Organized crime’s infiltration in legal economy
When godfathers become entrepreneurs: On the organized crime’s infiltration in legal economy
Criminal organisations invest vast sums of money within the legal economies of many countries worldwide. These investments provide criminal organisations with a powerful tool to raise forms of social consensus in some portions of the population. This column provides a characterisation of organised crime’s investment in Italy’s legal economy, a country historically plagued by the presence of criminal groups. The results indicate that during periods of economic and social downturn, organised crime may capitalise on the weaknesses of the institutional response to the crisis, consolidating and possibly expanding, its role as an investor in the legal economy.
Why is it that criminal organisations, deemed as perpetrators of murders, extortions, and other crimes, are still so powerful and prosperous? One of the explanations lies in the ability of organised crime to exploit the weaknesses (or even the absence) of the institutions needed to raise social consensus among local populations, and their ability to make policies aimed at reducing leniency toward these organisations less effective. Among the tools available to organised crime to raise social consensus, one of the most important is its investments within the legal economy.
Organised crime plays a key role within the legal economies of countries all over the world. This is hardly any news: in 1985, The New York Times column “Mafia Infiltration of Business Costing Consumer Millions” described the organised crime’s penetration of sectors such as construction, delivery, food, and private garbage collection, and showed that such penetration costs consumers hundreds of millions of dollars each year (The New York Times 1985). Organised crime raises a huge amount of money from its illicit activities, and a considerable part of this money then flows into legal economy disguised as investments. In 2009, organised crime’s worldwide proceeds accounted for $2.1 trillion, with $1.6 trillion reinvested in the legal economy (UNODC 2011).
Organised crime’s source of power and the COVID-19 challenge
Through its investments in legal economy, organised crime becomes an alternative provider of capitals and employment, especially in those countries with a stagnating economy and where institutional intervention is either lagging or insufficient. These ‘red-flags’ constitute a fertile soil for organised crime to establish or reinforce its infiltration. In other words, a crisis represents an opportunity for organised crime: with economies going through hardships, organised crime serves the market with its financial and non-financial resources, helping to satisfy the demand for goods and services among the population. The spread of the COVID-19 pandemic is no exception to this rule and will constitute an opportunity for criminal organisations to further cement and expand their business operations (UNODC 2020). As recently pointed out by the Italian media, in April 2020 there was already evidence of organized crime’s investments in the production and distribution of ‘epidemic kits’ to face the COVID-19 health emergency (The Guardian 2020). Moreover, organised crime has been recently deemed responsible for the distortion of funds intended for the management of the very same crisis (La Repubblica 2020).
Using data to understand organised crime’s investment
The investments of organised crime in the legal economy cannot be fought without a clear understanding of its nuances. Therefore, our priorities should lie in refining our tools to obtain a better understanding (both in qualitative and quantitative terms) of the size and impact of the investments in the legal economy made by criminal organisations. Over the past few years, this necessity has driven a series of researches (largely focused on Italy) aimed at digging into businesses secretly connected with organised crime. A recent column by Mirenda et al. (2019) describes what happens to the revenues of those enterprises which are potentially connected to the ‘Ndrangheta, one of Italy’s most powerful criminal organisations. Calamunci and Drago (2020), however, show how the presence of firms linked to organised crime in a given market can also have important spillovers on the performance of other firms operating within the same market. Finally, Ganau and Rodríguez-Pose (2017) highlight the general impact of the presence of organised crime in a given area on the total factor productivity of the enterprises operating within it.
The quantification of organized crime’s infiltration in the legal economy
In one of our recent studies (Le Moglie and Sorrenti 2020), we chose a different perspective so as to provide a more general characterisation of organised crime’s investment in the Italian legal economy, analysing its impact on the degree of local entrepreneurial activity. Our study exploits the mandatory registration required to all enterprises operating nationwide and assesses the impact of the financial crisis of 2007 on the establishment of new enterprises across different provinces. The idea underlying the analysis is simple: given the compulsory nature of the registration of all enterprises in a public registry, and the crisis that homogeneously lowered the legal credit available to start new businesses across the country, the registration of new enterprises in provinces with more criminal infiltrations and investments should have decreased relatively less during the recession. As a matter of fact, the reduction in new registrations of legal enterprises due to credit contraction should be partially offset by the registration of new ‘mafia-connected enterprises’, whose illicit sources of funding remained almost unaffected by the economic turmoil.
