COMMENTARY No. 70

a CANADIAN SECURITY INTELLIGENCE SERVICE publication

THE THREAT FROM TRANSNATIONAL CRIME: AN INTELLIGENCE PERSPECTIVE

Samuel D. Porteous

Winter 1996

Unclassified

Editors Note:

In this Commentary Samuel Porteous, a Strategic Analyst with the Canadian Security Intelligence Service, examines the phenomenon of transnational crime from an intelligence perspective.

Disclaimer: Publication of an article in the COMMENTARY series does not imply CSIS authentication of the information nor CSIS endorsement of the author's views.

Introduction

The scope and power of groups involved in transnational crime (TC) has unsettled governments around the world. The Chairman's Statement of the 1995 G-7 summit in Halifax stated that transnational criminal organizations represented a growing threat to the security of the G-7 nations. This recognition of one of the downsides of globalization as a threat both to individual and collective security is significant. By classifying TC as manifesting a threat to national security, G-7 leaders recognized that the threat posed by TC in its current manifestation transcends the sum of individual crimes committed. TC had become a threat to systems—political, economic, environmental and social.

THREATS FROM TRANSNATIONAL CRIME

Threats to Political and Economic/Financial Systems

At the outset of the current discussions on TC, most attention focused on the illegal drug trade, its attendant violence and easily discernible social ramifications. There are, however, less dramatic but equally menacing activities of groups involved in TC that deserve attention. In fact, many consider TC activities such as major fraud, corruption and manipulation of political and financial systems more important to those engaged in TC, both from a point of view of percentage of revenues and future plans, than the illicit drug trade itself.

A report released by the German Federal Intelligence Service (BND) in the summer of 1996 concluded economic crime has developed into the "world's largest criminal growth area". This view of the growing importance and sophistication of economic crime was supported at a recent conference on transnational crime held in the UK. At that gathering a UK National Criminal Intelligence Service (NCIS) representative made the point that the majority of Mafia activity is not drugs (40 per cent) but "financial or business enterprise: investment, banking, financial bidding, fraud". He noted the same was true of organized crime in Japan. The speaker emphasized the business and professional skills and extent of contacts with the upper economic world that enterprise crime has, the strategic enterprises it seeks out for control, and the numbers of prestigious financial interests implicated in organized crime At this same conference, the UK Minister of State for the Home Office, Earl Ferrers, stated that the biggest threat emanating from TC was that posed to the economic/commercial and financial systems of several countries.

The threat to legitimate commercial and financial systems from TC is real. Fairness and justice in commercial transactions are not abstract concepts. Criminal interference in economic and commercial decisions through either intimidation or bribery distorts the market process in a negative way with, as Transparency International and other rapidly growing anti-corruption groups have pointed out, real costs to individuals and organizations. The threat to financial systems is less direct. The threat TC poses to these systems is not "dirty" money overwhelming "clean" money. The vast majority of financial transactions are clean. Rather, the fear is these systems, reliant as they are on their own credibility and reputations, might be tainted by criminal association and thus lose the credibility so essential to their functions. One need only examine the flight of capital from the Former Soviet Union (FSU) to recognize the importance of a trustworthy and secure financial system.

Pierre LaCoste, the former head of the DGSE, France's Foreign Intelligence Service, has focused on the role TC actors play in major frauds against government. He has written that the first source of funding for the European La Cosa Nostra is the manipulation of public funds associated with regulated markets and major government subsidy programs like those of the European Union (EU). According to LaCoste, drugs come second as a revenue source. In May of 1996 the European Commission gave credence to Lacoste's statements in reporting that crime syndicates were behind billions of dollars in major fraud against European Union (EU) programs such as agricultural and structural subsidies and various tax evasion schemes. In just one case reported late in 1996 the European Commission's anti-fraud division participated along with German and Italian authorities in cracking a precious metal-smuggling ring that evaded close to US $100 million in import taxes. The evasion involved bringing silver into the EU from Switzerland through "a merry-go-round of phantom or filter companies".

Canada has not been immune to this type of activity. Cigarette smuggling rings openly flourished in this country between 1990 and 1994. At its peak smuggled tobacco supplied 30-35 per cent of the Canadian market. This not only cost the Canadian treasury hundreds of millions in lost taxation revenue but established a smuggling infra-structure as easily turned to arms and illegal alien smuggling as cigarettes and alcohol.

