FOLLOW-THE-MONEY METHODS

IN CRIME CONTROL POLICY

BY

R.T. Naylor

Professor of Economics

McGill University

A study prepared for the

Nathanson Centre for the Study of Organized Crime and Corruption

York University, Toronto

Introduction

Over the last 15 years there has been a quiet revolution in the theory and practice of law enforcement. Instead of simply closing rackets that generate illegal income, the central objective has become to attack the flow of criminal profits after they have been earned. Prodded on first by the U.S., then by the Financial Action Task Force of the G-7 countries, then, in more recent years, by the United Nations, a new crime – money-laundering – has been put on the books of many countries. Furthermore many law enforcement agencies now host special units responsible for pursuing not malefactors, but bank accounts, investment portfolios, houses and cars; while officials of the justice system are made responsible for managing such sequestrated assets until they can be forfeited and sold. The law enforcement apparatus therefore has ventured onto territory and begun using methodologies formerly the preserve of revenue authorities. Given the current zeal, it sometimes seems as if what criminals do has ceased to be as important as how much they earn by doing it.

The principal legal instruments employed in the pursuit of ill-gotten gains take the form of new regulations intended to hamper the infiltration of criminal money into the legitimate economy, and of asset seizure laws to facilitate the process of taking away from criminals the profits of their crimes. The two are closely related. Anti-money laundering rules that require extensive reporting on financial transactions help to create a paper trail to facilitate the subsequent tracing and seizing of criminal money, and create new offenses that help justify such seizure.1

Such laws have had as their consequence, to various degrees in various places, the undermining of traditional presumptions in favour of financial privacy, the opening of tax records to police probes with the danger that the integrity of a fiscal system premised on might be undermined; the muddling of civil and criminal procedures, and, in extreme cases (the U.S. is the most notorious example) the impairing of the right of an accused to due process. Clearly these new legal initiatives are powerful tools, sufficiently so that it is reasonable to ask that they not be deployed unless and until their need has been unambiguously established, their objectives clearly delineated, and the public well informed both of their actual (as distinct from purported) purpose and of any "collateral damage" their use might entail. It should be convincingly demonstrated that any perceived failure of existing methods of crime control results from deficiencies in existing laws, rather than from deficiencies in the application of existing laws, that a crisis exists of sufficient order of magnitude to require radical alternatives, and that such alternatives have a good chance of being effective in rectifying those deficiencies.

Yet, despite the rapid spread of such laws across the world, despite the growing popularity of a "proceeds" approach to crime control, no one really knows how much criminal income and wealth actually exists, how illegal gains are distributed or how harmful their impact on the legitimate society and the legal economy really is. As a result, no one can say with any degree of confidence what the actual effects of a follow-the-money strategy has on its intended target, though they can point with considerably more confidence to its pernicious side-effects. Consequently, it is time for a cold reassessment of the entire approach.

Origins of the "Proceeds" Approach

Contemporary laws that facilitate the freezing and confiscating of criminally-derived assets are of two main types. Some involve strictly in personam procedures – an individual must be charged with a crime, and that crime proven beyond a reasonable doubt, before specified property, also proven on criminal criteria to be the proceeds of that crime, can be seized. Standard safeguards - presumption of innocence, right to counsel, and protection against double jeopardy or disproportionate punishment – apply. Other laws, like those prevalent in the contemporary U.S., involve in rem procedures – property can be seized if it can be established by civil criteria (balance of probabilities) that the property was the proceeds of or means to commit a crime. With the U.S. approach, there is no need to even charge the owner with, let along prove, a specific crime. Once probable cause to freeze property is established, the burden of proof is shifted onto the owner who has no right to counsel, nor any protection against double jeopardy or disproportionate punishment.2 There are also mixed systems (as in England and Canada) where property can be frozen in advance of a trial and, if an individual is found guilty under criminal criteria, property can be forfeited using civil (balance of probabilities) criteria that it is likely the proceeds of a crime.3

Though both criminal and civil forfeiture have only recently assumed a prominent place in the roster of modern police tools, they have deep historical roots. The precursor of civil forfeiture is the Medieval notion of deodand ("gift to God"). If an object (anything from a runaway horse to a flying axe-blade) was deemed to have done injury (usually fatal) to a person, the object itself was adjudged guilty and therefore forfeit. Originally, in conformity with prevailing superstition, the guilty property was destroyed in elaborate rituals.4 Alternatively it was used for compensation to kinsmen of the affected party. But as considerations of revenue replaced those of remediation, the forfeited property went to the King. Whatever the fate of the property, from early times there were protests that the procedure really involved punishment of the owner without benefit of trial. Nonetheless the fiction was maintained that a piece of property rather than a person was guilty, and that the procedure was accordingly remedial rather than punitive.

The antecedents of today’s criminal forfeiture can also be found in early modern times. Anyone found guilty of treason was stripped of chattels and estate which then became Crown property. Later in England that process was applied to all convicted felons – with the number of felony offenses rising pari passu with the Crown’s need for revenue. Unlike modern criminal forfeiture, there was no need to establish any relationship between a specific crime and the lost property – a felony conviction could lead to loss of all chattels and estates even if they were of completely legitimate origin.

Although deodands and forfeiture of estate were the spiritual predecessors of modern civil and criminal forfeiture laws, there was actually a third method by which assets could be seized, one which would in some ways prove more influential in shaping modern proceeds-of-crime methods in North America (and beyond) even though its intended objectives were very different. The tasks of enforcing the Navigation Acts (which regulated trade within the British empire) and of assuring collection of the British government’s Customs and excise taxes were assigned to Vice-Admiralty and Exchequer courts where procedures were in rem. Strictly speaking their job had nothing to do with crime control – it was to enforce economic regulations and tax law.

For such purposes in rem procedures made sense. Taxes were overwhelmingly indirect, levied on commodities and therefore ultimately on income spent rather than on income earned. Given the primitive state of the tax administration, it made sense to impose taxes at the import level where there were fewer locations and/or merchants affected, than at the wholesale or retail level which would have required information and infrastructure far beyond what was available. Furthermore owners of cargoes, and of the ships that carried them, were often unknown or unavailable. Therefore merchants and/or captains were expected to bear the burden of proof that all taxes had been paid.

For example, if a ship and/or cargo lacked proper Customs stamps or tax receipts, it could be impounded. The Vice-Admiralty court would determine if there was probable cause for proceeding. If there was, the court ordered the ship and cargo appraised. Notice went out to those with a stake in the ship and cargo to show why their interests should not be forfeited. If there were no contest, a summary forfeiture occurred. If there were a contest, the burden of proof shifted to the party contesting the forfeiture.5

Of course the actual administration of the laws left much to be desired. The integrity of the process was compromised by giving Customs officials a share in confiscated cargoes. Corrupt officials left those merchants with whom they had a personal or pecuniary relationship unscathed, employed networks of paid informants against others and falsified the value of seized inventories.6 But, these abuses aside (not much different from those typical of the rest of the public administration at the time), the fundamental principle seemed reasonable in relation to the existing circumstances and objectives.

Deodands eventually died out, and were formally abolished in Britain in the mid-19^th Century. Forfeiture of estate, already de facto abandoned, was legally repealed in 1870, though maintained in cases of "outlawry" (i.e. fleeing justice) for some decades further. With the Navigation Acts already long gone, what was left was the device of enforcing tax law through in rem procedures in Exchequer Court. It would be left to Yankee ingenuity a century later to combine the superstitious spirit of deodands and the moral absolutism of forfeiture of estate with administrative procedures created strictly for fiscal purposes, to give birth to modern asset-seizure laws and practices.7

Yet oddly enough, the English tradition of asset-seizure had been badly regarded in the American colonies. Although deodands applied in the colonies, they were so unpopular they were rarely used. And one of the first acts of the Congress of the newly independent United States (in 1790) was to abolish forfeiture of estate in criminal cases. In fact the arbitrary use of in rem forfeitures to enforce the Navigation Laws and Customs control was one of grievances that helped goad the New England mercantile class into rebellion against British rule.

However, despite the legacy of hostility, after independence, in rem procedures against ships and cargoes in Vice-Admiralty courts, where owners of the property had no right to trial by jury and the burden of proof was reversed, quickly became one of the major tools for enforcing Customs and tax law in the U.S. The same rationalization applied – the difficulty of pursing non-resident owners through in personam processes. In the context of revenue enforcement, the in rem approach and the requirement that merchants and captains prove all taxes had been paid, was reasonable and legitimate, even if its actual application remained sometimes corrupt and arbitrary. In other contexts, it would neither reasonable nor legitimate, yet equally corrupt and arbitrary.

The first major towards finding a new vocation for in rem forfeitures came during the American Civil War when the Confiscation Act was passed to strip Confederate soldiers of their property rights and deprive all Southerners of any assets they held in the North. That move that sparked considerable concern. Over the course of the 20^th Century it has become well accepted in international law that a belligerent can proceed against the property of enemy citizens. But in the 19^th Century the drift had been in the other direction, to guarantee the sanctity of civilian property even in times of conflict.8 Furthermore the whole purpose of the Civil War was to force Southerners to remain American citizens. Hence the Confiscation Act could scarcely be rationalized as an attack on the property of enemy citizens. However the law was justified – and accepted by the U.S. Supreme Court – as an emergency measure, effectively a tool of economic warfare, designed to bring the conflict to an early end. One Congressional opponent of the measure sagely predicted that the law would open the door for in rem forfeitures being applied in other, much less serious offenses than armed insurrection.

In the early 20^th Century a wave of Puritanism swept North America. One consequence was a concerted effort to criminalize personal vice. Gambling, buying the services of prostitutes, using recreational drugs and even the consumption of alcohol were criminalized or, were they already criminal offenses, the laws were more rigorously and systematically enforced. No longer would cities be permitted to host "red light districts" in which otherwise legitimate citizens could temporarily sate their appetites before returning to a world of respectability.9 In response there was a dramatic change in the direction of law enforcement, the nature of which still does not seem fully understood. For the first time the main thrust of police action shifted from combating predatory offenses (robbery, extortion, embezzlement and the like practiced at the expense of an unwilling public) to attacking enterprise crimes (in which underground entrepreneurs attempted to service the forbidden consumption needs of a complicit public). Though today both are simply lumped together in the criminal code, there was and still remains a profound difference between the two in terms of their economic nature and social impact.

Crimes of a predatory nature have historically defined the evolution, objectives and modus operandi of the criminal justice system. They have also stamped their character heavily into the mindset of the law enforcement apparatus which still tends to think in terms of good guys and bad guys, cops and robbers, crooks and victims. At their core, predatory offenses are quite simple. They involve the redistribution of existing wealth from one party to another. Such transfers are bilateral, involving victim and perpetrator. Though others may be involved in subsequent handling of the misappropriated property, the fundamental act remains a bilateral transfer. These transfers are also involuntary, generally using force or the threat of force, though deceit may sometimes suffice. The victims (individuals, institutions or corporations) are readily identifiable, and usually quite willing to idenfity themselves to the police. The losses by the victims are also simple to determine – a robbed (or defrauded) person, institution or corporation can point to specific money and property. The sums involved, however large in relation to the participants, are small in relation to the economy as a whole, not only for each incident but summed over the total of all such incidents. (An economy in which theft and fraud were the operational norm would, by definition, have an existence that was nasty, brutish and, above all, short.) Since the transfers are involuntary, the morality is unambiguous – someone has been wronged by someone else. Therefore, over and above direct punishment of the guilty party, the policy response is simple - restitution to the victim of his/her property.

Enterprise crimes are quite different.10 While predatory offenses have a long historical pedigree, enterprise crimes, properly defined, became important as a result of the criminalization of personal vice in the early part of the 20^th Century. These crimes involve the production and/or distribution of new goods and services that happen to be illegal by their very nature – recreational drugs or illicit gambling, for example. Here the exchanges are multilateral, much like legitimate market transactions, involving (among others) producers, distributors, retailers and money-managers on the supply side and final consumers on the demand side. Since the transfers are voluntary, it is often difficult to define a "victim", unless it is some abstract (and largely meaningless) construct like "society." Nor is either side to the bargain likely to step forward willingly to assis the police. Although the total sums involved are often claimed to be considerable, in themselves and in relation to the economy as a whole, provided the transaction remains voluntary, there are no definable losses to any individual from the act itself (though there may be from indirect consequences of the act). The morality is accordingly debatable.

To be sure the contrast between predatory and enterprise offenses is not always so clear. In practice some predatory crimes require enterprise ones to fence stolen merchandise or to launder illicitly obtained cash. However the underlying act generating the money is unambiguously predatory since it involves an involuntary transfer of existing wealth of legitimate citizens by illegitimate ones. On the other hand, some enterprise offenses are committed in an environment punctuated by force or fraud. But the basic act is still a consensual contract between supplier and customer of new goods and services. They involved an symbiosis between the legitimate and the illegitimate, the first providing the demand and the second the supply in a voluntary market relationship.11

It is precisely because there is really no definable victim that the law enforcement apparatus had trouble articulating what, beyond standard forms of punishment, should be done, specifically with the "proceeds." With predatory offenses restitution served to remove the profit. It was precisely to find some equivalent with respect to enterprise crimes that the law ultimately stumbled onto the notion of forcing the guilty party or parties to forfeit the gains to "society" (or its guardians). That also meant that, as the main focus of crime control became actions that approximated the behavior of legitimate businesses, the tools deployed against it become increasingly fiscal in nature.

Of all these early 20^th Century anti-personal vice campaigns, that against alcohol was ultimately the most influential. And since the Prohibition regulations were written as a revenue measure, the front line troops in the booze war were Treasury agents. As a result, in rem forfeitures, something that had long been central to the Treasury’s kit of fiscal enforcement tools, played an important role. The primary target, though, was not the "proceeds-of-crime" but the "instrumentalities" of crime – the stills, the stocks of raw materials, the inventories of liquor and, not least, the means by which the booze was conveyed to market. For example, vehicles equipped with special hidden tanks were popular targets. But in all the heat of the booze war, seizure of "instrumentalities" was officially confined to that part of the property actually used in the production, distribution and sale of the banned substance. 12

These in rem procedures represented a sort-of half-way house. They were employed mainly by Treasury agents against a commodity that in normal times was legal but heavily taxed, but had suddenly become illegal per se. In fact, precisely the same was true for drugs – narcotics enforcement started as a revenue matter, with heavy taxes, in the 1890s, only becoming explicit contraband in 1914, and even then banned under a law that was written as revenue statute.13 This transition from fiscal enforcement to crime control would be complete once America mobilized for war – not against a resurgent Nazism, not against Communism, but against Crime.

The "New" Criminal Challenge

During the 1950s and continuing into the 1960s, a spectre haunted America. In fact, two. One, of course, was the Bolshevik Menace. The other was the Cosa Nostra. Indeed opportunistic politicians on occasion would neatly combine them, claiming that the Mafia was a branch of the International Communist Conspiracy. Though largely the product of the overactive imaginations of crime reporters and law enforcement agencies eager for budget hikes, the notion of a huge, vertically-structured Mafia operating across the U.S. to monopolize rackets and to use the resulting profits to infiltrate and corrupt the legal economy, gained widespread acceptance.14

To be sure there were legitimate causes for concern. Mafiosi existed, even if an organized, pan-American Mafia conspiracy with a stranglehold on the criminal economy did not. The Prohibition bonanza had given some mobsters the wherewithal to move into a number of legitimate sectors - construction, trucking, entertainment and professional sports prominently among them - along with taking control of some of the major unions. But the cash resources generated by vice-rackets were grossly exaggerated for public consumption.15 Nor was there any evidence of a massive hostile takeover-bid for the Fortune 500 by some sort of Mafia Inc. To the extent legal industries were penetrated, they were usually marginal ones characterized by small, unstable firms for whom the mob’s main role was as an enforcer of price-fixing cartels and a guarantor of labour peace.16 Nonetheless these fears of the consequence of "organized crime" control of the legitimate economy provided the rationalization for focussing attention on the "proceeds" issue and for reintroducing criminal forfeiture (abolished in 1790) back into the U.S. law enforcement apparatus.

In 1970, following Richard Nixon’s "get tough on crime" presidential campaign, three pieces of legislation followed in rapid succession. One was the Bank Secrecy Act, an Orwellian name for a law intended to reduce financial privacy! It imposed new reporting requirements on financial transactions, specifically on cash of more than $10,000 deposited in or withdrawn from financial institutions, and on imports and exports of more than $5,000 in cash or monetary instruments. The nominal objective was to create a paper trail that would permit the tracing of tainted money. Although it was not seriously enforced over the next decade and a half, the law incurred the concern of the U.S. banking community who unsuccessfully challenged its constitutionality. And it potentially put the U.S. at loggerheads with most of the world by jettisoning the presumption in favour of financial privacy.17 Once U.S. law enforcement actually began actively enforcing Bank Secrecy Act requirements, and followed up with a whole series of other financial measures aimed at tracing internationally the proceeds of drug trafficking and other forms of enterprise crime, the stage was set for a long series of disputes with foreign jurisdictions. Most would be resolved by other countries caving in to U.S.-sponsored initiatives.

