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Global Agenda Council on Organized Crime

Global Agenda Council on Organized Crime

For the 2010-11 term, the Global Agenda Council on Organized Crime has
decided to focus its efforts on the intersection between organized crime and the
legitimate economy, examining the vulnerabilities which cause certain sectors or
industries to be particularly prone to organized crime exploitation.

The Council has picked two concrete areas of particular interest, which reflect 
a sector of the “old” and the “new” economy. Both examples demonstrate how
organized crime is becoming an increasingly important risk that is exploiting
the opportunities offered by economic development.

A. Money Laundering into Real Estate

B.  Cybercrime: Current Challenges, Future Threats and Effective Response

Introduction

The popular imagination of organized crime – of Sicilian mafia groups confined to certain cities and a handful of criminal markets – is seriously out of date. The criminal enterprises of today represent a multibillion dollar set of networks that prey on every aspect of global society, distorting markets, corrupting governments and draining huge resources from both. Fuelled by the same forces of globalization that have expanded trade, communications and information worldwide, criminal syndicates not only have unprecedented reach into the lives of ordinary people, but also have undermined the competitiveness of multinational companies and the security of governments worldwide.

Borrowing from the UN Convention against Transnational Organized Crime, the Global Agenda Council on Organized Crime defines organized crime broadly – as groups of three or more people, motivated by profit, acting in concert to commit serious criminal offenses. Increasingly networked-based and multinational in scope, organized crime is exerting greater impact than ever before. Indeed, criminal organizations rank among the most entrepreneurial and adaptive elements of the global economy. They have proved particularly nimble in exploiting weak institutions and fragile states, but their impact is profound even in the most advanced economies. Organized crime affects the financial markets of Hong Kong, the banking industry of Japan and the construction industry in New York. Organized crime deters foreign investment in Mexico and Afghanistan, and stifles the reconstruction of many post-conflict societies such as Sierra Leone and the Democratic Republic of Congo. It fosters corruption, illicit trade and illegal migration, undermines the environment and human rights, and contributes to the depletion of natural resources.

As the world grows increasingly interdependent, criminal organizations will continue to expand and adapt. The rise of new powers such as China, India and Brazil will pose fresh challenges to the world’s ability to contain the spread of sophisticated crime syndicates.

Estimates of the economic size of organized crime vary widely and are at best rough estimates. But even the most conservative figures are vast. In 2010, in its first global assessment of transnational organized crime, the UNODC estimated illicit flows tied to crime syndicates at about US$ 125 billion per year, with about 85% of that attributed to the trade in illegal drugs. A 2011 study by Global Financial Integrity estimated the value of worldwide illicit traffic in “goods, guns, people and natural resources” far higher – at US$ 650 billion annually. Figures from Europol put EU sales of illicit drugs at an estimated € 100 billion per year, while a similar value is attached to the estimated value of organized VAT fraud in the EU.

Such numbers are at best estimates, but even the most conservative figures are vast. And these are just the direct costs. The indirect costs are believed to be far higher, coming in the form of political instability, violence and injury, human health, environmental clean-up, and an unfair playing field that favours illicit enterprise. Consider, for example, the social costs tied to illegal drugs, with 250 million users worldwide, in healthcare, law enforcement, premature deaths and ruined lives.

While these social impacts of organized crime are well documented, less well understood are its economic costs. Organized crime extracts a hidden tax on millions of transactions around the world each day, from cybercrime’s impact on the banking industry to the trafficking of counterfeit medicines and intellectual property.

Through tax evasion and money laundering, billions of additional dollars are lost to governments struggling to provide basic social services. This is revenue denied to governments, with direct impact on the taxpayer.

Individual industries are also affected, from banking and real estate to sports and entertainment. Mexico’s tourist industry – which employs as many as one in eight Mexicans – has been hard hit by a downturn in visits tied to violence fuelled by the narcotics trade. And, in the EU, investigators have tied € 5 billion in fraud in 2009 to the EU carbon trade emission regime.

The current economic crisis is also influencing the spread of organized crime. Rising unemployment rates threaten to increase the number of individuals alienated from mainstream society and hinder efforts to integrate immigrants and marginal groups. In this event, a growing number of unemployed and frustrated youth will be vulnerable to recruitment by street gangs, organized crime syndicates or terrorist groups. There is also a risk that the economic crisis has made legitimate businesses more vulnerable to compromise – resulting in higher levels of infiltration by criminal groups. In addition, the desire of individuals to maintain their lifestyles despite reduced purchasing power is likely to increase the demand for counterfeit, illicit or smuggled products.

