Illegal Business Practices - 6th International Research Meeting in

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Transcript Illegal Business Practices - 6th International Research Meeting in

Illegal Business practices: Why
should business and management
scholars be interested?
5th International Research Meeting in
Business and Management
7-8 Jul 2014 Nice
Gerard McElwee
Issues from the literature
Informal and Illegal
A methodology
Conceptual framework for illegal
Value Adding or Value Extracting
50 Illegal businesses
The Role of Business Schools
My interest
• Why do people engage in Illegal
• What is the ‘glue’ that holds society
‘To maximize their profit, entrepreneurs may drive
hard bargains with their customers and suppliers.
They do not tell their customers the prices for
which they purchased the goods they are reselling,
and they do not tell their suppliers the price at
which they can re-sell. They are allowed to
bluff…Bluffing is not considered lying, although
the effect is much the same: with successful
bluffing, the buyer pays more than he needs to,
and the seller receives less than he could get’.
Buckley and Casson (2001)
Research questions
• Does illegal entrepreneurship exist?
• The significance of ‘enterprise’ in the
• Value adding ? Value Extracting?
Neither? Both?
• Social Return on Investment (SROI)
• Ways in which ‘illegal’ enterprise in
the economy can be conceptualised
• Small businesses are the beating heart of
the EU economy. In 2013 more small
businesses were started in the EU than
ever before.
• There are now 4.9 million small businesses
in the UK, employing more than 24
million people and with a combined
turnover of £3,300 billion; small businesses
alone account for almost 60% of private
sector employment and nearly half of all
private sector turnover.
• Does illegal entrepreneurship exist and is it
different from
• EU informal economy average 7% of GDP before
• Bulgaria/Greece over 30% at least!!
• UK informal economy represents (at least) 12% of
GDP or approximately £150 billion (Schneider
and Williams, 2013).
What is to be done about the informal
Four possible policy options for dealing
with the informal economy:
1. Do nothing;
2. Eradicate the informal economy;
3. De-regulate the formal economy;
4.•Facilitate the formalisation of informal
Are there “good” and “bad” informal
Relatedly, can we distinguish between “good” informal
economy work activity and “bad” informal economy work
How do moral and ethical values comingle with economic
and political considerations when making these judgments?
And methodologically, how can we begin to answer these
types of questions?
Research Access problematic
If some informal economy activity is beneficial, how might a
society selectively cultivate these positive attributes?
Illegal enterprise activity is widespread (Bauchus
1994). e.g. illegal trading
1) the trading of goods or services that are normally
forbidden by law: narcotic drugs, prostitution,
certain categories of arms, rare wildlife, counterfeit
2) avoidance of taxes or duties on the trading of
legal goods and services
3) using illegal unfair practices to attain a
competitive advantage: insider trading, organizing
clandestine cartels and monopolies, tax evasion,
black market currency exchange
Drivers of Illegal (I)
• Shift in Morality
• Tax Morality
• Community Values
• Business Rates
• Trade Barriers
• Labour Barriers
Drivers of Illegal (II)
• Increased Taxation
• VAT Rates
• Working Time
• Unemployment
• Early Retirement
• It is not a purely a marginal activity of marginal entrepreneurs
• It is connected to the formal, modern, economy
• Those who work within the illegal economy may receive less
benefits and protections than labour in the formal sector
• It is available to any who have
– 1) a particular moral code
– 2) entrepreneurial capability and
– 3) chooses to engage in it
• But Illegal is not synonymous with the Hidden Economy
• Some elements of illegal entrepreneurship
may benefit from a government attitude of
• Illegal enterprise is similar to legal
entrepreneurial processes
• Many products or services can be part of
the illegal economy
• It normally, but not always, operates in cash
or in kind
Working Definition of Illegal
• Where entrepreneurs supply willing
customers with illegal services or products
or legal services or products using an
illegal process.
