Hijacking the Global Economy

Thank you Jane, a dear old friend, for kind interaction and thank you all for being here tonight. It's a, quite a privilege to have this opportunity. The essence of my conversation with you tonight is, it's about a book called "Illicit" how smugglers, traffickers and copycats are high jacking the global economy. And the center, the central theme is that illegal trafficking is changing the world. Central theme is that while we are transfixed, worrying, rightly so about terrorism, there are other powerful trends that are very transformative. And they are new and they are creating a new international, political and economic reality that is not clearly comprehended and understood by most of us. In order to, that's a very bold statement and in order to develop it one first needs to prove that there is plenty that is new. Because after all what we are talking is about the black markets, about smuggling, about trafficking and that is as old as trade itself. The first time anyone tried to move goods and services, and it was a government or some type of authority tried to stop it, immediately there were strong initiatives to find ways around it and that is as old as the Bible, perhaps before. So the challenges to discuss, what's new? And I would argue that there is plenty new and I would argue that unless we understand that that is new we will not be able to gain foothold, an intellectual foot hold, a better understanding in themes like democracy promotion in the world or trade policies or how the world financial system really works, or the war on terror. We would also not understand how decision making really operates in places like the Balkans or Russia or China or great spots of the developing world, plenty of countries in Latin America or in Africa are deeply linked and deeply shaped by the activities of these black markets. The first thing that has changed is of course the size of these trades and these activities. And that was driven by the changes of the '90's. In a group like this I don't have to dwell on those changes but essentially were all changes that facilitated trade and crossed border economic activities and crossed border connections of human, of all kinds of human kinds from the internet to pre-paid phone cards to very cheap, or travel to political changes that allow the borders to become more sparse, that allow territories that were before out of bounds to become apart of the global economy to economic reforms of all kinds that either eliminated trade barriers or eliminated exchange rate controls, or imposed very tight fiscal, conservative governments that among other things debilitated the ability of these governments to police their boarders. So at this convergence at politics, economic reforms and information and technologies that created a haven for traffickers and a very strong, difficult challenge for governments. I mentioned that I was going to talk about numbers and some are well known. And in the book I study five trades in detail but then I talk about five others. The five larger, largest trades are of course narcotics, weapons, humans, counterfeits , money and then, and there are huge and growing trades in endangered species, in industrial waste, in art, stolen art and uh logging and so on. There are several characteristics about these trades and their growth. If you think about drugs which is, the narcotics trade has been with us since along time, in 1991 it was reckoned to be 61 billion dollars, now it is estimated to be at about 900 billion, its about a trillion dollars in a decade. Small arms are, and here I am not talking about the trade in destroyers and tanks and things like that, I'm talking small arms, its about 3 to 6 billion dollars and growing. The United Nations estimates that 46 of the 49 largest world conflicts over the last decade were fueled over the trade of small arms. Of the, about half a billion small arms in circulations, only 3% are in the hands of the government, the military or police forces. Most of the weapons in the world are in the hands of civilians. Trading small arms is estimated to be the cause of a thousand deaths every day and 80% of those deaths, daily deaths, are women and children. Again this was smaller before and it grew immensely in the '90's. One, and for a variety of reasons that I mention like the others proliferation users of all kinds. One of the very strange conversations I had in the process of researching the book was with the inventor of one weapon that is very famous, was complaining that the U.S. government was purchasing the weapon from a counterfeit producer to arm the Iraqi army. And this person was thinking about suing the U.S. government for infringement of its intellectual property. And which brings me of course to the theme of intellectual property, counterfeits the watches, the Prada bags but also the airplane parts and the medicines and the, all kinds, essentially everything that is branded, or everything that can be copied is being copied. It is estimated to be 630 billion dollars this year. And um and, it, the range is amazing, its surprising. 40% of Proctor and Gamble shampoos in China are counterfeit. 