The UNODC assessment, released in June 2010, offers a sobering list of the varied impact of transnational organized crime:

  • The collusion of insurgents and crime groups in Africa and South-East Asia, plundering natural resources and fuelling terrorism
  • The spread of violence by drug cartels in Central America, the Caribbean and West Africa
  • The growth of migrant smuggling in Eastern Europe or North Africa on a par with that in South-East Asia and Latin America
  • The threat by cybercrime to vital infrastructure and state security, and its growth in identifying theft and financial fraud
  • The growth of piracy in the impoverished Horn of Africa, holding ships ransom from corporations based in wealthy nations
  • The traffic in counterfeit goods, undermining legitimate trade and endangering lives
  • The widespread practice of money-laundering, corrupting the banking sector worldwide

The threat posed by organized crime has prompted the UN Security Council to consider its implications in Afghanistan, the Democratic Republic of the Congo, Central America, Somalia and West Africa, and in relation to the trafficking of arms, drugs, people and natural resources. The impact of organized crime on fragile states is particularly corrosive, undercutting governance and confidence in government institutions.

For the 2010-11 term, the Global Agenda Council on Organized Crime has decided to focus its efforts on the intersection between organized crime and the legitimate economy, examining the vulnerabilities which cause certain sectors or industries to be particularly prone to organized crime exploitation.

The Council has picked two concrete areas of particular interest, which reflect a sector of the “old” and the “new” economy. Both examples demonstrate how organized crime is becoming an increasingly important risk that is exploiting the opportunities offered by economic development.

A. Money Laundering into Real Estate

B. Cybercrime: Current Challenges, Future Threats and Effective Responses

 

A. Money Laundering into Real Estate

Summary

Money laundering into real estate by crime groups and corrupt officials has been identified on every continent, but has failed to command the attention as a tool for money laundering that it deserves. Commercial and residential real estate is conducive to money laundering because of the easy mixing of the legitimate and illegitimate funds. The consequences of this money laundering are distinct from the sums that remain in cash or cash equivalents. Purchase of expensive homes by crime figures and corrupt officials shows that crime really does pay. Economic bubbles can be exacerbated by money laundering into real estate and ordinary citizens can be priced out of markets distorted by money launderers. Environmental destruction and over-construction are characteristic features of real estate construction undertaken to launder money. Moreover, this form of money laundering is more beneficial than other forms of investment in the legitimate economy as it can provide a base for criminal operations and/or a steady income stream.

The paper concludes that real estate professionals must focus on preventing money laundering into real estate using the guidelines established by FATF. Market analyses must also address susceptibility to money laundering. Greater transparency is required in land registries, privatizations and property transfers. Law enforcement must follow the money trails into both commercial and residential real estate and seize properties as they do other laundered assets.

Defining the Problem

Money laundering into real estate did not end with the movement of organized crime investment into Las Vegas. Rather, the problem is an enduring but insufficiently recognized international problem. Corrupt leaders, organized crime groups and even some terrorist organizations channel their illicit funds into real estate as a way to disguise the criminal origin of their proceeds and to integrate them into the formal economy.1 These illicit funds are invested into residential and commercial real estate as well as into farm lands and tourist properties, often allowing the criminals and corrupt politicians to enjoy the profits of their criminal conduct.2

Money laundering experts define three phases of laundering – the placement, layering and integration. Placement is the introduction of the dirty money into the system, the layering stage occurs when the money is already in the system and the audit trail is deliberated obscured. Integration is when the money is functioning within the system. Real estate can be used for laundering at all stages of the laundering process.

Money laundering into real estate can occur in the first phase of laundering, the placement stage, where the launderer places the illegal money into real estate construction or into a house purchase. Real estate can be used at the layering stage when money is moved overseas for real estate investment or when a foreign bank loan is given to a person to buy a house, where the loan is in reality the person’s own money parked overseas. In the integration phase, the criminal places money in the real estate sector and is not interested in trading in real estate but in investing.3

The Multiple Consequences of Money Laundering

1. Criminals show their success by buying valuable real estate.4 The success of the criminals in buying luxury properties can prove a tool for recruitment of prospective members, especially impressionable youth.

2. Economic bubbles can be exacerbated by money laundering into real estate. This was seen in Japan and more recently in Dubai.5

3. Individuals can be priced out of real estate markets, causing severe dislocations and economic distortions. The threefold increase of property prices in Mombasa, Kenya, within five years made it increasingly difficult for middle-income families in Kenya to buy a house.6In the mid-2000s, according to the Economist, South Africa had the largest price increase in housing of any major market analysed.7 The FATF president stated in 2005 that he suspected that money laundering was one of the reasons for the sharp increase in the price of property in South Africa.

4. Money laundering results in over-construction of expensive housing and hotels. Properties 8 stay vacant for years because individuals cannot pay the costs of this housing or hotels. The vacant hotel phenomenon is seen in Central America and several Soviet successor states. The housing boom in Turkey, facilitated in part by the laundering of drug proceeds, has resulted in over construction and empty housing in some coastal areas.

5. Money laundering into real estate can result in severe violations of environmental regulations and destruction of protected habitats. This has been a widespread phenomenon in southern Italy.

6. Money laundering into construction companies can drive out legitimate investors who cannot obtain bank credits or compete against the money launderers who have an excess of cash.

