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OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM Partial draft – do not cite or quote OUTSOURCING AND INSOURCING CRIME: THE POLITICAL ECONOMY OF GLOBALIZED CRIMINAL ACTIVITY TOMER BROUDE* & DORON TEICHMAN** “If displacement is happening then I would say that's all the more reason why other areas should take on this model. Let's drive people out to Lincolnshire and into the sea.”1 ABSTRACT This article presents a novel theory of the political economy surrounding the regulation of crimes that can travel across international borders. Profit-driven crime (such as racketeering, patent and copyright infringement, money laundering, human trafficking and the production of and trade in illegal narcotics) responds – much like other forms of economic activity – to local criminal regulation, by shifting to the territorial jurisdictions in which it incurs lower expected sanctions, making it most profitable for criminals. We distinguish between two types of crimes. The first are “desirable crimes” – these are crimes that are beneficial from the view point of jurisdictions. The second are “undesirable crimes” – these are crimes that harm jurisdictions. Analyzing an array of examples we show how jurisdictions attempt to attract desirable crimes and repel undesirable crimes. This analysis provides * Assistant Professor, Faculty of Law and Department of International Relations, Hebrew University of Jerusalem; BA (Int. Rel.), LLB, Hebrew University of Jerusalem; SJD, University of Toronto Faculty of Law. ** Assistant Professor, Faculty of Law, Hebrew University of Jerusalem; BA (Econ.), LLB, Tel-Aviv University; LLM, JSD, University of Michigan. 1 City's Blitz is Pushing Crime into the County, NOTTINGHAM EVENING POST 10, July 3rd, 2007 (quoting Alan Given, chief executive of the Crime and Drugs Partnership). 1 OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME important principles for the design of international criminal regulation regimes, which must address not only the negative transnational externalities of crime, but also neutralize the benefits states derive from criminal activity in their territory. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME I. INTRODUCTION Globalization is on the rise. The last few decades have marked the creation of an increasingly integrated global economy. This process has been driven by dramatic reductions in transaction costs that have helped bring together local markets. Technological advances such as wireless telecommunications and the Internet have connected buyers and sellers of goods and services across the planet through transactions that were not even feasible, let alone cost- effective, as little as a decade ago. No less importantly, economic globalization has been facilitated by the systematic removal of regulatory barriers to international trade. At the forefront of international economic liberalization, the creation of the World Trade Organization (WTO)2 in 1995 extended multilateral trading rules beyond trade in goods to the transnational provision of services, the protection of intellectual property rights, and technical and health-related standards.3 Hundreds of Regional Trade Agreements (RTAs) that reduce barriers to trade beyond the WTO now span the globe,4 complemented by an even greater number of international investment protection agreements (Bilateral Investment Treaties (BITs)).5 In the shadow of these economic developments, however, the same period has also witnessed the rise of transnational crime 2 See Marrakesh Agreement Establishing the World Trade Organization, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, Apr. 15, 1994, Legal Instruments—Results of the Uruguay Round, 33 I.L.M. 1125, 1144–53 (1994). 3 For analysis of the political economy of the WTO see KYLE BAGWELL & ROBERT W. STAIGER, THE ECONOMICS OF THE WORLD TRADING SYSTEM (2005); and MICHAEL J. TREBILCOCK & ROBERT L. HOWSE, THE REGULATION OF INTERNATIONAL TRADE, (3rd ed., 2005). 4 For a report on the proliferation of RTAs, see Jo-ann A. Crawford and Roberto V. Fiorentino The Changing Landscape of Regional Trade Agreements, WTO Discussion Paper No 8, 2005, available at http://www.wto.org/english/res_e/booksp_e/discussion_papers8_e.pdf. 5 On the increase in the number of BITs over the last few decades and analyses of their economic effects, see Eric Neumayer and Laura Spess, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries 33 WORLD DEVELOPMENT 1567 (2005); and Zachary Elkins, Andrew T. Guzman and Beth A. Simmons, Competing for Capital: The Difussion of Bilateral Investment Treaties, 1960-2000, 60 INTERNATIONAL ORGANIZATION 811 (2006). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME (roughly defined as serious crime whose perpetration and effects occur in more than one state)6 as a source of grave concern around the globe. Drug smuggling, arms trading, human trafficking, money laundering, wholesale intellectual property rights’ infringement – these and other illicit activities7 have flourished due to the advances of technology and the freer movement of goods, services, money and people that characterizes the modern world, just as legal international business transactions have. There are no doubt direct links between technological progress and economic liberalization, on one hand, and the growth of transnational crime and the anxiety that comes with it, on the other hand. For example, illegal child pornography became easier to distribute via the Internet,8 and the 6 Art. 3(2) of the United Nations Convention Against Transnational Organized Crime, G.A. Res. 25, U.N. GAOR, 55th Sess., Supp. No. 49, U.N. Doc. A/45/49 (adopted 15 November, 2000, entered into force 29 September, 2003) (the “CATOC”) defines an offense as “transnational” if: “(a) It is committed in more than one State; (b) It is committed in one State but a substantial part of its preparation, planning, direction or control takes place in another State; (c) It is committed in one State but involves an organized criminal group that engages in criminal activities in more than one State; or (d) It is committed in one State but has substantial effects in another State”. The juridical significance of this definition is limited to the purpose of delimiting the CATOC’s scope of application; the relevance of its different elements to our analysis varies, but it is in any case a useful starting point. 7 The CATOC does not list the types of crimes that may be regarded as “transnational”, generally applying to serious crimes “punishable by a maximum deprivation of liberty of at least four years or a more serious penalty” (art. 2(b) CATOC). The Fourth United Nations Survey of Crime Trends and Operations of Criminal Justice Systems (UN Doc. A/CONF.169/15/Add. 1, 4 April, 1995) listed the following categories of transnational crime: money laundering, terrorist activities, theft of art and cultural objects, theft of intellectual property, illicit trafficking in arms, aircraft hijacking, se piracy, land hijacking, insurance fraud, computer crime, environmental crime, trafficking in persons, trade in human body parts, illicit drug trafficking, fraudulent bankruptcy, infiltration of legal business, corruption and bribery of public officials or party officials and elected representatives, and other offenses commited by organized criminal groups. 8 See, e.g., Patrick Forde and Andrew Patterson, Paedophile Internet Activity, Australian Institute of Criminology, Trends and Issues in Crime and Criminal Justice, No. 97, November 1998, available at http://www.hawaii.edu/hivandaids/Paedophile%20Internet%20Activity.pdf; and Anna Grant, Fiona David and Peter Grabosky, Child Pornography in the Digital Age, 3(4) TRANSNATIONAL ORGANIZED CRIME 171 (1997) (two early studies charting the transformation of child pornography by new technologies, with an emphasis on the transnational dimension). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME removal of barriers to international trade in goods and the free flow of funds may have facilitated cross-border trafficking in illicit drugs.9 As such, transnational crime is indeed “the dark side of globalization”,10 and it is not surprising that national governments and law enforcement agencies worldwide have increasingly turned to international law and cooperation in their efforts to curb it, considerably augmenting the international legal field of global crime control.11 Moreover, as leading transnational crime experts Andreas and Nadelmann note in a recent book, it is an all too common generalization to view “the growth of global crime control as simply a natural and predictable response to the explosive growth of transnational crime”.12 The interaction between globalization, transnational crime and the emergence of global crime control is much more nuanced and complex in its historical, political and economic dimensions. For example, the rise of “transnational 9 See, e.g., Kal Raustiala, Free Trade Pact a Boon to Drug Dealers, UCLA Today, 22 May, 2001, available at http://www.today.ucla.edu/2001/010522freetrade.html (suggesting that economic liberalization can fuel international trade in drugs). 10 See Melvin Levitsky, The Dark Side of Globalization, 5 INTERNATIONAL STUDIES REVIEW 253 (2003) (book review of TRANSNATIONAL ORGANIZED CRIME AND INTERNATIONAL SECURITY: BUSINESS AS USUAL (Mats Berdal and Monica Serrano, eds. (2002)). Arguably, there are other “dark sides” to globalization, such as the negative distributional effects of global trade liberalization; see Tomer Broude, The Rule(s) of Trade and the Rhetos of Development: Reflections on the Functional and Aspirational Legitimacy of the World Trade Organization, 45 COL. J. TRANS. L. 221 (2006). 11 Global crime control is not an entirely new area - the International Criminal Police Organization, better know as Interpol, dates back to 1923, but was ineffective during World War II when it fell under Nazi control, remaining moribund until its re-establishment in 1956 (see http://www.interpol.int/Public/icpo/governance/sg/history.asp). Moreover, international governmenal activity in the field has gained considerable momentum since the 1990s, as attested by the young age of the UNCATOC and other international arrangements such as the “40 Recommendations” of the Financial Action Task Force on Money Laundering (FATF), originally agreed upon in 1990, but significantly updated in 2003 and 2004 (see http://www.fatf- gafi.org/dataoecd/7/40/34849567.PDF; for an evaluation of the FATF, see Jackie Johnson and Y.C. Desmond Lim, Money Laundering: Has the Financial Action Task Force Made a Difference?, 10(1) J. FIN. CRIME 7 (2003). 12 See PETER ANDREAS AND MARTIN NADELMANN, POLICING THE GLOBE: CRIMINALIZATION AND CRIME CONTROL IN INTERNATIONAL RELATIONS (2006), at v. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME organized crime” as a major point on the international policy- making agenda in the 1990s has been attributed to the end of the Cold War and US efforts to exert its international hegemonic influence in areas of domestic concern.13 It has also been persuasively argued that contemporary global crime control is a continuation of historical trends evident, e.g., in international efforts to combat piracy and privateering in the eighteenth century and slavery in the nineteenth century,14 as well as a manifestation of “ambitious efforts by generations of Western powers to export their domestically derived definitions of crime”.15 This article will elucidate some of this complexity by exploring the connection between globalization, crime and global crime control through the prism of political economy, providing a novel theoretical explanation for the dynamics of transnational crime and global crime control. In essence, we aim to answer three consecutive questions. First, why does crime travel across national borders? Our initial argument is that much like other forms of economic activity,16 criminal activity travels across the globe to the places in which conducting it is most profitable for criminals. To be sure, we do not argue that all forms of crime will shift across international borders in this fashion. Rather, it is mostly crimes that are driven by profit that are expected to move in reaction to cost-imposing domestic regulation that makes crime less lucrative.17 13 See Michael Woodiwiss, Transnational Organised Crime: The Global reach of an American Concept in TRANSNATIONAL ORGANISED CRIME: PERSPECTIVES ON GLOBAL SECURITY (Adam Edwards and Peter Gill, eds., 2003)(arguing that the US has successfully exported its analysis of organized crime problems despite evidence of its inadequacy). The work of persuasively shows that 14 See Andreas and Nadelmann supra note 12, at p. 22 et seq.. 15 Ibid., at vii. 16 The analogy between criminal and legal economic activity has its caveats (e.g., the use of violence against competitors is more common in the former), but in general, “illegal markets are governed by the normal economic forces”; see Pino Arlacchi, The Dynamics of Illegal Markets in COMBATING TRANSNATIONAL CRIME: CONCEPTS, ACTIVITIES AND RESPONSES (Phil Williams and Dimitri Vlassis eds., 2001) 7, 7 (defining illegal markets and their nature in comparison with legal markets). 17 This conforms to some extent to the strong (though non-exclusive) association of transnational crime with profit-based organized crime, although the theory presented in this article does not rest on such an association. The CATOC, for example, criminalizes agreements among people aimed at commiting serious OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME Second, how do governments react to the international mobility of criminal activity? This is the innovative core of our theory, in which we distinguish between two types of transnational crimes. The first we term as “desirable crimes” – these are crimes that are beneficial from the view point of local jurisdictions. With respect to these crimes governments have an incentive to adopt lenient crime control policies that will attract criminals committing them, internalizing the benefits of crime and externalizing its costs (“insourcing” crime). For instance, money laundering may carry economic benefits in one jurisdiction, but promote harmful crimes committed in other jurisdictions. On the other hand, there are crimes that we term as “undesirable crimes” – these are crimes that jurisdictions perceive as harmful. Hence, with respect to these crimes jurisdictions adopt harsher sanctions at the domestic level in order to shift and displace crime to other jurisdictions (“outsourcing” crime). For example, a jurisdiction might cause drug dealers to shift their harmful activity to neighboring jurisdictions by raising the expected sanction for drug crimes. What emerges is a complex pattern of criminal regulatory competition. Over time, the tendencies toward either lenient regulation or towards harsh regulation are expected, in tandem, to trigger a dynamic race between jurisdictions that will react to each others measures. For instance, jurisdictions might escalate their sanctions towards undesirable crimes in a type of “arms race” in order to try to become less attractive crime targets. Or, alternatively, they may lower the criminality of certain activities in order to attract it and benefit from it in economic or other social ways. Third, how should global crime control be designed to be successful? On the backdrop of our theory, we argue that different crime control regimes are required, depending on the type of cooperation problem a certain transnational crime poses, hinging on the extent to which a crime is viewed by states as either “desirable” or “undesirable”. Thus, our positive theory of global crime permits us to suggest a normative theory of global crime control. In order to develop our theory we draw on several bodies of literature that have yet to be combined in a comprehensive manner crimes “relating directly or indirectly to the obtaining of a financial or other material benefit” (art. 5(1)(a)(i). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME in the realm of international affairs.18 The first is the crime displacement literature.19 This literature demonstrates that profit- driven criminals tend to shift their activity to the geographic area in which the expected payoff from crime is maximized. Thus, if the expected sanction in one jurisdiction rises,20 some crime from that jurisdiction will shift to areas in which the sanction is lower. The second body of literature we draw from is the public choice literature.21 This literature predicts the decisions made by political agents using economic models that treat their decisions as such that promote a given set of preferences. More specifically we will utilize the insights of the literature highlighting the political economy of decentralized governments and that of criminal law. As for the former, starting from Tiebout’s seminal paper on the subject,22 legal scholars have modeled the effects of decentralization and jurisdictional competition on an array of legal 18 For analogous theoretical discussions in the realm of domestic law see Doron Teichman, The Market for Criminal Justice: Federalism, Crime Control, and Jurisdictional Competition, 103 MICH. L. REV. 1831 (2005). For a discussion of the theory and further refinements see: Rachel E. Barkow, The Political Market for Criminal Justice, 104 MICH. L. REV. 1713 (2006); Samuel R. Gross, Jurisdictional Competition in Criminal Justice: How Much Does it Really Happen?, 104 MICH. L. REV. 1725 (2006); Wayne A. Logan, Crime, Criminals, and Competitive Crime Control, 104 MICH. L. REV. 1733 (2006); and Doron Teichman, Decentralizing Crime Control: The Political Economy Perspective, 104 MICH. L. REV. 1749 (2006). 19 For early contributions to this literature see Thomas A. Reppetto, Crime Prevention and the Displacement Phenomenon, 22 CRIME & DELINQUENCY 166 (1976); Simon Hakim et al., Interjurisdictional Spillover of Crime and Police Expenditures, 55 LAND ECON. 200 (1979). For later reviews of the topic see, e.g., CRIME SPILLOVER (Simon Hakim and George F. Rengert eds., 1981); CRIME DISPLACEMENT (Robert P. McNamara ed., 1994); RATIONAL CHOICE AND SITUATIONAL CRIME PREVENTION (Grame Newman, Ronald V. Clarke and S. Giora Shoham eds., 1997). 20 Note that following traditional models of deterrence and crime control, a rise in the expected sanction can be achieved either by raising the sanction attached to a crime, or by raising the probability of detection. See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1968). 21 For a non-technical introduction to public choice theory, see ROBERT D. COOTER, THE STRATEGIC CONSTITUTION (2000). For a recent comprehensive discussion on the relation between public choice theory and the law see Symposium: Getting Beyond Cynicism: new Theories of the Regulatory State, 87 CORNELL L. REV. (2002). 22 Charles Tiebout, A Pure Theory of Local Expenditures, 64 J. POL. ECON. 416 (1956). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME topics.23 The general theme of these studies is that local jurisdictions aiming to maximize their own welfare compete among themselves in the legislative process in order to attract desirable activities and repel undesirable activities. Regarding the later, this emerging line of legal scholarship has explored how the different political forces surrounding criminal law affect the way in which it is structured.24 The third theoretical literature we turn to is International Relations (IR) theory on international cooperation.25 Institutionalist or neo-liberal IR theories use rational choice methods to explain and model the emergence of different international cooperative regimes under the prevailing condition of anarchy, that is, the absence of centralized authority in international law and politics. It builds on the rationality of states and adds layers of strategic thinking to state behavior through the use of game theory.26 23 See, e.g., Louis Kaplow, Fiscal Federalism and the Deductibility of State and Local Taxes under the Federal Income Tax, 82 VA. L. REV. 413, 458-61 (1996) (taxation); Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435 (1992) (corporate law); Richard L. Revesz, Rehabilitating Interstate Competition: Rethinking the “Race-to-the-Bottom” Rationale for Federal Environmental Regulation, 67 N.Y.U. L. REV. 1210 (1992) (environmental regulation); Jennifer Gerarda Brown, Competitive Federalism and the Legislative Incentives to Recognize Same-Sex Marriage, 68 S. CAL. L. REV. 745 (1995) (family law); Stewart E. Sterk, Asset Protection Trusts: Trusts Law's Race to the Bottom?, 85 CORNELL L. REV 1035 (2000) (trusts law); and Lynn M. LoPucki & Sara D. Kalin, The Failure of Public Company Bankruptcies in Delaware and New York: Empirical Evidence of a “Race to the Bottom”, 54 VAND. L. REV. 231 (2001) (bankruptcy law). 24 For some prominent examples of this literature see, e.g., Harry A. Chernoff et al., The Politics of Crime, HARV. J. LEGIS. 527 (1996); Stuntz, The Pathological Politics of Criminal Law, 100 MICH L. REV. 505 (2001); Teichman, supra note 18; Kathleen O'Neill and Rachel Barkow, Delegating Punitive Power: The Politics and Economics of Sentencing Commission Formation, 84 TEX. L. REV.1973 (2006). 25 For primers on the use of IR theories in the study of international law, See Kenneth W. Abbott, Modern International Relations Theory: A Prospectus for International Lawyers, 14 YALE J. INT. L. (1989) 335; Anne-Marie Slaughter, International Law and International Relations Theory: A Dual Agenda, 87 AM. J. INT. L. (1993) 205; and Anne-Marie-Slaughter et al., International Law and International Relations: A New Generation of Interdisciplinary Scholarship, 92 AM. J. INT. L. (1998) 367. 26 (see, e.g., COOPERATION UNDER ANARCHY (Kenneth Oye ed. (1986)); James Morrow, Modeling the Forms of International Cooperation: Distribution Versus OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME Combining the insights of these bodies of literature allows us to develop a comprehensive theory of the political economy of globalized criminal activity and its control. The paper is organized as follows: Part II sets out our positive theory of the political economy of global crime control. It explains the phenomenon of crime displacement, and builds on it to analyze the political economy of transnational crime control. Part III relies on our positive theory and explores its normative implications. We deal with an array of legal mechanisms that countries adopted both unilaterally and in cooperation with other countries, and present their advantages and disadvantages. Finally, in Part IV we conclude. II. GLOBALIZATION AND THE TRANSNATIONAL MOBILITY OF PROFIT-DRIVEN CRIME In this Section we present a positive theory of the political economy of transnational crime and its movement across national borders in response to local crime control policies. We begin by describing the way technology and economic liberalization have internationalized the production and distribution patterns of legitimate goods and services, permitting lawful economic activity to travel to the locations in which it incurs lower costs and generates higher profits as a result of economic and regulatory differentials between jurisdictions. On this background, we turn to the core of our thesis and argue that profit-driven criminal activities behave similarly to legal economic activities, tending to shift, whenever possible, to the areas across the globe in which conducting them is most profitable for criminals. Since crime control policies constitute some of the major costs of committing crimes, crime is expected (other things equal) to travel across the globe to areas in which the cost of commission is relatively low. Thus, crime control policies adopted by countries may influence the global distribution of criminal activity, and as a consequence, affect the level of crime in other countries as well. Information, 48 INTERNATIONAL ORGANIZATION 387 (1994); and Duncan Snidal, Coordination Versus Prisoners’ Dilemma: Implications for International Cooperation, 79 AM. POL. SCI. REV. 923 (1985). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME 1. Globalization and Shifts in Legitimate Economic Activity One of the most salient characteristics of globalization and the growth in international trade is the shifting of economic activity to locations around the globe in which it can be conducted most efficiently. In gross terms, over the last few decades significant segments of manufacturing have shifted from developed countries to the developing world.27 Geographical transfers of economic activity have also occurred within the industrialized world itself, as evidenced by the decrease in the US share in global output, the uneven growth of European economies, and the rise of Japan as an economic power; and also within the developing world.28 This dynamic redistribution of production is inextricably linked with the expansion of international economic activity: “the growth of international manufacturing activity and of international trade in manufactured goods can only occur with the parallel development of circulation activities within the production chain”.29 As the size of the global economy grows, production associated with a certain place gradually shifts to more efficient locales (and vice versa), while the original activities are replaced with more sophisticated and profitable ones. For example, Taiwan was once a major center for electronics assembly. It then became an important manufacturer of Integrated Circuits. Gradually, assembly and production is shifting to mainland China, and Taiwan is moving more significantly into areas of Research and Development (R&D).30 In an entirely different manufacturing sector, the textiles industry with its various stages – fiber production, yarn preparation, fabric manufacture, cutting, sewing and distribution – has proven especially mobile, with its economic loci shifting from Europe to the Americas to different Asian and African locations continuously.31 27 See PETER DICKEN, GLOBAL SHIFT: TRANSFORMING THE WORLD ECONOMY (1998) at 27. 28 Ibid. at 28-29. 29 Ibid., at 40. 30 See, e.g., Douglas B. Fuller, Moving along the Electronics Chain: Taiwan in the Global Economy in GLOBAL TAIWAN: BUILDING COMPETITIVE STRENGTHS IN A NEW INTERNATIONAL ECONOMY (Anne Berger and Richard K.Lester, eds., 2005) 137. 31 See Dicken supra note 27 at 283-315. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME These geographical movements of business activity are outcomes of systemic changes that allow Smith’s “invisible hand”32 and Ricardo’s principle of comparative advantage33 to act on the international plane. The combination of advanced technology, labor-cost differentials, trade liberalization and cross-border investment protection has led to increasingly complex transnational patterns of production. Today, the simplest of consumer products is likely the aggregate outcome of productive economic processes that take place in a number of continents.34 Dialing a customer-service telephone number in North America may connect to a call-center in India, where many other services activities, such as software development, have also shifted to over the last decade.35 Indeed, as the last example demonstrates, economic shifting is not restricted to the manufacturing sectors but is widely evident in service sectors whose importance in the global economy has grown tremendously. Many services such as telecommunications, financial services, entertainment services and so on36 are particularly prone to economic expansion due to the increase in service input mobility37 32 See ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS (1776). 33 See DAVID RICARDO, ON THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION (1817). 34 For an engaging account of transnational production and distribution chains see PIETRA RIVOLI, THE TRAVELS OF A T-SHIRT IN THE GLOBAL ECONOMY (2005)(analyzing the inter-related cotton, textile, retail and second-hand clothing sectors that span the globe). 35 See PAUL DAVIES, WHAT’S THIS INDIA BUSINESS? OFFSHORING, OUTSOURCING AND THE GLOBAL SERVICES REVOLUTION (2004); and Srilata Zaheer and Radhika Rajan, Creativity under Constraint: Technological Imprinting and the Migration of Indian Business to the New Economy in THE GLOBAL INTERNET ECONOMY (Bruce Kogut, ed., 2003) 191. 36 The WTO GATS (General Agreement on Trade in Services, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, Legal Instruments—Results of the Uruguay Round, 33 I.L.M. 1125 (1994)) covers twelve general service sectors: Business, Communication, Construction and Engineering, Distribution, Education, Environment, Financial, Health, Tourism and Travel, Recreation, Culture and Sporting, Transport, and the catch- all "Other", that are further divided into sub-sectors. For a good introduction to the GATS, see WTO, A HANDBOOK ON THE GATS AGREEMENT (2005). 37 On the importance of input mobility in the growth of international trade, see RONALD W. JONES, GLOBALIZATION AND THE THEORY OF INPUT TRADE (2000). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME and other transnational locational impacts of technological changes.38 In a world considerably ‘flattened’ by technological advances and international economic liberalization,39 the global distribution of economic activity is affected most fundamentally by objective economic differences between locations, roughly tracing the range of relevant “factor endowments” such as labor, land and capital, determining local comparative advantage.40 Where physical trade is concerned (in goods, or in services requiring proximity), geographical distances to markets that raise transportation costs may also figure highly in decisions on production and supply locations, at times potentially more important than considerations f the costs of production itself.41 Moreover, no less important than these are legal and regulatory differences between jurisdictions that can make or break the international economic viability of an enterprise in its location of choice. Perhaps the most obvious such regulatory factor is taxation. Corporate, capital, sales and income tax rates and policies among different locations may vary considerably, and these impact on business plans regarding international investment, incorporation and physical location of production or supply. Such differences 38 Technological advances have been key in increasing international trade in services, perhaps even more than legal deregulation. For a prescient analysis of the potential geographical effects of technological change in international services provision, see D.G. PRICE AND A.M. BLAIR, THE CHANGING GEOGRAPHY OF THE SERVICE SECTOR (1989), Chs. 6 and 8. 