The world’s press is full of the terrible problems which a ‘rogue banking system’ has caused. The actions of the banks in the fall of Lehman Brothers and the corrupt fixing of the LIBOR rate in London by Barclays and other banks has been presented by journalists and analysts as a breakdown of the system. This may well be true but corruption and the flouting of rules is hardly a novel or unique event. Much of all international economic life, under capitalist, socialist, communist or despotic systems which utilises the abstraction of currency to express value and as a means of exchange has always been full of variations on the same theme.
One of the most significant aspects of the interaction between business and society has been the growth and spread of crime and corruption as a major industry. Corruption is often conducted on such a massive scale that it involves sums greater than the Gross National Product of major industrial nations. Theoretically, when one country has a balance of payments debt another country or countries have an equivalent credit. The system is constructed as a zero-sum game where each debit is balanced by an equivalent credit. By 1970, this system had developed what the International Monetary Fund called an "asymmetry"; the sums did not cancel each other out. By 1980 the world was missing over $100 billion. By 1990 this "asymmetry" was over $320 billion. Current figures are in the trillions. These are the official figures relating to national debts and the official exchange of goods and services among nations. The true sums, reflecting both official and unofficial transactions, are certainly many multiples of these.
Some of these missing funds disappeared as "flight capital", fleeing fiscal authorities in the Third World. Some left home as "black money" to be laundered and returned clean. Some of these funds "leaked" from foreign aid schemes in a web of corruption involving suppliers, shippers and government officials. Some left as overpayments of invoices for goods and services with the excess reimbursed to the payer overseas; some disappeared as insurance payments on phantom goods loaded aboard sunken ships or supposedly destroyed in "friendly fires" in empty factories and warehouses; some vanished as unjustified depreciation of assets claimed by giant corporations or in their accountants' creative use of transfer pricing; some vanished as export subsidies on goods that never left the domestic economy. Some left as unvouchered cash donations to ethnic, religious and cultural organisations. Some were transferred by invoice; some by documentary credits; some by matching bank deposits; some by cash; and a great deal by the exchange of illicit goods (arms, drugs, high technology intellectual property) whose import and export never are accounted for in official trade statistics. Some were just made up by national treasuries in what was euphemistically called ‘quantitative easing’. The European Union’s Euro system is a fantasyland of virtual money.
These international transfers financed the growth of banks, legal practices, accounting firms, inspection agencies and financial institutions dedicated to institutionalising, enhancing and preserving national or regional accounts, establishing liquidity for illiquid currencies and some to preserve corruption. A substantial portion of these funds were handled directly by the internationally-integrated world of organised crime operating in symbiotic alliance with politicians and military figures in governments across the world. The bulk of the money, from all these sources, however it entered circulation, ended up in the respectable banks and trading houses which control the stock, bond and commodity markets of the world. These funds have financed 'institutional trading', fiscal anomalies like the junk bond industry, legitimate corporate lending and, most importantly, further criminal activities.
Crime and corruption are two of the world's largest multinational industries. Most people are generally aware that crime and corruption are part of their national or local scenes to one degree or another. They know that 'criminals' or 'corrupt politicians' run or tolerate illegal gambling clubs; brew illegal whisky; 'arrange' planning permission for commercial property; sell or auction votes in local and national assemblies; maintain illegal cartels or 'rings' which distort prices in the construction, transport and art businesses; and generally conduct those extra-legal activities which fill the tabloid newspapers with juicy stories every morning. They sometimes catch a glimpse of more sophisticated crimes when men like Boesky are brought before the courts or when cases like the 'Maxwell Affair’ and the BCCI scandal are reported in the press or banks are caught faking documentation of junk mortgage paper to assist their foreclosures... They are forced to be aware of the existence of a web of organized crime which is behind the trade in illicit substances and in the 'protection rackets' of the urban slums because these are all shown and discussed in television's endless police series or brought to the big screen in blockbusters like the 'Godfather' or the 'French Connection'.
