In the past month several high-profile incidents have highlighted what Major General Qassim al-Moussawi, the chief Iraqi military spokesman in Baghdad, described as the outbreak of "a frenzy of violent crime" in Iraq. Writing in the Times, Richard Kerbaj explained how "everyone is looking for a way to make a quick buck in Iraq, but none more so than the insurgents and gangsters". Indeed, present-day levels of crime in Iraq reflect the institutionalisation of criminality that may undermine the country's long-term development.

The road to the emergence of powerful mafia groups in Iraq did not begin with the 2003 invasion. Following the 1990-91 Gulf war and the curtailment of Iraqi territorial sovereignty through the creation of the "no-fly zones" and the imposition of sanctions, Saddam adapted his control of the country by devolving power to loyal tribes and families. The rationing of goods through patronage and the corruption around the oil-for-food programme encouraged practices of graft that would flourish and become far bloodier after the 2003 invasion.

In 2002 Saddam emptied his jails in preparation for the US-led invasion. What followed was the death knell of the Iraqi state, symbolised less by the toppling of Saddam's statue than by the mass looting and anarchy that embraced the country.

The disbanding of Iraqi security forces by the Coalition Provisional Authority included thousands of border guards, turning the country into a house without doors or windows. And the attempt to turn it into an instant free market resulted in the abolition of trade tariffs. Suddenly smuggling – which had blossomed under sanctions – became rampant.

While the CPA was happy to report the increase in the numbers of cars and satellite dishes that were appearing in Baghdad's markets, one of the less-reported consequences of the invasion was that Iraq became a transit point in the flow of hashish and heroin from Iran and Afghanistan – the world's largest producer of opium poppies – to Gulf countries and Europe.

The financial rewards of being involved in this trade were accentuated by mass unemployment and poverty in Iraq. According to the UN's 2008 World Drug Report, a kilo of heroin sells for $3,000 in Afghanistan and $3,200 in Iran. By the time it reaches Syria that kilo can fetch $17,000, and $21,000 in Jordan. In Europe the average cost of a kilo of heroin is upwards of $35,000.

Hamid Ghodse, the president of the UN's International Narcotics Control Board, explained in 2005 that "you cannot have peace, security and development without attending to drug control". Iraqi mafia groups operated largely under the radar as the horrendous levels of pre-surge violence dominated coverage of the country.

Meanwhile, this violence has combined with greater availability to create a larger internal market for drugs. In 2007 there was a 23% increase in drug abuse among children and youth alone according to Ali Mussawi, the president of the local NGO Keeping Children Alive.

Although Iraqi security institutions have improved considerably since their re-establishment, the institutionalisation of criminal groups means that they are regularly able to bribe or bypass customs and security officials. Recently, on an al-Jazeera programme that asked "Has the Iraqi government lost the war on drugs?", Dr Abdul Rahman Hamid, a vet from Al Muthanna province, claimed that drug smugglers have been cutting open camels' humps to stow their illicit cache.

Drugs are not the only source of criminal financing. There have being numerous bank robberies across the country. In one of the most high-profile cases several members of Iraq's presidential guards – which protect senior officials – broke into the state-run Rafidain Bank on 28 July and stole about $4.8m worth of Iraqi dinars.

In addition, since 2003 the middle and upper classes in particular have been targeted with kidnapping and extortion, forcing millions to flee the country. Photos of kidnapped relatives are everywhere in Baghdad. Corrupt security forces provide little break on crime, and children are being ransomed off for as much as £63,000.

Children also find themselves the victims in prostitution syndicates. Time magazine reported earlier in the year that 11- to 12-year-olds were being sold into prostitution for up to $30,000. The article quoted a human rights activist who witnessed "the buying and selling of girls in Iraq, it's like the trade in cattle ... I've seen mothers haggle with agents over the price of their daughters".

Iraqi government investigations found that 60% to 70% of criminal activity is carried out by former insurgent groups or by gangs affiliated to them – partly explaining the brutality of some of the crimes. Yet when faced with a weak government, itself mired in graft and corruption, and threatening to reduce its security budget, it is easy to see how criminal groups are able to thrive.

The institutionalisation of crime in Iraq remains a reality of daily life in the country and a key challenge for a weak government struggling to enforce the rule of law.