3 unexpected risks posed by transnational organized crime

3 unexpected risks posed by transnational organized crime

As globalization eases the flow of finances, goods, and ideas, political risk expands the opportunities and scope for criminal activity, which can have severe consequences for businesses.

Organized crime is defined by the United Nations Office on Drugs and Crime as a “structured group of three or more persons…acting in concert with the aim to commit…serious offenses…in order to obtain, directly or indirectly, a financial or other material benefit.” The shipping and extractive industries have long dealt with piracy and kidnapping, but the increasingly transnational scope of organized crime activities means that no industries are out of the reach of criminal groups.

Organized crime makes ground operations riskier by fueling local crime, violence and corruption. The increased level of insecurity both drives up insurance rates and negatively impacts the business climate. Counterfeiting, fraud, bribery, money laundering, economic espionage, and intellectual property theft rob businesses of profits. On a global level, transnational organized crime distorts the markets and undermines confidence in the financial system.

Here are three surprising ways that transnational organized crime threatens businesses and investors:

1. Cybercrime

The UNODC estimates that cybercrime and identity theft – whereby criminals steal private data and access bank accounts and payment details – generate an estimated $1 billion per year. Quinn Broda, of the international litigation and business law firm Sedgwick, reports that the eastern bloc gangs and the Russian and Sicilian mafias now generate most of their income from cybercrime.

Government entities, large publicly owned corporations, and financial institutions (including banks and insurance firms) are the most tempting targets for hackers. Successful hacks can be costly – in 2008, Russian hackers looted the Royal Bank of Scotland’s WorldPay, which transacts $9 million in a single day, and compromised the personal and financial details of 1.5 million customers.

In addition to the direct loss of stolen assets, victimized companies can be opened up to class action lawsuits and their damaged reputation can send stock prices falling.

2. Stock manipulation

Japan’s oldest and most infamous criminal organization, the Yakuza, has branched out over the last twenty years into the financial world. Involved in everything from insider trading to investing in startups, one expert on the Yakuza claims that the mob has effectively been turned into the biggest private equity firm in Japan.

Dubbed “Goldman Sachs with guns” by Yakuza expert Jake Adelstein, the mob’s methods are sophisticated and its reach international. The Yakuza uses both violence and their connections with people in high places to facilitate insider trading. Investigators report that the Yakuza even operate their own trading floors, where millions of dollars in stocks are traded daily under false identities.

The Yakuza also operate thousands of seemingly legitimate front companies, evading identification by employing mob-backed auditing firms to sign off on false accounts to manipulate earnings and stock prices. Investors in the Japanese stock markets stand to face major economic losses, as well as serious legal consequences, if they unwittingly invest in a Yakuza company. However, experts warn that this risk is not unique to Japan; investors must also be wary of similar organized criminal activity in Chinese and Russian markets.

3. Kidnapping and ransom

Corporate kidnapping for ransom has long been a risk of business travel abroad. The majority of kidnappings tend to target wealthy nationals, but foreign business executives are also preyed upon due to the high ransom they command.

When an employee is kidnapped, the victim corporation usually arranges for a bank transfer to move the ransom money to the area where it is to be paid. Terrorist organizations have increasingly been turning to kidnapping to raise funds and have collected an estimated $120 million in ransom payments over the past 8 years.

U.S. Treasury Under Secretary for Terrorism and Finance Intelligence David Cohen identifies kidnapping for ransom as the most significant terrorism finance threat today. Banks that provide cash for delivery to terrorists might face terror financing charges from the U.S. Justice Department, as well as civil penalties from the Treasury Department’s Office of Foreign Assets Control, which enforces U.S. sanctions and maintains the government’s blacklist.

Though the Justice Department has not yet prosecuted any companies for paying ransoms, Chiquita Brands International pled guilty in 2007 to paying extortion money to a Colombian terrorist organization. Chiquita paid the Justice Department $25 million and fought a number of lawsuits filed by victims of violence in Colombia. This case may provide a precedent for the prosecution of companies linked to funding terrorist groups.

The international community is deeply divided on the issue of ransom payments and different countries have varying rules regarding ransom payments. However, to avoid expensive lawsuits and the scandal of charges of financing terror groups, companies would be wise to assess the threat of kidnapping in the countries in which they work and perhaps invest in anti-kidnapping training. Crisis management firm Red24 lists the top ten countries for kidnapping as Afghanistan, Somalia, Iraq, Nigeria, Pakistan, Yemen, Venezuela, Mexico, Haiti, and Colombia.

Organized crime groups are adaptive and opportunistic. Therefore, investors must be aware of the threats posed by organized crime and operate defensively to protect their investments and themselves.

Categories: International, Security

About Author

Marina Mellis

Marina currently works for an informations discovery company and was previously working as a research assistant at the Economics Department of Columbia University. She graduated with a BA First Class Honours in International Development Studies from McGill University.