What Is Racketeering?

A mallet and handcuffs on a table, representing the justice system cracking down on racketeering.
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Racketeering is a criminal activity in which a person or organization engages in a “racket.” A racket is when a criminal creates a problem for others for the purpose of solving that problem by some type of extortion. The person or organization who engages in the racket is called a racketeer.

Racketeering has often been associated with organized crime, beginning back in the early days of the 1920s.

The Beginnings of U.S. Racketeering

Lucky Luciano, who emigrated from Sicily to the United States in 1906, is widely considered the father of modern organized crime and was a famous member of the Mafia. The Mafia originated in Sicily, and it was originally an organization loosely composed of families charged with protecting the island from foreign invaders.

While there were criminal organizations in the United States before Lucky Luciano, Luciano organized young gangsters in New York City to gain power after winning bloody wars with older mob bosses. They dealt in many rackets—with prostitution and bootlegging being the most lucrative. Luciano organized the gangsters into five crime families, which became known as syndicates.

Luciano was arrested in 1936 after some of the prostitutes gave evidence to prosecutors who had been investigating him. During World War II, Luciano assisted the federal government, from his jail cell. He had control, even from jail, of the longshoreman’s union. After that, he was released and deported to Italy, where he later died.

Early Activities

Some of the earliest examples of racketeering include prostitution as well as the numbers racket, which is an illegal lottery that was most popular before state and national lotteries were legalized.

Another popular early racket was providing protection. The protection racket involved members of the racket perpetrating crimes on, for example, a small business. Then, they would offer “protection” from similar crimes to the small business in return for large amounts of money.

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Other early examples of racketeering include drug trafficking, smuggling of weapons, kidnapping, and counterfeiting.

A Famous Racketeering Case

A famous racketeering case involving the securities industry was Michael Milken in 1989. The Milken case is an example of a racketeering case that does not involve the Mafia or a crime boss.

Milken worked for the Drexel investment bank as a bond researcher. He became instrumental in developing the junk bond market. Milken became a powerful player on Wall Street and was thought to sometimes skirt the Securities and Exchange Commission (SEC) regulations. As a result, he was under scrutiny by the SEC.

Milken was eventually indicted on 98 counts of racketeering and fraud with accusations of insider trading, securities fraud, and stock manipulation after being implicated by another defendant in a securities investigation. After a plea bargain, he was fined and jailed, but he is now free.

The RICO Act

The Racketeer Influenced and Corrupt Organizations (RICO) Act—also called the Organized Crime Act of 1970—was passed to try to eliminate organized crime. This federal law helped law enforcement correct a problem that prosecutors had when trying to charge crime bosses. They could charge the person in the racket who committed the crime, but they couldn’t charge the crime boss since they did not actually commit the crime.

After the passage of RICO, crime bosses could be charged and tried for the crimes. Due to RICO, the sources of revenue could be exposed, and both criminal and civil penalties could be imposed. Criminal penalties for racketeering are 20 years to life in prison—depending on the racketeering activity, and civil liabilities are triple that of a non-racketeering case.

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The RICO law was originally intended to take down Mafia crime bosses.

As the years have passed since its enactment, prosecutors have found other uses for it. There are criminal gangs and drug smugglers, and RICO laws can be used in their prosecution just like they were used in the prosecution of crime bosses.

Racketeering in Schools

Another recent racketeering case happened in the Atlanta school system in 2009 and was tried in court in 2015. The No Child Left Behind Act was passed under the George W. Bush administration, and it held schools accountable for student learning.

In 2009, a group of Atlanta school officials engaged in changing student answers on standardized tests that they had taken to determine what they had learned during the school year. The group of school officials was employed in a school district that was traditionally low performing, and the student scores spiked up during 2009.

After a long investigation, several were indicted and convicted on charges of racketeering, which carries a long prison sentence.

Cyber Extortion

Modern-day examples of racketeering get even more interesting. Cyber extortion occurs when the racketeer demands money or they will seize or damage electronic data, like computer data. Here's an example: say a hacker gains access to your computer—possibly through discovering your password—and uses that access to either damage your data or use your data in some way that is detrimental to you unless you pay them a large sum of money.

Another example of cyber extortion is credit card fraud. Criminals place credit and debit card skimmers on gasoline pumps to capture the data from them. The patrons of gasoline stations often don’t realize the skimmers are there. Other examples of modern-day racketeering are human trafficking, bribery, wire fraud, identity theft, illegal gambling, money laundering, and more.

Financial Implications of Racketeering

Racketeering has a high cost to society. In 2009, the United Nations Office on Drugs and Crime estimated that all forms of organized crime together generate 1.5% of the global gross domestic product or about $870 billion each year. That is about 7% of the world’s export of merchandise.