The second of the era’s "crime war" initiatives was the Racketeer Influenced and Corrupt Organizations (RICO) statute by which the U.S. federal Justice Department was supposed to strip mobsters of their control of legal businesses and unions. Conviction under RICO (of a "pattern of racketeering") was the prerequisite to forcing the criminal to divest his/her "interests" in a business obtained by racketeering.18 RICO represented another quiet revolution in American law enforcement. It reintroduced criminal forfeiture, in effect the first new form of punishment for crime since the invention of the penitentiary in the early 19^th Century.19 By making such forfeiture obligatory, it was both a throwback to the old principle of automatic forfeiture of estate in felony cases and the first major step towards the mandatory sentencing now so much in vogue in the U.S.20 By being deliberately drawn in broad terms, it shifted away from the traditional presumption of very strict construction of criminal statutes. Interestingly enough, while the most remarkable part of RICO was the de facto reintroduction of forfeiture of estate, one of the causes of the American Revolution, into the body of criminal law, during three days of debate over the law, Congress allocated less than two minutes to its forfeiture provisions.21

The third statute passed a few days later as part of a general anti-drug measure was the Continuing Criminal Enterprises Act, the so-called "kingpins" statute, intended to nail the big bosses of drug trafficking organizations and to allow the government to apply criminal forfeiture to their "profits". As with RICO, all elements had to be proven beyond a reasonable doubt, and the sums and/or property targeted for forfeiture spelled out explicitly in the indictment.

Despite great expectations, very little resulted from these laws. With the Bank Secrecy Act, the banks took their lead from the government regulators who seemed to regard the required forms as little more than a nuisance, and a diversion from their main task of assuring the liquidity and capital adequacy of financial institutions. For the next fifteen years the reporting requirements were widely ignored.22 Nor were the other two measures much more successful.

Partly it was a problem of interpretation. RICO permitted forfeiture of "interests," not proceeds or profits, and the courts (quite reasonably) ruled that illegally-earned money was only forfeitable if invested in or used to take control of a legal enterprise. And the CCE specified only profits as forfeitable. Hence the courts interpreted that (again quite reasonably) to mean that drug criminals could deduct costs from their income to establish the net amount subject to seizure by the state.

Partly, too, it was a problem of police traditions – rewards were handed out for numbers of arrests, not for amounts of money seized. And in general there was a deep reluctance of U.S. prosecutors to venture into the uncharted waters of criminal forfeiture, particularly since an alternative was rapidly coming available.

Civil forfeitures were commonplace in contraband and tax cases. They had even been used effectively against funds known to be of criminal origin. The American Internal Revenue Service, in addition to its capacity to use criminal law to enforce the tax code, has numerous civil statutes under which it can proceed. The burden of proof is almost always on the taxpayer to prove no arrears are due, and the IRS has the  right to  file  "jeopardy  assessments" that  preemptively  freeze  the assets of a suspect whom the tax collectors claim may be about to flee the country or otherwise escape their net.23 That soon led to discovery that supposedly among the most effective ways to combat drug trafficking (and by inference other enterprise crimes) was to use jeopardy assessments against assets of alleged traffickers. Going one big step further, in the early 1980s, the IRS was granted the right to arbitrarily impose a "tax" of 50% on cash carried by couriers the IRS believed to be working for drug traffickers – the presumption was that if they had possession of the cash, they were presumed to be the beneficial owners.24

These discoveries had two unfortunate consequences. First, the IRS would find that chasing criminals was much sexier than chasing people who earned their money legitimately but evaded taxes, therefore dissipating much of its resources into crime control rather than revenue collection. Second, the bona fide law enforcement agencies would covet the IRS tools, particularly the broad powers of in rem forfeiture and the reversal of the burden of proof, things that made sense in tax cases but represented an enormous threat to due process when used as instruments of crime control.

Back in 1970, as part of the anti-drug package that gave rise to the CCE statute, the Drug Enforcement Administration was authorized, on the Prohibition model, to seize not only illicit drugs, but also the equipment used to make and move them. Powers of in rem forfeiture were greatly expanded a few years later by a Supreme Court decision that remains appalling even by that body’s more recent standards of judicial doublespeak. In the Calero-Toledo v. Pearson Yacht Leasing Co. case, the fact that a lessor of a yacht left behind the butt of a single marijuana cigarette was determined to be sufficient grounds for the leasing company to forfeit the yacht even though no one suggested the company had the slightest involvement in or knowledge of the lessor's heinous offense. Then, in 1978, the DEA received statutory authority to use civil forfeiture against money not simply obtained from a drug offense but potentially used for it. Over time the courts would seamlessly permit this power to be exercised not merely against suppliers of drugs, on the Prohibition model, not merely against those purchasing with intent to resell, the most logical interpretation of the power, but final consumers. A police officer could decide that someone intended to use a sum of money to buy drugs, not for resale, but for personal use, and seize the money to preempt the act! The dividing line between police investigations and mental telepathy had been finally crossed. Combined with growing popularity of sting operations, these changes opened up enormous possibilities for police forces to go shopping for cash, jewels, luxury cars and high-class condos.

During the 1980s, the prevailing Drug War hysteria succeeded in further expanding the field of forfeiture on three different levels – reinterpretations of RICO and CCE to facilitate and widen use of their forfeiture provisions; a profligate expansion of civil forfeiture to the point where it is now authorized in nearly 200 different federal statutes plus myriad of state ones; and a new law, the 1986 Money Laundering Control Act (which came to be known as the "RICO of the nineties") that both facilitated the implementation of existing forfeiture laws and expanded once again the range of offenses for which it could be invoked. Simultaneously, the techniques of civil forfeiture were removed piece by piece from tax enforcement – for example a presumption that otherwise unaccounted for income had to be proceeds or crime, and the employment of net worth analysis to isolate potentially forfeitable assets - and turned into a broadly-based crime-control measure stripped of basic protections traditionally afforded to those accused of crimes. In the meantime the notion of using a proceeds-of-crime approach began to take root abroad.

Extortionists or Entrepreneurs?

In 1982, in the wake of a series of assassinations of prominent public figures by "the Mafia," Italy passed its Pio La Torre Law, popularly named after the murdered head of the Sicilian Communist party who had campaigned for the principles the law embodied.25 This widely heralded (and badly misunderstood) law introduced to Italy two fundamental legal departures. It created a new crime, the Mafia conspiracy, making membership in such an organization an offense per se. And, it opened the books of the Italian financial system to police probes. It waived bank secrecy in the event of a criminal investigation and allowed the courts to seize the assets of persons belonging to a "Mafia conspiracy" as well as those of any relatives or associates suspected of fronting for them.26 The two initiatives were linked - anyone guilty of membership in a criminal organization could lose the right to financial privacy and have their assets seized without any need by the state to demonstrate their participation in any specific criminal act.27

The law was intended to address certain fundamental underlying realities. Traditionally the Mafia was seen as a Sicilian problem, and a symptom of cultural isolation, social introversion and economic backwardness. But during the 1970s, a new "entrepreneurial Mafia" supposedly emerged. This transformation was reputedly fueled by the burgeoning drug trade. Not only did a drive for wealth displace the traditional concern with "honour" among Mafiosi, but the availability of drug-derived wealth permitted members to infiltrate deeply into the economy of certain southern areas (in Sicily and Calabria, reputedly, 15-20% of all economic activity came to be controlled by Mafia-linked firms and individuals), and to spread throughout Italy. Most alarming was the alleged tendency of Mafia entrepreneurs to take control of businesses offering legitimate goods and services, and to apply to them criminal principles of operation. Given the supposed ability of Mafia-linked firms to tap great pools of underground cash, push down wages, corrupt government functionaries and employ violence to drive out competitors, Mafia entrepreneurs were perceived to be a serious threat, not just to this or that local firm, but to the entire Italian economy.28

Therefore the Pio La Torre law attempted to deal with both the flow of new criminal money and the stock of accumulated criminal wealth. Against the on-going flow, it hoped to deter mob money from taking control of legal businesses, as well as stopping legal money from moving into illegal activity where higher rates of tax-free return were available. Against the accumulated stock of criminally-derived wealth, it was the explicitly stated hope of the intellectual author of the law that a serious threat of asset seizure would lead, not so much to the actual confiscation of huge amounts, as to the encouragement of a rapid and massive asset transfer. Mafia money would shift from illegal businesses (including legal ones operated in illegal ways) into the strictly legal economy. And it would shift from the ownership of assets like land and commercial property into passive financial holdings. There was an implicit amnesty at work here - money that made the transition was de facto (though not de jure) immune to the asset seizure apparatus. The result would be that the money accumulated through criminal means could be made accessible to the legitimate economy through passive investments without bringing with it the threat of criminal takeover (and criminalization) of actual businesses. Needless to say most of these subtleties escaped the notice of North American legislators.

There are many points at which the underlying theory of the Pio La Torre law could be subject to criticism.29 Did the theory exaggerate the overall amounts of criminal money actually pouring into the Sicilian economy? Did it put too much emphasis on the role of drug money in the transformation from "men of honour" to criminal entrepreneurs? Indeed, was the typical Mafiosi really becoming a criminal entrepreneur, or did he remain essentially an extortionist, simply shifting, as the economy itself changed, from draining money out of agriculture and construction to milking the commercial and financial system as well?30 In creating a Mafia conspiracy offense, was the new law in danger of accepting, even implicitly, the fundamental American error, of seeing Mafia as an "organization" instead of a pattern of behavior? If so, was there really any advantage to be gained from criminalizing association, particularly in light of the potential human rights abuses such a development might permit? Furthermore, was the crucial distinction between legal and illegal sectors, the logical foundation of the law, really a matter of black and white, or was the situation better seen as a continuum of various shades of grey?

Indeed, it could be further asked how many of the murders that finally galvanized Italian public opinion to permit the passage of the law were really attributable to the new flood of underground wealth from drugs and other illegal economic activities, as opposed to being the result of settling of accounts between, among and by political factions, secret societies and the intelligence services who simply hired Mafiosi on occasion to do the dirty deed? It was hardly a secret that Italian politics had less to do with electoral contests between legitimately structured, publicly functioning parties than it had to do with acts of corporate corruption, conniving by the Vatican and underground plots by a bizarre amalgam of crooks, spooks and secret parapolitical organizations. Even the Pio La Torre assassination may have been a contract hit instigated by those seeking to silence his opposition to the deployment of NATO cruise missiles in Sicily, rather than initiated by Mafia bosses to stop his agitation for a financial attack on Mafia wealth.31

Thus, at the end of the day, in Italy asset seizure was conceived not an end in itself. And it was more than just a deterrent in the standard sense of the term. Rather, the threat of such seizure was to work as an incentive for a long-term change of economic behavior. Needless to say, these objectives, considerably more sophisticated than generally appreciated, were quite different from those espoused in the U.S., and in other countries that followed the American lead. There the principle was, find it and grab it, without putting the slightest effort or thought into determining whether the assets of criminals were really the same thing as criminal assets. And the main tool for doing so was not criminal forfeiture through the RICO statute or the CCE act, but a remarkable proliferation of laws permitting and facilitating civil forfeiture – to the point where the sheriff of every sleepy one-store town and the Customs chief of every grassy one-runway airport can use them at will, for their own purposes be they crime-control or ego-enhancement, be they harassing ethnic and political undesirables or puffing up the local law enforcement budget.

The Modern "Proceeds" Approach Takes Shape

There were several factors that drove U.S. law enforcement to its present infatuation with chasing money rather than criminals. One was the apparent failure of traditional law enforcement strategies. During the late 1960s and 1970s, the buzz-word had been "targeting-up." This theory held that it did little good to nail and jail easily replaceable subordinates in hierarchically-structured criminal organizations as long as mob bosses were free to operate. Therefore the main objective was to target the top management. The only problem was that, in practice, it seemed to make little difference to the criminal marketplace.32 The obvious conclusion was that large-scale, formally-constituted criminal organizations were not as important to the overall crime scene as had formerly been thought. But, instead, the accepted explanation became that, not only were mob bosses, too, more easily replaced than had previously been thought, but even if they were not replaced, they had little problem continuing to run their businesses from their prison cells. That argued in favor of focusing law enforcement efforts against the one thing that was presumably indispensable - the money that supposedly provided both the incentive and the means to commit further crimes. The head of the U.S. DEA put it squarely before Congress in 1978, the year his agency was given the right to forfeit civilly both proceeds and funds supposedly about to be used in ‘narcotics’ offenses:

"We recognize that the conviction and incarceration of top-level traffickers does not necessarily disrupt trafficking organizations; the acquisition of vast capital permits regrouping and the incarcerated trafficker can continue to direct operations. Therefore it is essential to attack the finances that are the backbone of organized drug trafficking."33

That reassuring opinion was concurred in by no less prestigious body than the President’s Commission on Organized Crime in 1984. "Without the ability to freely utilize its ill-gotten gains, the underworld will have been delivered a crippling blow."34

Furthermore, advocates of the follow-the-money theory offered a reassuring corollary for those still fixated on "targeting up" – namely that mob bosses keep their distance from the street action, where historically most police attention had been focussed, while staying close to the money. Therefore, by grabbing the money, law enforcement might find it easier simultaneously to grab the top bosses.35 To this was later added the codicil that someone in prison stripped of assets lost prestige and power among fellow inmates, therefore reducing internal as well as external influence and with it, presumably, the pleasure of the prison stay.36

The second reason for shifting attention to the money trail was the conviction that during the 1980s the Western world was being flooded with "narcotics," and that, as a result, the world-wide drugs trade raked in gross earnings of at least $500 billion per annum, of which the US alone accounted for $100-120 billion.37 These horrendous figures seemed to be confirmed by hooded witness before televised U.S. Congressional committee hearings who, after striking deals privately for reduced sentences, went on to dazzle their audience publicly with tales of loading cash by the baleful into cargo planes en route to Panama, the Bahamas or the like. Unlike the glory days of gambling, prostitution, the numbers rackets and loan-sharking, the sheer magnitudes involved seemed to demand that special pre-emptive attention be given to the money, rather than just attempting to strip criminals of their "interests" in legitimate businesses after they had been acquired. Left to their own devices, the huge amounts of criminal income and wealth supposedly sloshing around an economy would not just corrupt legal businesses but also undermine the integrity of financial institutions, compromise the judicial system, threaten general prosperity and, quite likely, subvert national security by exposing the victim country to the depredations of foreign-based crime "cartels."38 Thus, several hundred Colombian cocaine manufacturers and exporters, who showed their aptitude for criminal conspiracy by routinely murdering each other and competitively flooding the market for their product, were edified in the public mind into a hierarchically-structured "Medellin Cartel," motivated in equal parts by greed and blind anti-Americanism. Eminent and influential Washington Post columnist, Jack Anderson, denounced the "cartel" as "a subterranean superpower that threatens U.S. security…" And he insisted that the U.S. government should "call upon" (i.e. force) all other countries to adopt emergency laws and treaties to confiscate drug money.39

A third reason was only occasionally articulated, though seemingly influential behind the scenes. The late 1970s and 1980s, when the new law enforcement strategy began to take shape, was an era when the traditional machinery for financial stability and monetary control was no longer working. Governments faced stubborn and growing budget deficits; national currencies were buffeted by waves of speculation; and the U.S. in particular faced a yawning balance of payments gap. At the same time the world was awash with hot and homeless money, prepared to rush about at the touch of a computer key through a network of offshore havens protected by the corporate and banking secrecy laws of a rapidly multiplying number of jurisdictions.40 It was politically inconvenient to blame the fiscal problem on the zeal with which the wealthiest and nominally most respectable class of citizens exempted itself from taxes. Nor was it polite to point to the propensity of big corporations, first to shift their profits offshore to low tax jurisdictions, then to reinvest in manufacturing in developing countries with "dime a dozen" labor standards before re-importing the products to the US. Instead, the problem of hot and homeless money, along with the fiscal gap and financial instability it engendered, could be imputed first and foremost to the allegedly burgeoning traffic in recreational drugs which permitted the "cartels" to drain off America's financial lifeblood. It was, on one level, a variant on the old theme of America-the-good under siege by conniving foreigners whose names were suspiciously difficult to pronounce.

