Chapter Three
TAKING CARE OF BUSINESS
"You don't refuse a customer just because his money isn't clean."
Money launderer, Nicholas Deak
It's like a stone tossed into a pond.
You see it hit the water because it makes a splash. As it begins to sink, the water ripples and, for a few moments, you can still see the spot where the stone hit. But as the stone sinks deeper, the ripples fade and by the time the stone reaches the bottom, any traces of where it hit are long gone and the stone itself may be impossible to find.
That's exactly what happens to laundered money.
The immersion stage is when the laundryman is most vulnerable. If he can't get his dirty money into a washing cycle, he can't clean it. However, once his cash is converted into numbers - blips on a computer screen - and those numbers are flashed back and forth across the globe, the ripples have disappeared and the stone is buried in silt.
Realizing that the optimum time to strike is when the laundryman is most exposed, the Bank Secrecy Act of 1970 attempted to force banks, savings and loans, and other financial institutions to report all cash transactions over $1000 to the Internal Revenue Service. But the ceiling proved to be too low. In spite of a provision exempting certain retail businesses, allowing banks to set higher limits based on a client's specific requirements, the government was still inundated with forms. Because there weren't enough people to process them, most of those forms wound up decomposing in a Detroit warehouse. Anyway, far too many legitimate non-retail businesses deal in large amounts of cash. Compliance became so time consuming and awkward that banks either exempted all their biggest and best customers, or simply gave up.
Over the years, the scope of the law was broadened to include non-bank financial institutions, such as travel agencies, money wire services, credit unions, car dealers, insurance agencies, money changers, brokerage houses and check-cashing businesses. Even a local convenience store selling money orders was expected to comply. Finally, Congress dictated that "all trades and businesses" dealing in cash fell under the scope of the act and increased the cash limit to a more realistic $10,000.
Although 43 otherwise upstanding banks, including Chase Manhattan and Bank of America, were penalized for a total of $20 million, the currency-reporting requirement was still widely disregarded until 1985. That's when the government decided to call time. It accused the Bank of Boston of gross and flagrant violations of the Bank Secrecy Act, alleging that the bank had failed to report some 1163 cash transactions amounting to $1.22 billion. Among the companies the Bank of Boston had supposedly exempted from cash reporting was the law firm of F. Lee Bailey. More ominously, the bank had given dispensation to a pair of real estate agencies controlled by a local organized crime boss. In the face of overwhelming evidence, the Bank of Boston pleaded guilty, admitting to an additional $110 million-worth of violations, and was fined a then-record $500,000.
The government drove home its point by going after another 60 banks. Chemical Bank admitted to 857 non-reported cash transactions worth $26 million. Irving Trust Company acknowledged 1659, worth $292 million. Manufacturers Hanover Trust confessed to 1400, worth $140 million. But the process was still in its teething stage and justice was arbitrary. When the Bank of New England was found guilty of 31 offenses, it was fined $1.2 million. When Crocker National Bank was found to have committed 7877 infractions, worth $3.98 billion, it was merely fined $2.25 million.
Despite such anomalies, banks across the nation were forced to sit up and take notice. Over the years, the Justice Department has become more adroit at digging deeper into a bank’s affairs and rooting out the laundrymen, and more severe about holding the bank responsible for the actions of its employees. At the end of 1994, the government’s wrath was directed at the American Express Bank International, after two of its senior officers were indicted in Houston for helping to wash $40 million belonging to Mexican drug trafficker, Juan Garcia Abrego.
A Mexican gas station owner named Ricardo Aguirre Villagomez - known by his friends as Kenny Rogers because he looked like the singer - was Abrego’s primary laundryman. Under Villagomez’s supervision, drug money collected on the streets of Texas was sent through exchange houses and banks along the Mexican border to Switzerland. From there it was wired to a holding company in the Cayman Islands established for Villagomez by Antonio Giraldi and Maria Lourdes Reategui at the Beverly Hills branch of AMEX. Some of his money was invested in a Blockbuster Video franchise, and some in lithographs by the Mexican artist, Rufino Tamayo. But the lion’s share went into American real estate. Giraldi and Reategui accepted $29 million as collateral for $19 million-worth of property loans, reputedly making Villagomez the bank’s biggest customer. At least until US Customs identified and froze the funds in the Caymans. Giraldi and Reategui both pleaded not guilty to several charges, including money laundering, but a Brownsville, Texas jury found otherwise. He was sentenced to 10 years, and she got 3 1/2. The government then went after the bank, fining it $7 million. American Express Bank International also had to forfeit $40 million of Villagomez’s laundered money and assets, and was obliged to spend $3 million on employee training.
