a threat to security. First, it supports and assists terrorist groups—it drives angry citizens into the terrorist fold, and corrupt politicians turn a blind eye to their presence or even provide logistical support. Second, corrupt officials who allow human smuggling and trafficking across their borders increase the likelihood of someone transporting a weapon of mass destruction into the country. Third, corrupt governments such as Algeria, Pakistan, and Yemen might purposely cultivate violent extremist groups to keep foreign aid dollars streaming into their coffers.
Corrupt governments are not “failed” or “failing.” Indeed, they are tremendously successful at what they do: functioning as criminal syndicates, enriching the ruling elite at the expense of their people.34 Corruption breeds corruption—it is nearly impossible to find honest people to serve in a corrupt government. One reason is self-selection: the honest will not participate in a corrupt system. A corrupt government is an effective criminal syndicate, like the Mafia: loyalty to its ways is rewarded, while anticorruption activists are punished as troublemakers.35
Corruption flourishes in spaces where regulations are complex, where there is little oversight of decision makers and public officials, and where the rule of law is weak (it is then made weaker by corruption). The remedies are long term, difficult to implement, and require periodic review to assess effectiveness: compliance must not cause greater harm than corruption or create new opportunities for corruption by generating more paperwork and opportunities for decision-making by petty officials, who can then wield their increased power to elicit more bribes.
“CALDERÓN’S WAR” AND THE RULE OF LAW
At our first meeting, on November 9, 2015, at New York’s Instituto Cervantes, former president of Mexico Felipe Calderón mused on the challenges faced by his administration, which ran from 2006 through 2012.
The average Mexican family consumes a kilogram of tortillas per day. In 2006, when the price of cornmeal rose 20 percent due to demand for corn crops as a biofuel, it was disastrous for poor Mexicans, who were already spending a fifth of their daily wages on tortillas; unrest ensued, in what became known as “the Tortilla Riots.”
“The [high] price of wheat and corn will not be tolerated, but thirty years of dictatorship will be,” he cautioned any aspiring heads of state in the room.
Earlier, in 2000, when Vicente Fox won the presidency, it was the first time in seventy-one years that a candidate who was not from the Institutional Revolutionary Party (PRI) had won. It meant that the deals between the PRI political party and the cartels were no longer valid. Fox earned his new-sheriff-in-town credentials by violently pursuing those cartels that had become too comfortable, and the cartels themselves launched into violent competition with one another. The spiraling violence required an ever more concerted response from the government, which eventually brought in the military to fight the cartels. Though Calderón’s legacy is marred by the widespread slaughter of the drug war, which brought his approval ratings down to 8 percent by the time he left office, he pointed to Me
xico’s economic development: when he took office, Mexico was the ninth-biggest exporter of vehicles in the world; by the time of his speech, in 2015, it was fourth, and it was slated to be third by March 2016.
Though nicknamed (perhaps a bit unfairly) “Calderón’s War,” according to Mexican journalist Carlos Loret de Mola, the violence started in 2004, under President Fox, in Tamaulipas. The same strategy of aggressively pursuing the cartel capos has held from the last two years of the Fox administration through Calderón and now with Peña Nieto.36 The reason it is referred to as “Calderón’s War” is that President Calderón “militarized” the war on drugs, enlisting the military to combat the cartels.
Under the Calderón government, the Mexican federal police were trained through the Mérida Initiative37 and grew from a force of 6,500 to almost 37,000.38 Though the military was considered more effective than the often-corrupt Mexican police forces, militaries are terrible at domestic policing, and human rights abuse complaints rose. So did the body count: “Drawing on data from Mexican government agencies, the Justice in Mexico Project maintained that between 120,000 to 125,000 people were killed (all homicides) during the Calderón Administration, with a gradual decline beginning after 2011.”39
Since May 2014, the Mexican government has adopted a controversial approach to DDR (disarmament, demobilization, and reintegration, as we saw in Colombia in 2010): it has started incorporating the self-defense groups (i.e., paramilitaries) into legal law enforcement, inviting them either to disarm or to register their members and their weapons as part of a legitimate “Rural Police Force.”40
Yet Calderón (contrary to his predecessor, Vicente Fox, and many other Central American leaders) does not advocate drug legalization; making drugs legal will not defeat the drug cartels, Calderón insists, and he thinks there is no point in legalizing drugs if you do not combat organized crime.
