The Drug Money Maze

CLOSING DOWN THE DIGITAL LAUNDRY

Tax-free money, even $100 billion worth, can be a problem when it is generated by drug deals, bundled in bills of small denominations, laced with minuscule traces of cocaine and lying around one’s house in suitcases. Each year, the world’s leading drug cartels generate upwards of that amount in $5, $10 and $20 transactions around the world, the vast majority of which take place in the streets and ghettos of America’s major cities. U.S. law enforcement officials and drug experts calculate the annual revenues from cocaine trafficking to be $29 billion a year in the United States alone. This drug money is the lifeblood of cartels, necessary for the operation and growth of their vast black market. It is used to pay their private armies and assure the complacency, if not outright complicity, of the nations that shelter them. With illicit profits politicians, judges, police and journalists are regularly bought or silenced by hired assassins.

But cash presents a fundamental problem. It is heavy and unwieldy. In $100 denominations, cash is three times the weight of the drugs that generate it; 450 paper bills weigh one pound. In the more common street-level denominations of $10 and $20 bills, it is at least 15 to 30 times the weight of its equivalent value in cocaine. To move cash around the world in the quantities and with the speed demanded by the operations of the major cartels is therefore difficult, if not impossible.

In recent years, senior law enforcement officers in the United States and nations with leading financial centers have begun to realize that the financial networks of drug cartels are highly vulnerable, especially at the point just before illegal money enters the international banking system, and that these networks can be attacked in a systematic and effective manner. The United States and other nations have not given up on the more traditional means of attacking drug traffic at the street level, nor have major international law enforcement bodies given up on controlling wholesale production and export. But the savvy money launderers who covertly guide cash from street corners to the pockets of drug kingpins are an ever-increasing target in the international war on drugs.

The global drug cartels and the men who launder their Croetian wealth have developed an enormous and growing capacity to conceal the source and destination of the funds that give them power. Their innovative techniques of moving and concealing vast sums of cash, coffee exports, car dealerships, insurance annuities, construction projects, check-cashing stores, often seem to be outstripping the capacity of the international criminal justice system and its diplomatic and legal underpinnings. At the same time, the weapons, legal, political and judicial, aimed at detecting and prosecuting money laundering have become formidable. Still, most individuals using these legal weapons concede that their tools stop short of the ultimate solution. Illicit funds, enforcement agents argue, must be stopped before entering the international banking system. After that, it is too late. The moment a foolproof system can be found to accomplish this apparently simple but in practice highly complex task, a stake will have been driven through the heart of the cartels. That foolproof system, now coalescing through the efforts of a number of multilateral agencies, has been designed and is within grasp. It only needs to be codified and enforced.

THE BUCK STOPS HERE AND HERE AND HERE

The first money launderers in the drug trade were little more than couriers. They would pick up funds from street-corner dealers and deposit them in the nearest bank. The banks were delighted to have this sudden stream of wealth pouring through their doors. Even if it was quickly transferred to its next destination, the overnight "float", interest generated by massive short-term loans between banks, could turn a handsome profit for minimal effort. The banks turned a blind eye to the source of this wealth. They never questioned the propriety of fish stands or vegetable markets that were generating half a million dollars a day in cash, all in small-denomination bills.

In 1970 the U.S. government began to plug some of the loopholes that were allowing these vast quantities of drug money to slide easily into the banking system and out of the country. The Bank Secrecy Act of 1970 required all banks to report cash transactions of more than $10,000 per day and demanded that all individuals taking more than $5,000 in cash across borders submit currency reports. Still, few banks took more than passing notice of these new regulations. And some bankers were always delighted to break large deposits into lots of $9,900 to avoid the reporting requirements.

