Money Talks: The Business of Black Markets

0:05Mariana van Zeller: Hello! Welcome to Money Talks from Slate Money. I'm Felix Salmon of Bloomberg and this is the show where we talk to the most interesting people in the world, about the most interesting subjects in the world. And this week I am reunited with my former colleague Mariana van Zeller. Mariana, welcome.

0:28Felix Salmon: Thank you, Felix. I'm happy to be here.

0:30Mariana van Zeller: Mariana, tell us, who are you? What do you do? And most importantly, what is your podcast?

0:36Felix Salmon: I have been covering black markets for about 20 years now. I have a show on National Geographic called Trafficked with Mariana Van Zeller. And I recently launched a podcast called The Hidden Third. It's called The Hidden Third because it's estimated 35 % of the global economy are black and markets. And yet we know very little about them.

0:56Mariana van Zeller: I love this so much. So we are going to dive into exactly that we're going to try and work out what is a black market? What are the incentives? What is the same as a normal market? Where do things go very, very different? You've been covering this, as you say, for decades now. So you are the expert on this. And there aren't that many experts on this. So I'm very excited about this. It's all coming up on Money Talks.

1:25Mariana van Zeller: mariana let's start at the top the hidden third speaking for myself i don't think that one third of my annual expenditure goes on black or gray anything i'd be surprised if it was 100th so maybe i'm just uncommonly law abiding but like tell me if it's a third of the global economy then that means that for everyone like me who just spends on like legal things there's someone else who's almost entirely spending on illegal stuff. Is that right?

1:57Felix Salmon: Not so much about the expenditure. It's more about the market share. I mean, when we talk about black markets, we're essentially talking about drugs and guns and illegal products. But we're also talking about gray markets, which is, you know, the man selling fruit on the side of the street, the product that you're selling online and is not taxed. So these are tax revenue that you're not getting and that ultimately is not being used to pay for better schools and hospitals and infrastructure and all that. And it's in that sense that economists estimate that it's around 30, 35 percent of the global economy.

2:32Mariana van Zeller: If I'm just paying cash for something, there's a decent chance that that counts as like gray market.

2:38Felix Salmon: Yeah, it's a gray market because it's untaxed, right? But you're saying how you are not the person buying these drugs or these illegal or, you know, taking part in this black market, even if you discount the gray markets, the black markets alone, these affect every single one of us. You might not see it every day, but whether you're talking about drugs, which is estimated to be between$300 and$600 billion a year, or scams. We all know people who've been affected by scams and victimized by scams. Illegal immigration. I mean, these are all subject matters that are on our headlines every day that have a huge impact on our lives.

3:15Felix Salmon: And again, I think we know very little about them.

3:18Mariana van Zeller: So let me first start with where most of the slate money audience is, which is the United States, which is, you know, a very rich country with relatively well-developed civil institutions and rule of law and that kind of stuff. Would it be fair to say that the black and gray markets are smaller than in the U.S. than they are globally or not so much?

3:44Felix Salmon: No, I mean, we're the number one consumer of drugs in the world. Our drug business here in the United States alone brings in$150 billion a year. Again, I've spent time with the cartel, with the Sinaloa cartel in Mexico and with sort of coyote operations, a guy called the King Coyote, bringing in immigrants to the United States. And these are two operations that are very different, but that essentially operate very much like the legal economy, like actual legal businesses. You know, they depend on marketing, for example. I will never forget the interview we did with King Coyote, where he was talking about how he gains new clients, people wanting to come to the United States, by marketing the work that he does.

4:29Felix Salmon: And he has lawyers in the United States. He has a human resources department. I mean, these are businesses that we tend to think as, you know, small and underground and hidden in the deepest corners of our world. But that if you look at them, they operate, they're very parallel to the legal economy.

4:47Mariana van Zeller: The lawyers in the United States who work for him, are they breaking the law? I feel like one of the things that lawyers do is they represent criminals. Like you have to be able to do that. Are they doing anything illicit?

5:00Felix Salmon: Not exactly. They're looking at examining what is changing on a federal level, what is changing on a state level in terms of immigration laws, and how they can exploit the system, how they can exploit the loopholes to give advice to their clients, to the King Coyote on how to bring people across the border. And the same happens with cartels. I mean, cartels in Mexico, I've spoken to several who've talked about hiring people, hiring lawyers in the United States for the exact same purposes and experts. And obviously, we haven't even spoken about corruption and what a big part that plays. But in trying to figure out how they can get their product across to the United States.