39 See THOMAS L. FRIEDMAN, THE WORLD IS FLAT: A BRIEF HISTORY OF THE 21ST CENTURY (2005) (a popular and influential depiction of the technological and economic changes of globalization). 40 We allude to the Heckscher-Ohlin “Factor-proportions hypothesis”, whereby states will tend to export products that use factors of production in which they are abundant, and import products that use factors in which they are poor. For the original formulations of the Hekcscher-Ohlin theorem from 19191 and 1924, see Eli F. Heckscher and Bertil Ohlin, HECKSCHER-OHLIN TRADE THEORY (Harry Flam and M. June Flanders eds. and trans., 1991). 41 The literature on location and transportation costs is vast and highly sector- specific. For basic generalized discussions, see Maurice Fulton and L. Clinton Hoch, Transportation Factors Affecting Locational Costs, 35(1) ECONOMIC GEOGRAPHY 51 (1959); Aneel Karnani, The Trade-Off between Production and Transportation Costs in Determining Optimal Plant Size, 4(1) STRATEGIC MANAGEMENT JOURNAL 45 (1983). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME have resulted in vigorous international tax competition,42 whereby the location of multi-million dollar manufacturing and assembly plants that may have significant effects on economic growth and the livelihood of thousands of workers, is determined by applicable tax rates. A famous example is the role of low taxes in the reinvention of the Republic of Ireland (Éire) as the ‘Celtic Tiger’, attracting strategic investments from corporations such as Intel, Bell Labs and Dell.43 Other regulatory factors include, but are not limited to, bureaucracy, labor, environmental, health and safety regulation, consumer protection rules and subsidies. This shifting of production and distribution has been encouraged by transnational corporate conglomeration in the business sector. Multinational corporations (MNCs) have emerged as major economic players who have both the incentives and the resources needed to take optimal advantage of economic and regulatory differences between jurisdictions, and to channel each part of their activity to the most efficient location through geographically-sensitive trade and investment.44 This entails globalizing at all levels of business activity – R&D, manufacturing, product development, quality control, finance, purchasing and 42 See INTERNATIONAL TAXATION AND MULTINATIONAL ACTIVITY (James R. Hines, Jr., ed., 2001); Mihir A. Desai, C. Fritz Foley and James R. Hines, Jr., Chains of Ownership, Regional Tax Competition and Foreign Direct Investment, NBER Working Paper 9224 (2002) available at http://www.nber.org/papers/W9224.pdf (empirically proving ; and Reuven S. Avi-Yonah, Bridging the North/South Divide: International Redistribution and Tax Competition, 26 MICH. J. INT. L. (2004) 1 (explaining the distributive effects of tax competition in the context of international development). 43 See Sean Dorgan, How Ireland Became the Celtic Tiger, The Heritage Foundation, Backgrounder No. 1945, June 23, 2006, available at http://www.heritage.org/Research/WorldwideFreedom/bg1945.cfm; PAUL SWEENEY, THE CELTIC TIGER: IRELAND’S CONTINUING ECONOMIC MIRACLE (2000); RAY MACSHARRY AND PADRAIC A. WHITE, THE MAKING OF THE CELTIC TIGER: THE INSIDE STORY OF IRELAND'S BOOM ECONOMY (2000); Frank Barry and John Bradley, FDI and Trade: The Irish Host-Country Experience, 107 ECONOMIC JOURNAL 1798 (1997)(all providing various explanations for Irish growth with a focus on tax policy and surveying the effects of tax-induced investment on production and trade). 44 See Brian Roach, A Primer on Multinational Corporations in LEVIATHANS: MULTINATIONAL CORPORATIONS AND THE NEW GLOBAL HISTORY (Alfred D. Chandler and Bruce Mazlish, eds., 2005) 19 (providing an overview of the growth of multinational corporations and explanations for their success). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME procurement, inventory management, marketing and advertising, distribution, sales and service, administration and more.45 These are not, of course, the only factors that have contributed to the international locational shifting in the production of legitimate goods and services, but they are the main ones. What is important for present purposes is that regulatory differences between jurisdictions are a major consideration in business decisions relating to location of business activities such as production and supply. At this point we turn to explore what we consider to be the analogous effects of globalization on the locational aspects of transnational criminal activity. 2. Globalization and Decentralized Crime Control The economic model of crime control treats potential criminals as rational individuals who choose to participate in criminal activity in order to promote their personal well being.46 According to this model criminals weigh the costs and benefits associated with criminal activity, and choose to commit a crime if, and only if, its benefits outweigh its costs. Our focus in this study is not on the decision criminals make as to whether to commit a crime. Rather, we focus on the decision they must make as to where to commit a crime. Just as the producer of a T-shirt needs to decide what is the location that will maximize the profits of production, a criminal needs to figure out which location will maximize his profits of crime. As in legal markets, the profits of crime can differ between countries due to an array of reasons ranging from the distance to consumer markets to the technological infrastructure of the country. An additional factor that can affect the profits of crime is law. The expected sanction (composed of the probability of detection and the actual sanction inflicted) is a cost criminals must bear when deciding where to commit their crimes. Indeed, “the cost of doing business within the illegal economy is much higher than in the legal economy” because of the additional cost of minimizing 45 See MICHAEL J. MARQUARDT, THE GLOBAL ADVANTAGE: HOW WORLD-CLASS ORGANIZATIONS IMPROVE PERFORMANCE THROUGH GLOBALIZATION (1999)(providing a business literature perspective on the globalization of business operations by Multinational Coprporations). 46 See, e.g., Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. (1968) 169, 176-79 (1968) (presenting an analysis of the supply of crime). For a more contemporary treatment of the issue see Isaac Ehrlich, Crime, Punishment, and the Market for Offenses, 10 J. ECON. PERSP. 43 (1996). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME exposure to sanctions, suggesting that differences in these costs may weigh heavily in the determination by criminal enterprises of their locus. When crime control is governed by a decentralized political structure, such as in the international arena, sanction arbitrages may emerge. In such situations, if everything else is equal, criminal activity is expected to shift to those countries in which the expected sanction is lowest.47 Building on this theoretical framework, economists have modeled different aspects of the geography of criminal activity and the precautions taken by crime victims.48 At the same time, criminologists have studied the effects of measures taken by both public and private actors aimed at lowering the expected payoffs of crime by “hardening” potential crime targets.49 Examples of such measures include police patrols, fences, street lighting, and the like. These studies demonstrate that in many cases such measures end up displacing crime to areas where these measures are not used. Concrete examples of crime displacement can be found with respect to burglary,50 robbery,51 sales of illegal narcotics,52 growing of illegal narcotics,53 and prostitution.54 47 Significant criticism has been brought against the economic model of crime control. See, e.g. Paul H. Robinson and John M. Darley, Does Criminal Law Deter? A Behavioral Science Investigation, 24 OXFORD J. LEGAL STUD. 173 (2004); Gross, supra note 18. In a nut shell, these criticisms view crime as a complex social phenomenon, and argue that criminals do not behave in the way economic models predict. While this literature makes legitimate criticisms, we find it less relevant to our project since our analysis deals exclusively with transnational profit driven crimes. 48 Deutsch, Hakim & Weinblatt, id. (modeling the spatial decision of criminals); Joseph Deutsch, Simon Hakim, and J. Weinblatt, A Micro Model of the Criminal’s Location Choice, 22 J. URB. ECON. 198 (1987) (same); Steven Shavell, Individual Precautions to Prevent Theft: Private Versus Socially Optimal Behavior, 11 INT’L REV. L. & ECON. 123 (1991) (evaluating the precaution decision potential crime victims make); Koo Hui-wen and I. P. L. Png, Private Security: Deterrent or Diversion?, 14 INT’L REV. L. & ECON. 87 (1994) (presenting a model of crime displacement); Scott Freeman, The Spatial Concentration of Crime, 40 J. URBAN ECON. 216 (1996) (presenting a model explaining the spatial concentration of crime). 49 See generally sources cited in note 19 supra. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME One can point out several examples for sanction arbitrages that brought about intra-country crime displacement. In a federal country, such as the United States, the states control criminal sanctions. This power brought about initiatives that caused crime to travel across state lines. For example, three strike laws caused criminals who already have two convictions to shift their activity to non-three strike states, since the sanction they faced in those states was significantly lower than the one they faced in three strike states.55 In unitary countries local jurisdictions cannot control the size of the sanction since the central government holds the exclusive power to legislate criminal law. Nonetheless, even in such settings one can point out initiatives of local government aimed at displacing crime by raising the probability of detection. In Israel, 50 Stephen L. Mehay, Burglary Spillover in Los Angeles, in CRIME SPILLOVER (Simon Hakim and George F. Regent eds., 1981) 67. 51 Chrisban Grandjean, Bank Robberies and Physical Security in Switzerland: A Case Study of the Escalabon and Displacement Phenomena, 1 SECURITY J. 155 (1990). But see Anthony A. Braga et al., Problem Oriented Policing in Violent Crime Places: A Randomized Controlled Experiment, 37 CRIMINOLOGY 541,567- 69 (1999). 52 John E. Eck, The Threat of Crime Displacement, in CRIME DISPLACEMENT (Robert P. McNamara ed., 1994) 103, 111-12 (reviewing the literature on displacement and drug enforcement); Rick Curtis and Michele Sviridoff, The Social Organization of Street-Level Drug Markets and its Impact on the Displacement Effect, in CRIME DISPLACEMENT (Robert P. McNamara ed., 1994) 155 (presenting a case study of the displacement of drug dealers in Brooklyn). But see Braga et al., id. 53 John R. Fuller and James R. O’Malley, Enforcement and Displacement: The Case of Marijuana Growing, in CRIME DISPLACEMENT (Robert P. McNamara ed., 1994) 137. 54 J. Lowman, Prostitution in Vancouver: Some Notes on the Genesis of a Social Problem, 28 CANADIAN J. OF CRIMINOLOGY 1 (1986); Roger Mathews, Developing More Effective Strategies for Curbing Prostitution, 1 SECURITY J. 182 (1990); Robert P. McNamara, Crime Displacement and Male Prostitution in Times Square, in CRIME DISPLACEMENT (Robert P. McNamara ed., 1994) 121; Phil Hubbard, Community Action and the Displacement of Street Prostitution: Evidence from British Cities, 29 GEOFORUM 269 (1998). 55 Teichman, supra note 18 at 1847-48 OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME for instance, municipalities have used private security companies in order to raise the probability of detection within them.56 To be sure, several qualifications should be made to the competition hypothesis set forth above. First, jurisdictions do not necessarily engage in deliberate efforts to displace crime from one to another. A nation may adopt a certain crime control measure for an array of political reasons that have little to do with crime displacement.57 Nonetheless, once a nation adopts a certain measure for whatever reason, the externalities this policy creates might drive other nations to adopt it. For instance, three strike laws were not enacted in order to deliberately displace crime to other jurisdictions.58 Yet once they were enacted displacement was a factor in their dissemination.59 Second, in the realm of domestic law one can see actual displacement of criminals from one area to another. Namely, as the cost of committing crimes in one jurisdiction rises, criminals leave that jurisdiction and move to other jurisdictions in which the cost of committing crimes is lower.60 While one cannot rule out such displacement in the international arena, a much more plausible form of displacement in that context is of the activity itself. In other words, lowering the cost of crime in one part of the globe will cause more local residents to engage in criminal activity in that area, while lowering the amount of people engaged in that crime in other jurisdictions.61 Just as the actual people engaged in T-shirt production do not travel from one country to another as a result of 56 Doron Teichman, The Geography of Crime (Hebrew). 57 For an analysis of the political forces driving criminal legislation in the United States see, Barkow, supra note 18 at 1720-23. 58 Cal. Dept. of Justice, Office of the Attorney General, “Three-strikes and You’re Out”: It’s Implications on the California Criminal Justice System After Four Years, 10 (1998) (describing the displacement caused by the local three strike law as an “unintended but positive consequence”). 59 David LaCourse, Editorial, Viewpoint: ‘3 Strikes, You’re Out’ Law Proving to be Efficient Crime Fighter, THE NEWS TRIB. TACOMA, WA, Apr. 3, 1997 at A9. 60 See Teichman, supra note 18 at 1843-47 (descrining how auto thieves migrated between states). 61 In the regulatory competition literature this phenomenon is know as market share competition. See DALE D. MURPHY, THE STRUCTURE OF REGULATORY COMPETITION 7 (2004). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME changing costs, the producers of illegal narcotics are not expected to travel as well. Third, shifting criminal activity from one place to another is a costly endeavor that is expected to create some rigidity in the crime market, and prevent some criminal activity from moving to more profitable areas. Costs such as setting up production lines, contacts with local enforcement officials, and contacts with other criminals in the region, are all country specific and therefore must be treated as a sunk cost for criminals.62 In addition, ethnic and language differences might cause difficulties for crime displacement. For instance, if a certain narcotic is distributed in the United States by members of criminal groups that migrated from its traditional place of production, then shifting production to other parts of the globe that have different ethnic characteristics might be difficult.63 Thus, some criminal activity might remain in regions in which the costs of crime have risen over time. Finally, we would like to emphasize the scope of our claims in this Article. Our theory deals mainly with profit driven criminal activity that will tend to behave in a rational manner. Crimes like money laundering, drug trafficking and gambling. Clearly, many (perhaps even most) crimes do not fit this characterization, and tends to be committed on a local basis, not withstanding the potential sanction arbitrage if committed in other areas. For instance, crimes driven by emotions such as inter-marital crimes are probably not susceptible to geographic substitution.64 With these qualifications in hand, we turn now to present our theory of global crime control. 62 For examples of barriers to displacement on the local level see, e.g., Reppetto, supra note 19, at 175; René Hesseling, Theft from Cars: Reduced or Displaced?, 3 EURO. J. ON CRIM. POL’Y & RES. 79, 87-8. 63 One could view the argument in the text as a form of informal vertical integration that creates barriers to entry into the market. See generally R. BLAIR & D. KASERMAN, LAW AND ECONOMICS OF VERTICAL INTEGRATION AND CONTROL (1983). 64 See, e.g., John P. Mclver, Criminal Mobility, in CRIME SPILLOVER 20, 36 (Simon Hakim and George F. Rengert eds., 1981) (pointing out that crimes of passion tend not to be displaced). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME 3. A Political Economy Theory of International Crime Outsourcing and Insourcing Our theory is built from the bottom up. In other words, we describe the incentives of decision makers on a national level, and from that we draw a global picture of crime control. As we shall see in detail below, domestic politicians may have an incentive to either attract crime (crime ‘insourcing’), or repel it (crime ‘outsourcing’). The precise structure of incentives will depend on the nature of the activity involved and the nature of the regime, economy and society of each country. (a) International Crime Outsourcing We begin by describing the outsourcing of crime since it reflects the basic intuitions of crime control. The general tendency is to view crime as a negative social phenomenon since it involves many harms. First and foremost are the direct harms of crime such as loss of lives, bodily injuries, and destroyed property. In the United States alone a 1988 study estimated the costs of crime to victims at $92.6 Billion.65 These direct harms translate into popular demand for crime reduction, which, in turn, translate into incentives for elected politicians to adopt policies that will in fact reduce crime. Another harm associated with crime is its effect on international investment. Local communities have an incentive to attract capital that can bring about employment and economic prosperity. Crime rates are considered to deter foreign investors and impair economic growth,66 and hence, countries have an incentive 65 Mark A. Cohen, Pain, Suffering, and Jury Awards: A Study of the Cost of Crimes to Victims, 22 L. & SOC’Y REV. 537 (1998). 66 See, e.g., CRIME, VIOLENCE, AND DEVELOPMENT: TRENDS, COSTS, AND POLICY OPTIONS IN THE CARIBBEAN, A Joint Report by the United Nations Office on Drugs and Crime and the Latin America and the Caribbean Region of the World Bank, Report No. 37820, March, 2007, available at http://siteresources.worldbank.org/INTHAITI/Resources/Crimeandviolenceinthec aribbeanfullreport.pdf, at 49 (showing that a majority of firms in the Dominican Republic cite crime as “a major obstacle to investment”, with access to finance declining due to crime, even though only a small portion of the same firms had been direct victims of crime); BBC News, Kenyan Crime Puts off Investment, Mar. 21, 2006, available at http://news.bbc.co.uk/2/hi/business/4828070.stm (reporting that rising crime rates in Kenya have significantly reduced levels of OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME to reduce their crime rate. For instance, President Mbeki of South Africa has reportedly adopted an array of social programs aimed at reducing crime rates in order to attract international investors.67 Finally, the types of profit-driven crime we deal with in this study often involve sophisticated criminal organizations. As these organizations gain power and influence, they can pose a threat to the stability of the political system of a country. The United Nation’s General Assembly has noted its concern with “the impact of transnational organized crime on the political, social and economic stability and development of societies.”68 Thus, if the political establishment wishes to maintain its independence from criminal forces, it has an incentive to adopt policies that will combat this threat (although clearly this incentive can be eroded if political decision makers seek to corruptly maximize their own personal profit and succumb to criminal influences). The political forces described above give politicians incentives to reduce local crime as it is committed among their constituencies and spheres of political influence, even if this entails Foreign Direct Investment (FDI) in comparison to safer neighboring countries such as Uganda and Tanzania); USA Today, U.N.: Urban Crime Drives Away Investment, Oct. 1, 2007, available at http://www.usatoday.com/news/world/2007-10-01-urban-crime_N.htm (describing UN report finding a correlation between insecurity caused by crime and low investment). 67 Eric Berger, The Right to Education Under the South African Constitution, 103 COLUM. L. REV. 614, 649 (2003). On the crime-growth nexus in the South African context, see also Anthony Altbeker, Losing our Nerve? Business Confidence and Crime in South Africa, 5(5) NEEDBANK ISS CRIME INDEX Jul., 2001, available at http://www.iss.org.za/PUBS/CRIMEINDEX/01VOL5NO4/Losing.html (detailing the diverse ways in which crime impacts on the business climate); George R.G. Clarke et al., South Africa: An Assessment of the Investment Climate, Africa Private Sector Group, World Bank, 2005, available at http://www.info.gov.za/otherdocs/2005/dti_ica.pdf (demonstrating strong influences of crime rates and investment); and Christopher Stone, Crime, Justice and Growth in South Africa: Toward a Plausible Contribution from Criminal Justice to Economic Growth, Harvard Centre for International Development, Working Paper No. 131, Aug. 2006, available at http://www.cid.harvard.edu/cidwp/pdf/131.pdf (examining the extent to which the South African criminal justice system can support economic development). 68 G.A. Res. 56/120, U.N. GAOR, 56th Sess., at 1, U.N. Doc. A/RES/56/120 (2002). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME ‘exporting’ crime to other countries – producing the outsourcing of crime. In our framework of analysis, this goal can be achieved by raising expected sanctions so that the country becomes a relatively less attractive environment (or target) for criminals. In a dynamic setting, in which these conditions apply, many countries interested in outsourcing crime will adopt a similar national strategy towards crime, and one can expect to see a cycle of ever-increasing sanctions towards these crimes. Thus, much like the arms race countries were engaged in during the cold war, one might observe an ‘arms race’ between countries in their war on crime – a race to strictness, or an ‘outsourcing race’. (b) International Crime Insourcing However, the dynamics of outsourcing crime are only one part of the story. We now turn to explore the political economy of insourcing crime. While some types of criminal activity pose threats to the political actors and decision makers, other crimes might actually be seen by them as desirable. We identify three main forces (at times overlapping) that might turn crime into a desirable activity from the perspective of policy makers of a given country. First, crimes (or activity that contributes to crime) might be perceived as conferring benefits on the general public. Conceptually, this might be the case when communities in different jurisdictions differ with respect to the definition of undesirable activity. For example, a community might view the use of a certain substance (say alcohol, or marijuana) as a crime worthy of severe punishment, while other communities see it as legitimate behavior that is not a crime, or at least as behavior that although formally illegal, is not to be subjected to strict sanctions because it is not understood to cause social problems.69 The general benefits of crime, however, may be indirect as well, such as when activity considered criminal in some jurisdictions is tolerated domestically elsewhere not because of any inherent value but simply because it supports local employment, economic growth, and government 69 For example, the liberal policy towards drug use in the Netherlands has been explained as the outcome of a general liberal and non-paternalistic Dutch approach to law-enforcement known as ‘Gedogen’, whereby only social cost- imposing law violations are repressed through law enforcement; see Justus Uitermark, The Origins and Future of the Dutch Approach Towards Drugs, 34 J. OF DRUG ISSUES 511 (2004). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME revenue. Legal casino gambling in places like Macao or Monte Carlo are examples. In Macao, the local population does not see the freedom to gamble as a value worth protecting in itself - in fact, there is considerable local concern about its negative social effects – but at the same time it is understood that the local economy is highly dependent on the provision of gambling services, which are tolerated for the sake of their indirect effects.70 These trends can explain the emergence of criminal activity even when it is internationally recognized as illegal, like narcotics farming and production that for all its negative effects in source (and target) countries, supports their economies and the livelihood of the farmers.71 Second, harmful crimes might confer benefits to specific interest groups. These interest groups may include actors from the legitimate economy, such as the tourism sector and financial institutions that derive profits from it; or shadier forces from organized crime, who act as criminal entrepreneurs. These interest groups, in turn, may influence politicians (elected or otherwise) to view these crimes as desirable, or at least to turn a blind eye to them, through direct or indirect election funding, political sponsoring (activities which might themselves be legal practices), vote-buying, bribery and other incentives. Finally, crimes can serve the interests of politicians directly. This is the case with regimes in which political leaders can function as heads of criminal organizations or maintain close relations with them through corrupt practices, and pocket the profits of crime for themselves. The political forces that lead to the insourcing of crime suggest a dynamic that is the mirror-image of the process previously described as leading to crime outsourcing.. Over time, one can expect to observe a ‘race towards leniency’, an ‘insourcing 70 See Fanny Vong Chuk Kwan, Gambling Attitudes and Gambling Behavior of Residents of Macao: The Monte Carlo of the Orient, 42(3) J. TRAVEL RES. 271 (2004) (noting that 50% of Macao’s tax revenue in the 1990s came from gambling and discussing the future of Macao’s economy in the face of local ambivalence towards gambling practices). 71 On the complexity of effects of narcotics farming in source countries, see Richard B. Craig, Illicit Drug Trade: Implications for South American Source Countries, 29(2) J. INTERAMERICAN STUDIES & W. AFF. 1. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME race’, in which some countries try to situate themselves as a place that is attractive as possible to commit certain crimes or crime- related acts.72 This can be the case both with respect to the regulation itself, and with respect to enforcement mechanisms. In extreme cases, one might even expect to observe governments that become directly involved in international criminal activity. (c) Complex Scenarios: Concurrent Insourcing and Outsourcing In addition to pure examples of ‘insourcing races’ or ‘outsourcing races’, more complex patterns of international criminal regulatory competition may emerge. In a given area of trans- nationally mobile illicit activity, jurisdictions in which the crime is considered, on balance, to be undesirable, will engage in crime deterring policies; among themselves, they may engage in a crime control ‘outsourcing race’, a regulatory ‘race to strictness’. Moreover, in jurisdictions whose policy-making process has determined that the same criminal activity is desirable, for any of the reasons described above, lenient policies will be adopted in order to attract crime. Thus, at the same time we might see heterogeneous policies, with crime being deterred in some national jurisdictions, and being encouraged in others. However, this does not mean that the relationship between crime outsourcing countries and crime insourcing countries is complementary or symbiotic. Crime-attracting states can produce transnational harmful effects that are felt in crime-deterring countries, making the latter’s efforts at outsourcing ineffective. This might even be a deliberate policy, as states seek to capture the benefits of a criminal activity, while externalizing some or all of its costs. Paradoxically, the combination of crime deterrence and crime encouragement may prove so effective and mutually supportive that both sides of the equation lose out. For example, the U.S. has pursued aggressive deportation and repatriation policies to ‘export’ (or rather, to re-export) dangerous criminal gang members to their source countries, e.g., in Central America. These countries may have, in the past, generally considered gang activity (especially in 72 To be more precise, this is the case with respect to crimes that serve interest groups or the regime itself. Crimes that are not regulated due to diverse beliefs about worhgfulnees are not expected to generate a race towards leniency. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME its ‘exported’ form) as desirable or tolerable. However, in many cases these countries were not prepared for the repatriation of gang members hardened in the tough realities of U.S. inner cities. As a result, gang activity has intensified in the source countries, in which their activities are no longer considered desirable by any standard, while the same gang members use there reclaimed homelands as bases for advanced criminal activity in the U.S..73 (d) International Crime-Control Competition and International Regulatory Competition The situations our theory describes are generally similar to theories of international regulatory competition in legitimate business sectors, and yet must be distinguished from them for several reasons. In regulatory competition in non-criminal areas, one also finds ‘races’ to both strictness and leniency and combinations thereof. Competitive trade and investment pressures can lead states to adopt less stringent regulation, a ‘lower common denominator’ or ‘competition-in laxity’74 sometimes known as the ‘Delaware Effect.75 This is produced when firms prefer a lenient environment and decision-makers identify political gains to be had from pursuing such policies. In contrast, other circumstances may lead to a race to the ‘highest common denominator’, leading to more stringent regulation where local firms use stricter regulations to their advantage in the face of foreign competition, and politicians can capitalize on both public sentiment and business support – sometimes known as the ‘California Effect.76 In yet a third set of ‘heterogeneous’ cases, some states adopt stricter regulations, while 73 See Ana Arana, How the Street Gangs Took Central America, 84(3) FOREIGN AFFAIRS 98 (2005); and Robert J.Lopez, Rich Connell and Chris Kraul, MS-13: An International Franchise – Gang Uses Deportation to its Advantage to Flourish in the U.S., LOS ANGELES TIMES, October 30, 2005. available at http://www.latimes.com/news/nationworld/world/la-me- gang30oct30,1,4836173.story?coll=la-util-nationworld-world. 74 See Murphy, supra note 64 at 6. 75 See W.L. Cary, Federalism and Corporate Law: Reflections on Delaware 88 YALE L. J. 663(1974), 666 for the original formulation of the phrase in the context of corporate law; and DAVID VOGEL, TRADING UP: CONSUMER AND ENVIRONMENTAL REGULATION IN A GLOBAL ECONOMY (1995) for a critique of claims that ‘Delaware effect’ in international trade is driving consumer and environmental regulation downwards. 76 See Murphy supra note 64 at 8. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME others adopter laxer ones; this occurs when the regulatory interests of firms in different jurisdictions are opposed to each other (or at least not harmonious with each other).77 As described above, a similar tripartite division occurs in criminal regulation: in some cases one will detect a crime outsourcing race, in others a crime insourcing race will arise, and in other cases what will emerge is a more complex combination of concurrent outsourcing and insourcing pursued by different states. There are significant differences, however, between international competition in criminal control and standard international regulatory competition. First of all, in illicit areas, it is unusual for the parties with a criminal interest – the perpetrators and beneficiaries of the crimes committed – to ever prefer a stricter crime control and enforcement regime. Thus, the reasons for ‘races to strictness or criminal California effects do not stem from the criminal actors themselves but from those who suffer from the criminal activity. Not so in the regulation of legitimate business activity, where a domestic producer may prefer a stricter regime in order to oust foreign competition that does not comply with it. Second, and as a result, situations of heterogeneity are substantively different in the criminal and non-criminal settings. Non-criminal policy heterogeneity occurs when productive firms in some countries prefer protective and restrictive regimes, while firms in others agitate for laxer ones. In contrast, heterogeneity in criminal regulation occurs when crime control policy-makers reach different conclusions regarding the desirability of a particular form of criminal activity. In each of these three scenarios – insourcing race, outsourcing race, and heterogeneity – states (and the international community) are faced with different sorts of cooperation problems. As we will discuss in section III, the diversity of relationship between and among crime outsourcing states and crime insourcing states – as well as the optimal form of regulating these relations – hinges on the understanding of the externalities that each type of state inflicts on the other in the global environment. Now, however, we turn to a number of examples that will serve to substantiate the ways in which our theory plays out in practice. 77 Ibid. at 169-210. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME 4. Examples A few examples might clarify the competition hypothesis set forth in this section. (a) Drugs An obvious first example is the area of drug production, trafficking and consumption. With respect to drug consumption, one can see how countries such as the Netherlands, which due to their tolerant social outlook and moral views adopted relatively lenient policies towards the use of ‘soft’ drugs (especially Cannabis).78 Amsterdam thus became an attractive destination for “drug tourists” who traveled there in order to commit activities that were outlawed in their home jurisdiction.79 Yet these tourists brought with them a set of derivative problems associated with their addiction.80 As a result, these external forces brought about internal forces to harshen drug policies.81 Thus, one can see how one country in one context can shift from an insourcing policy to an outsourcing stance as a result of changing circumstances – particularly related to the social costs of the criminal activity involved. An area with broader implications is that of drug production and trafficking. Actors in the international market for illicit drugs function much like for-profit corporations, aiming to maximize 78 See Ed Leuw, Drugs and Drug Policy in the Netherlands, 14 CRIME & JUSTICE 229 (1991) (describing Dutch drug policy as normalizing, pragmatic, and non-moralisitic); and Juan R. Torruella, The “War on Drugs”: One Judge’s Attempt at a Rational Discussion, 14 YALE J. ON REG. 235, 262 (1997). 79 Researchers have found that access to drugs is considered by “drug tourists” to be a part of the overall experience of travel, including not only the pursuit of pleasure and meaning but also attempts to engage in what the tourist perceives to be local “authentic” culture; see Natan Uriely and Yaniv Belhassen, Drugs and Tourists’ Experiences, 43(3) J. TRAVEL RES. 238 (2005). 80 Peter Zisser, Euthanasia and the Right to Die: Holland and the United States Face the Dilemma, 9 N.Y.L. SCH. J. INT'L & COMP. L. 361, 363 (1988). 81 Id.; Hans C. Ossebaard and Govert F. van de Wijngaart, Purple Haze: The Remaking of Dutch Drug Policy 9(4) INT. J. DRUG POL. 263 (1998) (explaining changes in Dutch drug policy on the basis of both political change in the Netherlands and international critiques of Dutch law enforcement). Comp. also Uitermark supra note 71. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME their revenues and minimize their costs.82 Interestingly, one can point out how some countries attempt to insource these crimes, while others attempt to outsource them. Insourcing countries do so for a variety of reasons. For example, the ruling political elite in those countries can reap the benefits of the crime. An extreme example of such a situation can be found in the case of North Korea, in which the central government is reportedly actively engaged in the production and exportation of illicit drugs.83 Another example can be found in Guinea Bissau, where cooperation between the local military and South American drug cartels has created an ideal transit point for drugs into Europe84 – demonstrating that drug trafficking, too (rather than production or consumption), has an insourcing market Another prominent example of a drug-production insourcing country is Afghanistan, that has experienced an “opium boom” since the 1990’s due to a confluence of factors.85 Under international pressure, traditional opium-producing countries such as Iran, Pakistan and Turkey, gradually managed to eradicate their opium farming, leaving global demand unsatisfied. During the same period, central governance collapsed in Afghanistan due to the 1979 Soviet invasion and its aftermath. This presented a tremendous economic opportunity for Afghanistan’s impoverished farmers: “in many ways [opium] is a miracle crop for Afghanistan’s battered rural economy – a durable commodity commanding a high price, with a guaranteed market outlet, easy to transport, and non- perishable”.86 Thus, the lack of law-enforcement allowed global market forces to work, turning the illicit production of opium into a ‘desirable’ crime. Furthermore, Opium production was sheltered by ‘governmental’ protection, when Afghan warlords became involved 82 The size of the worldwide retail-level market for illicit drugs in 2003 was estimated at $321.6 Billion; see UNITED NATIONS OFFICE ON DRUGS AND CRIME, 2005 WORLD DRUG REPORT (2006) 17. 83 See Bill Powell & Adam Zagorin, The Sopranos State, TIME MAG., July 27th, 2007. 84 Vivienne Walt, Cocaine Country, TIME Mag. (Jun. 27, 2007). Available at: http://www.time.com/time/printout/0,8816,1637719,00.html#). Similarly, it has been reported that Guatemala has become a haven for drug dealers to the corruption of local law enforcement. See Jerry Seper, U.S. agents see drug flow via Guatemala on increase, WASH. TIMES at A 08 (March 11th, 2003). 85 See CHRISTOPHER WARD AND WILLIAM BYRD, AFGHANISTAN’S OPIUM ECONOMY (2004) (World Bank, South Asia Poverty Reduction Working Paper). 86 Id. at 17. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME in production and trafficking, reportedly giving allegiance to the Taliban “in return for a promise to keep the opium profit”.87 On the other hand, countries that wish to fight the drug trade, find themselves in a battle not only with drug traders, but also in criminal regulatory competition with other countries that enact tough drug laws that drive international drug activity in their direction, prompting a race-to-strictness. Take for example Canada, a country bordering the United States (which is known as one of the toughest countries in the world with respect to drug crimes). This situation has brought law enforcement agents in Canada to demand larger budgets and higher sanctions in order to fight the incoming drugs. For example, a Canadian drug enforcement official was quoted saying “Organized crime groups laugh at us in Canada. We are an easy mark,” referring to the relatively low sentences for drug crimes in Canada.88 Similarly, the United States has managed to displace to Mexico a significant part of the production of the synthetic drug Methamphetamine (“Meth”),89 by adopting a regulatory scheme that made buying the chemicals from which it is produced more difficult.90 Interestingly, American legislatures were aware of the possibility that Meth production might shift to Mexico, leaving consumption unchanged.91 Nonetheless, given the danger Meth production creates to law enforcement agents and to surrounding communities, they were content with only displacing production. As Senator Talent, who co-sponsored the bill, put it: “Even if it doesn't reduce the number of meth addicts by even one, stopping the labs is a huge plus.”92 Following these developments Mexico 87 Id. 88 Andrew Mitrovica, Low funding caused U.S. drug action, B.C. says Blacklist considered, ruled out for now, THE GLOBE AND MAIL, August 16, 1999 Page A1. See also Shannon McCaffrey, Potent marijuana rolls into U.S. from Canada A joint antismuggling effort is hindered by liberal laws in Canada, PHILADELPHIA INQUIRER, June 23, 2003 Page A01 (law enforcement agents addressing the “problem” of lower sanctions for drug crimes in Canada). 89 UN Drug Report (2007) at 123. 90 See 21 U.S.C.A. § 830 (creating an array of limitations on the sale of pseudoephedrine, the active ingredient in Meth). 91 See SAM HANANEL, Congress Moves Closer to Passing Anti-Meth Law, AP (Feb. 16th, 2006). 92 Id. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME has reportedly adopted similar measures, thus displacing some of its meth related activity to Central America and even Africa.93 (b) Gambling Gambling is another telling example of illicit activity shifting from one national jurisdiction to another, being both “outsourced” and “insourced” in response to differential domestic regulation. Gambling makes an interesting case for present purposes for a number of reasons. First, in economic terms, gambling services are relatively unfettered by objective criteria establishing competitive advantages, such as climate, land, labor or skills. Absent regulatory intervention, gambling services could be provided or consumed virtually anywhere. Geographical movements of gambling activity can therefore largely be attributed to regulatory differences between jurisdictions.94 This is evident not only on the interstate level but transnationally as well. For example, since the early 1990’s, the Government of Ontario, Canada, has invested heavily in the legal casino it owns in Windsor, Ontario – just across the river from Detroit, Michigan.95 This development – reportedly causing Michigan a capital loss of $1 Million a day in 199496 - prompted Michigan voters to approve various proposals legalizing casinos, subject to regulation, throughout the state.97 93 UN Drug Report, supra note 89 at 123. There are additional examples of such phenonmena taking place with respect to trafficking as well. For example, recently Mexican officials have proudly indicated that they have managed to displace cocaine routes to other countries with their law enforcement efforts. See JOHN WARD ANDERSON & DOUGLAS FARAH, MEXICO FACES U.S. SCORN IN FAILING DRUG WAR, SEATTLE TIMES, page A15, Feb. 10th, 1999. 94 In the US, for example, casino gaming that was originally pursued in only a few locales, has considerably expanded in geographic terms over the last few decades due to economic competition. The number of states licensing casinos has increased from only one in the 1970’s to 27 states in 1999; see William R. Eadington, The Economics of Casino Gambling, 13(3) J. ECON PERSPECTIVES 173 (1999), 173. 95 See, recently, Ontario, Ministry of Economic Development and Trade, Government of Ontario Invests in a Competitive Casino Windsor, Feb. 14, 2005 (http://www.ontariocanada.com/ontcan/page.do?page=5900). 96 See As Vote Nears, Detroit Edges Closer to Gambling, NY TIMES, Jul. 24, 1994(http://query.nytimes.com/gst/fullpage.html?res=9B0DE1D9133EF937A157 54C0A962958260). 97 See William M. Thompson and R. Fred Wacker, The Michigan Question: A Legal Quandary, 1(4) GAMING L. REV. 501. