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C O N F I D E N T I A L SECTION 01 OF 04 NAPLES 000037

SIPDIS

STATE ALSO PASS TO ONDCP; TREASURY FOR OFAC

E.O. 12958: DECL: 6/5/2018
TAGS: ECON KCRM SENV SNAR EFIN PGOV KCOR IT
SUBJECT: ORGANIZED CRIME IN ITALY II: HOW ORGANIZED CRIME DISTORTS
MARKETS AND LIMITS ITALY'S GROWTH

REF: (A) NAPLES 36 (B) 07 NAPLES 119

NAPLES 00000037 001.2 OF 004


CLASSIFIED BY: J. PATRICK TRUHN, CONSUL GENERAL, AMCONGEN
NAPLES, STATE.
REASON: 1.4 (b), (d)
¶1. (U) Summary: This is the second of a three-part series;
this message examines the economic dimension of organized crime
in Southern Italy. According to a recent study, organized crime
is the biggest individual segment of the Italian economy,
accounting for seven percent of GDP. Wherever it occurs,
organized crime in Italy distorts markets. While in some
instances it lowers prices (but usually with adverse side
effects), in general its activities (e.g., extortion, rigging of
public contracts) lead to higher costs for the government,
business owners and consumers. Estimates of how much organized
crime costs the country are at best approximate, and do not
always take into account the lost opportunities for foreign
investment, the pernicious environmental and health effects, the
losses due to corruption and inefficiency, and social costs
related to higher rates of drug dependency and drug-related
crimes. The three main organized crime groups in Italy earn
tens to hundreds of billions of euros a year, depending on the
estimate. End summary.

Organized Crime: Businessmen With Guns
-----------------------------------------

¶2. (U) Often viewed as a political or social phenomenon,
organized crime in Italy, as in any country, is first and
foremost a business. A 2007 report by the Italian business
association Conferescenti estimates that it is the biggest
sector of the Italian economy, with a 90 billion euro ($143 b)
turnover, accounting for seven percent of GDP, and 20,000
"employees." However, because illegal activity is by definition
clandestine, it is impossible to quantify all of its effects on
the economy. Organized crime distorts prices (mostly upwards,
but sometimes downwards); undermines legitimate business;
discourages entrepreneurship and the establishment of large
businesses; and hinders economic growth, not only in the South
but throughout Italy. The GOI's Statistics Institute (ISTAT)
calculated in late 2007 that Italy's underground economy
accounts for about 18 percent of total GDP; not all of the
black-market economy, however, is run by organized crime.
According to a 2008 study by the anti-Mafia Rocco Chinnici
Foundation, extortion, loan sharking, money laundering, tax
evasion and wasted public funds are estimated to cost the
Sicilian economy a hefty one billion euros annually, or 1.3
percent of the island's GDP. According to another study by the
Eurispes Institute (an Italian think tank), the Cosa Nostra
earns over eight billion euros ($12.7 b) a year from its
activities; the Camorra about 12 billion euros ($19 b) a year;
and the 'Ndrangheta 36 billion euros ($57.2 b) a year --
basically tax-free. A May 2008 report by the Eurispes think
tank calculates that the 'Ndrangheta's business operations
represent 2.9 percent of Italy's GDP, or 44 billion euros ($70.8
b) per year, the equivalent to the combined GDPs of booming EU
members Slovenia and Estonia. Sixty-two percent of this amount
comes from the drug trade. A CENSIS study estimates that
organized crime annually drains 5.7 billion euros from the
Italian economy and represents a loss of 2.5 percent in the
South's economic growth. Italy's Treasury Police estimated in
2005 that the profits realized from illicit activities (not all
of which are controlled by these three groups) ranged from 500
to 1,000 billion euros per year. The wide range of these
various estimates is an indication of just how difficult it is
to calculate the profit and effects of organized crime in Italy.