60% of Honda motor bikes, um 80% of all DVD's and 94% of all brand name software sold in China is counterfeited. And is not only in China. Piracy rate of business software in Japan and France is 40%, in Greece its 60%, in Germany and Britain its 30%. And the complexity and the sophistication of these networks is a very telling example of how this thing, these trades work. And in fact it is by looking, by being surprised by one of these transactions that I got involved and interested in this general subject. And perhaps, this anecdote is useful because it gives insights into the nature of the beast. I was working in a street in Milan in the mid '90's and there was a street vendor that was selling counterfeit bags. And he was selling a Prada bag that I knew that three blocks away in the official Prada store was being sold for 6,000 dollars and he was selling it for thirty and I engaged in a conversation with him and very quickly it became evident that he was as elicit as the bag he was selling. He had been transported from Cameroon by this networks in which they gave him credit in order to pay the transfer from Cameroon to Europe and then he had to work selling these bags to repay a debt that was going to become unpayable. He lived in rich conditions and he was for all practical purposes a slave. After that encounter I flew back to the United States through New York and I walking the streets of Manhattan guess what I found? The bag, exactly the same bag, and that this time instead was being sold by a person from Malawi that himself had been trafficked in very similar ways. He didn't know and he was not part, he didn't even know of my experience in Milan and in those two experiences, the you start digging and think about the complexity of this transaction. First, you have to steal the design from Prada or from Microsoft or from whomever owns legally the products. Then you have to take it in the case of the high end fashion kinds of things. You have to steal the design, take it to China typically. In China, you have to get the raw materials. If, say it's a bag, you have to take the buckles of the purse, the letters and everything else that goes into the bag. Then you have to assemble it in the thousands, then you have to put it in containers and move it around the world and simultaneously deploy it in all of the major capitals. And then procure the merchants that are the retailers of these goods in the streets of our cities. If you ask any C.E.O . of a major multinational corporation about the degree of the detail entailed in this sequence they will tell you that this is more difficult, than far, than many, many of the things they do regularly. It is a huge managerial challenge. It entails a very complex inventory management, it entails very detailed procuring and recruiting and controlling of the human resources, very complex accounts payable and accounts receivable, international trade and everything else. Now all of this, then add the complexity that all of this is illegal. That each one of these transactions that I mentioned is a crime. So it is a sequence of crimes that you have to aggregate in order to pull this off. And not only one country, you have to do it in multiple countries. So add the complexity and then you'll see what kind of operation it requires and then just try to imagine just how much money do you need to support that kind of operation day in and day out, at great speed and in all sorts of products. So I took a, this anecdote just to give you a sense of what is it were talking about. None of these trades could have happened without the internet with out the changes of the '90's that I already described. An then this anecdote also, its useful because it shows the connection between the traders in people and the trade as in counterfeits and as I discuss in the book there is also the district of traders connected to other traders of all kinds of illegal products. The trade of people is particularly abhorrent and particularly difficult and uh and just to give you a sense of its magnitude it took four hundred years to bring 12 million slaves from Africa to the New World and it took, in the last ten years, 30 million people has been trafficked only in Asia. I repeat the numbers, four hundred years to traffic 12 million people, ten years to traffic 30 million people just in Asia. And that, that's a business that's about 12 billion dollars per year and is one of the fastest growing in this categories. It has two dimensions, it has two parts. One is the voluntary smuggling of people and the other is the involuntary smuggling. The voluntary smuggling is the poor woman in Guatemala that pays somebody to take her to the United States to work at a restaurant or as a nanny or in some activity. The involuntary is the equivalent of that woman that has bad luck. And instead of being trafficked and being up working at a restaurant as a nanny is kidnapped, beaten up, broken and exploited for sexual services. And that is not just in Central America and here, its in the world. And international trafficking of women and children for sexual exploitation is a very important and growing aspect of this trade. In, you can, there are many examples, of,of you can buy girls in villages in Bangladesh and Nepal that are sold for a thousand dollars in the west. In T---, a small town in Romania, women are sold for fifty dollars and then resold for ten thousand dollars in London or Paris. And UNICEF estimates that there are about 200 thousand childrens enslaved by cross smuggler borders in central and west Africa. And in East Asia, in China the trade is growing very, very rapidly. All these trades and the numbers I