7. Money laundering into property may lead to decay of urban areas as well as increased crime.9 In some cases, the properties are bought to launder the money and then are left vacant. This has been observed in such different environments as rural Ohio in the United States and dense urban areas of Tokyo.10 This decay is allowed to occur so that the criminals can subsequently buy neighbouring properties at depressed costs. 11

8. Money laundering into real estate may yield profits allowing the criminals to sustain their activities while simultaneously providing stability and security for their investments. This has been seen in Mexico, major cities in the United States and in Italy.12

9. Money laundering into agricultural can distort agricultural prices. This was seen in Colombia where drug traffickers chose to invest in agricultural lands that did not demand constant cultivation. They therefore invested in cattle ranches. They depressed the price of beef because the drug traffickers’ desire was not to engage in profitable cattle farming but merely to launder their money. 13

10. Money laundering into apartments can be used to facilitate the work of drug traffickers who can use these places for production of drugs and distribution.14 They also can be used to house illegal workers who are sometimes exploited in the business of the apartment owner.15

11. Money laundering into hotel construction and tourism businesses may facilitate other illicit activity of the organized crime group such as human trafficking. This has been seen in tourist areas in Spain and Turkey where drug money has moved into the hotel sector.16 In South-East Asia, Japanese organized crime investment in the hotel sector has facilitated sex tourism.

12. The recent financial crisis has provided cash-rich organized crime groups the possibility to acquire foreclosed properties at sharply reduced prices because they have cash-rich businesses, i.e. from the drug trade.

13. Citizen revulsion at the opulent wealth and homes of corrupt leaders helped fuel the uprisings of the Arab Spring in Tunisia, Libya and Egypt. Money laundering into ostentatious homes is a dramatic force for destabilization, as it shows that leaders can enjoy the fruits of corruption.

14. Criminals’ purchase of elegant properties with their ill-gotten gains shows that crime pays.

Diverse Environments in which Real Estate Money Laundering Occurs

Money laundering into real estate occurs in both the developed and developing world and has been identified by researchers and/or law enforcement on all continents. Significant money laundering into real estate has been identified in diverse G8 and Europol member states, whose membership have highly regulated economies and limited reliance on cash. Europol reports that false documents are used to conduct mortgage fraud in the purchase of premises. Within Europe, property rental agencies and managers of holiday parks, either knowingly or unknowingly, facilitate money laundering through their real estate properties.17

Money laundering into real estate also occurs in cash-based economies where there is no regulated price market and no specific property acquisition requirements. These features make these countries especially vulnerable to money-laundering abuse in both the commercial and residential markets. In these regions, as in the developed world as well, real estate professionals are key facilitators of this area of money laundering.

Because of the diverse regions in which money laundering into real estate can occur, property has become an important option in the organized crime investment portfolio. Moreover, money laundering into real estate occurs because it is a relatively safe and prestigious investment. Launderers benefit in multiple ways because they can often acquire valuable and appreciating investments at the same time that they launder money into the legitimate economy.

The extent to which criminals and corrupt officials launder money into real estate depends on the “cultures” of organized crime groups and the effectiveness of the regulatory and confiscation policies of a particular country. In cultures where investments traditionally occur in property, there is a greater likelihood that money laundering will occur in all forms of real estate both in their home region and abroad.

Furthermore, the possibilities for laundering are enhanced because the exact value of properties is difficult to assess and there has been a long-term tradition of speculation in real estate markets. Real estate offers many comparative advantages as a financial instrument, as it allows launderers to dispose of considerable sums of money through construction yet also derives a subsequent income flow, particularly in markets where there is a need for housing.18 With real estate, one can also produce steady returns of clean money from tourists who stay at hotels and visit resorts. The facilities, as in the case of apartments, garages and warehouses, can also be used to conduct criminal activities.19 As one European analyst concluded, “To sum up, the real estate sector is by its very nature complex and prone to criminal abuse.”20

Earlier Patterns of Money Laundering (Before 2000)

Money laundering into real estate has occurred for decades but is constantly changing as the criminals adapt to changes in regulations and market conditions and become more global investors. Earlier identified examples show that most investing was close to home:

1. Colombian cartels moved money into Bogota real estate and Colombian farms. As a result of this laundering, there was a rapid escalation of commercial real estate prices.21

2. Mexican cartels moved money and drugs into and through Cancun and other resorts. This provided them a steady revenue stream.22

3. Japanese Yakuza moved into multiple real estate markets, forcing rapidly escalating purchasing prices. Individuals who resisted purchase of their homes by Yakuza-associated real estate investors faced severe harassment. Banks could not collect on the large loans made to Yakuza property developers leading to large uncollectible loans for the banking sector and contributing to Japan’s “so-called” lost decade.23

4. Organized groups acquired agricultural lands in Sicily, villas off the Sicilian coast and real estate in Naples. From the 1980s to 2000, real estate was the major asset seized by the Italian state from Italian organized crime groups. Post-1993 money laundering was no longer concentrated in the major urban areas of the south but spread to secondary and tertiary cities in that region.24

