A Typology of Profit-Driven Crimes

3. Detailed Analysis of Selected Cases (continued)

3. Detailed Analysis of Selected Cases (continued)

3.4 Loan-Sharking

In Canada, loan-sharking is officially designated as a criminal offence if the effective rate (including fees and penalty payments) exceeds 60% per annum. This offence was created during the 1970s, some say, out of a widespread and inflated fear of the mob.

Problems in the analysis of loan-sharking begin with actually defining the trade.[8] After all, pawnshops in major cities routinely charge 20% per month or more, far above the legal limit. However, police who visit them look only for stolen goods; they only infrequently query the rates. It seems that loan-sharking is seen, in the eyes of law enforcement (as distinct from in the eyes of the law), not as a problem per se but only as a problem when carried on by a certain type of individual in a certain milieu (i.e., the notion that it is an important source of income to "organized crime"). This type of confusion of acts with actors typifies much of the treatment of profit-driven offences.

Two things distinguish loan-sharking from ordinary finance. One is extraordinarily high interest rates. This seems to make it fall into the commercial category – it is a legal service (i.e., lending money) delivered by illegal means; it involves market-type exchange but on "unfair" terms, because the terms of trade are twisted by asymmetries of power; and it leads to redistribution of existing (rather than creation of new) income.[9]

On the other hand, the second characteristic is the unique nature of the collateral – in extremis, the borrower’s own person, or so the popular theory goes. A business reputedly marked by intimidation and violence would appear little different from extortion. That would suggest it should be seen as a predatory offence falling into the grey area between legitimate business and criminal activity more typical of commercial crimes.

However, if it turned out that intimidation was the exception, that clients overwhelmingly enter voluntary contracts with loan sharks with full knowledge of the terms and consequences, then arguably it should be categorized as a market-based offence. It would involve trading among willing participants of a commodity or service in defiance of regulations restricting the terms. Only an close empirical analysis can settle the question.

According to a popular view, for which the evidence is restricted to a few sensational mob stories, during the 1930s, mobsters who grew rich during Prohibition used usurious loans as a device for infiltrating and eventually taking over legitimate businesses strapped for cash in the Depression-induced credit crunch. That story has set the tone for most subsequent discussions of the loan-sharking phenomenon in the USA and abroad. Thus, during the 1970s there was much political, press, and police attention, mainly in Quebec, but also elsewhere in Canada, to the phenomenon, even though anecdotal evidence suggests that most loan-sharking was linked to illegal gambling. Even as late as the mid-1980s, the USA Presidential Commission on Organized Crime insisted that loan-sharking was the second most important source of criminal earnings; the most important being labour racketeering.  However, by the end of the decade in both countries, drugs had definitively displaced things like loan-sharking and illicit gambling as the major concern. The result is that today loan-sharking seems largely, although not entirely, forgotten. Some police officers interviewed recently insisted there was no such thing as loan-sharking. On the other hand, a police veteran, who dealt extensively with this offence during his career, insists the problem is still rampant. In a sense, both are right.

The old view was that the loan-sharking business was organized hierarchically. The process started with a mob boss who regulated the terms, arbitrated disputes, controlled the use of violence, and taxed the profits. Sometimes, too, the mob boss would put up some or most of the capital, lending to mob members or associates. (In fact, in some cases, allegedly, those occupying a lower position in the mob pecking order would borrow from the boss, not because they needed the money, but because their debt helped to confirm the patron-client relationship.) The members or associates, in turn, would lend to retail loan sharks, most of whom would be independent of the immediate "family." Then the retail loan shark would use one further intermediary stage in the form of a "steerer" or "finder" - a cab driver, nightclub doorman, bartender, etc. - who would, for a fee, search out customers. This process permitted the "banker" at the top to keep several layers of insulation between himself and the street action.