¶3. (C) In addition to extracting money from others, the Mafia
engages in its own entrepreneurship when it comes to public
contracts, especially in the construction industry. In the case
of Cosa Nostra, for example, the criminal organizations, using
money laundered from other illegal activities such as extortion,
turn private real estate companies into Mafia-controlled
monopolies. Through a system of programmed rotation, all of the

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companies controlled by the Mafia are guaranteed contracts while
offering only a minimal discount; the lucrative profits allow
the contract winners to deliver larger bribes to both the Mafia
and the corrupt politicians and public officials who accommodate
it. Through such transactions, billions of euros in central
government and EU development funds have wound up in the hands
of organized crime. Lorenzo Diana, a former Senator and former
head of the Democratic Left Party's anti-Mafia unit, makes the
credible assertion that most of the highway running from Naples
to Reggio Calabria was built -- using substandard materials and
methods -- by Camorra and 'Ndrangheta clans. According to
Vincenzo Macri, a deputy anti-Mafia prosecutor, the proposed
Strait of Messina bridge (linking Sicily to the mainland) is
another goldmine on the horizon for organized crime. Although
the crime syndicates would be only marginally involved in the
planning, the realization phase will offer billions of euros in
contracts and subcontracts for construction, materials, services
and other forms of what he terms "indifference."

¶4. (C) Prices for most goods and services in Southern Italy are
anywhere between two and five percent higher than what they
would be in the absence of organized crime, according to several
sources. Giuseppe Gennaro, and anti-Mafia prosecutor in
Catania, Sicily, tells us that the Cosa Nostra takes a two to
three percent "tax" on most transactions in Sicily. In Reggio
Calabria, Prefect Salvatore Montanaro says 70 to 80 percent of
businesses in his province pay protection money; estimates for
Sicily are similar, while about 40 percent of businesses in
Campania and Apulia reportedly make extortion payments. SOS
Impresa, an anti-racket association, estimates that the
mafia-related cost to Italian merchants is 30 billion euros
($47.7 b) annually, including 12 billion from usury, 11 billion
from rigged contracts and six billion from extortion.
Protection "fees" range from 100 to 500 euros per month for
small stores to 10,000 euros per month for construction sites.
Those who refuse to pay are threatened, harassed and sometimes
attacked or killed, or their businesses are burned. According
to the Chinnici Foundation study, however, those who do pay do
not feel any safer. One long-term extortion victim claimed his
payments "resulted in no concrete benefit, either in terms of
security or business growth." Another called it "a
liberty-killing event, the worst insult, an attack on your very
existence...like kicking yourself in the face."

¶5. (C) This is not to say that the market distortions always
raise prices. According to Roberto Saviano, author of a
best-selling book about the Camorra, industries can save up to
80 percent of the cost to legally dispose of their toxic waste
by hiring the Camorra to dispose of it clandestinely. This
actually makes many factories (virtually all of which are
located in northern Italy) more competitive, but at a terrible
environmental cost (the brunt of which is paid by residents in
the South, where the waste winds up). According to former MP
Isaia Sales, an expert who has written two books on the Camorra,
organized crime sometimes lowers agricultural and food prices,
too, by favoring certain business owners who are able to produce
more efficiently due to increased business. The Camorra also
lowers real estate values, by forcing property owners to sell at
ridiculously low prices through intimidation. Similar to the
Camorra's trafficking in toxic waste to reduce the burden for
northern Italian business, the 'Ndrangheta (according to Mario
Spagnuolo, anti-Mafia prosecutor in Catanzaro) manages illegal
immigration rings that provide foreign workers to Calabrian
employers for a mere 20 to 30 euros a day, thus lowering labor
costs for some businesses. Spagnuolo also says the 'Ndrangheta
has so streamlined the arms market (trafficking, for example, in
leftovers from the Bosnia war) that one can purchase a
Kalashnikov assault rifle for one-third the price of a legally
purchased pistol.


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Environmental and Health Costs
------------------------------

¶6. (U) The effects on the environment and health are stunning.
Saviano told a recent interviewer that the Camorra earned six
billion euros in two years from toxic waste disposal.
"Farmlands bought at extremely low prices are transformed into
illegal dumping grounds.... The type of garbage dumped includes
everything: barrels of paint, printer toner, human skeletons,
cloths used for cleaning cow udders, zinc, arsenic and the
residue of industrial chemicals." Authorities near Naples
discovered in February 2008 a dump brimming with hospital waste,
including used syringes, thousands of vials of blood samples and
a human embryo. Legitimate landfills have also been also used
for illegal dumping, one of the reasons they are now at
capacity, which has led to a waste disposal crisis throughout a
large part of Campania region (ref B). In 2006, the World
Health Organization found rates for stomach, liver, kidney, lung
and pancreatic cancer to be up to 12 percent higher than the
national average in areas just north of Naples where the Camorra
has dumped thousands of truckloads of toxic waste. The
environmental costs of organized crime may never be calculable,
and the overall costs in terms of human and animal disease and
mortality cannot be quantified.