5. Major mafia investment in real estate in large cities in US, particularly Las Vegas and New York, from the 1930s. Pension funds diverted by organized crime from the teamsters union helped to develop Las Vegas.25

6. In 1996, the Dutch national organized crime report determined that, through their illegally acquired property, organized crime groups had acquired control over Amsterdam’s Red Light District. Amsterdam at this time had become a major centre for international organized crime.26

Recently Identified Patterns of Money Laundering into Real Estate (post-2000)

1)     Europe

  • A. Analysis of over 50 cases of money laundering in the Netherlands revealed that between 30% and 40% of the cases had laundering into immovable property.27
  • B. An Italian study of all property confiscated from organized crime revealed that laundering into real estate was no longer confined to the south but had spread throughout Italy.28
  • C) The French Supreme Court froze 73 properties purchased by the families of African dictators from Gabon and two other countries after Transparency International and Sherpa successfully initiated legal action to freeze the properties.29

2)  Africa

Research in Southern, Western and East Africa identified crime processed into real estate. A recent real estate boom and market price increase in the past years in Kenya (Nairobi Eastleigh and Mombasa) has been associated with ransom money and piracy attacks off the coasts of Somalia. The new cocaine routes through West Africa have contributed to a real estate boom in some countries, in particular in countries where the traffickers are known to be active. Money has flowed from other parts of Africa and Asia into South African real estate.30

3) Asia

The Yakuza remain very significant real estate investors and have been identified by the GAC’s research as the second largest real estate investor in Tokyo. Yakuza have invested in Hawaii and Southeast Asia.

4) North America

The United States has identified money laundering most frequently in residential properties from both criminal sources and by corrupt officials. Former Ukrainian Prime Minister Pavel Lazarenko bought a US$ 7 million home in California and was charged and prosecuted for money laundering in 2004.31 A recent Senate investigation examined four cases of money laundering into real estate by politically exposed persons in Africa.32 Canada has identified drug traffickers using property across Canada. 33

5) Middle East

The proceeds of Afghanistan corruption or opiate trafficking related proceeds are laundered in real estate in neighbouring countries, particularly in commercial and residential real estate in Dubai and the rest of the UAE. Turkish drug trafficking groups, based in Europe and Turkey, move money into real estate in Istanbul, resort properties on the coast and central Turkey.

6) South America

Money laundering continues in Colombia and Mexico, but other countries such as Argentina and Venezuela have become prominent in Latin America for their money laundering into real estate.34 Money laundering into Uruguayan real estate has also become a major problem. A recent study reports that 90% of money laundering occurs through real estate.35 Panama has been singled out for money laundering in the real estate sector.36

How is this money moved for real estate investment?

1. Cash
2. Wire transfers
3. Through financial institutions
4. Hawala system particularly present in Africa and the Middle East
5. Alternative remittance systems, directly or with the use of third parties

How are purchase made?

1. Lawyers and other in positions of trust buy as front people
2. Bought under false names or by relatives/close associates – especially by corrupt officials 
3. Recently established companies are often used as vehicles for laundering money into real estate

Why is real estate such a frequent instrument?

The absence or deficiencies of anti-money-laundering legislation related to the real estate sector makes it attractive to criminals. Moreover, the absence of will among many real estate professionals in many parts of the world to conduct due diligence on their clients and the absence of sanctions for complicity in money laundering into real estate exacerbated the problem.

What can be concluded from these criminal behaviours?

1. Last global financial crisis was caused, in part, by problems in the real estate market and inflated valuations; organized crime has inflated property values in many areas of the world.

2. As we focus on establishing regulation to prevent such future financial crises, the impact and role of organized crime and corrupt elites in real estate markets should be properly assessed and addressed to minimize their contribution to risk.

3. Money laundering into real estate is also connected to core themes of the World Economic Forum – disparity of income, access to decent housing, and problems of quality of urban life in densely populated areas where organized crime is a key investor.

What Can and Should Be Done?

1. Market reforms must include greater oversight of the sources of funds entering into real estate markets. There must be greater accountability for real estate professionals who facilitate money laundering into real estate.

2. Property registrations must have greater transparency to reveal ownership.

3. Privatization of land and real estate must be conducted with openness and access to a full range of possible purchases.

4. The risk-based guidance for real estate agents issued by the Financial Action Task Force in 2008 should be further examined to ensure that real estate markets are properly regulated against money laundering.

5. Law enforcement officials who follow the money must give higher priority to the placement of money in real estate and the revenue streams going to the organized crime leaders who own the residential and commercial real estate.

6. Seizures of criminal-owned property and their subsequent use for the social good as has been done in Italy provides a model to ensure that “crime does not pay”.

7. Analyses of real estate markets must focus on the anomalies created by money laundering.

8. The real estate profession must make countering money laundering a higher priority. This prioritization must include not only professionals who sell properties but all aspects of industry from those that facilitate investment to those who are involved in the sale and registration of property.

