Special Agent Harold D. Wankel
DEA Chief of Operations
Drug Enforcement Administration
United States Department of Justice
House Banking and Financial Committee
Money Laundering by Drug Trafficking Organizations
Rayburn House Office Building
February 28, 1996
Note: This document may not reflect changes made in actual delivery.
Mr. Chairman, Members of the Committee: I'm pleased to appear before you today to discuss the threat organized criminal groups pose to the international banking system. Perhaps the most notorious and dangerous of these criminals are international drug traffickers, who launder their illegal drug money through a variety of financial systems, including the legitimate banking industry.
The Drug Trade: An International Business
As you know, the laundering of illegal drug profits is an integral part of drug trafficking, as important and essential to drug trafficking organizations as the distribution of the illegal drugs themselves.
Drug organizations are truly international businesses, and like any business, these organizations are fueled and motivated by huge profits that are their lifeblood.
Drug trafficking is a multibillion dollar cash business, and drug money is essential to these enterprises. Without it, they cannot finance the manufacturing, the transportation and the smuggling, the distribution, the murder and the intimidation that are essential to their illegal trade. Drug money laundering organizations are established to ensure the cash flow to these illegal businesses.
Profits from the sale of illegal drugs are recycled through laundered investments, which take place across many borders--and often involve international financial institutions--banks and money exchange houses. With today's sophisticated banking techniques, including the electronic transfer of money, once the money enters into the banking system, it can be transferred among dozens of banks within a 24-hour period, making the paper trail either impossible or extremely time-consuming to follow. Globalization of the drug trade has necessitated an expansion and sophistication of the laundering of illegal drug profits.
As the international drug markets have been expanded across all continents and into virtually every nation, so too have methods used to launder--or make legitimate--illegal profits of the global drug trade. Methods of laundering drug money vary by country and region of the world driven by a number of factors, including the sophistication of banking and financial centers, the existence of underground banking systems that operate largely along ethnic lines, and strength of enforcement pressure.
This morning, I'd like to give you an idea of the magnitude of the problems law enforcement officers face with international drug money laundering and the progress we've made with our international partners toward putting a choke hold on the flow of profits back to the illegal drug trafficking enterprises. I will concentrate my discussion on those countries and areas of the world where law enforcement is seeing the majority of drug money laundering activities, beginning with the epicenter of the cocaine trade, Colombia.
The Cali mafia is still one of the primary recipients of drug proceeds from the United States. Until just recently, they were responsible for 80 percent of the cocaine sold on the streets of the United States. Colombian economists conservatively estimate that each year $4.5 billion is repatriated to Colombia by drug traffickers. The arrests of the Cali leaders in 1995 and the emergence of crime syndicates from Mexico have impacted somewhat the amount of U.S. dollars flowing back to Cali, but the long-term impact has not yet been determined.
These dollars are controlled by a cadre of well-educated, skilled accountants, who follow the rules of business drawn up by Cali mafia leaders to literally keep track of every dollar in their worldwide trafficking network. The city of Cali stands as a monument to the billions of narco-dollars the Cali mafia has returned to Colombia. Majestic, modem skyscrapers fill the skyline of the city--many of which remain unoccupied--none of which has outstanding mortgages.
The alliance of the Cali mafia with the trafficking organizations in Mexico has created a highly effective method of repatriating Cali profits. Money laundering has evolved from the late 1970s and early 1980s, when traffickers simply showed up at U.S. banks with suitcases full of money, deposited it in accounts, and then had it transferred either back to Colombia or to safe havens in Europe and offshore banks.
After legislation in the U.S. forced the reporting of deposits over $10,000, "structuring" became the method of choice for many money launderers. One form of structuring is "smurfing," in which individuals recruited by the Colombians run from bank to bank and deposit just under $10,000 in cash. An organization of 10 smurfs, each hitting 10 banks a day, can convert about $1 million in cash each day into a small stack of cashier checks of $9,000 to $9,900 each, which is much easier to get out of the United States.
This system was cumbersome, however, and not without substantial risk. As the Cali mafia began to monopolize the cocaine trade in the 1990s and their profits began to soar, they turned to bulk transfers of cash in commercial shipments.
