“The drug war is weakening state institutions, infiltrating judicial systems and undermining rule of law,” all of which is bad for business, César Zamora, Nicaraguan businessman and vice president of the Association of American Chambers of Commerce in Latin America (AACCLA) told the Christian Science Monitor on February 16, 2012.
A criminal cancer is spreading through the global economy, taking its nutrition from the world-wide illegal drug business. In many countries, your travel agent, your lawyer, your banker or your telephone installer is as likely as an assassin or brothel manager to be working for a criminal organization. Almost everywhere, narco-dollars corrupt government officials and business agencies and fuel criminal opportunities.
The global illegal drug economy is not capable of precise measurement, but according to the latest report from the United Nations Office on Drugs and Crime, the retail market in illegal opiates is $68 billion (mostly heroin) and in cocaine, $85 billion. Their last valuation of the cannabis market was $142 billion in 2005.
Excluding the significant markets in methamphetamine, Ecstasy, psychedelics and other drugs, this is a criminal retail market in the range of $300 billion annually. Most of the markup is at the retail level. This enormous market is evidence that our efforts to stop the drug supply create the incentives that have grown a global criminal infrastructure of countless drug prohibition enterprises.
In 1984, 1986 and 1988, Congress injected the U.S. anti-drug effort with legal steroids. As counsel to the House Crime Subcommittee during the “war on drugs,” I helped write many of those laws. But those laws, as well as hundreds of billions of dollars in enforcement, have not protected business from the consequences of drug prohibition. This is in large part because neither Congress nor the business community have ever thought systematically about the drug business, drug enforcement and the economy.
In the early 1980s, I helped Congress investigate how drug money laundering was compromising legal casino gambling as the drug business responded to the Bank Secrecy Act. Congress heard, but did not understand, how our drug laws hurt a sector of American business. Congress pushed currency transaction reporting, for example.
The 8,000 reports filed in 1985 have grown to over 14,800,000 in FY2011. What had been a minor inconvenience is now a major responsibility that costs banks hundreds of millions of dollars annually. Despite this burden, the great untaxed profits of illegal drug sales worldwide have enabled local drug trafficking gangs to transform into global criminal organizations.
Drug prohibition enterprises corrupt bank officers and tellers, accountants, lawyers, financial advisors, real estate brokers, securities dealers, freight forwarders, shipping companies, airline employees, etc. to ship and pay for drugs, and to launder their receipts and profits. In one example, in March 2010, corruption was exposed in the Wachovia unit of Wells Fargo Bank, now the fifth largest U.S. bank by deposits. Wachovia was forced to disgorge $110 million and was fined $50 million for failing to internally police $378 billion in transactions with casas de cambio in Mexico that laundered drug profits. Businesses cannot count on the integrity of their agents or counterparts in such environments, and Wachovia’s shareholders paid an enormous price.
All over the world, drug organizations depend upon corrupting border guards, customs inspectors, police, prosecutors, judges, legislators, cabinet ministers, military officers, intelligence agents, financial regulators, and presidents and prime ministers. Businesses cannot count on the integrity of government officials in such environments.
Illegal drug organizations rely upon violence for conflict resolution, security, employee management, management succession, and influencing policy makers. Over the last two years, countless business leaders and their families have fled drug violence in Monterey, Mexico’s once-safe commercial capital, as the country has been rocked by some 50,000 killings related to control of the drug trade. Violence is pervasive, law enforcement is largely ineffective, and impunity for using violence is rampant. Not only in Mexico, but in Central America, the Caribbean, Colombia, West Africa, and parts of Asia where the prohibition-fueled drug trade is extant, business personnel are frequently in danger.
Domestically, there are additional consequences. In the 1980s, America’s crime rates were near historic highs. Congress took for granted that we needed to fight drugs with long sentences. Now crime rates are profoundly lower, but most analysts conclude long prison sentences have not been a major factor. The political dynamic of being tough on crime and drugs led to a dramatic expansion of the population with a criminal record. Those records are accessible by nearly every employer. Yet, few analysts have calculated the full impact of expanded criminal punishment that has reduced opportunities for education, job training, employment, credit, marriage, and ultimately, American productivity and consumer buying power.
Today, tens of millions of Americans — would-be consumers – because they have been convicted of a drug offense, aren’t earning what they could earn without a record. Our prison population, estimated as high as 2.3 million persons, is out of the car market. Ford and GM should calculate how many cars they could sell in the U.S. if our imprisonment rates were close to those of their European or Japanese competitors (instead of 7-to-10 times higher). How many cars could they sell if tens of millions of Americans did not have a conviction-suppressed income? A reduced average household income and credit capacity suppresses sales of goods and services for almost every American business. While most of those offenses were instances of youthful bad judgment, the consequences for the economy last for decades.
The business community needs a complete economic analysis of the impact of drug policy. In the 1980s, war on drugs policies were not on the radar of business or investors at all. Today, the intensity of global competition and the fragility of our domestic economy require management and investors to fully understand how American drug policy plays with their profits. Every investor should analyze how much the costs of drug policy shrink return on investment.
Eric E. Sterling, former assistant counsel to the House Judiciary Committee, principally responsible for anti-drug legislation, (1979-1989) is the author of “A Businessperson’s Guide to the Drug Problem.”
By Eric E. Sterling