Prostitution and drug profits boost Italy’s GDP


Financial institutions spend a lot of money and effort on KYC/CDD solutions to keep illicit profits from sex, drugs, and organized crime out of the banking system. But it’s not always a unified effort.

 Italy made that clear last week, at least symbolically, when it acknowledged it will be adding the contributions of the black market and other criminal enterprises to its calculation of the official Italian gross domestic product, or GDP.  The new calculations are expected to increase Italy’s GDP by at least 1.3 percentage points this year.

According to a Bloomberg story, the change in GDP calculations will apply to 2014, and prior years’ figures will be adjusted to reflect criminal contributions to the GDP, as well.

The strategy, not surprisingly,  is not designed to identify or restrain criminal activity in the financial system or economy. Rather, it is to make Italy’s economy look better on paper as it seeks to show the European Union that it has a sufficiently low debt-to-GDP ratio.

Financial expectations for EU member countries include limiting spending and debt to certain percentages of their GDP. A massaged GDP gives Italy more latitude for spending and for debt without incurring large fines for non-compliance with EU rules.

So far, Italy is the only EU country to take advantage of this strategy, but countries like Spain and Greece, both of which have large black markets and prolonged recessions, may follow suit, according to reporter Trish Regan in the USA Today.

On one hand, this type of creative accounting of the GDP is predictable and even understandable. Several consecutive years of recession around the world have left countries mired in debt and sluggish growth.

But it’s also ironic, a fact surely not lost on those in the financial services industry who are charged with keeping criminal profits out of official banking systems around the world. On one hand, required KYC/CDD and AML solutions are supposed to support government’s efforts while on the other some officials take political advantage of the criminal activity, further evidence of the high stakes and complicated relationships that abound in the financial world.