To solve some of their money transfer problems, Colombian traffickers bought a fleet of large planes, such as Boeing 727s, Caravelles, and the Turboprop Lockheed Electras, gutted them, and used them to transport multiton loads of cocaine to Mexico, Canada, Portugal and West Africa for sale in the United States and Europe. Once they offloaded the cocaine, they reloaded the planes with U.S. cash, sometimes as much as $20 to $30 million in drug profits, to return to Colombia.
Bulk shipments of cash, whether in cargo planes or commercial shipments, continue to be the primary method of smuggling cash; however, another increasingly popular method of laundering drug proceeds is "dollar discounting." This method involves a broker approaching a legitimate businessman in Colombia that needs U.S. dollars to buy goods in the United States. The money broker simply sells the drug proceeds, which are already in the United States, to the businessman at a discounted rate up to 20 percent. The businessman then deposits the equivalent sum in pesos in the trafficker's bank account in Colombia and his or her agent in the U.S. picks up the U.S. dollars. The discount rate of 20 percent is a dramatic increase in the cost of doing business for Cali money launderers. Previously, Colombian brokers paid between 6 and 10 percent to move funds into Colombian accounts.
We've also seen an increase in the shipment of large quantities of postal money orders. The money orders, with names left blank, are sent directly to Colombia and Panama. There, the funds are sold to "casas de cambio"--or money changing houses--for cash that will be deposited into the traffickers' accounts. The money orders are then sold and resold through the networks of casas. They are finally redeemed at banks outside of Colombia. When the U.S. Post Office began to detect this money laundering pattern and began to seize these funds, the money movers began to send the money orders back to the United States to be deposited into bank accounts.
More sophisticated alternatives to the banking system have also surfaced, such as the laundering of drug money through import-export businesses and other front companies. Elaborate import-export schemes are being used to make drug proceeds appear as legitimate income. Falsified export documents, bills of lading, and invoices for goods being shipped out of Colombia to the United States are used to justify large payments sent to Colombia.
The use of payable-through-accounts held in U.S. banks by foreign banks makes it difficult for law enforcement to trace the money. These accounts can have hundreds of sub-account holders in foreign countries who have complete access to these accounts but who are unknown to the U.S. bank and maybe even to the foreign bank.
The goal of all these schemes is to get the money into the banking system unchallenged. Last year, Colombia passed a law requiring Colombian banks to report large currency transactions; however, once in the system, the money can be wire transferred into a labyrinth of worldwide accounts at a moment's notice.
The arrest and continued incarceration of major Cali drug lords have disrupted the financial safe haven status Colombian traffickers have enjoyed at home for many years. The enforcement of currency requirements and anti-corruption police efforts have also placed drug assets at risk in Colombia.
The international net is continually drawn tighter, limiting opportunities for Colombian traffickers to conceal their assets with a minimum of risk. For example, organized crime is believed to control 20 percent of the commercial banks in Russia, however, the lack of stability in the country, as well as no long-standing basis of trust, has precluded major investment in that alternative. Recent seizures and forfeitures in Europe, particularly the $142 million seizure from Colombian trafficker Julio Nasser-David in Switzerland has caused considerable concern on the part of Colombian drug lords about putting their illegal money into European banks.
The key to our future success in Colombia and Mexico, as well as the Far East, is promoting strong money laundering laws that are strictly enforced in all countries, and maintaining strong ties with foreign officers in the financial centers around the world. Under Presidential Directive Decision (PDD) 42, we are addressing those countries that are the most egregious in offering safe havens to traffickers' illegal money.
On October 21, 1995, President Clinton used the authority given him by the International Emergency Economic Powers Act to invoke economic sanctions against 97 companies and individuals who are involved with four members of the Cali drug mafia. It is now illegal for any U.S. company to trade with these businesses or individuals. This is another tool we can use against the drug traffickers and their illegal wealth, and we are encouraged by the positive results we are seeing.
As drug organizations from Mexico become more powerful in the international drug trade, so too does their influence in money laundering. Mexico returns more surplus currency to the United States than any other country. We are now seeing millions of dollars laundered by Mexican organizations. The primary reason for this is that the Colombians are now paying the Mexican transportation organizations in cocaine. Considering 80 percent of the cocaine smuggled into the United States comes through Mexico, the Mexican Federation is indeed a major player in the drug trade and must find ways to launder and conceal the profits from their cocaine sales.
