In Russia, where bureaucratic markets have been legalized, power and influence is highly monopolized, even by socialist “standards.” Liberalization and privatization of prices and trade have led to a cutthroat battle for redistribution of and control over property, resources, and allocation channels, and also have fed economic crime.
Economic crime is hardly a new phenomenon. As long as people have exchanged goods, they have cheated. With the rapid development of technology and communications and the explosive increase in financial interactions between people in the second part of the twentieth century, economic crime has become a highly diversified and fast-growing industry. It is impossible to point to crimes that are specific to countries currently in transition, but some particular crimes flourish in transition, some could not be committed during socialism, and others decline when reforms begin. Illegal economic activities can be grouped in the following broad categories:
• Corruption—abusing power related to a particular job or position to gain unlawfully wealth or influence.
• Fraud—financial gain obtained through loopholes in regulations, manipulation, or exploitation of public or personal trust (smuggling, illegal operations with hard currency, falsified bankruptcies, forgery, falsified credits, illegal capital flight, and so on).
• Theft and extortion (racket)—direct (physical) intervention of criminals; expropriation of property or the property rights of others.
• Tax evasion. This category is beyond the scope of the this aticle. (Russia’s tax police in the first half of 1996 uncovered about 12,000 cases of evasion resulting in 3,100 criminal cases, raising 13 trillion rubles for state coffers, and lodged penalties that will bring in another 9.3 trillion rubles, Interfax News Agency reported. Compared with previous years, the numbers reveal a change in government policies on tax evasion. During 1994 only 1,500 tax offenses were filed in court, of which only 20 cases were considered as criminal and only 10 saw sentences pronounced. In 1995, of 4,229 tax evasion cases, 1,611 were considered criminal and 312 evaders were sent to court.) There is a crucial difference between the “second” economy and economic crime. The “second” economy is a productive sector guilty of one main crime—tax evasion; economic crime is only a redistributor of wealth.
In the Soviet Union theft of socialist property, corruption, and illegal hard currency operations were the major economic crimes. Large-scale theft of socialist property and massive fraud involving hard currency could be, and were, punished by death. (William A. Clark analyzed trials of Soviet government officials and enterprise managers charged with economic crimes, as reported by the Soviet press between 1965 and 1990. Of the 849 officials tried, about 500 received jail sentences, with an average of eleven years jail for embezzling public property and eight for bribery. Thirty-two persons were sentenced to be executed.)
In 1994, particularly, the Russian public discovered how much damage can be done by investment fraud and pyramids. Since the collapse of the Soviet Union new business rules, including the opportunity to establish limited liability companies, have opened a wide gate for fraud and other “market type” economic, white-collar crimes. Crime has become a highly profitable business in Russia. From an international perspective, the Russian criminal economy is extremely efficient. The sudden explosion of economic crimes has caught the Russian public and the government off guard. According to some estimates, the 1994 worldwide average per capita income from economic crime reached $100. The corresponding figure for Russia, however, was $130, assuming 38.4 trillion rubles in annual crime-related income (box 1). In Ukraine revenue from the infamous black economy reached $1.3 billion in 1994, or “only” $25.20 per capita.
A high degree of the criminality in the transition economies was brought about by the privatization and marketization processes. These crimes are not specific to transition economies but rather are related to the process of redistributing property rights. In Great Britain, for example, the Thatcherite promotion of popular capitalism during the 1980s distributed shares of denationalized industries to a large number of first-time investors. Despite the best intentions of policymakers and special legislation to protect investors (absent in Russia when privatization started), many small investors were tricked into selling their shares at unfairly low prices to those who flocked to London to take advantage of the new, deregulated financial markets.
Economic crime is mobile.