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME Second, the morality of gambling is relative and evidently 98 pliable, to the point that gaming lends itself easily to a spectrum of incremental degrees of criminalization, from absolute bans, through discreet regulation or guarded tolerance, to government monopolization and even full liberalization. This allows governments to set the desired level of formal gambling activity in their territory relatively flexibly, either discouraging or encouraging it as the case may be. Third, where in the past gambling operations would rely on the physical mobility of patrons and their relative geographical proximity (e.g., Monte Carlo in Western Europe,99 Las Vegas in the western US, Atlantic City in the east,100 and Macao in the far- east101), contemporary gaming services have proven particularly adaptive to Internet technology. Much of the modern gambling economy is online, permitting remote transboundary provision of gaming services, with gamblers virtually indifferent to the physical location of providers.102 Moreover, it is notable that this situation 98 Allegedly, even evangelist Rev. Billy Graham found Las Vegas to be “a nice place to visit”, pointing out that “while he did not gamble himself, the Bible said nothing definitive against the practice”; see JOHN M. FINDLAY, PEOPLE OF CHANCE: GAMBLING IN AMERICAN SOCIETY FROM JAMESTOWN TO LAS VEGAS (1986). 99 The economic affluence and continued political independence of the principality of Monaco have to large extent been based on the legendary success of Monte Carlo’s luxury casino in the 19th century – a direct result of regulatory lenience aimed at insourcing activity that was considered illegal elsewhere. The Principality’s income from gambling permitted it to engage in another form of regulatory competition when it abolished all individual taxes in 1869, creating a tax haven that has drawn millionaires from all over the world to shift their domicile to Monaco; see Russell T. Barnhart, The Legal Future of Monte Carlo, the World’s Oldest Gambling Casino 1(3) GAMING L. REV. 371 (1997). 100 Legalized casino gambling was introduced in Atlantic City, NJ, in 1976, in an effort to revitalize the east coast resort. This is another example of a jurisdiction’s attempt to decriminalize a certain activity for economic gains. However, interfering planning and political factors severely impeded the anticipated success of this move; see Paul Teske & Bela Sur, Winners and Losers: Politics, Casino Gambling, and Development in Atlantic City, 10(2-3) REV. POL. RES. 130 (1991). 101 See references in fn. 72 supra. 102 See I. NELSON ROSE & MARTIN D.OWENS, JR., INTERNET GAMING LAW (2005), 53 et seq. (discussing the proliferation of gambling in light of technological change). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME has resulted in the complication of the ability of national authorities to independently regulate gambling within their jurisdiction.103 Fourth, the relative criminalization of gambling is often considered in cost-benefit terms, taking into account government profits and tax revenues, employment and peripheral gains such as income from tourism (on the one hand), and moral considerations, and social and incidental costs caused by violence and prostitution (on the other hand).104 On this backdrop, it is interesting to focus on the dynamics of the contemporary online gambling industry and the transnational insourcing/outsourcing trends that it has produced over the last few years. At the advent of online gambling in the 1990s, because remote gaming was generally outlawed in the US,105 internet firms targeting the US market for gaming sought to establish their operations – in both corporate and operational terms - outside the US, in order to avoid criminal liability and its costs. In a classical case of ‘crime insourcing’, a number of non-US national jurisdictions rose to the challenge and provided attractive taxation and regulatory packages to investors in gaming enterprises, facilitating the establishment and licensing of internet gambling providers. This is a phenomenon that continues today, with many jurisdictions competing over the insourcing of internet gaming providers.106 103 See I. Nelson Rose, Should Antigua Sue China?, 11(6) GAMING L. REV. 645 (2007), 645: “Gambling has almost always been a local issue […] The introduction of internet gaming into interstate and intercommercial commerce has turned the control of gambling on its head”. 104 For a comprehensive study of gambling regulation in the US, covering many of the points mentioned here, see ERNEST P. GOSS & EDWARD A. MORSE, GOVERNING FORTUNE: CASINO GAMBLING IN AMERICA (2007). 105 See Joel Michael Schwartz, The Internet Gambling Fallacy Craps Out, 14 BERKELEY TECH. L.J. 1021 (1999)(positing a forceful argument that internet gambling is illegal in the US, even if servers are based offshore); and Gregory Manter, The Pending Determination of the Legality of Internet Gambling in the United States 2003 DUKE L. & TECH REV. 0016 (2003) (http://www.law.duke.edu/journals/dltr/articles/2003dltr0016.html) (disucussing legality of internet gambling in the US with respect to judicial and legislative subsequent developments). 106 Such jurisdictions include, but are not limited to, the United Kingdom, Canada, Costa Rica, Gibraltar, Antigua and Barbuda, and recently – the seemingly unlikely state of Papua New Guinea; see Edward A. Morse, The Internet Gambling Conundrum: Extraterritorial Impacts of Domestic Regulation, in CYBERLAW, SECURITY AND PRIVACY (Sylvia M. Kierkegaard, ed., 2007) 267, OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME However, US authorities, either concerned about the corruptive effect of online gambling on US gaming patrons and their environment, or alternatively about the protection of land- based gaming services in the US, pursued aggressive extra- territorial prosecutorial policies against principals of off-shore gambling enterprises who catered to US customers. These included the celebrated arrest, prosecution and extended jailing of Jay Cohen, an executive of an Antigua-based internet sports-betting company;107 the arrest of Peter Dicks, a British director of Sportingbet, an offshore internet sports betting company, while visiting the US108 - a law-enforcement act that resulted in the closure of Sportingbet’s online gaming activities in the US;109 and the arrest of a David Carruthers, chief executive of Betonsports, another online gaming website,110 leading to a settlement essentially abolishing this corporation’s commercial operations from the US, from 2007 onwards.111 These US actions against foreign-based gaming service providers accentuate the tension between the US as a crime- outsourcing jurisdiction, in this case, and other countries as crime insourcing jurisdictions.112 Indeed, to the extent that internet technology enables a state to reap the benefits of gaming while minimizing its costs, there is a strong incentive to “insource” gambling services for export purposes; but at the same time, “a country that ‘exports’ gambling services may also be exporting 268. For an example of undisguised publicity aimed at attracting internet gambling businesses to establish (in this case) on the Isle of Man, see Isle of Man: Nice Place for your Online Gambling Business!, VIADEN MEDIA, Apr. 16, 2007 (http://casinoblog.viaden.com/2007/03/15/isle-of-man-nice-place-for-your- online-gambling-business/) (interviewing Tim Craine, e-business minister of the Isle of Man and explaining tax and other benefits). 107 See United States v Cohen, 206 F. 3d 68 (2d Cir. 2001), cert, denied, 536 U.S. 922 (2002). 108 See Simon Bowers and Andrew Clark, Sportingbet Arrest Threatens Internet Gambling, THE GUARDIAN, September 9, 2006. 109 See Dominic Walsh, Sportingbet Pays $400,000 to Call it Quits, THE TIMES, Mar. 22, 2007. 110 See James Quinn, You Bet: Dallas Arrest Spoils the Party, THE TELEGRAPH, Jul. 21, 2006. 111 See Andrew Ross Sorkin and Stephanie Saul, Gambling Subpoenas on Wall St., NY TIMES, Jan. 22, 2007. 112 This is an example of a complex model of inter-jurisdictional competition, as explained in section II.3(c) supra. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME social costs that other governments may have to address without the benefit of the tax revenues traditionally generated by land-based gambling enterprises”.113 Morse observes that many of the countries that export internet gambling services have “relatively low percentages of internet penetration in their own markets”.114 This means that the otherwise illicit activity can be insourced with very small negative impact on local society. In contrast, governments of export-market countries have to choose between joining the ‘insourcing’ race by permitting internet gambling in order to generate taxes that might cover social costs, on one hand, and pursuing aggressive crime ‘outsourcing’ in order to try and deflect the impact of foreign-based activity, on the other. In internet gambling the US chose the latter path, but not without creating direct conflict with gaming insourcers, whose interests have been hard hit. In an interesting confluence of the international rules regulating the globalization of legitimate economic activity, and the globalization of illicit activity, US Federal and state gambling legislation has for a number of years stood at the center of an important trade dispute at the WTO initiated by Antigua and Barbuda, in which the US has been found to be in violations of its obligations under the WTO GATS.115 While currently facing the prospect of authorized retaliation by Antigua of over $20 Million a year, until its legislation is WTO- compliant,116 the US has forwarded similar WTO complaints by negotiating a withdrawal of US gaming-related GATS commitments towards interested parties, such as the EU.117 The US has also enacted legislation that aims to prevent internet gambling in the US, not by criminalizing gambling patrons and gaming services but by making it illegal for providers of credit card and online payment services, to accept and process transactions that 113 See Morse supra note 110, 269. 114 Id.. 115 See WTO, WT/DS285/AB/R United States – Measures Affecting the Cross- Border Supply of Gambling and Betting Services (Appellate Body Decision) 7 April, 2005. 116 WTO, WT/DS285/ARB/ United States – Measures Affecting the Cross- Border Supply of Gambling and Betting Services – Recourse to Arbitration by the United States under Article 22.6 of the DSU (Decision by the Arbitrator), Dec. 21, 2007; see also James Kanter and Gary Rivlin, In Trade Ruling, Antigua Wins Right to Piracy, NY TIMES, Dec. 22. 2007. 117 See EU Out of US Online Gambling Market, LA TIMES, Dec. 18, 2007. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME they suspect to be online wagers,118 with clear detrimental effects on gaming ‘insourcers’.119 This is not, however, the end of the transnational gaming story. Having been frustrated by US policy in the attempt to use foreign jurisdictions as offshore bases targeting the lucrative US market for gambling, online gaming enterprises are now reversing their strategy: the latest trend is the establishment of gaming operations based (at least at the corporate level) in the US, but targeting patrons in other jurisdictions – all the while complying with US criminal law, including the UIGEA. For example, US- based Yahoo! Has launched Yahoo Poker,120 reportedly based on UK and Ireland property, but blocked by Yahoo! itself in the US and Gibraltar. Here we see that a crime ‘outsourcing’ policy based on strict legislation and domestic enforcement can co-exist with an ‘insourcing’ policy, by separating the costs and benefits of transnational illicit activity. Furthermore, one sees that regulatory policy has not only shifted locus of the illicit activity of providing gaming services, but also that it has contributed to the displacement of gambling itself: gaming firms that have abandoned the US market are reporting significant growth in their revenues from wagers placed in non-US jurisdictions.121 (c) Money Laundering An additional example for the way transnational crime displacement and attraction play out in local politics can be found in the realm of money laundering. Money laundering is “the process by which one conceals the existence, illegal source, or illegal application of income, and disguises that income to make it appear 118 See the Unlawful Internet Gambling Enforcement Act, Pub. L. 109-347, Title VIII, Oct. 13, 2006, 120 Stat. 1952, Codified at 31 U.S.C. §§ 5361-67. 119 See, e.g., US Gambling Legislation Hitting Gibraltar Jobs, IXGAMES.COM, Nov. 10, 2006 (http://ixgames.bloghi.com/2006/11/10/us-gambling-legislation- hitting-gibraltar-jobs.html) (claiming hundreds of online gambling employees laid off in Gibraltar and India due to UIGEA); and Simon Bowers, Players Walk Away as US Law Wipes Out 90% of PartyGaming’s Poker Revenue, THE GUARDIAN, Oct. 17, 2006 (describing investor response in leading online gaming firms after enactment of UIGEA). 120 See http://yahoopoker.stenodoc.com/yahoopoker/poker/home/index.html. 121 See Morse, supra note 110, 269. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME legitimate.”122 This process is conducted by an array of transactions involving different financial institutions at the end of which cash generated by criminal activity (e.g. drug sales) is transformed into funds in a private bank account that can be legitimately used for personal consumption, at best,123 or for other anti-social activities (e.g., funding terrorism), at worst. Money laundering can therefore be viewed as a derivative crime: the criminality of the financial transactions involved in laundering depends on the criminality of the source of the funds being laundered. On this basis these transactions abuse bank secrecy and other aspects of financial regulation in order to erase the criminal origins of the funds.124 As part of an effort to fight crime, states have adopted international agreements and national laws that both prohibit different aspects of the laundering process, and require financial institutions to report suspicious transactions. Once criminalized, money laundering is an activity that typifies the model we describe in this article. Money launderers engage in a business-like activity, which is purely motivated by financial gains. In addition, the activity itself is highly mobile 122 See PRESIDENT'S COMMISSION ON ORGANIZED CRIME, INTERIM REPORT TO THE PRESIDENT AND ATTORNEY GENERAL, THE CASH CONNECTION: ORGANIZED CRIME, FINANCIAL INSTITUTIONS, AND MONEY LAUNDERING 7 (1984); on the international level, see similarly, rticle 6(1)(a) UNCATOC, whereby money laundering is: “(i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action; (ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime.”; 123 For a description of laundering see, e.g., Mariano-Florentino Cuéllar, The Tenuous Relationshop Between the Fight Against Money Laundering and the Disruption of Criminal Finance, 93 J. CRIM. L. & CRIMINOLOGY 311, 326-38 (2003). 124 Id. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME worldwide. Unlike past years, when criminals had to carry suitcases filled with cash to near-by countries, current technology allows for swift and inexpensive money transfers around the globe that enable launderers to pick and choose the jurisdiction in which they will commit at least some segments of the laundering. Viewing the political economy of money laundering the interesting players from our current perspective are the financial institutions. Financial institutions have two incentives to ease money laundering regulation. First, such regulation creates significant direct costs due to the vast reporting requirements. Second, and more importantly from our perspective, the displacement of laundering to jurisdictions with lenient regulation can cause significant revenue losses for domestic financial institutions.125 Thus, one can see several examples of lobbying conducted by the financial district in order to ease or prevent money laundering regulation. These examples include small and relatively undeveloped economies in which the banking industry contributes a relatively large part of the GDP, and larger developed economies.126 (d) Sex Crimes Finally, we would like to point out that the argument presented here can be extended even to the area of sex crimes. While sex crimes tend to be perceived as having much to do with passion and physiological urges, and little to do with rationality, in some cases sex offenders – and those who are susceptible to the satisfaction of their demands - exhibit behavior that is completely in 125 For instance, it has been reported that the Bank of New York made as much as $240 million in fees from laundering. See Kathleen A. Lacey & Barbara Crutchfield George, Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms, 23 NW. J. INT'L L. & BUS. 263, 274 (2003). 126 See, e.g., Igor Reichlin & Peter Galuszka, Germany’s Brash New Import: Dirty Money, Newsweek (issue 3260) April 6 th 1992 (German legislation could “scare away customers”); Ivelaw L. Griffith, Drugs and Democracy in the Caribbean, 53 U. MIAMI L. REV. 869, 873-4 (1999) (describing how banks prevent legislation in the Caribbean); Mark A. Uhlig, Panama Resisting Move to Clean Up Banking System, NY TIMES (ABSTRACTS) at A1, October 22, 1990 (Panamiam buisnesmen worried legislation “would ruin country's lucrative position as tax haven and dollar-based financial center” ); Judy Dempsey, Israel Plans to Act Against Money Laundering, Financial Times, June 30, 2000 (Israeli bank association concerned over “protecting the privacy of the citizen”). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME line with a rational-choice model. The emerging international “sex tourism” market serves as an example for this type of phenomenon. In the last few years lower travel costs coupled with the lower search costs brought about by the Internet, have enabled people from developed countries interested in engaging in commercial sexual activity that would not be deemed normative in their home countries, including pedophiles, to travel around the globe to developing countries in which the expected sanction for their acts is significantly lower than in their home countries. As one Kenyan observer puts it simply, “Men who would never visit brothels in their home countries for example, will end up doing so in a foreign country where there is a negligible chance of detection and (or) penalty”.127 That is to say that equal opportunities exist in western countries, but the social and legal sanctions, and chances of detection, are much higher there. Traveling pedophiles, for example, have created a pressure on national legislatures and law enforcement agencies to align their policies with other countries in order not to be become a sex tourism attraction. After the British rocker Gary Glitter was sentenced to three years in jail for molesting two girls in Vietnam, local experts reacted by noting that “Such an outcome could reinforce a perception of lax laws in Southeast Asia and attract foreign child molesters who face tougher penalties at home.”128 Similarly commentators in Thailand have raised concerns that weak law enforcement and the low probability of detection is drawing sex offenders to the country.129 The fear of sex tourism has brought Southeastern Asian countries to be aware that differences in policies amongst themselves can also affect the destination of choice of sex offenders. For example, Tjokorda Bagus of Indonesia's Committee Against Sexual Abuse has noted that “Since Thailand has become more stern in their law enforcement, more 127 See Rose Kisia Omondi, Gender and the Political Economy of Sex Tourism in Kenya’s Coastal Resorts, Africa Regional Sexuality Resource Centre, Paper presented in Tromso, Norway, September 24-26, 2003, http://www.arsrc.org/downloads/features/omondi.pdf, at 9. 128 Christopher Torchia, Child Sex Tourism Continues in Southeast Asia Despite Legal Efforts, (March 12, 2006). 129 Craig Simons, JonBen00E9,et case arrest highlights scope of overseas sex trade Hundreds of thousands of girls and boys believed to work in Asia, which is considered a haven for pedophiles (August 20, 2006). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME pedophiles are coming to Indonesia.”130 One should note that given the touristic nature of these crimes, the effects of legal reforms can be global and not regional. A policy change in Southeast Asia can simply cause a “sex tourist” to get on a flight to another part of the globe. Indeed, a Kenyan government report pointed out that sex tourism has moved to that African country from Asia as a result of the differential legal situation.131 130 Torchia, supra note 128. See also THAILAND UNDER A FAMILIAR GLARE, BANGKOK POST (August 27, 2006) (pointing out that “child sex tourists are more likely to go to Cambodia, Vietnam, the Philippines, or Indonesia, where law enforcement is less strong.”); SUMMARY OF THE NEWS : FROM JAN 19 TO JAN 25, 2003, BANGKOK POST (January 26, 2003). 131 Patrick Mayoyo, Tour Firms 'In Child Sex War', November 4, 2004. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME III. OPTIMAL INTERNATIONAL CRIME CONTROL In the previous Section we demonstrated that the crime control policies adopted by one country affect the policies adopted by other countries. In this Section we turn to explore the normative implications of our analysis. We begin by setting out the theoretical framework to analyze the efficiency of crime control measures adopted by countries. In a nut shell, we argue that although there are many advantages associated with a decentralized system of crime control, the current situation in which each country is sovereign to determine its policies has several detrimental effects. Given that claim, we then turn to evaluate an array of policy tools ranging from informal cooperation between countries to highly structured cooperation mechanisms. 1. The Normative Framework Both academics and policymakers dealing with transnational crimes often refer to the need to foster international cooperation with respect to fighting these phenomena.132 Obviously, one cannot argue against international “cooperation.” Yet that still begs the question, what does cooperation precisely mean when we are dealing with transnational crimes. In order to answer this question, we focus our discussion on the efficiency of crime control, and explore the ways cross border crimes can be dealt with such that aggregate welfare will be enhanced. There is a long standing debate on the efficiency of regulatory competition.133 The question at the core of this debate is to what degree should policy decisions be delegated to regional political units. In this regard, this literature is not limited to the international arena, and deals with domestic issues such the relation between local governments within a country. On one hand, lie those who view competition as a desirable means to promote the efficient supply off public goods by governments.134 Much like in other market settings, regulatory competition functions as a check on the monopoly power of the state, and helps promote individual welfare.135 The normative conclusion stemming from this line of 132 Cite. 133 Cite basic literature. 134 Cite Tibout and following literature. 135 See ROBERT COOTER, THE STRATEGIC CONSTITUTION ___ (). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME thought is that the competitive regulatory market, much like other markets, should be left unregulated. On the other side of the debate lie those who argue that regulatory competition is inefficient.136 These scholars point out that countries designing regulatory regimes might be facing a collective action problem.137 In these situations, often modeled as non-cooperative games such as the prisoners’ dilemma, the parties would like to reach a cooperative solution, yet each party’s individual interest is to defect, leading the group to an inefficient equilibrium in which they all defect. Thus, these scholars often argue for some type of limitation on the ability of jurisdictions to compete among themselves. As is the case in many other settings, the accurate description lies somewhere between the two extreme positions. The regulatory market can function as an efficient way to supply public goods, as long as a series of conditions are satisfied. Importantly for our purposes, one of the necessary conditions for the market to reach an efficient outcome is the lack of externalities.138 Thus, the focus of the discussion can shift to the point of externalities. To the extent we can demonstrate that externalities exist in the area of crime control, there might be a need to adopt policy tools that will assist countries to deal with these externalities. The main insight of our positive analysis is that crime control policies adopted by one country do in fact create externalities. There are two types of externalities that countries can create in this regard. First, some crimes committed in countries create harm in other countries. This is the case, for instance, when an illicit drug is manufactured in one country and consumed in another. In such cases, crime control efforts of the country in which the original crime is committed creates positive externalities.139 Second, crime control efforts may cause criminal activity to be 136 Cite. 137 Cite. 138 Cite general reference. Cite Tibout note. 139 This claim is tied to a long line of criminological studies that point out the positive diffusion of law enforcement efforts from one area to another. See generally, Ronald V. Clarke & David Weisburd, Diffusion of Crime Control Benefits: Observations on the Reverse of Displacement, 2 CRIME PREVENTION STUD. 165 (1994). OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME displaced to other countries. In such events, the crime control efforts of one country cause a negative externality in other countries. With this framework in hand, we can now sketch out some conclusions regarding the efficiency of regulatory competition in the area of transnational crimes. We begin by pointing out the main advantages of competition in the area. First, like in any other competitive market, the market for crime control can drive actors to behave efficiently, and help weed-out inefficient behavior. Countries that innovate and a develop a well functioning law enforcement system will enjoy low crime rates, while countries that fail to adopt such measures will find themselves with growing crime rates. Second, decentralization allows governments to adopt policies that are tailored towards the preferences of specific communities. For example, an urban community can offer its residents a basket of taxation and public goods that emphasizes investments in opera and fine arts while a suburban community can offer their residents a basket that emphasizes schools and public parks. In the area of crime control moral diversity and distinct social norms might lead to different legal regulation of some activities.140 For instance, decentralizing the control over criminal justice allows for communities that have different views on issues such as prostitution and the definition of illicit drugs to design regulation that best fits their preferences. Similarly, communities can differ as to the way and magnitude of the appropriate punishment due to non-consequentialist reasons. Decentralizing the control over these decisions allows more communities to adopt what they see as the appropriate sanction.141 Yet decentralizing crime control also has a series of draw backs, which stem from some of the pathologies of markets. The externalities we pointed out above can lead countries in a dynamic setting to an equilibrium in which they adopt crime control policies 140 Interestingly, there is actually a lot of convergence regarding how communities judge different crimes. See, e.g., - cite cross culture studies. 141 Note that the non-consequentialist perspective in the text has consequentialist implications to the extent that people’s welfare is affected by the appropriateness of the sanctions assed to criminals. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME that do not maximize aggregate welfare. More specifically, with respect to undesirable crimes, crime displacement might create a “race towards harshness.” Since raising expected sanctions will both deter and displace crime, countries will tend to adopt policies that are harsher than they would had they operated in isolation from one another. On the other hand, countries dealing with desirable crimes might find themselves in a “race towards leniency.” In these situations the fact that the crime is beneficial from the perspective of local political forces will cause them to create a crime friendly environment even though they might have opted for a collective decision in which they all agree to adopt harsher regulation. In extreme cases countries might even “subsidize” crime in the sense that we will see active involvement of government officials in organizing criminal activity. Another draw back of decentralization is the fact that much like in other market settings, competitive markets measure the parties’ willingness to pay given their initial endowment, and not their actual welfare.142 A large body of public finance literature has analyzed the fiscal disparities associated with decentralization.143 In general, this literature points out that decentralization can bring about inequalities, which benefit wealthy communities. In the area of crime control, a poor and impoverished country might suffer tremendously from the adverse affects of cross border crime being displaced into it, but not invest the necessary resources in order to keep up with other countries simply because it cannot afford to do so. It is quite clear that many countries in the world (assuming they wanted to) cannot afford to indulge themselves with the incarceration rate that the United States currently holds.144 Notice that there could be a tension between the advantages and disadvantages of a competitive decentralized system in the area of crime control. For instance, the desire to enable societies to adjust regulation so that it will reflect their local values and traditions might conflict with the need to control negative externalities. This tension is evident in the global debate over the 142 Add citations. 