Nine
Every smuggling racket is a cash business. It may not pay taxes or provide health care, but it still has bills to pay and payrolls to meet. As the racket grows and flourishes, the amount of cash starts to pile up. One pound of cocaine is worth six pounds of $20 bills. Prior to the 1970s, this wasn’t a problem. Anyone could walk into a bank with a trunk full of $100 bills, make a deposit and walk away with a receipt.
As Al Capone discovered, unreported income can create problems with the Internal Revenue Service. So smart smugglers began to keep a substantial fraction of their assets in foreign banks. A variety of nations set up bank secrecy laws (Isle of Man, Cayman Islands, Liechtenstein) to encourage anonymous currency to find a permanent home. But you had to get it there.
In the mid-1970s, a new term entered the language: money laundering. The phrase came from the world of politics, where sources of campaign funding were disguised to conceal the identity of the real contributor. The Watergate scandal popularized the term worldwide.
As the drug industry ramped up in Florida, shopping bags full of cash were spotted more frequently by bank tellers. Mike McDonald of the IRS noted: “We had people walking in with rope-handled shopping bags and deposit slips going into banks. We had 12 individuals in Miami who were depositing $250 million or more annually into non-interest-bearing checking accounts.”
In 1980 McDonald was about to launch an attack on money laundering in Miami called Operation Greenback. The first raid had an unexpectedly fatal consequence, he explained to an interviewer for PBS’s Frontline: “We did our first seizure, which was an airplane that was taking $1.2 million down to Colombia and it didn’t make it—we seized the money, and there were two pilots that were taking that money down. Our reports are that each of them had a family member in Colombia killed because they lost the money. They were held responsible for it. That’s when we started realizing who we were dealing with. We’re dealing with top dogs down here by going after the money.” Frontline’s four-part series “The Drug Wars” began airing March 9, 2000.
In the early 1980s, the United States was in a tight-money recession, and every Federal Reserve Board Branch—except one—reported a shortage of cash. San Francisco, New York, Minneapolis, Kansas City, Boston, Chicago—each Federal Reserve Branch showed a deficit. All except Miami, which reported a growing surplus quarter after quarter. It was as if the nation’s money supply was draining into Florida.
The smugglers single-handedly kept Florida out of the recession. National economists became aware for the first time of the serious financial impact of drug smuggling. Miami was awash in cash, and that had serious implications for the regional economy.
Florida real estate was booming, in part because smugglers realized buying and selling real estate was an excellent way to cool their hot money. Proceeds from a home or land sale, for example, were clean and bankable. These and other dodges to avoid the bank restrictions created a new profession: the money launderer. In 1986 Congress made the new profession illegal with the Money Laundering Control Act.
By the mid-1980s, a bevy of restrictions were in place. Any cash deposit of more than $10,000 needed a declaration including positive identification of the depositor. While this was required since the 1970 Bank Secrecy Act, it was virtually ignored until 1985, when the Bank of Boston was fined $500,000 for not reporting $1.2 billion in transactions. Wire transfers, new accounts, negotiable instruments like cashier’s checks—all came under tighter controls.
After 1985 a smuggler could no longer cool his hot money with a simple bank deposit. Some resorted to “smurfing,” where accomplices went from bank to bank making deposits just under the $10,000 reporting threshold. This technique is still used, but only for smaller ventures. Smurfing becomes extremely labor-intensive and expensive when billions are moved around.
Others resorted to bulk smuggling of cash. IRS Agent McDonald recalled stopping a private aircraft bound for Panama from Miami with $5.4 million aboard. A search warrant turned up a ledger indicating that single pilot ferried more than $1 billion in cash to Panama in his career. The logistics are daunting: $1 million in $20 dollar bills weighs 114 pounds. $20 million is more than a ton. “We’re talking about people that were getting up to $7 million a day and had to launder it,” McDonald told Frontline.