Money laundering spawned an entire cottage industry. "Cells" sprang up in cities across the United States, reporting ultimately to big-time money laundering specialists in Colombia. Each cell consisted of a cell boss and a small army of runners or "smurfs," named for the industrious little blue cartoon characters who labor tirelessly. The task of smurfs was to run from bank to bank where accounts had been opened, depositing several thousand dollars at a clip, always staying under the $10,000-per-day ceiling for cash transactions. It took 16 years for the government to crack down, but in 1986 Congress made it a separate federal crime to avoid the reporting requirements of the Bank Secrecy Act of 1970. Federal agents of the Drug Enforcement Administration (DEA), Federal Bureau of Investigation, Internal Revenue Service and various bank regulators began to move in on the banks themselves. Moving cash in and out of U.S. banking institutions became an increasingly high-risk operation.

Also during 1986, President Ronald Reagan stepped up the push to put drug smuggling on the international diplomatic agenda. He signed National Security Decision Directive No. 221, making drug enforcement a national security priority. While diplomats were sitting down at international conferences, American drug agents and criminal justice attorneys began demonstrating the consequences of the failure to comply with the new international standards of banking behavior. Corporations, banks and individuals operating in money-haven countries found their assets in the United States subject to freezing and forfeiture. While many of the new requirements for determining the owners of bank deposits were American-inspired norms, they quickly spread as international standards. Drug agents fanned out through countries like Colombia and Venezuela, explaining to bankers what failure to comply meant specifically to their banks and their clients. Bank presidents began realizing that dealing with money launderers was simply bad business. Profits on these accounts were marginal. E.F. Hutton, Merrill Lynch and the Bank of Boston, among others, received a lot of bad publicity; some banks, such as BCCI, faced criminal indictments.

Through a combination of revoking visas to the United States, targeting recalcitrant banks’ operations in North America and threatening to embarrass banks’ legitimate clients, foreign bankers have slowly been persuaded to avoid the international drug cartels. The Swiss did not get religion about the pernicious effects of illegal drugs and drug money until about a decade ago. The good burghers of Geneva and Zurich were shocked by the gradual proliferation of needle parks in their pristine cities. The final straw was a corruption scandal involving the husband of Switzerland’s minister of justice, Elisabeth Kopp, the leading candidate for prime minister of the Swiss Confederation. He was accused of participating in a Zurich company that harbored funds for the Medellin cartel and Turkish mafia in Swiss accounts. Until then the Swiss had operated the way most foreign bankers still do, turning a blind eye to the sources of funds arriving in their nation’s banks. Certainly the magnitude of the transfers was a powerful argument against questioning the funds’ origins. For banks in a small nation like Switzerland, or Luxembourg, the Bahamas, the Turks and Cacos islands and scores of other bank secrecy havens, a few days’ worth of deposits was enough to ensure a profitable year. But suddenly it became clear to the Swiss that the very foundations of government and society were being corrupted by this money. Swiss banking law underwent a total reevaluation.

The focus on money laundering has had some remarkable results. For example, a massive three-year-long sting operation initiated by the DEA in 1989, dubbed Operation Green Ice, was able to lure money launderers into using a phony leather goods company with a string of warehouses in major U.S. cities to conceal international money transfers. Law enforcement officers ultimately arrested 192 people in six countries, the United States, Italy, Canada, England, Spain and Costa Rica, seizing more than $50 million in drug profits and uncovered links between Colombian cocaine cartels, Mafia organizations in the United States and Italy’s chief crime lords in Sicily, Naples and Calabria. Of particular significance were the arrests of seven top money managers of the Colombian Cali drug cartel.

In the eight years since money laundering has become a federal crime and the U.S. government has begun to concentrate resources on its enforcement, the cost of laundering money has risen from 6 percent to a maximum of 26 percent for full-service laundering: pickup, transfer to multiple banks, merging with funds from legal sources and finally investment. Operation Buckstop, initiated by the U.S. Customs Service, seized more than $171 million in outbound currency between 1989 and 1992. Federal drug agents estimate that between $200 and $500 million remains blocked in the United States awaiting transfer out of the country. Nevertheless, $500 million is still less than two percent of the entire take in the United States alone from the Colombian cartels’ cocaine sales each year. In one way or another, the funds are leaving the United States.

