Financial intelligence and economic security
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Financial intelligence and economic security
di Pierluigi Granata
Financial intelligence and national economic security
Economic and financial intelligence (EFI) is essential to ensure national security, and therefore the continuity and development of a state. Above all, complexities and dangers are looming on the national economic and financial system, not always perceived organically and consequently underestimated in their multiple offensiveness.
Due to global competition, many states have stepped up their commitment to defending national businesses by incorporating the protection of corporate interests into the objectives of diplomacy and public policy. Many believe that in the area of economic and financial intelligence, there is a considerable delay in Italy, while significant intellectual and institutional profiles feature in other European countries (e.g. France).
Based on such premises, it follows that in Italy new cooperation in EFI between the public and private sectors is possible and indispensable to reinforce the interested bodies' information network. Such new cooperation can allow the State and private to protect communities and economies adequately.
National Economic Security
The globalization processes have resulted, among others, in a progressive and unrelenting increase in the volume and fast spread of information of an economic and financial nature, with its criminogenic potential, increasingly calling into question the concept of national security. For example, the events of the financial crisis and the consequent recession, which occurred in the years 2008-2009, have shown that state security goes beyond the protection of territorial and institutions integrity or defense from political events, both of an internal or external nature.
Therefore, it is safe to infer that both economy and finance are vital ganglia of the State strength: a crisis in the financial or productive system constitutes an obstacle to the regular continuity of each country. Such risks are significant even at a higher level, comparable to military actions or internal political subversion events. In other words, it can be sustained that the competition between nations to reach either world supremacy or extended areas of intercontinental influence nowadaysconstitutes an "economic war".
In France, the term guerre économique has been used since 1971, after having been coined by its French theorist Christian Harbulot, considered by many as one of the leading experts of the economic warfare. Obviously, there are many other sectors of economic-financial intelligence; in particular, competitive intelligence is a legal business practice, as opposed to industrial espionage, which is unlawful. There are many other legal areas which denote relative differentiation: real-time business intelligence (RTBI) is a sub-sector of the business intelligence (BI). The common reference is information on business operations.
There are several risk factors as regards national economic security. For editorial reasons, this article will take into consideration only a few. Such methodological choice also aims at providing a different cultural approach in the modern criminological field, by providing an overview of the various heterogeneous risks incumbent on companies, so far managed as individual economic-criminal phenomena, not considered interconnected in terms of their overall legal offensiveness towards businesses.
Economic security risk categories
Foreign economic penetration
A light needs to be shed on non-EU companies that in their respective countries enjoy substantial state aids and contributions, both direct and indirect, and in various forms (research incentives, tax breaks, non-repayable loans guaranteed by the banking system, political interventions, support bycentral structures, - particularly Intelligence bodies, etc.). In such circumstances, those companies present themselves in the European and world-wide market with competitive advantages allowingthem to be assigned public tenders, assignments allocated through lower bids and acquisition ofimportant areas of the internal market. Such intrusion in the economic sphere can also occur through illicit systems, including industrial espionage and corruption at various levels. In this way, the regular functioning of the free market, the cornerstone of the modern economy, is put at risk.
An example that can be considered paradigmatic is the evolution of the investment policy outside the national borders pursued by China through the help of the national Intelligence bodies and the Chinese Communist Party. The perspective of an increasingly accentuated economic bipolarity is escalating. This does not constitute a sort of ordinary competition between states but seems shaping as a real "economic war" for global supremacy as mentioned above.
After events, over the years, of bulk purchases in Western countries by China, a new strategy was launched with the support of President Xi Jin Ping, based on new investment plans abroad. The avoidance or modification of the regulatory rules imposed by the United States and its allies, is supported by a targeted creation of consensus through the co-optation of cultural and economic elites. The arrest in Germany in 2019 of Klaus Lange, political scientist and member of the Hanns-Seidel-Stiftung Political Foundation (C.S.U) is an evidence.
This new expansion plan provides for the targeted acquisition of foreign companies, with the backing or lack of opposition by the political authorities and economic institutions involved. This strategy aims to create bridgeheads to permanently penetrate the European market and acquire more and more new technologies, from microchips to industrial mechanics, necessary to gain ground in the hi-tech supremacy vis-a-vis the USA itself.
The consequence is to export, with products and capital, the anti-competitive distortions that characterize Chinese state capitalism.
