A Literature-Based Qualitative Framework for Assessment of Socio-Economic Negative Impacts of Common Illicit Cross-border Freight Logistics Flows

Hintsa, Juha; Mohanty, Sangeeta Conference Paper A Literature-Based Qualitative Framework for Assessment of Socio-Economic Negative Impacts of Common Illicit Cross-border Freight Logistics Flows Provided in Cooperation with: Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management Suggested Citation: Hintsa, Juha; Mohanty, Sangeeta (2014) : A Literature-Based Qualitative Framework for Assessment of Socio-Economic Negative Impacts of Common Illicit Crossborder Freight Logistics Flows, In: Blecker, Thorsten Kersten, Wolfgang Ringle, Christian M. 978-3-7375-0341-9 (Ed.): Innovative Methods in Logistics and Supply Chain Management: Current Issues and Emerging Practices. Proceedings of the Hamburg International Conference of Logistics (HICL), Vol. 18, epubli GmbH, Berlin, pp. 317-338 This Version is available at: https://hdl.handle.net/10419/209237 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-sa/4.0/ A Literature-Based Qualitative Framework for Assessment of Socio-Economic Negative Impacts of Common Illicit Cross-border Freight Logistics Flows Juha Hintsa and Sangeeta Mohanty Abstract Global supply chains and freight logistics systems are commonly exploited in trafficking activities: for example cocaine may be shipped from Colombia to the Netherlands concealed in ocean liner structures while stolen cultural products may be hidden inside an air container, shipped for example by express courier from Egypt to Italy. In order to design effective and efficient governmental policies and corresponding regulations, enforcement priorities, inspection schemes and other countermeasures, one needs a clear picture of such common illicit flows - such an integrated research paper does not exist today. The objective of this paper is to capture and summarize some of the key characteristics, in particular socio-economic negative impacts, of following six common trafficking flows: trafficking in cocaine and heroin; counterfeit products; ozone depleting substances; firearms; stolen cultural products; and endangered species. The negative socio-economic impacts in this paper fall ultimately into following six categories: Increasing health care and social security costs; Increasing environmental damages; Increasing human suffering; Increasing market place distortions and/or unfair competition; Losses in tax revenues regarding indirect border taxes; and Losses in cultural heritage. The main outcome of this paper is an integrated matrix derived from both practitioner and academic literature to map the socio-economic negative impact –categories per 317 Juha Hintsa and Sangeeta Mohanty each illicit flow-type. Finally, this qualitative paper suggests several quantitative research (sub-)topics for the future. Keywords: trafficking, illicit trade, socio-economic impacts, FP7-CASSANDRA 1. Introduction Freight logistics systems, a crucial layer of global trade and supply chains, are exploited for a variety of illicit activities, in particular for trafficking of prohibited and restricted goods. These imply heavy costs to several public institutions, including but not limited to the law enforcement bodies such as customs and police. In general terms, the socio-economic impacts of these illicit trade streams are many, while crucial information on them is dispersed across extant literature. This fragmented knowledge risks producing disjointed responses to the aforementioned crime category. A systematic compiling of this vital information would enhance a holistic understanding of the vicious acts, their linkages and societal implications. Thus the intent of our paper is to present a high level assessment of the various negative socio-impacts of the select cross-border illicit flows for the benefit of regulatory bodies, law enforcement agencies, supply chain practitioners, and academics alike. We focus on six commonly occurring illegal trade flows, derived from the literature (see e.g. Männistö et al. 2014, Hintsa et al. 2012, Hintsa 2011, Hintsa et al. 2011). These flows are: Trafficking in cocaine and heroin; counterfeit products; ozone depleting substances; firearms; stolen cultural products; and endangered species. 2. Socio-economic impact assessment in the context of illicit activities Socio-economic impact assessment (SEIA) is commonly considered as a yardstick for measuring the direct and indirect potential impacts of a proposed 318 A Literature-Based Qualitative Framework development activity on social, economic and environmental welfare (Mackenzie 2007, pp. 6-7). It aims for a qualitative and quantitative analysis of the proposed development project or policy initiative, helping to optimize social and economic welfare, address social equity concerns and devise mitigation strategies against negative impacts (Tamborra 2002). However, in the context of illegal activities such as organized crime, SEIAs have been conducted to facilitate an evidencebased understanding of the related issues and to develop appropriate mitigation strategies (EP 2013, pp. 811). In other words, SEIAs are used first to understand the situation