¶7. (U) Organized crime's environmental impact extends to food
frauds, and Campania leads the country in this sector.
According to police reports, the Camorra runs an estimated 2,000
illegal bakeries (two thirds of the region's total), using
expired flour and ovens which emit toxic fumes (the "wood" is
often old doors covered in paint). Caserta has illegal cheese
factories which mix buffalo milk with powdered milk from
Bolivia, cutting retail mozzarella costs by a third; they also
use lime to help ricotta "keep" longer. According to a
Commander of Naples' Carabinieri, the most flourishing business
is recycling expired products. The Camorra also passes off
low-quality imports with made-in-Campania labels, from
pesticide-laden Moldovan apples to E. coli-infested Moroccan
industrial salt. Organized crime is also heavily involved in
IPR fraud, from fake designer fashion bags to bogus DVDs;
Sicilian authorities even discovered recently several garages
where fake Ferraris were being manufactured.

Creating Chaos
--------------

¶8. (C) Organized crime also has insidious effects on the urban
landscape. Giap Parini, a researcher who met us at the
University of Calabria in Cosenza, says that it is wrong to
think of mob-infested cities as poor; on the contrary, they can
be inhabited by wealthy bosses. Behind the run-down exterior
walls are golden faucets and marble bathrooms. No, the main
characteristic of a mob city, Parini argues, is chaos.
Uncontrolled expansion, illegal construction, lack of green
spaces, failed urban planning, incomplete public works, poor
infrastructure, low educational standards, and general
government inefficiency are all signs of organized crime.
Mayors who try to install illumination in public areas often
find the lights broken within a day, as streetlamps are not
propitious for drug dealing. Naples Prosecutor GianDomenico
Lepore says politicians and citizens do not realize the burden
that organized crime is on the economy: "There's no development
here." Indeed, the Camorra made an enormous profit in the early
1980s by constructing public housing in Naples after a major
earthquake; today, these neighborhoods are characterized by
crumbling cement high-rises and an absence of piazzas, stores,
parks and trees.

¶9. (C) Ironically, according to University of Calabria
sociology professor Pietro Fantozzi, there are more giant

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shopping malls per capita in poverty-stricken Calabria than in
the prosperous Milan metropolitan area. Throughout Southern
Italy, highway exits are lined with luxury car dealerships,
expensive home decoration stores, and ostentatious,
neo-classical villas -- fantasies about which the general public
(nearly a third of whom are living at or below poverty level)
can only dream.

¶10. (SBU) Comment: Put all these factors together and it
becomes clear that organized crime is a major, if not the main
reason why the southern Italian economy lags so far behind that
of the rest of the country, and one of the main causes of
Italy's growth lagging behind the rest of the European Union.
Organized crime keeps away investors and ensures that small
businesses cannot become large, which in turn perpetuates the
high unemployment rates (averaging 20 percent in the South, and
35 percent for young people). Extortion and the imposition of
Mafia-associated suppliers make many businesses unprofitable;
business owners must compensate by raising prices and/or by not
paying taxes. Attempts by the government or the EU to spark
development in the South are frustrated by Mafia-run corruption
and mob fixing of contracts and sub-contracts. Legitimate
businesses are also undercut by Mafia-led production and
distribution of pirated and counterfeit products. Development
would create an alternative to organized crime that would put
its practitioners out of business, so it is in the mob's
interest to retard economic and social development. Not
surprisingly, a study published in January 2008 by researchers
at the Magna Grecia University of Catanzaro and Naples' Federico
II University showed that the presence of organized crime is a
strong disincentive for foreign investors. While the
established U.S. businesses in the South (almost all of which
are relatively large) have not complained to ConGen Naples about
organized crime, countless potential investors have expressed to
our Commercial Service office a reluctance to invest out of fear
of the mob. Southern Italy has few major U.S. investments
compared to the rest of the country. In the end, the costs of
organized crime are felt directly or indirectly by virtually
every Italian citizen. While the problem might seem
intractable, the third and final cable in this series will
examine ways Italy and the United States can successfully
confront organized crime. End comment.
TRUHN