• These customers may not necessarily be
aware of the illegal nature of the
transaction of the service or product which
they are acquiring or the legality of the
process of which they are a part.
Stakeholders in Illegal Entrepreneurship?
Customs and
Trade Unions
Tax Offices
Police Force
Areas of Diversification
Agricultural Services
Trading enterprises
Accommodation & catering
Equine enterprises
Recreation & Leisure
Unconventional crops or crop-based processing
Unconventional livestock or livestock processing
Letting buildings or storage space
Environmental Stewardship
Telephone Masts
Other employment
Conceptual framework for ‘illegal’
Type I
The Legal Enterprise
with marginal illegal
activity or
Opportunist illegal
Type II
The Legal enterprise
as a front for illegal
Type III
The illegal enterprise
Type I
The Legal Enterprise with marginal illegal activity
Formally registered as a business but will engage in semi-legal
activities when possible.
The entrepreneur may not perceive activities as problematic.
Such activities may include:
•Accepting cash for allowing others access to premises or equipment
• Illegal sale of livestock / meat without registering the animal.
• EU subsidy frauds.
• Environmental crimes e.g. polluting the environment with slurry
• Illegal use of red diesel.
• The illegal use of labour and gangmaster crime.
Type I (cont) The Opportunist illegal enterprise
• Requires an enterprising skill set.
• Cattle rustling and sheep stealing
• Trade in illegal veterinary products or farmers renting
out barns for illegal raves
• Illegal shooting parties.
• Bare Knuckle Fighting
Type II
The Legal enterprise as a front for illegal activity
• Rural entrepreneur allowing the business to be used for
money laundering purposes with criminal knowledge /
• A drug dealer from an urban environment buying a
country garage business and running it down whilst
using it as a vehicle for laundering money on fictitious
• A haulier operating an unviable business to gain a more
lucrative income stream from drug running or from off
the books haulage of illegal substances.
• “A Norfolk haulage firm fined £15,000 after hazardous
waste was illegally dumped at a motor racing site “
Type III The illegal enterprise
• Structurally efficient enterprise with access to supply
networks and knowledge of customers and markets.
• Examples: Rustling Drug dealing, Smuggling,
Prostitution, Stills, Counterfeit currency
• An individual will rent or acquire property to evade
police attention. They use the property either for
cannabis factories or for a drugs stash.
• Hyder (1999) referred to this typology as the ‘Greenbelt
• Illegal ‘puppy farming’ and ‘halal slaughter’ (Smith,
• Dog fighting, hen fighting, illegal dog racing and badger
baiting, hare coursing and the commercial poaching of
deer and salmon.
More examples
• Mr Andreas. Runs a weekly bus service
between Lithuania and Cornwall. Bus
carries parcels both ways.
• Current top seller is homemade vodka
which retails for £5 a litre and sells in
Lithuania for 70p per litre.
• The business has upset the local illegal still
owner. Supplies a local Polish shop with a
wide range of items.
An illegal still
How to Build a Still - Vodka Distiller
Illegal Distilleries
• 2013 10,000 bottles of illegal
vodka seized by customs on a
bottling factory hidden on a
remote farm
• Netted 35,000 litres of pure
alcohol - capable of making
100,000 bottles of the 35% proof
• The alcohol, branded Glens,
along with manufacturing
equipment; stills, bottles and
counterfeit packaging were all
• 6 men were arrested
• The potential revenue loss to
the public has been estimated
at over £1million
More examples
• Mr Thomas. Trades currency pound coins at £60
per £100 and notes at £40 per £100.
• Local research in Cornwall shows one in twelve
pound coins are counterfeit. Principal source is
Tesco! (The Royal mint estimate that 2.5% of £
coins in circulation are fake about 28 billion
• Portugal seizes huge haul of fake euros 21st Feb
Illegal businesses: Whose Morality?
• Antiques/collectibles
• Drug Dealing.