5:38Mariana van Zeller: And like the marketing campaigns, what are they using? Some kind of social media?

5:44Felix Salmon: Yeah, it's so interesting because it's something that I'd never heard before I interviewed King Coyote. But what they do is his company and they were, you know, bringing thousands of people across from southern Mexico all the way to northern Mexico and into the United States. And what they're doing, what he did was that he would send out WhatsApp messages with sort of his success rate and how many people he managed to get across and then putting out this price point. And he says it's all word of mouth. Most of the marketing campaigns, you know, it's not billboards outside or podcast ads, but it's word of mouth.

6:19Felix Salmon: If you give people a good, you know, enjoyable experience, they're likely to share that contact to other people and other people want to use that service.

6:28Mariana van Zeller: I feel like this is a big opportunity for Slate money. We should just be selling podcast ads to criminals because that's not illegal, right? Like we would be allowed to do that. And this is the third of the global economy. Like there's money here.

6:41Felix Salmon: I'm not sure if they'd like all that attention. But, yeah, you know, traffic where basically I get access to these hidden worlds around the world. You know, it's an expensive show to put together. And many times we've thought that we should actually be involved in those black markets. So we've been paying for this expensive show.

6:59Mariana van Zeller: Seriously, like you've been covering these markets for a long time. They are a massive part of the global economy. Obviously, there is a lot of demand for these services. How often do you find yourself thinking, this is a really good product or service? You know, I would quite like to avail myself of it if it wasn't illegal.

7:19Felix Salmon: It's not so much about the product. So I don't think I would, you know, I've been to fentanyl labs in Sinaloa and I've seen they put out some pretty pure products, but that's not the kind of stuff that I'm interested in.

7:30Mariana van Zeller: That's contraindicated. I wouldn't start like failing yourself with that one.

7:34Felix Salmon: Or counterfeit money. I've spent time in Peru with a counterfeit money group of people that basically make dollar,$100 bills that look exactly like the real ones. Those I'd probably be more likely to bring back. But I think most of what has shocked me in my decades of working in black markets has been the talent and the entrepreneurship and the creativity behind many of these people, these black market operators. And for the vast majority of people I speak to, they are involved in these worlds of crime, not because they were born thinking, oh, that's what I want to be. I want to be a fentanyl chemist or a drug trafficker or a coyote.

8:14Felix Salmon: It's because of the environments they grow up in. You know, if you grow up in Sinaloa and your whole family is part of the cartel, it's very likely you're going to end up being part of the cartel. Or for lack of opportunities. I've interviewed, you know, dozens of people, if not hundreds, who sort of entered, who started selling drugs or became sicarios or, you know, became scammers because of lack of opportunities. And as long as we don't talk about the incentive, it's going to be very hard to change the outcome. And that's what's missing usually in the conversation about these black markets.

8:43Mariana van Zeller: In a normal like legitimate market, you know, I get a creative job as, you know, let's say I'm a designer of a fake handbag or a hundred dollar bill or even a pharmaceutical product. And this is a skilled job and I get paid a wage for it and I pay my taxes on it. Tell me about like on the one hand, obviously, I am breaking the law. So I'm running the risk of being like captured and prosecuted. How does the pay compare? Is it more or less than like someone who does that kind of thing legitimately?

9:17Felix Salmon: I think it depends usually on the risk. The higher the risk, and that's very similar with the legal economy as well, the higher the risk, the more generally you are paid. I mean, particularly in the world of black markets. You know, you mentioned gambling, for example, that has now become legalized in the majority of U.S. states. It brings in, I think it's something like$200 billion a year. Illegal gambling has actually been growing, even though it's been legalized. black market gambling. It brings in, I think it's something like$600 billion a year. And that's partly because people decide, you know, sometimes you want to gamble.

9:49Felix Salmon: You don't want your loved ones to know about it, your wife, your parents, whatever it is. So you prefer to do it in websites that people won't find out about it. You don't want to get taxed.