There may have been some truth to the stereotype once upon a time in a few places, particularly New York City. But in the last two or three decades, a number of institutional developments have intervened. Most countries have loosened their interest rate regulations to permit financial institutions to charge higher rates, therefore capturing part of the loan sharks’ former clientele. And the remaining business seems to have been democratized. Perhaps in some cases career criminals linked to "organizations" can be still found in the business – there is no reason why not. They, in turn, might still hire muscle to keep accounts up to date. But they certainly do not "control" the business, and probably never did. Along with democratization of the entrepreneurial profile has come a diversification of both sources of funds and types of customers.

Some funds did and perhaps still do come from the profits from other cash-rich rackets like drugs or gambling. There are stories, hard to substantiate, of lottery winners using their gains to fund loan-sharking, turning tax-exempt winnings into tax-free, income-earning assets. Some could come from perfectly legal businesses owned either by underworld figures or by legitimate businessmen seeking the higher rate of (tax-free) return that putting their money out into the "street" can yield.[10] When large sums are involved, the origins might be institutional. A bank, for instance, might unwittingly make a loan to an apparently legitimate customer, only to have the funds diverted into loan-sharking. There have even been instances when an officer of the bank is an active participant, bribed or coerced into either lending to the loan shark or directly to one of the loan shark’s customer who would not command the credit rating to obtain a bank loan legitimately. However, the very nature of the loan-sharking business, to the extent it is successful, should make the entrepreneur quickly independent of outside financing. This also suggests that the more profitable the business, the less the need for any mob affiliation.

Customers fall into two main classes. Some borrow for purposes of consumption and some for production. The lowest end of the loan shark spectrum handles ordinary citizens, those on welfare or unskilled blue-collar workers, with irregular incomes, or occasionally, exceptional credit needs, to finance consumption of legal goods and services. Reputedly there are sharks who go door to door in low income neighbourhoods searching for the elderly or welfare recipients badly in need. 

More lucrative, it seems, is lending to consumers of illegal goods and services. Gamblers are regular targets, with the loan-sharking done by associates of the same group who run an illicit or rigged gambling operation. Even where gambling is legalized, sharks hang around the casinos, encouraged, in places where casinos are privately owned and run, by the owners to ensure that their lower end or higher risk customers (i.e., those not accommodated directly by the casino) are kept supplied with funds.  Similarly vulnerable are clients of drug dealers; some of the latter directly lend to their customers and might well profit more from the lending than the trafficking end of the business.

However, there is another sector, whose relative importance may have grown of late. This is the demand for loans from entrepreneurs who either cannot borrow from the formal banking system or would find it risky to do so. Entrepreneurs selling inherently illegal goods may have no other source of start-up money or working capital. Hence loan-sharking may be necessary as an input for market-based crimes. But informal sector entrepreneurs, those selling legal goods and services in illegal ways, might also have this need. The sweatshop boom in some major North American and European cities would likely have been impossible without the services of loan sharks.

There are also some who could borrow legally, but prefer on occasion to use loan sharks for their speed, "informality", and especially their secrecy. Then there are those who appear completely legitimate, but have overextended their credit lines from formal institutions and hence have no recourse but to "alternative" financing methods.

In all of these cases, the contract is purely voluntary. There may also be those who think they are borrowing legitimately, then, when the conventional financing they have been promised fails to arrive at a critical time, find themselves offered a "bridging loan" at usurious rates, but this appears exceptional.

There are two distinct ways in which loan-sharking can be profitable. The first, undoubtedly the most common, is directly through the high rates of interest, provided they adequately compensate for risk. The second is indirect, through the profits from securing control over a defaulting debtor and/or their business. However, even in this second case, it is important to distinguish in practice between takeovers of businesses that occur because that was the intent of the loan-sharking operation (i.e., the old stereotype about a mob-controlled transaction), and those that were the inadvertent consequence of an unpredicted inability of the borrower to repay. After all, if money is earning 5-10% per week in the street (allegedly gambling loans can carry 40-50%), there would seem little incentive for a shark to wish to take over a dépanneur, sweatshop, or neighbourhood restaurant with a long history of municipal fines for insalubrious conditions. It is precisely this type of businesses which is most likely in debt to a shark.

