Broken Borders

Last week a British sting operation code-named Bluesky busted a Pan-European ring that, according to Scotland Yard, was allegedly responsible for smuggling as many as 200,000 people into the United Kingdom during the last few years. In August U.S. officials dismantled a gang they accused of trafficking everything from drugs to forged postal stamps to millions of "supernotes"--almost-perfect fake currency--as well as rocket launchers and counterfeit cigarettes into the United States. Two weeks ago a diverse group of CEOs of major multinationals including Nestle, Microsoft and GlaxoSmithKline announced that they were pooling efforts to combat the illegal trade in counterfeit goods, which costs the world economy an estimated $630 billion per year.

Yet what each bust or high-profile initiative really speaks to is the exponential growth in illicit trade across the world. While governments have spent billions since 9/11 to fortify their borders against everything from potential terrorists to illegal drugs and nuclear materials, the size and sophistication of those trafficking operations that have been rolled up has continued to increase. A study released earlier this year by the Washington-based Institute for International Economics found that despite the cumbersome laws that many governments enacted after September 11, money launderers face only a 5 percent chance of being convicted in any given year. (Asked recently how much harder it was to move $50 million secretly now than 10 years ago, a Swiss banker smiled and replied: "The main difference is that now I charge more.") A report last month from the Pew Hispanic Center estimated that the number of illegal immigrants entering the United States since 9/11 has stayed roughly the same since the 1990s--about half a million per year. The trade in small arms has grown into a $4 billion-a-year industry, fueling insurgencies and guerrilla wars from Iraq to Congo.

This is more than a security issue: the dark trades, driven by the same globalizing forces responsible for the surge in international commerce over the last two decades, now threaten the smooth functioning of the legitimate world. Smuggling revenues are spectacular. From 1992 to 2002 the total size of the global drug trade more than dou--bled to $900 billion annually. Fifteen years ago the trade in counterfeit goods was almost insignificant; today the bootleg-CD business alone is worth $4.6 billion a year. The illicit arms trade accounts for an additional $10 billion. So does cross-border human trafficking. Stolen art is worth $3 billion each year. An illegal trade in toxic waste is estimated at $12 billion.

Money laundering offers perhaps the best glimpse of the total size of the world's illicit economy. While global trade has roughly doubled since 1990, from the $5 trillion to the $10 trillion range, the amount of money being laundered worldwide has grown at least tenfold --to nearly $1.5 trillion in some estimates. Since illicit trades can thrive only with government complicity, this means that traffickers are investing huge sums to gain political influence, and not just in their home countries. Their operations have become truly multinational, weaving together global networks of political allies and generating profits on an unprecedented scale. Indeed, the sheer size of the problem is forcing entire industries--from shipping to software, banking to movies--to rethink their operations.

Like those businesses, the trafficking boom owes much to globalization. In the last decade revolutionary changes in technology and politics have reduced the obstacles that distance, borders and government policies had imposed on the movement of goods, money and people. In the 1990s the Internet made international coordination almost costless, and the only price that dropped faster than shipping a cargo container from Shanghai to Los Angeles was the cost of a phone call across the world. Meanwhile, governments everywhere lowered tariffs, eliminated currency controls and opened their economies to foreign traders and investors. All this has not only made the traffickers' job easier, but allowed them to internationalize. Chinese counterfeiters now contract with Cameroonian people-smugglers to have illegal migrants sell fake Gucci bags in Paris or New York. Ukrainian criminals trade guns to their counterparts in Colombia in exchange for cocaine.

Meanwhile as the revenues of the traffickers have soared, the law-enforcement agencies fighting them have seen their budgets dwindle as a result of widespread attempts to downsize government. In 2004 Interpol's entire budget was only $50 million--the cost of just one of the fast ships or planes routinely used and abandoned by traffickers. And other priorities have complicated efforts to combat smuggling. Last week an audit showed that the number of criminal investigations opened by the FBI has dropped by nearly half in the last five years, a reflection of the bureau's shift toward stopping terrorism. In 2004 the agency assigned more than 2,000 fewer agents to criminal matters than the year before.

All these changes have made more acute a longstanding asymmetry: national borders are a boon for traffickers and a nightmare for law-enforcement agencies. Borders allow for the price differences that yield rich profits to smugglers with the ability to transport goods across them. (While in 2004 the average annual income of a poppy farmer in Afghanistan was just $1,700, a kilo of heroin fetched more than $39,000 in the United Kingdom.) Borders also provide a convenient legal shield for smugglers once they cross over to another jurisdiction. Governments have a very hard time collaborating with other governments; their natural habitat is inside their national borders. In contrast, traffickers are most effective when operating across borders--which makes them in many ways better suited to today's world.

Indeed, while some smugglers still deal in only one product--cocaine, say, or human kidneys--much of the power to dispatch goods and set prices now rests with agents, brokers, transporters and those who control the bottlenecks where profits are highest. Crime organizations in northern Mexico have long since expanded their activities from drug trafficking (which they frequently subcontract to smaller players) into new "profit centers." Their business model involves opportunistic arrangements whereby they support Ukrainian, Chinese or Middle Eastern traffickers in the smuggling of various items (including human beings), using their routes into the United States. Drugs remain a large part of the picture, but the real prize--the core competitive advantage--is the ability to sneak goods and people across the border.

