Understanding Organized Crime in Economics

Krassen Stanchev, Sofia University, chairman of IME Board, and CEO of KC2 LTD (stanchev@ime.bg) Economics of Organized Crime (with some examples from the Balkans) Economics of Bizarre Phenomena Partners' Academy September 19, 2024 1

Working definitions and assumption - 1 Intentional and repeated over time production and supply of criminalized goods and services (Vito Tanzi, Corruption: Arm s- length Relationships and Markets , in: Fiorentini, G. i Pelzman, S.M (eds.): The Economics of Organised Crime, Cambridge: Cambridge University Press, 1995.) Governments and traditions define what is crime . Like all professions, the supply of criminalized goods and services may require high and low qualification, white and blue color criminal activity. White collar would presuppose a certain degree of refinement of knowledge and skills, certain professionalism on the producer and supplier side. Two ways to look at those: from historic and from market perspective. Partners' Academy September 19, 2024 2

Not so profound definitions of OC Not so profound definitions of OC Brittanica: complex of highly centralized enterprises set up for the purpose of engaging in illegal activities. Such organizations engage in offenses such as cargo theft, fraud, robbery, kidnapping for ransom, and the demanding of protection payments. UNTOC (2003) no definition OC-INDEX (https://ocindex.net) illegal activities conducted by groups or networks acting in concert, by engaging in violence, corruption or related activities in order to obtain, directly or indirectly, a financial or material benefit, carried out both within a country and transnationally. CORRUPTION (?) refers to government involvement (Jan Teorell: https://www.gu.se/sites/default/files/2020-05/2007_5_Teorell.pdf ALIPIEV (2012 - https://procon.bg/system/files/views_007.pdf) OC not necessarily complex, or severe crime act. But typical for any market-based society . Partners' Academy September 19, 2024 3

Bulgarias Penal Code (Art. 93/20) Bulgaria s Penal Code (Art. 93/20) An "organized criminal group" is a structured permanent association of three or more persons for the purpose of committing in concert, in the country or abroad, offences punishable by more than three years' imprisonment. The association might also be structured without any formal division of functions between the participants, duration of participation or developed structure. Partners' Academy September 19, 2024 4

Low and High Entry Barrier on Market for Organized Crime (Examples) Low entry costs: Credit, Prostitution, Smuggling, Money laundering . Border zone between high and low entry costs: Industrial counterfeit of goods, money, documents and credit cards, etc. High entry costs: Supply of services requiring systemic and professional use of violence, Industrial production and supply of drugs, weapons, etc., Overcoming juridical barriers (including state boundaries), which is defined as crime. Partners' Academy September 19, 2024 5

OC AND TERRORISM OC AND TERRORISM Terrorism is the deliberate use or threat of violence against civilians by a non-state entity (individual or group) in pursuit of a political goal. Like wars between states, civil wars, or insurgencies, terrorism is a species of political violence, distinguished from ordinary criminality on account of its goal of advancing some political end beyondits immediate targets themselves. Partners' Academy September 19, 2024 6

Management issues Management issues Informality No formal (or just tacit) profit and loss reviews No annual financial statements No invoices on the letterhead of the organizations No formal credit No tax reports Partners' Academy September 19, 2024 7

Microeconomics of Crime (and Terror) Microeconomics of Crime (and Terror) Rational individuals; They perform cost-benefit analysis; More likely to attack unprotected individuals than armed lads; in search of greater security and better terms of a custodian institution. The collective actions - principles of guerilla warfare: Small units, loosely connected, Surprise tactics, High level of mobility, Low costs. Most importantly: criminal and, especially, terror service providers are few in number Partners' Academy September 19, 2024 8

Overall consequences for the OC business Overall consequences for the OC business organizations organizations Trust is personal and professional, not impersonal. Contract enforcement informal and personal. These do not depend of the level of complexity and/or It is irrelevant whether government, low- enforcement bodies are involved or not. Partners' Academy September 19, 2024 9