The acceleration of this race for economic hegemony has recently led the EU to develop suitable legislative instruments to protect EU companies considered strategic, first and foremost adopting the golden power, which will be presented later on in this article.
For further information on China's economic expansion, see in this volume the chapter authored byAntonio Selvatici.
Organized crime infiltration in the economy
The implications of the criminal phenomenon and, in particular, of money laundering, in relation tothe aspects of integrity and stability of the economic system are significant and relevant, to the point that may be discussed in relation to the threat to the civil democratic order. Consequences, those, partially mentioned and emphasized during the works of the International Forum on Crime and Criminal Law in the Global Era (IFCCL) "Financial crime, money laundering and asset recovery", which was held in Rome on 12-13 December 2020.
The risk scenario has been made even more complex and difficult to counter due to the entry into the international trade of the electronic money (Bitcoin). More specifically, the negative impact plans on the entire system generally affect two areas: financial and economical in the strict sense.
A) Effects of "financial pollution"
In parallel with the evolution of the forms of payment and intermediation from which it draws, money laundering has gradually taken on the monetary, banking, financial and telematic fields.
Money laundering activity, making the necessary recourse to (unaware or interested) interventions by financial intermediaries, produces a distorting effect on the market mechanisms of the complete financial sector, as well as on the capital solidity and management capacity of the operators themselves, not only those involved in money laundering but also those unrelated, especially the regular ones (ordinary credit companies, special credit institutions, financial companies, etc.).
Indeed, on the one hand, access by a financial operator, for money laundering purposes, to a greater volume of intermediated funds, compared to the normal amount justified by the critical success factors (rate of return on deposits and other contractual conditions for customers, increase of the number of branches, breadth of the portfolio of services offered, overall service quality), distorts the market steadiness and the functioning of the "invisible hand", thereby creating an unfair damage to competitors;
On the other hand, accepting the contribution of a wealthy customer, often subsequently entrusted almost automatically to obtain loans, without having assessed the real solvency on an objective level, gives rise to underestimated "non-performing" loans in the asset of the launderer.
Other consequences of money laundering can be:
A tendency towards an increase in the remuneration rate of the funds raised in the system (againstthe recent European trend to decrease the structure of the interest rates), given by the unfair competitive confrontation suffered by the intermediaries not involved - meaning, the majority! - by the few subjects involved in money laundering operations or engaged in other organized crimeactivities, which manage false low-cost structures;
An alteration of the average indicators of capital and management soundness of financial credit intermediaries, more closely involved, in certain local areas, in a struggle for survival due to unfair competition by money launderers (altered loan/deposit ratio, imbalance in the structure of loaned assets/securities and excessive incidence of loans at risk / total loans, to the detriment of solvency; imbalance of free liquidity reserves held, with consequent risks of liquidity reduction);
B) Effects of "economic pollution"
The impact on the economic system in general, can be described, for reasons of clarity, in two distinct analytical processes: the first, related to micro variables (competition and markets in general), and the second focused on the main macro-real variables (savings, investments, expenditures).
Concerning the microeconomic effects, it should be noted that engagement in the various crime markets occurs with companies that are lawful in appearance but financially drawing on "reservoirs" of illicit proceeds. This generates distorting effects on the relative competitive mechanisms, as detrimental to the principles of free competition and level-playing field: these basic rules of "good functioning" of the markets are altered by the presence of individuals capable to finance themselves outside the traditional credit circuit and to operate without the support of ordinary economic constraints (so-called outsider operators), due to the basically inexhaustible capital pool, from which they can potentially draw resources; this happens, not only in the financial market but also in all other competitive economic areas.
Therefore, a form of unfair competition is created vis-à-vis regular companies, which make use of legitimate financing channels, and which will be placed in conditions of financial fragility in the medium-long term or will even be forced to exit the market, often also after having resorted to loan sharking practices managed by organized crime syndicates to buffer financial difficulty.
As for the macro-economic aggregates, the impact that crime and money laundering generate, directly or indirectly, in terms of withdrawal of available resources appears to be significant: the effects produced can affect both private and public entities.