A proper definition of corruption is essentially 'institutionalised unprosecuted crime', comprising activities engaged in by one or more persons in contravention of the laws governing their legal environment which go unpunished or unprosecuted. These unpunished acts may be petty in nature or may be major delicts with international implications. In either case they represent unpunished and unpursued violations of the law. What is vital to the understanding of what constitutes corruption is not the criminal act itself, but why this act is unpunished. In most cases these criminal acts go unpunished because they derive from a strong element of abuse of power, privilege or status. Someone or some organization or group wielding political, economic, social or religious power has used this power to deflect the ordinary course of justice. This aspect is crucial to understanding what makes 'crime' turns into 'corruption'. There is a lot of unpunished crime which is not corruption (often depending on lack of prosecutable evidence or triviality) but there is no corruption without criminality. It is the abuse of power which is exercised in the avoidance of prosecution which distinguishes corruption from mere criminality.
What is difficult for many to understand is that crime and corruption are both massive, pervasive and multinational; conducted on a scale which defies one's ability to manipulate numbers; and which plays such an important role in one's own political and economic life even though one may be oblivious to its influence. However, the fundamental reason why crime and corruption thrive and prosper is the most difficult for anyone to accept; it goes against everything one has been taught or led to believe. The reason is both simple and obvious. Crime and corruption are not anomalies or signs of a breakdown in our economic or political systems; they are vital and integral parts of those systems. Quite simply, our national and international political and economic systems have developed so that they do not work without them. Crime and corruption is so massive and sophisticated an industry that most analysts cannot comprehend its sheer scale and the level of its integration into the international system or its symbiotic relationship with power and influence.
People and corporations with power abuse their power to influence, buy and pursue political aims with an impunity which derives from the learned helplessness of those set up to control them, or as a result of their complicity in the abuse.
The Sociology of Corruption:
One missing ingredient in the learned studies of crime, criminality and corruption is the controlling variable of time or 'time horizons'. The poorer the person the shorter his time horizon. A government can plan and function on a relatively long time horizon. It has a five-year plan; a series of three-year pilot projects, regional development schemes, etc. Its time horizon stretches out into the distant future. Most major international corporations operate on a similar time scale. They can make 'long-term' investments; position themselves to take advantage of a market which is emerging over the medium term; build in 'loss leaders' for the short-term to buy long-term market share. Middle class professionals, civil servants and white-collar workers can plan their lives and career prospects in years. Blue collar employees can plan in units of years, quarters or months. Poorer people on the dole or receiving supplementary assistance can plan in weeks.
The truly poor can only plan on days or even shorter intervals. The shorter the time horizon, the more immediate the need for satisfaction of basic needs - food, shelter and protection. It is this time horizon disparity which has been the seed bed of corruption in societies across the globe. Governments, political parties, aid and social welfare agencies cannot minister effectively to the needs of the poor because they do not and cannot operate in the same time zone as the poor. Those who can deliver in the short term - deliver money, extend credit, provide food or craved illicit substances, protect households or shops from attack, arrange employment opportunities, and punish enemies - are almost exclusively criminal organizations and often receive in exchange for their assistance the control of the political, religious and economic powers of those whom they assist. Those who take these political powers in exchange for material goods trade them for more valuable considerations with governments, corporations or international agencies. This exchange is the beginning of the trail from criminality to corruption.
A second dimension often missed out in the academic analysis of corruption is that for the large majority of the world's population most governments, including their own, are foreign governments or run by strangers. When Karl Marx stated that 'workers have no country' he was not stating only an ideological message, he was recognising, however unwittingly, that the majority of the world's population has been and remains under what it considers foreign or at least exogenous domination. Throughout history, the nations of Europe, Latin America, the Middle East, Africa and Asia have been ruled by foreign powers - potent military occupiers stretching in a long line from the Persians, the Moghuls, the Han Chinese, Alexander's Macedonians, the Romans, Byzantium, the Holy Roman Empire, the Fulani, the Zulus, the Ottomans, Napoleonic France, the Austro-Hungarian Empire, the British Empire, the Third Reich, the Great East Asian Co-Prosperity Scheme, the USSR to name but a few. Even today, many of the peoples of the world, in developed as well as less-developed nations, although freed from the shackles of colonialism or occupation, still feel alienated from their governments which are led by a single tribe, ethnic group or powerful social or caste or religious elite not their own.. There is a social, ethnic, political and economic distance between the leaders and the led. What this has meant in terms of crime and corruption is that there is a certain legitimacy which attaches to acts against a foreign occupying or dominant power and against those in power that represent a different ethnic group, religion, caste or class. Under these circumstances, criminal acts are not considered criminal; they are a tolerated subversion of an inequitable system. Many of the most durable of the world's criminal societies, the Mafia, the Camorra, 14-K ,the house of Hung, the Sun Yee On, the Wo Hop To, the Yamaguchi-Gumi, the Union Corse, the IRA, the Sendero Luminosa,, the Sons of Liberty and Black September arose directly out of this maelstrom of criminality cum nationalism and the struggle against foreign domination. Some end up as the new governments with their own enemies. Other preferred to continue their preference for more profitable criminal activities. What is important is that these criminal organisations institutionalised criminality on the basis of a political and ethnic message and spawned political parties, created political alliances, generated giant legitimate and semi-legitimate corporations as part of their service to the disenfranchised and, by so doing, created a symbiotic relationship with governments.
