The International War on Drugs - Money Laundering
bank financial act funds
Money laundering is a special aspect of the war on drugs. Simply put, money laundering is the attempt to make funds earned illegally appear as if they were earned legally. The cash that drug traffickers collect, usually in small-denomination bills (five, tens, and twenties), must be deposited in banks so that the funds can be transferred, paid out again, spent, or invested. Traffickers cannot simply haul their cash to banks by the truckload for deposit without arousing suspicion. Money launderers hide the fact that funds deposited in banks have been illegitimately obtained. The U.S. attorney general defines money laundering as "all activities designed to conceal the existence, nature, and final disposition of funds gained through illicit activities." The crime is codified under Title 18 of the U.S. Code, Section 1956. Money laundering can range from things as simple as mailing a packet of money out of the country or as complex as a series of international bank transactions involving speed-of light transfer of money by wire.
Before 1986, the Bank Secrecy Act of 1970 (PL 91-508) served as the main tool against money laundering. The act required financial institutions to file a currency transaction report (CTR) on all cash deposits of more than $10,000. Institutions also had to file reports on international transactions exceeding $10,000. Launderers avoided these regulations by keeping each transaction under $10,000 (known as "smurfing"). They would, for instance, split a $100,000 deposit into twelve smaller deposits. Smurfing is now illegal as well. Until the early 1980s, bank compliance with the law was lax and penalties were lenient. As a result of the Eduardo Orozco case (Orozco laundered approximately $151 million in drug profits through eighteen New York banks), compliance became stricter.
The Money Laundering Control Act of 1986 (PL 99-570) made laundering a federal crime. The act prohibits engaging in financial transactions or transfers of funds or property derived from "specified unlawful activity" and engaging in monetary transactions in excess of $10,000 with property derived from proceeds of "specified unlawful activity." In addition, the act prohibits the structuring of currency transactions to evade the CTR reporting requirement.
Increasingly, the government has been monitoring all transactions of those known or suspected of money laundering or drug trafficking—and, since 9/11, those suspected of terrorist linkages. U.S. banks today must have "know your customer" policies. They must verify the business of a new account holder and monitor the activity of all business customers so that activities inconsistent with a client's type of business can be spotted.
The Mechanics of Laundering
Drug dealing creates a lot of cash. Drug users don't like to pay by check or credit card (even if they could), lest their habits become known. To hide the illegitimate origin of drug funds, dealers pass them through legitimate businesses, which pretend, for a cut of the profits, that these funds were earned legitimately. Dealers also deposit money in cooperating offshore banks, or smuggle cash out of the country. Once drug cash has been deposited without detection in the legitimate banking system, it can be used freely. While the actual amount of drug money laundered in the United States is unknown, federal law enforcement officials across agencies estimated in 2003 that drug traffickers laundered between $100 billion and $300 billion, much of it through legal financial institutions.
A preliminary step in laundering is to convert masses of small bills into larger bills by exchanging them at a bank, post office, or check cashing service. The larger bills are then smuggled out of the country or deposited in a domestic financial institution. The usual route is to deposit funds into foreign accounts. Getting the money into the financial system is called the placement stage. Laundered money is most vulnerable at this stage. Regulations and reporting requirements are designed to detect unusual deposits.
After the funds are in the financial system, they are moved from institution to institution to hide their source and ownership. This is known as the layering stage. To circumvent the reporting requirements, numerous deposits just under the $10,000 cash transaction threshold may be made. The high volume of wire transfers and the speed with which they are accomplished make it difficult to distinguish an illegal transfer from a legal one except by patterns of activity such as frequent transfers when made by or at the behest of unlikely individuals. A typical major bank in New York will handle about forty thousand transfers every day, moving about $3 billion.
The third stage involves the investment of illegal funds into legitimate businesses, known as the integration stage. It must be possible for drug lords to extract this money again as "profits" dividends, commissions, bonuses, salaries, or in the form of property. Drug organizations create and maintain dummy or "front" corporations for this purpose. Such "fronts" can be art dealerships, precious metal stores, casinos, jewelry shops, real estate investment companies, car and boat dealerships, or banking institutions—any type of business that can easily justify the pay-out of large amounts of money.
Targeting the consolidated earnings of drug kingpins is the most effective way to reach the top layers or at least to disrupt their operations. Drug lords are well insulated from street-level dealers but must keep close to their money. Laundering invariably leaves a paper/electronic trail of transactions that authorities can trace, although such tracing may involve massive investigative effort.
Operation Casablanca, completed in 1998 by the U.S. Treasury and the U.S. Department of Justice, was such an operation, dubbed by Treasury "the largest drug money laundering case in U.S. history" ("Operation Casablanca Continues Its Sweep," Press Release, U.S. Department of the Treasury, May 20, 1998, http://www.treas.gov/press/releases/rr2467.htm). The indictment charged Mexican bank officials and Venezuelan bankers. Several American banks, including Citibank and Bank of America, testified or were cited for failure to supervise their own operations. The international ring was linked to the Colombian Cali cartel. The operation seized more than $100 million in domestic bank accounts and cash.
Operation Casablanca resulted in more than 160 arrests, including those of dozens of Mexican and Venezuelan bankers. In May 1998, forty-four individuals were arrested in the final takedown. Of these, forty-one either pled guilty or were convicted. In addition, two Mexican banks pled guilty to criminal money laundering charges, and a third forfeited $12 million.