have given you end up in money and you have to do something with that money and that something is laundering that money and therefore one of the trades that you need to corporate in the conversation is money laundering. According, one of the estimates is by the international monetary fund is that money laundering ranges between two and five percent of global GOP. It 2-5% of the global economy. Your talking about two trillion dollars a year. And again there are many, many examples of this let me give you an anecdote and a study as a reference. The anecdote is that I asked in the process of researching for the book I asked a banker in Switzerland, how much more difficult after 9/11 it has become to "manage" 50 million dollars for an individual of a group. By manage I meant moving it secretly across the world and hiding it from government and tax authorities and others. He smiled and said, "The only difference is that now I charge more". And there is a study just released by the Institute for International Economics of Washington that is a four year study of the anti-money laundering system that was put in place after 9/11. it's a very sophisticated, very careful study by two very serious experts that conclude that the probability of being caught if your laundering money is about 5%. What, and I can give you more numbers about the other trades but I don't want to center the conversation in numbers but in highlighting for you what these trades have in common. What all of these very desperate things, were talking about money and guns and Prada bags and people and what do they share? Four things, the first is that in each one of them is a case in which governments are trying to contain markets and in each of them there are huge price differences that are driving the process and throughout the book I keep saying that these trades are not just about low morals but about very high profits. So it is important to talk about the morality of it all but it very often happens that by centering it on abhorrent situation and the morality of it all the profit motive that is driving these markets is lost and therefore it ends up in a morality tale that ignores some of the fundamental drivers. So the first things is that governments against markets. The second thing is that these trades are no longer bound by geography. Smuggling used to be a very regional, very local kind of activity. It used to be about two countries, two adjacent countries. It was across borders especially. No longer, it is global by nature. And we have plenty of examples of Nigerian traffickers operating north of Thailand, Ukranian traffickers of weapons and women entering into complex arrangements with Colombian and Mexican traffickers. We have very interesting agreements through Chinese networks of counterfeits, international counterfeiting that are in agreement and have sophisticated arrangements with traffickers from West Africa that in return are linked with money launderers and so on. And in all of these cases the notion of distance and the notion of geography matters far, far less than what it used to matter before, that's the second thing. The third thing is borders, is in each of these trades borders create opportunities for traders and headaches and limitations for governments. In each of these cases, in each of these trades borders are what create price differences and borders are what shelter the criminals. Borders offer great protection. If you commit a crime in one jurisdiction then you are able to move to another jurisdiction its gonna take a while for the law to catch you and extradite you. You see, the natural habitats of governments is inside their country. Governments are designed, created and they're operational nature is domestic. They are comfortable at home. They don't do well working across borders. Governments have a hard time operating across borders. It is as artificial for an official government agency to work across borders as it is any of us to work on the water. In order to operate on the water we need all sorts of artificial support systems. For governments to work in another country they need all sorts of artificial support systems for treaties and agreements and special deals and so on. So meanwhile the habitat of governments as imminently national and local that habitat of traffickers is international, borderless they thrive in the borderless world they thrive in flags of convenience and opportunities to operate in any location offers at the right time, the right place, the right opportunity to transact in some of the specialties of the day. So you have governments bounded by borders and criminals boosted by borders and that is an asymmetry that is, at behind a lot of this growth and is also an asymmetry that is behind my forth point about what all of these trades have in common. And that is that in each of these cases governments are loosing. There is not one instance that you can point or anyone can point in which governments have been successful in containing these trades. Not one. Think about the war on drugs. It was launched by President Nixon. This government, the U.S. government spends 40 billion dollars a year, with a B, trying to contain the importation and consumption of narcotics, yet the consumption is growing. It increased, the consumption of marijuana increased three folds in the '90's. Surveys of high school students indicate that they respond that for them