Inside The Shadow Economy

By David Lake

It costs money to commit acts of terrorism and field armies to fight the battles of jihad. The cost to pay for fighters, food, equipment, lodging, training, deployment and medical services for the jihadist by the controlling organisation or group is not cheap. When operating beyond the borders of the sponsor of terror, the costs can be five times as much as it would cost to conduct a local operation. For clarity, jihad will be separated into three tactics. First is the ‘inspired’ lone wolf attacks, then the planned and directed operations of terror groups, and finally the mobilisation of terror armies on the battlefield.

The overhead of a lone wolf attack is low for the instigator, but there are costs associated with creating, producing and broadcasting the instigating message through a variety of channels. How much does it cost to publish Inspire, the online magazine owned by Al Qaeda in the Arabian Peninsula? While the group behind the publication may not have to pay traditional publishing costs, such as print and distribution since it is an online publication, they still have to pay someone to do the production and work on the material – or that person will have to get a real job to eat, support loved ones and so on. It is possible in this scenario that the lone wolf begins to receive some funding for training, existing and equipment once his operational commitment is confirmed and financial support is justified.

The overhead of a planned terror event by a terror cell is much higher. If the cell is ‘radicalised in place’ members will already have established lives, which often include a job and a place to live. They may require extra funding for training, travel and equipment. If the cell is ‘inserted’, the costs grow considerably to establish housing, transportation, food and so on. Often, inserted cells have no legal means of employment in the host country. Cell members may have access to welfare, loans or other funds, but not enough to provide a manageable life while waiting to execute their mission.

Then there are the various wars occurring around the globe – jihadist armies attacking government forces and civilian populations without regard. The costs associated with recruiting, training and deploying armies is extreme. The costs of beans, bullets, bandages and bad guys is beyond the reach of simple donations or petty crimes. To sustain any of these programs requires a significant funding infrastructure that can evolve when detected and redevelop when disrupted and dismantled.

Terror Groups are Criminal Syndicates

For the first part of this discussion, set aside the motive for gaining money by terror groups and look at them like any other organisation or business. They have goals and need to make money to achieve those goals. That is no different than any business or organisation that exists today. They all have to market their product, pay employees, provide training and supplies, and pay for travel and lodging, communications, mentoring and so on.

Once that paradigm shift is made, the next concept can be considered, which is that all terror acts are criminal; they are violent crimes with theological motives. Any group that commits criminal acts, regardless of motivation, is functioning as a criminal syndicate. What separates a criminal syndicate from a normal business is the fact that syndicates commit crimes to generate money. Now, do not get distracted here. This discussion is not about business ethics or conduct – it is about criminal syndicates specifically. These syndicates have employees, overheads, operating costs and all of the general struggles of normal business operations, compounded by the fact that they are operating outside of legal boundaries. In the end, the only difference between a criminal syndicate and a terror group is the ideological goals of the terror group. Criminal syndicates kill people, attack governments, create fear in civilian populations and even use propaganda to further their agenda. They just do it for greed and power, while terror groups do it for religion or politics, such as the Irish Republican Army.

With the terror group / criminal syndicate paradigm established, the two can be set side-by-side and the operational similarities that help in speeding up the identification of terror cells in the future can be considered.

Traditional Organised Crimes can Support Jihad

The one thing that can be said without any argument is that criminal syndicates make extremely large amounts of money. When compared with legitimate business, criminal syndicates are alarmingly profitable. When presenting on the topic of shadow economics, I am often heckled by an attendee shouting, “So you are saying that crime pays!” To which I respond, “Crime pays extremely well. However, the retirement plan stinks and the competition will kill you.”

The truth is, there is a tremendous amount of profit in shadow economic crimes. In fact, it is in these crimes that there is enough profit to pay for actions like terror operations, which probably comes as no real surprise to most readers. What is often surprising, however, is just how close to home these funding operations can be. Additionally, the types of funding tools used by many terrorist organisations have, over recent years, evolved in such a way that the average person may be funding terror and not realise it.

When they hear about criminal syndicates or organised crime, most people immediately think of drugs. The wealth generated in this vertical is high. It is known that cartels from Columbia to Mexico function as transnational criminal syndicates, shooting it out with government forces, killing judges and so on, and have for years. Afghanistan continues to produce opiates which Al Qaeda has financially benefitted from. In fact, the list of organisations that have financially benefitted from the sale of drugs and applied the money to their own sinister goals is longer than most people would believe.

The drug trade is heavily investigated by governments around the world. This is partly because governments believe that drugs are still the primary source of funding for criminal syndicates. They are wrong. Drugs are just one amongst many sources of funding, not the source. Criminal syndicates have diversified into areas such as human trafficking, bank fraud, cargo theft, organised retail theft, identity theft, benefits fraud, trafficking in stolen property, stolen antiquities, stolen minerals, trees and even oil. Like any smart business, criminal syndicates and terror groups have realised that they cannot afford to have all their eggs in one basket and have diversified their income sources accordingly.

The global crime market is awash with opportunities to generate funding. Interestingly, however, if one was to calculate the combined income generated as a result of previously listed crimes, the total income is dwarfed by the largest, most profitable shadow economic crime of all. This single source of criminal income not only provides significant profit for the offender, it is conducted in plain sight, has social approval and is subjected to very little enforcement action.