While all countries are at risk, countries of the former Soviet Bloc have been particularly vulnerable to these sorts of threats against public and newly formed private actors. The large-scale privatisation and chaotic economic and political/regulatory transitions experienced in former Eastern Bloc countries since the collapse of the FSU have created fertile soil for all manner of illegal and/or corrupt private sector and public sector activity. According to transnational crime specialist Louise Shelley, "the most lucrative element of post-Soviet transnational criminality lies in the area of large-scale fraud against government."

From a Canadian perspective crimes of this nature involving resource products and raw materials are of special importance. Reportedly, many Russian bureaucrats have aligned or are beginning to align themselves with criminals involved in the illegal export of raw materials. Ronald Noble, an undersecretary with the US Treasury, has described the scale of income and excise tax fraud taking place in Russia as unprecedented and a threat to the stability of the Russian financial system. Former director of the CIA, James Woolsey stated in 1994 that according to Russian Customs officials, "the illegal export of raw materials alone reportedly costs the Russian government $10 billion in lost revenues per year". This is apart from any destabilizing effect illegally exported Russian natural resources might have on international commodity markets.

One of Russia's most important export earners, diamonds, is the latest resource product to trouble the beleaguered central government. In November of 1996, citing mismanagement and other concerns the Russian government gave the President of the Republic of Yakutia—home of Russia's state-owned diamond company, which controls 98 per cent of the country's diamond production—one week to remove officials now running the organization. At this time Alexander Livshits, Russia's finance minister, revealed the company was facing fines amounting to more than US $379 million just for its violations of foreign exchange regulations.

Concerns regarding behaviour of this nature are so strong the Russian government recently formed the second "Vecheka", or extraordinary committee, in its history to assist in and monitor the collection of government revenue. While the extremely complicated Russian taxation system evokes little sympathy, influential observers, including the International Monetary Fund, agree some action was necessary to ensure Russia continues to raise enough revenue to continue functioning as a state. The formation of this second Vecheka indicates the Russians are taking this matter very seriously. The first extraordinary committee's mandate was to deal with counter-revolutionaries and ultimately evolved into the KGB.

Countries formerly within the Soviet orbit have been similarly affected. Groups involved in TC are exerting a disturbing influence over the transition from state control to market economy. Often this influence manifests itself in the form of "trusted advisers" to senior political officials who pose as successful businessmen but are merely criminals. When these TC actors fail to obtain the results they wish through cooption and corruption they turn to violence. For example, the attempt on the life of Ukrainian Prime Minister Pavel Lazarenko in the summer of 1996 was attributed by some to the Ukrainian "coal generals" whose illegal profits from the Ukraine's coal industry were threatened by the prime minister's efforts to restore law and order in this sector.

The targets and negative repercussions of the various FSU-based TC groups extend beyond the FSU and its former satellites. Their victims encompass the globe. Russian TC group activity in public sector fraud affecting other countries includes large-scale health-care fraud in California, gasoline tax evasion schemes in California, New York, New Jersey and Ontario (amounting to billions of dollars) and exploitation of the subsidies the German state provided resident Soviet Military troops in Germany.

While the scope, scale and the political/security ramifications of the Russian activity merit special attention TC is clearly not a strictly Russian phenomenon. Transnational aspirations have also been detected among African and Asian-based transnational crime groups. These groups have been particularly active in financial fraud and other economic crime. In fact, elevated concern over TC has occurred partially as a result of the increasing strength and ambitions of these newer more aggressive TC groups. Since they are only now passing through the violent and politically uncomfortable stages of development most Western TC groups passed through decades ago.

By beginning to go after the wealth to be found in the Western democracies, these TC groups are disturbing previously accepted resource allocations. Through their unacceptable business practices, they are also interfering with the ability of legitimate developed-country commercial interests to safely and securely access new opportunities evolving in developing regions. The privatisation processes now going on in many of the countries most threatened by TC have drawn the interest of criminals within and outside those nations. These programs offer a once-in-a-life-time opportunity both to launder criminal funds and to gain enormous influence in the legitimate economy. Not surprisingly, TC actors are reluctant to share these opportunities with legitimate investors.

Cooption and Corruption

Perhaps, even more insidious and threatening than the actual crimes themselves, is the groundwork that must be laid by TC actors to ensure their success. To facilitate their activities those engaged in TC must by necessity target decision centres within countries in order to ease their existence. Corruption, cooption and political manipulation become primary tools. The goal is, if not to replace, at least develop a symbiotic relationship with the centres of power within a country. An atmosphere wherein it becomes increasingly difficult to disentangle the interests of TC actors from those of power brokers within the state is the goal.