Because of the difficulty of laundering money through traditional financial institutions and the proximity of Mexico to the United States, Mexican drug traffickers simply smuggle bulk shipments of cash across the U.S.-Mexico border. In Mexico, between April and October 1995, Mexican authorities made three seizures of U.S. currency which totaled nearly $20 million. Last April, $6.2 million was discovered inside in a shipment of air conditioners at the Mexico City Airport. The following month, Mexican authorities seized $1.5 million from a Colombian money launderer at the Mexico City Airport. And in October, Mexican officials found $12 million inside suitcases taken from a private plane that is believed to belong the Carrillo-Fuentes drug organization.
Each year, over 500,000 bank drafts drawn on Mexican banks enter the U.S. One bank in Arizona determined that the average Mexican bank draft was valued at $65,000, but that it was not unusual to clear drafts in excess of $200,000 to $400,000. Mexican bank drafts which were not subject to U.S. reporting requirements now must be reported and the implementing regulations are being written. Previously, this was a significant method of reintroducing drug profits back into the United States.
Although illicit enrichment is illegal and money laundering is a fiscal offense in Mexico, money laundering is still prevalent and not a criminal act. Banks are also required to keep records of transactions and make them available to law enforcement authorities upon request. However, DEA sources report that many Mexican traffickers have purchased large shares of banks and placed members on boards of directors. As a result, many banks keep two sets of books and bank examiners are paid off by corrupt bank officials. In addition, much of the money that is going back into Mexico is being invested in the infrastructure of the Mexican economy and is not subject to seizure. Money is also invested in U.S. institutions, as well as financial institutions throughout the world.
As a fiscal offense, money laundering charges provide for fines and sentences of up to 5 years. In Mexico, the money laundering law targets any illegal act, including tax evasion, illicit enrichment, corruption, as well as drug trafficking.
In May 1995, Mexican Attorney General Antonio Lozano announced that his office would be drafting a new money laundering law aimed specifically at Mexico's major drug trafficking organizations. The bill, which is to be presented before Congress sometime in 1996, criminalizes money laundering under the penal code.
Currency Transaction Reporting (CTR) requirements unfortunately are not part of the proposed legislation, however, the pending bill attempts to fill some of the loopholes of the existing law. For example, it provides for penalties for banks who fail to report suspicious transactions. The bill would also reverse the burden of proof in asset forfeitures related to drug cases. As in the United States, the defendant would have to prove that his or her possessions were derived from legitimate sources. The primary opposition to this proposed legislation comes from the banks and financial institutions, as well as the close-knit community within Mexico that has controlled the vast majority of business in Mexico for years.
Unlike cocaine organizations, which are largely Latin-based and concentrated in the Western Hemisphere, heroin traffickers are more diverse and they operate from bases all over the world, including Southeast Asia, Southwest Asia, the Middle East and now Colombia.
International law enforcement efforts are frustrated by the fact that opium cultivation and heroin manufacturing primarily takes place in countries with extreme political turmoil and developing governments. Because of this, our nations have limited access and influence in the key heroin source countries of Southeast and Southwest Asia.
Money laundering in this area of the world is conducted through a complicated maze of trusted confidantes who have done business together for generations. These underground banking systems go back years and years to a time when family members worked away from home and needed to get their wages back to their families in other provinces. That same system exists today and is used to launder millions of dollars in drug money for Southeast Asian traffickers.
I'll confine my remarks to the most active of the money laundering countries in Southeast Asia-Singapore, Thailand, and Hong Kong.
Although there is neither cultivation nor processing of drugs in Singapore, it is an important financial center for narcotics-related proceeds. Along with Hong Kong, Singapore plays a key role in the transfer and concealment of proceeds from the sale of Southeast Asian heroin.
While Singapore is a not a signatory to the Vienna Convention, it is a member of the Financial Action Task Force (FATF) and continues to maintain a tough stance towards drug trafficking. In 1993, Singapore passed The Drug Trafficking (Confiscation of Benefits) Act, which provides for 7 years incarceration and a fine of $100,000.
A recent case involving the RCMP and the DEA demonstrates their commitment. In what has been called Singapore's biggest money laundering case, between 1992 and 1995, law enforcement authorities seized $5.4 million in Singapore currency, equal to $3.8 million in U.S. dollars. Officials in Singapore believe that between 1989 and 1992 a drug trafficking group funneled approximately $100 million in U.S. currency through one underground bank in Singapore to Bahrain and ultimately to the organization's worldwide bank accounts. Singapore's Commercial Affairs Department has frozen the equivalent of $20 million U.S. dollars from previously arrested and convicted members of this hashish and marijuana organization.
