Estimating illegal activities in the national accounts

European regulations for compiling macro-economic statistics prescribe to include all economic activities, including illegal ones. As a result Statistics Netherlands (CBS) began including illegal activities and informal activities in the national account estimates for the Netherlands in 2014, Logically, these estimates are affected by greater uncertainty, and we have to use different methods and sources from those for legal activities. This article provides insights into the latest estimate for the 2021 reporting year, with a particular focus on the difference between illegal activities conducted within Dutch national borders and the activities that ultimately contribute to the Dutch economy. Cocaine trafficking offers a clear example of this disparity: although cocaine generates earnings of €10.7 billion within our national borders, only €1.2 billion is attributed to the Dutch gross domestic product (GDP). In accordance with the European directives, the remainder is allocated to principals outside the Netherlands.

Every economy encompasses not just legal activities, but also illegal ones, such as the trade in drugs and the provision of unlicensed prostitution. The European Union’s (EU) directives state that, as of September 2014, the national accounts that describe the national economy must also include an estimate of these illegal activities.

It is much more difficult to provide reliable estimates of illegal activities, as the ‘hidden’ nature of these activities means that accurate information about them is hard to find. Whereas CBS can usually generate estimates using a range of direct sources such as registers and surveys, no such sources are available for illegal activities and we must instead rely on indirect information. This information is drawn from sources such as reports issued by the Netherlands Police and other bodies, information about goods confiscated by Customs and reports produced by research organisations. CBS also contacted several organisations to obtain additional background information for this research.

On 23 May 2024, CBS published the initial outcomes of the revision of the national accounts for the 2021 reporting year, including the revision of the illegal sector of the Dutch economy. Given the wide margin of error surrounding these estimates, CBS only publishes revised figures on the scale of the illegal economy in the Netherlands once every five years. This article discusses how CBS arrived at its estimate of the illegal economy.

The article begins by providing a definition of illegal activities in the national accounts and the extent of those activities. The method used to generate the estimate about cocaine is then described in detail, and finally the article gives a brief description of how estimates are produced for other illegal activities. We also highlight the difference between income generated within the Dutch national borders and income that can ultimately be allocated to Dutch residents. This disparity is especially significant in the case of the trade in cocaine.

CBS generated the estimate contained in today’s publication based on information from various sources that was available at the time of publication, as well as interviews with experts. Under European agreements, all other EU countries will also have to revise their estimates of the illegal economy in the near future. However, member states are not required to publish these data in full. The EU will conduct a quality control in the coming years, using GNI verification to assess the methodology and sources used for the Dutch estimates both in isolation and in comparison with other EU countries.

An illegal activity is the production of or trade in goods and services where the sale, distribution and/or possession of those goods and services are prohibited by law. International directives dictate that activities that are prohibited but tolerated – such as the sale of cannabis – are also classed as illegal activities.

In the national accounts, these activities contribute to the Dutch economy if they fall within the ‘production limits’ of the Netherlands. This is only the case for transactions that involve the consent of both parties (buyer and seller), so activities such as theft or sending spam e-mails do not count towards economic production. However, the production of goods consumed by households themselves (such as agricultural production for personal use) do fall within the production limits. This includes the illegal production of cannabis for personal use.

Whether an activity is legal or illegal can of course vary from country to country. Whereas the Netherlands tolerates the sale of cannabis in coffeeshops and has legalised certain aspects of the prostitution sector, other countries take a different regulatory approach. These international differences in law are not the primary consideration for the purpose of the national accounts, as the accounts must anyway include all transactions that fall within the production limits. This publication treats the legal aspects of prostitution in the Netherlands as part of the illegal economy, even though in a statutory sense these activities are not illegal.

When describing the informal economy, the national accounts make a distinction between activities that are illegal and those that are undeclared. Illegal activities, such as trading in drugs, are in conflict with the law; undeclared activities are in general permitted by law, but the producer has unlawfully failed to report them to the Dutch Tax and Customs Administration. Although both illegal and undeclared activities are included in the national accounts, this article is only concerned with illegal activities.

Compared to the previous estimate in 2015, certain illegal activities are no longer part of the system of national accounts as various other EU countries only included the mandatory elements. To ensure that the Dutch figures are comparable to those from other countries, the Netherlands now also only provides estimates for the mandatory elements: the production of and trade in drugs; prostitution; and the illegal trade in tobacco. This and future revisions will no longer include the handling of stolen goods; the illegal copying of software, games, films and music; illegal temporary employment; or illegal gambling.