In recent years these criminal/political complexes have become potent weapons in the arena of international affairs and the conduct of foreign policy. This is not a new pattern - the Thugees of India, the Japanese Ninja and the Assassins of Syria were masters of this trade. As early as the First World War, the Imperial German Army made common cause with the dacoits of India, the mujahideen of South Asia, and the Mexican bandits to harass the British and the U.S. war efforts. During the Second World War the Allies made a series of alliances with the Italian Mafia to assist in the retaking of Italy just as the Axis formed alliances with the IRA and the Arab bandits of the Grand Mufti of Jerusalem to harass the Allied War effort. Post-war activities in pursuit of the Marshall Plan in Europe enfranchised the Mafia, the Camorra, the 'Ndrangheta and the Union Corse in the Mediterranean and in French Indo-China. When Chiang Kai-Shek entered Shanghai in 1927 his first act was to join forces with the Green Gang to destroy the communists. Other triads in China also allied to the Kuomintang in exile in Taiwan under Allied leadership to fight on against Mao Tse Tung. The bandits and min tuan warlords of the Shan states joined with the Union Corse to build the giant drugs industry of the Golden Triangle. The Japanese yakuza, powerful after their successful quasi-governmental assignment of the rape of Manchuria, acted as the acceptable surrogates for the anti-communist political parties in occupied Japan when many of the national political leaders were barred from holding office because of their Imperialist pasts. The urban vice and gambling barons of the Gold Coast allied themselves to Kwame Nkrumah to win the struggle for independence, only to fall out with the new Ghanaian leadership and provide valuable anti-Nkrumah services on behalf of the U.S. and the British thereafter. The black gangsters of Guyana were actively recruited and trained by the British in their efforts to counteract Cheddi Jagan's more militant policies. The relations between Abu Nidal or George Habbash or the PLO with Arab political leaderships have shaped Middle East politics for years.
In all these cases, and in many other examples, organised criminal societies became legitimatized and joint activities with them became part of the range of policy options open to foreign policy planners. The price for this was the acceptance of crime and corruption as part of the 'legitimate' political structure and the turning of a blind eye to the financial lubrication needed to make this system function smoothly. The salient feature of modern organised crime has always been that it is militantly anti-communist. Communists have their own, quite unique, type of mafia which is antithetical to the organised crime of the Italian type. As powerful, unfettered criminal societies, these organizations were integrated into the arsenal of democracy. When Jack Kennedy hired Momo Giancana to assassinate Fidel Castro he was not breaking new ground; this type of transaction has been a part of the political system for at least a thousand years.
A third theme which is often missing from the analysis of crime and corruption is the universality of criminal structures. Whilst it is fashionable to speak of developed and underdeveloped nations this is an economic distinction, not a political one. There are very few nations in the world which are politically underdeveloped. They may not be modern or representative democracies, but they are not politically underdeveloped. Nations developed, over time, the political institutions which matched the power structures in their areas. These may have been based on the military might of a single clan, access to a river or a well, ownership of a particular piece of land, control of the priesthood of the local religion, etc. These were congruent with the realities of the political system in which they operated.
Along with the growth of relevant political structures was the parallel growth of criminal structures. Each society has its own criminal element and organizations. Their level of sophistication matched the level or organization of the society within which they functioned. These criminal organizations often thrived by providing unavailable services or filling the needs that traditional political structures could not fill. Primary among these was the provision of credit - rural credit to farmers to buy seed and equipment; and urban credit to the peasants who left their farms to find work in the towns and cities and where they were unknown or had no extended families. For most of the world's population life is experienced as a high wire act worked without a net. The price of failure under these rules is a very high price indeed. For most, the existence of a criminal parallel society served as their net, their ultimate security when their own legitimate society failed them. Many who made this bargain were not giving up anything of value which their own society offered them; to a large extent this was the only deal open to them. Some took it with reluctance, but took it nonetheless.