Appendix

Real estate and related activities, ranging from construction and restoration to property investment companies, real estate agencies and the purchase of immovables, is an economic domain habitually used for laundering money. For example, criminal groups employ controlled construction companies to restore acquired property – often no more than mere ruins – with crime-generated money. As soon as buildings or estates are reconstructed to perfect condition, they sell them, laundering the invested money and making a profit on the sale. That modus operandi reflects an extremely profitable, double-layered money laundering technique. In fact, a significant amount of criminal proceeds can be used in the reconstruction phase, purchasing building material also on the black market and hiring irregular workers. Such behaviour shifts onto others the burden of cash placement, while splitting considerable amounts of illicit profits into small fragments that are far more difficult to detect. Then, the fully refurbished and often prestigious end product is sold on the real estate market for an allegedly legitimate and well-deserved profit.

(OCTA, 2009)

B. Cybercrime: Current Challenges, Future Threats and Effective Responses

Summary

The Internet has revolutionized the way we live and has contributed to making societies borderless. The “information superhighway” envisaged 30 years ago is now a reality, with the world increasingly dependent on high-tech communications and banking systems. Criminals with various levels of organization exploit the same trends (social, political, technological, environmental, etc.) that drive legitimate market developments.

In addition to misuse of the Internet in the commission of offline crimes, recent years have also witnessed the emergence of a digital underground economy in which large amounts of stolen data are traded and converted into criminal proceeds. The continued evolution of the Internet and related digital technologies demands a coordinated and collaborative response that harnesses the expertise of a wide range of security stakeholders, aimed at disrupting and preventing cybercrime and other forms of online criminal activity.

In addition to misuse of the Internet in the commission of offline crimes, recent years have also witnessed the emergence of a digital underground economy in which large amounts of stolen data are traded and converted into criminal proceeds. The continued evolution of the Internet and related digital technologies demands a coordinated and collaborative response that harnesses the expertise of a wide range of security stakeholders, aimed at disrupting and preventing cybercrime and other forms of online criminal activity.

Current Challenges

The Internet as a Criminal Facilitator

As a communication tool, information source, marketplace, recruiting ground and financial service channel, the Internet now facilitates all types of offline organized criminality. Illicit drug extraction, synthesis and trafficking, trafficking in human beings for sexual exploitation, illegal immigration, mass marketing fraud, VAT fraud, currency counterfeiting and the trade in prohibited firearms are all facilitated via the Internet. In particular, the perceived anonymity afforded by communications technologies such as e-mail, instant messaging and Internet telephony (VoIP) has led to them being used increasingly by criminal groups as a countermeasure to law enforcement detection and surveillance. Online banking and virtual payment systems, meanwhile, provide groups with opportunities to move criminal assets faster than ever before, unhindered by offline geographical barriers.

The widespread adoption of Internet technology has also prompted an unprecedented expansion in the markets for intellectual property theft, especially for copyrighted audio-visual material and software, and child abuse material. Child victims of sexual abuse are exposed to prolonged victimization as a result of the continued circulation on the Internet of visual and other records of their abuse, with images increasingly produced to order.

The scale of such activity represents a considerable challenge to both the authorities and service providers. For example, one recent international investigation into online child sexual abuse, Operation Rescue, identified nearly 700 suspects and over 200 victims worldwide from an online network of 70,000 members of a forum that promoted sexual relationships between adults and young boys. This operation lasted three years and brought together law enforcement agencies from 13 different countries around the globe.

In recent years, one of the most striking forms of criminal activity on the Internet has been hacktivism, or cyber-protest. Groups such as Anonymous have espoused a variety of causes, among them file sharing and political protest, launching denial of service attacks against regulatory, financial and hosting services whose actions they deem to be “morally questionable” 37 The group’s actions in support of WikiLeaks brought it global notoriety, which in turn afforded significant media attention to hacking attacks on commercial and government entities conducted by affiliates such as LulzSec. These have subjected a number of large organizations to reputational damage and spread a sense of insecurity amongst Internet users. In light of the high level of publicity associated with these attacks, it is expected that hacktivist activity will increase in the future.

The Digital Underground Economy

In addition, there is now a sophisticated and self-sufficient digital underground economy, in which data is the illicit commodity. Stolen personal and financial information – used, for example, to gain access to existing bank accounts and credit cards, or to fraudulently establish new lines of credit – has a monetary value. Credit card details and compromised accounts, as well as information such as addresses, phone numbers, social security numbers, full names and dates of birth, are all retailed in this market. This drives a range of new criminal activities, such as malicious software distribution and the hacking of corporate databases, with a fully fledged infrastructure of malicious code writers, specialist web hosts and individuals able to lease networks of many thousands of compromised computers (botnets) to carry out automated attacks. As the Internet continues to develop, a host of new criminal opportunities are presenting themselves, among them rogue anti-virus software, search engine optimization of malicious web links (black hat SEO) and cybercriminal toolkits comprising multiple attack vectors, retailing for US$ 3,000-8,000.38

The threat has matured into a cybercrime business model which includes :

  • Development and distribution of malware
  • Creation and operation of botnets
  • Theft of personal and financial data
  • Using such data to conduct scams, attacks on online banking systems, etc.
  • Channelling illicit proceeds

Three elements are crucial to its success: forums, botnets and money mules. Forums are where malware components and services and stolen data are retailed. It is here also that skills are recruited for criminal enterprises, and budding cybercriminals learn their trade by means of tutorials.

