In an article published in 1996, Brad McBride and I examined how smuggling evolved in Mexico over about 15 years. We concluded that smuggling did not disappear as a result of trade liberalization. Liberalization was rarely complete, and smugglers could still take advantage of not paying taxes other than tariffs. However as a possible consequence of trade liberalization in the 1980s and 1990s, smuggling in Mexico shifted from project to organized crime and took on a more sinister aspect. Furthermore, by the mid-1990s evidence was surfacing that possible synergies between organized crime involved in the illicit drug trade and organized crime involved in the illegal importation of legal consumer goods were beginning to be exploited. We concluded the article by warning international marketers of the negative impact that this new smuggling could have on their operations. 

Since the publication of that article, increasing evidence has unfolded supporting both the evolution of smuggling into organized crime and the use of smuggling as a way to launder money for international drug cartels and possibly terrorist organizations. In retrospect, we were particularly astute in understanding and predicting the recent evolution of smuggling but relatively naïve in our assumption that firms did not willingly involve themselves in smuggling.

In June 2000, U.S. Customs estimated the global volume of money laundering, much of which is related to the illicit trade in narcotics, to total more than $600 billion a year or between two and five percent of the world’s domestic product. The connection between money laundering and smuggled consumer products has been a major concern of U. S. Customs for several years particularly after the government cracked down on money laundering through U.S. banks. In 1997, undercover agents traced drug money laundered via the Black Market Peso Exchange (BMPE) to bank accounts of major U.S. corporations. U.S. exports often purchased with narcotics dollars include household appliances, consumer electronics, liquor, cigarettes, used auto parts, precious metals, and footwear.

The U.S. firms that sell these products have routinely denied having any idea that they were involved in the BMPE and have been successful in preventing law enforcement agencies from keeping seized monies. Beginning in June 2000, however, a group of corporate executives began a series of meetings at the Justice Department with then Attorney General Janet Reno and other top officials. The companies included Hewlett-Packard, Ford Motor Company, Whirlpool, General Motors, Sony, Westinghouse, and General Electric Company. With the exception of General Electric, the companies called to participate had products appearing in the Colombian black market. General Electric was invited as the example of a good citizen who was successfully cleaning up the smuggling of its goods into South America. But shutting down smuggling came at a price to the firm. Between 1995 and 2000, General Electric estimated that its good citizen policy cost the company about twenty percent of its sales to South America.

Perhaps the most widespread corporate involvement in smuggling concerns the tobacco industry. Its participation in smuggling and money laundering has come under increased scrutiny since the late 1990s. But the real excitement begins in 1999 when internal company documents were made public after the settlement of litigation by Minnesota against the five largest international tobacco companies. The International Consortium of Investigative Journalists within the Center for Public Integrity, a non-profit organization based in Washington, D.C., spent six months analyzing what amounted to 11,000 pages of papers—then posted on their website correspondence suggesting the firms have encouraged smugglers in various ways. Belize, Canada, Ecuador, Honduras, and a group of state governors from Colombia filed lawsuits against cigarette companies for their alleged participation in smuggling. These suits have sought redress for past taxes, reimbursement for policing costs, and triple damages under RICO.  To date, the companies have seen the cases dismissed under the “Revenue Rule” that disallows U.S. courts from helping foreign governments collect taxes. But governments are now more likely to assume the worst from international marketers whose smuggled goods show up on black markets. The era of assumed innocence is past.