Indirect profits can also be obtained if customers are coerced into criminal acts – on the waterfront or in trucking firms, longshoremen and teamsters reputedly repay by assisting in the hijacking of cargoes. The same holds true when defaulting businessmen are forced to use their businesses to provide cover or support for criminal activity – an operating site for other rackets, or putting mobsters on the payroll to give them an apparently legitimate source of income. All these undoubtedly have existed. How extensive or representative they are of the loan-sharking business in Canada today, even in Montreal, the historical centre for concern, is open to considerable doubt. (See Appendix III.)

In terms of the two salient characteristics of loan-sharking, the first being extremely high rates in relation to market norms is certainly true – although whether the rates are really so high in relation to risk, no one can say a priori.

As to the second, the use of violence or its threat to ensure repayment, it makes the trade approximate a predatory practice like extortion. In reality actual violence seems rare – even criminals who borrow generally repay, for they never know when they might need the services of the loan shark again. Indeed the stereotypical view may exaggerate even the prevalence of threats, explicit or implicit. Most anecdotal evidence seems to suggest that underground pledges of property are often the collateral, and where none exists, fears of a bad credit rating in the underground economy, or the reputation for having breached a trust, can be sufficient to guarantee payment. To the very limited extent violence or the threat thereof is used, it rarely reaches extreme forms, unless someone clearly had the means to pay and deliberately flaunts their "dead-beat" status. However, there do seem to be more examples of incidents where the violence is against property – arson might be used to assure, through the resulting insurance money, that a borrower can repay.

On balance, loan-sharking seems more likely to fit the market-based than the predatory or commercial categories. It operates in violation of regulations, using underground networks, with payments in cash, and on the basis largely of free-market exchange. Yet it is a curious kind of offence in which the borders between sharp business practice and actual crime are hazy, where there are constantly changing norms and institutions, where concern over the phenomenon flourishes and fades for reasons that are unclear, and where the matter might best be treated strictly as a regulatory (and fiscal) rather than criminal code concern. Only in the event that violence or its threat are used does there seem a clear case for the traditional criminal justice system to take much heed, and there are plenty of statutes under which to proceed against the perpetrator of those acts without having to use the arbitrary and arcane offence of usury.

3.5 CFC Smuggling

This crime grew out of Canada’s adherence to the 1987 Montreal Protocol, the most comprehensive multinational environmental convention ever signed, to phase out the production and use of ozone-layer depleting CFCs and similar chemicals used particularly in refrigerants and automobile air conditioners. The Protocol called for wealthy industrial countries to implement a rapid phase-out, while developing countries were permitted to actually increase their production and use for a time, before also beginning a programmed elimination. As a result Canada agreed that, after January 1st, 1996, its supply of new CFCs would cease, and that subsequently the only domestic lawful supply would come from reclaimed and recycled sources. It passed an amendment to its Environment Protection Act by which unauthorized imports of CFCs would be a strict liability offence with penal consequences.

In Canada to date there seems to have been only one case – R. v. Haas in the Alberta Provincial Court Criminal Division in 1993. The accused were found to have crossed the border with CFCs in full knowledge of applicable law pertaining to the chemicals – they were, after all, in the refrigeration business. The court also ruled that the defendants had been unable to prove due diligence, qualifying them for a guilty verdict under strict liability. However, because of uncertainty over the description of the goods, their location and condition, the accused were acquitted.

While Canada introduced a phased withdrawal and import ban, the U.S.A. introduced an import duty, an excise tax at the point of first sale that rises every year which also applies to recycled material, restrictions on the uses to which imports could be put, and a floor tax on existing stocks, all combined with a ban on further domestic production. The result was a six­fold increase in domestic price. The result, as well, was to produce a burgeoning black market – one estimate puts it at 30,000 tons a year at its peak – that some suggest threatened the very foundations of the Montreal Protocol. Granted the problem is self-limiting – no automobile built after 1994 uses CFCs in its air conditioning system and there are substitutes which are actually cheaper for other refrigerant uses. Nonetheless, there is still an enormous number of used cars in the USA; they are often exported to other countries; and the ozone problem is so urgent any continued CFC use is worrisome.

