By Sanday Chongo Kabange, The Red Flag Group®
We frequently think of criminal organisations as operating separately from legitimate businesses and our everyday lives as corporate citizens. The infiltration of organised criminal groups into legitimate businesses has moved beyond the traditional underworld sectors such as restaurants, bars, construction, and transportation providers and into new industries such as renewable energy and pharmaceuticals.
The age of globalisation has come with increased mobility, economic liberalisation and technological innovation. All these advancements have enabled legitimate businesses to expand their operations across borders. At the same time, organised criminal groups have seized upon the same resources to go global with their illegitimate operations. For example, exploitation of forced or trafficked labour has always been part of organised criminal groups’ purview and the ease at which we now travel and communicate has only exacerbated such exploitation. Industries involving construction and maritime work remain at high risk of inadvertently using exploited labour.
In fact, organised criminal groups have taken advantage of the benefits of globalisation in ways that legitimate corporations cannot, as legitimate corporations are under constant regulatory scrutiny through domestic laws and regulations. Organised criminal groups also aim to secure the sustainability of their criminal operations by tapping into existing legitimate business networks and in many cases, taking over parts of certain industries through geographical or logistical control.
Multinational companies have a role to play in avoiding association with organised crime, as it is in their interests to avoid affiliation with or enable criminal activity. The same networks which legitimate businesses use to expand often overlap with those used by organised criminal groups.
The double-edged sword of territorial expansion
American and European companies have moved into Asia and engaged extensive networks of suppliers, distributors, logistics providers, brokers, agents and customers. This has built an opportunistic environment for various organised criminal groups in the region to connect to new customers, suppliers and intermediaries. Through the course of expanding into new territories, legitimate businesses have found themselves in need of local facilitators to help them bridge connections and provide logistical support. The role of such facilitators has become a legitimate service offering by well-connected entrepreneurs who are sometimes affiliated with organised criminals.
Organised criminal groups have capitalised on the needs of legitimate businesses by using them to launder illegitimate funds. At the same time, legitimate businesses and corporations are not helpless in dealing with the encroachment of those who act outside of the law. The key message is: know your third parties and how they do business.
Remember, organised criminal groups do not act alone, they often partner with existing business operations.
Lawyers and accountants as facilitators of crime
Like lawful businesses, organised crime groups also need legal and accounting services. Law and accounting firms are often well placed to act as conduits for bribes or laundered funds. They can also advise on setting up corporate structures designed to conceal the real ownership and source of funds for illegitimate businesses.
We advise that extra scrutiny and due diligence be applied to the services of small local professional-service firms, especially when unexplained payments are being made for generic-sounding services such as “consulting” or “marketing.”
Pharmaceutical suppliers and distributors
The manufacture of illicit drugs is often enabled by the supply of precursor chemicals from pharmaceutical suppliers who are also in the business of selling legitimate products. The entire world’s supply of cocaine and heroin can be made from diverting less than 1 percent of the legitimate global supply of their respective precursor chemicals.
Even finished drug products that are prone to abuse, such as methylphenidate (e.g. Ritalin) and oxycodone (e.g. OxyContin or Roxicodone), can be diverted to the black market and peddled by organised criminal groups. Such diversions usually happen at the distributor level, and therefore it is important to obtain on-the-ground reputational intelligence on high-risk distributors and suppliers. Risk analysis should be go beyond merely country and industry, but should extend to understanding local regions that may be strongholds for criminal groups and their businesses.
Hong Kong: Port city and financial centre for illicit drugs
Criminal groups have been taking advantage of the comprehensive system of regional transportation routes in the Golden Triangle (the border region of Thailand, Laos and Myanmar), to transfer heroin and methamphetamine produced there into China. A large amount of these drugs are then smuggled into Hong Kong and other port cities of the Pearl River Delta. Most of the drugs smuggled into Hong Kong are not consumed domestically. The Pearl River Delta acts as a distribution hub so that these drugs can make it onwards to Australia, Europe and North America. Local organised crime triads and other entrepreneurs act as distributors of drugs to the rest of the world. With Hong Kong being an international financial centre, known for its ease of banking funds from such illegal activities enter the global economy legitimately through banks branches in this city.
It was not difficult to see how certain global banks provided systematic support to launder money for the Mexican drug cartels when they were accepting deposits from drug traffickers, who provided cash in boxes specifically designed to fit through teller windows. Since the cartels are not classified as terrorists they did not appear on watch lists and as such paper-based due diligence systems were easily circumvented. In any case, in our view, a true know-your-customer process goes beyond screening against a list.
Green energy and the mob
The Italian mafia has become heavily involved in the renewable energy sector of Europe in recent years, taking advantage of new government funding and corrupt local government officials. The corruption extends across fraudulent tenders and bids, forged invoices, embezzlement and improperly obtained permits and licences. It has even been reported that if one had performed basic due diligence on one of the largest players in industry, Mr Vito Nicastri, they would have found he had ties to the Sicilian Mafia and had a criminal record for bribery dating back to 1996.
The involvement of organised crime in clean energy is also happening in Japan, where the Yakuza’s interest in renewable energy, in particular solar power, has been a relatively recent phenomenon not widely reported. There have been reports from Chinese investors who have backed out of renewable energy projects in Japan due to alleged association with the Yakuza.
This coupling of sustainable energy and criminal infiltration suggests that unlawful groups are interested in sectors where large investments are present. This is a reminder for those companies who operate in industries and geographical regions where government approval is required for lucrative contracts, as making such deals are prone to corruption and thus require extra scrutiny to make the deal worth the risk. When it comes to investments involving infrastructure, avoiding seizure of assets is worth the cost of due diligence.
Human trafficking and forced labour
Today, half the world’s forced labour are found in Asia. While there is a prevailing assumption that most trafficked victims are women and children who are forced into the sex industry, it is estimated that 75 percent are trafficked into forced labour. Victims of forced labour are usually found in factories, construction sites, fisheries and other places involving rigorous manual labour. Any employer who deprives a worker of their pay or their liberty is in the business of forced labour, or modern-day slavery, even if the worker voluntarily signed on to the job in the first place. Industries at the highest risk of utilising forced labour are those where jobs are low-skilled and that depend on a migrant workforce. Criminal groups exploit some of the most vulnerable members of a community, such as people looking to escape poverty, to enable trafficking and subsequent bonded labour.
There are new laws in the United States and Europe which aim to address transparency in the supply chain. Certain companies now have a legal responsibility to report what steps they have taken to ensure that slavery has not occurred among their suppliers. To this end, a company should document an approach on how they are going to prioritise their largest suppliers for integrity audits, which should be conducted using both quantitative and qualitative measurements.
It may be hard for us to imagine that legitimate companies engage in transnational organised criminal activities directly, however officials at many companies may still be playing a significant role in enabling criminal activity, either knowingly or unknowingly.
The steps which corporations are obliged to take go much beyond regulatory adherence to a know-your-customer programme or screening. They require a deep understanding of how illegitimate businesses creep into legitimate businesses. In the end, a good business is one that is sustainable, knows who it is working with, and takes precautions to protect its long-term success.