Follow-the-Money Methods of Crime Control: An Appraisal

by

R. T. Naylor

Professor of Economics

McGill University

Montreal

Follow-the-Money Strategy:

• Makes big changes in criminal law

• Revolutionizes law enforcement methods

• Conscripts private financial sector

• Transforms client-institution relations

• Complicates international relations

Follow the Money Strategy:The Basic Questions

1. What is it?

2. Why was it adopted?

3. How does it operate?

4. Does it work?

5. What kind of “collateral damage”

1.What: The U.S. Model

• New crime “money laundering”

• New reporting requirements

• Facilitate freeze and forfeit

• “Proceeds of crime ” to the police

• Operates nationally and internationally

Traditional Financial Investigations

1) Reactive

2) Case-by-case

3) Usually target predatory crimes

4) Seeking evidence against perpetrators

5) And/or restitution to victims

Modern Financial Investigations

1) Proactive (including stings)

2) Targets criminal economy

3) Usually market-based crimes

4) Object to seize “proceeds”

5) To punish and deter

2. Why Was It Adopted?

a. Logic of deterrence

b. Presumed sums

c. Danger of “cartels”

d. Threat of infiltration

e. View of banker

f. Secret agendas?

a. The Logic of Deterrence

Taking away the money removes:

- motive to commit new crimes

- means to commit new crimes

- capacity to infiltrate the legal economy

Motives and Mores? A Changing View of Crime

• Old View:Focus social context• New View:Criminal as cost-benefit calculator• Other motives ignored or downplayed:- Peer pressure- Lack of alternatives?- Pyscho-social disorders- Stupidity of certain criminal laws

b. A World Awash With Criminal Money?

• World drug trade: $500 billion per annum!• US share: $100-150 billion!• Laundered Money = 2-5% World GDP!• Meyer Lansky’s assets: $300 million • John Gotti’s annual income: $350 million!• Pablo Escobar’s fortune: $2-14 billion!• World GCP: $1.2 trillion!

Criminal Income: What is Really Known About…

• Amount?

• Trend?

• Distribution?

• % Profit?

• % Laundered?

• % Legally Invested?

• Impact?

Existing Scientific Knowledge

First Law of Crimodynamics

“You do not have to take the square root of a negative sum to arrive at a perfectly imaginary number.”

.

c. The Criminal “Firm” (I)The Harvard MBA Model

• Large organizations

• Hierarchical structures

• Long term planning

• Huge profits

• Profits concentrated

• Infiltrate legal economy

• Corrupt legal markets

The Criminal “Firm" (II)The Rotary Club Model

• Individuals and small groups

• Arms length, ad hoc relations

• Opportunistic

• Modest profits

• Profits widely shared

• Cash mainly on street

• Rare and usually benign infiltration

d. Threat of Criminal Infiltration

“The business community is so infected by drug money we can’t handle it with law enforcement tools alone.” Director, U.S. National Drug Intelligence Center

“Approximativement 90% des

clubs, bars et brasseries sont

contrôlés par le crime organisé.”

Montreal Police Study

Why Criminal Money Enters the Legal Economy

• Long term security

• Inheritance

• Reducing risk to income

• Tax cover

• Supporting rackets

• Applying criminal methods to extract profit

e. Role of the Banker

Police

Client

Banker

f. A Hidden Agenda?

• A.G. Official: “The potential in this area is really unlimited. My guess is that, with adequate forfeiture laws, we could….”

• Senator: “We could balance the budget?”

• A.G. Official: “There clearly would be millions and hundreds of millions available”

Senate Judiciary Committee 1982

3. How: Changing Relations of Banker, Client and Police:

OLD NEW

Client Police

Police Client

Banker Banker

Information Flows and Client Relations

Report Banker Information Client

CTR passive objective aware

(conduit)

STR reactive subjective aware (?) but

(informant) uninformed

KYC proactive subjective unaware &

(private eye?) uninformed

The Financial Analysis Centre

• Customer Bank clerk

• Bank clerk Bank manager

• Bank manager Bank security

• Bank security Financial centre

• Financial centre Tax authority

Police

Intelligence agency

Financial Institution Vulnerability

• Criminal charges - fines

- suspension of charter

- “death penalty”• Civil penalties - fines

- forfeitures• Social fallout - flight of clients

- civil suits

- falling share values

4. Do New Reporting Requirements Work?:

• deluge of information

self-defeating• institutions in

conflict of interests• premium on

rumour, bias, stereotype• out of sync with

modern banking

The CTRDefeated by:

• Evasion techniques

• Sheer mass

• Good business cover

The STR

Problems:

• training of front-line staff

• lack of objective standards

• propensity to over-reporting

• changing nature of banking

-- centralized deposit processing

-- spread of electronic banking

KYC Rules

• changing nature of banking

• need to “know” - client

- client’s clients

- client’s client’s clients etc.

• what are we supposed to know?!!!??

5. Collateral Damage?The U.S. Model

a. Regulatory infractions = crimes

b. Civil forfeitures

c. Seized assets to police

d. Imposed on world

e. Applied to “terrorist finance”

a. Money Laundering as a Crime

• contrived offense?

- shifts focus from underlying crime

- creates two classes of citizens

• unnecessary offense?

- use of conspiracy or aiding & abetting

- expand definition of predicate offense

- fiscal procedures eliminate profit

b. Civil Forfeitures• taint of criminality

without trial• reverses burden

of proof• collateral damage

to innocents• abuse of concept of instrumentality• creates professional informants

c. Financing Law Enforcement from Forfeitures

• community control

subverted

• budgets detached from

logistical needs

• focus shifted from

violent to rich offenders

• corruption encouraged

d. Externalizing the U.S. Model

• institutional conditions differ

• legal traditions differ

• social priorities differ

• no proof it actually works

e. Attacking Terrorist Finance?

• Removes motive? - No

• Removes means? - Marginal

- small sums required

most legal in origin

the rest from petty crime

• Key Asset - Determination

Can’t Be Frozen in a Bank Account

Follow-the-Money Methods: Another Faith-Based Initiative?

• Dubious logic

• Bank-client conflict

• Information overload

• Degradation of civil rights

• More international disputes

• For no proveable result