California leads states in identity fraud and computer hackings, report says

An estimated $30 billion to $40 billion in illicit funds are laundered through the state’s commerce each year, says a new report on transnational criminal activity. Some question the report’s recommendations going forward.

The same high-profile assets that make California an engine for America’s creativity and economy – think Silicon Valley and Hollywood – have made it a magnet for international criminal enterprises. If that sounds like a cover story for “Duh Magazine,” the first comprehensive report about it was released here Thursday, and it backs up the assertions with data and investigative evidence – and recommends what to do next.

“California is a global leader on a number of fronts and, unfortunately, transnational criminal activity is one of them,” says a report by California Attorney General Kamala Harris, calling the state the top target in the United States for fraudulent and lawless organizations originating everywhere from China to Africa to Eastern Europe.

Specifically, California leads all US states in the number of victims of Internet crimes, the number of computer systems hacked or attacked by malware, the amount of financial losses suffered by all of the above, and the number of victims of identity fraud, according to the 181-page report, entitled “Gangs Beyond Borders.”

The report describes operations as running “the gamut from traditional crimes – such as narcotics, weapons or human trafficking – to complex money laundering schemes and specialized cybercrimes.”

The amount of illicit money moving through California’s economy – approximately the world’s eighth largest – “threatens the security of the state’s financial institutions, local businesses, and communities, with an estimated $30 to $40 billion in illicit funds laundered through California commerce every year,” it says.

From 2009 to 2012, the number of intentional breaches of computer networks and databases in the US jumped by 280 percent, and California – whose gross domestic product is currently $2 trillion – leads the nation, it says.

"It is no surprise that California is in the sights of transnational criminal organizations which commit large-scale crimes involving the theft of Intellectual Property,” says Prof. James Cooper, director of the International Legal Studies Program at California Western School of Law in San Diego. “Much of the state's economy is based on IP rights and the revenue streams that innovation brings,” he writes in an e-mail.

Some cybercrime experts say the report only states the obvious.

“It’s not really news that this is going on. The question is, what are they going to do about it?” says Peter Toren, author of “Intellectual Property and Computer Crimes” and a former federal investigator of cybercrimes. The state, he says, should concentrate on educating in-state corporations how to avoid cybercrimes rather than trying to go after organizations in foreign lands. “The federal government should be doing that,” he says.

The report calls for the Legislature to change state law so that prosecutors can freeze the assets of transnational criminal organizations and associated gangs before seeking an indictment.

Some question that recommendation.

“Seeking pre-indictment seizure of assets – I get it, but it could be subject to abuse and I don’t like it. And indictments are prepared under seal so contemporaneous seizure would accomplish the same,” says Ian Wallach, an intellectual property attorney.

The report also says the state should mimic federal law by increasing punishment for people convicted of supervising, managing, or financing transnational criminal organizations.

Attorney General Harris “is apparently seeking harsher prison sentences for supervising or managing transactional offenders than those currently in place,” Mr. Wallach says. “I don’t think prolonged incarceration ever works as a deterrent, and it is terribly expensive. Our prisons are already unconstitutionally overcrowded – largely as a result of unnecessarily long sentences.”

But Professor Cooper sees drawbacks to how punishment is currently meted out. "The reason that transnational criminal organizations engage in these illicit industries [involving intellectual property] is that the profit margins are so high and the fines (or ... prison time) are so low,” he writes. “Why transport cocaine or meth when you can just copy a Hollywood DVD and make big bucks selling it on street corners around California's cities?"

Some question Harris’s motivations in releasing the report.

“I think she is coming out with this simply as a way to draw attention to excite the public about the issue to get more funds to battle the problem,” says Rob D’Ovidio, assistant professor at Drexel University in Philadelphia, where he teaches for the criminal justice program.

If so, that’s not a bad idea, others say.

“More power to her,” says Rachel Ehrenfeld, director of the New York-based American Center for Democracy. “This is an issue that sorely needs our attention. Many people are asleep about this.”