In 1992 Congress required that banks report any suspicious financial activity—regardless of amounts or limits—without informing the customer. And banks were given limited protection from civil lawsuits for complying with the new federal requirement. The provision was expanded in 2002 to include the entire money services industry, including check cashing, money order purchases and the issuance of traveler’s checks. Bankers now could rat on suspicious customers behind a veil of secrecy.
In addition to keeping an eye on current activity, federal agents began looking for assets hidden years ago by smugglers. On February 10, 2000, John Varrone, a senior executive with the U.S. Customs Service, testified to Congress:
It was the excellent work performed by our Asset Removal Group in South Florida that traced the assets of a convicted marijuana smuggler, who for nearly 15 years, had hidden his assets through a myriad of nominee corporations, business dealings, and off shore bank accounts. Despite his best efforts, the Asset Removal Group was able to trace the profits of his drug trade. Just last year [1999], this convicted drug smuggler forfeited 50 million dollars to Customs, the largest single Customs Service and Treasury Department monetary seizure. The Monroe County [Florida] Sheriff’s Office provided substantial assistance to the investigation and, based upon their contributions, last year, Commissioner Kelly shared 25 million dollars of the seized money with that department.
Contraband continued to flow, and the cash kept coming in. It became increasingly difficult to move the earnings. The only safe place appeared to be under the mattress, and spending it was dangerous too because then the Internal Revenue Service could investigate for nonpayment of taxes.
Prior to 2001, people smuggling millions in cash out of the country in a backpack, briefcase or luggage only violated a customs regulation for failure to report it on a declaration form. Often the cash could not be confiscated. And as law enforcement officials realized, the cash smuggler was inevitably a low-ranking member of the smuggling ring. If jailed, they were easily replaced.
The Bulk Cash Smuggling Act of 2001 was introduced prior to the September Al-Qaeda attacks in New York and Washington. It made cash smuggling a federal felony, punishable by five years in prison. And it allowed the government to seize the cash. After September 11, the proposal was wrapped into the omnibus U.S.A. Patriot Act of 2001 and became law.
During debate on the bill, Representative Marge Roukema (R-NJ) said, “It has been reported that over $30 billion a year is smuggled in, out and through the United States each year by drug dealers, organized crime and terrorist organizations. This money moves by planes, trains, automobiles, ships and even by mail.”
Smuggling money in bulk amounts circumvents all the new regulations. The National Drug Intelligence Center’s 2005 “Threat Assessment” shows Florida as the third or fourth highest destination for cash headed out of the country between 2001 and 2003 (depending on the year). Miami and Orlando were popular staging grounds to assemble the money because as top tourist destinations, they are high-cash areas. The addition of a couple billion more there would be less noticeable than, say, in North Dakota.
Economists are trying to get an idea of the magnitude of this phenomenon of mobile underground cash. Miriam Wasserman wrote for the Federal Reserve Bank of Boston’s Regional Review in the first-quarter edition of 2002:
Today, nobody knows for sure how much money is laundered globally. It is difficult to know if money is being counted more than once as it cycles through the system and harder still to know how much goes undetected. Nonetheless, experts believe the amounts are large. The most cited figure is between 2 and 5 percent of global GDP [Gross Domestic Product]—or between $600 billion to $1.5 trillion per year. Still, this is an admittedly rough estimate based on extrapolations of the global sales of illegal drugs on the lower bound, and estimates of the size of underground economies on the upper bound.
Wasserman’s low estimate of $600 billion (for illegal drugs only) in global money laundering is vastly higher than Congressman Roukema’s estimate of $30 billion in the United States. Roukema’s estimate would require laundering $1,000 every second to keep pace in America. Wasserman’s estimate would require laundering $20,000 every second globally.