A fourth and more subtle reason lay in the changing ideological environment of the era. Most noticeable in the U.S. and Britain, though soon spreading throughout much of the world, were demands for a drastic reduction of the role of the state in economic life, for rolling back regulations and privatizing public functions. If the government should do less, it should also tax less – and vice versa. Furthermore, in a sharp retreat from the principle of universality of access to public goods, such taxation as continued to be imposed should, the ideologues insisted, move away from progressive income taxes towards special purpose levies and user fees for public services. Only a small shift was required to take the principle that users pay the full cost for hospitals, schools, and other services formerly considered a public responsibility, and to apply it to crime control. Apart from the spread of prisons-for-profit, the notion of loading onto the criminal the costs of crime control manifested itself in the idea of seizing criminal proceeds and investing them in law enforcement, thereby relieving taxpayers of the responsibility. This was clearly articulated in 1982 before the U.S. Senate Judiciary Committee by a senior official of the Attorney General’s office:

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.

Official …. There clearly would be millions and hundreds of millions available…41

Together, these influences sufficed to allow the law enforcement apparatus to take the superstitious notion of tainted property harking back to the age of deodands, combine it with forfeiture of estate for a class of citizens deemed traitors to the prevailing moral order, and go after their reputed hoards using procedures originally intended purely for fiscal purposes. The one thing missing from the exercise, then and now, was some proof that the "proceeds" approach could actually accomplish its supposed goals.

With the enthusiastic support of the law enforcement and justice apparatus, the proceeds-of-crime approach underwent a dramatic expansion and transformation in terms of widening the definition of what was forfeitable, broadening the range of offenses enabling seizure, easing the methodology by which assets could be taken and increasing the motivation for law enforcement to do so.

The various forfeiture statutes, criminal and civil, were amended to remove ambiguities and broaden the target to proceeds of crime, regardless of whether or not invested in another enterprise, rather than just "interests" (as in the original RICO) or profits (as in the CCE Act). Therefore a criminal engaged in an enterprise offense stood to lose not just the net benefit (income minus costs) but also a sum equal to everything earned even though most of that sum might be simply a reimbursement of costs. Furthermore, the doctrine of "relation back" was borrowed from civil forfeiture and tacked onto in criminal. This allowed the government to claim ownership of property from the time it was derived from or used for the commission of a crime with little regard for the rights of intermediate purchasers. The notion of instrumentalities in both civil and criminal procedures was expanded almost without limit. It applied to the demand side as well as the supply side of the market. That permitted seizure of cars, houses etc. used by customers, rather than just the vehicles and facilities employed by the sellers as had been the norm during Prohibition. And in the event law enforcement could not get its hands on particular assets, the law was changed to permit forfeiture of substitute assets ostensibly of equal value.

The possibilities for forfeiture was also broadened greatly by the criminalization of money laundering in the 1986 Money Laundering Control Act. Though supposedly a Drug War measure, in fact the very act of attempting to hide money, even if its origins were strictly legal, was criminalized. Almost every federal offense became an occasion to also lay money laundering charges. What would previously have been considered fairly minor administrative offenses (failure to fill out forms or attempting to evade reporting thresholds by making small deposits etc.) became major crimes. And the penalties for handling criminal money in many cases became far more severe than the underlying offense. Furthermore the new laws meant that bankers could be conscripted as police spies through the threat of being co-defendants with their clients.

To further facilitate forfeiture, procedures for so-called administrative civil forfeitures (those done by default when uncontested) became much easier. In the past any property worth more than $10,000 had to be adjudicated. But the threshold for automatic forfeiture in the event the owner failed to post a proper bond or respond within 20 days to the seizure was raised to $100,000. Furthermore, to discourage citizens from actually contesting the forfeiture, therefore forcing the government into the expense of a civil trial, the law enforcement agencies began initiating separate proceedings against each individual piece of property seized from any one individual. That permitted the seizure of total amounts well in excess of the $100,000 threshold. It forced the owner to post a bond and to undertake a defense of each item (cash, cars, jewelry, boats, houses, planes etc.) if he/she wished to avoid administrative forfeiture.

While the process seemed to move seamlessly from old in rem revenue forfeitures to modern crime-control ones, and both courts and legislatures treated it as a smooth and logical succession, in fact there was a huge leap in logic involved. In revenue cases the seizure of property (generally cargoes of merchandise and/or their conveyances) and the circumstances around that seizure simultaneously provided what was deemed all the necessary proof of the offense that justified subsequent forfeiture. If the goods were there, or evidence of their transportation was clear, then whoever was in physical possession had to provide proof that all due taxes had been paid or else forfeit them. But in enterprise crime cases such as drugs, there was no need for evidence the goods existed to justify a freeze. A passenger car, not a merchant ship whose sole purpose was to move goods to market, could be seized on suspicion it had been previously used for prohibited purposes with no need for real physical evidence. Furthermore, money, not the actual goods or services that supposedly generated it, was the main target. It, like the supposed "instrumentalities," could be taken on no further evidence than hearsay or a paid, anonymous informant’s tip-off. Essentially the new asset forfeiture provisions took the gross abuses typical of the British enforcement of revenue law during the colonial period and made them legal, while stripping the process of any concrete link to the contraband good that justified the procedure.

Nor, with respect to financial assets, did the courts or legislature seem to appreciate another enormous change their actions implied. In the past probable cause was sufficient grounds to seize the records of financial assets as part of the investigation or prosecution of an offense. That made sense. Those records could be powerful evidence of the commission of a crime. But it was quite another thing to seize the actual financial assets on nothing more than probable cause. From an evidentiary point of view grabbing assets rarely added anything more substantial than would the records alone – from a punitive point of view, it was quite another matter. And the process became even more suspect when those seized assets themselves were turned into a means of paying for other investigations and prosecutions.

For, on top of the sweeping changes in the laws facilitating forfeiture, came changes in incentives to use of the laws. During the 1970s, there had been a pronounced reluctance by prosecutors to use the forfeiture powers of RICO and the CCE. During the Drug War hysteria of the 1980s and the general "moral panic" of the late 1980s and 1990s, all such restraint was abandoned. One of the most important "reforms" introduced in the 1984 Comprehensive Forfeiture Act was the provision that forfeited assets go not to the state treasury (as fines do), but to the police forces who do the grabbing. This permitted them to introduce  business-like criteria into judgements about the performance of police personnel - the more money the cops brought in, the more plaudits and bonuses they could win. It also freed them from the constraints of government imposed budget limits. In effect, police forces could evolve into self-financing bounty-hunting organizations, assisted by networks of informants, usually themselves career criminals, who could be paid out of the assets seized. Similarly prosecutors’ offices began collecting a share of the loot. It was perhaps the supreme irony. The police had appropriated the techniques and prerogatives of the revenue authorities, then applied them to the task of becoming independent of normal forms of civilian control exercised through scrutiny of a budget.

The influence of these changes was felt far beyond the U.S. American pressure has turned the attack on criminal profits, especially those associated with drug trafficking, into a global Crusade that rivals in religious fervor the anti-Western jihad supposedly proclaimed by Middle Eastern fundamentalists. The U.S. State Department now hands out brownie points (in its annual "narcotics" report) to countries according to how well they have imitated American legal initiatives. At the same time the U.S. threatens reprisals against countries deemed uncooperative in drug control measures, including those pertaining to the flow of "proceeds." Therefore country after country has been coaxed or cudgeled into passing American-style anti-money laundering regulations and asset seizure laws, in most cases with the enthusiastic support of their police forces.

Although forfeiture of estate ("confiscation") on felony conviction had been abolished in Britain in 1870 (and finally repealed for outlawry in 1938), it began to sneak back in 1973 with the approval of forfeiture of instrumentalities – although only if an apprehended person had possession or control at the time of arrest and only if the prosecution could prove that the suspect used or intended to use them for the commission of a specific offense. Then, in 1981, following a drug conviction, a court ordered forfeiture – only to be overruled. The Law Lords, the highest court in Britain, voided the confiscation order on the grounds that only tangible instrumentalities could be forfeited - the property in question was a bank account. The judges also ventured the opinion that the law should be changed.

In 1986 Parliament passed the first of a series of measures reintroducing criminal forfeiture. The pioneer act dealt specifically with drug offenses. But the most recent one, passed in 1995, provided that all newly convicted criminals would lose their assets unless they could prove they were legally derived, coming perilously close to the old automatic forfeiture of estate on felony conviction. Criminal conviction was still required. But once that was accomplished, the burden of proof with respect to property was reversed.

Similarly in Canada, new forfeiture statutes followed a failed attempt by the RCMP to seize a bank account, only to be told, like their British equivalents, that intangibles were off limits under existing law. The response was Bill C-61 which received royal assent in 1988. Touted by the government as an anti-drug initiative, in fact C-61 applied forfeiture to the proceeds (not profits), direct and indirect, of a whole range of "enterprise crimes," a category that included everything from bribery to keeping a common bawdy house, from murder to counterfeiting. Pandering to the moral absolutism of the time, drugs were singled out for special treatment in one respect. If the police were pursuing assets derived from drug offenses, they were allowed access to confidential tax records. Shortly after, and quite predictably, the police began agitation for carte blanche to fish through tax records for any and all "enterprise crimes." On one level they had a valid point – it made no sense to subvert the confidentiality of the tax system to pursue someone selling marijuana, yet leave it sacrosanct to protect the assets of a serial contract killer. But whether it even made sense in drug cases was a question, of course, that was rarely, if ever, raised.

Like U.S. law, the Canadian one provided for a form of substitute assets, though in the shape of fines assessed at a rate the judge deemed equal in value to the targeted property if it could not be located, was in a foreign jurisdiction, was complicated by third party transfers or commingling, or was substantially diminished or worthless. By this last stipulation, presumably the court could decide not to seize an old car or house, for example, but to demand from the owner a payment equal to the value at the time of initial purchase. Also like U.S. measures, Canadian law permitted the use of the equivalent of net worth analysis – the court can determine that property is proceeds of crime if it can be established that a convicted individual has property greater in value than before the commission of an offense and that such an individual’s legitimate income cannot reasonably account for such an increase in the value of their property.

The Canadian law differed from U.S. practice (while conforming to English) in one important respect. Forfeiture could occur only following a criminal conviction. However, once that was accomplished, the judge could order forfeiture on civil (balance of probability) criteria as part of the same trial process.

Although technically seized assets go the federal treasury, bit by bit American-style policing-for-profit is making its appearance in Canada. The federal treasury shares the proceeds with provincial attorney-generals who are in charge of actually enforcing (federal) criminal law; and in one province, British Colombia, police can apply to the provincial attorney-general for permission to use forfeited assets for "special projects." Furthermore the federal government has set up so-called Integrated Proceeds of Crime units across the country. Each is financed by a loan from the federal purse – and they are expected to repay that loan out of the proceeds of seized property.

There is another feature which may make the Canadian law unique. If there were no proof that targeted property came from the specific crime for which someone was convicted, "but the court is satisfied, beyond a reasonable doubt, that property is proceeds of crime, the court may make an order of forfeiture…" No one bothered to explain how a judge could claim to know beyond all reasonable doubt that a crime had been committed before charges, a trial and a conviction for that crime took place.

Why Chase the Money?

Many rationalizations have been offered for these new laws, and for the police subsequently devoting so much time and energy to following the money trail. However, they really come down to four. First is the theory that attacking profits acts as a powerful deterrent – since presumably profit is the motive for criminal offenses. Second is the notion that leaving criminals with their ill-gotten gains permits them to infiltrate and corrupt the legitimate economy. Third is the view that taking away the money removes the capital essential to commit future crimes. And fourth is the moral principle that no one should profit from their crimes.

As to the first, the notion that seizing proceeds acts as a powerful deterrent, arguably the impact of the threat of forfeiture on criminal behavior has been exaggerated. That is partly because career criminals are often motivated by factors other than money – the sheer thrill of the act or the desire to show off to peers and partners. In addition, most career criminals seem to be profligate spenders. That reflects partly inherent hedonism, partly the urge to impress friends and associates, and partly the fact that they always operate under the threat that their career profile might be shortened by competitors or regulators. The stronger the asset seizure provisions, the more their propensity to earn, spend and run. Furthermore, since it is no mystery that the bulk of the career criminal class is made up of down-and-outs, rather than billionaire narco-barons, losing assets might well simply force them to repeat the acts that generated the money, since career criminals tend not to have a particularly wide range of career alternatives. It is also true that enterprise criminals, no less than other entrepreneurs, have a learning curve – burned a few times they might well learn the techniques of hiding and laundering their assets.

All in all there is no proof in fact or logic that asset forfeiture does anything to curb crime. In fact there are circumstances under which it could make things worse. For, totally contrary to the logic underlying the notion of seizing substitute assets, it has been demonstrated time and time that for most people, including those who earn some of their income illegally, their behavior with respect income is very different depending on its source. People will behave one way with money of legitimate origin, and yet another with that of illegitimate provenance. With respect to illegal money, the usual principle is easy-come, easy-go. A 1980s study of Oslo prostitutes, for example, showed that they budgeted and used carefully money from legitimate jobs or welfare, but blew their illegal earnings on drugs, booze and fancy clothes. Under these circumstances, asset seizure would claim the legitimate part of their earnings, not the illegal, and that is hardly an incentive to give up a life of crime!

Perhaps the ultimate repudiation of the facile notion that asset forfeiture acts as a deterrent is the simple fact that the U.S., where the proceeds-of-crime approach is, by far, most intensely used, boasts a higher percentage of its population in prison than anywhere in the world except Russia. Yet it remains the richest world market in per capita terms for the forbidden products enterprise criminals are peddling.

The second rationalization for forfeiture is the argument, (that has been around since RICO days) that a proceeds approach is essential to stop criminals from infiltrating and corrupting legitimate markets. But this, too, is at best an exaggeration. Apart from the fact that the rather obvious question - just how much criminal money is out there - has to be answered before any rational judgement can be made about what kind of threat it poses, it is also necessary to ask just why criminals would wish to invest in the legal economy. There are actually several reasons, with radically different consequences.

One is that some criminals, especially aging ones, want a legal social security fund. Not only is their reason for investing in the legitimate sector benign, but so too their methods. They will choose to work through bona fide brokerage houses to make passive investments in the form of portfolios of high-quality securities that convey no control over the issuing enterprise. There may be a moral objection to the principle of the criminal so securing his/her profits, but if the investment takes this form there is no practical reason for any concern. On the contrary. Given current fears about the future capacity of the public social security system to carry the weight of an aging population, presumably there is something beneficial about encouraging persons to provide for their own retirement no matter what their career choices happened to have been!

A criminal may also decide that, in anticipation of death, arrest or retirement, he/she wants to be able to transfer wealth to members of his/her biological rather than criminological family. Ensuring an inheritance would require first moving the assets into the legal economy. Although the choice of investments may be slightly different than for purposes of providing for the entrepreneur’s own retirement, the basic principle remains true. The reasons, the methods and the consequences are all perfectly harmless from the point of view of the nature and operation of the legal economy. Indeed, a case could be made that this, too, is not simply benign but positive. Successful mobsters are well-known for attempting to ensure their offspring do not follow their career choices. On the other hand, a proceeds-of-crime approach rooted in the Biblical notion of deodands might well prefer to invoke the rule that the sins of the fathers are to be vested on the sons (and daughters). Though that, once again, is a moral rather than a practical decision.

Alternatively, the criminal entrepreneur might seek to reduce risk to his/her income stream by diversification into an active legitimate business. Legally derived income might be seen as much less vulnerable to disruption by competition or regulatory pressure. Presumably the more insecure is the illegal income, the greater the strictly financial need for an independent legal source, and therefore the greater the incentive to create a legitimate alternative. But for this strategy to be truly effective, the business should be run in an impeccably clean manner - criminal methods would probably be avoided; and the business is unlikely to be used as a front for illegal operations or for laundering criminal money.

In all three cases, the integration of criminally-earned assets into the legal economy does not threaten the integrity of legal markets. In all three cases, the acquired assets, financial or commercial, must be kept clean of any association with their underworld origins. That poses a dilemma for crime control policy. If the objective is punishment of past acts by the individual criminal entrepreneur, the logical policy is take away from the criminal the legitimate assets acquired through illegitimately earned income. If the objective is to prevent recidivism, there is a case for leaving the status quo untouched. And if the objective is not to address this or that malefactor, but to attack the criminal market-place as a whole, the correct policy might be (as in the logic underlying Italy’s misunderstood Pio La Torre law) to actually encourage the movement of criminal assets into the legal economy. These kinds of transfers represent a process of legitimization, not merely of laundering. They simultaneously reduce the assets of the underworld economy, while raising those available to the legal one.