in a great majority, its easier to get a joint of marijuana than to get a packet of cigarettes. If your, in an American high school today, the hassles of getting a packet of cigarettes or a bottle of vodka are higher than getting a joint of marijuana. And the purity of the drugs available, the quantity of drugs available, it's a higher. So that's just an example of drugs. But if you think for example a trafficking of people before 9/11, during the '90's in which the government had less reasons to pay attention to borders because of terrorism was not paramount in our minds it is estimated that about half a million, 500,000 illegal immigrants entered the United States each year. After 9/11 and the Patriot Act many other measures were taken to control the borders and limit the in flow of illegal immigrants. A recent study released just a few weeks ago discovered that the number of illegal immigrants entering the United States after 9/11 is 500,000 per year. Or take the trafficking in arms, in small arms when was the last time that any of you heard of an armed insurgency anywhere in the world that went out of business for lack of ammunitions or lack of arms? When was it, when sis you ever hear that a guerilla movement could not continue to operate because it couldn't get the guns? Never, there's not one single instance that we know or that I have discovered in which people committed to get weapons could not get the weapons. Despite embargos, laws, rules efforts from the military, the diplomats and international treaties, international organizations in yet the weapons trading continues unabated. And that is the case for each one of the trades that I have studied. What are the consequences of this expansion of illicit trades? The consequences have to do with the fact that traders have adopted, that traders are driven by the profits. Why we are worried about the global instability and insecurity that is driven by religious fanaticism and terrorism, the instability driven by profit is up there and continues. And these are businesses. As every successful business they do three things. They have same reasons to emulate the strategies of normal, private businesses. The three strategies are to diversify, to politicize and to legitimize. By that I mean that the first thing you do if you are running an above the board, illegal business and you start being very successful is to diversify your sources of revenues and your assets. You don't want to put all your eggs in the same basket. We all know that. So if you are running an operation that is essentially illegal and therefore very risky, what would be the first thing that you'd do if you have some money? Well you diversify into the legal economy to decrease your risks and diversify your sources of revenue. And that is happening in huge volumes and great quantities and its confounding our traditional definitions of what's private enterprise that is legal and what it is that is illegal. The second thing that companies do especially if their regulated, legal companies, is the more regulated they are the more incentives they have to spend money in influencing government. If you want to be very elegant and corporate you say that they invest money in government affairs. If you want to be more precise you say that they spend money lobbying. And if you want to be very crass you say they spend money in buying government influence. And that's true for all companies that are regulated from banks to pharmaceutical companies to the defense industry every company that's regulated spends money in being close to the regulators and getting to know them and getting to influence them and so on. Well these trades are the most regulated of them all. They are banned, so the rate of return of any investment that these traders make in trying to purchase government influence is infinite, its huge. Indeed, you can not operate if you do not buy government officials. Remember the example I gave you about the counterfeit operation. And so when that happens, and it happens on a world wide basis, you don't just buy the local chief of police, you have to buy several chiefs of police in different localities. You have to buy judges, you have to buy custom officials, you have to buy Congress people, and so on. So that leads to what I call in the book the criminalization in the national interest. Where depending on the dysfunctionality and the nature of the country you can end up with countries. That, were important policies and decisions are driven by the calculations of the traffickers and not the calculations of the national interest. And I have several examples that I can elaborate, very specific examples that I can elaborate on. And finally, every successful investor individual tries to buy legitimacy, social legitimacy and the way you do that is by sponsoring churches and orchestras, museums and sports clubs, and theatre and the arts. And that's normal and why shouldn't the criminals that are accumulating some of the vast, biggest fortunes in our time today don't do the same thing. And so again these three trends, these three strategies, essentially confound the business that is criminal to business that is legal, politics that is illicit and and philanthropy that is also confounded and intertwined with illegal activities. Together these trends are changing the world and that is the story that I came to tell you this evening. Thank you very much. Q & A