as-is, with all the current negative socio-economic impacts of specific illicit activities; and afterwards the SEIA-outcomes may be used e.g. to facilitate work to enhance the criminal code. On global scale, there have been a few socio-economic assessment reports on the illicit narcotics industry, paying particular attention to consequences on employment and productivity, inflation, income distribution, trade and balance of payments, finance and investment, family and community, poverty, public health, education, environment, corruption and other threats to civil society (UPDCP 1995 & UNDCP 1995b). On European scale, an exploratory study has been carried out by the European Parliament in the year 2013. It focuses on the dynamics of the distribution and existence of various forms of organized crime, and provides a structured, analytical framework of the costs of organized crime as well as baseline estimates of the social and economic costs associated with these criminal rackets. The existing discrepancies across the EU in data collection approaches and data matching in the private and the public sectors, the priorities in practice by enforcement and other relevant agencies, the nature of the exposure of each Member State (MS) to different crime risks (with some MSs as points of origin and some as points of destination), varying legal systems and practices etc., made crosscomparisons and policy guidance quite difficult. Nevertheless broad estimates of the damage costs of several categories of organized crime in the EU have been provided in this report. These include human trafficking, cigarette smuggling, VAT fraud, fraud with agricultural and structural funds, fraud against 319 Juha Hintsa and Sangeeta Mohanty EU individuals, motor vehicle theft, payment card fraud and insurance fraud (EP 2013, pp. 811). The study draws important distinctions between the direct harm caused by the activities themselves and the “criminal economies of scale”, where perpetrators exploit existing crime and social networks and existing technology. It deepens our understanding of the social and economic impacts of the crimes that are linked to the victim’s resources, and the nature and patterns of various forms of organized crime (EP 2013). On national level, the UK undertook an extensive study aimed at an increased understanding of the scale and social and economic costs of some organized crime types. Illegal activities like theft, organized child sexual exploitation, counterfeit currency, drugs supply, organized environmental crime, firearms supply, organized fraud, organized immigration crime, organized intellectual property (IP) crime and organized wildlife crime, fall within its scope. The costs estimated are based on damages done within the UK only (Mills et al. 2013). Regarding our paper, we consider the socio-economic impact assessment (SEIA) literature - in particular when in "illicit context" - as important reference information for us. In the next section of this paper, our intention is to identify a maximum number of instances of negative socio-economic impacts, in our research context of "six common illicit cross-border freight logistics flows". 3. Literature-based analysis of six common illicit cross-border freight logistics flows The purpose of this section is to review key literature - both practitioner and academic - in problem characteristics, market volumes and values, logistics routes etc.; and eventually the negative impacts of six common illicit cross-border freight logistics flows. The six illicit flows have been chosen by the study authors, based on previous work conducted by them (note: this list of six flows is not meant to be exhaustive, and it can and should be expanded in future research). In each of the sub-section below, the socio-economic impacts per illicit flow - paragraph comes as the last one. 320 A Literature-Based Qualitative Framework 3.1 Trafficking in illicit narcotics: cocaine and heroin Heroin and cocaine represent the largest share in the global illicit narcotics markets. According to experts, global drug use in terms of the number of drug dependent users or drug use disorders, has remained more or less stable during the past years (UNODC 2013, p. ix). Global estimates on the total amounts of cocaine manufactured range from 776 to 1,051 tons in 2011, expressed in quantities of 100% pure cocaine (UNODC 2013, p.x). The Andean region, including Colombia, Peru and Bolivia are the main suppliers. The annual market volume consumed in Europe is around 124 tons worth a value of 34 billion USD (UNODC 2010, p. 95). The chief entry points into Europe are Spain and Portugal, while the Balkan routes are increasingly being used for trafficking into South-East Europe (Europol 2011, p. 9). Trafficking mostly occurs via maritime routes and to a lesser extent by air traffic and postal services (UNODC 2010, p.96, Frontex 2012, p. 29). Heroin consumption in Western and Central Europe has been showing a declining trend but its use has been growing in parts of Asia and Africa (UNODC 2013, p.x & p.32). The annual flows into the global market are assessed to be between 430-450 tons. Afghanistan is the chief source followed by Myanmar and Laos (UNODC 