by Seshata on 13/12/2016 | Legal & Politics

How the Global Economy Depends on Illegal Drug Money – Part II: Trade Routes, Empire, & the “Narco-State”

Drug Money Drugs have been traded between countries for centuries, and laws have been passed banning their sale or consumption for perhaps as long. The early history of the drug trade is patchy, but from the 17th century onwards there is plenty of evidence of a flourishing international trade – as well as plenty of efforts to stamp it out.

How the Global Economy Depends on Illegal Drug Money - Part II

Colonialism, Drugs & the Balance of Power

British, Portuguese, French, Spanish and Dutch interests had been competing for control of key Asian territories and trading routes for over a century by this time. Among their territories, the Portuguese had control of Goa, and the Dutch controlled Bengal – which happened to be two very important opium-producing regions.

It’s important to note that at this time, the European governments were only indirectly involved in this emerging international trade network. The principal actors were the merchants of the East India Companies – collectives of traders with indirect support from their respective governments.

By the late 17th century, the Portuguese and British East India Companies were transporting opium to Canton (Guangzhou – the principal Chinese seaport at the time) from Goa, while the Dutch East India Company had established a monopoly on the opium trade between Bengal and China.

The Chinese empire was an important regional power, with which Europe had an imbalanced trading relationship. The Chinese exported vast quantities of valuable goods to Europe, but had little need for European products in return. But opium sales represented a highly effective means of acquiring Chinese silver to offset the European deficit, and at first, the Chinese were happy to buy it.

Then, due to concerns over rising numbers of addicts and declining silver revenues, China passed a law banning the sale of opium in 1729. However, this did not stop the trade, merely pushing traders to implement more subtle methods of getting their products to China.

The private armies of the British East India Company fought and won important wars in 1757 and 1764 that allowed it to take control of Bengal, Bihar and Orissa – major opium-producing regions of India. This period marked the true beginning of Company rule in India, which was to continue until the establishment of the British Raj in 1858.

In 1773, the British Crown granted the Company a monopoly over the opium trade in Bengal; the Company then commenced selling opium to private merchants in Calcutta (Kolkata), in order to avoid openly flouting the Chinese ban on opium sales. These merchants would then transport the bulk of the opium directly to China.

“The Opium Ships at Lintin, China” by William John Higgins
“The Opium Ships at Lintin, China” by William John Higgins

The Opium Wars & China’s Defeat

The Company was fully aware that its continued trade in opium past 1729 was illegal under Chinese law. However, it pursued the trade, and for a short time even took opium directly to Canton in Company ships – but ceased this when Company directors in London criticised the practice for “jeopardising legal forms of Sino-British trade, as opium was contraband in China”.

Over the next few decades, the Company increased its efforts to control and penetrate the Chinese market, and the trade in opium became ever more crucial to its ongoing efforts in Asia.

Despite partially relaxing the ban in the decades after 1729, new increases in addict numbers and heavier silver losses motivated China to issue new bans on opium consumption (1796) and imports (1800). Then in 1834, the Company lost its Crown-granted monopoly (due to widespread British protests in favour of free trade) over opium, and competition began heating up.

This period saw increasingly devious and aggressive attempts to control the trade. The Company issued written orders to the private merchants it traded with, ostensibly banning them from smuggling opium to China, while secretly requiring them to transport it.

During this time, merchants would typically ship opium to warehouses situated on islands close to Canton. In 1839, Chinese officials inspected these warehouses, and confiscated and destroyed 20,000 chests (around 1,400 Imperial tons) of opium.

At this stage, the Company appealed to the British government for assistance. The British government, understanding that the opium trade was now essential to maintaining a British trade presence in Asia (and healthy revenues for Britain itself), sent a fleet of warships up the Pearl River Estuary towards Canton – and the first Opium War (1839-1842) began.

By this time, the laissez-faire economic philosophy of Adam Smith was greatly popular in Britain, and Chinese restrictions on the opium trade were held up as an example of unfair trade restrictions – a jaw-dropping hypocrisy, given that the East India Company’s monopoly had been lifted just five years previously.

By 1865, the British, with support from the French and the Americans during the second Opium War (1856-1860), had taken control of Hong Kong, Shanghai and Nanjing, and fully opened them up to trade. The opium trade into China was now fully established, and with the signing of the “Unequal Treaties” of Nanjing, imports were made fully legal under Chinese law.

These treaties, along with widespread social instability caused by protracted war and steadily climbing numbers of addicts, brought the mighty empire of China to its knees. What would follow would become known as its “Century of Humiliation”, and its subjection to European colonial powers. With the last great non-Western power defeated, the era of Western supremacy had begun in earnest.

Drug Banking in the Colonial Period

Thomas Sutherland, opium merchant and founder of HSBC
Thomas Sutherland, opium merchant and founder of HSBC

But where do banks come into this sordid history of drug smugglers, governments and war? We’ve seen evidence that major banks have a crucial role in laundering drug money in today’s world. But if the entire formation of the modern capitalist system depends on the complex relationship between governments, businesses and banks, then banks must also have a role stretching back centuries.