PARCEL POST TO PANAMA

This full-bore approach, combining tighter banking regulations and better enforcement, has largely forced the cartels themselves out of the money laundering business. Recognizing that their strength lay in the production and marketing of their product, the cartels have hired specialists to manage the two riskiest aspects of their operations: transporting the drugs and laundering the proceeds. The money laundering specialists to whom the cartels have turned are businessmen and bankers, whose commodity is money itself. Each time a million dollars has to be moved from a particular city in the United States, bids are taken. For a lot of $1 million, the money launderer guarantees the cartel’s accountant $900,000, or whatever bid is fixed. The launderer delivers the $900,000 in Bogota, generally in Colombian pesos or perhaps in merchandise that is quickly sold for pesos, and later takes possession of the dollars in New York or Los Angeles or Miami. It is then up to the launderer to get the full million dollars out of the United States. His profit is $100,000 minus expenses.

In October 1992 the DEA stumbled on evidence outlining the intricate five-stage process that money launderers use to disguise the origin of their cash, a system that has become gospel to the big-time launderers of the cartel. According to Gregory Passic, chief of the agency’s financial enforcement division and one of America’s leading specialists in combating money laundering, a Luxembourg police detective had become curious about Colombian funds entering Luxembourg banks. A list of suspicious Colombian depositors was run through DEA computers. One name leapt out: Franklin Jurado. DEA agents and Luxembourg police followed Jurado for a year, finally arresting him as he was about to board a plane for Moscow. When they kicked down the door of his apartment in Luxembourg, they found a treasure trove of records, 115 bank accounts based in 16 countries from Luxembourg to Budapest. Examining the evidence they made an even more important discovery: Jurado’s blueprint for international money laundering.

The first step is the initial deposit, which must be made to a bank in a country where the launderer knows he and his associates will not be arrested within 24 hours and the money cannot be frozen quickly. This deposit is the single most important step, where the money is the dirtiest, where it is most directly tied to the illegal source and therefore subject to seizure or forfeiture. The succeeding stages are complex, but increasingly mechanical. In the second stage the money is transferred to a bank controlled by a non-Latin, usually Spanish, company. Next, it is transferred to an account in the name of a Japanese or West European company. Then, once processed there, it can be put either in a working account, most frequently in Colombia or in a savings or investment account in Europe or the United States. In Colombia, the final stage is conversion into Colombian pesos. This series of transactions serves three purposes: it creates a complex paper trail, makes the origin and ownership of money dubious and commingles drug money with legitimate financial transactions.

The key step is the first. Strict enforcement of the bank secrecy and anti-money laundering acts over the last few years has made it increasingly difficult to use the U.S. banking system in this stage.1 As a result, the cash has had to leave the United States. The destination? Any of a number of islands, territories or nations where bank secrecy is still marketed as a service: the Cayman Islands, the Turks and Caicos, Venezuela and Panama. For smugglers, the fundamental problem is the weight and volume of the cash. Means must be found to reduce both. A preferred method for reducing the weight and volume of cash is money orders: U.S. Postal, American Express, Western Union, Thomas Cook or Travelers Express. Bought by the same smurfs who once raced from bank to bank making deposits, money orders are smuggled by plane, even by DHL or private couriers, to places where bank transactions are less rigorously scrutinized.

Until last year, the destination of choice for smurfed money orders was Panama. But recently, a unique computer program was developed by inspectors of the U.S. Postal Service and the DEA and implemented by the Federal Reserve Bank of St. Louis, the clearinghouse for all 800,000 or so postal money orders that enter the system for payment each day. Using this new software, the government was able to determine the source bank of the illicit transactions, the Hong Kong Shanghai Bank of Panama. Moving quickly, federal agents and Justice Department attorneys froze the bank’s correspondent accounts at Marine Midland Bank in New York. Within weeks, banks in Panama began refusing all such postal money orders arriving from the United States. The money launderers moved on to the next destination. Unfazed, money launderers have been finding, more quickly than their pursuers can detect, new countries and a panoply of innovative, if often expensive, techniques. Colombian kingpins and their money launderers have set up a network of private, outwardly legitimate corporations, designed to obliterate all traces of the illicit origins of their money and obfuscate the electronic trail of money transfers.

