The business of crime: drug dealing

Lucy Mair finds out who's making money from this global black market – and who's paying for it

Athousand metres above the Bolivian city of La Paz, Andean people chew bitter-tasting coca leaves to suppress the fatigue, cold and hunger that accompany life on the harsh altiplano. In the canyon below, San Pedro prison houses several thousand Bolivian and foreign inmates - almost all of them for dealing or trafficking cocaine made from the same leaf.

The notorious prison in the heart of La Paz is a reminder not only of the huge impact of trafficking in drug-producing countries, but also of the 1,000 tonnes of cocaine that the UN estimates is smuggled from Bolivia, Peru and Colombia to consuming countries, including the UK, each year.

The drug trade is nothing new. Cannabis and opium-based drugs have been imported to Europe from Asia and the Middle East for medicinal and recreational use for several centuries. That's until, in the early 20th century, western governments began outlawing their recreational use. Newly-discovered drugs, such as cocaine and synthetic substances, were also prohibited due to the negative impact of drug addiction and abuse on society.

But the most significant development came fifty years ago, when the 1961 UN Single Convention on Narcotic Drugs adopted enforcement-led prohibition into the international legal framework. The Single Convention aspired to create a drug-free world, but instead it established a global criminal market worth $330 billion (£206 billion) annually.

Supply and demand

Drugs are commodities and, like legal commodities markets, the black market is governed by supply and demand. The theory adopted by the UN in the 60s was that by prohibiting the production of drugs and stepping up enforcement measures, the supply of drugs in the market would fall. The squeeze on supply would push the price of illegal drugs up, and consumer demand would then decline because most people would be priced out of the market.

International enforcement measures, from crop fumigations to armed seizures of drugs, have put pressure on the production and supply of narcotics. But demand for drugs has, nevertheless, increased. The 2012 Alternative World Drug Report by non-profit alliance Count the Costs estimates that demand for drugs has risen by 300 per cent in the past half-century, now with up to 300 million drug users worldwide.

A smaller supply and growing demand has increased drug prices, which has created a huge profit opportunity that's exploited by criminals. The price of illegal drugs is further inflated to account for the risk suppliers face of being caught and, because it's an unregulated market, criminal entrepreneurs can increase prices at will.

Who makes the money?

Drug trafficking can be a lucrative trade, but it isn't always. Farmers who cultivate illegal crops tend to earn more than they would for growing fruits and vegetables. But their share of the final street value of drugs produced from their crop is negligible.

A kilo of cocaine at the farm gate costs around £325, but by the time it's sold on the street in the UK, the price is over £50,000 - more than a 15,000 per cent mark-up. Meanwhile, the mark-up on coffee from the farm gate to supermarket shelves is just 413 per cent. A study by economists at the University of Bogota found that in 2008 just 2.6 per cent of the total street value of cocaine produced in Colombia remained in the country, while 97.4 per cent was laundered through banks in consuming countries by organised criminals.

Producers don't make much from farming the crops but, more surprisingly, neither do drug dealers on the street. An analysis by Freakonomics co-author Steven Levitt in 2004 found that the structure of a drug-dealing gang in Chicago "is just like McDonald's". He says gangs are bottom-heavy with "foot soldiers" who serve up drugs on the street making less than the minimum wage, while franchise operators, regional vice-presidents and the board of directors profit from their work and take home six-figure salaries.

It's Levitt's chief executives in consumer countries, cartel leaders in producer countries and couriers who risk smuggling narcotics between the two who profiteer from the drug trade. They do so by exploiting the price mark-ups, avoiding taxes and engineering a monopoly on business through corruption and violent crime.

Financial institutions also make money indirectly from drug trafficking. The drug trade is a cash economy and money laundering is the process by which drug money is entered into the banking system through fake companies, international money transfers and shady investments. HSBC is set to face a fine of $1.5 billion for breaching anti-money-laundering regulations in the US. Meanwhile, in 2009 then-head of the UN Office on Drugs and Crime (UNODC) Antonio Maria Costa said that drugs money saved some banks at the height of the crisis because it was "the only liquid investment capital" available.

Paying the price

In addition to the exchange of goods and money on the black market, the cost of enforcement to stop trafficking is an important part of the drug economy. The Serious Organised Crime Agency (SOCA) estimates that the social and economic cost of illegal drug markets to the UK is £17.6 billion each year, including expenditure on enforcement, treatment and the criminal justice system. What's more, global spending on drug law enforcement exceeds $100 billion annually.