9:57Mariana van Zeller: Sometimes you don't want, yeah, you don't want to get taxed on this huge amount of money you're winning on your gambling.

10:02Felix Salmon: That's exactly it. You don't want to get taxed. So sometimes it's about tax incentives and wanting to make more money. But a lot of times it's also actual need. You spoke about fake pharmaceuticals. It's a huge, massive business. I think it's something like 20 million Americans are something that can't afford their life-saving medication. So they have to go online to pharmacies. Most of them are in India or to Mexico. They cross the border into Mexico to buy their pharmaceuticals. And yes, because they are much cheaper there. The problem is that there's not as much quality control. A lot of the pharmaceuticals being made in Mexico are actually made by the cartel.

10:38Felix Salmon: Little fact that most people don't know. We did a story about this for Trafficked. And so there's little quality control and it can end in a lot of harm, sometimes death. So it's incredibly dangerous as well.

10:48Mariana van Zeller: So the drug cartels are really in the drug business writ large, not just illegal drugs, but even pharmaceuticals.

10:56Felix Salmon: Yes, and to some extent. In our reporting, we realized, and actually the LA Times did incredible, investigative reporting about this, how they started analyzing a lot of the medications that are sold at pharmacies on the border in Mexico and realized that some of them were tainted with fentanyl and meth and crazy other products. And so we started investigating this and trying to understand why this was happening. And essentially, I mean, wherever the cartel figures out that they can make some money, they'll be in that business. You know, whether it's illegal fishing or drugs, as we know, immigration, and in this case, fake pharmaceuticals.

11:31Felix Salmon: So what we found out was that the cartels had figured out how they could create their own products, hire actual chemists to create products. And sometimes because of lack of quality control, they'd get tainted with other illegal products and then sell them and even force pharmacies to sell their products so they can make money from them.

11:50Mariana van Zeller: Tell me about like the HR operation. I'm fascinated by this. Like these These are large organizations with large numbers of employees. And presumably a lot of those employees are just like on payroll and need to get paid a certain amount of money every two weeks or whatever, just like any normal people. Like, how do they get paid? And do they then need to start worrying about how do I launder this and make it legitimate?

12:14Felix Salmon: Absolutely. The laundering is always the most complicated part. One of the things that I remember King Coyote telling us was why HR was important. Why was it important to make sure that your people are working for you in these sort of large organizations? Why you need to keep them happy and why you need to keep your clients happy. And it's all, again, it's word of mouth, right? And if as a client, if you're not treating them well, if they're not providing you a good experience of bringing them across the U.S. or providing them the drugs that ultimately won't kill them, you're keeping your clients happy and that's good.

12:46Felix Salmon: If you're not treating well your employees, there's a high risk. Trust is incredibly important because there are no court systems, you know. We don't have the legal system, but also, you know, threats are everywhere in black markets.

12:58Mariana van Zeller: Do you find yourself very often or ever talking to people who had the choice between like, I could do this illegally and make more money or I could do it legally and make less money and choose the illegal option?

13:12Felix Salmon: Not very often. More often than not, it is really lack of opportunity and lack of choice. But that's not always. I interviewed for my podcast the bookie involved in Yotani scandal. I'm not sure if you remember that big scandal.

13:23Mariana van Zeller: Yeah, we talked about it on the show. He was like stealing a bunch of money from Shohei Yotani and gambling it.

13:30Felix Salmon: The interpreter, that's right, through a bookie called Matt Boyer, who we interviewed on the podcast. And this is a guy who's incredibly smart, who had obviously a ton of other opportunities, but who decided. And in fact, he was working illegally before. And then he realized that this actually he loved doing this. He wanted to run an illegal booking operation. It became massive. He was moving, I think it was something like$40 million every Monday. He had to figure out how to get that money to the betters. And it's insane,$40 million. And all of this had to be done sort of under the cover, right?

14:02Felix Salmon: It wasn't legal money.

14:04Mariana van Zeller: How does he do it? Like, I mean, he's not paying them in cash, right?

14:07Felix Salmon: He had couriers. He had dozens, if not hundreds of people working for him around the country. It was a combination of cash and money transfers and, you know, Venmos and all of it. It's insanity. I would not be able to sleep at night if I have much responsibility.

14:22Mariana van Zeller: So he is another one of these people who needs a whole like HR operation.

