No. 17 - The financial profile of firms infiltrated by organised crime in Italy by Marco De Simoni

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March 2022

JEL Classification: D22, E26, K42, K49.
Keywords: OC, infiltration, money laundering, financial statements.

The aim of this work is to investigate infiltration by organised crime (or OC) in legitimate businesses and the resulting financial profile of criminal firms. We address some of the shortcomings of the existing economic literature in the field (uncertainty on unlawful nature of businesses analysed, limited geographical span) by relying on a unique sample of 237 firms which were seized by the judiciary within OC-related prosecutions and are located in most Italian regions. We identify four different types of infiltrated firms and we focus on the two most frequent ones: investment firms (used as conduits to invest illicit proceeds through legal activities) and competition firms (which are run to gain control of the market of interest, deploying mafia methods to harm competitors). Overall, we find that infiltrated firms, despite their higher revenues with respect to legal businesses, appear less profitable, as they may be pursuing other goals than mere economic performance. Moreover, while all criminal firms feature low inventory levels, investment firms have a large stock of tangible assets as opposed to competition firms, which prefer relying on leased facilities and equipment. That may be because competition firms are more at risk of detection and consequently adopt appropriate strategies to reduce any harmful consequences from potential appropriations by law enforcement. Both classes of criminal firms also feature larger cash holdings with respect to non-infiltrated firms in order to have more readily disposable assets in case of detection. Financing costs are lower for competition firms and higher for investment firms with respect to the control sample. Some evidence shows that competition firms have higher costs of labour, suggesting that they may be providing job opportunities to local people and associates so as to gain support for the criminal organisation.