What has been most important for the survival and expansion of these criminal institutions was that they were better constituted to adapt to changes in their environment than the political organizations and structures within which they operated and for which they substituted. Criminal institutions, by definition, usually are composed of the outcasts of the society (even though they may be closely allied to the mightiest in the land). They are self-elected and self-sustaining. This has meant that they are much more able to adapt to the challenge of change than the 'regular' political organisations. When they have difficulty in adapting to contemporary challenges, as during the Castellamarese Wars in the U.S. between the 'Moustache Petes' and the modernisers, the adaptation process is often more swift and final than the changes achieved through the ballot box. A key feature of this ability to adapt is that criminal organisations are flexible in establishing alliances with other similar organizations for mutual gain.
The first multinationals were criminal multinationals. Long before General Motors or ITT or the Seven Sisters spread their corporate nets across the globe, giant criminal multinationals and cartels were already in existence and in business with legitimate governments. The overseas Chinese throughout Southeast Asia spread with them their triad organizations. The Italians spread across North America with their variants of the ‘Black Hand’. The black African slave suppliers spread across the lower reaches of the Sahara in a highly organized fashion to supply captives to the European traders and Catholic religious orders plying the coast of West Africa in search of cheap plantation labour. Many of the freebooters of the Spanish Main operated quite sophisticated alliances with each other depending on the changing favours of the Spanish, Portuguese, British and French monarchies. Several (Francis Drake, Henry Morgan, etc.) were government-licensed pirates. Many legitimate governments hired and contracted organised criminal societies, like the Barbary pirates, to break sieges and subvert embargos. The Arab slave dealers of East Africa formed alliances with local criminals to enlist and transfer slaves to the Middle East and India. The international drugs industry is a testament to the powers of multinational criminal co-operation, starting with the Mafia's French Connection, taking Asian opium, refining it into heroin in France, and distributing on the streets of New York through black and Hispanic street dealers, to the international association of the Mexican Cartels delivering from the Medellin and Cali cartels, shipping through Caribbean entry points and border crossings to the U.S. where Italian, black, Hispanic, Greek, Chinese and Iranian criminal organizations take on the marketing and distribution of these products. The organisational sophistication rivals that of any of the largest Fortune 500 companies and its turnover figures make even the largest multinationals look puny in comparison.
The Mechanics of The System:
Crime and corruption are integral parts of our daily lives and are so common that they do not arouse our attention. In New York one needs only to look carefully around and several questions immediately arise A key question is, how do poor people survive? Any observer can see that the poor people in the ghettos of Harlem, Bedford Stuyvesant, and in Fort Apache in the South Bronx cannot survive on the meagre subsistence payments of welfare and food stamps. Yet, these citizens walk around quite well-dressed; shop at well-stocked food shops; buy at flashy furniture shops; and spend a great deal of the evening socializing at neighbourhood restaurants, bars and clubs. Where does the money for all this come from? It comes from an institutionalized system of corruption which starts at the National Highways Trust Fund and passes through layers of the state and city bureaucracy to end up as urban credit to the poor. No one in any U.S. urban ghetto lives more than four and one-half blocks from a liquor store. Why? Why is it that whenever there is a riot, as in Watts, Los Angeles, Detroit, Cleveland or Washington the first shops destroyed by the rioters are these same liquor shops? The answer is that the liquor shops in the ghettos are the dispensers of credit to the poor. Liquor shops cash cheques; they advance funds against welfare cheques. They are open all hours. They are run in association with the political bosses and trade electoral loyalty for credit. They are the interface between the System and the poor. In exchange they deliver the votes to the uptown white parties. The political system co-exists with an economic, power base - black organised crime. This orientation is equally true for ghetto Hispanics, the last remaining ghetto Italians, ghetto Chinese, ghetto Greeks and ghetto Koreans and Vietnamese. The slums and ghettos of the world are run in parallel to the normal political system, where corruption, crime, credit and control are the basics.