On the other hand, some of the reasons criminals shift their money to the legal parts of the economy are not so benign. A legitimate business might be used, for example, to support underworld operations. That in turn can take three different forms.

One is to provide laundry facilities. By running illegally-earned income through the cover of a front company, the criminal entrepreneur gives that income an alibi. However, even though money laundering is treated in some criminal codes as an especially heinous offence, it is not a means of earning criminal profit but of redirecting profit after it has been earned. Once laundered, the money might be used to bribe a city councilor or hire a professional assassin. Or it might be used to make payments into the criminal's retirement savings account. Yet in actual crime control measures, no distinction is made.

Another possibility is that a front business can provide the underworld entrepreneur with tax cover. Legitimate citizens take their total income, calculate taxes due, and then decide in what proportion to consume or save the remainder. Underworld entrepreneurs work in reverse - they estimate how much after-tax income they wish to have available to legally and visibly consume, save or invest, then calculate the level of pre-tax earnings of the front enterprise that would sustain the after-tax total. All criminals expecting to remain in business for any length of time must undertake some such exercise, however informal, unless they have exceptionally strong police or political connections or their incomes are so low that they have virtually no fiscal vulnerability. By itself this introduces no serious distortion into the operation of illegal markets. Indeed, on one level it is actually beneficial, since income that would otherwise remain untaxed becomes exposed to the grasp of the fiscal authorities.

Yet another possibility is that a front operation supports directly underworld rackets. It might function as a place through which to sell stolen or contraband goods and services, or in which to traffic drugs, sell kiddy porn or operate an illegal gambling enterprise. What is involved is not so much the corrupting of legal markets so much as the use of legitimate enterprises to disguise illegitimate ones that otherwise continue to operate according to underworld economy rules. Whether used for laundering, tax-cover or logistical support, the front company that is apparently part of the legal economy remains in reality part of the apparatus of enterprise crime.

Where the threshold is unambiguously crossed and criminal entry into the legitimate economy becomes unambiguously harmful is when the criminal decides to use investments in the legal economy, not as cover for on-going enterprise crimes, but as a direct source of criminal profit. In this instance the criminal takes into the legal economy, underworld techniques - a reputation for violence, the ability and willingness to bribe regulators, the capacity to extort kickbacks and discounts from suppliers and the means to reduce through intimidation both labor costs and competition - in order to squeeze higher profits out of the legal business than would be possible using strictly legitimate methods. Here (and only here) is it possible to say with absolute conviction that criminal assets corrupt a legal business. However it still cannot be said a priori that criminals do more to undermine the integrity of legitimate markets than do legitimate business-people who decide to employ illegal means to achieve the same ends. Yet no one suggests seizing their assets preemptively to head off that result.

Thus, there is no a priori reason to assume that criminals who move their money into the legitimate economy necessarily corrupt legal markets. It depends on the individual case and the precise motivation (among many possible ones) for making the move. And even when it is unambiguously true that a criminal investment will distort the operation of a legitimate business, there is no proof that it represents more of a threat to legal markets than legitimate entrepreneurs using legitimate assets to take over a legitimate firm and then criminalizing its function. Indeed, the second is likely far more common than the first.

The third rationalization for attacking proceeds of crime is based on the premise that, deprived of the financial resources to maintain a constant flow of product to their customers, crime "cartels" would be quickly put out of business. There is an obvious problem with this contention. Asset seizure targets the firm not the industry. For every firm knocked out, others are eager to enter or expand. To the extent any one criminal firm is affected, it is not clear it will reduce the scope of a criminal market so much as change the identity of those who earn the profits. Furthermore, to the extent enterprise crime markets offer credit to operators, repeat offenders, who will be among the most seasoned operators will probably have the least problem securing loans to get back into business.

Nonetheless, unlike the deterrent and corruption-of-legal markets arguments, the notion that depriving a criminal of operating capital might seriously impair illegal markets does merit some careful investigation.

Assessing the Proceeds Approach

There is a propensity on the part of law enforcement to take the occasion of each large sum seized to proclaim simultaneously that the seizure: (a) is evidence the proceeds approach is working; but (b) tougher laws and/or more resources are required to confront an ever-growing problem. However absolute sums, taken in isolation, are meaningless. To truly determine if the attack on proceeds has had any discernible impact on the criminal market-place requires certain concrete steps be taken.

First, there must be a calculation of the ratio of seized criminal wealth to total criminal wealth both at the beginning and again at the end of the test period in order to assess how big a dent is being made in underworld resources. In fact, properly speaking, that ratio should be calculated for every year in the period under review to reduce the possibility that the first and/or final years are for some reason anomalous. Second, it is also necessary to make a comparison between the rate of growth of criminal income relative to legal income to ascertain if the chunk being taken out of criminal wealth is actually affecting adversely the ability of illegal markets to service their clientele. Without both types of data no defensible conclusion about the impact is possible.

To find the value of seized assets should be simple. In fact it is not. The figures announced by the police are generally their guess about the value of properties frozen. These reported sums must immediately be deflated by eliminating double or multiple counting. This multiple counting is especially a problem with bank data – a sum of money might have been wired from one bank to another, and instead of merely reporting the net deposit, every intermediate deposit is added together to arrive at a grand estimate of the amount involved. When actual forfeiture occurs, the values (rarely reported) are usually substantially less than the value of the amount initially frozen because the initial amount was exaggerated for PR purposes, because some assets presumed to exist could not be found, because some assets depreciated badly in police custody or because it proved impossible to persuade a judge or jury that there was really any link between the assets and the crime. Furthermore, all innocent property inadvertently (or, sometimes, deliberately) caught in the net should be deducted. This involves factoring out a large part of the seized "instrumentalities." Obviously if a teenager is caught smoking a joint in the backyard, and the parents’ house is forfeited as an instrumentality of crime, it makes little sense to include the value of the house in a calculation purporting to demonstrate how much criminal wealth is being taken out of underworld circulation – though that is precisely what published American data on the value of seizures attempts to do.

Even if the value of seized criminal wealth could be satisfactorily calculated, it has to be compared with the total amount of criminal wealth in existence. The only way to make even the roughest guesstimate of that is to: (a) arrive at some approximation of total criminal income flows; (b) pick a proportion of that income that might be saved in the form of asset accumulation each year (why not the magic 10%?); and (c) cumulate those assets while imputing a certain rate of return (if held in financial form) or depreciation (if held in the form of durable goods). The problem here is that attempting to estimate criminal income flows (as the basis both for calculating criminal assets and as a prelude to figuring out the ratio of criminal to legal income) is a task that is well nigh impossible.

To be sure, there are many people on the job, churning out an impressively wide range of impressively large numbers as evidence, it is claimed, of a huge and growing problem. This is not because of any conspiracy to exaggerate. Rather there is an implicit consensus among a large-number coalition comprised of: law enforcement agencies whose powers and budgets increasingly depend on the perceived threat of large-scale (read large dollar value) crime; informants who have a vested interest in puffing their own importance by inflating the significance of the information they are imparting; criminals eager for peer and public esteem; the mass media which long ago discovered that sensationalism linked to crime sells exceptionally well; politicians who raise their profile by posing as anti-crime crusaders either to appeal to their constituents or to attack the other side; and the research community whose grants usually depend on them finding a "large" problem to study.

Obviously when dealing with illegal activity, it is very difficult to obtain reliable data. Attempts have been made from both the macro and micro directions to calculate criminal income flows - with singularly unimpressive results. Using macro data, the usual starting point is the "underground economy", the sector of economic activity that is supposedly unrecorded, unregulated and untaxed. Underground sectors of modern economies involve two sub-sectors. One is the "informal" – off-the-books sales of otherwise legal goods and services. This is the realm, for example, of pushcart operators or restaurateurs offering selected customers tax-free dining pleasure for cash payments. The second is the explicitly criminal, the realm of enterprises and enterprising individuals dealing in prohibited goods and services. The usual assumption – which is hard to fault – is that the first is by far the larger of the two. But in macro estimation techniques the two are lumped together.

Measuring the Unmeasurable?

Those estimation techniques take several forms. Some are based on labour market surveys – to find the "hidden" labour force and thereby calculate the amount of labour income escaping the official statistics. To impute accuracy to any such survey-based result means assuming that the survey sample is accurate, and that people surveyed answered awkward (in this case potentially incriminating) questions correctly. Both assumptions are highly questionable. And even if that were the case, all such techniques can hope to pick up is hidden labour income, ignoring completely anything accruing to capital.

A second approach is based on a presumed discrepancy between income and expenditure. It assumes people, whether to avoid criminal charges or to evade taxes, under-report their income, but are willing to report accurately their expenditure, perhaps through a consumer survey. If national expenditure is greater than national income, that is an indicator of the approximate size of the "underground" portion of economic activity. Leaving aside the question, once again, of the accuracy of survey results, and taking at face value the dubious assumption that people who under-report income are willing to correctly report consumption, there are still serious flaws in the approach. For it assumes people who earn income illegally, spend it legally. Therefore it completely ignores the fact that people enter the underground economy as consumers as well as income earners. If some under-report illegal income, others under-report illegal consumption. There is no way a priori of guessing what the net result will be.

A third approach is to rely on tax audits. Typically a sample of returns is taken and an intensive audit conducted to detect hidden income. That has the advantage, in theory, of picking up all forms of unreported income accruing to capital as well as labour. But, much as with survey data, this requires that the sample be an accurate reflection of the economy as a whole. In fact these audits are usually sector-specific each year. This method also requires, again like survey data, that the results of the audit are actually accurate. In fact the more successful an underground entrepreneur, the better hidden the money, with the result that tax audits usually only turn up the unlucky or the incompetent. Therefore there is really no sound basis on which to extrapolate from the audit sample to the economy as a whole.

Finally, and most popular, are estimations based on monetary aggregates. These grew out of the experience of World War II when it was observed that the public’s appetite for large denomination bank notes grew far faster than income, a relationship imputed to the rise (relative to the legal sector) in off-the-books cash transactions to avoid wartime rationing and high taxes. When studies of the underground economy came into vogue in the late 1970s that observation was taken as the starting point for a series of regression estimates. The actual equations varied greatly. But the basic common assumption was that the underground economy operated largely in cash and the legal one largely in normal bank instruments. Therefore a base year was selected in which it was assumed underground activity was negligible. Then, a ratio of cash to checkable demand deposits was calculated. Then, a target year (or a series of years) was selected and the same ratio calculated. Increases in the ratio of cash to demand deposits between the years selected were then taken as a surrogate for the proportion of national income hidden from view.

The results are highly dependent on a whole range of factors. Was the choice of base year correct? How was the money supply defined and measured? How was the velocity of circulation of money calculated, and was it assumed to be the same in both the legal and illegal sectors? The widely differing answers offered in different studies to these and a host of other contentious issues meant that estimates differed absurdly. Nonetheless most current figures purporting to reveal the size of the underground economy rely on some variant or another of this methodology. It then remains only to assume that a given percentage of estimated underground activity (based on nothing but a guess) is explicitly criminal in nature and a dollar figure can be conjured up, the bigger the better.

Apart from (fatal) weaknesses in the underlying methodologies, there are a host of problems with these macro estimates.

First, the two sectors of the underground economy – the "informal" and the explicitly criminal - although always estimated together, are likely to be behaviorally quite distinct. Although obviously there is a grey area where the two shade into each other, in general the informal involves activity that is legal but undertaken in illegal ways to avoid regulations and evade taxes. It is therefore reasonable to add an estimate of the informal (if a reliable one were possible) to an estimate of the formal to arrive at some total figure for national income. But the explicitly criminal is quite different. Apart from the obvious fact that crime, and the damage it does, should be seen as a moral rather than an economic issue, it makes little epistemological sense to try to measure it. Like the informal sector, the criminal is unseen, unregulated and usually untaxed. But unlike the informal sector, it exists not because it manages to avoid being measured, but because it is inherently unmeasurable. If enough light were ever shed upon the criminal sector to permit it to be measured, taxed and policed, it would, by definition, vanish. Up against that kind of logical contradiction, why bother to even try?

The answer often suggested is that dollar figures for the criminal sector are of value in making decisions about allocating public resources. The assumption is that the best way to convince the public and the politicians that extra effort in the form of more money or more arbitrary police powers are essential to fight the rising tide of enterprise crime, is to present data demonstrating the enormous money value of the criminal economy. That runs up against fundamental problems of logic and measurement.

To begin with, the assumption that big crime numbers mean economic cost to society confounds, once again, the impact of predatory and enterprise crimes. Predatory crimes are crimes purely of redistribution of existing wealth: they do not generate new goods and services and therefore do not increase total income flows. As a result, barring indirect consequences deriving from increased insecurity and/or additional costs of policing which may adversely affect the overall level of investment in the economy, their net effect on GNP is zero. By contrast, enterprise crimes involve the production and distribution of new goods and services. Judged in strictly economic terms, if they could be accurately measured and included in the national income accounts, they would have a positive impact on GNP. In fact today in Europe, EC regulations require that member countries estimate the presumed value of such illegal commercial transactions in calculating their level of national income. It may well be that enterprise crimes are morally and socially deplorable, but they cannot be said to have adverse economic effects, at least not directly.

But even assuming moral and social considerations do (and in fact should) take precedence over crude economic calculations, any numbers generated to demonstrate the size and therefore the threat from enterprise crime would still be fatuous.

The monetary value of transactions is the result of multiplying price times quantity. Prices for legal goods and services are, by definition, lower in the informal sector than in the formal by the amount per unit by which taxes, social security charges and minimum wage restrictions can be evaded. Granted, quantity of the product demanded in the informal sector may rise in response to those lower prices. With some commodities the quantity increase will offset the price fall; with others the reverse may be true. The net effect on total value of goods and services exchanged in the informal sector cannot be determined a priori. Nonetheless, since the goods and services traded in the informal and formal sectors are identical, if a decent estimate of informal sector activity can be made, it seems reasonable to add that estimate to the amount of formal activity to approximate the total value of GNP. It is also reasonable to use such estimates to arrive at the relative rate of growth of the two sectors. For if it were presumed that policy could be adopted to eliminate the informal sector, almost all of that activity would immediately transfer to the formal.

With explicitly illegal goods and services, the results are much fuzzier. By definition, no comparative price data from the legal economy are available. Yet it is clear that the result of criminalization is to put upward, not downward pressure on prevailing prices. The prices are high for the most important illegal goods and services precisely because they are illegal. The tougher is enforcement, the higher the prices. Marijuana, for example, a prolific weed, were it not illegal, would sell at a price about equivalent to straw. Therefore it is impossible to take an estimate of the value of transactions in the criminal sector of the economy and compare it to the legal economy to arrive at a conclusion that illegal activity is growing (or, for that matter falling or staying the same) in relative terms. The only valid comparison would occur if the criminal activity could be revalued as if it were legal. Leaving aside the fact that this is a logical absurdity, the result would be a massive deflation of the numbers – most of the value of the criminal economy would immediately disappear.

Another problem with the methodology is even more fundamental – the fact that, unlike the "informal" sector, much of the activity of the criminal component of the underground economy is in fact already captured in the existing GNP statistics! This is because the simple dichotomy between underground-overground confuses a statistical issue with a behavioral one.

There are two distinct ways in which economic activity can be hidden. One involves hiding the existence of a transaction, the other hiding its nature. Thus, the market for illicit sexual services divides roughly into prostitutes working the streets for cash and prostitutes operating out of the front of institutions like escort services or massage parlors which accept checks and credit cards. Both are manifestations of the same illicit market. Yet one successfully evades regulation and taxation, while the other does not. The second is indeed captured in the national income accounts but under a falsified category. Granted there is likely some tax evasion involved in the use of criminal front companies. But it is probably no greater relatively in the criminal-controlled part than in the rest of the "hospitality" sector.

Writ large, the more criminal entrepreneurs follow the second route, of operating through the front of legitimate-looking business institutions, therefore hiding the nature rather than the existence of their income, the greater will be the underestimate of the amount of illegal economic activity taking place. Indeed, given the fact that so much successful criminal activity ends up looking like, and being statistically recorded as, part of the formal economy, the really interesting question is not how much underground activity is criminal but how much apparently legal activity is really a front for criminal business.

Yet another problem with the macro calculations is that even if there were reasonable estimates of the size of the underground economy and even if the proportion imputable to criminal activity were known with some degree of confidence, the result would be only an estimate of the dollar value of enterprise crimes. It omits what is probably by far the more important sector of the criminal economy, that of large-scale commercial crime.

