The economic analysis cannot but start with its precise economic definition, which highlights the following characteristics:
- illegality: the activity of recycling regards any financial gain originating from criminal or illegal actions;
- concealment: the primary scope of this activity is to conceal the illicit origin of such financial gains;
- specificity: the activity of recycling is put into motion utilizing one or more intermediaries, financial or non-financial, whose position can be passive or unaware, or rather, active or aware (this last notion is clearly specified for the case of financial recycling only).
Recycling figures as an autonomous criminal economic activity, with an essential economic function consisting in the transformation of liquid assets of illicit origin, or potential buying power, into real buying power, usable for consumer choices, for saving, investment and reinvestment. The recycling phenomenon then, can be studied through a micro-economic analysis of the behavioural actions of the criminal subjects.
In such approach, a model for the study of the choices of an economic subject is proposed, who must decide whether, or not, to recycle the proceeds of a crime and, to what extent. It is hypothesized that the economic subject (the ‘criminal’) gains a flow of income from an illicit activity. These illicit gains represent potential buying power: its direct utilization would increase the probability of discovery of the crimes committed by the subject.
Generally, for the criminal, a ‘clean’ euro has more value than a ‘dirty’ euro, because the first can be invested with more profit and/or at minor risk of incrimination. The criminal, therefore, must decide whether or not, to clean every euro of illicit income.
The value of criminal earnings declines with the probability of the discovery of the crime and in the severity of legal sanction, while it grows in the anticipated average yield of the laundered liquid assets. The criminal, therefore, must identify the optimal level of the assets to launder, keeping in mind the maximum resources at his disposal.
The optimal value represents the limit beyond which it is no longer advantageous to utilize recycling services: the damage deriving from the discovery of the crime and of the relative legal sanctions would become so high as to render negative the expected gains.
In this case, it is profitable to utilize the ‘dirty’ money in nil-profit expenditures. The critical value can be interpreted as the propensity to recycling, which depends on the parameters of the model: more effective and/or severe anti-recycling policies reduce the propensity to recycle; an increase in the profitability of the laundered liquid assets and a reduction in the costs of the recycling operations increase the propensity to recycle.
Having defined a micro-economic model of the choices of recycling has permitted us to formulate a macro-economic model of the relation between development of the illegal markets and the laundering activity.
The importance of the economic analysis of recycling can be appreciated also in its possible utilization in evaluating the impact of a serious anti-recycling action: in particular, it could allow us to make a comparison between the costs and the benefits deriving from the fight against the crime under examination
On the one side, a closer monitoring of the origin and the modalities of transferral of the capital would lead to an increase in the cost of the laundering service, with a consequent diminution of the quantities exchanged and undoubted advantages for the society (one thinks, for example, of the reduction of tax evasion and the weakened power of the criminal organizations).
On the other side, we must consider the diminution of the expediting of the exchanges and the registration costs, and of reports from fiscal intermediaries (agents of the public authorities) and, in part, from clients.
From an economic point of view, the solution to this problem lies in the minimization of a function of social loss, which, in this case, means the harmfulness of recycling and the costs involved to fight it.
Certainly, the optimal level of anti-recycling activity would end up by depending on the characteristics of the policy-makers and the community and, in particular, on the relative sensitivity with regard to the level of recycling and of the costs imposed, particularly on the financial system and, in general, on the economic system.
Lastly, the economic analysis can be used to analyse the international panorama of the problems of recycling.
The economic approach allows us to examine what the dilemmas for the policy makers are, which, with the globalization of finance and credit, necessitate operating in the presence of banking and financial markets that are always more integrated with criminal organizations, always more trans-national, but still in a context of policies of regulation and national and segmented vigilance although marked by minimum levels of harmonization and homogeneity.