The fine is the largest assessed to date against a US bank for money laundering. But that’s a record that probably won’t stand for very long.
*****
In the name of responsible banking, but largely at the insistence of the United States, Great Britain, France and Japan, nations around the world have endorsed the doctrine that financial institutions must do their part to help identify money being laundered at any stage of the washing cycle. The result is "Know Your Customer", a campaign to target clients who maintain accounts that are not in keeping with the type of business they do; or clients with accounts fed by deposits from a large number of different individuals; or anyone opening a low-interest-bearing account with a sizable sum of money. Cash remains the give-away, especially when someone makes unusually large deposits; or makes multiple deposits at different locations; or transfers large deposits quickly to other accounts; or makes an inordinately high number of very small deposits that add up to a very large sum.
For the most part, banks throughout the industrialized world have shown a sportsmanlike willingness to cooperate, despite the fact it means they have to spend their own money to train staff in the skills of financial vigilance. A front-line strategy, akin perhaps to reminding children to drink their milk and brush their teeth, it sometimes works. But not all the time.
Agip (Africa) Ltd. was a Jersey, Channel Islands-registered company drilling for oil in North Africa. A wholly owned subsidiary of the Italian state oil company, its chief accountant was a crook who over the course of several months, used fraudulent invoices to wire $10.5 million from the Banque du Sud in Tunis to the London account of the Baker Oil Corporation, a shell registered on the Isle of Man.
Any bank manager might fairly assume that Baker Oil was in the petroleum business. However, almost as soon as funds were bedded down in that account, instructions arrived directing the bank to transfer everything to the Euro-Arabian Jewelry company. The money was then immediately wired to company in Paris pretending to be a jewelry store. Suspicious? Perhaps. Illogical? Almost certainly. Yet the bank manager who handled the transfers, and charged Baker Oil a fee for the service, earned his living not by knowing his customers but by catering to his customers. His job description did not include interfering with an oil company sending all its money to a jewelry store.
Responsible banking, it must be said, is a terribly vague concept. Admitting as much, some governments do more than merely encourage bankers to know their customers: they force banks and other businesses to engage the enemy by decreeing that ignorance of the laundrymen's methods will not provide an adequate defense where laws have been violated. The onus therefore falls on corporate officers to monitor and report suspicious activities. Any officer of a financial institution in America who is found guilty of being involved in money laundering risks up to ten years’ imprisonment and/or a fine of $500,000. Under certain circumstances, the government can also impound the offending company.
That was the dilemma faced by Banque Leu, a Luxembourg corporation operating in Northern California, after agents from the IRS and the Drug Enforcement Administration followed a trail of drug money from Los Angeles to Colombia then back to a pair of accounts at the bank. Several arrests ensued, including those of two Colombians and a rogue bank officer. Confronted with the threat of a federal grand jury indictment against the corporation that, in theory, might have shut them down, executives at Banque Leu opted for damage control. They accepted legal responsibility for the actions of their account officer, conceding that he "either knew or was willfully blind" to the fact that specific accounts were used to launder drug money. In exchange for the US Attorney’s waiver of that indictment, the management of Banque Leu pleaded guilty to money laundering, forfeited $2.3 million, paid an additional $60,000 fine, agreed to submit special audit reports to the US government for the next three years, and further agreed to conduct an anti-money laundering education project.
According to a recent federal court ruling, foreign corporations with branches or subsidiaries in the United States can now be prosecuted no matter where they're laundering money. A classic illustration came out of a 1988 Securities and Exchange Commission investigation into insider trading.
Stephen Sui-Kwan Wang was a trainee analyst in the Mergers and Acquisition Department of merchant bankers Morgan Stanley in New York. Lee Chwan-hong, an investor who called himself Fred Lee, was president of two British Virgin Island companies with headquarters in Hong Kong. According to the SEC, over the course of 18-24 months, Wang provided Lee with non-public information which allowed Lee to take positions in 25 companies through 30 different brokerage accounts. Lee came out the other end with a profit of $19.4 million.