Economically motivated crime is actually of three rather than two distinct varieties. The first, and most classic, is predatory crime – involuntary transfers of existing wealth using force or deceit. The second, the main objective of modern crime control measures, is enterprise crime – voluntary market exchanges of explicitly banned goods and services. The third can, for lack of a better term, be referred to as commercial crime, albeit with a meaning quite different from that normally ascribed to the term by police forces with "commercial crime" divisions.

Commercial crimes are committed by entrepreneurs and corporations – crimes committed against them would fall into the predatory class. Commercial crimes involve the production of goods and services which are inherently legal, but whose methods of production and/or distribution are illegal. They cover a huge expanse – from the domain of the unlicensed pushcart operator to the Fortune 500 corporation falsifying cost data on a public sector contract, dipping into the company pension plan to finance a vice-presidential jet or conning customers with worthless product guarantees. Since transfers occur within a normal business setting, exchanges are multilateral and, on the surface, voluntary. However there are inevitably involuntary elements as well. Fraud can be committed against workers, suppliers, financiers or customers. Because of the element of fraud, the morality should in principle be unambiguous – though in reality it is often difficulty to differentiate fraud from a slick sales pitch or a particularly clever contract negotiating ploy. It is for that reason that, barring the most egregious forms of fraud, disputes of a commercial nature were historically treated as regulatory matters if they involved the state, or left to be resolved by civil litigation if they involved disagreements between two parties to a contract. However today the tendency has been towards progressive criminalization.

Commercial crimes can be divided into two sub-sectors. One is petty commercial crimes, small-scale tax and regulation evasion offenses which are largely the preserve of the "informal" sector. The other is grand commercial crimes which take place inside large, formal businesses and involve, not the generation of new wealth but, by means of fraud against workers, suppliers, shareholders or competitors, the redistribution of what already exists. Therefore they generate revenues that are already part of the formal reporting process and therefore already captured in the GNP numbers – and, incidentally, require no laundering. Persistence of such offenses may, over time, cause GNP to rise or to fall. But at any point in time they are fully taken into account in the existing data. Therefore to find the value of economically-motivated criminal activity taking place, it is necessary to add to the enterprise offenses of the underground sector, the commercial offenses of the formal sector. And since commercial fraud, not only is difficult to detect, but goes frequently unreported even when detected, that task is also effectively impossible.

Finally, with respect to the macro data problems, aggregate numbers, even if reasonable, are simply that – aggregate numbers. By themselves they give no clue as to the numbers of beneficiaries or the distribution of the sums among those beneficiaries. Therefore they can provide little or no information about how criminal enterprises are structured or how criminal markets actually work.

The Distribution of the Gains

Prevailing belief holds crime to be typified by large organizations making huge amounts of profit and plotting the infiltration of legal markets with a view to distorting them to criminal ends. Facts on the ground have repeatedly show the opposite. Constrained by lack of access to the formal capital market, by the inability to employ mass marketing techniques (which attract attention), by the rapacious attention of competitors and by the constant threat of the police, typically the criminal firm is small, unstable and for the most part generates only low and sporadic profits.

-----------------------------------------------------------------------------------------------------------

The Criminal Firm: Two Views

Model I                                                                                  Model II

large organizations                                                          individuals or small groups

hierarchical management                                              arms-length ad hoc deals

with long term planning                                                that are purely opportunistic

huge criminal profits                                                  profit rates modest and total

in few hands                                                              widely dispersed

infiltration of legal markets                                          most money stays on the street

legal market corrupted                                              invested cash behaves legally

Which of these two perspectives is most correct is important. Clearly criminal income even in large amounts, if distributed among a whole host of petty wheeler-dealers, poses much less of a threat to the integrity of legal markets than massive infiltration of money in the hands of a few criminal titans. In fact, the more widely distributed the proceeds, the greater the likelihood of it staying on the street, being blown on the purchase of flashy goods, frittered away in prestige-enhancing entertainment of peers or playmates or lost by gambling. This means that any assessment of the impact of criminal wealth on legitimate society requires that basic questions be answered about the nature, size and strategic objectives of the criminal firms earning the money. Furthermore that same information is necessary to being able to adequately assess a proceeds-of-crime policy. Even if it could be established that the ratio of seized assets to total criminal assets was rising, without information on distribution, it would not be possible to say whether or not the criminal market itself was adversely affected. For example, if seizure values are skewed upwards by a few large catches in a marketplace dominated by many small firms, there is likely little impact on the ability of the criminal marketplace to satisfy its customers – others will simply and directly expand to fill the void.

Similarly nothing can be safely concluded without taking into account the intent of the criminal entrepreneur with respect to the seized assets. There is an enormous difference, which rationalizations for the proceeds approach deftly gloss over, between the assets of criminals and criminal assets. If the objective of a criminal accumulating assets was to further a life of crime, taking away those assets might well have a positive effect – even if it does not go beyond merely changing the identity of the players in the criminal marketplace. But if, instead, the objective was to create an alternative and legal source of income as a prelude to retirement from the underworld, seizing those assets can hardly be construed as a contribution to crime control.

Facts on the Ground?

Even if little can be accomplished with the macro approach to estimation, surely effective data on a local or regional level can be obtained from particular incidents? By inference, these should also give some clues about the distribution of criminal income among various enterprises and individuals. This kind of data can come from informants, actual cases or sting operations.

Informant-derived information is especially problematic. The criminal milieu has more than its share of people who have lived so long in the shadow world of deceit and deception, they cease to recognize any border between fact and fantasy. This is all the truer in so far as informants have a vested interest (in terms of direct payment, license to continue their own rackets or reduced sentences for cooperation) in exaggerating the importance of the information they are peddling. In the case of enterprise crimes that usually means puffing the dollar value of the traffic. This tendency is reinforced by the remarkable propensity, very prevalent in the U.S., for former crooks to reap fat royalties directly or indirectly from published memoirs in which they rarely let facts stand between them and a good story.

Case-driven information should, in principle, be more reliable. But, once again, there is a major distinction between predatory and enterprise crimes. With predatory offenses, or with the predatory component of commercial ones, establishing the value of misappropriated property is fairly straightforward. The victim has an incentive to report – with some danger of exaggeration if the insurance company is expected to cover the bill. What the victim loses, the perpetrator gets – albeit if it is physical property, the returns to the perpetrator from resale are likely much lower than the replacement cost to the victim (or the insurance company). But with an enterprise offense that is not true. There is no victim to complain. If caught, the felon (the criminal supplier) has an obvious vested interest in minimizing the amounts earned. The felon will face charges for the particular incident for which he/she was caught, not for the sum total of all the income they might have earned over a career in crime. Yet while a particular heist in a predatory crime might generate a very large sum, and be rarely repeated, in an enterprise offense the predominant pattern is more likely for the great majority of incidents to involve very small retail sales – the real payoff comes from multiple iterations.

Furthermore, even if reasonable data on the size of the enterprise operations, rather than just on the single transaction for which he/she was likely caught, could be gathered from the case, there is a Catch-22. The only way to know if information pertaining to structure and scale derived from one particular case is truly representative of the market as a whole is if the overall structure and scale of the market is already known. If not, the most that can be said is that the case is representative of itself. Furthermore when someone is arrested, he/she has a strong vested interest in hiding the extent of their own operations – unless they turn informant, in which case they will tend to do the opposite, exaggerating the size and importance of other people’s activities. The impact of asset-seizure laws accentuate both effects – the arrested person tries to hide his/her assets, while the informant is sometimes paid on the basis of how much of other people’s assets are seized.

Nor is the situation better with information that originates in police sting operations. Police are subject to legal and resource constraints that will predetermine what form their sting operations take. Since stings are exceptional, and apply to only a narrow part of highly segmented markets, the best they can yield is a view of what might be going on in that particular segment which might have little relevance anything else. Furthermore, by participating in the market in a particular way, they automatically affect the structure of the parts of the market with which they deal. Police action can function to mould the market-place into directions which it would not "naturally" take. Therefore the information which the police derive from sting operations in which undercover police service clients is likely atypical, representing only the police view of the criminal market-place rather than the larger reality.

Probably the biggest single problem in working with incident-derived data is that, even if it were not distorted by informant fabrications, by deceit on the part of malefactors in order to reduce charges or evade the impact of asset-forfeitures or by the peculiar circumstances of police stings, the results may still be meaningless from the point of view of the market-place as a whole. Simply put, there is no genuine, broadly-based market for cocaine or heroin or LSD. There are simply a series of more or less interconnected regional sub-markets. For a genuine market to exist, there must be a legally enforceable free flow of information, commodities and money within it. With legal markets, the role of the regulators is to guarantee that free flow. With illegal markets, their job is to do the opposite. Hence data derived from one case reflect conditions in the one regional sub-market (which could be no bigger than a city block), and little or nothing more. It is therefore impossible to extrapolate from individual cases to a market as a whole, and use individual case data to extrapolate overall numbers for the value of trafficking in a particular illegal good or service.

Assuming all data problems were satisfactorily solved, there is still a fundamental logical failing in the entire exercise – it is not clear what the numbers prove. With predatory offenses, a successful law enforcement strategy, by definition, means that, relative to some appropriate base of comparison, the number of offences should diminish. Predicting what will happen to the value of goods taken in each incident is more problematic. From the point of view of the victim there is no a priori reason that the sums involved per offense should change. But from the point of view of the perpetrators, they will. In the case of theft, for example, to the extent law enforcement also targets the fencers of stolen goods, they will discount the risk by offering lower prices to the thieves. Nonetheless, whether returns to the thieves per incident stay the same or fall (they certainly will not rise in response to a law enforcement blitz), the net effect of successful law enforcement is that the number of offenses, and possibly the number of perpetrators, will decrease and so too will the total value of illegal property transfers.

However, with enterprise offenses, the opposite is true. As enforcement becomes more effective, the number of participants might well rise. Criminal entrepreneurs respond by increasing the number of defensive layers of intermediation between themselves and their customers, therefore diffusing earnings and reducing the danger of being caught with large accumulations of criminal capital. At the same time the physical quantities involved in each transaction should fall – more participants each handling smaller quantities. Yet prices should rise in response to greater risk. Since presumably the demand for criminal goods and services is somewhat "inelastic" (quantity demanded does not fall in percentage terms as much as price rises), the value of goods and services traded actually increases in the face of successful law enforcement. Since the profits are distributed across more participants there is no way of determining a priori if the net income of each participant should rise or fall.

------------------------------------------------------------------------------------------------------------

Impact of "Successful" Law Enforcement

                                             Predatory Offenses                                      Enterprise Offenses

participants

per incident

incident                                   or decrease

-----------------------------------------------------------------------------------------------------------

Hence, unlike predatory crime where large and growing numbers and/or values of property involved are a sign of a law-enforcement crisis, with enterprise offenses they are more likely a sign of success. Therefore there is something patently absurd, and self-serving, when law enforcement uses large numbers representing the apparent value of illegal economic transactions as an indicator of the need for more resources and/or greater arbitrary power to deal with the problem. The opposite conclusion could as easily be drawn.

The Market for Laundering Services

These difficulties apply not just to the primary markets for illegal goods and services but also to the secondary market in laundering services. There have been attempts to estimate the total amount of money being laundered, not just within particular countries, but on a world basis. The most charitable thing one can say about the results is that they prove that one does not have to take the square root of a negative sum to arrive at a purely imaginary number.

Working with specific incident-derived data is also problematic. Each incident is likely unique, and difficult to generalize. And almost all information comes from either those who got caught, who, by definition, tend to be the more incompetent, or from police stings. This produces all the usual problems of unrepresentative or distorted data. Indeed, in the case of money laundering those distortions may be greater than with the underlying offenses. There are those who suggest that money-laundering stings are welcomed by criminals. A few subordinates are sacrificed and some of the money lost when the operation is taken down, but in the meantime the perpetrators have been guaranteed a laundry service that is remarkably efficient (since by definition immune to regulatory problems) and relatively cheap (since the police try to avoid taking business away from sting operations run by other law enforcement agencies).

This problem aside, optimally money laundering cases should yield three different kinds of information – the amounts being laundered, the prices charged and the methods employed. In fact there are difficulties with all three.

In terms of sums, there is often double- or multiple-counting of bank balances, at least at the initial freeze stage. There is also the problem of co-mingling – for cover, illegal money is put in bank accounts where much, probably most of the funds are of legal origin, and the total is then reported as a seizure of "proceeds-of-crime."

But even without the data problems, it is not clear what the numbers show. Even if seizures of assets (or arrests) in money-laundering cases are trending up, the result is meaningful only in relation to the trend in the total value of criminal assets being laundered (or the total number of launderers busy at work). Lacking such figures, there is no evidence to support a judgement on the results one way or the other. Even worse, assuming the real objective of law enforcement is not to wrack up arrests statistics or to fill the coffers with forfeited booty, but ultimately to prevent and deter crime, there is a more fundamental problem. Judged in such terms, the most successful and the least successful anti-proceeds programs will have exactly the same results – small value of seizures and small numbers of arrests.

In terms of rates, the problems are similar to those involved in interpreting illegal price data. Once again, there is no market per se, merely a set of sub-markets at best only vaguely related. In one case an underworld entrepreneur might pay a certain percentage to wash his/her money. In another case, sometime later, another underworld entrepreneur might pay a higher sum. But it is impossible to claim on this basis that there is a general upward movement of laundering costs. Yet this assertion is repeatedly made.

Furthermore, even if rates are rising across the board, the claim that this hurts the criminal market-place cannot stand unqualified. Raising the costs of money laundering through a concerted proceeds-of-crime crackdown will, in the first instance, redistribute criminal income from those committing the underlying crimes to those handling the money, precisely the same shift from suppliers of goods and services to financial managers that is observable in the legal economy. Redistributing profits by itself will make no dent in the overall amount of criminal income or wealth being generated – which is the only ultimate test of the efficacy of the policy. Moreover, to the extent that drug money is the main target, it is not clear that it will be the criminals on the supply side who pay. To the extent that the demand for drugs is "inelastic" (with quantity consumed declining relatively little compared to the rise in price increases), any hike in laundering costs will be merely passed on to the consumer. The effect, on balance, will be to take more income from consumers and transfer it to criminal entrepreneurs. Thus, just as anti-drug enforcement acts as a price-support program to raise the incomes of successful dealers, anti-money laundering measures might do the same for criminal money managers.

In addition, the current policy may contain an internal contradiction. It works on two tracks – criminalizing money laundering to deter the act, and seizing criminally-derived assets to deter crime and cripple the organizations. In theory they are intended to complement each other. Together they are expected to reduce the frequency and raise the cost of laundering. But they may not work quite that way.

Certainly adding an offense of money laundering to the penalties for the underlying offense that generated the money should have a deterrent effect, other things being equal. The problem is, things seldom are equal. For asset-forfeiture laws might have the opposite effect. The greater the danger of losing proceeds of crime, the more energy will be put into devising means to protect it. There is no way of measuring the net result. If the need to protect assets from detection and seizure takes precedence over fear of attracting additional criminal charges, then, contrary to what law enforcement often suggests, the overall effect of the anti-money laundering laws is to both increase the frequency and raise the cost of money laundering operations.

Finally, with respect to methodology, since all information on laundering comes from either those who were caught or from police stings, it is not clear what general inference can be drawn from it. If the first, presumably it is mainly the inept who are caught. That suggests that the information will do less to provide data on what the prevailing market trends are than to send out a message to the money laundering "industry" to improve its techniques. If information comes from a police sting, there are other problems. The police employ a particular technique not because it is most representative (something that can only be determined, if at all, after the fact), but because it is the one they best understand and/or have the resources and legal powers to deploy. They catch criminals and report success. Those reports become the evidence for claiming that the technique the police used is the one representing money laundering in general. That in turn becomes the basis for targeting more resources against a particular form of money laundering, with each success further confirming the original hypothesis even if the actual trend in the money laundering "market" is in some completely different direction.

For example, it was claimed in the U.S. that the 1986 and 1988 anti-money laundering measures "resulted in a significant reduction in the amount of money laundering through traditional financial institutions." Hence "non-traditional" financial institutions were immediately proclaimed the new front line of the drug war. New regulations were imposed that may have increased operating costs in precisely the sector of the financial system that is most in demand by the most economically disadvantaged part of the population, those who, for one reason or another, have great difficulty using orthodox banking channels. Yet, based on what has show up in hundreds of cases over the last decade and a half, the most sensible working hypothesis would appear to be that money laundering is so decentralized and its technology so geared to mimicking a wide variety of innocent and ordinary financial management methods, that reported "trends" might well reveal more about the point on the learning curve law enforcement has reached than anything new in the pattern and pace of money laundering.