“Organized crime’s objective is to capture the state,” he says.
In other words, he believes that organized criminals want to co-opt the state infrastructure—financial, physical, and administrative—and make it work for them. They want to turn judges and cops to their favor, use the banking infrastructure to store and move money, and use the ports, roads, and warehouses for the goods they are selling and buying. Furthermore, Calderón believes that legalization will increase children’s access to narcotics.
Over lunch in his New York office on February 24, 2016, former Central Command general and CIA director Gen. David Petraeus concurred with Calderón’s view. Petraeus, often called “the most effective military commander since Eisenhower,” literally wrote the manual on counterinsurgency (“COIN”) for the US military. He then implemented his own theory in bringing Iraq back from the brink. When he was appointed head of Central Command in 2007, Iraqis were dying at a rate of ninety a day,41 mostly by being blown up by suicide bombers; his strategy reduced casualties by more than 90 percent. Petraeus has said that Mexico’s cartel-induced violence is akin to an insurgency and requires a counterinsurgency strategy like the one he employed in Iraq.
“The problem is that it’s comprehensive and expensive,” he said over our egg drop soup. “The key is instituting the rule of law.”
I said that that’s what Calderón told me, and he nodded.
“Effective rule of law,” Petraeus continued, “has three legs: police, courts, and prisons. In Baghdad we instituted a judicial Green Zone, where the police, the judges, and the prisoners were kept secure; the transportation between the prisons and the courts was within the Green Zone, away from insurgent attacks.”
He said the city elders in Monterrey, Mexico, a major industrial center, have done the same thing.
“They doubled the pay of police, provided the police, the judges, and their families secure homes and supervised transportation, and secured the prisons, with private money. It has worked,” praised Petraeus.
“Good. But it means they have privatized some important functions of the state,” I retorted.
“They have secured their homes and businesses,” Petraeus replied.
In Calderón’s view, there can be no real development without rule of law, the lack of which he considers Latin America’s biggest problem, along with its transnational organized crime groups.
“Without rule of law, we will not be a developed country,” Calderón believes. “When I took office, I found a capturable state.”
President Calderón has very definite views on the drug cartels in his country. He believes that the motive behind drug cartel violence is to strike fear in order to gain control of people and territory. Violence is a valuable tool in the drug business: it secures the supply chain, by keeping suppliers, creditors, distributors, and competitors in line. He says that “the real business of organized crime is extortion,” adding that people can’t call the police to help them if they are at “the margins of the law,” citing prostitutes and gamblers as examples. Corruption, he feels, is both a facilitator and an objective.
“Organized crime, in order to survive, needs the protection of the authorities … The lubricant of the old traditional system in Mexico is corruption.”
But corruption, of course, is not limited to the Mexicans. In order to ply their trade, he says, the cartels need to bribe Mexican police, sure, but, more important, the American patrols at the border as well. Wherever vast quantities of illicit goods are crossing a border (like drugs in the Southwest), customs agents are in on it. In order to fight this scourge, Calderón identifies two priorities: first, fight the criminals; second, strengthen institutions. To the latter point, he advocates examinations to vet police and professionalize them, as well as raising their salaries. He says that Plan Colombia was successful because it helped strengthen Colombia’s law enforcement.
“I didn’t have enough support from Congress or the Americans,” he stated.