The key to the black market is the price gap – in the USA illegal CFCs sell for $25 an ounce while the cost of production in developing countries (legal under the Montreal Protocol) is about $1.00. CFCs are a colourless, odourless gas, making detection difficult. And cover for illegal imports is provided by the existence of a residual legal import quota, for essentials like inhalers, for re-export to places where their use continues to be legal under the Protocol, and for industrial feedstock inside the USA provided they are destroyed in the process.

The techniques for violation are the obvious ones: claim the material is part of that permitted for essentials; bribe Customs inspectors; smuggle via Mexico using any of the thousands of trucks rolling across the border; hide the gas cylinders inside other, larger cylinders with benign markings; interchange containers in ports; mislabel the material as similar but legal chemicals (e.g., propane or HCFCs); add nitrogen to raise the pressure and mimic HCFC on the test instruments; or adulterate with a touch of water vapour and pass them off as "recycled."

From point of production to final sale inside North America, the black market CFCs are marketed through an underground network that is embedded inside the legal business structure. It runs from developing country manufacturer to international chemical broker to legal exporter to smuggler to illegal importer to legal distributor to retailer. That last link in the chain is often a service station owner or an auto parts shopkeeper who might not even be aware of the illegal origins of the product.

CFC trafficking in both Canada and the USA falls into the category of market-based crimes – a restricted and/or banned good is imported with intent to make use of it or to sell it with full knowledge that it is prohibited. True, in some respects, the offence seems to fit the commercial category – it appears to occur in a normal business context, and most transactions are settled in normal banking instruments. Nonetheless, it is an offence in which there is no force or fraud, except with respect to false customs declaration, and transfers take place on a strictly volitional basis. Furthermore, as with things like illicit jewellery sales evading the excise tax, the distinction between underground network and legitimate business context is not really important – they are one and the same.

3.6 Trafficking in Bear Gall Bladders

The main factor driving this crime is the growth of Traditional Chinese Medicine (TCM). Bears are the only significant mammal producers of ursodeoxycholic acid used (and of proven efficacy) for treating a wide range of ailments. In addition, bear paw is regarded in the Orient as a delicacy and an aphrodisiac. As the numbers and wealth of potential consumers soars (TCM is also the basis of local medical practice across much of Asia outside of China), the world’s bear population, perhaps a million, cannot support it. With the Asian black bear hunted to near extinction, pressure is growing on North American species.[11]

Poaching of bears in Canada takes place in and through a jurisdictional maze. Each province regulates its own wildlife – some ban bear hunting and trading in parts; others permit hunting, but not trading in parts; others permit both under restriction. The federal government also has rules for trade in wildlife outside of a province. Then there are international treaties, specifically the Convention on International Trade in Endangered Species (CITES), which lists North American bears as an Article II species, not endangered but potentially so and therefore tradable only with a CITES permit. This jumble of often contradictory regulations and laws provides an excellent means for those intent on violation to find a way of falling through the cracks.

The chain begins with hunting. It is legal with strict quantity limits in most provinces. Hunters’ attitudes towards animal parts vary – some regard it as an insult to the dead animal to rip off paws and tear out gall bladders; others use them to finance an expensive hobby, usually turning them over to outfitters; while others use them to tip their guides. Poachers are different. Unlike legal hunters, who almost exclusively target mature males, poachers target all of the population because, alas for bears, the size of their gall bladders bears no relationship to their age or sex – rather it reflects such factors as diet. Typically, poachers target bears in the spring, when they are hungry and sluggish from hibernation, and they attract the bears with food-baited traps. Poachers are typically paid in cash.