In keeping with current procedure, the SEC filed against Lee for $19.4 million, then used the Racketeer Influenced and Corrupt Organizations Act (RICO) to seek a civil penalty of three times that amount, for a grand total of $77.8 million. Knowing that Lee had moved his money out of several company accounts around the country and put the bulk of it in the New York branch of the Standard Chartered Bank, the SEC attempted to freeze his accounts. But Lee was one step ahead. He'd already ordered Standard Chartered New York to wire his money to Standard Chartered Hong Kong. So now the SEC sought an order against the Hong Kong bank to repatriate the assets.
Standard Chartered's lawyers argued that the American courts had no jurisdiction in the matter and could not enforce an action in Hong Kong. But a US district court thought otherwise. It agreed with the SEC, ruling that if Standard Chartered Hong Kong did not return the money to the United States, the New York branch could be held in contempt. Risking daily fines and the possibility that its bank officers in the US could be arrested, Standard Chartered sent the funds back to New York, to be held there by the courts, awaiting the determination of the SEC's claims against Lee.
Needless to say, Lee was anything but pleased, and demanded that his money remain at his disposal in Hong Kong. He insisted that Standard Chartered had a contractual duty to him. When the bank pointed out that the money was already in the States, two of Lee's companies sued Standard Chartered in Hong Kong on the grounds that it had acted unlawfully.
The case posed the terribly awkward question, where does a bank's allegiance lie? Must a bank comply with a court order, albeit in another jurisdiction, or are banks bound by contract to their client, no matter what?
The High Court in Hong Kong ruled against Lee, saying that because the money was a result of a crime, the bank had acted correctly in sending it to the US, subject to a ruling there. The underlying message was a warning by the US Justice Department to all banks: When you deal with the proceeds of crime, we reserve the right to hold you responsible.
At first glance, a ruling like that would appear to be an effective weapon. But it can take forever to locate the proceeds of the crime and work the case through several jurisdictions. The world is no longer a collection of independent financial markets. It's a global bazaar, backed by an electronic infrastructure that permits the instantaneous transfer of funds from anywhere on earth to anywhere else. Pinpointing one or even a series of transmissions is extremely difficult. So Congress now takes the approach that banks and non-bank financial institutions have a watchdog’s role to play.
As dangerous as that might be, and there are civil libertarians who argue that bankers should not be turned into policemen, as of 1996 Wall Street broker-dealers and other non-bank financial institutions are required to determine, as best they can, that wired funds are not crime related. They must also maintain their wire transfer records for five years.
Simply because a client represents himself as being engaged in a lawful business, the government no longer excuses the companies he hires from reporting inconsistencies that might document an illegal source. Because laundrymen prefer financial institutions where they aren’t known and where they can’t be identified through records of previous transactions, the government insists companies pay particular attention to clients who don’t normally hold accounts or otherwise transact business. That’s lead one critic of the law to call it, "Know Your Non-customer."
As banks have cracked down, laundrymen have turned to non-bank financial operators. They use money changers - known as casas de cambio along the US-Mexican border which is crawling with them - money transmitters, such as Western Union and American Express, neighborhood check-cashing businesses and Giro houses, which are wire-transfer businesses. But more often than not, finding dirty money in a sea of wire transfers means putting the dirty money there in the first place.
World Telecom was a store front business at 373 Broadway, Chelsea, Massachusetts. Owned by a 32-year old man named German (pronounced Herman) Cadavid, the company offered various services, such as faxes, post office boxes, beeper rentals, and money exchange. Five doors down was the World Travel Service, a money transmitter and licensed franchise agency for Vigo Remittance Corporation of New York. It was also owned by Cadavid. Both were related, through Cadavid, to World Travel Service and World Telecom offices in Rhode Island.
US Customs had reason to believe that from the time he went into business in 1992, and for much of the next two years, Cadavid and his associates were laundering dirty money. His volume of transfers was greater than it ordinarily might have been for a new business, almost all of the transfers went to the Dominican Republic, and the local Dominican population was not affluent enough to account for the sums he was moving. However, without someone on the inside, busting him was next to impossible. So Customs set up a sting. An undercover operative convinced Cadavid to handle three transfers totaling more than $100,000. After taking his usual seven percent commission, Cadavid unsuspectingly wired the money into the Barclays Bank account of a US Customs front company in London.
As a Vigo franchisee, he was under an obligation to observe certain strict rules, such as never accepting an order over $5000 without demanding proper identification to verify the full name and address of the sender. To get around Vigo’s rules, Cadavid simply assigned the transfers to fictitious names, partitioned them into $4500 parcels, and staggered transmissions.