Thailand has an extensive and efficient network of banks and financial institutions which are used by drug traffickers to move and hide their proceeds throughout Asia.
Thailand had a number of significant accomplishments in the past year in terms of fighting drug-related money laundering. Last year, approximately 138 investigations were initiated under 'Thailands asset seizure law, and last fall, the first criminal convictions and forfeiture actions were handed down. As of mid-December, over $9 million had been frozen compared to $1 million just one year ago.
Thailand has enacted narcotics conspiracy and asset forfeiture laws. The asset forfeiture law stipulates that the suspects are required to prove their assets have been acquired through legal means.
Thailand has taken major steps to become a major financial center in Asia. The country has established offshore banking and has issued a number of licenses. Those banks can take deposits in foreign currencies and borrow in foreign currencies from local and foreign institutions.
Thailand has proposed a new money laundering law which addresses only drug proceeds. The law will require recording and reporting of significant and suspicious transactions, as well as provisions that protect bank employees who comply with the law from retribution.
Real estate continues to be a widely used means for investing drug proceeds. Drug traffickers have also invested in companies involved in rubber processing, seafood packing, food products, import-export businesses hotels, and jewelry shops. Underground banking uses these businesses to send money around the world.
With its flexible corporate laws, sophisticated banking industry and currency and exchange controls, Hong Kong is a prime location for the laundering of illicit proceeds by narcotics traffickers. Hong Kong, however, has implemented asset seizure, money laundering and organized crime legislation. The law requires that bankers notify authorities of suspicious transactions. After bankers received training about what to look for, the reporting of suspicious transactions rose by 288 percent in one year, however, no existing legislation regulates the extensive network of underground bankers operating throughout the country.
Other legislation allows the United States to request civil forfeiture of identified proceeds of drug trafficking. Another law allows the Hong Kong government to identify and seize proceeds generated from any crime, not just those linked to drug trafficking.
Money laundering is a criminal offense, and the law allows the government to trace, freeze and confiscate proceeds from convicted drug traffickers. In 1995, Hong Kong concluded its first successful money laundering prosecutions. Two members of a Chinese Triad were convicted of laundering approximately $56 million of heroin trafficking proceeds.
We don't know what the impact on drug trafficking and money laundering will be when Hong Kong reverts to the People's Republic of China (PRC) in 1997.
Nigeria is a home base for major trafficking groups who smuggle Southwest Asian and Southeast Asian heroin into the United States and Europe. The Nigerians are using South Africa as transshipment point as well.
Although Nigeria is neither a significant regional or international financial center, nor an important tax haven or offshore banking center, drug traffickers have laundered money in Nigerian financial institutions. Drug profits are being pumped into the economy, as well as being laundered for reuse in other countries.
The Nigerians use a variety of methods, including bulk smuggling in electronic car traps, refrigerators and other merchandise which is later sold; wire transfers to Hong Kong and Thailand; couriers; and the purchase of "junk commodities" that are later sold for high prices.
Foreign currency accounts in Nigerian financial institutions are not prohibited, nor do banks have to disclose the source of the funds.
Nigerian law prohibits attempts to hide drug proceeds as well as the transport of drug profits internationally. Money laundering is also illegal and carries prison terms of 15 to 25 years.
Nigerian heroin traffickers appear to be capitalizing on the vulnerability of South African borders to create a new drug pipeline for heroin coming out of Southwest Asia destined for the United States. Nigerian criminal groups with histories of drug running are immigrating into South Africa and using that country as a staging area for smuggling heroin into the United States. The DEA believes that South Africa may also be targeted by drug lords from Brazil and Colombia as a potential market for cocaine and other drugs.
Nigerians are involved in smuggling cocaine into Europe and distributing it to middlemen who sell it in South Africa. According to INTERPOL, an increasing number of South Africans are being arrested throughout Europe and Africa for drug offenses. We should anticipate that South Africa will be used by money launderers, as well.
There is minimal reporting regarding criminal groups involved in drug money laundering native to or based in the Middle East, in such countries as Syria, Jordan, Saudi Arabia, Qutar, Bahrain, Kuwait, Iran, Iraq, Cyprus, United Arab Emirates, Yemen, or Oman. However, countries such as Cyprus, Bahrain, and the United Arab Non-indigenous ethnic groups take advantage of offshore banking centers to launder drug proceeds.