Indeed, when looking at the history of banking during and immediately after the Opium Wars, we come across a familiar name – the Hongkong & Shanghai Banking Corporation, now known to the world as HSBC.

Established by British businessmen in 1865, after the second Opium War, the bank served the needs of British traders in China – at a time when 70% of the trade was in opium. In fact, certain founding members (particularly Dent & Co and Thomas Sutherland of P&O) made their fortunes directly from the opium trade, while it was illegal under Chinese law. During this time, opium was considered to be the most valuable commodity in the world.

Several other banks were involved in handling the proceeds of opium at the time, including Barings Brothers, Jardine Fleming Bank Ltd, and Hottinguer & Company. These banks handled opium money until around the end of the First World War, when the trade became internationally illegal – at which point their role in handling drug money either ended or became clandestine.

The Emergence of Modern Money Laundering

As the trade in drugs became illegal throughout the world, it was not eradicated – it simply went underground, just like British trade into China after the Chinese bans on opium. As the risks of operating as a drug smuggler became higher, so too did the potential rewards, and mafias and cartels quickly became established. Governments that had previously been open in their support distanced themselves from the drug trade, and a new era of anti-drug rhetoric emerged.

Now that drug revenues were internationally illegal, the need for money laundering came into force in a big way. By the US Prohibition era of the 1920s, vast amounts of illegal money would be laundered. After all, one of the most lucrative commodities of all time – alcohol – was by then prohibited in the US, and the illegal revenues pouring into the coffers of the emerging American mafia were staggering.

The art of money laundering was in its infancy at this time, and in fact, money laundering itself would not become internationally illegal until the 1980s. Thus, when Al Capone was imprisoned in 1931, it was not for bootlegging or money laundering, but for simple tax evasion.

However, this signalled to other mobsters that the authorities may be paying attention to their own business dealing, and the money laundering business began to pick up speed. Prominent Jewish mobster Meyer Lansky soon began transferring illegal cash to Swiss bank accounts, which were protected by the Swiss Banking Secrecy Act of 1934. He would ultimately set up his own offshore Swiss bank and a vast and complex money laundering system to accompany it.

Since then, banks have repeatedly been shown to still have involvement in the illegal drug trade. Examples include the Bank of Credit and Commerce International, the Nugan Hand Bank, the Federal Reserve’s Miami branch – all active during the 1970s and 1980s, when the cocaine trade in Latin America was taking off in earnest.

Now, money laundering systems have evolved to become highly complex and intricate, comprised of vast webs of banks and businesses stretching across dozens of countries. Drug money is used to purchase gold, diamonds, clothing, footwear, agricultural equipment and various other legitimate goods, and the paper trail is almost impossible to follow.

The Battlegrounds of the War on Drugs

International laws are now in place prohibiting money laundering and the trade in drugs, along with several treaties that render illegal any open attempt by a government to interfere with another sovereign nation’s market using military force.

But while colonialism may officially have ended, certain patterns have been perpetuated – continuing to enrich the ex-colonial powers by transferring wealth from the “developing” world. Drugs still represent a huge source of wealth, businesses that smuggle drugs continue to channel vast amounts of money into the “Western” economy, governments still involve themselves in wars that perpetuate the trade, and major banks and other “white” businesses continue to facilitate the process.

Since the balance of power has shifted from Great Britain to the USA, the primary battlegrounds of the war on drugs have shifted too, from Southeast Asia to Latin America. Now, the world’s most valuable commodity is no longer opium, but cocaine.

US Soldier patrols opium field in Afghanistan (©
US Soldier patrols opium field in Afghanistan (©

The Ambiguous Concept of the “Narco-State”

As colonialism ended and former colonies achieved national independence, the world saw another fundamental socioeconomic shift. Colonial powers were losing their grip on revenues from their former colonies, and the colonies themselves were in a new, uncertain stage of life, with a desperate need to become financially self-sufficient.

Although the major Western powers were losing outright political power in their former territories, they still held vast economic power, built up over centuries of unfair trading practices. For many such territories, their largest trading partner today is still their former colonist – and invariably, trading relationships remain vastly unequal. In fact, this phenomenon has been labelled “neo-colonialism”, and its effect on the world economy is profound.

For some of these former colonies, dominions and mandates, drugs destined to be sold internationally still make up a vast chunk of the national economy. In certain countries, participation in the drug trade has had an enormous and visible effect on the development of their economies. This is how we come to the concept of the “narco-state”, although (as so meticulously pointed out in The Myth of the Narco-State, P.A. Chouvy, 2015) the designation is dubious and has never been clearly defined.

However, there are various clear similarities between major drug-producing nations. They are typically “developing” countries, with widespread poverty. They are often politically unstable, and prone to unrest and violence. They typically have weak governments that may enable, encourage, or even directly profit from the illegal drug trade to varying degrees. Often, a mafia or cartel system will have developed, and will benefit from a deep level of infiltration into law enforcement and government.