A latter-day equivalent of the eighteenth-century Triangular Trade has sprung up between Colombia and the United States, with legitimate products such as coffee and leather being bought by the drug cartels in Colombia with Colombian bank loans secured by letters of credit from Panamanian banks, backed by drug-generated cash or money orders. The coffee, often tens of millions of dollars worth, is then sold in the United States and the proceeds transferred to shell corporations in Europe. By the time U.S. agents show up in Switzerland with a search warrant, the funds in the Swiss bank account of the money launderer appear entirely legitimate, proceeds of a coffee transaction. Other scams are built around world-class art and antiques valued at more than $10 million, purchased by corrupt dealers through some of the major international auction houses.

OPERATION ROYAL FLUSH

The DEA and other U.S. anti-drug investigators scattered across some 42 different U.S. departments and agencies have come to a depressing conclusion: They have remained a step behind the cartels, who are hopscotching around the world finding new havens for their funds as each old sanctuary is denied them. Even more troubling is the latest wrinkle: the money launderers have begun to buy equity in international banks.

Top international law enforcement officials who have spent their lives studying and pursuing the international drug cartels believe that the new Clinton drug policy, designed to attack the drug problem by damping demand on the streets of the United States, while politically expedient and morally correct, is wrongheaded in its long-term goals and approach. Once the drugs reach the streets of America, indeed once the powder leaves the jungles of Colombia, most experts on the big-time cartels believe it is too late. Law enforcement must break the backs of those who produce the drugs. But arresting, convicting, even imprisoning them is not enough. With vast wealth at their disposal, no prison walls can prevent them from continuing their pernicious activities. Despite all odds, the goal must be to strangle the financial networks.

Thus the United States created a new approach in 1992 called Operation Royal Flush, a code name for identifying and neutralizing the 150 or so leading Colombian money launderers who provide the means for the cartels to function. Operation Royal Flush is a policy based on a solid three-legged stool: information exchange, enforcement and regulation.

A coordinated, reliable and above all timely method of exchanging information on financial targets, money brokers and bank accounts is essential if the major drug enforcement agencies are to leapfrog the cartels and their money launderers rather than remaining always one step behind. Tough and uniform enforcement is also vital. Those who launder money must be certain that if they are caught, their funds will certainly be seized, their accounts will be frozen, and they will wind up in prison for a long time.

The shakiest leg of the stool is regulating the banking industry itself, policing its operations and above all the beneficial sources of its deposits. Yet this is the only leg that denies the international banking system to the drug traffickers. Moreover, if the launderers are themselves beginning to buy into banks, strictly enforced criminal regulations are the only way to put the money launderers out of business.

THE WORLDWIDE WEB

"The first line of defense against money laundering must be the financial institution, acting in partnership with law enforcement and supervisory authorities," says Rayburn F. Hesse, the State Department’s principal expert on money laundering. But most of the world outside North America including, until recently, most of Europe, have a very different concept of banking and bank secrecy. There, an individual is believed to have the inviolable right to maintain and build private wealth without the scrutiny of neighbors or governments. The intrusion of police into banks or financial matters is believed to exceed their function as law officers.

The influence of the United States on international criminal law enforcement and drug interdiction has begun to affect these attitudes. The 1989 decision by the Swiss Federal Parliament to criminalize money laundering in the wake of the Kopp scandal was the first break in the concept of universal bank secrecy. Many other countries began to perceive the potentially pernicious effects of the arrival of vast sums of ill-gotten cash on their shores. Each time the international cartels and their money launderers pour their money into a particular country’s banks, they want to make sure that not only the banks themselves but the environments where the banks do business and the operations of the banks fall under their narcotic spell. So there are often horrific social and political costs for nations that succumb to the seduction of billions of dollars in drug funds flowing into their coffers, corruption of judicial, police and government officials at the highest levels, bribery of entire parliamentary blocs and ultimately the corpses of judges, prosecutors and journalists. In the last year Spain, Hong Kong, Canada and the United Kingdom have taken sweeping measures through laws, regulations or increased enforcement to crack down on money laundering.