14:26Felix Salmon: Right. And also where to store the money, right? He also was paying. He said when he was arrested, when the FBI came looking for him, he had money stuffed everywhere, including he would pay this guy in his town where he lives to hide millions of dollars in cash or hundreds of thousands of dollars in cash in tires. It was like this tire shop. And yeah, basement, under his mattress, everywhere.

14:51Mariana van Zeller: It strikes me that if I'm struggling with opening up legitimate bank accounts, not raising any red flags with the banking system, I'm hiding cash in tires and all of this kind of stuff. In a weird way, if I'm just owed a million dollars by some rich gambler guy in Los Angeles, everyone's asset is someone else's liability. You know, if I put a million dollars in the bank, that means I'm owed a million dollars by the bank. That's problematic. If I'm owed a million dollars by some rich guy, then that's still my asset. I don't need to realize that asset. I don't need to extract that money from him.

15:28Mariana van Zeller: If I ever want to pay for something, I can always just go up to that guy and be like, pay this for me. And that will discharge your debt. Maybe if I'm in this line of business, having a bunch of people who owe me money in town, those are all assets. Those are all like accounts payable, you know?

15:44Felix Salmon: Right.

15:45Mariana van Zeller: And I can use those assets to pay for things. I can be like, if you pay for this, then that debt is expunged.

15:51Felix Salmon: Yeah. In a sense, that is true. I mean, it's a little bit like how the cartel operates in the United States. They have their distributors here in the United States. And I interviewed a guy called El Gringo, an American guy, doesn't speak a word of Spanish. He's one of the main distributors for the Sinaloa cartel here in the US. And one of the things the cartel does, sends him drugs. It's not as if he can say, I want X amount of fentanyl or meth. It's whatever the cartel has. And they always send way more than the guy can pay for. And the idea is that you keep somebody on the hook. So that guy, he owes money to the cartel.

16:23Felix Salmon: So you're going to keep him on the hook. And he's going to keep working for the cartel because he's always going to owe money to the cartel. They're always offering him more product than he is able to pay for. So you're always keeping that person on the hook, which is a very classic tactic that the cartel has.

16:39Mariana van Zeller: We need to take a very quick break to hear from some very legal companies that are not in the black market at all. But when we come back from these ads, we will talk more about all of the violence and crime that is part of this market.

17:03Mariana van Zeller: Tell me about the way that people in these industries think about the risk of getting caught by law enforcement. Is this like something they're constantly worried about? Is there always like this cat and mouse game? Or is it something that they just kind of live their lives and then one day there's a knock on the door?

17:24Felix Salmon: It depends on the level of risk and the type of black market, right? If you're dealing fentanyl, you're going to be sentenced and spend a long time in prison, right? But if you're putting an illegal bet in or, you know, the likelihood of you actually spending time in prison is very low. So it depends. But I would say that's always on the back of your mind, which is why every single person we interview, we need to make sure that we're hiding their identity when we're talking about some of these black markets, at least on camera and not on the podcast, but on the show, we're hiding their identity.

17:56We're making sure

17:57Felix Salmon: that we're not disclosing the location. I mean, we spend months, sometimes even years convincing people to talk to us. It's the hardest part of my job. And when they do, we have to make sure that we're protecting their identities because obviously they've become our sources. It's our job as journalists to protect our sources.

18:13Mariana van Zeller: So to ask the obvious question, like why do they talk

18:17Felix Salmon: to us.

18:18Mariana van Zeller: Do they talk to you? Yeah.

18:19Felix Salmon: I think three main reasons. It's ego. You know, a lot of these people work in these black markets. They're the best counterfeiters and traffickers and scammers. And sometimes their families don't even know what they do. And they have an opportunity behind a mask to sort of boast about what they're so good at doing. I think it's impunity in a lot of these places in the world. Corruption is king. And so they don't really see a downside to talking to an international journalist that comes in from National Geographic and wants to talk to them. And then I think the most important reason is a very human characteristic that we all share of wanting to be understood.

18:54Felix Salmon: And I think I give people that opportunity. I tell them I'm here not to judge you. I'm here to try to understand why you do what you do. And I think that goes a long way. And it goes back to the incentives. I'm trying to understand when I'm doing all these stories, the human side of it. I'm trying to get people to connect with the folks considered the worst of the worst, right? The people operating these black markets, because only by understanding what are the incentives and why they join and why they work on operating these black markets, will we be able to prevent these black markets from existing.