By isolating specific transfers and following the money trail, Customs was able to arrest him. But, in those days, more than 500,000 wire transfers, representing in excess of $1 trillion, electronically circled the globe daily. And even if there weren't too many to keep tabs on - and there most definitely were - there wasn't enough information on any single wire transfer to determine whether the money is clean or dirty. There still isn't. Changing the system would mean implementing a global strategy for accurately identifying the sender, the recipient, and the source of all wired funds. Any hope of doing that, of getting every country in the world to make wired monies ultimately traceable when it is clearly not in the every country’s interest to do so, far exceeds sane wishful thinking.
*****
American law requires that a Cash Transaction Report (CTR), technically known as IRS Form 8300, be filed with the Internal Revenue Service for any and all cash dealings over $10,000. This not only applies to banks and other financial institutions, but affects all sorts of businessmen, from antique dealers, builders and shop owners to garage owners, restauranteurs, barbers and dentists. Banks and financial institutions have the added responsibility of maintaining records of every cash transaction of $3000 or more for five years.
Although a CTR is also mandatory if the sum of all cash transactions over a 12 month period exceeds $10,000, one way laundrymen get around the law is by structuring their dealings. In a recent case, $29 million in cash become almost invisible on its way to Ecuador because the laundryman was willing to lumber through 40,000 separate transactions.
Phony bank accounts are another ruse and, believe it or not, the government has investigated cases where accounts were opened in the names of Marilyn Monroe, Abraham Lincoln, James Bond, Mae West and Roger Rabbit.
Nevertheless, cash remains legal tender. It even says so on the front of every bill. That means there's nothing to prevent someone from handing their bank $1 million in used $5 bills. But when that happens, the government wants to know who's doing it and where the money is coming from. Consequently, more than eight million IRS 8300 forms are now being filed annually. They wind up at a collation center in Detroit, where the information contained on them is fed onto computer tape. From there, the tapes are sent to the headquarters of the Financial Crimes Enforcement Network (FINCEN) in Vienna, Virginia.
Housed in a modern office complex with a huge ellipse on the front of the building, FINCEN is several floors-worth of locked doors protected by security cameras and armed guards, of restricted-area open-plan offices where desks with computer terminals are separated by half-height partitions, and of over-air-conditioned rooms access to which is off-limits to just about everyone because that’s where they keep their super-powerful computer mainframes.
Information on the tapes from Detroit are fed into those mainframes, melded into FINCEN’s already enormous database of cash transactions. Specialists continually prowl through the database, looking for patterns of unusual financial transactions from which to build a detailed diagram of illegal activity. Whether they’re working on an investigation for the Treasury Department, or answering one of the more than 6000 requests for information that come in annually from diverse law enforcement agencies across the country, the bedrock of FINCEN’s research is the set theory of Venn diagrams - overlapping circles to indicate relationships.
Say the search begins with the names of five individuals who are suspected by Customs of money laundering. Checking those names in the database reveals several different residential addresses. Cross-checking those addresses matches one with a company under investigation for drug dealing by the San Francisco police department. That company has used several bank accounts, one of which shows up on an IRS Form 8300, having accepted a cash deposit from a gentleman whose home address is the same as a company that is currently the object of a probe by the Pittsburgh office of the DEA. As the search broadens, FINCEN links the original five individuals to a dozen more, adding 15 companies and 30 bank accounts to the investigation.
It is an expensive and lengthy process, and all too often, by the time programmers input the paperwork and the analysis section sorts through the data, many trails have gone cold. But when FINCEN does score, the results can be staggering. In June 1995, a pair of law enforcement agencies requested information on two individuals who had no apparent affiliation. By cross checking patterns of their financial dealings, a FINCEN specialist was able to tie both to two small business. Although neither business reported annual sales of more than $1 million, the specialist soon linked those businesses to $120 million in cash deposited across the country at the rate of $50,000-$80,000 a day. By August, the FBI was on to a huge drug and arms dealing conspiracy.
Further strengthening the government’s hand is the 1990 Depository Institution Money Laundering Amendment Act which reemphasizes that the burden is on banks to report. By turning a blind eye, bank directors are risking everything, including the possibility of the government taking over any financial institution convicted of money laundering offenses.
Along with those laws, the RICO statutes permit the government to seize laundered money, regardless of the source, to confiscate all assets derived from the use of those funds, and to levy fines of up to three times that amount against anyone involved with money laundering.