Still, in vast stretches of the developing world, even modest sums can make people impossibly wealthy. In much of Latin America and the Caribbean, where many of the bank secrecy havens of choice are now located, bribes may vastly exceed official salaries, indeed may amount to a life’s earnings for a single service rendered at a critical moment. The task of those attacking the money of the international cartels must be diplomatic persuasion or even at times intimidation. Linking foreign policy with law enforcement, a phenomenon that dates only to the late 1980s when there was a realization that there was simply no other means of containing the global drug trade, has been perhaps the single most important factor in targeting the drug cartels and their financial manipulations.

DILIGENT PURSUIT

The initial U.N. conventions regarding drug trafficking, the 1961 Single Convention on Narcotic Drugs and its 1972 protocol, were largely toothless. In 1988 diplomats gathered in Vienna to sign an updated version, the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. For the first time, an international convention addressed the need to attack international drug money flows. Indeed, the new convention mandated that signatories criminalize activities connected with money laundering. In the five years since it was signed, some 75 nations have ratified the convention. At a minimum, it has become an important moral reinforcement to the first two legs of the money laundering stool, exchange of information and enforcement of criminal statutes. But it still fails to strengthen the third leg, the most fundamental to the destruction of the cartels’ ability to move and launder illicit revenue. It fails to require a bank to examine the origin of a deposit and the commercial activity generating it before it is accepted.

Ultimately, an international convention on the beneficial source of money, effectively a convention of "due diligence" encompassing the actions and practices of attorneys and accountants as well as bankers, may be the best solution. The first steps are already being taken toward such a convention. The Bank of International Settlements and the Basel Committee of the Group of 10 (which actually includes the central bankers of 12 member nations) have accepted the banking principle of "know your customer" as a standard for every financial institution they oversee. But while both bodies are important in dealing with the major money centers of the world, they still remain a relatively small and elite group when it comes to the vast panorama of international banks available to global cartels.

A more promising institution is the Financial Action Task Force, a five-year-old international organization that operates largely outside the purview of the United Nations. It was established with the full diplomatic and political backing of the United States and its major Western allies, but its vision is global. Operating from a suite of offices in the Organization for Economic Cooperation and Development in Paris, FATF has charter members from the entire Group of Seven (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States), the European Community and four other European nations (Austria, Sweden, Switzerland and Australia). An intensive campaign that may at times have bordered on coercion has added seven more members, Finland, Iceland, Norway, Turkey, Hong Kong, New Zealand and Singapore, plus the Gulf Cooperation Council.

FATF has issued a 40-point list of recommendations on money laundering countermeasures, which goes substantially beyond the previous U.N. conventions. FATF mandates regular outside evaluation by recognized experts of each member nation’s progress in implementing the 40 points. FATF is beginning to move in the right direction, but there are two fundamental problems. The first is its continued lack of universality. Specialists who monitor international money laundering interdiction for FATF report that in one recent arrest alone, the target was found to have placed funds in banks and nonbank financial institutions in 40 different countries, only 15 of which were members of FATF.

The second problem is one shared by the 1988 U.N. convention, the lack of a tough enforcement mechanism. Certainly, FATF’s 40 points address the key issue of compelling bankers to examine the beneficial source of each deposit as well as the background of each depositor. The problem is that enforcement, for the moment, does not go beyond the reach of moral suasion and the prospect of a nation being held up as an international example by the evaluating panel.