Thus, there is no real proof that a proceeds of crime approach really succeeds in accomplishing three of its major declared objectives. It cannot be relied on to deter; it likely has little or no impact in terms of preventing the corruption of legal markets; and there is no evidence it really cripples criminal "organizations" by depriving them of capital. However there is a fourth rationalization offered for targeting proceeds of crime. It states simply and starkly that criminals should not be allowed to profit from their crimes. It is a principle that requires no empirical verification. Few would disagree with the fundamental moral principle that society should strive to strip criminals of illegal gains. However, on the subsidiary issue, of how much collateral damage society should be willing to sustain to implement that principle using current tools, the amount of disagreement could be considerable, particularly since an excellent alternative to the "proceeds-of-crime" approach is readily available.

Proceeds-of-Crime: Seven Fatal Flaws

Although no other country yet matches the U.S. with its ever increasing array of laws permitting forfeiture of an ever expanding range of properties with ever shrinking defenses against abuse, police elsewhere speak with envy about the tools their American brethren possess and agitate frequently for improved forfeiture powers. At the same time no country has given more evidence of precisely the dangers of such a profligate use of the forfeiture tool than the U.S. where as time goes on asset forfeiture appears less a means of controlling economically-motivated crime than another form of it. That manifests itself in seven particularly disturbing ways.

The first has been the very creation of a crime called "money-laundering." Behind it lies, apart from Drug War hype, the unfortunate penchant in recent decades for criminalization of matters formerly regarded as, at worse, regulatory offenses. Simultaneously the border between civil and criminal processes (never all that clear when governments use civil proceedings against citizens) has been obscured.

There is a remarkable contrast between the amount of public anxiety around (and the severity of the penalties for) "money-laundering" and the promiscuous way in which it is defined, if it actually is. Much confusion has resulted precisely because popular accounts, police reports and even laws have employed the term "money laundering" to apply to simple acts of smuggling, hiding or merely spending illegally earned money. Strictly speaking, money laundering should be construed as a dynamic three-stage process that requires: first, moving the funds from direct association with a specified form of crime; second, disguising the trail to foil pursuit; and, third, making the money available to the criminal once again with its occupational and geographic origins hidden from view. To be truly deserving of the term "money laundering", all three stages are necessary. Money cannot be said to be truly "laundered" unless it is given the appearance of legitimacy, which is precisely what the final step of the three-stage cycle is designed to achieve. And that requires as well there actually be a defined and proven criminal origin to the funds.

However, in practice all manner of acts of merely hiding or smuggling funds no matter what their origins have been construed as "money-laundering." They range from making a series of deposits, each small enough to circumvent the American requirement of reporting all cash transactions of a sum greater than $10,000, to rushing to board an international flight with a bearer bond tucked away, forgotten and therefore undeclared, in the traveler’s attaché case. All too often, when a court in the U.S. finds that actions for which people run afoul of the "money laundering" laws involve an unacceptable stretching of the meaning of the term as it is used in existing statutes, the government reacts by expanding the definition to include those actions.

These laws supposedly intended to combat the contamination of the legal economy with the proceeds of crime make no distinction between funds derived from heroin trafficking and funds derived from baby-sitting for unreported cash payments. To deal with the proceeds of genuine crime, and to punish those involved in handling those proceeds, it would have sufficed, and indeed made more sense, to simply clarify in the statutes governing the underlying offense that, for example, drug trafficking means wholesaling, retailing, knowingly providing the means of transportation or the site for the transaction, and managing or facilitating the transfer of the funds that finance such a transaction. Instead, the act of "money-laundering" was edified into a separate and distinct offense.

There is something quite bizarre behind this transition. In the past someone trying to dodge alimony payments by keeping a low financial profile would have been vulnerable only to a civil contest. Once money-laundering and its multiplicity of ancillary acts became criminalized, merely failing to fill out a piece of paper, even if all of the funds involved were of strictly legitimate origin, became subject to severe criminal sanctions. The implicit view is apparently that anyone seeking secrecy by definition has something criminal to hide. In fact, the reasons most persons seek secrecy may be immoral, they may even be illegal, but they are not necessarily criminal. Dodging child support payments is certainly offensive. But it is certainly not sufficient grounds for the perpetrator to spend several decades breaking rocks on a prison chain-gang.

Second, this attack on the "proceeds of crime" has indiscriminately eliminated the traditional right to financial privacy while burdening the financial system with reporting requirements and regulations that are at best useless, at worst counterproductive. This zeal for an on-going reporting regime began in the U.S. where it might perhaps have been partially justified by the unique institutional conditions. As a result of a history of barriers to interstate banking, and of state as well as federal licensing, the U.S. still (despite recent moves to consolidate) has the western world’s most decentralized banking system – and its most discursive regulatory regime. Perhaps a case can be made for the multiplicity of reports U.S. bankers are required to fill out, failure to complete which can lead to criminal charges against client and banker alike. But not only do other countries usually have alternative ways of generating the sort of information the U.S. regulations produce, there is no proof the U.S. regulations have had any proactive role in criminal law enforcement.

Not only has the sheer volume of information accumulated become an impediment to its own effective use, but a long history of industry practice shows that the best screen against criminal activity is to rely on bankers to mobilize their professional instincts to report voluntarily anything that looks seriously amiss, rather than require them to routinely fill out rigid forms concocted by committees of civil servants and police. Indeed, filling out a standard form and filing it discharges all legal responsibility and serves to get the bankers off the hook. Yet, facing pressure from the U.S. government, many countries began blindly imitating the U.S. requirement of cash transactions reports for sums over $10,000 even at a time when the U.S. Treasury agents were complaining of being overwhelmed with paper, and when Congress was actively debating a major hike in the reporting threshold. The spread of U.S.-style reporting requirements, however, is providing some relief to U.S. bankers. Their philosophy appears to be that if they are required by U.S. law to maintain records that might frighten away skittish clients and impede their ability to weigh into the 1990s growth sector of international private banking services, their government should level the playing field by imposing the same burden of overhead costs and reduced guarantee of client privacy on their potential competitors abroad.

Even worse, the impact of the laws is to shift the burden of regulation onto the private sector. Those rules and regulations are so complex and frequently changing that they are virtually impossible for smaller private sector institutions, which cannot afford the luxury of "compliance officers" and high-priced legal advice, to understand, let alone to properly implement. Simultaneously, it takes privatization of public functions one step further, forcibly recruiting bankers as police spies if they themselves to not wish to end up in the docket with their clients.

Furthermore the U.S. has set a world standard for a low threshold at which the bank as an institution becomes criminally liable – even for the actions of a single, low-level employee. The delight the U.S. criminal justice system takes in high-profile indictments and prosecutions of the banks themselves, a throwback to the superstitious spirit of the deodand, comes from the practice of endowing business institutions with a life and mind of their own independently of those who run them, therefore imposing on shareholders who for the most part are utterly ignorant and powerless, the costs of management malfeasance. The only thing missing is the spectacle of bank headquarters being symbolically hauled off to maximum security prisons or perhaps ritually burned to the ground by mobs of chanting federal prosecutors.

Third has come a dangerous erosion of due process, directly traceable to the myth of guilty property that underlies in rem forfeitures. Property has no civil rights, no right to counsel, no defense against double jeopardy and no protection against a reversal of the burden of proof. Once accused, in a process in which paid informants and hearsay evidence are acceptable, property is assumed guilty unless its owner can find the financial and legal resources to prove otherwise. Recently the U.S. Supreme Court upheld the process by, once again, reiterating that the purpose of in rem forfeitures was remedial rather than punitive. That judgement was, quite frankly, absurd. It is impossible for seizure of property to be anything but punitive. It is impossible to declare a car or house or bank account to be the proceeds of cocaine sales, for example, without simultaneously smearing its owner with the accusation of drug trafficking. Yet in the U.S., where there is no need for a criminal conviction prior to asset seizure, there is also no need to enter a shred of evidence in court to substantiate the implicit accusation against the owner of the property. In fact, even in cases where a criminal process is implemented, and the person charged found innocent, the U.S. government can and does relitigate the same facts against that person’s property on civil criteria with the onus reversed.

The use of paid informants in such cases is particularly disturbing – there is something inherently offensive in logic and justice about relying on the worst motives of the worst people to make cases on the weakest of possible legal grounds.

Even in cases where criminal conviction precedes civil forfeiture, since all property not otherwise accounted for is deemed proceeds of crime, the result could be to exaggerate the size of the offense – the owner of the property might then be in the position where the only way to prove those assets were not the proceeds of crime for which they are charged would be by providing evidence that the prosecutors could use to charge them with yet another offense. On the other hand, if the owner, to avoid self-incrimination on further charges, implicitly agrees with an exaggerated view of the amount of the proceeds of the first crime, that can not only strip him/her of legally acquired property, but influence sentencing and parole prospects. It might also further affect that convict’s reputation after discharge when he/she has supposedly paid their debt to society.

Yet further injustices were permitted when the "relation back" doctrine was borrowed from civil forfeiture and pasted onto criminal. This permitted the government to claim ownership of property from the time it was derived from or used for the commission of a crime and therefore allowed criminal courts as well as civil ones to trample on third party and innocent owner rights. Those third party rights were further compromised when the notion that "instrumentalities" was quietly extended to the demand side as well as the supply side of the market. Not only did that permit seizure of the cars of consumers as well as dealers, but it also allowed the police to grab cars owned by third parties who might be totally unaware that someone (possibly their teenage children) had used their car to score some dope. Furthermore, taking the notion of instrumentalities to its absurd conclusion, not only could houses in which drugs were simply consumed rather than traded be taken, in one case someone lost their home simply because they had used the phone in the house to set up a deal – presumably in the future they will have enough sense to use a cell phone in a public park.

Not least of the problems, in the U.S. one of the targets of the proceeds-frenzy is attorneys’ fees. Courts have relied on the relation-back doctrine to determine that the money being used for criminal defense belongs to the government, therefore the defendant has no right to use it to pay for a lawyer even if those funds are the only way the defendant can secure the services of a lawyer of his/her choice. In effect, the court ruled that even attorneys no right to live off the proceeds of crime. But what else do most criminal attorneys do, unless all of their clients are innocent? If they are only supposed to accept innocent clients, what happens to the right of any accused individual to counsel? Are lawyers in criminal cases supposed to allow juries to not only determine the guilty or innocence of their clients but also whether or not the lawyer will be paid for his/her efforts? In a rational world proceeds-of-crime should not be so designated until proven beyond all reasonable doubt to be so, after the individual is already convicted. It is hard to escape the conclusion that the real reason for attacking lawyers’ fees is really resentment by police and prosecutors about the television-generated image of super-smart defence lawyers raking it in by the bushel as a reward for getting their "obviously guilty" clients off.

A fourth problem, also derivative from the myth of remediation, is the grossly disproportionate penalties that have become standard in the U.S. (Intriguingly, the Canadian media in recent years have been filled with laments from the police about the supposedly loose and light sentencing provisions of Canadian law.) In the U.S. today "money-laundering" charges can now carry much heavier consequences than the underlying offense that generated the illicit money. And they can be compounded almost at will. Someone breaking a deposit of $99,999 in cash into ten equal parcels of $9,999 to evade the $10,000 reporting threshold can potentially face ten charges of money laundering and, if convicted, 200 years of prison. The mere threat of money-laundering charges is often enough to force a suspect to make a deal, for information or for property to be ceded in a civil settlement. If there is really a case to be made for harsher sentences, it would be far more honest to load them directly onto the underlying offense than to introduce them through the backdoor by additional charges of money laundering. However, if the real purpose is to shake down suspects or blackmail them into turning informant, the current approach makes sense.

Furthermore the deft shift from profits to proceeds as the target of forfeitures greatly increases the punitive effect. In an enterprise offense, an entrepreneur inevitably has costs that have been disbursed prior to and as a precondition for earning income. To declare that the full income rather than the net benefit is forfeitable, means that the person charged (or not as the case may be) has to cover all costs twice – once to suppliers and a second time to the state or its guardians - even if the initial capital used to purchase a banned substance for resale was of completely legal origin. Yet at the same time that double payment is imposed on the defendant, the fiction is maintained that the process is remedial, not punitive.

That became all the truer when the notion of substitute assets was quietly slipped into the laws, permitting the state to detach forfeiture from the explicit assets associated with the offense and go after any piece of property of similar value when the specific assets were difficult to get. It apparently went unnoticed at the time (or since) that if the specific piece of property was no longer the object of the search, then all fiction that the procedure is remedial disappears by definition. Although the idea of transferring equivalent value to a victim in a predatory offense can be seen to be simply restitution sense, in an enterprise offense with no victim, it cannot be so interpreted. Once the seizure of any substitute asset of equal value is permitted, by any reasonable definition the courts were in effect imposing a fine as a criminal punishment on the owner without any right to a defence.

The fifth problem is the threat the follow-the-money mania poses to the integrity of the fiscal regime. Modern tax systems derive most of their revenues from the direct taxation of income at progressive rates. They are premised on self-assessment and voluntary compliance – i.e. on trust back up by the force of criminal law. Central to their success is the guarantee of confidentiality, that tax information will not be leaked to competitors or creditors or, for that matter, to divorcing spouses. That confidentiality has taken a serious blow with the intrusion of the police into matters properly belonging to revenue enforcement.

That has occurred on a number of fronts. In rem forfeitures, now the core of American proceeds-of-crime strategy, were themselves tools devised strictly for fiscal processes. Now net worth assessments, again designed as a revenue instrument, have been permitted in forfeiture proceedings in the U.S. since 1994, and in Canada (without actually using the term) from even earlier. While revenue officials have long required the power to use confidential tax information in criminal proceedings designed to enforce fiscal regulations, now the process is being put in reverse. Police are being given permission to fish through tax files in pursuit of evidence in criminal investigations. The next step will come when the police are given the authority, which the American forces are now seeking, to use tax files for purely civil forfeitures as well.

Sixth, the approach has had the effect of skewing law enforcement priorities in pernicious directions. That was ably summed up in Miami in 1990 when U.S. Customs agents chanced upon a major cocaine shipment and decided to let it go in the hopes of following the trail. The purpose, however, was not the classic "controlled delivery" to target those further down the distribution chain. Rather it was explicitly and deliberately to let the drugs hit the streets, then seize the cash generated. Customs released the cocaine to the importers, and never found a trace of the resulting money.

Pushed by the U.S. Justice Department who urged more effort be put into forfeitures, the law enforcement apparatus shifted attention away from violent criminals who would be a genuine threat to society (and to the police) towards wealthy ones. Under the old regime police faced with limited resources who were targeting, for example, marijuana growers in a certain area, would focus their efforts first on the one with the largest number of plants. Under the new regime they will go first after the one with the largest and most valuable property regardless of the number of plants. Furthermore, under the influence of the proceeds-of-crime doctrine, police forces began to prioritize their actions according to the amount and type of assets seizable. They conducted pre-raid planning sessions to determine what should be taken. Cash, jewels, cars, boats and easily liquifiable commercial real estate are the favourites. Generally, though not always, the police avoid seizing entire businesses. They are hard to re-sell, especially if there are other partners who might not be charged with anything. Furthermore between the time of seizure and the time of the court-ordered forfeiture the police have to operate a seized business. One force found itself in the intriguing position of operating a porno cinema.

Another effect is to skew the choice of who gets prison time and who takes a walk, albeit somewhat lightened of their cash and property. The wealthier persons charged can plea bargain their way out by offering the police part of their property, while the poor get hard time. The wealthier the enterprise criminal, the greater the chance of this happening. This is indeed a curious result of a policy rationalized in public as the way to make sure the king-pins of enterprise crime get their just deserts.

Simultaneously there has been a reduction in the number of charges filed under laws that might lead to imposition of fines - which are paid to the public treasury - in favour of charges under laws where assets can be seized and shared among police and prosecutors.

The end result is that some police forces and prosecutors offices now run at a profit, with budgets well in excess of what they were formerly voted when they were subject to civic control. Indeed there are small town forces that have become so flush with drug cash, they now boast fully-armed, state-of-the-art SWAT teams though there has not been a seriously violent crime in the jurisdiction for decades. This is another distortion introduced by the introduction of a predatory crime-control mindset into an enterprise crime setting. While predatory crimes are generally specific to a locality, the various components of enterprise crimes take place over long distance: they might even be global. Yet the benefit from seizures can depend on an accident of geography – a well-heeled dealer was nabbed driving through town – rather than on actual need.

Furthermore, if the objective of so much law enforcement energy is to seize assets to bolster (or replace) the police department budget, the obvious next step is for each and every officer, in the interests of economic efficiency, to cut out the middlemen and to vote themselves salary increases and bonuses by directly pocketing the proceeds of seizures.