2010, p.9). Europe appears to be the main market for Afghan heroin (UNODC 2010, p. 111). Around 87 tons are consumed on an annual basis mostly in Western and central Europe (UNODC 2010, p. 120). The annual consumption in Western Europe alone is worth approximately 20 billion USD (UNODC 2010, p. 110). Heroin is mostly trafficked into the EU via the Eastern Mediterranean route, at the Turkish borders (Frontex 2012, p. 28). However recent years have witnessed a remarkable proliferation of new, emerging routes such as the Black Sea and the Balkan routes (Europol 2011, p. 8). The bulk of the heroin flow enters Europe by sea and air, while the Balkan routes rely primarily on road transportation (UNODC 2010, p.120). Socio-economic impacts: Drug addiction has consequences for public health and safety, employment and productivity, environment, criminal activities and other dangers for civil society. Cocaine, heroin and other opiates are strongly associated with drug-related deaths and the spread of blood-borne and sexually 321 Juha Hintsa and Sangeeta Mohanty transmitted diseases like AIDS and Hepatitis C, through needle sharing (less in cocaine) and prostitution, increasing healthcare costs (UNDCP 1995, pp. 31-33 & UNODC 2010, p. 109). Driving under the influence of drugs is a common cause of road accidents and resultant injuries and deaths. Drug abuse is linked to unemployment, destroying human capital and creating economic burdens to society. Drug addicts in the workforce have low rates of productivity and create significant costs to the business sectors, reducing the competitiveness (UNDCP 1995, pp. 16-17). School children will often have impaired psychological and social development which decreases their potential and future employment opportunities (UNDCP 1995, p. 35). Narcotics production has been known to cause inflation in countries like Afghanistan and Bolivia, where the cost of food articles rose due to increased narcotic cultivation (UNDCP 1995, p.25). It has profound effects on ecosystems: coca and opium poppy plantations are associated with massive deforestation, disappearance of rainforests (applies mainly for cocaine), soil erosion, improper disposal of toxic wastes, overuse of chemicals, overuse of land and so forth (UNDCP 1995, pp. 36-37). Moreover, drug users raise their likelihood of engaging in criminal activities like petty theft or burglary, in order to finance their addiction. A report on heroin addicts revealed some 90 percent to have resorted to shoplifting or burglary to finance their drug purchases (UNDCP 1995, p. 37). Further, the illicit drug industry frequently incites serious violence. A notable example is Colombia, where narcotics trade has been associated with a vast number of killings (UNDCP 1995, p. 38). Finally, drug trafficking has destabilizing effects on the economy. The “drugs-for-arms” trade, refers to the vicious circle where drug businesses financially support warlords and militants, who in turn are directly involved in drug trafficking. These activities have deleterious consequences on governance, security and the authority of the state (Ward and Byrd 2004, p.36). 3.2 Trafficking in counterfeit products Counterfeit products constitute a breach of Intellectual Property Rights (IPR). It refers to “contraband activities which are a form of theft and involve the illegal 322 A Literature-Based Qualitative Framework production and sale of goods which are intended to pass for the real product” (FIA 2001, p.10). The problem of counterfeiting has escalated with the development of a free global market and the recent trend of outsourcing manufacturing activities to developing countries offering cheaper labor force but with weaker regulatory regimes, thus creating opportunities for unwarranted production (UNODC 2010, p. 173). Electronic products are one of the most common classes of counterfeited goods, while apparel - clothing, accessories and shoes - remains the most dominant category of counterfeits (UNODC 2010, pp. 173). Recent years have witnessed a surge in counterfeit pharmaceutical medicines and lifestyle drugs (Europol 2011, pp. 27-28). The International Chamber of Commerce (ICC) frequently cites counterfeiting to account for 5-7% of world trade that translates into 600 billion USD per year, whereas the Organization for Economic Cooperation and Development (OECD) estimated the value of counterfeit and pirated goods at 176 billion USD in 2007, accounting for 2% of the world trade in goods (UNODC 2010, p. 173). China is the main country of provenance for counterfeit products finding their way into the EU, particularly in the context of cigarettes, clothes, shoes, toys and pharmaceuticals. While sea is the main conveyance for larger volumes of imports, smaller consignments are being sent via air and by post (UNODC 2010, 179). The annual market volume entering the EU from East Asia has been roughly estimated as two billion articles per year, worth about 8.2 billion USD at destination (SANGEEETA16, p.175). Socio-economic impacts: The negative impacts of counterfeiting are many. Counterfeit manufacturing directly hurts licit businesses as they suffer from IPR infringements. For example, the WHO estimates the annual losses