• Cannabis Farms
• Puppy farming
• Car boot sales
• Car cleaning/valeting
• Catering
• Distillery
• Cigarette Smuggling
Counterfeit currency
Money Lending
Trading in OOD
Veterinary Products
Trading in Red Diesel
Gardening services
Making and greetings
• Handyman services
• Wildlife crime
Badger Baiting
Hare Coursing
Dog fighting
• Managing Hazardous
• Match Fixing
• Gangmaster
• Loan Sharks
• Online trading Sites such
as eBay and Amazon
• Employing illegal
• Drug Smuggling
• Counterfeit clothes
• Porn
• Environmental crime
• Commercial poaching of
deer and salmon
• Rhino Horns Rhino Horn
40K a kilo
• People Trafficking
• Child Labour
A LEGAL Enterprise
Strategic Direction
Finacial Probity
Legal Status
An ILLEGAL Enterprise
A Drug Dealer
Strategic Capability
Understands Markets
Knows the Customer
Understands Supply Chain
Financially Aware
Gizza Job
From Kathmandu to Dohar
• Kafala System
• 44 workers died JuneAugust 2013
Questions to ask
Illegal Enterprise in the Environment
Is it?
Determined by
• Value-extracting
• Value-adding
VA and VE
involves activities that
value in excess of that
enrich the individual but
which accrues to the
which impoverish the
society within which they
individual and, as such,
occur. VE
includes benefits which
entrepreneurship occurs
accrue to society more
outside of and seeks to
delegitimize established
legislative structures and
ethical mores.
A value chain
• Afghanistan worlds largest producer of Opium and
Cannabis Opium poppy farmers in Afghanistan probably
earned more than $1.4bn (£910m) last year - equivalent to
9% of the country's GDP
• 2009, 92% of the opiates on the world market originated
in Afghanistan
• export value of about $64 billion. Afghanistan a kilo of
opium costs around £500, equivalent to £14 per ounce
• Estimated number of opioids users in EU: 1.5 million
(1.3–1.7 million), average prevalence between 4 and 5
cases per 1,000 adult population (aged 15–64).
• In the UK Price reports per gram (mean price £19.26),
• On these prices
£19,200 a kilo on the streets
Legitimising the hidden enterprise
• Conventional deterrence approach, seeks
to eradicate off-the-books entrepreneurs
by penalty and improving
actual/perceived likelihood of detection
• Consequence government subdues with
one hand the enterprise culture that with
another hand they wish to nurture
• This paradox more acutely felt in deprived
and rural areas.
It is not a simple continuum
A crisis in confidence
• Shifting Moral Sands
• A failure of leadership
• Changing Value Systems
Business Schools?
ABS Ethics
'There has been a failure of corporate governance, which
has led to a growing demand for higher standard of
business ethics. People expect organisations in the
private, public and voluntary sectors to exhibit
corporate social responsibility and to adopt policies and
strategies that address sustainability and the
NB nothing on Morality!
From the ABS
• uphold the principles of integrity, honesty,
equality, diversity and fairness in the course of
conducting business, managing and performing
your function.
• All branding, marketing and promotional
activity reflects the truth and reality of the
situation within the institution.
• Maintain the highest standards of fair, ethical
and transparent professional behaviour.
• If you observe corrupt and/or illegal business
dealings you must report it to the relevant
Should Business Schools
• Have an explicit role in teaching/research
on Illegal enterprise practice
• The Hidden Economy
• Personal Ethics?
• Is so why?
So Why?
• Understand the Informal and the Illegal
• Effect Policy
• Challenge
• Illegal entrepreneurship is a difficult concept to
qualify and/or quantify, and hence to boundary
• Is an important and dynamic aspect of society
• It all adds value – well maybe!
• Little academic research and few policy-related
studies have explored the topic of illegal
• There are both similarities and important
differences between legal and illegal enterprise
• The difficulty of obtaining data because of access
to such enterprises and entrepreneurs.
Thank you