Recycling: the micro-economic causes

First of all, recycling must be given a definition – from the viewpoint of the economic analysis – which evidences the specificity compared to other illegal or criminal activities, typical of accumulation and/or reinvestment, which is the following: a recycling operation exists every time a given flow of buying power – which is potential buying power (insofar as it is not directly usable in consumer choices or reinvestment), since it is the fruit of the illegal activity of accumulation – is transformed into effective buying power.
Concentrating our attention on the concept of transformation of potential buying power into effective buying power allows us to understand not only the characteristic feature of such illicit economic activity, but also its generality. The adopted definition maintains a substantial unity between three aspects which, according to other points of view, represent three different objects of counteracting this illicit activity: the financial flows; the wealth and goods understood as terminal moments of such flows; the owners, or who, however, possesses the fluid assets of such wealth and goods.
Therefore, in our analytical scheme we shall always have a subject who has committed a crime which produces accumulation of illicit proceeds, moves flows to recycle, with an end to, subsequently, increasing his financial assets, through an investment activity in the legal sector or of re-accumulation in the illegal sector.
The first crucial actor to put under observation is, therefore, the criminal organization. For criminal organizations we mean a group of individuals and instrumental goods, associated with each other with the scope of exchanging or producing, in an exclusive way, services and goods of an illicit nature, or rather: services and goods of a legitimate nature with illicit means or an illicit origin.
The criminal organization, through activities carried out in the illegal markets accumulates resources. The moment of accumulation of illegal resources presents, however, an immediate problem of recycling. The recycling activity has its finality in transforming the ‘dirty’ fluid assets coming from any criminal activity or illegal into funds which – being ‘laundered’, that is, without those traces which can connect it to crimes – can be utilized for consumer choices, saving, investments in the legal sector and reinvestments in the illegal markets. The moment of the legal investment and that of the re-accumulation complete the model.
As a general rule, the choices of an economic subject to employ his resources in illicit activities – thence becoming a criminal subject – depend, given the possible returns, on two measures: the probability of being incriminated and the sentence he receives in the case of being recognized guilty . The analysis of the choices of organized crime can, undoubtedly follow the same approach.