At the time of the revision of the national accounts, the value added of the illegal activities in the Dutch economy – namely drugs, prostitution (including the legal aspects) and the illegal trade in tobacco – for 2021 was estimated at €4.5 billion. This refers exclusively to the value that was allocated to the Dutch economy because it was earned by residents (see the information box). In 2021, the share of the illegal economy in Dutch GDP was 0.5%. The latest estimate for the 2015 reporting year puts the extent of the illegal economy at 0.6% of GDP.

As mentioned in Section 2, estimates were made for fewer illegal activities in 2021 than in 2015, although the mandatory illegal activities relating to drugs, prostitution and the illegal trade in tobacco were estimated in both reporting years. In the 2015 reporting year, the share of these activities was 0.5% of GDP; the relative extent of these activities remained the same in 2021, but this picture is more nuanced as the various illegal activities saw substantial changes in the intervening years. However, it is not possible to make an authoritative statement about whether and to what extent these changes were caused by a clear increase in the scale of the illegal activities, or whether this research and new sources enabled CBS to observe the changes more accurately.

According to the new CBS study, the total value added of illegal activities within the Dutch economy in 2021 came to €4.5 billion, or 0.5% of GDP. The production of and trade in cannabis added the most value to the economy, followed by activities related to cocaine and synthetic drugs. However, there is much more money involved in these illegal activities than is allocated to the Dutch economy. Earnings from the trade in and/or production of cocaine and synthetic drugs are especially likely to be allocated to other countries. The next section discusses the estimate of the trade in cocaine, while Section 4.2 provides a brief overview of the other illegal activities.

4.1 Estimate of the extent of the trade in cocaine

The trade in cocaine added €1.2 billion in value to the Dutch economy. However, this only refers to the aspects of the trade that are allocated to Dutch residents. The earnings from cocaine within the national borders are significantly higher, at €10.7 billion. The following sections flesh out these estimates, for both the value that leaves the Netherlands for overseas destinations and the value that remains within the Dutch economy.

4.1.1 Estimate of the extent of the trade in cocaine within the Dutch national borders

Cocaine is derived from the leaves of the coca plant. The chemical process that reduces it to a white powder takes place primarily in cocaine-producing countries in South America, such as Ecuador, Colombia and Peru. Although the Netherlands does not produce the drug, the country is generally viewed as a key hub for the international trade in cocaine.

To determine the value added of cocaine transportation within the national borders, we first study the physical flows of the drug based on both confiscations in ports and the statistical likelihood that the people involved will be caught. The value of these flows is then calculated using various prices such as the import price, the wholesale price in the Netherlands, the street price in the Netherlands and the export price to various countries.

Cocaine is most often smuggled by sea. In recent years, more cocaine has been confiscated at the port at Antwerp than at Dutch ports. Previous studies estimated that between 70% and 80% of the cocaine that travels through Antwerp is destined for Dutch criminal organisations (National Police Force, 2022). We do not know the quantity of these drugs that physically crosses the border into the Netherlands. According to the instructions for the national accounts, however, this is not relevant, as the delineation of international trade is based on the transfer of economic ownership and not on border crossings. In this article, the estimate of the extent of the trade in cocaine within the national borders includes all the trade destined for Dutch organisations.

We can combine the amount of cocaine confiscated with the ‘confiscation percentage’ to estimate how much cocaine enters the Netherlands through ports in the Netherlands and Antwerp. The confiscation percentage is by definition subject to considerable uncertainty, as it is impossible to accurately determine this percentage. However, the decision about which percentage to use has a significant influence on the outcome of the estimate of total cocaine smuggling. Estimates vary from 20% to 50% (NRC, 2023). The confiscation percentage used for the estimate of the illegal economy is 25%. This means that actual confiscations represent 25% of the total cocaine imported, so 75% of the cocaine is successfully smuggled into the Netherlands (or Belgium).

Once the drugs are successfully smuggled into the Netherlands from Central and South America, their market value almost trebles. The prices shoot up again further along the chain, at the point of consumption in the Netherlands and when the drugs are exported to other countries. These huge trade margins are the reason why, in spite of the confiscations, the trade in cocaine is so profitable.