The reduction of the national and local economic development generates an impact on the private sector by:
removing resources from the national or local economy that are sent to tax and financial havens or to other areas of the country that ensure greater profitability;
causing a removal by the territory of investments or discouraging possible new ones, as the presence of organized crime inevitably affects the costs of legal businesses and increases the risk profile of regular economic activities;
redistributing income to the benefit of participants in organized crime activities and thereby causing a (probable) greater concentration of income, a growth in consumption, and a simultaneous reduction in the growth rate of overall expenditures (rich people are incline to lower consumption than the poor);
burdening the local communities affected by organized crime with hidden and illegal forms of taxation (from the classic "pizzo" to bribes, including theft or damage to the property of individuals and businesses that do not comply with the demands of organized crime). This hidden burdening can, in turn, trigger, by way of compensation, elusive or evasive practices of the ordinary tax burden (with the impoverishment of the budget of the local authorities and the consequent lower possibilities of public expenditures and expansion measures).
With regards to the effects on the public sector, it is necessary to distinguish between the revenue side and the public expenditure side.
As for revenue, the infiltration of crime into the legal economy produces a reduction in tax revenue, as criminal groups, to maximize available income, subtract all or part of their proceeds (made in the legal or illegal areas) to direct and indirect taxation.
Such illicit practices can also respond to the needs of legal firms, which act as counterparts to organized crime, to justify the proceeds related to money laundering. For example, reference is made to the false sales invoices that the legal firm receives to justify cash flows produced by illegal activities.
In addition to false invoicing, the creation of shell companies also represents a trait d'union, of interests and profits, between the launderer and the tax evader in the case of natural persons: as a matter of fact, both need to create a fence which, in the first case, prevents the identification of the effective dominus while, in the second, it allows to reduce the more onerous effects deriving from the progressiveness of the tax rates on individuals.
Obviously, the final effect on the overall economic system (private and public) will depend on specific behavioral parameters, such as the propensity to consume by criminal operators and the degree of integration between licit and illicit production. However, a contraction of the local economic cycle is likely to be expected, especially considering that crime tends take root and develop in prosperous areas. Therefore, an essential economic substrate is required to prove that the criminal impact on wealth is destructive rather than productive.
The general trend is that the higher-yielding crimes become more visible in territories engaged inthe economic recovery, with a prevalence in Northern and economically developed districts.Opposite, in areas of industrial decline, crimes with low profitability become chronic: it seems that criminality mirrors development.
The economic consequences of the Covid-19 pandemic will undoubtedly accelerate, if not even favor, such distorting processes, as already emerges from the analyses carried out for this purpose by the relevant state bodies.
Market distortions by economic crime
We will now briefly examine only two types of distorting phenomena of the economic market caused by economic crime.
The first is represented by the manipulation of information by rating companies, hedge funds, subjects operating in the shadow banking sector (investment funds, insurance companies, online credit platforms) which can inhibit the competitive potential of the company operating in the market, with the consequent competitive disadvantage at a global level and the related economic risks, including phishing for phools operations (increasingly sophisticated techniques that economic operators use to exploit both psychological weaknesses and information asymmetries of potential customers, the main cause of fraud and bankruptcy to the detriment of American savings and loan banks, the so-called junk-bond market started in the 1980s up to the recent financial crisis).
The second is carried out through automatic trading systems (high-frequency trading) which, through sophisticated algorithms, collect large amounts of privileged information in the context of the purchase and sale of securities in different financial markets, thus identifying in advance the investor's intentions to operate and therefore abusing privileged information (insider trading), causing an alteration of the normal functioning of the economic market.
Cybercrime, in its broadest sense, includes various illicit conducts which are all necessarily carried out through the use of a device that allows connection to the network: a criminological definition coined on the occasion of the Convention on Cybercrime of the Council of Europe, signed in Budapest in 2001.
The most emblematic example of cybercrime and the most feared is hacking, which can be defined as a set of actions aimed at achieving abusive access to a computer and telematic systems, having various illicit purposes such as stealing sensitive data or damaging them, becoming aware of particular sensitive information potentially endangering the reputation of a company or causingdamage to the companies that use them, with possible consequences in the economic sphere. A significant concrete case of the latter illicit offense is represented by what happened on 7 May 2021 in the USA: a cyberattack by Darkside - an international criminal organization - forced the closure of the oil pipeline system owned by the company Colonial Pipeline, which generated an increase in the price of oil from $ 64 to $ 66, with all presumable economic consequences worldwide.