Botnets are fundamental to cybercrime’s profitability. With a botnet, cybercriminals can make use of many thousands of compromised computers at a time to automate attacks on private individuals and corporate systems, send spam, host phishing websites, distribute malware, mount denial of service attacks and scan for vulnerabilities: without one, they must target victims and machines manually and individually.

With regard to the scale of botnet activity, on average 148,000 computers per day were turned into “zombies” in 2009.39 The size of each network varies, from 165,000 computers active on a typical day in the Waledac botnet 40,
to the Mariposa botnet’s total of 12.7 million infected computers.41 In effect, the emergence of botnets has been a landmark in the
industrialization of cybercrime.

The monetization of data is essential to cybercriminal enterprise: accordingly, online financial services are used to “cash in” stolen personal data. “Mules” are recruited via employment search websites and social networking sites, very often in different jurisdictions to those from which the funds have been removed, e.g. from a compromised credit card.

Online banking provides criminals with the opportunity to move their assets faster than ever before, and irrespective of offline geographical barriers. Online gambling is used for the laundering of criminal proceeds, as are the in-game currencies of virtual worlds. Alternative payment systems have also been used by criminal groups for laundering and monetization. 

The profits generated by hacker Albert Gonzalez, arrested in 2008, give some indication of just how lucrative data theft can be. Gonzalez’ offences included the theft of 130 million payment card numbers from a payment processor, and a further 40 million from large retail concerns 42. In addition to property and vehicles, he amassed more than US$ 2.7 million. The breach cost TJX Inc. alone US$ 200 million, and is said to have affected 46 million of their customers 43.

An Evolving Threat

The threat of cybercrime is subject to constant evolution in line with technological developments. The increasing mobility and outsourcing of data poses new risks to the public and private sectors and to end users. Mobile devices are increasingly the primary tools for connecting to the Internet, and are being marketed in large numbers to areas of the world that have previously enjoyed limited Internet connectivity. The “always on” culture fostered by mobile devices ensures that potential victims are online, and data exposed, for a longer amount of time, while the mass distribution of corporate smartphones and the increasingly porous boundary between individuals’ professional and private lives has resulted in cybercriminal exploits against these devices in an attempt to access data that mirrors information on corporate servers. One recent study cites a 42% increase in mobile operating system vulnerabilities in 2010 44.

Widespread availability of mobile processing power and Internet connectivity means that crime also is more mobile: this has brought greater efficiency to certain types of serious and organized criminality, such as the distribution of child abuse images produced by travelling sex offenders. Coupled with substantial increases in the amount of data and hardware to be analysed, this improvement in criminal productivity and operational speed presents a clear challenge to the current capability of law enforcement and Internet Service Providers (ISPs) alike.

Globalization, cost-cutting exercises and – in some cases – concern for the environment mean that larger organizations are increasingly moving towards deploying remote workforces. Technological developments have accelerated this trend, which threatens data security as much as it improves lifestyles, productivity and air quality.

Individuals and organizations are increasingly opting to outsource their data storage to third parties, as a cost-saving option and to enable remote access to data from any location. Data stored in “the cloud” is not only accessible to all authorized users, but also vulnerable to external attacks. While corporate-owned servers are evidently themselves subject to hacking, the lack of direct control entailed by cloud computing raises concerns about whether security measures will be properly enforced by the storage provider, or understood by the data owner or customer. In the cloud computing scenario, for example, the personal and financial data of retail customers could be stored on the Internet by a third party without that customer’s knowledge, and without the direct control of the organization that has processed the data. The key to cloud computing’s success and long-term uptake will be whether the convenience of remote access will be matched by confidence in its security provisions.

At the same time, individuals are increasingly using publicly available cloud storage, which is cost effective (in many cases free of charge) and often encrypted. Offenders seeking to evade law enforcement, such as child abuse image distributors and possessors, may well choose this storage option over personal computer hard drives, thereby requiring law enforcement to seek evidence in the cloud – from one or more of a large number of current providers in a variety of jurisdictions – as well as seizing a suspect’s physical storage.

In addition, the expansion of remote working now demands a fully functioning replica of the office environment in which employees can interact directly in order to complete tasks as if they were physically present in the same location, rather than bound by the inherent delay of message exchange. Under-adopted functionalities such as video/avatar conferencing and collaborative document editing will finally come into their own, and arguably will be a key to the success of remote working. As with the majority of Internet mediated technology, the level of encryption protecting these spaces from data theft and malicious software distribution is likely to be determined in the short-term by the speed with which users will need to access them and, ultimately, the time organizations are prepared to lose waiting for files to decrypt.