In turn, RICO gave renewed vigor to the asset-forfeiture program. Today, thanks entirely to drug traffickers and laundrymen, the government has owned horse farms, yachts, planes, cars, watches, oil wells, cattle, hotels and for a while, a house of prostitution. It has seized and sold enough art to fill dozens of museums. Not long ago it grabbed a 1972 Salvador Dali "Self Portrait." The painting had been bought in Spain with drug money by a known trafficker who’d taken it back to Colombia, then shipped it to Miami, intending to sell it at auction. The government obligingly put the painting on the block, but after the hammer went down at $500,000, Uncle Sam kept the money.
The government has also owned the occasional film set. When Ken Mizuno and an associate sold 52,000 memberships to an exclusive Japanese country club that only allowed 1800 members, bilking investors for nearly $800,000, the Feds got Mizuno for fraud and money laundering. They confiscated his mansion in LA and sold it for $1.8 million, having marketed it as any good real estate agent might - with a glossy brochure emphasizing that the house had been widely featured in Eddie Murphy's 1987 movie, "Beverly Hills Cop II."
*****
Nowhere else in the world is money laundering given the same prestige.
In the United Kingdom, several pieces of legislation have been aimed at thwarting the laundrymen, yet each falls short of America’s get-tough approach. Instead of requiring that cash transactions over a certain amount be reported, the British chose a system called suspicious cash transaction reporting. Which means the front-line battle against the laundrymen gets bogged down in the definition of the word "suspicious."
If someone deposits £50 in cash and an employee at the bank thinks there's something odd about it, he is obliged by law to file a CTR. If another client deposits £500,000 in cash and no one finds anything odd about it, the deposit goes unreported.
Having opted for suspicious cash transaction reporting because mandatory reporting costs more than they were willing to spend, the British are getting what they paid for. In the mid-1990s, a two-year survey by the British Police Foundation revealed that 20,000 suspicious cash transaction reports had led to fewer than six investigations and that out of those six investigations no one could say how many arrests were made, or if any convictions resulted. Today, the Serious Organised Crime Agency (SOCA) handles the cash/suspicious transaction reports that used to go to the National Criminal Intelligence Service (NCIS). They reportedly receive in excess of 250,000, but with a permanent staff to process those reports smaller than the one that was incapable of handling 20,000.
The police can confiscate drug-derived assets. However, bankers can defend against this by proving they did not know or did not suspect that they were dealing with laundered money. Or, having suspected as much, that they disclosed the facts to the proper authorities.
It is much the same story throughout Europe.
The Dutch have anti-money laundering laws, and have made a conscious effort to force banks to report. But it doesn’t always work. A drugs cartel from Surinam, working out of a gold and jewelry shop, washed $59 million through two Rotterdam branches of the Dutch bank ABN AMRO between 1989 and 1993. There have since been prosecutions, but when bank officials first reported suspicious transactions, the Central Bank told them to leave the matter alone, that it was of no real interest.
In 1995, the Dutch police decided that at least half of Holland’s 110 foreign exchange bureaus were laundering drug-tainted guilders. The Central Bank took over direct supervision of those exchanges and many of them, especially those owned by foreign bearer-share companies, quickly folded. But almost as many have since reopened just across the border in Belgium.
Although no one can put an accurate figure on the amount of money being washed through the Netherlands, a former minister of justice said in 1993 that it could be more than twice as much as flower exports, Holland’s most profitable crop.
In Germany, money laundering has only recently become a crime. Unification, which soldered an important chunk of the Eastern Bloc to the West, created a massive sink. Helmut Kohl's government had no choice but to fly in the face of a traditionally secretive banking industry and comply with European Community directives. He signed a law that requires banks to record the names of anyone depositing cash in amounts over DM 20,000 ($12,000), and to alert the police when they suspect that money has come from drug dealing or other criminal activity. But prosecutions haven’t followed.
The French, too, have made money laundering a criminal offense but weakened the effort by using a suspicious cash transaction reporting system. They created TRACFIN, modeled after FINCEN, specifically to expose money launderers. But in the end, TRACFIN is like an NFL expansion club: all the players know the rules of the game, they've got the jargon down pat and they wear nifty multi-colored uniforms, but they just haven't learned how to win. It took the French over six years to bring their first money laundering prosecution to court. And then, it only happened because the DEA handed it to them.