A specific hacking typology, particularly dangerous for national security systems, is one represented by the fraudulent acquisition of important economic and financial intelligence data and information, as occurred at the end of 2020, again in the United States: an attack by the Russian Secret Services (SVR) against SolarWinds, a Texas software company. Thanks to the malwareinstalled in the programs of the Texan company, the Russian criminals were able to access the data of 18,000 government agencies, companies, and other non-profit organizations.
Other forms of cybercrime are represented by phishing, used to improperly dispose of the payment or financial instruments used by companies; DOS (Denial Of Service) attacks aimed at interrupting the continuity of the service provided by the company; industrial espionage, which includes both practices damaging industrial intellectual property - also those protected by copyright at European level (industrial espionage) - and theft of trade secrets (economic espionage) or economic (corporate espionage) by competitors, in particular emerging foreigners.
In order to promote public awareness of the seriousness of the problem, the FBI Director Mr Christopher Wray, in an interview with the Wall Street Journal in 2021, put on the same level the large number of cyber attacks with the pressure brought on national security by the notorious event of September 11.
Statistical reports on the criminal phenomenon above are not very representative of its gravity and diffusion, due to the high obscure figures, i.e. those facts not detected or detectable, as many companies are not aware that they have been victims of cybercrime or prefer not to report while paying to stop the cyber attack, in order not to damage their prestige and reliability in the corporate field and stock market.
On the other hand, statistics and news display the ease by which these cyber-attacks are implemented. This problem determined that the same companies, even the largest ones, underestimate the problem, preferring to increase profits to the detriment of investments in security, as was done by the aforementioned Solar Wind. From this, an axiom would stem: it is not possible to look at infrastructural investments without allocating a large part of the funds to cyber security. In this regard, please see the chapter authored by Mauro Santaniello.
Financial Economic Intelligence
From the above derives that globalization and world bipolarization of a competitive-economic nature have made government economic strategies obsolete and inadequate, based on the protection of internal markets through the imposition of duties.
Therefore, while considering the dangers in question, it is essential to evaluate the type of response that a State can provide, favoring predictive analysis as an instrument for prevention and contrast to any phenomenon, even not of a formally illegal nature, but in any case harmful for the economic system and, for the integrity of the state itself, in the terms set out above.
Economic-Financial Intelligence represents the key tool of this activity (hereinafter referred to as IEF), understood as a discipline that, through research, acquisition, processing, analysis tools, can identify the critical factors of the competitive global economic-financial system context to detect and communicate to the national authority in charge (decision makers): competition opportunities, the forecast of emerging threats and the risks for the security and solidity of the national heritage.The modern meaning of economic and financial intelligence was developed in the 1960s, during the Cold War, based on the studies carried out by the pioneer Harold Wilensky, which are summarized in his publication entitled Organizational Intelligence: Knowledge and Policy in Government and Industry. The work, among other things, highlights how important it is for the development and maintenance of power at international level, cooperation between states in economic development, and safeguarding knowledge. Scholars of the specific subject unanimously recognize Wilensky as the founder of modern economic-financial intelligence. For further information on the Italian pioneers of financial investigation, see in this volume the chapter authored by Pierpaolo Martucci.
Regarding the growing importance of the EFI for companies and the economic system in general, it should be emphasized that, in the fundamental volume on this matter, it is even stated that this discipline is increasingly used to compensate for the errors arising from the forecasts made by economists themselves, who mainly employ mathematical models, eliminating the human component, represented by the analyst (data scientist), who instead plays a role of fundamental importance in the EFI process.
The European states that use the EFI the most are France and Germany, given their historical tradition in protecting their national and foreign economic interests. In particular, the École de guerre économique was established in Paris in 1997 by the aforementioned Harbulot as co-founder. Japan also uses military techniques to support the economy in the wake of global challenges. Despite the aforementioned culture of economic intelligence and unmatched experience in the fight against mafias, in Italy there is a cultural delay (some speak of a sort of backwardness), essentially due to two reasons:
one is the underestimation of the overall concrete risks incumbent on businesses, especially among economic operators themselves, for the reasons set out in the previous paragraph;
the second reflects the consideration that it is a discipline of the exclusive prerogative of the State Intelligence Services, not immediately recognizing the practical utility for the national business system.