Social and Economic Impact

Underreporting is an obstacle to appreciating the true scale and nature of cybercrime. Individuals may fail to report because they simply do not notice the offence taking place (e.g. in the case of infection by malicious software), because amounts lost to fraud may be considered too small to be of interest to police, or because (especially in the case of mass marketing fraud) they may be subject to blackmail or threats of violence. Commercial organizations, particularly those in the financial and retail sectors, often opt to absorb the cost of data breaches rather than exposing themselves to reputational damage or committing themselves to the expense of an investigation. Accordingly, one recent study estimates that just 30% of organizations report all data breaches and losses suffered to the authorities 45.

Nevertheless, isolated estimates give an indication of the economic impact of Internet facilitated criminality. These include the average cost of data breaches, which ranges from US$ 1.2 million per organization to US$ 7.2 million per incident in the US 46, a loss of more than US$ 100 per citizen to mass marketing fraud alone in some countries 47, and a global corporate loss of US$ 1 trillion each year to cybercrime 48. Recent hacktivist attacks on payment processors and retail concerns illustrate the impact of breaches on public confidence, with, for instance, shares in Sony dropping 5% as a result of hacking on the Playstation network.

In addition, unquantifiable emotional damage is suffered by the victims of Internet mediated scams, many of whom are vulnerable as a result of a lack of experience of online culture. Given the role of the Internet as a force multiplier, its misuse in, for instance, the sexual exploitation of children and victims of human trafficking may reasonably be said to prolong the suffering of some members of society.

Moreover, as the world’s critical infrastructure becomes increasingly dependent on Internet communication and electronic systems, new hybrid threats have emerged that target power supplies and industrial facilities, the most notorious of which has been the Stuxnet worm, identified in 2010. Looking ahead, the interdependency of communications technology and critical infrastructure is sure to intensify, thereby making it imperative that those responsible work to minimize vulnerabilities.

Policy Response – Collective Enforcement

The global reach and scale of cybercrime presents significant challenges to current law enforcement resources and skills. 

Law enforcement agencies around the world are already joining forces to fight different forms of Internet-facilitated crime. The Virtual Global Taskforce (VGT), for example, brings together the Australian Federal Police, UK Child Exploitation and Online Protection Centre, the Italian Postal and Communications Police Service, the Royal Canadian Mounted Police, the US Department of Homeland Security, the Ministry of the Interior for the United Arab Emirates, the New Zealand Police, EUROPOL and INTERPOL, to deliver initiatives that disrupt and deter paedophiles from abusing children online. Its international reach enables law enforcement not only to provide a round-the-clock investigative response, but also to develop concerted awareness-raising programmes to address the risk taking-behaviour of young Internet users.

Meanwhile, industry actors are doing their best to protect their critical infrastructure without necessarily making progress against the wider cyber threat. Given the plethora of stakeholders, global industry consortia for Internet security are now an urgent requirement.

Above all, public-private synergies are needed to improve intelligence gathering, analysis, research and development and capacity building, so that the various actors can make the most effective use of their resources, recognizing that successfully combating criminal misuse of the Internet will require the active engagement of all stakeholders, from governments and ISPs to end users. This is not a question of greater regulation, but of harnessing information from disparate sources to better prevent criminal access to the personal data and processing power of the world’s citizens. In addition, it is hoped that a collaborative response will assist both the public and private sectors in meeting the challenge of cybercriminal activity in jurisdictions with which, until now, judicial cooperation has been less than effective.

 

Joining Forces

A prerequisite for effective cybercrime investigation is access to the relevant information. It is therefore essential to develop the exchange of information about cybercrime between all relevant actors.

From an operational perspective, botnet task forces have already proved to be highly effective examples of cross-sectoral working, as illustrated by the dismantling in 2010 of the Waledac and Mariposa botnets. In the case of the former, joint action by law enforcement, Microsoft, Symantec, the University of Washington and the Shadowserver foundation resulted in the successful takedown of its command and control infrastructure. The latter comprised nearly 13 million infected machines in over 190 countries, including those of half of all Fortune 1000 firms. A team consisting of Spanish and US law enforcement, an Internet security firm, US Defense Intelligence and a US university succeeded in shutting down the botnet, and the investigation also resulted in the arrest of its command and control operators.

Gathering such information for investigative purposes (as performed by industry and law enforcement) also provides opportunities for wider analysis of the cybercrime phenomenon (by industry, law enforcement and academia), in order to identify and understand the modi operandi used by cybercriminals and the underground economy that supports them. In the longer term, analysis of aggregated data should also have the aim of understanding criminal career progression, with a view to developing interventions that prevent young hackers from engaging in sustained cybercriminal activity.