Of course, smuggling and international crime have always existed. But three things make this new breed of trafficking far more dangerous than ever before. First, the threat posed by the goods being smuggled has increased exponentially: think only of the black market in nuclear know-how run by Pakistani scientist AQ Khan, which stretched from North Korea to Libya, or the estimated 300 tons of unsecured nuclear material in the former Soviet Union. The movement of people is one area where authorities have recognized a threat and taken strong measures to confront it--yet hardly made a dent in the flood of migrants (accompanying story).

Second, companies are not only losing revenues to smugglers, copycats and fraudsters but also facing added costs--from protecting intellectual property to complying with cumbersome new regulations for shipping or international fund transfers. According to one estimate, adhering to new money-laundering laws now accounts for 10 percent of private banks' costs. And as the criminals reinvest their profits in legitimate companies, businesses confront them aboveground, as it were--as competitors, suppliers, distributors, bankers and perhaps even partners.

Finally, along with diversifying, illicit traders have cultivated political ties--and the more unstable and dysfunctional the country the better. Attempts by criminals to infiltrate governments are as old as governments themselves, of course. But never have they had as many riches with which to buy cooperation, distraction and shelter. Last year the Lithuanian Parliament impeached President Ronaldas Paksas for taking funds from a Russian businessman with alleged ties to Russian organized crime; provincial officials from Afghanistan to Mexico have been implicated in the drug trade. It is no longer possible to understand some of the current behaviors of China or Russia or anticipate their likely evolution without considering the enormous influence that illicit traders have gained at the highest levels of their central and provincial governments. Beijing, for instance, is not likely to crack down on the country's massive counterfeiting industry as long as military and Party officials continue to have a hand in the trade. The same is true of many countries in Africa, the Balkans, Eastern Europe and Latin America.

We are, in fact, headed toward a confrontation between geopolitical black holes and bright spots. In astrophysics, a black hole is an area of the universe where traditional laws of physics don't apply. In geopolitics, it is one where traditional concepts of international law and politics don't. In such places one cannot assume that a single authority is in charge; that that authority governs a clearly delimited territory; that the government is the wealthiest, most resource-rich entity in a particular country, or that it has a monopoly on the use of force or on the ability to enter into international political alliances. In Afghanistan, where the central government cannot get electricity to hundreds of villages, smugglers can ship heroin to the streets of London in 48 hours.

Bright spots, by contrast, are places where governments function, people respect the authority of police and judges, and are willing to abide by laws and sanction offenders. There are many such places. But the idea that they can insulate themselves from the black holes is a delusion. There is no fortification strong enough to prevent borders from leaking; and you need not travel far to peer into a geopolitical black hole. It might be in Manhattan, where an Armenian trader recently offered to broker for undercover agents the purchase of radioactive materials suited--he pointed out--for a subway attack. It might be the Pakistani suburbs of Leeds. It might be the same offshore center where your money is stored.

Are governments doomed in this struggle? Only if we stick to the strategies of the past. Especially since 9/11, there have been remarkable advances in technologies for surveillance, tracing, detection and the identification of products and people. Some are moving toward fast adoption, like biometric passports or the ubiquitous closed-circuit cameras that record us in public places. Others raise thorny issues of privacy and civil liberties that each society must work through. Business, too, must realize that technology that makes copying too costly or even impossible will increasingly become the only way to protect one's products against counterfeiting. In this sense investments in design and engineering will yield far higher returns than the millions currently showered upon lawyers and lobbyists.

But technology won't be enough unless we rethink government at the same time. Government agencies are hampered by functional, geographical and jurisdictional divisions. Database experts, for instance, often work for the financial investigation unit. The lawyers fight counterfeiting work for commerce ministries. And so on. It's hard enough to foster communication between these hierarchical, process-driven cylinders. It's much harder when several countries are involved. Moreover, efforts are doomed to fail if they continue to be driven by the same political attitudes and government policies that treat global crime as a secondary threat that has always existed.

On the other hand, we also ask government to do too much, to spend too many resources fighting things like soft drugs, where decriminalization would drastically shrink the value of trafficking and may well lower the social harm of the trade. Voters hold the power to sanction politicians who stick to failed strategies, and to reward those with the courage to speak openly about trafficking. But they tend not to do so. Seeing illicit trade primarily in moral terms of right and wrong--the way we've long dealt with it in courts, churches and classrooms--no longer works, if it ever did. "I have no doubt that what we are doing on the war on drugs is not working," says one U.S. senator. "But I also have no doubt that if I say it and come out in favor of legalizing some drugs... I will lose my next election."

Combating trafficking starts with the recognition that hypocrisy reigns in the way we talk about all these trades. It's common to denounce illegal immigrants while benefiting from industries for whom they are a lifeline to profitability. We decry the evils of drugs and complain loudly about infringed copyrights, but do little to staunch the demand that fuels both drugrunning and counterfeiting. Instead we should be regulating those trades we can live with and devoting our full resources to stopping the others--the traffic in small arms, for instance, or in kidnapped children. Only when we realize that illicit trade is about high profits, not low morals, will we start to beat back the scourge.