In more concrete terms, the EFI is an activity aimed at the acquisition and analysis of information concerning the global economic-financial scenario to protect e.g. the technological knowledge (know-how) of the industries considered strategic for state security, to prevent the penetration of foreign interests in vital economic sectors (defense, infrastructure, communications, energy, creation of internet networks), to avoid the loss of economic competitiveness of national companies on an international level, to combat economic crime capable of causing damage to the industrial system and the economic market (manipulation of the stock market, industrial espionage, counterfeiting, illicit online sales, financial scams), to prevent and repress the infiltration of organized crime in the economic sphere, in the manner illustrated in the part above.
An example is represented by the practical application of this discipline as an analysis tool (which has been reported by the media) is the use of the EFI for the application by the individual European State Authorities of the rules relating to golden power, or the retention by the State of a shareholding in companies, public and private, operating in sectors deemed vital for national security, with powers that are excessive compared to those envisaged for a normal shareholder.
From the point of view of methodological practice, the EFI process takes place through the following phases:
1) definition of objectives: identification of threat / risk / danger;
2) information gathering, mainly from Open Source INTelligence (OSINT), making use of the possibilities offered by big data, and, using the assumptions and functional utilities, by HUMan INTelligence (HUMINT);
3) verification of information, analysis, evaluations, also by resorting to text and data mining systems, implementation of information assets also based on previously acquired cognitive data, to derive smart dates;
4) elaboration of reports containing the possible scenarios, with the related risk or opportunity profiles;
5) resolution of the problem to be communicated to the decision-maker (state authority in charge);
6) evaluation of the strategic choices made.
Therefore, the operators of this process carry out research, study, and analysis of socio-economic phenomena that can potentially damage national economic security.
In particular, they proceed to:
monitor the attempts to penetrate foreign interests in national strategic sectors, identifying the circumstances behind which could hide foreign interests in the acquisition of important equity shares of companies operating in relevant sectors, such as energy, banking, and telecommunications;
at the same time, examine the activities of financial operators (mainly investment banks, rating companies, hedge funds, money market funds) which, due to the volume of money and information that they can manage and control, could cause decision-makers and public administrators difficulties linked to the loss of control over key parameters for one's own economic policy choices;
prevent that international financial variables such as inflationary trends, with the objective to avoid unexpected financial hysteria, from taking by surprise the managers of economic and monetary policy and users in general;
observation of the markets by monitoring the trends of raw materials and industrial products, focusing on the energy sector;
watch over "attractive realities" for the exercise of illegal activities: financial havens and offshore areas, which, due to the type of tax and the legal regime they offer, favor money laundering or other financial offenses;
identify transactions unaccounted that take place through unofficial channels, such as the exchange of precious goods, works of art and real estate, commonly used to carry out money laundering operations and, in general, the control of the circuits through which the transfer of “anonymous” funds, especially in countries where strict banking secrecy exists or judicial or fiscal cooperation is void. The “difficult traceability” of these funds makes them particularly useful for organized groups wishing to carry out illegal or criminal conduct.
From the above, two important statements are derived. The first is that the activity of EFI is essential to guarantee national economic security, and therefore the continuity and development of a state. The second refers to the size and complexity of the dangers looming on the national economic and financial system, not always perceived organically and therefore underestimated in their final multiple offensiveness.
Therefore, it follows that cooperation in the context of the EFI between the public and private sectors cannot be delayed, and that there is a need to increase the information network and make it available to the relevant operating bodies that can allow the State itself to protect communities and economies from external and internal attacks.
It will therefore be useful, specifically to reinforce the information base and the level of knowledge and analysis of external and internal threats to national economic security, to increasingly develop collaboration in this domain between the peripheral offices of the public bodies responsible for the defense of the State and the Private institutions, in particular trade associations and research centers, also on the model of the aforementioned École de guerre économique, with private universities. To achieve this form of synergy, it will be necessary for the business world to carry out a work of cultural awareness and training among its members (EFI training for company managers, conferences and round tables on the subject, production of studies, and research in sectors under review, to be able to form a private, scientific EFI community that will be able to determine the information needs to support the choices in terms of international agreements).
The costs to implement the aforementioned project would be considered a profitable investment in terms of security of the national company assets. The project could also be implemented at no cost, bringing together the resources and skills that already exist but are dispersed in various public and private institutional settings.