Industry Insight: Puerto Rico — Are we paying attention to illicit trade?
Recently, headlines and promos from local media have inundated the public discourse with images of carnage and concern over what is perceived as a deep security crisis. What is striking is how commentators and pundits are accustomed to theorizing about potential solutions to the problem.
Maybe the fact that I have grown some gray hair indicates that such sterile conversations are recycled to flood the airwaves for many decades without any real improvements or solutions.
Of course, we all learned in college that you cannot seek to resolve a problem until you delineate or define it. And if you don’t really understand the systemic roots of a problem, you cannot reach a solution. This is a topic that I have discussed in this publication, and more than once.
The bottom line is there are security challenges beyond narcotics or human trafficking that have a direct effect on our economy and way of life, which cannot be understood independently. Criminal activity has gone beyond the paradigms we once knew and has really embraced the changes that the 21st century has introduced.
Today, organized crime has global tentacles, is tech savvy, sophisticated and often conceals itself within legitimate businesses. According to the United Nations Office on Drugs and Crime (UNOC), organized crime is a “continuing criminal enterprise that rationally works to profit from illicit activities that are often in great public demand.”
A paradigmatic shift must occur by looking at illicit trade, which refers to the unlawful exchange or movement of goods, services or commodities in violation of national or international laws and regulations. This clandestine activity involves the evasion of customs duties, taxes or regulatory measures, as well as the circumvention of legal frameworks designed to ensure public safety, health or security.
Illicit trade encompasses a wide range of illegal activities including, but not limited to, trafficking of counterfeit goods, illegal drugs, weapons, wildlife and cultural artifacts. The motivations behind illicit trade can vary and may include financial gain, organized crime and corruption.
Efforts to combat illicit trade typically involve international cooperation, law enforcement initiatives and the implementation of measures to strengthen regulatory frameworks and border control.
The negative impact of illicit trade on legitimate businesses is considerable. Companies may inadvertently support illicit trade or suffer from the unfair competition posed by counterfeit or noncompliant products, necessitating collaboration with public organizations and a focus on corporate social responsibility (Lapprand).
For example, in the illicit tobacco product trade, legitimate businesses suffer from reduced tax revenues and damage to economic interests. Further, such illicit trade can fund organized crime and terrorist groups, undermining public health policies aimed at reducing smoking and thereby exacerbating health-related damage (Kulick & Prieger, 2019). Press reports in the Dominican Republic highlight that 32% of cigarettes sold in 2022 were illegal.
In Poland, the “shadow economy” was found to have a dual nature — acting both as a barrier and a potential growth opportunity for small and medium-sized enterprises (SMEs), influencing their development and operations in the legal economy (A. Buszko, 2017).
The rise of online marketplaces has also highlighted the effect of illicit trade in the form of lost revenues and brand reputation damage for legitimate businesses, along with risks to consumers and society. This has led to concerns for businesses and business associations across Europe (Wallberg, 2016).
Illicit trade impacts legitimate businesses by necessitating increased control measures at customs, affecting the time and costs of business operations. Moreover, companies can inadvertently become entangled with illicit trade, for example, by sourcing from suppliers who may be involved in illegal activities. Such associations can lead to legal consequences and reputational harm. The challenges extend to the need for businesses to invest in security measures and technology to protect against the infiltration of illicit goods along the supply chain, which can be costly.
Beyond these direct impacts, illicit trade can create unfair competition by circumventing regulations, undercutting legitimate pricing and disrupting established economic structures (Epperson et al., 2007; Philippou, 2005).
For a small economy like that of Puerto Rico, illicit trade presents significant challenges:
– Economic impact: Illicit trade can have a detrimental effect on the formal economy of Puerto Rico, leading to reduced tax revenues as illicit goods and activities often escape taxation. This can strain public resources and limit the government’s ability to fund essential services. Considering the ever-present drawback of the islands’ informal economy,
– Undermining legitimate businesses: Illicit trade can create unfair competition for legal businesses, which may struggle to compete with lower-priced, illicit goods. This can lead to financial losses and, in some cases, business closures. One such product we must pay attention to is counterfeit alcohol.
– Loss of jobs and income: As legitimate businesses are negatively impacted, they may have to cut jobs or reduce wages. This can lead to higher unemployment rates and reduced income levels for individuals and families, further weakening the local economy.
– Weakening of rule of law: Persistent illicit trade erodes trust in institutions and the rule of law. When citizens witness widespread illicit activities without effective enforcement, it can lead to a breakdown in social order and trust in government.
– Security concerns: Certain forms of illicit trade, such as drug trafficking or illegal firearms trade, can contribute to elevated levels of crime and violence. This poses serious security challenges for law enforcement agencies and the overall safety of Puerto Rican citizens.
– Strain on public services: The revenue loss from illicit trade can strain public services, including health care, education and infrastructure. This creates difficulties in maintaining and improving the quality of life for residents.
– Erosion of social fabric: Illicit trade can foster an environment where criminal networks operate with relative impunity. This can lead to the spread of corruption, violence and a general decline in community well-being.
– Impediment to economic development: The presence of a significant illicit trade sector can deter foreign investment and economic development. Investors may be hesitant to commit resources to an economy where the rule of law is compromised and competition is distorted.
– Limited fiscal policy options: Illicit trade constrains the government’s ability to implement effective fiscal policies. This can hinder efforts to stimulate economic growth, address social inequalities and fund critical public projects.– Loss of reputation: A reputation for high levels of illicit trade can negatively impact Puerto Rico’s standing in the international community. This can deter potential trade partners, investors and tourists.
The overall atmosphere created by illicit trade, facilitated by globalization, threatens legitimate businesses by exploiting international trade routes and movements of goods, people and money across borders.
Addressing illicit trade requires a multi-faceted approach involving law enforcement, regulatory reforms, multisector cooperation and community engagement. It is crucial for Puerto Rico to work collaboratively with neighboring countries, as well as international partners, to combat illicit trade and safeguard its economic and social well-being.