This overt corruption of law enforcement is the seventh and most serious flaw. Repeated studies by the U.S. General Accounting Office have shown that forfeited property not used or sold by the police force itself is usually trashed or stolen – often by the police. Black street people in Washington have been shaken down by beat cops for sums as little as $4.00 – they would have to post a $5,000 bond and hire a lawyer to protest the seizure. At the other end of the scale, a New Jersey prosecutor used the power of his office to force accused persons to cede property, which was then sold for a tiny fraction its market value to friends and secret business associates of the prosecutor. Those business partners knew better than to try to rat out or cheat on the prosecutor – he threatened to plant cocaine in their cars if they crossed him. He was eventually charged with 30 counts of mail fraud, tax fraud, conspiracy, financial-aid fraud, obstruction of justice and perjury. However rarely is the outcome so satisfactory to the course of justice.

Thus, a law enforcement strategy that was supposedly required to prevent huge sums of criminal liquidity from corrupting legal markets, undermining financial institutions, compromising the judicial system, threatening general prosperity and subverting national security has in itself become the major threat – to civil rights, security of private property, financial efficiency, due process, fiscal balance, the effectiveness of the justice system and the very integrity of law enforcement. Perhaps all this "collateral damage" would be tolerable if there were the slightest evidence of the existence of a huge crime crisis, if the proceeds-of-crime approach could be show to be effective in dealing with it and if there were no real alternative. The reality on all three counts is a resounding negative.

The Alternative Strategies

While the West has been busy criminalizing actions that generate illegal money and further criminalizing its subsequent management, other countries have chosen to subject individuals to criminal law and their wealth to financial policy initiatives.

Partly the differences can be imputed to distinctions of cultural and legal traditions. But mostly they can be attributed to the supply of capital. Rich Western economies can easily afford to attempt to neutralize the savings of criminals. Simultaneously they denounce the apparently complicit attitude of governments in some of the world’s poorer countries who hesitate to take action against illegally earned money, and may in fact facilitate its laundering. The U.S. is particularly aggressive in this respect. All over the world, U.S.-style find-freeze-forfeit regulations are being pushed with the same intensity as Marlboro cigarettes and Macdonald’s hamburgers, while any reluctance by other countries to sign on is immediately imputed to political corruption or loose moral standards. This posture by the U.S. is particularly hypocritical. Not only is it the world’s most powerful economy, but it is the primary beneficiary of illegal funds fleeing other countries. To be sure, most of those attracted to the U.S. are the product of tax and exchange control evasion by otherwise legitimately earned money. But it is safe to say that the flight of such funds from developing countries does at least as much damage to their social and economic fabric as the laundering of drug money does to the U.S. In fact it almost surely does far more.

Developing countries that have attempted to evolve alternative strategies to deal with illicit money generally start from the premise that illegally-derived incomes and wealth behave differently than legal, with potentially serious anti-social consequences. Although the evidence is anecdotal, a few generalizations about such behavioral differences seem sustainable.

First and foremost, in an atmosphere of insecurity produced by the threat of detection and loss, illegal income, whether derived from activity that is explicitly criminal or merely "informal," is much more prone than legal to being quickly consumed rather than saved or invested. In the West that is a sociological oddity – in the developing world, already plagued by a shortage of savings, it may be a serious impediment to indigenous industrial growth. Furthermore illegal income tends to be consumed in untraceable services, or blown on entertainment that promotes prestige among peers, or used for high-profile items like jewelry. If spent on more basic goods, these will tend to be acquired and enjoyed in clandestine form – stimulating the market for stolen or smuggled items. The more money wasted in such ways, the less can be traced or, if traced, forfeited. That means that the worse the state of insecurity of illicit income and wealth, the more anti-social its behavior.

To the extent illegal incomes are saved, once again there are behavioral differences. Rather than bank accounts, the immediate impulse may be to keep the money in stashes of high denomination notes, preferably hard currencies like U.S. dollars or Deutschmarks or Swiss francs. It may also be hidden away in gold (often smuggled), or prestige items like valuable works of art which are liquid, but whose value at time of purchase is difficult for regulators to establish. It will also have a higher propensity than legal money to hide abroad, promoting capital flight. In all these cases the savings are kept out of the formal financial system and therefore are unavailable to the legal economy.

If criminal income gets actually put to work to purchase assets, the preference is likely to be urban luxury real estate, diverting resources away from things like low-income housing; or it might go into rural land employed for prestige purposes like cattle ranching or horse-breeding rather than food production. Alternatively it might be used to buy commodities in short supply, therefore exacerbating shortages, driving up prices and allowing the criminal entrepreneur to speculate at the expense of the poorer elements of society. If the money does get actually invested in operational businesses, the preferences are luxury services (which give opportunities to skim and launder), professional sports (which are a source of prestige) or the entertainment sector – present day Bombay is as beholden as was latter day Hollywood for mob money for its huge film industry.

In general criminal money seems to concentrate on sectors from which it can be quickly liquidated in time of crisis or need, or which give extra political and social influence. Definitely not on the list are basic primary or secondary industries which are the sine qua non of economic development. Nor, unless there is extra encouragement or protection, is criminal money likely to be tempted to enter the formal capital market where it can be put at the disposal of legitimate firms or the government.

If the sums of illicit money are small relative to the economy as a whole, as is the case in rich industrialized countries, the impact is purely at the enterprise level. But if the sums become relatively large, particularly in countries with problems of low per capita income, perceived illegitimacy of government and weakly developed financial institutions, serious distortions can result. Faced with these difficulties, governments of countries so afflicted have in the past often chosen, not to try to find, freeze and forfeit, but to attempt to make illegal income behave more like legal.

The policies have been many and varied. Sometimes they take the form of passive accommodation. It is well known in Peru, for example, that coca-paste dealers sell their product for cash dollars to Colombian narcos; banks and exchange houses send buyers into the coca-growing areas to buy the dollars with intis, the local currency. The dollars are then resold to businesses seeking to pay for legal goods smuggled in from the U.S. or persons seeking to build up a Miami nest egg in defiance of Peruvian exchange controls. And the coca-paste makers in the interior lend their extra intis to rural money-lenders who in turn lend them to the farmers to buy seeds and equipment to grow and harvest normal food crops.

Some countries go further, seeking to actively draw the illegal cash hordes into the formal economy via either banks or government securities. This, in fact, is precisely the role of bank secrecy laws in many jurisdictions. While bank secrecy laws have become notorious for their role in attracting criminal money, most infamously drug money, into a Caribbean or Pacific island haven for a quick wash job, in fact most countries introduced bank secrecy laws to encourage the deposit of locally generated illicit money, whether from the hoards of career criminals or the stashes of tax evaders, by offering protection from detection and seizure.

There are governments, including some from precisely those countries now at the forefront of the "drug war," that have in the past offered to criminals the option of buying bearer securities. The objective, quite explicitly, is to attract illicit money to help the government finances. For that service the criminals collect interest, courtesy of legitimate sector taxpayers. Although the U.S. government has recently abandoned the practice of funding public expenditures, presumably including part of the costs of the "war on drugs," by offering interest-bearing sanctuary to criminal money in the form of bearer bonds, others still make it a regular practice. Sri Lanka, India and Pakistan frequently in the past have offered bearer bonds denominated variously in local currency, foreign exchange and even gold, along with pledges that no questions would be asked about the origin of the funds and no impediments raised to the investors, ability to recover the principle plus interest. Nor is the practice dead. A recent bearer bond issue by Pakistan have led to sharp clashes with the U.S. which, with its usual short and selective memory, has accused Pakistan of deliberately setting out to attract and launder the cash hordes of the world’s drug kingpins.

In fact such bearer securities do not really launder criminal money, even though they deliberately entice underground hordes by offering interest and anonymity. The fact that no questions are asked does not mean an amnesty is offered. Indeed, that would be logically impossible. The bonds are bearer instruments. Yet amnesty can occur only if the holder of funds to be cleansed is identified. Therefore some countries have gone further, offering such explicit amnesties. Some take the form of bank amnesties – underground money is deposited in designated bank accounts for a certain period, a laundry fee is paid to the state and the registered depositor is then able to use the remaining funds without fear of their being seized. Others take the form of state-issued whitener bonds. Unlike bearer bonds, whiteners require the purchaser identify him/her self and typically bear a lower rate of interest. But once the bonds mature, the money is vested, free and clear, in the hands of the investor. All such amnesties are directed at the money, not at the individual who can still be prosecuted for the acts that generated the funds.

A third variant of the amnesty does offer some relief to the owner as well as a clean slate for the money. These apply to unpaid taxes. Tax amnesties have been used across the world. While their institutional forms differ widely, the basic principle is the same. The delinquents (including criminals who have compounded their initial felony by tax evasion) step forward to reveal how much income has been hidden from the tax collector, pay a certain amount in penalty that always works out to less than the normal tax load, then are left with the rest of the money with the previous (fiscal) offense forgiven. Much the same takes place in the form of capital flight amnesties, to attract back money that has fled in defiance of exchange controls. The money is placed in state banks, invested in public debt instruments or merely declared on its return. The government clips a certain percentage and pronounces the rest clean and clear.

There are countless subvariants on these techniques, but they all have one thing in common – they fly squarely in the face of the current trend towards finding, freezing and forfeiting criminal money. The fact that so many developing countries, desperately short of capital, have for so long attempted to coax illegal earnings to behave more like legal in order to assure that the funds are available for the creation of agricultural, industrial or public infrastructure, explains far better than the notion of some conspiracy by corrupt heads of state, why these countries have been so slow to follow the U.S. in anti-money laundering and asset-forfeiture schemes.

To be sure there have been instances when developing countries have decided to attack illegal hoards head-on, in order to neutralize, rather than accommodate or legitimate them. The most common device is the mandatory currency conversion. There have been numerous examples – in India, Burma-Myanmar (at least three times), Nigeria (twice), Zaire, Iraq, the USSR and more recently Russia, to name but a few. The logic is that by announcing a sudden de-monetization and/or exchange of some or all of the national currency, the government can catch, and negate, the hoards of cash held by black marketeers and tax evaders. Sometimes all that happens is the largest denomination bills are withdrawn from circulation, with or without compensation. Sometimes the entire currency is withdrawn, with the population permitted to exchange without question a certain limited quantity of old notes for new - the rest can either be annulled outright or permitted to be exchanged if and only if the holders can adequately account for their origins. The result is to clear space for the central monetary authority to issue more currency without risking inflation or depreciation – in effect the purchasing power of the cash being destroyed is transferred to the central government.

Although superficially appealing, such demonetizations in practice have proven useless with respect to their nominal target, and sometimes a disaster in terms of their impact on the population at large. Typically those big black marketeers who cannot simply bribe their way to an exemption or launder their cash through legitimate-looking businesses, have already switched their savings to gold or foreign exchange or offshore bank accounts, leaving the petty traders and that part of the population either unserved by or mistrustful of banks to take the fall. Where the government is at all responsive to public pressure, as in the final days of the USSR, the political heat can force the authorities to raise the allowances and signal to those scrutinizing excess holdings to go easy, therefore negating most of the impact. The only times where such exchanges have been successful have been when, despite the anti-crime rhetoric that accompanies them, they have had political rather than economic objectives. That occurred, for example, when the federal government of Nigeria wiped out the currency to destroy the finances of the secessionist state of Biafra in the late 1960s. It also occured when Iraq did likewise with its high denomination notes to bring rebellious Iraqi Kurdistan to heel in the early 1990s.

While currency exchanges are blunt instruments, striking the economy as a whole and only incidentally (if at all) picking up the assets of underground entrepreneurs, there have been occasions when developing countries have attempted to use something akin to asset forfeiture to attack ill-gotten gains. One of the most striking was in the Philippines after the overthrow of the Marcos dynasty. The new government created the Presidential Commission on Good Government and turned it loose to search out and sequester assets belong to Marcos and his cronies. In short order the PCGG seized hundreds of millions of dollars worth of real estate, corporate shares, boats, cars and bank accounts. This was supposedly a prelude to having courts adjudicate either their return to their rightful owners or their permanent cession to the government to help it finance a program of land reform. Indeed, so enthusiastic was the commission in the early stages that it inspired entrepreneurial imitators - people would secure false credentials identifying them as officers of the commission, then go about the country extorting money from businessmen under the threat of being denounced as Marcos cronies.

Not that the record of the PCGG itself was much better. Assets were seized out of pure vendetta; members of the staff made off with jewels, aircraft, livestock and other portables; corporations and land were grabbed from cronies of the old power elite and retransferred to cronies of the new power elite; the broadcasting system, seized almost en masse, was deployed to further the political objectives of the new rulers; all leads pointing to the extensive involvement of Japanese businesses in Marcos era plundering were covered up to avoid offending the Philippines' largest foreign investor; assets were grabbed and then deals made for their release without any charges being actually filed against the owners; and, in the final analysis, the entire process ground to an end when the government, dominated by the sugar aristocracy, put a break on the land reform the asset seizure was supposed to finance.

This should have been a useful omen. But certainly in the U.S. no one seemed to be taking note. Year after year the State Department "narcotics" report lauds those countries who imitate U.S.-style proceeds of crime initiatives without, it seems, bothering to cross check with the branch of the same department that annually deplores lack of legitimacy and respect for human rights exhibited by certain governments. In light of the record of the Philippines, a relatively open society with an independent press and a powerful political opposition, it will be interesting to see what the ultimate consequences will be in post-Mobutu Zaire whose thuggish new regime has turned loose on the parts of the country it controls, an Office for Ill-Gotten Gains, supposedly to track down and retrieve the misappropriated wealth of Mobutu and his colleagues.

The Fiscal Option

A U.S.-style attack on the "proceeds-of-crime" – heaping on all manner of reporting regulations, co-opting bankers as police informants and grabbing suspect wealth using administrative or civil proceedings – is, bit by bit, place by place, being mimicked around the world, though its triumph is not yet, nor likely to be, complete. It is a luxury that perhaps advanced western capital-rich countries can afford, provided they put little value on legal niceties like due process. It is not something that should be gratuitously forced on other countries whose social priorities are different and who have evolved alternative attitudes towards and policy approaches to criminal income and wealth that might better suit their circumstances and needs.

Furthermore even in the West, there is no proof that the "proceeds-of-crime" approach, in the form of selective asset seizure, has produced positive results in terms of reducing the amount and frequency of enterprise offenses by deterring recidivism or crippling the crime "cartels." The entire exercise rests on a series of inaccurate or at least unproveable assumptions and involves the commission of a series of sins against common decency and common sense. Yet clearly something must be done to take away from criminals the profits of their crimes. Fortunately that result can be achieved using means other than selective asset seizure and therefore without the "collateral damage" – though it will be fought bitterly by law enforcement agencies desperate to keep control of the "drug" cash to which they are rapidly becoming addicted.

Back in the 1930s the U.S. government set the precedent by using charges of income tax evasion against Chicago kingpin, Al Capone, who had proven himself capable of beating the rap for more orthodox offenses. Two decades later, former bootlegger and labour racketeer, Frank Costello, got the same treatment. The objective was not to grab their assets and so cripple their "organizations," but simply to find something for which they could be tossed in jail. Since those glory days, the U.S. IRS has been so keen on high profile busts of "known" criminals that it has attracted the complaint, including from one of its former commissioners, that it neglects its proper duty, of assuring fiscal equity and guaranteeing to government the revenue necessary to fulfill its social obligations. By expending so much energy on high-profile prosecutions where the motive was to "get" the individual rather than collect the revenue the IRS has, in effect, put matters in reverse.

Furthermore, using tax charges is a very onerous method for enforcing criminal law. Instead of simply proving a basic violation of a simply defined statute, the government has to bring forward witnesses to outline the individual’s expenditures and demonstrate beyond all reasonable doubt that they considerably exceed his/her reported income. It is a strange way to enforce a law against pimping, for example, by calling a string of witnesses, not to the fact that "girls" were beaten up or that johns were hustled, but that the pimp blew a wad in a high-class restaurant. Furthermore using tax law to prosecute criminals indirectly for the basic offenses has had the unfortunate effect of sending out to the public at large the message that it is all right to cheat on taxes provided the money originates from legitimate sources.

However it is possible simultaneously to use the fiscal code for its proper purposes and to attain the moral objective of ensuring that at least some criminals do not profit from their crime. Tax codes provide for fines and forfeitures, interest and penalties, and, interestingly enough, the means to seize wealth using a reversed burden of proof. This reverse onus has been, legitimately, part of tax enforcement for centuries. In the days when most state revenues came from Customs duties, it was normal and natural that merchants prove their cargoes had met all payments rightly due. Today, in the same spirit, a citizen with otherwise unaccounted for income should be required to demonstrate that all taxes rightfully due have been paid. In neither case does the origin of the income matter – what counts is the requirement that all citizens meet their fair share of the overall fiscal burden.