Import amounts within Dutch national borders are estimated at almost 420,000 kilograms, with an import value of €6.4 billion. This figure includes €1.6 billion in cocaine that has been confiscated and can therefore not be traded; this amount is still included in the import value, as it was paid for by the criminal organisation that imported it. This confiscated cocaine no longer generates value in the rest of the chain. The imported cocaine may be intended for domestic consumption, or it may be destined for export to other EU countries or the rest of the world.

CBS used KWR’s (Kiwa Water Research; 2021) analysis of sewers in large cities to estimate the relevant share of domestic consumption. KWR measures traces of cocaine in sewage water in various cities over several days, and these measurements can then be used to calculate the consumption of cocaine in these cities in a full year. Consumption in the cities analysed is scaled up to calculate consumption across the Netherlands as a whole, wherever possible taking into account the level of urbanisation. Using this method, domestic consumption is estimated at 8,500 kilograms of pure cocaine. However, because cocaine is cut with 3,500 kilograms of other substances, such as caffeine, the actual consumption is in fact 12,000 kilograms. This represents a consumption value of €618 million.

The cocaine that is not consumed in the Netherlands is exported to other countries. The main sales markets in Europe are Germany, Scandinavia and the United Kingdom, but Dutch cocaine is also exported to Russia, Turkey, the Middle East and Australia. Based on interviews and the sources consulted, CBS estimates that 80% of exports remain within Europe, with the rest being destined for other countries. These exports to more far-flung countries are particularly profitable, as the price of the drug experiences another considerable increase as it travels from the Netherlands to the target country. The value of the total exports comes to almost €16.5 billion.

The amount earned from the trade in cocaine within the national borders is determined by taking the revenue from domestic sales (consumption) and exports and deducting the import value. This generates a figure of €10.7 billion. This calculation also includes other costs totalling tens of millions of euros, such as payment for storage and petrol.

4.1.2 Estimate of the extent of the trade in cocaine in the Dutch economy

A small share of the €10.7 billion earned from this trade is specifically included in the description of the Dutch economy. After all, most of the huge profits flow overseas, to wherever the international drug bosses are based. These overseas principals are the actual owners of the trade in drugs on Dutch territory, because they run the operation, arrange for payments and revenues and have connections with other countries, through which large trade margins can be achieved.

Even if the principals hold Dutch passports, they are not Dutch residents because they live outside the Netherlands. In accordance with the international directives for the compiling of macro-economic statistics, their contribution to the trade in drugs is therefore not allocated to the Dutch economy. All principals who are engaged in exporting cocaine are assumed to live outside the Netherlands.

If the export of drugs is run by a non-resident principal, the export and its associated import are not allocated to the Dutch economy and are instead viewed as transit trade (see information box). The people involved in this trade who do live in the Netherlands are de facto treated as service providers commissioned by the non-resident principal.

For example, cocaine collectors provide the service of retrieving the drugs from shipping containers at the ports. The principal also has to pay all the planners, drivers and transport companies. This is categorised as exports of services, with a total estimated value of €813 million in the 2021 reporting year.

The same applies to imports: only that proportion of the imports that is actually consumed in the Netherlands is allocated to the economy of the Netherlands and therefore also to Dutch GDP. In 2021, the total value added of imported cocaine amounted to €6.4 billion. The import value of the proportion consumed in the Netherlands is considerably lower, at €245 million. The Dutch consumption of cocaine has a retail trade value of €618 million (see Section 4.1.1). This translates to an estimated trade margin of €373 million achieved by resident intermediaries and street traders on the consumption in the Netherlands.

On balance, of the €10.7 billion euros earned on cocaine within the Dutch national borders, only €1.2 billion in value is added to the Dutch economy. This figure is the sum of €813 million in trading services provided to overseas principals and a €373 million trade margin on domestic consumption.

4.2 Methods for other illegal activities

In addition to the trade in cocaine, CBS also produces estimates for certain other illegal activities. This section discusses the methods used to estimate prostitution (both legal and illegal), the production of and trade in synthetic drugs and cannabis and the illegal trade in tobacco.

The estimate of the production of and trade in synthetic drugs is based on a report issued by the Police Academy of the Netherlands (Tops et al., 2018). The investigators used sources such as packaging and raw materials found after raiding illegal laboratories to generate an estimate of the amount of MDMA tablets (XTC) and amphetamines (speed) produced.

As in the study discussed above, this investigation also used sewage water analysis to estimate domestic consumption. The rest of the drugs are assumed to be destined for other countries. As is the case with the trade in cocaine, we assume that the production process is run by overseas princiapls and that this causes a significant share of the profits to be enjoyed outside the Netherlands.