It is an offense in Italy to launder money, but only in cases involving kidnapping, robbery, or blackmail. In 1989, the Italian Banking Association asked that member banks identify every cash transaction in excess of 10 million lira, not quite $7000. They are also supposed to register all bearer savings passbooks, and to refuse service to any customer who fails to cooperate. Ignorance, abuse, and sheer disregard of the law are widespread. Promises of change have come fast and furious ever since recent scandals have rocked the government and implicated so many politicians of complicity with organized crime. But before Italy can tackle the laundrymen, it needs a government with credibility, one that will last long enough to survive the constant mayhem that has been Italian politics since 1945.
In Luxembourg, banking secrecy is guaranteed by legislation that prohibits any bank from disclosing information either to local or foreign tax authorities. Luxembourg has been known in the past to cooperate with other countries investigating drug-related crimes. But the Grand Duchy emphatically draws the line there. One result of its blatantly freewheeling company registration policy is that banks such as BCCI could be securely headquartered in Luxembourg while running amok throughout the rest of the world. A 1989 law did make money laundering a crime there. However, it stipulated that the authorities could only seize assets after the owner of the funds had been convicted of a crime. As a result, the courts found themselves in a very embarrassing position. $36 million belonging to known drug trafficker Heriberto Castro Mesa had been laundered through 33 banks in Luxembourg and eight other European countries. When Mesa was killed in a shoot-out with police, Luxembourg authorities arrested and convicted his two laundrymen, Franklin Jurado Rodriguez and Edgar Garcia Montilla, and ordered all their assets frozen. That’s when Mesa's widow, Esperanza, and his daughter, Ampara Castro de Santacruz - who was married to Jose Santacruz Londono, a founding member of the Cali cartel - went to court to get those funds unfrozen. In January 1993, the case reached the court of appeals, which ruled that the money must be released because its owners, Esperanza and Ampara, had broken no laws. Their links to Cali drug trafficking were of no significance. They'd never been convicted of a crime. Nor, for that matter, had Castro Mesa.
In the midst of the ensuing publicity and international criticism, the Grand Duchy decreed that any money confiscated in drugs cases would be used to fight trafficking and money laundering. It also promised to shut the offending loophole. Credit institutions and professionals in the banking sector would now be required to report any activities that might be construed as money laundering. The immediate response was a blood-curdling scream from local bankers, who insisted that the decrees jeopardize the nation's unique financial position by nullifying banking secrecy. Weighing one argument against the other - the social consequences of drug trafficking and money laundering versus the pecuniary benefits of secret banking - the legislators did precisely what you might expect them to do. They voted for their wallets. A compromise bill was passed, allowing the authorities to clamp down on money laundering. But the information they would need before they could act would be made available only by banks only "on their own initiative." Business in Luxembourg is back to normal.
The European Community set the tone right from the beginning, letting banks off the hook by declaring that it was not their responsibility to detect money laundering. Instead, bankers are politely requested to know their customers so that money launderers will find it harder to operate; to comply with existing legislation and law enforcement agencies in the fight against money laundering; to improve their record-keeping systems so that suspicious activities can be detected early; and to train their staffs so that they can recognize and report money laundering activities.
The Japanese have copied the British, obliging banks to report suspicious cash transactions, though they've gone one step further in forcing banks to report all domestic cash transactions in excess of $240,000, and all foreign cash transactions in excess of $40,000. Where drugs are concerned, prosecutors can put banks and financial institutions in the dock for laundering money.
Closer to home, Canadian banks sometimes report suspicious transactions, but only on a strictly voluntary basis, and following procedures instituted by the banks themselves. The government does not demand reporting.
The United Nations climbed on the bandwagon in 1988, proposing that money laundering be an internationally extraditable offense. Some 80 nations agreed in principle to ratify a pact. But 80 nations is much less than half the UN membership. And in the first five years, only four actually signed. Notable among the hold-outs were Luxembourg, Liechtenstein, the Netherlands Antilles, the Cayman Islands, Panama, Uruguay, Hungary, Russia, Pakistan and Bulgaria.
Brian Bruh, the first director of FINCEN, is quite frank when he compares the American system with what’s practiced elsewhere in the world. "A suspicious cash transaction reporting system is essentially a voluntary system. If someone walks into a bank, a narcotics trafficker or a money launderer, and wants to conduct a financial transaction, and he sees that the bank officer is very alert, he simply says, ‘I forgot something’ and walks down the street to another bank, until he’s able to conduct a transaction where the bank official is not so suspicious. In our country, if someone walks into a bank, conducts a large cash transaction, a report must be file. If I were a money launderer, I would prefer to do business in a country with suspicious cash transaction reporting. Although, suspicious cash transaction reporting is still better than no cash transaction reporting."