Peculiarities of Performing above Activities 1989 2005 (1) At the eve of the period, before January 1989, most normal economic activities would have been considered a crime, Overall crisis of the state exclusivity rights (of monopolies, use of violence, and controls), Over-supply of force and control structures and enterprise recruited from military and paramilitary circles (creation of such circles), idle former sportsmen, secret police and security service, communist parties and communists youth organizations. Attempts of legalization of these structures and/or attempts of protection from persecution. Privatization of profits and nationalization of losses. Spontaneous use of different opportunities, legalization and protection. Partners' Academy September 19, 2024 10

Peculiarities of Performing Above Activities 1989 2005 (2) Before and during the UN embargoes on ex-Yugoslavia Concurrent jurisdiction of crime in neighboring countries, Financing democracy and semi-successful oligarchies. Post-embargo and post-war period: a) increased government control, b) instances of use of violence for constitution making purposes, c) support for such use from private and public constituencies, d) ineffectiveness of international involvement, e) increased bureaucracy and regulation, f) corruption as a substitute of democratic finance. Partners' Academy September 19, 2024 11

Peculiarities after 2005 Peculiarities after 2005 Involvement of law enforcement agencies; The role of the prosecutor general, especially after 2012; Erosion of the system in 2022-23; Political parties and leaders accidental cooperation with law-enforcers; Same macroeconomic and management challenges apply. Partners' Academy September 19, 2024 12

White Collar and Financial Low entry costs: Insofar as criminalization is usually a function of the bodies of representative democracy, Insofar as the supply of criminalized services is a product of and presupposes a certain social status and the resulting rents, including monopoly rents, The essential roles derive from the criminalization and distortions of the free combination of supply and demand, ranging from a criminal exchange as a social phenomenon to kleptocracy. In this sense, organized crime arises in the process of competition between empowered (subject to or in the process of empowerment) plunderers, in the competition between kleptocrats. Empowerment can happen formally or informally. When it is formal and with the mechanisms of representative democracy - the role of the empowered plunderer belongs to the government, or rather to the elected top polititians. When the empowerment is informal - the empowered might be criminal, criminalised. Partners' Academy September 19, 2024 13

White Collar and Financial Aspects Related to Different Phenomena are as Follows: Low entry Link to organized crime History Credit Irrelevant, response to regulation like most low entry costs activities Early post-communist transition Money laundering Financing, if counteracting (prevention of laundering is successful) Early stage outside the region, lately in the region High entry costs Link to organized crime History Services in professional violence White collars provides additional services to this type of business Internationalization Production of drugs, weapons White collar serves as initiator Pre-1989 it s a government business, then deregulated and internationalized Partners' Academy September 19, 2024 14

How big is the cake? - Perhaps, it is not very big A. B. C. It is not national Closest phenomenon is the grayeconomy In the Balkan, in 1900-2003 (excluding, Greece, Turkey and Slovenia), the gray economy is between 30 and 40% of GDP. Due to regularities that are not easy to study and due to typical constellations in consumption, fixed capital formation and gross value added, it would be hardly possible to have a domestic black economy (organized crime ) over 2/5 of the gray economy. This means that, if measurements of gray economies are correct, the organized crime, at 10% of gray assumption is between EUR 3.6 and 4.8 or between 7.2 9.6 (at 20% assumption). D. E. Partners' Academy September 19, 2024 15

THE EU DIMENTION: focus on serious and THE EU DIMENTION: focus on serious and organized crime organized crime How the EU fights serious and organised crime What is EMPACT? Results of the EU's fight against crime EU crime priorities for 2022-2025 Rights of victims Russia's military aggression against Ukraine Mutual evaluations Source: https://www.consilium.europa.eu/en/policies/eu-fight- against-crime/ Partners' Academy September 19, 2024 16

EU Classification of OC EU Classification of OC The top criminal activities in Europe are: cybercrime trafficking in human beings migrant smuggling drugs trafficking excise fraud COMMENT: the accent is derived from TFEU Origins: the EU rescue of the nation states. Partners' Academy September 19, 2024 17

Organized Crime Index Organized Crime Index Link: https://ocindex.net Partners' Academy September 19, 2024 18