19:23Felix Salmon: And I think sometimes we keep tackling these problems with law enforcement and building walls and not actually trying to understand the root cause behind all these black markets.

19:34Mariana van Zeller: When you talk about the impunity, which countries in the world would you say, oh, yeah, like that is a place where you can operate an illegal operation and obviously have impunity, you're never going to need to worry about that?

19:49Felix Salmon: That's what black market operators are really good at, right? They're trying to make as much money as they can and lower the risk. And so they're always going to try to find a place where they can do that and maximize their profit. And we filmed and I've done reporting in Myanmar, for example, where there are these massive scam compounds with tens of thousands of people working day and night to scam Americans and Europeans and Western folks that have more money and that are more likely to hand over their money. And what was shocking was finding out that a lot of these people that are there are forced labor.

20:23They go, they apply for jobs that they think they're going to be working in a legal job.

20:28Felix Salmon: job. And instead, when they get there, they take away their passports. The bosses, the owners of these compounds, scam compounds, take away their passports, beat them, torture them, electric shocks. It's horrific what's happening there. And it's complete and total impunity. We actually had the opportunity to go inside and visit one of these scam cities.

20:46Mariana van Zeller: Is that part of the junta? Did the profits from that flow up to the government?

20:50Felix Salmon: Yeah, there are several different military groups in the area that are fighting for control of this area against the junta, the military junta. And they're making a lot of money also from these scam compounds. So it's not in their interest to make sure that they're closed down. And in Mexico, the same thing. I mean, I've spent more time in Sinaloa than I think anywhere else in the world outside of the United States as a reporter. You know, there's enormous corruption. And one of the biggest problems, We did a story for Traffic this last season called Cartel USA, where we sort of looked at what the presence of the cartel in the United States.

21:26Felix Salmon: And I think most people just they think cartel, they think violence, they think drugs, but they don't understand how none of these, they can't operate without corruption and how corruption has fully seeped in into the United States. So I spoke to law enforcement agents, I spoke to drug distributors, and every single one of them in every single interview I did pointed to corruption as being sort of the multiplier. And without it, they wouldn't be able to operate at the scale that they do.

21:55Mariana van Zeller: You've been covering this, as we've mentioned, for a while. Over the course of your career, would you say that the United States has become significantly visibly more corrupt?

22:06Felix Salmon: Yes, it's not me saying. It's law enforcement people, folks that I've been talking throughout the years. I mean, in this case particularly, we started our investigation with a woman who was tortured and killed inside a cabin in Georgia, in a little town in the middle of nowhere, in the woods. And again, I think most people think drugs and cartels, violence. They think big cities. They're everywhere. And they're only allowed to operate because of corruption and the amount of money that is being paid to local officials, to law enforcement, even to federal agents. I've worked extensively on the border.

22:41I've seen fentanyl.

22:43Felix Salmon: I've seen a woman crossing into the United States with five kilos of fentanyl. And we did a story about how a lot of the fentanyl that comes across, I think you know this well too, Felix, doesn't come through, you know, the Pacific in fishing boats. The majority of the drugs that come into the United States come through official ports of entry. And a lot of it is done through corruption.

23:03Mariana van Zeller: If I, you know, put you in charge of America for a few weeks, what would be the main sort of policy response that you would try and implement in order to reduce the amount of corruption in this country?

23:16Felix Salmon: This is why I'm not running for president.

23:20Mariana van Zeller: All right. All right. Let me rephrase the question. Is there a good example that you can think of maybe somewhere else in the world where the degree of corruption has come down significantly over the years you've been reporting about this?

23:30Felix Salmon: Yeah, absolutely. If you look around the world, places where there is more corruption is places where police force isn't well paid, government officials aren't well paid, right? So there's a bigger incentive. If you're risking your life as a police officer every day going out on the streets and you're paying, you know, pennies, there's an enormous... And then suddenly, you know, a guy, a drug trafficker comes up and says, look, I'll pay you this amount more, which is, you know, whatever amount you get paid in a year or more for you to work with us. The incentive is there. It's all about changing the incentives, giving people the pay that they deserve and making sure that civil servants and law enforcement are paid well and that there is no incentive there for them to turn to the black market ultimately.