*****
In the good old days before cash transaction reporting, laundering huge sums of dirty money used to be a fairly easy stunt. All anyone had to do was send runners around the country depositing cash a lot of different bank accounts. Each runner, known in the trade as a "smurf" - the nickname was first used by investigators in Florida because the runners reminded them of the television cartoon characters - would be assigned a daily route, exactly like a postman or a milkman. Once the runners had collected the day's cash from their contacts, they'd work their territory. If each runner deposited $200 in 20 accounts, hardly enough in any one bank to raise suspicions, ten runners could put $40,000 in dirty cash per day into the banking system. That's $200,000 a week, $10.4 million a year. One California drug trafficker bragged when he was arrested that his smurfs had gotten so good at it, they could buy up to 2000 cashier's checks a day and deposit them, within a few hours, in 513 different banks.
The secret of good smurfing is speed. To deposit the most money in the shortest amount of time, areas are targeted where banks are located close to each other and business isn't too hectic. Small towns are no good because tellers there remember clients. Banks with little business are no good because tellers have too much time to think about a deposit or a familiar face. The best smurfing is done in affluent suburbs where there are just enough banks with just enough customers. Big cities, it turns out, are as bad as small towns. Lines are usually too long.
Anyway, that's the way the game used to work, before the government got wise to such capers and forced the laundrymen to find new approaches. So the laundrymen turned their attention to non-bank financial institutions, such as casinos.
A cash-intensive industry, casinos routinely perform many bank-like services. They cash checks, exchange foreign currency, offer the use of safe deposit boxes and pay out large sums in cashier's checks. They also frequently extend credit, which means you can leave your money on deposit in one casino and get it back from a casino in another jurisdiction. Not only is a well-established, well-organized gambling den an obvious place to reduce the bulk of a stash, to change $10 and $20 bills into $50s and $100s, it is a believable source of revenue. All you have to do is stroll into a casino, buy $1000 worth of chips, play for a few hours, cash out and hand your bank manager $500,000. You might someday have to substantiate your claim of having won it at a casino, but that's no problem for anyone with a friend high up in the casino's management.
Better still, if you owned a casino you wouldn't have to bother pretending to play the roulette wheel. You'd simply shove your cash into the till and make sure your accountant lists it in the profit column when he files your tax returns.
Acknowledging this natural alliance, Congress subjects casinos to the same cash transaction reporting requirement as banks. Furthermore, a 1993 law requires casinos to file suspicious cash transaction reports if they witness questionable transactions; to institute programs for training employees; and to improve the procedures they use to identify customers applying for credit accounts. But the law as it was passed and the law as it was proposed turn out to be two different matters. "Pending further study," Congress backed down from forcing casinos to maintain a list of customers who are known by aliases; to keep a chronological record of all transactions at the cashier's window; and to verify the identity of any customer whose cash transactions exceed $3000.
The casino lobby had also taken a healthy bite out of the suspicious cash transaction requirement by getting Congress to exempt smaller casinos from the obligation. Nor did Congress include all of the Indian reservation casinos, of which there are around 130 in 16 states, doing an estimated $27 billion a year in business.
At the beginning of 1993, the Treasury Department fined ten casinos in Atlantic City a total of $2.5 million for "willfully failing" to report cash transactions that took place between 1985 and 1988. The gaming industry now insists that it’s cleaned up its act and is in full compliance with the 1993 law. But then it always said it was in compliance with the 1985 law, which requires any commercial casino with a turnover of at least $1 million a year to keep records of large cash transactions - except if they happen to be located in Nevada.
And from Capital Hill came the perfectly straight face affirmation that Congress continues to have every reason to believe casinos will faithfully comply with the suspicious cash transaction requirements - tantamount to a government endorsement of the tooth-fairy.
Racetracks provide laundrymen with much the same kind of opportunity. The strategy here hangs on the natural reluctance of some winners to let the IRS know just how much they're putting in their pocket. A winning ticket is a negotiable instrument and laundrymen are only too happy to help the lucky punter avoid taxes by giving him cash for his ticket. Racecourses across the country are filled with these "flies" who stalk the tracks looking for folk with tickets to sell.