Major drug-producing countries usually also have an intricate financial system in place to internationally launder drug trade profits. Typically, they also have a long history of exploitation and subjugation by a colonial power. They are heavily dependent on foreign aid, leaving them open to financial bullying and manipulation at the international level. Countries that fit this description are usually situated in Africa, Asia and Latin America.

A map of the major Mexican cartels and their territories (© DEA)
A map of the major Mexican cartels and their territories (© DEA)

Demonising Drug Producing Nations is a Key Propaganda Tool

There is a huge and ceaseless global market for drugs, and a “moral” argument in keeping them illegal. This moral argument is highly compelling, and is a key part of the rhetoric ostensibly “justifying” the war on drugs.

Since Prohibition times, drug-producing states have been labelled as narco-states, scapegoated, and subjected to military aggression from major powers, particularly the US. This military aggression is fêted as an attempt to eradicate the illegal trade in drugs, but there is now a great deal of evidence to suggest that it in fact perpetuates it, and gives narco-traffickers ever more power and influence.

In May 2001, the terrorist group known as the Taliban imposed a ban on opium production in Afghanistan, which had a profound effect on the global opium market – dramatically reducing availability and increasing prices. Months later, the US invaded – and the Taliban reversed their policy on opium, sending production skyrocketing over the following years.

Afghanistan’s opium production has long been linked with the funding of terrorist organizations, particularly the Taliban, Al Qaeda and now ISIS. For example, it has been widely reported that ISIS receives $1 billion per year in illegal drug revenues.

The Dubious Link Between Drugs & Terrorism

However, upon looking closer, there are obvious flaws with the argument. Certainly, some of the profits generated by the illicit trade in drugs go towards financing terrorist groups, but it is thought to be a small fraction of total funding.

ISIS, according to the Centre for Analysis of Terrorism, made $2.4 billion in 2015 – of this, $800 million came directly from taxing the citizens living in the territories they control, and a further $600 million came from oil. The remaining $1 billion came from a mixture of sources including kidnapping & ransom, antiques, donations, agriculture, phosphate mining and natural gas. Any revenue earned from drugs apparently comes from taxation of drug producers rather than management of drug production.

Yes, terrorist groups can benefit from the stealth and liquidity of drug capital, but it’s clear that they are far from the main beneficiaries, and that drugs make up a negligible proportion of total funding. The Taliban may be an exception here, with up to 40% of their funding arising from Afghan heroin (possibly over 60% at the peak of the trade). But the Taliban’s total annual revenues are less than a quarter of ISIS revenues, and it is thought that they receive greater total amounts directly from Pakistan and the Gulf states.

Mexican Army soldiers in an operation against cartel members in Michoacan
Mexican Army soldiers in an operation against cartel members in Michoacan

The Main Beneficiaries of the Drug Trade

With a trade worth over $320 billion a year, even if ISIS (the “world’s richest terrorist organization”) did make $1 billion annually (and the evidence suggests they do not), terrorist organizations are bit players in the international drug trade. The main beneficiaries are the drug cartels themselves, along with the banks and businesses that do business with them.

Just for comparison – it’s thought the Sinaloa cartel makes $3 billion per year, and the Latin American cartels combined may make as much as $64 billion annually, almost entirely from the trade in cocaine (with small percentages deriving from other illegal drugs).

The entire global financial system continues to benefit from the illegal drug trade, keeping drug-producing countries trapped in a cycle of unbreakable economic dependence. This is furthermore facilitated by vast quantities of international aid, which keep drug-producing nations subject to the economic whims of their international creditors.

“Count The Costs”, an international organisation offering an “alternative World Drug Report”, states:

“Globally, in excess of $100 billion a year is spent on fighting the war on drugs – roughly the same as the total spent by rich countries on overseas aid. The US, and other countries, have diverted development aid from where it would be most effective, blurring it into military spending for its allies in the war on drugs – most significantly in Latin America.”

This points to the deeply flawed and unequal nature of our current economic model. It also suggests that what is required to actually end illegal drug smuggling is the establishment and maintenance of an economic system that does not depend on a pool of illegal cash to turn to when the usual mechanisms fail, and is not based on the unsustainable exploitation of weaker nations.

Currently, we are experiencing fundamental changes to the global economy, and some economists believe that the era of Western economic supremacy is drawing to a close. As this transitional phase continues, we are likely to see radical changes within the drug trade. The current trend towards legalising and regulating the world’s most valuable cash crop – cannabis –  may be an aspect of this fundamental change.

If you are interested in reading part 1 of the article, please follow this link

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M. Simon

Developing nations consume vast quantities of recreational drugs. In America the drug of choice was alcohol. Although opiate use was not unknown (Nantucket). With development that use rate declines. The alcohol temperance movement was a reaction to that use rate despite the fact that alcohol consumption was already in decline. And we now know why.

Addiction is a symptom of PTSD. You can look it up. - That is why even in America we have a residual of opiate addicts.

The fear that opiate use will greatly spike if it is legalized is unwarranted. We no longer get large amounts of PTSD just from living. Our residual amounts of PTSD are from child abuse. Dr. Lonny Shavelson found that 70% of female heroin addicts were sexually abused in childhood.


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