But calls to scrap prohibition and enforcement, in favour of decriminalisation or legalisation, are growing louder. A change of tactics would help to suffocate organised crime, introduce regulation to the drug market and make drugs safer for users. A YouGov poll of nearly 3,000 British adults in June 2011 revealed that only 11 per cent believe the government's current approach to illegal drugs is working and almost 90 per cent agreed that it's impossible to eliminate drug use, so the aim of policy should be to reduce the harm users cause to themselves and others. This October, the UK Drug Policy Commission made the case for decriminalisation, while Transform Drug Policy Foundation is campaigning for a state regulated drug market.

Portugal decriminalised drug use in 2001 and, as a result, addiction to hard drugs has fallen by half, the cost of drug offenders in the criminal justice system has been reduced and the retail price of drugs has fallen, reducing funding for organised crime. There's a long way to go to reverse the effects of prohibition and the criminal market it has created - from the prisons of Bolivia to the ones on our doorstep. But the economic and social case for a regulated drug market is certainly a compelling one.

Inside view: The ex-drug trafficker

Chris Heifner - Author of Fail! An anti-motivational guide to avoiding the seven idiotic habits of losers

How did you become involved in the drugs trade?

When I graduated I tried everything, but for some reason I couldn't find work. My girlfriend got pregnant, Christmas was two weeks away, and we were getting evicted from our apartment. I'm from El Paso, Texas, on the Mexican border with Ciudad Juarez - the drug trafficking capital of the world. I turned to friends to ask for a loan, then they convinced me to work for them.

I began driving loads of around 400lb (180 kg) of marijuana across the US. I'd unload it, pick up about $200,000 (£125,000) and drive the money back. I later became an informant for the Drug Enforcement Agency (DEA) after I was threatened by a hit-man.

How does drug smuggling work?

Every deal was different, so you'd always negotiate new prices and new terms. It wasn't like the Mafia - there was no hierarchy, just a black market of people trying to make money. Sometimes it would be a very simple transaction between two people, but if it's a bigger operation drugs might change hands 12 to 15 times before they reach the street. There are no rules.

How profitable is drug trafficking?

I made several hundred thousand dollars in six months - which is more than I've made working legitimate jobs in my entire life. The profit margins are around 95 per cent. Everyone involved takes a cut and makes a lot of money - even small transporters. My friend turned his drug trafficking organisation into a $30 million-a-year operation. The leaders of Mexican cartels are billionaires, but their money comes indirectly from drugs - it's more from bribery and corruption.

Do you think prohibition is the best way to tackle the illegal drugs trade?

In a perfect world, I'd say that drugs are bad and if you do drugs you should suffer the consequences. But, unfortunately, we live in a world where the drug epidemic is taking control. Since the war on drugs began, the US government has spent $2 trillion - if drugs were decriminalised it would solve economic problems. Logically, decriminalisation makes sense, but morally, it's up to the individual and I don't take a position on it.

Inside view: The policy reformer

George Murkin - Transform Drug Policy Foundation

What is the social and economic cost of illegal drugs in the UK?

Transform has estimated that the total crime, health and other social costs of Class A drug use in England and Wales in 2003/4 was £16.785 billion.

Such huge costs are the product of prohibition. Because drugs are illegal, their price is inflated, meaning those who are dependent on drugs have to steal to feed their habit. The illegal drug market also creates crime because gangs and drug dealers settle their their disputes with violence, rather than in the courts. We must then spend billions on police and prisons to deal (largely unsuccessfully) with this crime.

What is the solution to these problems?

Transform believes the solution is legally regulated drug markets, strictly controlled by governments. This is a pragmatic approach which recognises that drugs cannot be eliminated from society, so must be made as safe as possible.

Current drug policies maximise the potential harms of drugs because organised criminals cut their products with dangerous contaminants. By disempowering organised crime, a system of legal regulation would also help reduce the horrific violence and devastation occurring in producer countries such as Mexico and Colombia.

How would a legally regulated drug market look in the UK?

Legal regulation doesn't mean a free-for-all whereby drugs are available to anyone, at any time. Transform wants to see strict regulation applied to an area where currently there is none, as we think drugs are safer when they're in the hands of of governments, doctors and pharmacists - rather than organised criminal gangs.

There are five models we propose for regulating the availability of drugs, including medical prescription or supervised venues for the highest risk drugs; specialist pharmacist retail with licensed user access; licensed retailing; licensed premises for sale and consumption - similar to Dutch cannabis "coffee shops"; and unlicensed sales for the least risky products.

To what extent does trying an illegal drug as a student contribute to the problems associated with the drug trade?

At the moment, if you buy and use drugs, you are effectively financing organised crime. But it's the policy of prohibition - not individuals' drug use - which is at fault. In a government-controlled, legally regulated drug market, these funds could instead be spent on building schools, improving healthcare or any other socially beneficial policy.