Again, Russia and Eastern Europe serve as cautionary examples. The moral vacuum created by the collapse of the Soviet state and the Warsaw Pact, ineffectual enforcement and regulatory structures, coupled with a still crude understanding of capitalism and democracy—particularly in the former Soviet Republics—have resulted in what some describe as a golden age of corruption within the FSU and Eastern Europe. Emilio Viano of the American University in Washington DC, has cited estimates that 30 to 50 per cent of Russian TC group revenues go to corrupt officials.

Once again the threat presented by this activity is not limited to Russia and Eastern Europe. The corruptive skills these groups have developed within the FSU are now eagerly transferred to the penetration of new markets for major frauds against governments and commercial crimes in countries outside the FSU. Eric Seidel, deputy attorney general in charge of the New York State Organized Crime Task Force since 1995:

Recent reports of some Russian crime groups' methodical approach to infiltrating foreign economies and political structures, including the funding of political parties, support expressed concerns regarding the impact of large-scale TC on the very fabric of civil society. These views are supported by the head of a unit established by Canada's Immigration Department responsible for barring entry to Canada individuals believed to be involved in TC. The official described these Russian TC actors with their enormous financial resources and corruptive techniques as "a major, major concern" and "a challenge to our democracy and political institutions."

The sophisticated techniques employed by the Russian mafia pose serious enough threats when applied to traditional criminal fields but become even more worrisome when applied to less publicized TC activities such as certain types of financial fraud, the disposal of toxic waste or other special materials. In a recent Canadian example, US $350 million worth of non-radioactive isotopes of Russian origin were illegally shipped into Michigan from Canada. The materials were allegedly purchased for US $24 million by a Swedish-Russian joint venture which transferred ownership of the material through several companies located in the Toronto area. Canadian involvement in the case was initiated by a request from the Russian government.

These corruptive practices should not, however, be seen as unique to Russian TC activity, but merely standard criminal group activity that should be anticipated from any TC group of sufficient size and maturity pursuing certain goals within a jurisdiction. Academic Peter Lupsha described a typical example of criminal corruption and cooption which took place in a small community that became a major international drug export consolidation centre in Peru between 1993 and 1994. Eighteen months before the drug operations began, criminal figures from Colombia and Peru entered the community holding themselves out as entrepreneurs and tourism developers.

During the four months the site was operational, allegedly 40 tons of cocaine base was moved through the community. In examining such examples Lupsha is correct in concluding that once criminal groups become embedded within a society, "organized crime ceases to be a criminal justice problem and becomes a public policy problem".

At its worst this type of cooption and corruption infiltrates the governing mechanism of the country itself, raising the unwholesome prospect of "criminal states". In a criminal state the battle has been lost and TC actors see the government of the day as a partner, not an enemy.

Terrorist Racketeering and Collaboration with Insurgents

Another area where TC activity raises concern is terrorist racketeering and collaboration with insurgents. TC actors' vested interest in weak states where governments are unable to focus firmly and resolutely on TC issues sometimes leads them to go beyond mere manipulation and corruption of existing political and governmental machinery to direct support and collaboration with insurgents. According to Woolsey:

FARC's extensive criminal fund raising activities, particularly through involvement in illicit drugs, have led many to refer to the one-time hardline communist group as the 'third cartel'. The importance of criminal activity as a revenue source to FARC was demonstrated earlier this year when Rudolf Hommes, a former Colombian finance minister, cited a study on guerrilla finances which calculated that the main Colombian groups "doubled their funding between 1991 and 1994, with the drug business contributing 34 per cent of income, extortion and robbery 26 per cent and kidnaps 23 per cent."

This "terrorist racketeering" has become increasingly common as it becomes more difficult to obtain funding from state sponsors given the New World Order in which the Soviet Union is no more and legislation designed to punish terrorist funding becomes more widespread. The Provisional Irish Republican Army (PIRA), for example, has reportedly been involved in gaming, social clubs, fraud and charities in order to raise money.

Importantly, these terrorist racketeering activities often extend beyond the direct theatre of conflict. In Canada, according to news reports, the Liberation Tigers of Tamil Eelam are involved in numerous TC activities, including partnerships with Pakistani heroin producers/traffickers, alien smuggling, extortion from Tamil families living abroad, and various forms of fraud. All this in order to raise funds for their insurgent activities in Sri Lanka.

As traditional funding sources dry up these groups will become ever more entangled in TC activities.

A STRATEGIC RESPONSE TO TC THREATS

Given the nature and breadth of the threat, governments, in order to go about their business in the best interests of their citizens, need intelligence on TC actors. Strategic intelligence consisting of information on who these actors are, their intentions, capacities and potential impact is essential to any government response to this problem.