143 Cite basic literature. 144 Cite current incarceration rates and expenses on it. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME decriminalization of certain types of drugs. In recent years several countries have considered adopting more lenient policies towards some drugs.145 These initiatives have been driven by both the growing use of some of these drugs for medical purposes, and by the recognition that not all societies view the use of these drugs as harmful and undesirable. Yet given the fact that legalizing consumption or production of drugs in one country might create a negative externality to outlawing countries as production activity shifts to the legalizing country both interests cannot be fully protected. In order to deal with this conflict, countries need to develop formal or informal modes of cooperation. We now turn to explore these mechanisms in more detail. 2. Solutions In this final subsection we wish to point out several solutions that countries have adopted or can adopt in order to deal with the problems associated with crime control. Unlike the national setting, in which the central government usually holds many legal tools in order to regulate local governments, the international arena lacks an authoritative central government that can deal with trans-border externalities. Nonetheless, as this subsection will point out, countries have managed to create an array of solutions to the problems associated with cross border crimes. i. Informal Cooperation A first mechanism through which countries can manage to solve some of the problems we presented above is informal cooperation. Examples of such cooperation can be found both with respect to legislation and with respect to enforcement. Countries routinely assist each other to fight crime. This includes both large projects like the International Law Enforcement Academy that the United States founded in Budapest in 1996,146 and smaller initiatives that are even conducted at the city level.147 Similarly, one can point out many examples of bilateral efforts by countries to amend their criminal legislation in order to deal with common crime control problems.148 145 Cite. 146 Cite. 147 Cite example of LA helping Mexico. 148 Cite examples of help in the area of sex crimes in Asia. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME The existence of cooperation given the incentives of countries to act in a non-cooperative fashion with respect to crime control begs the question: how do countries manage to achieve such cooperation. We find that there are two equally important explanations for this phenomenon. The first relates to the proper modeling of the strategic situation countries are situated in. The problems associated with decentralized crime control stem from the collective action problem countries might be set in when they design their policies. Yet the situation countries face when choosing between policy options is not identical to that of two players in a prisoner’s dilemma. Countries, as apposed to the regular prisoners’ dilemma setting, are repeat players. Thus, the potential long term benefits associated with cooperation can cause them to adopt policies that are mutually beneficial despite the short term tendency to defect.149 Just like the neighbors in Shasta County,150 countries can also achieve cooperation without the use of formal legal mechanisms. The second reason for the cooperation we observe in the area of crime control is the fact that the formal public choice model fails to fully describe what countries maximize when setting their policies. Public choice models are a development of the rational choice model used by economists to model individual decisions. While the rational choice model views individuals as aiming to maximize their personal utility, public choice models view countries as solely concerned with maximizing their own welfare. In recent years a significant body of experimental research has demonstrated that individuals do not always behave according to the predictions of rational choice theory.151 Rather, they behave in a way that reflects concern over issues such as fairness and social norms. Within our framework behavior aimed at promoting fairness may affect policies both directly, through politicians’ perceptions of fairness, and indirectly, as rational politicians promote the fairness preferences of their constituents. In any event, the result is policies 149 On of cooperation in repeated games see generally _____. 150 See ELICKSON, ORDER WITHOUT LAW (). 151 Cite literature. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME that promote a common good, even at the expense of the narrow interests of the country adopting them.152 To be sure, there are several reasons to believe that informal cooperation will not always be a viable option to sustain cooperation even with respect to entities such as countries. First, while countries are long term players that might strive towards cooperation, politicians are in many cases driven by short term gain and elections. Such political opportunism might lead to the unraveling of some forms of cooperation. In addition, the cooperation equilibrium might be destabilized by crime control initiatives that unintentionally have cross-border affects. Such “unintentional defections” might cause very real effects in neighboring countries, and force them to adopt similar measures in order to deal with the cross-border effects.153 Given these draw backs of informal cooperation; we now turn to explore more formal methods of cooperation. ii. International Organizations International organizations play a central role in fostering of cooperation between countries. Complete –general background on this issue for law review piece. The first way international organizations can assist countries is by helping them reach multilateral conventions. The United Nations has promoted a series of conventions dealing with issues such as illicit drugs, money laundering and organized crime. Complete – review of agreements. The problem of the organizational solutions described thus far is that they are based on the voluntary behavior of countries. Voluntary participation can be a useful means to achieve cooperation when cooperation is in the best interest of all countries 152 See e. g., http://www.sgir.org/conference2004/papers/Kaunert%20- %20JHA%20New%20Single%20Market.pdf (regarding EU). Another paper with a IR theoretical approach: http://www.ciaonet.org/isa/bua01/. 153 One might assume that once the unintended consequences of a certain measure are discovered, countries will cooperate and agree not to adopt it if that is a desiarable outcome. We find such an outcome to be unlikely given the political difficulties to cut back on crime control measures once they are adopted. See ____. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME involved and no single nation has an incentive to defect.154 Once cooperation is the desirable outcome from an aggregate perspective, but not from the perspective of some countries, achieving it might be difficult. A common economic reaction to individuals who behave in a non-cooperative manner that runs against the common interests of the community is to use penalties, in order to alter the incentives of people and drive them to behave efficiently. Tools such as tort law, criminal law, and taxation are all used in order to structure people’s behavior in an efficient way. In the area of international cooperation, on the other hand, the use of such “sticks” may be problematic, since generally, the international community has limited abilities to sanction countries. Thus, one can see how the international community through different organizations has managed to create a set of benefits that are granted to countries that comply with cooperative norms. While such “carrots” are much easier to use as a policy tool in international relations, from an economic perspective they can create incentive that are identical to those created by penal regimes.155 A concrete example of a regime that is based on carrots can be found in the context of the Organization of Economic Co- Operation and Development (OECD). The OECD is a small elite organization whose members are the developed global economies. While membership in the organization might have little direct payoffs, it is seen as a stamp of approval and carries an array of indirect benefits. Thus, countries have an incentive to comply with the requirements set forth by the organization in order to be admitted. This, in turn, enables the OECD to cause countries to adopt policies that run against the narrow interest of the joining country. For example, Israel has recently adopted serious reforms in areas such as IP protection and money laundering in order to comply with the OECD requirements. These reforms led the OECD to open a formal discussion on accession with Israel in May of 2007. . 154 This is the case in situation that can be modeled as coordination games. For further analysis and review see ____. 155 Add economic citation. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME iii. Unilateral Enforcement A final line of solutions for crime control externalities is through the unilateral use of the political-economic power of single countries. Powerful countries and entities, such as the United States and the EU, can threaten to use their economic and political power to sanction countries that do not comply with standards they set forth unilaterally. These sanctions can include foreign aid reduction, trade sanctions, or even just an act of global shaming. An example of such a unilateral policy can be found in the American policies regarding illicit drugs. According to the Foreign Relations Authorization Act (FRAA) the president must submit to the Congress an annual report identifying countries that serve as major centers for the production or distribution of illicit drugs.156 Countries included in this list can, as a result, lose fifty percent of the financial support they receive from the United States.157 In addition, according to the Act the United States Executive Director of each multilateral development bank must vote against any loan or other utilization of the funds of their respective institution to any listed country.158 The system of unilateral enforcement has both advantages and disadvantages. The most clear advantage is it effectiveness. Unilateral enforcement creates a clear decision making process that can lead to substantial sanctions on nations that do not comply. Thus, one can point out several examples of countries that reformed their policies as a direct result of the threat unilateral enforcement. In the area of human trafficking, for example, Israel has amended its criminal code and began to enforce this legislation as a result of its inclusion in the State Department report.159 This move can be explained by the threat on the American aid to Israel, but can also be explained by the shaming effect caused by the inclusion in an official list of the state department. 156 See 22 U.S.C.A. § 2291h. updated information on the work of the Act can be found at the website of the State Department. See http://www.state.gov/p/inl/c11766.htm (last visited July 3, 2007). 157 See 22 U.S.C.A. § 2291j (a)(1). 158 See 22 U.S.C.A. § 2291j (a)(2). 159 Cite. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME On the other hand, unilateral enforcement suffers from several drawbacks that stem from the fact that it is conducted in order to serve the interests of the country initiating it, and therefore will not necessarily serve the interests of aggregate global welfare. First, in many cases the issues unilateral enforcement focuses on are those that are of interest to the initiating countries. These could be economic interest, as is the case with the strong emphasis the United States puts on enforcing IP rights. Or other political interests, as is the case with the pressure the United States puts on other countries with respect to illicit drugs. As we pointed out earlier,160 the issue of drug regulation might require a balancing between the interests of countries like the United States, and the interests of countries that do not share its norms and traditions. Yet a unilateral mechanism might circumvent this balancing and force a solution that is not necessarily welfare maximizing. Second, within the issues that are enforced unilaterally, enforcement will be subject to the political interest of the enforcing country. Case in point, Pakistan. For years Pakistan has been a major hub for the international drug trade, and should have been subjected to the sanctioning scheme of FRAA. Nonetheless, US political interests in Pakistan have caused the President to routinely use his authority under FRAA in order to prevent such sanctions. Another example of unilateral enforcement can be found in the recent move among countries to widen the scope of their criminal jurisdiction to crimes committed by their nationals outside of the geographic boundaries of the jurisdiction. International law recognizes five distinct justifications for a nation’s criminal jurisdiction: (1) territorial; (2) nationality of the perpetrator; (3) nationality of the victim; (4) protective; and (5) universal.161 Traditionally, Anglo-American criminal law tended to minimize the use of extraterritorial jurisdiction, and focused on crimes committed within the jurisdiction.162 In recent years one can see a growing tendency among Anglo-American countries to exercise their extraterritorial jurisdiction along two dimensions. First, jurisdictions have begun to 160 See supra notes __-__ and accompanying text. 161 Cite. 162 Cite. There are many exmples that traditionally included extraterritorial crimes under their jurisdiction. For example…cite. OUTSOURCINGCRIMEDRAFT 2/20/2012 6:20 AM OUTSOURCING AND INSOURCING GLOBAL CRIME prosecute crimes committed in other countries that have consequences within the jurisdiction.163 This is an obvious way to deal with crimes that create cross border negative externalities such as drug production. A second, and perhaps more controversial broadening of criminal jurisdiction, is the application of criminal law to nationals who committed their crimes outside of the jurisdiction, and that their crimes have little consequences within in the jurisdiction. The most prominent example in this context are laws enacted by several Anglo American jurisdictions that criminalize illicit sexual conduct committed outside of the jurisdiction.164 These new laws, aimed at fighting the growing sex tourism phenomenon, function under the assumption that several developing countries simply cannot generate sufficient deterrence in order to combat these crimes. Thus, developed countries from which sex tourists originate, can provide additional deterrence by sanctioning offenders at their end. IV. CONCLUSION To be completed. 163 Cite. 164 Cite laws.
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