Furthermore, with tax charges, there is no need to trace particular assets and impute them to any specific crime. All that is necessary is to demonstrate, using net worth or similar analysis evolved specifically to assure fiscal equity, that someone’s expenditures exceeded their reported income. The undeclared portion of their illegal income (probably along with a fair chunk of the legal part) will vanish in arrears, interest and penalties. And tax procedures can go ahead with no need for individuals to incriminate themselves with respect to the origins of the money. Yet if the underlying theory of proceeds-of-crime is correct, the motive and the capital for further offenses will automatically vanish, without the need for a criminal trial on specific charges pertaining to the underlying offense.

The other great advantage is that while tax evasion is a crime, tax enforcement officials prefer the civil route. Unlike the police, they can use civil proceedings without stigmatizing the individual as a cocaine trafficker, for example, without the benefit of a trial. Yet they can still collect their due, and more.

The counter-case is sometimes made that using the tax code cannot strip criminals of their ill-gotten gains, for it can only be applied at the marginal tax rate against their illegal income. If tax law is used, criminals would be permitted to deduct expenses to determine the net amount due, leaving most of the proceeds, a sum equal to cost plus profits net of taxes, still in their hands. But there are several obvious rebuttals.

The argument that a criminal will likely be left with much of the profit intact could only be advanced by someone who has never tangled with revenue authorities intent on using their full powers. Once fines for failure to file or for filing false returns are added to interest charges on overdue balances, it is highly unlikely any of the net income accruing to an enterprise crime will be left for the criminal to enjoy or reinvest. In fact such a procedure would likely bite deeply into legally earned net income as well. If it does not, that suggests merely that the general tax rate structure is insufficiently progressive, something that is hardly the criminals’ fault!

Moreover, using tax law should be easier in another respect – judges and juries are likely to be more sympathetic with forcing the criminal to pay overdue taxes plus interest and penalties to the government treasury to finance education and welfare than with forcing him/her to forfeit a BMW for some local police officer to enjoy.

The fear that taking only profits or net income will do little to remove the motive from crime is absurd. To the extent money is the overwhelming factor in determining their behavior, criminals do not enjoy, or get motivated by, "proceeds" – they enjoy and are motivated by profits. No one looks forward to laying out money to cover the costs of running a business.

Part of the objection to using tax code procedures against the proceeds of crime reflects the continued influence of the fact that so much law enforcement philosophy was born in the pursuit of predatory crime, and it has really not come fully to terms with the fundamental commercial, financial and fiscal differences that enterprise crime represents. In the event of predatory offenses courts should be able, on the basis of the charges (which directly involve specified property) to order confiscation or, should the property no longer be available in the form originally misappropriated, restitution of equivalent value to the victim, in addition to fines which would go to the state. After all, with a predatory offense, both the basic act, taking some else’s property, and the means by which it was done, through force or fraud, are illegal. Nor is there any value-added to society from the act – it is purely one of redistribution of existing wealth obtained (presumably) by the expenditure of after-tax income.

In the event of enterprise offenses, the role of the criminal courts should be quite different. There is a fundamental distinction between the underlying offense, trafficking in forbidden goods and services, and the question of how much money was so earned. The act per se is illegal; but the means by which it is carried out, a market exchange among willing participants, is not. Furthermore there is value-added, in the provision of new goods and services, and all income earned is subject to tax whether the origins are legal. Therefore the role of the criminal courts is to weigh evidence of the underlying offense and, if appropriate, convict the entrepreneur. At that point a second process logically kicks in – the role of the revenue authority to trace, freeze and forfeit property equivalent to the unpaid taxes, plus interest and penalties, due on the net benefit the individual received from the transaction.

Furthermore, unlike the case in asset forfeiture proceedings, for fiscal purposes it is perfectly reasonable to start with the premise that net profits and proceeds are the same thing, unless and until the individual proves that costs were incurred. There is nothing morally objectionable about an enterprise criminal (as distinct from a predatory one) being permitted to write off costs, since the method used to commit the crime, market transaction, is inherently legal – it is only the results that are wrong. And, in any event, the tax code used properly can easily strip the criminal of all net benefit, plus. In more practical terms there are actually advantages to permitting the deduction of expenses. Allowing a convicted enterprise criminal to charge off costs actually enhances rather than limits crime control. In order to claim deductions, the criminal must provide all details of his intermediate suppliers and employees, permitting police to not only roll up entire networks, rather than just isolated individuals, but also giving police intelligence officers and independent researchers the hard data with which to map out networks and actually understand (for the first time) how criminal markets really operate.

It is also objected that using tax law legitimates criminal business by treating it just like all other economic activity. This is also false. If the objective is really to attack the motives and the capital of crime "cartels," it makes absolutely no difference if the money is taken away using selective asset forfeiture or tax code means. (Nor, for that matter, should it matter if the ultimate beneficiary is the state treasury, legitimate creditors of the criminal, family members in need or even defense attorneys – the only persons or institutions that should be excluded from a division of the loot are the criminal and the law enforcement apparatus.) And if the state chooses to go the criminal rather than civil route in pursuing tax charges, it is difficult to imagine why a criminal should feel better about being jailed for five years for tax evasion than being jailed for the same term for dealing cocaine – the fact of a jail sentence, a criminal record and the loss of financial assets constitutes the punishment and, at least to some degree, the deterrent, no matter what the particular charge. Indeed, to the degree that prison life actually improves with the prestige of the offense for which the individual was tossed inside, tax charges are likely to reduce a prisoner’s status vis-à-vis an arsonist, murderer or drug dealer.

Perhaps the most important single reason for using tax law to take away criminal profit is to maintain the integrity of the revenue system – the police are blocked from fishing expeditions through tax files which threaten to undermine the confidentiality that is the sine qua non of the system. On the other hand the police would be expected to deliver to the revenue authorities any evidence of unreported income they chance upon in their investigations. Meanwhile attacking criminal profits under the tax code sends out a positive message – everyone pays their taxes, and if they fail to do so voluntarily, the state had tough means at its disposal to collect what is due.

------------------------------------------------------------------------------------------------------------

                            Asset Forfeiture                                                  Tax Code

Application         applies to specific offense                          applies to all income

Beneficiary         law enforcement                                          state coffers

Fiscal Impact    undermines tax system                              reinforces tax system

------------------------------------------------------------------------------------------------------------

Certainly not least of the advantages, if tax law can do the job, there is no need to criminalize money-laundering. Unlike drug trafficking, peddling kiddy porn or illegally dumping toxic waste, money laundering consists of a set of acts, each of which is completely harmless – except to the extent that they rob the public purse of tax revenues legitimately due. That is precisely why it has historically been so difficult to get many jurisdictions to accept the logic of creating such a criminal offense. Even if is claimed that those who handle the money for certain serious crimes are just as guilty as those who commit the underlying offense, that is an argument for simply including them within the reach of the law dealing with that underlying offense. Since an enterprise crime in drugs, for example, requires, in addition to producers, exporters, importers, distributors, and retailers, skilled personnel to manage the resulting money flows, why not simply add them to the list of parties guilty of the predicate offense?

Furthermore, if tougher sentences are the objective, they can be added them directly to the basic offense, rather than introducing through the back door by an artificial crime called money laundering. In fact so contrived is the crime of money laundering, that, in order to win public acquiescence, the popular imagination had to be stoked by conjuring up great crime "cartels" dripping filthy lucre as they rapaciously eye the commanding heights of the legitimate economy. It took a big lie to create a phony offense, and set law enforcement off on an absurd, dangerous and ultimately useless chase for money rather than criminal offenders.

On the fundamental principle, there is little disagreement – criminals should not be permitted to enjoy the profits of their crimes. But beyond that basic moral conviction there is no consensus on how large the problem of criminal money flows really is, on why society is actually worse off when criminals, rather than legitimate business people, consume, save or invest, or on just what level of "collateral" damage society should be called upon to accept in the name of a war on criminal profits. Yet despite the fact that so many fundamental questions have remained not merely unresolved, but often undiscussed, police forces around the world are being turned loose to find, freeze and forfeit the presumed proceeds of crime on the basis of little more than a vague assurance that this is the most resource-effective way to deal with economically motivated crime.

Thus, in the spring of 1998, the U.S. government’s National Drug Intelligence Center hosted a gathering of the elite of U.S. law enforcement figures involved in anti-money laundering efforts. Top people from Customs, the DEA, the FBI, the IRS and the CIA were present along with a host of bankers and prosecutors. For three days issues ranging from the operation of parallel currency markets to the impact of cyber-banking to the insidious effects of international transfer pricing were debated. Ultimately the NDIC issued a limited circulation ("for official use only") report on the deliberations. It began with what it called the "key judgement": namely that "The most efficient and effective means to cause genuine damage to drug-trafficking organizations is to disrupt their financial infrastructures."

A few months later, the RCMP, to celebrate its 125^th birthday, held a major money-laundering conference in Montreal whose statement of purpose boldly announced: "Crime is a phenomenon that affects every sphere of society. Money laundering in particular poses a direct threat to our institutions."

Perhaps the "key judgement" of NDIC experts is correct. But perhaps it is not. Perhaps, as the RCMP experts contend, criminal money poses a serious threat to the integrity of legitimate economic institutions. But perhaps it does not. Perhaps serious crime groups are adversely affected by current legislation and practices designed to take away from them the proceeds of their crimes. But perhaps they are not. Not once during the entire NDIC event was there a shred of evidence presented to substantiate its main claim – it was merely assumed from the outset and that assumption was then recycled at the end of the deliberations in guise of a conclusion. Not one presentation in the RCMP conference attempted to assess precisely how the legal economy was threatened by the accumulation and laundering of criminal wealth. Nor did either event make any attempt to objectively assess the success or failure of the follow-the-money approach. The bald fact remains that, after 15 years of progressive escalation of its use, no one has been able to determine with any remote degree of confidence whether or not the proceeds-of-crime approach to crime control has had any discernible impact on the operation of illegal markets or on the amount, distribution and behavior of illegal income and wealth.

Of course it is possible to find the occasional criminal who is, in all senses, filthy rich. The big question – rarely posed and never answered – is how representative is that occasional underworld magnate in relation to the criminal economy as a whole? Is it not true that laws should be written to deal with a general anti-social trend rather than the occasional aberration? On the other hand, is it really sensible to start rewriting laws on the basis of one or a few spectacular incidents, particularly when those laws potentially involve so much "collateral damage?" Such questions are particularly serious given how many of the spectacular proceeds-of-crime busts have been the result of stings, therefore making it impossible to determine a priori how much money would actually have been involved had not law enforcement agencies been egging on the process. Furthermore even if a trend did exist for the accumulation of huge amounts of criminally derived wealth (as distinct from legal income that evades taxes), and that criminal wealth is growing relative to the economy as a whole, the logic of deploying asset-forfeiture as the primary weapon simply does not hold up to critical scrutiny. There are more efficient ways to do the job, without the attendant moral and human costs.

    ENDNOTES

2 There is a growing critical literature on the use of asset forfeiture laws in the U.S. See especially David Fried, "Rationalizing Criminal Forfeiture," Journal Of Law And Criminology, Vol. 79, No. 2, 1988; Steven Kessler, Civil And Criminal Forfeiture: Federal and State Practice, Clark, Boardman and Callaghan, New York: 1994; and especially Leonary Levy, A License to Steal: the Forfeiture of Property, University of North Carolina Press, Chapel Hill:1996,

3 For the Canadian statute, see 35-36-37 Elizabeth II Chapter 51 Section 420.17

4 This practice is commonly traced back to the injunction in the Book of Exodus (Chap. 21, Verse 28) that, "If an ox gore a man or a woman that they die, then the ox shall surely be stoned and its flesh shall not be eaten. But the owner of the ox shall be quit."

5 Levy, License, 44.

6 For some of these abuses, see Eric Blumenson and Eva Nilsen, "Policing for Profit: the Drug War’s Hidden Economic Agenda", University of Chicago Law Review, Vol. 65, Winter 1998, n 143-149. There is an excellent summary of this article entited "The Drug War’s Hidden Economic Agenda" in The Nation 9/3/98.

7 It was much as the eminent jurist Oliver Wendell Holmes observed. "The customs, beliefs of needs of a primitive time establish a rule or a formula. In the course of centuries, the custom, belief or necessity disappears, but the rule remains. The reason which gave rise to the rule has been forgotten, and ingenious minds set themselves to inquire how it is to be accounted for. Some ground of policy is thought of, which seems to explain it and to reconcile it with the present state of things and then the rule adapts itself to the new reasons which have been found for it, and enters a new career. The old form receives a new content, and in time even the form modifies itself to fit the meaning which is has received." (Cited in Levy, License, 16)

8 On this transition see R.T. Naylor, Patriots And Profiteers: On Economic Warfare, Embargo-Busting and State-Sponsored Crime, McClelland & Stewart, Toronto: 1999, Chap. 1.

9 This is well analyzed by Stephen Fox in his Blood And Power: Organized Crime in Twentieth Century America, Penguin, New York: 1989.

10 Law enforcement often uses the term "enterprise crime" in a sloppy way to refer to any crime with an economic motivation. See, for example, the category of enterprise crime as used in Canada’s Bill C-61, its proceeds of crime law, in which everything from arson to murder to counterfeiting is lumped together. There is no actual definition of enterprise crime – it would be impossible to come up with an actual definition to deal with this grab bag list which has the air of being a typical political compromise: everyone involved in drafting the act apparently got to stick their favourite offense into the mix. In fact it should have a much more precise meaning, along the lines suggested in the text.

11 These distinctions were addressed in R.T. Naylor, "From underworld to underground: Enterprise crime, "informal sector" business and the public policy response" Crime, Law & Social Change, Vol. 24, 1996.

12 Judy Osborne, Spectre Of Forfeiture, Access Unlimited, Frazier Park, Calif.: 1991, 73.

13 Ethan Nadelman, Cops Across Borders: the Internationalization of U.S. Criminal Law Enforcement, University Park, Pennsylvania: Pennsylvania State University Press, 1993, 93.

14 For a critical survey see R. T. Naylor, "Mafias, Myths and Markets: On the Theory and Practice of Enterprise Crime", Transnational Organized Crime Vol. 3, No. 3, Autumn 1997.

15 See, for example, the account of the puffing of illegal gambling figures by Robert Lacey in his biographical study, Little Man: Meyer Lansky and the Gangster Life, Little Brown, Boston: 1991, 206.

16 Peter Reuter "Rackateers as Cartel Organizers" in Herbert Alexander (ed.) The Politics And Economics Of Organized Crime, Lexington Books, Lexington, MA: 1985

17 See especially Berta Esperanza Hernadez "RIP to IRP – Money Laundering and Drug Trafficking Score a Knockout Victory over Bank Secrecy" North Carolina Journal of International Law and Commercial Regulation, Vol. 18, 1993.

18 See Jeff Atkinson, "Racketeer Influenced and Corrupt Organizations", Journal of Criminal Law and Criminology, Vol. 69, No. 1 1978.

19 Fried, "Rationalizing Criminal Forfeiture", 330

20 In United States v. L’Hoste, 1980 the Fifth Circuit Court confirmed that RICO forfeiture is mandatory on conviction. (Fried, "Rationalizing Criminal Forfeiture", 335) Mandatory sentence is a development that has gone far to undermine the traditional capacity of judges to tailor punishment to the circumstances of the offender, and has produced a series of legal atrocities.

21 Levy, License To Steal, 72

22 John Villa "A Critical View of Bank Secrecy Act Enforcement and the Money Laundering Statutes" Catholic University Law Review Vol. 37: 489, 1988.

27 On the genesis and objectives of the Italian law, see the opinions of its intellectual author, Pino Arlacchi, "Effects of the new anti-Mafia law on the Proceeds of Crime and on the Italian economy" Bulletin on Narcotics XXXIV, No. 4, 1984.

28 On these developments, see especially Arlacchi, Mafia Business. There is a hysterial account of the rise of the new Mafia in Claire Sterling, Octopus: How the long reach of the Sicilian Mafia controls the global narcotics trade, New York: Simon and Schuster, 1990.

76 Far Eastern Economic Review 17/10/87, 4/8/87; New York Times 17/10/88; The Economist 15/8/88.

82 Canada, GRC-RCMP, International Money Laundering Conference, Press Release, 17/7/98.