The political operating environments are very different in Mexico and Colombia. Colombia has a centralized political system, while Mexico has a federalized political system—“which is a mess,” Calderón says. Mexican feds cannot remove complicit corrupt cops or governors. It was police officers, he says, who kidnapped the forty-three students in Iguala, Guerrero, on September 26, 2014, a case that shocked not just the nation, but the international community.
In an age where money is being laundered through apps on phones, Mexicans also need better financial intelligence. Mexico’s challenge is that it needs more human talent. It needs smart, honest, and brave patriots to track finances. Money and weapons coming from the US are what are generating the violence in Mexico. Calderón is not only quick to blame the US for insufficient support, he is also skeptical of its will to reduce drug consumption.
Calderón did not cite motives for this laxity, but there have long been whispers in policy circles that there is too much of a profitable industry around drug consumption. The banks receive cash; more police officers and DEA agents get hired for drug busts; and the prisons and the rehab centers receive the criminals and addicts, inflating their revenues, either from the public purse or private ones.
But mainly, it’s about the banks: in 1979, when Miami was in the grips of a cocaine craze fed by the Colombian cartels, the Miami branch of the Federal Reserve reported a US$5 billion surplus—more than the entire rest of the US Federal Reserve banks combined.42 Recent scandals at Wachovia and HSBC banks illustrate this point.
MONEY LAUNDERING 101
It was the Watergate scandal in 1973 that brought us the first known use of the term “money laundering”; it first appeared in a court decision nine years later, in 1982.43 The UN Office on Drugs and Crime estimates that the amount of money laundered globally in one year is 2 to 5 percent of global GDP, or $800 billion to $2 trillion in current US dollars. Given what we know about the size of the proceeds of crime, the UNODC estimate is likely low. Money laundering threatens legitimate business and the clean economy, making honest businesses uncompetitive, generating unemployment, and providing richer pickings
for the criminals and terrorists to gain supporters and collaborators. It disguises the proceeds of crime and integrates them into the legitimate financial system, creating a link between the legal and the underground economies.
Money laundering not only robs governments of tax revenue and generates corruption, bending the loyalties of public servants to their new private masters, but has significant second-order effects on legitimate business as well. Money laundering distorts the competitive environment. Businesses whose primary purpose is to be a money-laundering vehicle do not need to make a profit through their ongoing operations. They are therefore able to undercut their competitors, causing clean businesses to fail. When clean businesses go under, the unemployed examine their options and turn to the dirty businesses or the crime syndicates themselves, thus further eroding law and order and improving the black market operating environment. This then accelerates the downward spiral: economies become weaker, and more people are unemployed and turn to the black markets of illicit trade and criminality.
According to the Financial Crimes Enforcement Network of the US Treasury Department (known as FinCEN): “Money laundering is the process of making illegally-gained proceeds (i.e. ‘dirty money’) appear legal (i.e. ‘clean’).”44 The dirty money—the proceeds from a crime, such as prostitution, or the sales of narcotics, weapons, or counterfeit goods—is laundered in three steps,45 whose detailed mechanisms can vary.
The first step is placement: putting the money, furtively, into the financial system. The easiest way to do this is to go through a financial institution or through the broker of another commodity who can transform the cash into a less identifiable and more discreet tradable good or monetary instrument, such as traveler’s checks, bearer bonds, a foreign currency, diamonds, gold, or even cigarettes. Gambling the money and having it be paid back in winnings is a popular method, too.
When cash is first deposited into a financial institution, two more tricks are used to avoid triggering a currency transaction report from the teller that can prompt a suspicious-activity report, prompting investigation by federal authorities. Under US law, a currency transaction report must be filed anytime an account receives more than $10,000 in a day—even if the deposits are made by different people at different branches. Therefore, one must “structure” the deposits, limiting them to $9,000 a day per account; but one can deposit $9,000 into each of several accounts, all with the same “beneficial owner” (a legal term whereby specific property rights—“use and title”—in equity belong to a person even though legal title of the property belongs to another person).
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