The analysis of the conduct of a criminal organization in terms of rationality can certainly not be considered exhaustive. In fact, it cannot be excluded that the criminal subject is tied to and influenced by logic which is different from the logic of rationality. It should be noticed, however, how the economic component has become the characterizing, or even the predominant element of the most recent typology of the criminal organizations.
To put into motion the recycling activity, the organization that owns the fluid assets deriving from the illicit activity, will decide whether or not to use a given economic system, a specific criminal offence, that of recycling: evaluating, of course, the probability of discovery and the relative sentence, comparing it with the expected earnings, to the net of the economic costs of the recycling activity.
The choice of the organization implicates a considerable autonomy of the crime under examination and of the relative productive organization, compared to the other criminal cases, which originated the proceeds in the phase of accumulation. Furthermore, the crucial role that the recycling activity performs in the growth and profitability of the entire industry of crimes suggests the hypothesis of its centrality, qualitatively and quantitatively, in all the criminal organizations.
First of all, recycling must be given a definition – from the viewpoint of the economic analysis – which evidences the specificity compared to other illegal or criminal activities, typical of accumulation and/or reinvestment, which is the following: a recycling operation exists every time a given flow of buying power – which is potential buying power (insofar as it is not directly usable in consumer choices or reinvestment), since it is the fruit of the illegal activity of accumulation – is transformed into effective buying power.
Concentrating our attention on the concept of transformation of potential buying power into effective buying power allows us to understand not only the characteristic feature of such illicit economic activity, but also its generality. The adopted definition maintains a substantial unity between three aspects which, according to other points of view, represent three different objects of counteracting this illicit activity: the financial flows; the wealth and goods understood as terminal moments of such flows; the owners, or who, however, possesses the fluid assets of such wealth and goods.
Therefore, in our analytical scheme we shall always have a subject who has committed a crime which produces accumulation of illicit proceeds, moves flows to recycle, with an end to, subsequently, increasing his financial assets, through an investment activity in the legal sector or of re-accumulation in the illegal sector.
The first crucial actor to put under observation is, therefore, the criminal organization. For criminal organizations we mean a group of individuals and instrumental goods, associated with each other with the scope of exchanging or producing, in an exclusive way, services and goods of an illicit nature, or rather: services and goods of a legitimate nature with illicit means or an illicit origin.
The criminal organization, through activities carried out in the illegal markets accumulates resources. The moment of accumulation of illegal resources presents, however, an immediate problem of recycling. The recycling activity has its finality in transforming the ‘dirty’ fluid assets coming from any criminal activity or illegal into funds which – being ‘laundered’, that is, without those traces which can connect it to crimes – can be utilized for consumer choices, saving, investments in the legal sector and reinvestments in the illegal markets. The moment of the legal investment and that of the re-accumulation complete the model.
As a general rule, the choices of an economic subject to employ his resources in illicit activities – thence becoming a criminal subject – depend, given the possible returns, on two measures: the probability of being incriminated and the sentence he receives in the case of being recognized guilty . The analysis of the choices of organized crime can, undoubtedly follow the same approach.
The analysis of the conduct of a criminal organization in terms of rationality can certainly not be considered exhaustive. In fact, it cannot be excluded that the criminal subject is tied to and influenced by logic which is different from the logic of rationality. It should be noticed, however, how the economic component has become the characterizing, or even the predominant element of the most recent typology of the criminal organizations.
To put into motion the recycling activity, the organization that owns the fluid assets deriving from the illicit activity, will decide whether or not to use a given economic system, a specific criminal offence, that of recycling: evaluating, of course, the probability of discovery and the relative sentence, comparing it with the expected earnings, to the net of the economic costs of the recycling activity.
The choice of the organization implicates a considerable autonomy of the crime under examination and of the relative productive organization, compared to the other criminal cases, which originated the proceeds in the phase of accumulation. Furthermore, the crucial role that the recycling activity performs in the growth and profitability of the entire industry of crimes suggests the hypothesis of its centrality, qualitatively and quantitatively, in all the criminal organizations.
The indication of a usefulness of the crime of recycling summarizes, in reality – giving it a unitary expression – the value of a series of more general services that stimulate the growth of a demand for recycling services by the criminal organizations, which accumulate illicit resources. Recycling produces, in fact, for those who use it:
- the economic value, strictly speaking, of fully transforming into buying power, the fluid assets deriving from the most diverse criminal activities (transformation); the transformation, in its turn, produces two other uses for the criminal subject:
- the possibility of increasing the rate of penetration into the legal sectors of the economy through the subsequent moment of the investment (pollution);
- the possibility of increasing the rate of the camouflaging of subjects and criminal organizations in the system in its entirety (camouflage);
Having defined the problem in general terms, it is possible to investigate, in a thorough manner, the choices of a generic ‘Criminal Organization’, which, having accumulated resources in the illegal markets, must decide whether or not, and to what extent, to recycle the proceeds of a certain crime. In other terms, it is possible to analyse the determinants of the demand for recycling at micro-economic level of a single criminal organization .


Recycling: the macro-economic effects

Having defined the micro-economic foundations of the model, accumulation – recycling – investment, it is possible to offer also an aggregate specification.
In this approach, concentrating on the behaviour patterns of a general ‘illegal sector’, which derives incomes from a given criminal or illegal sector and which, to invest them, needs to recycle them, the role of the recycling as multiplier of the activities concerning illegal sectors clearly emerges.
Let us assume that in a given economic system a legal sector and an illegal sector can be distinguished – both, producers of income. The illegal sector (FIG.1) produces an initial volume of earnings which are fruit of crimes equal to I, and that – at least, for a part y of these funds – there is a need to effect recycling operations, while a part d can be utilized without any risk of incrimination, for consumer expenses and investment in the legal sector.
In other terms, without cancelling the illicit origin of a part y of the earnings of the illegal sector, these funds have a minor economic value (for simplicity, zero).Lastly, the illegal sector can utilize its takings on the illegal markets. The illegal sector reinvests a quota q of the initial takings in the illegal markets (obviously y+d+q=1). We will return to this point shortly.