Counterfeit Goods

How are counterfeit goods more profitable than all the other shadow economic crimes combined? From a business standpoint, the answer is quite simple. Consider drugs. The worldwide drug trade is estimated by a variety of sources to range between $350 billion and $500 billion annually in US dollars. In that total, the profit margin is relatively low compared to the cost of production, smuggling, sales and the laundering of money. The market for this product is only about five percent of the population globally (UNDOC, 2015). And that is not for each type of drug, but all drugs combined. In the US, it is estimated that nine percent of the population uses drugs, with 70 percent of that drug use being marijuana, according to the National Institute on Drug Abuse (2017). That means that as a consumable product, it is only consumed by 10 percent of potential customers.

The same can be said about human trafficking where, thankfully, only a relatively small percentage of the population participates in the purchasing of sexual favours from slaves. Yet there is enough money to keep the industry going, but it is not nearly the most profitable crime. Direct cash thefts and frauds can be more profitable because the overhead is lower; however, they can be complicated to carry out.

Counterfeit is a term to describe the copying of a legitimate product, including its trademark, and then selling it to the consumer. It does not imply that the consumer must know it is fake. So, consider this simple question. If five percent of the population uses drugs globally, what percentage uses soap, toilet paper, brake pads, cigarettes, medicines, clothing or even eggs? According to the Global Chamber of Commerce, the value of counterfeit goods is $1.5 trillion US.

Let that sink in for a minute. The global counterfeit goods trade is three to five times larger than the global drug trade, with astronomical profit margins. Along with the incredible profit when compared to the efforts to fight drug trafficking, counterfeit goods enforcement is nearly non-existent.

When talking about the counterfeit goods trade, there is a long list of crimes to choose from. For example, cargo theft is estimated to be a $30 to $50 billion a year market, while organised retail theft is estimated at $110 billion a year, not to mention a whole range of fraud types that, when combined, equate to nearly a trillion US dollars a year. But fraud requires certain skills that many do not have. So, when looking to launch a new criminal enterprise, an activity that requires low skill, is extremely profitable, has a large marketspace and has low risk of violence from competition is needed (making all the money in the world will not help if one is dead). Furthermore, it would be preferable to start the illegal business in an area that is nearly ignored by most governments, as those involved really do not want to get arrested or go to prison. Sadly, the trade in counterfeit goods meets all of these criteria.

This is a massively misunderstood crime that allows criminals to make money in the open, right under the nose of most governments. What is more, it is accepted as being perfectly fine by many consumers. There is enough marketspace that the groups involved in the trade of counterfeit goods do not have to shoot it out with their competition over street corners, although that does happen from time to time.

Furthermore, counterfeiters have a global partner in China (as in the country China) who will provide any item that can be imagined in counterfeit form. Counterfeiters can order online and even sell online if they wish to remain even farther underground and undetectable. If they use prepaid credit cards and post office boxes that change regularly, they can keep a few steps ahead of the rare and incidental investigation.

How much money might they stand to make in their new counterfeit goods business? If they are engaged in the piracy of music and films, it will depend on their set-up. A sloppy, entry level operation should cost about $0.50 per disc to make. Music can be sold for $5 US a disc and $7 US for a movie. I have investigated groups that made high-quality discs for 5 cents a disc, making a profit of over 90 percent. In this scenario, now that the counterfeiters are making real money, they can expand their operation to include some luxury brands, where they buy a purse for $5 and sell it for $35. A purse is not a consumable, but it does provide reasonable cash flow. In the blink of an eye, they can expand into toothpaste, contact lenses, brake pads, electrical cords, dog food, eggs and just about anything else that can be imagined.

All of this steers back to the earlier point at the beginning of this article. Why exactly was there a need to set up an illegal business and make all this money? Because those waging a terror campaign cannot work a regular job. Any of the shadow economic crimes work well for funding other underground activities, but counterfeiting is the most profitable, least enforced, and most widely accepted by consumers of all the ways they might seek to make fast, illegal money.

Now that they have money, they simply need to get it to their other like-minded individuals, which can be done many ways. To really maximise their financial power to fund terror, they can use currency exchange. The simple fact is that goods produced by global companies cost relatively the same everywhere. A specific clothing iron in the US is $35 dollars and, taking into account currency exchange, it will be roughly the same in any other market in which it is found. However, labour, food and housing are paid at local prices. So, if $100 US is wired to Syria, it will be $21,434 Syrian P ounds at today’s rate. The average monthly salary after tax in Syria is currently $93.13 US.

This means that for every $100 US made selling counterfeit goods, a jihadist can be paid for a month to take up arms. Imagine what else can be done with all of the money when the profit margin is over 90 percent and market opportunities are endless.

These are not theories but proven concepts. I have conducted several cases where money was being wired into countries such as Syria, Sierra Leone and the like. I have never had the capacity to trace the money within those countries. However, I can tell readers that there is no evidence it is being used to fund orphanages. When interviewing the suspects, they all claimed to not know what the money was being used for.

The task ahead is a massive one. Counterfeit goods have been woven through all economies of the world. How can criminal profiteering be sorted from terror funding? In a world where counterfeit investigations are comparatively rare, the markets are booming and profitable, with little fear of enforcement. If the estimates on global intellectual property rights trade are correct, this is one of the most economically destabilising threats to civilisation, with things like global jihad just benefitting from the ride.

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David Lake has over 28 years’ experience in law enforcement, with a focus on shadow economics for the last 18 years. He is the founder of the International Institute for Shadow Economic Research.