Kenneth Rijock knows how to do it. He laundered hundreds of millions for the cocaine cartels before his arrest and conviction. He told Congress on June 23, 2000, “I was for 10 years a career money launderer for narcotics trafficking organizations who smuggled drugs through Florida and thereafter distributed them throughout the United States and Canada. It was my responsibility to ensure that the proceeds of narcotics crime made it safely through the world banking system and into the tax havens, whose offshore jurisdictions attracted dirty money by combining bank secrecy with a legal obscenity known as corporation secrecy. I was able to operate with virtual invincibility from law enforcement attack due to these laws. The tax havens are the most powerful ally drug traffickers have.”
Another ally, Rijock noted, is the fixed habits of law enforcement. “I can tell you from personal experience that narcotics traffickers and their money laundering cohorts exploit law enforcement’s seniority system. When all of your experienced senior agents are watching the Redskins game on Sunday, leaving more junior, inexperienced hands on duty during the infinite number of off days and legal holidays, the dope comes in and the money goes out right past the people least qualified to recognize what’s happening,” he told the House Committee on Government Reform.
Once overseas, life gets easier for the cash smuggler. The money is simply deposited in a foreign bank into the account of a real business or shell corporation, where it disappears into the ebb and flow of currencies. The account holder then can legally transfer the money by wire back to an American bank, and then draw against it at any ATM (automated teller machine). The dirty money is now clean.
Banks are cropping up in the oddest places. For example, the tiny Pacific island of Nauru—all eight square miles of it—is the world’s smallest independent republic. The CIA Factbook 2006 notes, “intensive phosphate mining during the past 90 years—mainly by a UK, Australia, and NZ consortium—has left the central 90% of Nauru a wasteland and threatens limited remaining land.”
Furthermore, Nauru is broke. “In anticipation of the exhaustion of Nauru’s phosphate deposits, substantial amounts of phosphate income were invested in trust funds to help cushion the transition and provide for Nauru’s economic future. As a result of heavy spending from the trust funds, the government faces virtual bankruptcy,” the CIA Factbook observes.
In the 1990s Nauru “lacked a basic set of anti–money laundering regulations, including the criminalization of money laundering, customer identification and a suspicious transaction reporting system. It had licensed approximately 400 offshore ‘banks,’ which were prohibited from taking deposits from the public and were poorly supervised. These banks were shell banks with no physical presence. Excessive secrecy prevented the disclosure of the relevant information,” according to the 1999–2000 report by the Financial Action Taskforce on Money Laundering of the OECD (Organization of Economic Cooperation and Development).
Wasserman wrote that Nauru “allowed people to set up banks for as little as $25,000 without even setting foot on the island. The nation has been accused of facilitating the laundering of $70 billion in Russian Mafia money through almost 450 banks based there (all registered to the same government post office box).”
Rijock was asked what happens to laundered money once it reaches an offshore bank. “What would happen is, let’s take $5 million sitting in a bank account in Nauru. The next day it goes to Taiwan; two days later, it’s in the account of a French mortgage company; three weeks later it ends up in a Panamanian corporation with bearer shares. It ends up being used to obtain a loan in a western European country, totally kosher,” he told the committee.
“And if money laundering institutions which are very well organized by now know that, we’re not talking about people from Miami with gold around their neck, sir. We’re talking about people with Ivy League law and MBA degrees who sit in some of the biggest cities in the United States and form overseas companies without so much as picking up a telephone. We’re talking about organizations that are so sophisticated that they almost defy description. And they’ve been in place now for 20 years, they’re getting better and better. And that’s why more money is moving,” said Rijock.
At a May 15, 1997 hearing before the House Committee on Banking and Financial Services, Edward Federico of the IRS’s Criminal Investigation Division said, “There’s no doubt that legitimate businesses are being utilized. The money itself has been cleaned up and is just part of the money flow.”
A lot has happened since Nauru opened its doors to the world’s money launderers. In 2000, the Financial Action Task Force of the OECD published a list of fifteen countries with wide-open banking laws. The next year it added eight more. They were called “non-cooperative countries and territories.” And the task force recommended a series of tough measures to force the twenty-three countries and territories to adopt anti–money laundering initiatives (for example, making money laundering a crime).
