Organized Crime Infiltration in the Supply Chain

Much of the recent debate on organized crime infiltration in the business world has focused on the financial strength acquired by the mafia and other similar groups since the 2008 financial crisis. Clearly the liquidity accumulated by the world’s mafia and its ready availability for cash-strapped companies and individuals alike in the long recession that has hit the developed world in the past few years is a major problem. However, we should not lose sight of how this liquidity is generated and what other implications this profit generation process may have for the business world including the impact on the supply chain.

Obviously some of the proceeds of organized crime groups come from illegal activities that are both well-known and readily identifiable, such as drugs, prostitution, and racketeering. An increasingly important part, however, emerges from more discreet activities such as infiltrating the supply chain of legitimate businesses.
Legambiente, the Italian League for the Environment, set up an Observatory on environmental crimes in Italy in 1994. Each year, the Observatory publishes a report on crimes affecting the environment covering a number of areas, such as construction, waste, arson, and archaeological crime. According to the 2013 Ecomafia report, the turnover of environment-related crimes for Italian organized crime groups has reached €16.7 billion and the Italian local administrations dissolved by Presidential Decree due to mafia infiltration has risen from 6 to 25.
These crimes do not affect Italy alone. The dumping of toxic waste in Somalia by Italian organized crime gangs has had an impact on the local population, international troops and, following the 2004 tsunami, on many distant shores. Aside from the obvious and disastrous health hazard caused by the dumping, this “trade” is widely alleged to be connected to the piracy of recent years: organized crime groups supply Somali warlords with arms in return for permission to dump waste.

If toxic waste dumping affects a small section of the business community, other activities have broader ramifications. The Italian authorities seized assets worth €1.3 billion from Sicilian businessman Vito Nicastri last April. Nicastri, dubbed by the Italian media as “Lord of the Wind,” is alleged to be a mafia frontman in the renewable energy sector. Italy’s favorable subsidy regime led many investors to seek opportunities in Italian renewables over the past decade. Companies, individual investors, and many private equity funds who dealt with Nicastri are now fighting seizures and the inevitable reputational damage that has ensued. Many of those affected are foreign investors who failed to conduct appropriate due diligence.
Organized crime infiltration in the construction industry is not only an Italian problem. It is well-known that major efforts have been undertaken in several other countries including the United States to curb the power of the “families.”

Construction is another area traditionally associated with the mob. Fear of infiltration in the reconstruction efforts following the earthquakes that hit the region of Emilia Romagna last year has led the authorities to create a “white list” of construction companies. Although adherence to the list is voluntary, only white list companies can bid for public contracts in the region. The aim here is not only to protect the region from infiltration, but also to protect workers by ensuring that proper contracts and health and safety regulations are adhered to.

Organized crime infiltration in the construction industry is not only an Italian problem. It is well-known that major efforts have been undertaken in several other countries including the United States to curb the power of the “families.” Evidence emerging from Quebec’s Charbonneau commission of inquiry on the awarding and management of public contracts in the construction industry is just one recent example suggesting that organized crime infiltration is still alive and well in North America. The public inquiry is still ongoing, but many allegations about illegal political financing, bid-rigging, collusion, and mafia ties in Quebec’s construction industry have already come to light.

Transport is another major area where infiltration occurs as the freight business offers synergies with drug trafficking and other forms of illegal cross-border trade. Dutch freight and delivery group TNT Express fell victim to the Calabrian” 'Ndrangheta and Milan magistrates had to take temporary control of a number of its branches in Lombardy in 2011. So, even large and reputable multinationals are not beyond infiltration.

Energy, construction, and transport are important examples of areas in which company supply chains can become polluted. Any company may need to build a new plant, repair its buildings, transport its goods, or decide to diversify its portfolio into renewables. The threat is increasing as clans diversify into the legal economies of developed countries. And the perils for businesses and investors are also on the rise as health and safety, anti-bribery and corruption legislation may implicate not only the supplier but the company awarding the contract as well.

But a solution is available: applying appropriate due diligence checks can go a long way to mitigate the risk. Supply chains can involve thousands of third parties, so a methodical approach should be applied to segment risk and prioritize red flag situations which may require deeper analysis. Third party risk assessment tools use algorithms to quickly process risk profiles, enabling companies to identify which relationships might pose the greatest threat to their organization. Armed with this information, companies are better able to prioritize future due diligence efforts, for example checking links to known criminals. Organized crime generally moves in families, and many organizations, from police forces to observatories and charities, will publicize the criminals’ names and names of known affiliates and sectors of operation. Reconstructing family ties is a key exercise in attempting to determine links with organized crime. Legambiente identified 34,120 crimes in its last Ecomafia report, these were down to 302 clans—a significant but much more manageable number of repeat offenders to look out for.

Learn more about fraud statistics and trends in Kroll’s annual Global Fraud Report.