to the pharmaceutical sector at 45 million EUR (UNICRI 2012, p. 34). Legitimate companies also tend to accrue losses through reputational damage as consumers unsuspectingly buy duplicate low quality products assuming them to be the bona fides (OECD 2007, p.18). As lawful businesses lose competitiveness, they cut down on retail and manufacturing jobs, ultimately leading to loss of innovation and reducing employment (Europol 2013, p.1). Counterfeit products put public health in jeopardy. Spurious drugs have reduced 323 Juha Hintsa and Sangeeta Mohanty therapeutic value, cause patients to develop microbial resistance, or even lead to deaths through a complete therapeutic failure (UNICRI 2010, pp. 27-28 &.184). Other fake commodities like cigarettes, cigarette lighters, mobile phones, batteries, toys, and clothing may contain toxic substances and other elements endangering human health. Counterfeit alcoholic drinks are known to have caused several deaths in Europe and beyond. (UNODC 2010, p. 173 & Europol 2013, p.2). Counterfeit production has been associated with serious labor rights violations, negligence of workplace safety, environmentally unsound practices, illegal labor and underpayment (UNODC 2010, p.174 & UNODC 2010, p. 176). This unscrupulous practice implies fiscal losses to the state as legitimate companies experience a reduction in sales, and fake commodities undermine the tax base by evading customs duties and sales tax / VAT through smuggling and informal retailing (UNODC 2010, p.176, UNICRI 2012, p.35). Other indirect losses to the states and governments may arise from this illegitimate activity. The presence of counterfeits can be a deterrent to foreign investors. Further, legitimate companies may raise the price of drugs to offset their losses, implying additional economic burden to national health services (UNICRI 2012, pp. 3435). Law enforcement authorities face logistical challenges from the increasing volumes of seized counterfeit goods, in terms of storage capacities and disposal which can be a technically complex and costly operation. Finally, counterfeit businesses can contribute to political unrest as the illicit profits fuel other criminal networks like terrorist organizations (OECD 2007, p. 15). 3.3 Trafficking in ozone depleting substances Ozone depleting substances (ODS) primarily include chlorofluorocarbons (CFCs), hydrochlorofluorocarbons (HCFCs) and halons, which are used for various purposes like refrigeration, air-conditioning, fire-fighting and crop protection (UNODC 2012, p.115). They are one of the worst pollutants linked to soil, water and air contamination, the most worrying possibly being the thinning of the ozone layer. The public concern over this alarming phenomenon led to the establishment of the Montreal Protocol on substances that deplete the ozone 324 A Literature-Based Qualitative Framework Illicit flow Negative socio-economic impacts at the destination Trafficking in cocaine and heroin Impacts public health, employment, productivity, drives up social welfare costs, triggers criminal activities and violence, fuels other organized crime types. Trafficking in counterfeit products Hurts licit businesses, loss of tax revenue, impacts public health, deters foreign investment, puts pressure on healthcare services, puts pressure on law enforcement authorities (storage and disposal). Trafficking in ozone depleting substances Environmental damage, climate change, impact on human health, impact on agriculture and food security. Trafficking in firearms Widespread killing, robbing of natural resources, impedes investment and rebuilding, deters education, worsens poverty, impacts public health through spread of diseases. Trafficking in stolen cultural products na Trafficking in wildlife Threats to public health through spread of animal-borne diseases, fuels other organized crime types an d fraud. Trafficking in timber Losses in tax revenues, environmental damage Tab. 1: Negative socio-economic impacts at the destination country / region 331 Juha Hintsa and Sangeeta Mohanty Illicit flow Negative socio-economic impacts at the origin Trafficking in cocaine and heroin Human suffering, environmental damage, causes inflation (some cases), incites violence, fuels other organized crime types and political stability. Trafficking in counterfeit products Hurts licit businesses, violates labor rights, causes environmental damage. Trafficking in ozone depleting substances Environmental damage, climate change, impact on human health, impact on agriculture and food security. Trafficking in firearms na Trafficking in stolen cultural products Loss of national cultural heritage, economic loss to state, damage and destruction through looting and pillaging, sorrow and economic loss to private owners, threatens archaeological research. Trafficking in wildlife Animal cruelty, ecosystem and biodiversity loss, feeds corruption, impedes economic growth (losses to tourism and aviation sector), creates unemployment, losses to national parks, fuels other crime types and fraud, causes exploitation of local comm unities and triggers violence (e.g. killing park rangers). 