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

Structure

QuestionsIssues from the literatureInformal and IllegalA methodologyConceptual framework for illegal enterprisesValue Adding or Value ExtractingExamples50 Illegal businessesThe Role of Business Schools

Conclusions

2

My interest

• Why do people engage in Illegal enterprise?

• What is the ‘glue’ that holds society together?

‘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 economy• 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.

THE INFORMAL ECONOMY

• Does illegal entrepreneurship exist and is it different from

• THE INFORMAL ECONOMY

• EU informal economy average 7% of GDP before 2012

• Bulgaria/Greece over 30% at least!!

• UK informal economy represents (at least) 12% of GDP or approximately £150 billion (Schneider and Williams, 2013).

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What is to be done about the informal economy? 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 work.

Relatedly, can we distinguish between “good” informal economy work activity and “bad” informal economy work activity?

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? 

Are there “good” and “bad” informal economies?

IllegalIllegal 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 goods

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)

• MORAL• Shift in Morality• Tax Morality• Community Values

• LEGALISATIVE

• Business Rates• Trade Barriers• Labour Barriers

Drivers of Illegal (II)

• ECONOMIC• Increased Taxation• VAT Rates • Working Time

Directives

• SOCIAL• Unemployment• Early Retirement

Characteristics

• 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 tolerance

• 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 Entrepreneurship

• Where entrepreneurs supply willing customers with illegal services or products or legal services or products using an illegal process.

And• 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?

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• Energy• Waste• Aviation• Environmental Stewardship• Property• Telephone Masts• Other employment

Conceptual framework for ‘illegal’ enterprises

Type I

The Legal Enterprise with marginal illegal activity or Opportunist illegal enterprise

Type IIThe Legal enterprise

as a front for illegal activity

Type IIIThe illegal

enterprise

Type IThe 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 spillages. • 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 / intent.

• 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 deals.

• 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 Bandit’.

• Illegal ‘puppy farming’ and ‘halal slaughter’ (Smith, 2008).

• 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 spirit.

• The alcohol, branded Glens, along with manufacturing equipment; stills, bottles and counterfeit packaging were all seized.

• 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 pieces.

• http://www.royalmint.com/Corporate/facts/CounterfeitPoundCoins.aspx

• Portugal seizes huge haul of fake euros 21st Feb 2013

• http://www.bbc.co.uk/news/world-europe-21528262

Illegal businesses: Whose Morality?

• Antiques/collectibles dealing

• Drug Dealing.• Cannabis Farms • Puppy farming• Car boot sales• Car cleaning/valeting • Catering • Distillery• Cigarette Smuggling

Counterfeit currencyMoney Lending ProstitutionTrading in OOD

Veterinary ProductsTrading in Red DieselGardening services Making and greetings

cards

• Handyman services • Wildlife crime • Badger Baiting• Hare Coursing • Dog fighting• Managing

Hazardous Waste• Match Fixing• Gangmaster• Loan Sharkshttp://www.rsnonline.org.uk/opinion/help-us-stop-loan-sharks-now

• Online trading Sites such as eBay and Amazon

• Employing illegal immigrants• 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• Marketing• Networking• Finacial Probity• Legal Status

An ILLEGAL EnterpriseA 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 June-August 2013

Questions to askIllegal Enterprise in the

Environment

VA and VE Entrepreneurship• Value-adding

entrepreneurship creates value in excess of that which accrues to the entrepreneurial individual and, as such, includes benefits which accrue to society more broadly

• Value-extracting entrepreneurship, involves activities that enrich the individual but which impoverish the society within which they occur. VE entrepreneurship occurs 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 culture?

• 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 environment.'

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 authorities.

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

Conclusions• 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 Entrepreneurship

• 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