Our analysis is performed on Italian provinces, with the exclusion of the regions where Italy’s criminal organisations originated (i.e. Sicily, Campania, and Calabria). Each province has been classified as having a high versus low presence of criminal organisations based on the ‘Transcrime Mafia Index’ (Calderoni 2011) – an index measuring the presence of organised crime in Italy. Figure 1 shows the geographical distribution of organised crime according to the main definition used in the study: dark gray provinces are classified as those with the higher presence of organised crime, while light grey provinces tend to have a lower presence of such organisations.
Figure 1 Organised crime’s presence in Italy
The study compares the number of newly registered enterprises between provinces with a high and low presence of organised crime, before and after the outbreak of the financial crisis of 2007. Such a comparison (Figure 2) depicts a clear framework: before the crisis hit the country, both groups of provinces were on parallel trends in terms of newly established enterprises. In other words, the two groups were evolving in a similar way in the pre-crisis period. With the outbreak of the crisis in 2007, the dynamics of both groups started to diverge in favour of provinces with a higher presence of criminal organisations. In these provinces, the negative impact of the crisis on the number of newly established enterprises was lighter. On average, the difference between post-crisis performance in provinces with a higher presence of organised crime and those with a lower presence is around 4%, a percentage suggesting that at least 241 newly established enterprises every year after the crisis are likely to be linked to mafia investments into the legal economy.
Figure 2 Organised crime’s presence and establishment of new enterprises
In line with judicial evidence, we show that the effect is stronger in those enterprises operating in the construction sector and for those that adopt the form of limited liability companies. This subset of firms is deemed the ‘most infiltrated’ economic sector by organised crime, and the most common legal form adopted by it to run its businesses. On the contrary, we do not find any effect in sectors rarely infiltrated by organised crime. We also rule out other compelling explanations related to a differential change in important determinants of the establishment of new enterprises between provinces with and without organised crime in the post-crisis period. Among them, the demand for goods, the degree of openness to the global market, and the accessibility to economic resources such as public procurement of EU funds.
Several important conclusions can be drawn from the results of our study. The quantitative analysis shows that ‘Mafia Inc.’ plays an important role in the legal economy. Moreover, we highlight how organised crime may generate positive-in-sign spillovers for the local population through its investments in the legal economy that also help them gather higher social consensus. From a normative perspective, our results point to the importance of the adoption of more effective policies to curtail the power of criminal organisations. These policies should complement standard repression strategies with institutional interventions aimed at reducing the positive-in-sign spillovers of organised crime’s investments in the legal economy. The analysis by sectors informs policymakers on the most sensitive areas where vigilant monitoring and stricter legislation should be targeted. As a final remark, we illustrate that during economic downturns (like the one represented by the COVID-19 pandemic), ‘godfathers’ may have a comparative advantage compared to common entrepreneurs, especially when it comes to the availability of financial resources. Therefore, vigilance should further increase during these periods to preempt a larger infiltration into the legal economy.
Calamunci, F and F Drago (2020), “The Economic Impact of Organized Crime Infiltration in the Legal Economy: Evidence from the Judicial Administration of Organized Crime Firms”, Ital Econ J(6): 275–297.
Calderoni, F (2011), “Where is the Mafia in Italy? Measuring the Presence of the Mafia across Italian Provinces”, Global Crime 12(1): 41-69.
Ganau, R and A Rodríguez-Pose (2017), “Smaller Firms Suffer More from Organised, Mafia-style Crime”, VoxEU.org, 19 August.
La Repubblica (2020), “Le mani della ‘ndrangheta sui fondi per l’emergenza Covid: otto arresti, ottenuti 45mila euro di contributi”, La Repubblica, 14 July.
Le Moglie, M and G Sorrenti (2020), “Revealing ‘Mafia Inc.’? Financial Crisis, Organized Crime, and the Birth of New Enterprises”, The Review of Economics and Statistics (forthcoming).
Mirenda, L, S Mocetti and L Rizzica (2019), “The Boss on Board: Mafia Infiltrations, Firm Performance, and Local Economic Growth”, VoxEU.org, 26 October.
The Guardian (2020), “Why the mafia are taking care of everyone’s business”, The Guardian, 25 April.
The New York Times (1985), “Mafia Infiltration of Business Costing Consumer Millions”, The New York Times, 19 December.
UNODC (2011), Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes, Vienna: United Nations Office on Drugs and Crime.
UNODC (2020), The Impact of COVID-19 on Organized Crime, Vienna: United Nations Office on Drugs and Crime.