332 A Literature-Based Qualitative Framework Illicit flow Negative socio-economic impacts at the origin Trafficking in timber Environmental damage (landslides, floods, soil erosion, global warming) , threatens survival of animal species, exploitation of local communities, loss of livelihood, fuels other organized crime types, contributes to political instability. Tab. 2: Negative socio-economic impacts at the origin country / region In total there are six categories of SEN, presented as columns in the matrix, first explained in the list below: • SEN1: Losses in tax revenues regarding indirect border taxes • SEN2: Increasing health care and social security costs • SEN3: Increasing market place distortions and/or unfair competition • SEN4: Increasing environmental damages • SEN5: Increasing human suffering • SEN6: Losses in cultural heritage Fig. 1: Integrated matrix mapping the socio-economic negative (SEN) impact - categories against each illicit flow type 333 Juha Hintsa and Sangeeta Mohanty The four pieces of notes, as indicated on the rightmost column of the matrix above, are explained next: • Note1: With counterfeit products one may face five of the six categories of negative socio-economic impacts (excluding SEN6, losses in cultural heritage), depending on the product type; counterfeit pharmaceutical products being an extreme example. • Note2: Trafficking in ozone depleting substances may have negative impacts for the future agriculture and food production. • Note3: Next to the loss of actual cultural products, this illicit flow may disturb / threaten archeological research activities. • Note4: May lead to increasing unemployment rates in the tourism sector at the origin countries, as less tourists travel there to see the wildlife. Lastly, following four aspects were excluded purposefully from this summary matrix: • 1. One could consider that each illicit flow may lead to losses in tax revenues regarding indirect border taxes, while consumers ultimately purchasing these illicit products have then less money to buy licit products. • 2. One could consider increased regulatory, law enforcement, judicial and penitentiary costs for each of the illicit flows. • 3. One could consider increased organized crime activities as a "side cost" for each of the illicit flows, e.g. when illicit economic gains are reinvested into parallel criminal activities. • 4. One could consider increased petty / opportunistic crime activities as a "side cost" in particular for illicit narcotics trafficking, as drug users commonly fund their purchases via petty theft etc. 5. Conclusions and topics for future research The objective of this paper has been to provide a clear, robust picture of common illicit cross-border flows of goods, including their socio-economic negative impacts both at destination and at source; particularly in order to facilitate 334 A Literature-Based Qualitative Framework enhancements in governmental policies and corresponding regulations, enforcement priorities, inspection schemes and other countermeasures in fight against illicit, in the context of global supply chains and freight logistics systems. The main outcome of this paper has been the integrated matrix to map the socioeconomic negative impact –categories (in total six) per each illicit flow type (in total seven, following splitting endangered species into two). The most common impact categories were following two, both with five “illicit flow matches”: Increasing health care and social security costs; and Increasing environmental damages. On third position is increasing human suffering (four matches); followed by Increasing market place distortions and/or unfair competition (three matches). The last ones were Losses in tax revenues regarding indirect border taxes (two matches) and Losses in cultural heritage (one match). Ultimately, it is left for politicians on both national levels as well as on international agreement levels to set weights and priorities within the various illicit flows, in terms of future policy and regulatory development, enforcement priorities and actions and so forth. Finally, several sub-topics call for future research, including the following five: • With all flows: Quantification of both the illicit market sizes (value, volume etc.) and the socio-economic negative impacts (monetary and nonmonetary, whenever feasible). • With all flows: Distinguishing between import “freight logistics flows versus other modalities (e.g. passenger luggage and inside body)”. • With some flows, e.g. counterfeit products: Distinguishing between “domestic production versus 3rd country imports”, while assessing the problem size etc. • With some flows, e.g. firearms: Distinguishing between “legally versus illegally imported” products, while assessing the problem size etc. • Beyond the illicit flows presented in this paper: Expanding the analysis to cover various forms of fiscal fraud, quota violations, trafficking in human beings, currency export / import violations etc. 335 Juha Hintsa and Sangeeta Mohanty Acknowledgements This paper results from the CASSANDRA project, which is supported by funding from the 7th Framework Program of the European Commission (FP7; SEC2010.3.2-1) under grant agreement no. 261795. 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