The effort is considered successful; in 2006, only one country remains on the list—the rogue state of Myanmar (ex-Burma). Nauru was taken off the list in 2005 after closing four hundred banks and passing appropriate legislation.
So the money launderers moved on to a new scam: the Black Market Peso Exchange (BMPE). The smugglers of Colombia and Mexico have a problem. Their vast incomes are in American dollars, but they need pesos to buy gasoline and racehorses and to bribe judges. Dollars won’t pay the payroll, buy the coca or cater their meals. This problem applies to all high-dollar smugglers, not just the dopers.
Instead of hauling around dollars by the ton, they turned to Latin America’s well-established system of currency exchange brokers. The BMPE started in the 1960s as a response to Central and South American nations’ complicated system of currency restrictions. A lively black market in currency exchange was developed. By tapping into it, smugglers don’t need to move their money physically across borders.
The deal works like this. Sam the smuggler in Bogotá has $3 million in Miami and wants pesos in Colombia. A bank would give him, for example, 200 pesos per dollar, if he could get the dollars to Colombia.
Instead Sam goes to the local Black Market Peso Exchange and cuts a deal with Moe the money-changer. Sam gets 160 pesos to the dollar from Moe’s Columbian bank account for his $3 million. Moe gets the $3 million in Miami.
Sam calls Miami and says, “Gather up the $3 million and go to the luggage store.” Three million in $20s will fill six full-size suitcases. Moe calls his man in Miami and says, “Six suitcases are waiting for you at the luggage store.” Moe’s guys pick up the dollars and start smurfing them into bank accounts.
Moe’s inventory of pesos is down (Sam has them now), and his dollar supply is up. Moe now looks for somebody needing dollars. Maybe it’s auto-store owner Carlos in Bogotá, who needs dollars to buy a shipment of carburetors from Detroit. Moe the money-changer can offer a good exchange rate, say 185 pesos to the dollar, because Moe got the dollars cheap. Carlos writes Moe a check in pesos, drawn on his legitimate bank account in Bogotá. Moe deposits the smurfed dollars in Carlos’s account in Miami to buy the carburetors and puts Carlos’s pesos in his Colombian account. Now Moe’s peso supply is replenished in Colombia and his dollar inventory is down in Miami. Meanwhile he’s made money on the difference, doing the buy-low-sell-high dance.
Carlos does not receive the market rate, but has an incentive to go to the Black Market Peso Exchange. If Carlos went to his Bogotá bank to change the money, the bank would demand identification, want to know why Carlos needed dollars, did he have the appropriate import license and will he be paying the customs and excise duties on the carburetors? The license is time-consuming to obtain, the customs and taxes are expensive and it is all a bother. So it’s easier, faster and cheaper for Carlos to visit Moe.
Everybody’s happy. Sam has pesos to run his cocaine cartel; Carlos has dollars to buy his carburetors; and Moe lives on the wide split, accumulating profits on both deals. That’s the simple version. It is propelled by Sam’s desire to dump his dollars, even at a steep loss.
It gets more complicated. What if Sam owns Carlos’s auto parts store? Or what if Moe wants to cut deals with multinational corporations, buying pesos with dollars or vice versa? Both circumstances are appropriate because the cocaine cartels diversified over the decades into scores of legitimate businesses, and multinational corporations are always looking for the best currency exchange rates.
The real world numbers show how profitable the BMPE can be. The money exchangers demand a 30 percent commission from the smugglers. They can pass a fraction of that savings to their dollar customers, making them quite attractive to very large businesses that are always looking to shave a percentage on currency transactions.
But should multinational corporations benefit from money laundered by the drug trade? McDonald says one American firm decided to abstain. “General Electric took very aggressive steps to ward off the black market money coming into its company from sales to Colombia. And I believe the figure is about 25 percent of sales that they lost. Now, I assure you that 25 percent fewer refrigerators or washers and dryers were not bought in Colombia, but they just went to other businesses,” he told Frontline. Other corporations took note of the drop in sales and declined to follow GE’s lead.