Over the past several years there has been an increase in drug trafficking by organized crime elements in Russia. The country has emerged as a transit route for heroin from Southwest and Southeast Asia to Europe and the United States, as well as for cocaine from South America to Europe. There is an increased threat of international drug money laundering by criminals elements in Russia as well as by criminal elements among Russian emigres located in such areas as Europe and the United States.
The enormous amount of money associated with the drug trade has attracted Russian organized crime elements who now are involved in all aspects of the opium and hashish industries, including cultivation, production, distribution, and money laundering operations. Criminal groups in Russia are exploiting the open access to the West and the lack of regulations in the banking, financial and commercial sectors of their country.
The lack of regulatory controls and legislation inhibits Russian Government efforts to target drug money laundering operations. Russian officials speculate that criminals have taken control of some banks and are laundering proceeds from a wide variety of criminal activities, including drugs. Some experts estimate that 25 percent of Moscow's commercial banks are controlled by Organized Crime, and there is speculation that Colombian cocaine traffickers and Sicilian mafia may be using Russian banks to launder funds.
Mr. Chairman, each year criminal drug organizations accumulate war chests of billions of dollars from the sale of drugs in the United States. This money equates to power, and the ability to produce more illegal drugs, which are sold in our country--and countries around the world.
Over the years, one of the things we have learned is the power of financial investigations. Drugs are a cash business and drug traffickers must find ways to make their vast wealth appear legitimate--and money laundering is the only way they can do that. The drug trade is a vicious cycle, and by attacking the financial base of these organizations, we can have a direct impact on their ability to do business.
We've seen the potential of financial investigations in two recent global law enforcement operations to disrupt the financial operations of the Colombian cocaine cartels--in Operation Green Ice in 1992 and Operation Dinero in 1994.
In Operation Green Ice, law enforcement from Italy, Colombia, the United Kingdom, Canada, Spain, Costa Rica, the Cayman Islands, and the United States cooperated together to expose the financial infrastructure of the Cali mafia. During the first phase of Operation Green Ice, over $50 million in cash and property were seized and almost 200 people were arrested worldwide, including seven of Cali's top money managers. In addition, valuable information was obtained when we gained access to financial books and records, as well as computer hard drives and discs containing financial transactions and bank account information. During the second phase of Green lce, nearly 14, 000 pounds of cocaine, 16 pounds of heroin, almost $16 million in cash were seized, and over 40 people were arrested.
During Operation Dinero--a two-and-a-half year undercover investigation involving the DEA and the IRS, as well as law enforcement and police organizations in Italy, Spain, Canada, and the United Kingdom--we penetrated the drug money laundering networks and followed the money trails that led us to the top echelons of the Cali cocaine organizations.
Through this investigation we further established direct links among the criminal organizations of the Italian Mafia and the Colombian cocaine mafia. This was an historical operation also because it was the first time a law enforcement agency established a private bank--operated by undercover agents--as an investigative tool to gain insight into the seamy netherworld of drug money laundering.
The results of Operation Dinero made it an overwhelming success. Over $52 million and 9 tons of cocaine were seized, and 88 people were arrested worldwide. This was cocaine that did not end up on the streets of our cities. This is money that will not be used to further the production and distribution of more illegal drugs. And, these are criminals who will not continue to pursue the deadly cycle of drug-related crime and violence.
But the major result of both Operations Green Ice and Dinero was the message it sent to the drug mafias-that the number of safe havens for their drug money is quickly dwindling. Law enforcement agencies will continue to use financial investigations like these two highly successful operations against traffickers and money launderers.
As is the case with all crime, money is the motivating factor. For enforcement to be effective, we must attack the money of these multibillion dollar drug enterprises. We must continue to work with--and strengthen--our international partnerships, and maintain strong ties with our counterparts in the financial centers of the world. We must continue to urge all countries to ratify the U.N. Convention and to pass more effective money laundering and forfeiture laws. Above all, we must continue to identify the points where the money is most vulnerable and identify what we can do to separate traffickers from their ill-gotten gains.
Mr. Chairman and Members of the Committee, that concludes my
remarks. I'll now be happy to answer any questions you may have.