Nevertheless, even the existence of this evaluation mechanism gives considerable hope to its creators. In place and functioning effectively is a process that could be transformed into an international system of bank policing. The first step toward this goal, expected to be taken this summer, is a formal notice by FATF to all international banks that their duty is to determine the beneficial sources of all their deposits. The next step, still down the road, would be formal codification of this notice with enforcement provisions. Firm, consistent enforcement could finally stop the laundering of illicit proceeds of drug trafficking, as well as arms trading, terrorism, counterfeiting or any other illegal activity.

PROSPECTS FOR A GLOBAL BANK POLICE

The ideal, of course, would be to create a true multinational bank regulatory body that would function like the Comptroller of the Currency, the Federal Reserve or the Department of Justice to compel examination of the sources of deposits in every nation. Short of this goal, however, individual national banking systems or banks themselves are now in a position, thanks to FATF monitoring, to enforce their own standards, again, provided the will exists. A complex process of education is under way to develop the will to enforce these standards. The FATF and State Department officials who chair the task force’s working group on policy and external relations have embarked on a global campaign to convince banks they must conform to international norms, or else. It is the "or else" that until now has proven elusive in many parts of the world.

Few countries are inclined to cede sovereignty over their national banking systems to any external authority. Moreover, since banks wield substantial political power in most nations where they control the purse strings, they are unlikely to accept regulation by a supranational body over which they would possess comparatively little control. Nevertheless, FATF officials believe that they will have in place by 1998 or 1999 the core of a global regulatory and enforcement mechanism considerably more rigid than any now in place. After a critical mass of countries has adopted and implemented laws consistent with the FATF’s 40 points, the governments that have taken those steps will be in a position to recommend actions against those governments that have not.

Even more important, it is likely that banks in "white-listed" nations, those that no longer tolerate concealment of fund origins, will refuse to handle any transactions originating or passing through "blacklisted" nations, whose banks are prepared to handle illegally accumulated funds. To go this last step, pressure from the top down and especially the bottom up is essential. The U.S. government must be prepared to exert substantial leverage, diplomatic, political and financial, to convince countries of the urgent necessity of taking measures that will effectively remove their banks from the money launderers’ preferred lists. The administration needs support, perhaps even pressure, from Congress and the electorate to place this effort high on an increasingly crowded list of international priorities.

But of equal, if not greater, importance is bottom-up pressure from the client companies and important depositors in international banks. These clients must insist that they will not do business with institutions that fail to adhere to the new, tough international norms on examining money sources. Only this kind of tangible pressure on financial bottom lines, threats to move large deposits or transfer business elsewhere, will give bankers the basic pocketbook motivation to take the hard actions that are necessary.

Ultimately, if all these moves prove as effective as they promise, one final determination will need to be made. At what point have the good guys won? Or, as one enforcement agent put it, "How much money do we have to take out of the system for how long a period of time to destabilize or neutralize the drug cartels?" The United States is not yet there, or even close. But it is certainly moving far more rapidly in the right direction in this area than in the other two U.S. priorities, reducing demand or interdicting the shipment of product. Demand, it appears, is only rising, if not in the United States, then certainly in much of the world. Interdiction still only gets a tiny fraction (estimates range from 5 to 15 percent) of the total product shipped each year. But the efforts of an army of financial, diplomatic and enforcement professionals have managed to drive the cost of money laundering from 6 percent to 26 percent. In short, the United States has taken out of the pockets of the drug kingpins more than a quarter of their profits. Although much of it still goes into the pockets of their confederates, the money launderers.

The aim, clearly an achievable one, is to make their task as expensive and dangerous to them as it is to the cartels. If this goal remains high on the international diplomatic, political and law enforcement agenda, and rises to comparable heights on the global financial agenda as well, it is by no means an impossible dream.

FOOTNOTE

1 The Money Laundering Suppression Act of 1994, whose enactment is expected this year, is designed to provide law officials and legitimate businesses some relief by narrowing the criteria for reporting notable cash transactions, which numbered more than ten million in 1993. The act also broadens existing law to encompass "nonbank" institutions, which handle check cashing, money orders, traveler’s checks and wire transfers.