Because data from confiscations are considered to be less accurate than KWR’s sewage water analysis, that analysis also forms the basis for the estimate of cannabis production and trade. To determine the extent of exports, we assume that the Netherlands serves 10% of the European cannabis market. The sources used to establish the extent of this market include international research into numbers of cannabis users.

Cannabis is produced locally and on a much smaller scale than other drugs. Unlike with cocaine and synthetic drugs, the barriers to entry into the market are relatively low, as cannabis production is less demanding in terms of knowledge, contacts and raw materials. It is also the case that much less of this drug is exported. This makes it reasonable to assume that most of the profit from cannabis remains in the Netherlands, and that a much smaller share of this market is run by overseas principals.

To produce an estimate for prostitution in the Netherlands, we looked at three aspects: the legal and licensed part of the market, including brothels, sex clubs, escort agencies and window prostitution; the legal but unlicensed part, primarily home prostitution; and finally the illegal part, which includes human trafficking.

For the licensed part, we looked into the number of permits granted, while for unlicensed prostitution we used research conducted by Regioplan (2021) for the Research and Data Centre (WODC) into advertisements on sex websites. CBS presumes that the estimate of unlicensed prostitution is underestimated by 20%: this was categorised as illegal prostitution.

These aspects were then used to determine the number of prostitutes in the Netherlands. A range of studies also yielded prices per type of prostitution. Combining the number of sex workers, the prices and the hours worked generates the total production of prostitution and thereby also its value added. For the estimate of the total extent of the illegal economy, we included the full extent of both legal and illegal prostitution.

The estimate for the 2021 reporting year does not include exports of prostitution services. Prostitution services are considered to have been exported if someone who is not a Dutch resident consumes services in the Netherlands. As a result of the travel restrictions caused by the coronavirus pandemic, we estimate that there were only marginal exports of prostitution services in 2021.

The illegal trade in tobacco also includes the production of counterfeit cigarettes in the Netherlands. However, most of the profit comes from Dutch people smuggling cigarettes into the Netherlands from countries with significantly lower excise duty on cigarettes. Some of the products are then consumed by Dutch people, while others are exported to countries that charge higher excise duty than the Netherlands, such as France and Finland.

The national accounts include estimates of three illegal activities: the illegal production and sale of drugs; prostitution; and the illegal trade in tobacco. In 2021, according to new estimates produced for the revised national accounts, these activities contributed €4.5 billion to the Dutch economy (the GDP of the Netherlands). This works out at 0.5% of the total economy. The previous estimate of the extent of the illegal economy for the 2015 reporting year was 0.6% of GDP. However, that estimate still included specific illegal activities that were not mandatory parts of the national accounts in Europe.

Generating estimates for the illegal economy involves greater uncertainty than estimating parts of the economy for which plenty of direct information is available from registers and surveys, and the assumptions made when estimating the illegal economy can also significantly influence the outcomes. The fact that these economic activities are conducted in the shadows means that we do not have very reliable sources. The assumptions around the trade in cocaine, primarily the confiscation percentage and the prices, heavily influence the outcome, and similar caveats should be understood to apply to the other illegal activities.

The location of the ultimate owner of the illegal process also has a significant effect on the extent of the estimate of illegal activities in the Dutch economy. Where owners are non-resident, a large part of the value is allocated to their overseas location. For example, cocaine generated €10.7 billion in earnings within Dutch national borders, but most of these profits are enjoyed outside the Netherlands. Just €1.2 billion in value was added to the Dutch economy. This is also true, to a lesser extent, for other illegal activities (primarily related to synthetic drugs).

Bleeker, Y., van den Braak, G. (2021), De Nederlandse seksbranche: een onderzoek naar omvang en aard, beleid, toezicht en handhaving. [The Dutch sex industry: a study of its extent and nature, policy, oversight and enforcement.] Regioplan.

KWR (2021), Rioolwateranalyse van drugsgebruik in de gemeente Rotterdam. [Sewage water analysis of drug use in the City of Rotterdam.]

NRC (2023), Deze 'drugsoorlog' is geen Vlaams onderonsje [This ‘drug war’ is not only an issue for Flanders], 10 januari 2023.

National Police Force (2022), Fenomeenbeeld drugs 2021: de narcostand van Nederland. [Phenomenon impression of drugs 2021: narcotics in the Netherlands.]