24:17Mariana van Zeller: One of my favorite ever episodes of Slate Money was when we had Yuan Yuan Ang on talking about the history of corruption in China and how it kind of helped a little bit with development for a while until it became harmful. And then there was this big corruption crackdown. I think a similar story can be told about Indonesia where it's useful until it's harmful. Tell me a little bit about China, though. I'm sure just such a sort of superpower in so much of the global economy right now. Certainly, we had a great interview quite recently with Joe Salama about money laundering, and they seem to be like the number one source of demand for dollars in the world.

25:00Mariana van Zeller: Like they will launder your dollars for much less than anyone else because they want those dollars for various reasons. Do you think that the rise of China as a part of its share of the global economy has coincided with rise in the black and gray markets?

25:16Felix Salmon: Yes, it's interesting. On the ground, you know, because I've been reporting on this for so many years, five, six years ago, I started hearing about Chinese money launderers. And before the cartel would figure out other ways of laundering their money, and suddenly it seems like it's not only here in the United States, I've heard it's in the UK and in Europe all around, where these operations with Chinese folks ready to launder your money and that it's become much easier. They take a much smaller share and that they're everywhere. So yeah, I mean, it's usually the cog in the system, right? It's the biggest headache, I think, for many of these black market operators.

25:53Felix Salmon: Making money, as they say, isn't the difficult part. Laundering that money is the hard part. So if you have a country like China and folks here in the United States from China ready to launder that money and making it easy and fast, that's only going to grow whatever black market you're involved in.

26:09Mariana van Zeller: Are you relatively sort of, I don't know, realistic, pessimistic? I don't know what the word is. Like, you've been doing this for a long time. It sounds like it's only really got worse over that time. Do you ever feel like you're just chronicling the slow decline of civilization here?

26:27Felix Salmon: The more I report on these black markets, the more I understand that it's the systems that are broken. It's not so much human beings. When I'm talking to a 16-year-old kid who travels through the mountains of Peru with 30 kilos of cocaine on his back because he wants to one day be able to afford college, to become a dentist. This is a story of a kid that we met and interviewed. You know, you realize that it's not this kid. He's not doing this because he wants to. He's doing this because he has no alternatives. and that these kids and these mothers that I've spoken to and people all around the world, there are people, human beings, just like you and I.

27:07Felix Salmon: They have goals and aspirations. They're our neighbors. They're mothers. They're fathers. And it's because of lack of opportunities they end up, they do. And so that has given me sort of enormous hope in humanity, knowing that even when I'm meeting face-to-face these sicarios and traffickers and scammers, that they can still find humanity and that there is still redemption possible there. but it's the systems that are broken. And so if we can tackle those, then, you know, we'll, very cliche, but we'll sort of create a better world. And so that's given me a lot of optimism in humanity in the world.

27:42Mariana van Zeller: Yeah, I'm probably taking the other side of that one, because it strikes me that what you're really talking about is inequality, where there's a massive difference between the poverty in somewhere like Peru or Myanmar and the riches that you can find in the UK or the US, then there will be criminals who try to sort of arbitrage that and take advantage. And so long as inequality is going up, we're not going to make a lot of progress on this front.

28:06Felix Salmon: I 100 % agree. I know. But again, it's the system, right? It's what's put in place. It's not the human beings. Biggest problem of our time, I really believe, is inequality. We have half of the world's population with less than$7 a day. And that's just unattainable. As long as there's inequality, there's going to be violence.

28:23Mariana van Zeller: Mariana Van Zeller, thanks so much for coming on Money Talks. It's a slightly pessimistic conclusion, but a fascinating conversation all the same. Remind us of your podcast, and presumably we can find it wherever you get your podcasts, as they always say.

28:37Felix Salmon: I'm going to do my podcast voice you can watch on YouTube, slash Mariana Van Zeller, or listen to The Hidden Third wherever you get your podcasts.

28:44Mariana van Zeller: Thank you so much for coming on. Thank you so much to Jessamyn Molle and Shana Roth for producing. And we will be back on Saturday with a regular episode of Sleep Money.