FIG. 1

Therefore, the initial demand for recycling is equal to yI.
Let us assume now that each operation of recycling has a cost c for the illegal sector, proportional to the amount of income which is decided for recycling (0<c<1).
The parameter c represents the price of recycling. In other words, for the kings to use a quota y of the illegal funds without risks of incrimination is not a free meal.
The illegal sector cannot influence that price, it is price taker, the demand is perfectly indifferent to the price.
Obviously, this does not mean that the level of the cost of recycling does not effect the economic value of the operation: to the growth of the burden, the volume is reduced – equal to (1-c)yI – of the laundered funds available to the illegal sector for legal consumption and investment.The illegal sector will continue, at the same time, to invest in the illegal markets. With a rate of yield on such markets equal to r, if the investments go well, we shall have a new demand for recycling for funds equal to yq (1+r). If the recycling operation is effective, in the subsequent period the recycling demand will be equal to yq2 (1+r)2, and so on.
What will the total of the demand of recycling, generated by an initial flow of illegal proceeds be equal to I? If the value of the parameters is such that q(1+r)<1 (condition of convergence) the demand for recycling expressed by the illegal sector amounts to:

MLd = yI : 1- q(1+r)


The parameter ß represents the multiplier (simple) of recycling: given an initial volume of illegal funds, the more effective the action of the recycling of illicit money, the larger the final flow of money available for the criminal sector will be.
We have clarified up to now that the condition of convergence highlights how a model which produces cautious evaluations is chosen. In fact, the condition of convergence implies, at the economic level, that the additional flows of the recycling demand are progressively minor; in other terms, the volumes do not explode. Respecting, or not respecting the condition of convergence in reality can obviously be verified only at an empirical level, substituting the parameters for the assessed values of the experience.

Returning to the multiplier, its dimension depends, therefore, on three fundamental variables:
1) proportion y of the illegal proceeds needed to be recycled;
2) the proportion q of the illegal proceeds reinvested in the illegal economy sector;
3) the yield r of the illegal activities. Furthermore, its characteristics can be modified, varying the hypotheses of the behaviour of the illegal sector.


Conclusions.
Towards an assessment of recycling?

Finally, one can try to use the model described in the preceding paragraph to propose an estimate of the economic value of recycling, utilizing, initially, its basic version, i.e. that in which the illegal reinvestment does not necessitate laundered funds.
The economic value of the demand of recycling for the illegal sector is equal to:

MLd = yI: 1 - q(1+r) = ßI (i)

Indicating the initial illegal proceeds with I, the quota of those which need laundering with y, the quota of illegal reinvestment with q, the rate of yield in the illegal sector with r, and finally, the multiplier (simple) of recycling with ß.
If then, we indicate with c the percentage of the flows to recycle which go to remunerate the operation of recycling (the cost of the recycling), the net value of the recycling for the illegal sector is equal to:

(i)ML= (I-c)yI: 1 - q(1 + r) = ß+I (ii)

To carry out the assessment exercise, we must formulate certain assumptions.
1) In the first place as already underlined – we shall identify the economic value of the recycling for the illegal sector as an economic disvalue for the legal sector. Such assumption is cautious because we do not calculate all the effects – direct and indirect, of brief and long period - which the buying power available to the illegal sector provoke, thanks to the recycling activities.
2) In second place, the methodology is cautious also for another reason:
We do not calculate the economic value of the investment in the legal sector which the illegal sector is able to achieve, thanks to the recycling activities.
3) Finally, to be able to explicitly consider the role of the regulations, let us assume that, all other conditions being equal, the cost of recycling depends, of course, on the efficacy of the regulations. The growth in the efficiency of the regulations, increases the probability of being discovered as the operators of the recycling, an increase of the risk ensues; the aggregate cost of the recycling rises, the multiplier falls.
This last hypothesis enables us to render the objective to which the regulations must be directed explicit, always on the basis of the model adopted. Regulations are effective if the recycling activity does not create economic value for the illegal sector (in analytical terms, this means that the optimal value of the parameter is ß equal to 1).
The absence of the creation of economic value is the maximum to which the design of the regulations can aim. In fact, a situation in which the recycling activity could even destroy value from the point of view of the criminal organizations – that is, have a multiplier inferior to 1, and therefore, a net value of the illegal activities inferior to the initial one – does not appear rational, that is, not plausible, especially for long-term periods. In fact, if an activity destroys economic value, the economic subject which undergoes the loss, modifies its ways of action.
In our case, in the face of a multiplier which is less than 1, it is presumable that the illegal sector will modify its ways of action, with the relative results in terms of values of the parameters of the model (quota of proceeds from recycling, quota of reinvestment).
Furthermore, the definition as objective of the regulations, that of the stabilization to 1 of the value of the recycling multiplier, is as valid as the hypothesis is sound – which we have specified from the beginning – that the initial volume of the illegal earnings, as also the profitability of the illegal activities, are independent of the recycling activity. Stated in still another way, the action of the regulations can have stable effects only on the value of the multiplier, not on its existence de facto.