A State's TC Strategic Intelligence Needs

A good example of this strategic intelligence on TC issues came from an April 1996 hearing of the US House International Relations Committee on the threat from Russian organized crime. In testimony before this committee, John Deutch, the director of the Central Intelligence Agency (CIA), provided some much-needed dispassionate analysis of the big picture surrounding the TC threat. In describing the CIA's role with regard to TC in the Russian context, he said the agency was analyzing how the Russian government "will deal with this problem as it tries to move towards democracy and a free economy and, secondly, what kind of threat does it convey to us abroad." When asked by a committee member whether Russia could be described as a "crime state" where it was "hard to distinguish between the criminals and government officials", Deutch responded, "I certainly wouldn't call it a crime state, sir." He went on to say that while he considered the Russian TC issue extremely serious:

Deutch also offered some sectoral analysis down-playing the frequently exaggerated estimates of the number of Russian mafia-controlled banks. During testimony the director was confronted with the often used figure of 50 to 80 per cent of all Russian banks being controlled by Russian organized crime and asked whether he agreed with this analysis. Deutch replied:

Deutch then offered to provide more details in closed testimony.

The environmental impact of some TC activity is another area that lends itself to strategic analysis. The waste disposal industry has long been known to be a significant revenue source to the La Cosa Nostra. Waste disposal becomes critically important when it involves toxic materials. Reports from Italy indicate the disappearances of up to 30 ships loaded with toxic waste, in many cases Italian industrial radioactive material, were linked to a complicated Mafia insurance fraud scheme dating back to the late 1980s. After being at sea for months these ships were suddenly posted as lost and presumably scuttled. The Italian government has requested assistance in the ongoing investigation from the European Commission and Greenpeace.

In another example, the Russian mafia has taken advantage of the ban on production of ozone-threatening CFC chemicals in several developed countries by illegally supplying these markets with CFCs produced in Russia. Reportedly, at one point, the black market for CFCs in the US was valued at US $600 million. Interestingly, once the combined efforts of the CIA, US Customs and the Internal Revenue Service managed to shut down the Russian supply of CFCs the Russian TC activity in this area began targeting several Western European countries as possible markets.

The easy profits to be had by TC groups involved in waste disposal willing to ignore environmental regulations renders this sector a key target for TC groups around the world. Few activities better illustrate the threat TC groups pose than their irresponsible behaviour in this area.

Strategic Intelligence and TC: A Canadian Perspective

The need for this type of strategic analysis on TC issues in a Canadian context was recognized by the Canadian Security Intelligence Service (CSIS) in its 1995 Public Report and Program Outlook. Noting that other governments "are using their security and intelligence services to fight transnational crime" CSIS stated that the Service had a role to play—primarily through the provision of strategic analysis—in assisting government deal with the TC issue. The report went on to say CSIS's established relationships with foreign intelligence services examining TC issues would play a key role in the Service's work in this area.

TC-related strategic intelligence could examine a range of issues important to the Canadian government. For example, a CSIS TC-related strategic intelligence report might explore the influence of TC figures within a selected country, what threats this influence presents to Canadian interests and prognostications for the future. The report ideally would serve as a valuable aid to decision-making involving Canadian interests and policies to be pursued with regard to the subject country.

In a similar vein, the Service may be required from time to time to examine the bona fides of certain large commercial entities operating out of the so-called "zones of chaos" in the FSU, Eastern Europe or parts of Asia seeking to do business in Canada. "Due-diligence" work of this nature resulting in individual and company profiles would be useful to government economic policy-makers and those involved in counselling Canadian commercial interests. According to Woolsey, one of the reasons the CIA devotes so much time to these issues is that "people are sort of storming the battlements out at Langley trying to get as much information as they can about precisely this type of subject". Finally, intelligence assessments of attempts by TC actors to infiltrate and influence both foreign governments and our own would be of essential interest to the Canadian government.

Conclusion

The scope and scale of the threat posed by TC and recognized by the G-7 is sobering. Its ramifications extend beyond the violence prone drug trade and its attendant social costs. As serious as these problems are, they should not lead policy makers to ignore the less familiar and more difficult to discern faces of transnational crime emerging from the darker corners of the New World Order. Economic and commercial crimes, including major fraud against governments, will continue to grow as a percentage of revenue for those involved in transnational crime. The need to corrupt and coopt civil authorities will expand hand-in-hand with the ambitions of the various TC groups. As always, power and money will be the incentives, while the stability of strategically important states, the maintenance of civil society and the integrity of economic and even environmental systems will suffer the consequences. Strategic intelligence provided to policy makers regarding who these TC actors are, their intentions, capacities and potential impact on Canadian interests will be an essential element of any approach to this challenge.