This urban pattern in replicated across the world. In the urban slums of Mexico City local caciques hold weekly surgeries where supplicants come to make requests of the local party boss; in the Gulf petitioners attend an informal weekly majlis. In the favelas of Brazil the power arrangements are no different. In the urban sprawl of the Agege Motor Road in Lagos or in the backstreets of Tsimshatsui in Hong Kong the faces and accents are different, but the System is the same. This subculture of corruption is universal. The differences are of degree, not of kind. Crime and corruption are not only for the poor. Whole industries are constructed to handle corrupt practices.
Crime and Corruption is International:
Crime and corruption are inseparable. The type of investigation of crime and corruption which focuses on the over-invoicing of goods and services to the Third World and the commissions or 'kick-backs' taken by high officials, while often running into many millions of dollars, is still petty-ante crime in the wider scale of international corruption. Modern banking corruption represents many multiples of those sums. Many international agencies and lending institutions are concerned with the impact of corruption on good governance and economic growth as a result of corrupt practices; especially in developing countries. This is important but represents a rounding error in the levels of worldwide corruption... The problem is one of scale. Any student of the Banco Ambrosiano Affair, for example, will attest to the fact that many billions of dollars disappeared through deep-rooted corruption in Italy and the recurrent economic problems of Italy attest to the scale of the diversion of funds. For years one of the biggest growth industries in the European Community was the fraudulent documentation of agricultural products trying to qualify for EC subsidies. There is probably more corrupt and criminal money being washed through urban American and European banks in one week than the total amount of African corruption in a year.
The difference is that corruption in modern industrial states is largely invisible to the middle classes. The structure of crime and corruption in modern industrial economies is such as to leave the middle classes out of its perpetration and its rewards. The poorest of the Western societies know all too well what the effects of corruption are when they have to interact with public officials. At the top of societies, captains of industry and their advisors often have to deal with legislators, administrators, elected officials and 'lobbyists' whose hand on the "Pork Barrel" often determines their financial opportunities. There can surely be no one who has ever spent any time lobbying in Rome, Washington or Brussels who has any illusions about the uniqueness of the Third World experience with corruption.
When the American colonial overlord of the Philippines, Taft, reported to the Congress that the literacy rate among Filipinos was low and social services rather limited, William Jennings Bryan replied that it was probably a good idea to keep the Filipinos illiterate, "Lest they read our Constitution and mock us for our inconsistencies." The problem with corruption in the Third World is that it is disorganised corruption; the same small elite make up both the political and the business communities. Crime is endemic, but it is disorganised. With the exception of Medellin, Cali, Hong Kong and Bangkok, crime is unsophisticated.
We in the West are far more advanced. We have organised crime which has established organic links with organised business, organised labour and organised government and an every-willing banking and financial centre happy to oblige in the transfer and storage of the funds. The hoi polloi need never concern itself with these ties as they are largely invisible. However, when we engage ourselves in the confrontation with corruption in the Third World we ought to at least reflect that we run the risk pointed out by Bryan, that the recipients of our moral and financial strictures might reasonably ask to delay their transition to godliness until we have dealt with the problems of Chicago, Tokyo, Palermo, Madrid, Brussels, Milan, Vaduz and New York.
This international criminal industry and its partnership with political corruption accounts for the missing world trillions. These 'wages of sin' have placed a heavy burden on legitimate businesses and tax-payers who are, effectively, making the interest payments on these missing funds through higher interest rates, tighter credit limits and higher prices on goods and services and policies of extreme ‘austerity’. The world's banking system has been transmogrified by this influx of hot money as has its stock, bonds, commodity and property markets. In some countries lending agencies like the World Bank estimate that the losses due to corruption are almost twenty per cent of all transactions. Crime accounts for at least an additional twenty per cent. At least an eighth and perhaps as much as a quarter of the total world's GNP passes through the hands of the parallel society. A concomitant development has been their use of these largely undocumented funds to create political action committees or similar vehicles to elect those who will continue this system.
The world is now faced with a challenge in dealing with this deeply institutionalised criminality. The death of the communist system has removed much of the raison d'etre for the alliance of democracies with crooks. Perhaps by bringing this interdependence of criminality, corruption and the nations of the world to the public's attention can there be an open debate on how or if this strange symbiosis should continue and, equally as important, if the criminal societies are to be interdicted and corruption decreased how can governments adapt their policies to address the problem of the parallel society. Then, perhaps we can deal with the banks and the financial communities.