3.1 The economic value of the recycling: an assessment of the world market.

Given the hypotheses 1), 2) and 3), let us try to assess the economic value of recycling at a world level.

First and foremost, we need an estimate of the illegal proceeds of recycling. From a theoretical point of view, we should use an estimate of all the illegal economy (or hidden economy). As we have underlined previously, the demand for recycling services is potentially generated by all income deriving from activities connected with crimes and, therefore, characterized by a probability of discovery and prosecution.
If for hidden economy, we mean the whole of all those productive activities in which, at least, one law (or regulation) of the State of reference has been violated, then all the income of the hidden economy is a possible source of the demand for recycling. For example, the aggregate world value of the illegal economy for the year 2003, was estimated as being equal to 15,070 million dollars.
Nevertheless, our objective being the elaboration of cautious assessments, let us formulate a fourth assumption:
4) let us consider only the subset of the illegal economy characterized by the so-called criminal economy, which means the whole of the value of the activities which concern the criminal organizations;
5) in addition, Schneider and Windischbauer, in 2006, calculated that 40% of the activities of organized crime is represented by the proceeds from the production and traffic of drugs;
6) according to the World Drug Report of the United Nations of 2005, the value of the world traffic in drugs amounted to 320 billion dollars.

Therefore, on the basis of 5) and 6), we assume that the total proceeds of recycling amount to 800 billion dollars. Now, it is necessary to apply the value of the parameters of the multiplier of the recycling. We shall use intermediate values of the intervals of assessment presented in Unger, 2007, for each of the parameters of interest. Thus, we assume that:
7) the proportion y of proceeds that must be recycled is 0.75 (in an interval between 70% and 80%),
8) the proportion c for the costs of recycling c is 0.10 (in an interval between 5% and 15%),
9) the proportion q of reinvestment in the illegal activities q is equivalent to 25% (in an interval between 20% and 50%, but it is necessary to bear in mind that y is equal to 0.75, thus, we choose a value which is greater than the inferior limit of the interval, but coherent with the connection for which y+q+d=1. It derives that d=0, thus, we hypothesize that all and every legal enterprise requires laundered money),
10) the rate of yield of the illicit activities r is 100% (cautious
choice, in an interval between 50% and 60%, superior limit for drugs such as heroine).
Given the hypotheses of 7) to 10), the simple multiplier is 1.5, thus, the economic value of recycling amounts to 1200 billion dollars (2.7% of the world GDP of 2004, equivalent to 41,430 billion U.S. dollars) while the net multiplier is 1.35, and the net value of recycling is 1080 billion dollars.

The economic value of recycling can be compared with the preceding estimates: Tanzi and Quirk (1996, 1997), who estimated a value of between 2% and 5% of the world GDP, while Walker (1999) estimated a value equal to 4% of the world GNP.

As one can see, in terms of figures, the values obtained are in the same order of size as the preceding analyses. The crucial difference lies in the methodology used. Unlike the preceding studies, the estimates are obtained utilizing an explicit model and providing the data, utilized as input, in a clear and complete manner.
This means that the estimates can be repeated and improved, utilizing more reliable data, discussed, proposing different economic models.