Other multinationals haven’t been so altruistic. At an October 22, 1997 hearing before the House Banking and Financial Services Committee’s General Oversight and Investigations Subcommittee, Chairman Spencer Bachus (R-AL) opened the proceedings by saying,
This form of money laundering is particularly harmful for a number of reasons. It provides a very safe and quick method for the drug cartels to obtain their illegal profits. With the use of the peso broker as a middleman, the cartels can obtain their profits almost immediately.
In economic terms, peso brokering permits the cartels to launder their money by piggybacking on world trade. From this perspective, however, black market peso brokering threatens the legitimacy of the world economy. In essence, black market peso brokering results in Fortune 500 U.S. companies being paid in drug dollars. We will hear today the names of certain U.S. companies that have had their exports paid with narco-dollars. This is not to indict these U.S. companies for selling their goods to legitimate businesses in Colombia and other countries. However, the reality is that when peso brokers are used to pay U.S. companies for their exports to Colombia and other countries, these U.S. companies, knowingly or not, are facilitating money laundering and providing an easy mechanism for the drug cartels to reap their profits.
Bachus then introduced the first witness, a woman named “Jane Doe.” She sat behind a screen, flanked by two beefy law enforcement agents. She then proceeded to name names. “As a money broker, I arranged payments to many large U.S. and international companies on behalf of Colombian importers. Some of these companies included Sony, Procter & Gamble, John Deere, Whirlpool, Ford, Kenworth, Johnny Walker, Swatch, Chorrera, Orleander Group, Orotex, Italian Telas, Commercial Colve, Allen Bradley, Jacobsen’s, J&B Importers, U.S. Gear Corp, Merrill Lynch, Cotextil, Industrias Ossa, Taiwan Hodaka Industrial Company, Seattle Bike Supply, Troy Lee Design, T. Gears, Dentsply, Reebok, Amcol International, Inc., and Midatlantic Purveyors. These companies were paid with U.S. currency generated by narcotics trafficking. They may not have been aware of the source of this money. However, they accepted payments from me without ever questioning who I was or the source of the money.”
On October 30, 2002, the European Union filed lawsuit against RJR Nabisco (and associated subsidiaries) in U.S. District Court alleging:
The RJR defendants have, at the highest corporate level, determined that it will be a part of their operating business plan to sell cigarettes to and through criminal organizations and to accept criminal proceeds in payment for cigarettes by secret and surreptitious means, which under United States law constitutes money laundering. The officers and directors of the RJR defendants facilitated this overarching money-laundering scheme by restructuring the corporate structure of the RJR defendants, for example, by establishing subsidiaries in locations known for bank secrecy such as Switzerland to direct and implement their money-laundering schemes and to avoid detection by U.S. and European law enforcement.
This overarching scheme to establish a corporate structure and business plan to sell cigarettes to criminals and to launder criminal proceeds was implemented through many subsidiary schemes across the European Community.
The suit ended in the lap of the U.S. Supreme Court, which instructed the appeals court to reconsider its ruling against the European Union.
While legislation has been introduced in Congress since 1998 to provide sanctions against companies playing in the Black Market Peso Exchange, nothing has passed since the bulk cash smuggling bill was rolled into the Patriot Act of 2001.
Convicted money launderer Rijock wonders why: “When I used to launder cash in the Caribbean, and I would sit out there on the porch in St. Martin and drink a cup of coffee and watch the sun come up, I wondered, one of these days, am I ever going to see an American aircraft carrier out there, and are the Marines going to come ashore, arrest all the bankers, close down the banks, take the records, take them to Miami, and charge all those people in Federal court with money laundering? Well, that’s never happened. Because nobody’s decided that it’s important enough.”
In the 1980s, the majority of paper currency in the United States was contaminated with cocaine powder. By the turn of the century, multinational corporations were tainted with smugglers’ profits.