Money Laundering in the Post-9/11 Era
The September 2001 terrorist attacks on the United States produced changes in domestic and international efforts to stop money laundering, making it more difficult for drug traffickers to operate. As noted earlier, U.S. government policy now links drug trafficking and terrorism. The new international rigor came from the fact that terrorists also move money around and must hide its origins. The State Department's INL notes one significant difference between terrorist and drug-related money laundering ("Money Laundering and Financial Crimes," International Narcotics Control Strategy Report—2002, Washington, DC, March 2003, http://www.state.gov/g/inl/rls/nrcrpt/2002/html/17952.htm). It is that the amounts of money terrorists need to funnel to their cells are relatively small. The 9/11 attack had estimated funding of $500,000—mere pocket change in the drug world. The implication is that techniques for detecting terrorist money movements must be capable of pinpointing small transactions.
USA PATRIOT ACT.
The Patriot Act, passed in October 2001, revised provisions of the Bank Secrecy Act and modified the criminal code. The INL, in the 2002 International Narcotics Control Strategy Report cited above, sums up the changes as follows:
On the financial side, the USA PATRIOT Act expands the scope of pre-existing forfeiture laws; broadens compliance, reporting and record keeping requirements for certain types of financial institutions; encourages information sharing mechanisms between the government and the private sector; and restricts the ability of shell banks to do business in the United States. The USA PATRIOT Act also amends existing law to make it easier to pursue federal prosecutions of money remitters who fail to comply with state licensing or registration requirements.
A "shell" bank is a bank that does not have a physical presence in the country. Regulations implementing the Patriot Act did not issue until 2002; the more demanding provisions of the act are thus very new.
Statistical Tracking in the United States
Under the Bank Secrecy Act, financial institutions are required to file Suspicious Activity Reports (SARs) with the U.S. Department of the Treasury. The SARs reporting system provides a statistical view over time of activities that banks and other financial institutions have felt were of a suspicious nature and the proportion of these judged to be connected with money laundering. (See Table 7.4.)
Based on Treasury data, activities that looked like money laundering are the most reported suspicious activities—and have been increasing. In 1997 (in the months following April 1), 35,625 cases, representing 40.1% of all cases, were reported under the money laundering category. In the first half alone of 2003, 72,462 SARs filed were connected with money laundering suspicions, 47% of all cases.
|Commercial loan fraud||960||905||1,080||1,320||1,348||1,879||934|
|Consumer loan fraud||2,048||2,183||2,548||3,432||4,143||4,435||2,271|
|Counterfeit credit/debit card||387||182||351||664||1,100||1,246||659|
|Counterfeit instrument (other)||294||263||320||474||769||791||615|
|Credit card fraud||5,075||4,377||4,936||6,275||8,393||12,780||6,037|
|Debit card fraud||612||565||721||1,210||1,437||3,741||4,575|
|Misuse of position or self dealing||1,532||1,640||2,064||2,186||2,325||2,763||1,564|
|Mortgage loan fraud||1,720||2,269||2,934||3,515||4,696||5,387||3,649|
|Wire transfer fraud||509||593||771||972||1,527||4,747||4,317|
|*The violation of Computer Intrusion was added to Form TDF 90-22.47 in June 2000. Statistics date from this period.|
The following is INL's listing of methods used by drug traffickers for decades to hide the sources of their money—the kinds of activities that result in the filing of SARs:
- Financial activity inconsistent with the stated purpose of the business;
- Financial activity not commensurate with stated occupation;
- Use of multiple accounts at a single bank for no apparent legitimate purpose;
- Importation of high dollar currency and traveler's checks not commensurate with stated occupation;
- Significant and even dollar deposits to personal accounts over a short period;
- Structuring of deposits at multiple bank branches to avoid Bank Secrecy Act requirements;
- Refusal by any party conducting transactions to provide identification;
- Apparent use of personal account for business purposes;
- Abrupt change in account activity;
- Use of multiple personal and business accounts to collect and then funnel funds to a small number of foreign beneficiaries;
- Deposits followed within a short period of time by wire transfers of funds;
- Deposits of a combination of monetary instruments atypical of legitimate business activity (business checks, payroll checks, and social security checks); and
- Movement of funds through countries that are on the FATF list of NCCTs.
Money laundering is an international activity that can be fought only with international cooperation. As more countries have tightened their controls and shared information, narcotics dealers have become more sophisticated in their techniques. International criminals are not tied to geographic boundaries and can operate in jurisdictions that permit, or even encourage, money laundering in their territories. In addition, cyberbanking and digital cash are two methods used by money launderers to keep ahead of legislation.
The 1988 Vienna Convention made the laundering of money an international crime. The Financial Action Task Force on Money Laundering (FATF) is a multilateral governmental organization founded in 1989 with thirty-one member nations from around the world that extended the Vienna Convention to include the proceeds from all crimes. The INL describes the task force as "the flagship of international anti-money laundering/anti-terrorist financing efforts." FATF conducts what is known as the Non-Cooperative Countries and Territories (NCCT) process, under which FATF members can apply sanctions against countries that have failed to pass anti-money laundering legislation and to implement effective enforcement efforts. Following 9/11, FATF imposed sanctions on Nauru (an island in the South Pacific) and Ukraine, which had been on the NCCT list for a long time. In response, and presumably in order to avoid similar sanctions, Dominica, Hungary, Israel, Lebanon, the Marshall Islands, Niue (also in the South Pacific), Russia, and St. Kitts and Nevis introduced changes in their money laundering processes so that they were removed form the NCCT list in 2002. Nigeria had made changes in its legislation earlier at FATF's instigation. The Ukraine responded to sanctions by changing its laws so that it was also removed from the list in 2003.