These requirements highlight the need for an online community platform to facilitate information sharing between law enforcement, industry and academia. Such a platform should include a forum for best practices and training materials, and for the development of crime reduction measures by industry and law enforcement. But it should also go further, by providing for the real-time exchange of information between privileged users on cybercrime threats, for example botnets, as they happen.

Some such platforms already exist, but they are the preserve of Internet security managers in private companies. The concept should be adapted for use by law enforcement and other relevant actors.

A pilot project with a limited number of actors – selected representatives of law enforcement, industry and academia – would allow for the technical and content-related aspects to be developed and a “proof of concept” to be prepared before the project is rolled out to a wider user group.

As the globalization of markets further accelerates – with an increasing number of international virtual economies – there will be more data to compromise, with higher impact, particularly for those developing economies that will depend on connectivity to thrive.

Given the continued development and uptake of Internet technology, the time is now ripe to step up the fight against cybercrime. The success in individual instances of botnet task forces, international law enforcement consortia and public involvement in protecting against malicious software infection paves the way for more concerted global initiatives that represent the interests of all stakeholders in Internet security, and empowers them to assume collective responsibility for preventing and disrupting criminal misuse of this now essential infrastructure.

The Global Agenda Council on Organized Crime therefore urges all stakeholders to unite in driving forward the establishment of a multidisciplinary online platform. This platform should:

  • Exploit synergies between the Global Agenda Councils on Organized Crime and Internet Security, and with the World Economic Forum’s Risk Response Network
  • Serve as a first step towards greater levels of collaboration between the public and private sectors
  • Provide opportunities for mapping and measuring cybercrime
  • Encourage the exchange of information on trends in cybercriminal activity and investigative good practice
  • Accelerate operational responses to criminal activity
  • Enable the crime-proofing of digital technologies and services in development
  • Ultimately foster new initiatives for crime disruption and prevention

Conclusion

Building on the work by the World Economic Forum’s Global Agenda Council on Illicit Trade, the Organized Crime Council will focus on the organizations behind these criminal transactions. Among our priorities:

  • Sophisticated crime syndicates and networks, illicit enterprises, and criminal conspiracies
  • Regional mapping, to provide a look at what types of organizations are most active around the world
  • Case studies of multipurpose criminal infiltration (investments, money laundering) in legitimate business (affected industries real estate, banking and advanced sectors such as the Internet and new technologies)
  • The criminal services industry that supports organized crime, including use of attorneys, front companies and financial managers
  • Understanding how organized crime contributes to global risk
  • Mapping the impact of organized crime on key global trends (shortage of resources, population growth, continued economic uncertainty and economic disparity)
  • Crime proofing strategies and standards, based on best practices around the world
  • Raising awareness of the impact of organized crime on ordinary people and society at large, through policy reports, news media coverage, and public interaction
  • And ensuring that policies promoted by the Council do not destroy lives or impair civil liberties unduly in the name of fighting organized crime

Ultimately, we see the role of the Forum’s Organized Crime Council as catalysing investment in the rule of law, in proactive law enforcement strategies, and in building public support for crime-proofing techniques that protect society and improve the world. Effective strategies put into place today – by businesses, communities and governments – can have a major effect in minimizing the impact of criminal organizations, putting the brakes on a 21st century organized crime that is increasingly multinational, network-based, capable and deadly.

Members of the Global Agenda Council on Organized Crime 2010-11

Chair

Robert Wainwright, Director, Europol (European Police), The Hague

Vice-Chair

Louise Shelley, University Professor, School of Public Policy, George Mason University, USA

 Members

Martin Arévalo de Léon, Representative and Programme Officer, Haiti, Interpeace, Guatemala

Peter Gastrow, Senior Fellow and Director, Programs, International Peace Institute (IPI), USA

Maria Grazia Giammarinaro, Special Representative and Coordinator, Combating Trafficking in Human Beings, Organization for Security and Cooperation in Europe (OSCE), Vienna

David E. Kaplan, Editor at large, Organized Crime and Corruption Reporting Project, USA

Michael J. Keelty, Commissioner, Australian Federal Police (2001-09), Australia

Michael Levi, Professor, Crime, Security and Justice Research Group, Cardiff University, United Kingdom

Kuniko Ozaki, Judge, International Criminal Court, The Hague

Hernan Penafiel, Head, Teaching, Universidad Mayor Law School, Chile

Paul Cristian Radu, Journalist and Editor, Romanian Center for Investigative Journalism (RCIJ), Romania

John Sandage, Deputy Director and Officer in Charge, Division for Treaty Affairs, United Nations Office on Drugs and Crime (UNODC), Vienna

Ernesto U. Savona, Director, Transcrime, Italy

 

 

 

 

The views expressed here emerged from the Council meetings and interactions and do not necessarily reflect the views of the World Economic Forum or those of all the Council MembersFor more information on projects initiated by the Global Agenda Council on Organized Crime, please contact Miguel Perez at [email protected]