The gall bladders are collected by outfitters or passed on directly by hunters to middlemen who in turn sell them to travelling wholesalers, again usually for cash. Typically the transaction will occur in a bar or hotel room in some small town near the wilderness where wildlife officials are few, and local law enforcement officers are likely to be fairly sympathetic towards hunters generally. Then the wholesalers might take the galls to a big city – Toronto and Vancouver are the main staging points. They are turned over directly to Chinese pharmacies for local sale (quite openly) or to brokers who arrange their transportation out of the country. If the sale is to a local pharmacy, payments might be in the form of bank instruments, albeit with their purpose disguised by invoice fraud. If bound abroad, the bladders, usually dried, are consigned singly or in small lots to couriers who are usually members of extended families. Occasionally they go in large shipments, intermingled with legal parts and ostensibly covered by the same documents – hunters’ license number, CITES certificates, export permits, etc. At that point the trade might well be covered by a standard bank letter of credit.

Laundering is commonplace. Some provinces and states permit hunting but ban the trade in parts. In that case the bladders are simply driven to a state or province that does allow legal trade and registered there in the name of people who hold bona fide hunters’ licenses. One trick apparently common in Quebec is to extract the bile from several small bladders and inject it into a larger one, then export it with a single permit.

Even where it is legal to hunt and export parts, there is a parallel illegal trade that is  driven by the desire to avoid taxes and duties, the nuisance of filling out forms and obtaining permits, the search for top quality bladders that may be obtainable only out of season or from animals in protected areas, or, not least, by the need to witness the hunt to reduce the chances of being conned.

When the bladders are sold, there is fakery aplenty in the trade – which is one reason why buyers in the Orient sometimes insist on sending their own hunters or else demanding parts be accompanied by videotapes showing the bladders being removed. For some reason bile from larger gall bladders is considered more desirable, and therefore fetches a higher price per gram, than from smaller. As a result, traffickers inject gall bladders with plastic beads and lead weights. Colour of the bile also matters, with obvious consequences. Sometimes pig bile is mixed with bear, or, alternatively, small amounts of genuine bear bile injected into pig gall bladders.  It is difficult, without every expensive test, to differentiate pig and cow from bear bladders if the size is about right.

There are frequent statements from sources as varied as Interpol and anti-hunting activists that the traffic yields huge sums (that overall world illegal trade in wildlife is second only to drugs in profit is a frequent claim) and that "organized crime" is heavily involved. But the truth is much more banal. There are no gall bladder barons tracing their shipments by computer. From time to time a big operator is exposed. But for the most part the hunting is opportunistic, exchanges take place mainly through extended family networks, there is little relationship (barring a few well publicized exceptions) to other forms of contraband, and the returns are not particularly high. Nonetheless, it is wrong to minimize the ecological damage or the moral seriousness of the traffic for these reasons. And the anti-lobby has a strong point when they insist that disparity of legislation combined with confusion about whether to regulate or ban is worse than doing nothing at all. It has been proven time after time in the wildlife trade that regulated trade simply provides the perfect excuse for those involved in the black market. Blanket prohibitions should be used more frequently.

In terms of the typology, trade in bear gall bladders is another of those offences that falls into all three categories. Poaching to obtain the animal or parts is clearly predatory – an act of theft, in effect, from the Crown which holds title to wildlife on public lands. Trading poached animals or their parts falls neatly into the market-based crime category. They are smuggled out by hiding in luggage or commercial cargo, by using faked paperwork, or by mixing of loads of legally and illegally exported. At the consumer end, there is a great deal of adulteration and misrepresentation, an obvious case of commercial crime. However, the market is demand-driven, and the product is either restricted or banned, by provincial, national, or international regulations, sometimes all of them. Poaching is done in the full expectation there will be a ready sale – it is most commonly done to order. Consumers, even when conned, are largely aware that the traffic is illegal. Hence the classification of market-based crime seems to fit best.