Purchasing lottery tickets is slightly more complicated because the winners aren't in a single place at any given moment. But here again, it's a no-lose situation for all parties involved, even the IRS. The big prizes in most state lotteries are paid out over a 20-year period, so a $10 million win is worth $50,000 a year for the next two decades. From the laundrymen’s point of view, a 20-year annuity is well worth a suitcase filled with cash. The original winner gets his money up front - although the burden of dealing with so much cash now rests on his shoulders - while the laundryman has turned millions of dollars of dirty money into a totally legal, tax-declarable entity.
Such stunts have been going on for the past decade, but the FBI only cracked their first major lottery laundering scheme in 1995, when they stopped a fugitive from collecting $1.9 million from the Massachusetts lottery.
In July 1991, Michael Linskey’s ship came in, bringing him a $14.3 million jackpot in the state’s Mass Millions game. A few days later he sold half his winnings to a syndicate lead by James "Whitey" Bulger. Brother of Massachusetts Senate President William Bulger and leader of Boston's so-called Winter Hill Gang, Whitey had apparently joined forces with the Patriarca crime family run by "Cadillac Frank" Salemme, uniting New England’s Italian and Irish underworld. Indicted in 1994 on federal racketeering charges, Whitey promptly went on the lam. So did Cadillac Frank, though he was soon arrested in Florida thanks to tips from viewers who recognized him from the show "America's Most Wanted." To get at Whitey, the FBI went after his lottery winnings. Three days before he would have been eligible to collect his annual installment, they filed a seizure warrant with the Massachusetts Lottery Commission.
*****
Casinos, race tracks and lotteries offer variations on Meyer Lansky's legacy to the money laundering industry. He instinctively understood, and helped to nurture, the natural coalition between organized crime and licensed gambling. Lansky was, after all, the man who once said, "There is no such thing as a lucky gambler. There are just winners and losers. And the winners are those who control the game."
One man who controlled the game for a very long time was Nicholas Deak, once the uncrowned laundry king of the non-bank financial operators. In 1953, the 48-year-old refugee from Hungary helped his pal Kermit Roosevelt launder money for the CIA when it wanted to finance the overthrow of Iran's Mossadegh regime and reinstate the Shah. The empire he subsequently built, Deak and Co, was for a time America's largest retail foreign-exchange and precious metals brokers. The holding company's subsidiary, Deak-Perera, was America's foremost retail currency and gold trader.
President Reagan's 1984 Commission on Organized Crime added another feather to Deak’s cap, naming the company one of the biggest money laundering sinks of all time. In its report, "The Cash Connection," the Commission’s detailed the extent of Deak's laundry services. For instance, on October 5, 1981, Humberto Orozco and his brother Eduardo - professional drug-money launderers - walked into Deak-Perera's office in downtown Manhattan carrying 233 pounds of cash stuffed into cardboard boxes. It took the staff there most of the day to verify the total of $3,405,230. At the brothers’ instructions, the money was deposited into Deak account #3552, held in the name of Dual International (Interdual). Over the next two weeks, Orozco made four more cash deposits, putting $3,892,889 into the #3552 account. Before the month was out, he topped it up with another $3.3 million.
When the brothers were finally arrested, investigators established they'd systematically used 11 banks throughout New York to launder $151 million. Between November 1980 and March 1982, they'd washed nearly two-thirds of their stake, close to $100 million, through 232 unreported deposits at Deak-Perera.
The absence of any serious money laundering laws allowed Deak to construct his sink, and though that is a defect that has since been corrected, there are still enough loopholes in the laws to drive a cash laden armored car through. And because the bad guys these days tend to have more money than the good guys, driving through loopholes is a productive business.
Today’s non-bank battlegrounds are the securities and commodities markets. Under the banner of "Operation Eldorado," a joint task force created in 1992 and made up of agents from US Customs and the IRS, is probing Wall Street to determine whether brokers have willfully invested drug profits or otherwise engaged in transactions to conceal the source and ownership of dirty money. Word came out in September 1994 that several Wall Street firms were under investigation and that clients’ accounts had been examined at Merrill Lynch, Dean Witter Discover, Bear Stevens, Prudential Securities and Paine Webber. A specific area of interest appeared to be brokers’ business in offshore havens, among them Panama. In March 1993, two Merrill Lynch brokers working out of the company’s office there were indicted for money laundering by a federal grand jury in Tampa, Florida.
Federal interest in Wall Street may be new but the fundamentals of the game have been around for centuries.
*****