July 24, 1997
Mr. Chairman, thank you for the opportunity to testify before this Committee today. I was asked to testify before this Committee because of the Committee's concern about the increase in the national and world wide narcotics trafficking and associated money laundering. My association with this Committee goes back to before 1986 when this Committee worked hard to draft and pass the Money Laundering Control Act of 1986 now codified as Title 18 United States Code Sections 1956 and 1957. As that time, I was the Chief of Narcotic and Dangerous Drug Section of the Criminal Division of the Department of Justice and was charged with the responsibility of coordinating all money laundering cases in United States Courts. It is more than unfortunate that the situation regarding the drug trade, criminal money laundering and the United States national security has grown more serious in the past eleven (11) years. I intend to share the reason for my concerns later in this testimony.
To begin with, however, it might be beneficial to discuss the typology of money laundering and the domestic and international drug trade and the impact they have on the United States. As you know, insomuch as this Committee has been the traditional repository of information concerning sophisticated money laundering techniques and enforcement efforts, there have been two (2) types of money laundering usually encountered by law enforcement. The first type of money laundering which is the traditional money laundering are those efforts by domestic United States criminals to hide the source and origin of their wealth. Traditional money laundering has focused on creating methods for making expenditures here in the United States to support the lifestyle of the domestic criminals appear to be from legitimate or at least undetectable sources. Most often, traditional money laundering involved the use of networks of domestic accountants or lawyers who for the benefit of the domestic criminal open off shore corporate accounts in bank secrecy locations into which they would deposit the criminal's money. After the criminal's money was deposited in a off shore location under the name of a corporation, the shareholders of which are anonymous, then the violator felt free to repatriate that money to the United States often alleging that the money was received by him as the proceeds of a loan to him or to his United States business entities from the foreign corporation. Thereafter, the United States criminal not only had the benefit of anonymity but also was not required to declare the proceeds of the loan as income and could, in fact, take a tax deduction for the interest which he paid on the loan that he never had after the receipt of monies which were his to begin with.
The second form of money laundering which we have been encountering and investigating since the early 1980s is the movement of the gross proceeds of narcotics trafficking in the United States to points outside of the United States. This laundering is for the benefit of the trans-national cartels and the cartel leaders who reside outside of the United States and require that money for their purposes be moved out of the United States and in a form usable by them. As this Committee is well aware, the drug trade in the United States generates multi-billions of dollars in gross proceeds annually. A substantial portion, some estimate as high as thirty (30%) percent, of those gross proceeds are the property of trans-national cartels who are responsible for the cultivation, production, importation and wholesale distribution of much of the narcotics within the United States. Those trans-national criminal organizations are big international businesses. Like any multi-national business, they have complex financial needs. These complex financial needs are not satisfied by the accumulation of substantial amounts of street dollars in the United States. After a cocaine importer from Colombia successfully brings in a crop of cocoa leaves, he converts that crop to cocaine base. Next, he imports it to Colombia where he further converts the base to cocaine hydrochloride. Next, he smuggles it into the United States where his subordinates transport it in wholesale volumes to distribution points through the country and sell it largely on consignment to domestic traffickers who subsequently pay for their shipments in cash. Payment is usually in twenty ($20.00) dollar bills. The cocaine baron then has mountains of United States currency in small denominations accumulated here in the United States by his employees. The cocaine baron has sophisticated needs for Deutsche Marks to purchase acetone to be shipped out of Bremen for his conversion laboratories. He needs Inti to pay camposinos in Peru, and he needs untraceable dollar instruments to purchase aircraft in the United States. For this reason, he relies upon the professional international money launderer who, for six (6%) percent or more, will transform mountains of United States currency in small bills into wire transfers of Pesos into the accounts of the drug baron in Colombia.
Once a professional trans-national money launderer has possession of the currency in the United States, this Committee has seen the hundreds of ways used by the money launderer to transport, conceal, and sell this money to willing or unwilling customers who need the dollar instruments and are willing to give the money launderer the Pesos the money launderer needs to repay the drug baron. For many years, we saw the money launderers using United States banks with impunity. Relying on the innocence, greed, or corruptibility of United States financial institutions, the money launderers were transporting suitcases, shopping bags, and cardboard boxes full of money through the front doors of the bank. They were standing in line to deposit the money into United States accounts with assurance that their conduct would probably not be reported to the United States law enforcement.
After several years of aggressive law enforcement, regulatory activity, and an awaking consciousness by the United States banks, this type of conduct has significantly diminished and has nearly disappeared.
For a short time after the bank doors were closed to them, the money launderers were relying upon methods of structuring their transactions to avoid the currency transaction reporting requirements. This conduct was generally known in enforcement circles as "smurfing", a name which had been coined by my then five (5) year old son, Christopher. As the Committee is well aware, "smurfing" is extremely expensive in terms of manpower and security and very cumbersome and slow as a means of converting multi-millions of dollars in cash. The technique has been largely abandoned by the multi-national cartels except as a way of converting the monies needed for domestic overhead expenses for that portion of the enterprise needing dollars in the United States for their operations. Consequently, two (2) forms of transactions became and remain the vogue. The first transaction requires the smuggling of substantial amounts of currency out of the United States for the deposit in off shore banks. Forms of concealment of the currency are inventive and continue to evolve. Most recently, one substantial seizure by United States Customs involved currency concealed in hidden roof panels in a truck crossing the Southwest border of the United States into Mexico. Prior to that, we have seen instances of money packed in compressors, industrial vacuums, truck brake drums, new tires, and on one occasion, sealed Monopoly boxes. Because the United States is one of the few nations in the world that does not regulate or inspect outbound passengers and pays little regulatory attention to outbound commercial shipments, then the chances of a smuggler's apprehension by law enforcement remains slight. I was present in 1984 when Ramon Milian Rodriguez was stopped while flying his Lear jet from Fort Lauderdale, Florida to Panama City, Panama in which he had over Seven Million ($7,000,000.00) Dollars in United States currency. Milian had not bothered to conceal the money at all.
The second emerging method of placing currency accumulated in the United States is to rely on non-bank institutions and businesses to conceal the currency among large currency transactions done by those businesses. Thus, in the La Mina investigation we uncovered a ring of launderers operating a string of gold billion businesses who had laundered as much as $1.2 Billion Dollars by concealing the currency among the receipts moving each day in the world-wide gold market. Once the currency, disguised as the proceeds of legitimate commence, enters the stream of commerce, it moves internationally with little scrutiny.
To the many problems and challenges associated with criminal money laundering, we must add a new dimension. Today, we see enormous wealth which has been successfully laundered in the hands of despicable criminals who are demonstrating their will and capacity to subvert whole countries. Recent news articles regarding Cambodia and Colombia demonstrate the vulnerability of many fragile economies and systems.
Members of the Committee, I would strongly suggest that if we do not effectively improve and use all of our law enforcement tools to seize drug profits, we may well be subjecting ourselves to greater international tyranny by the narcotics barons. As this Committee is all too well aware, efforts towards democratization and privatization in the emerging countries of the world have presented private enterprise with astounding new opportunities for investment. Unfortunately, these same opportunities are available to organized criminals. The potential of narcotics traffickers purchasing a newly privatized key industry of an emerging democracy and thereby holding that republic as a political and economic captive is a very real and present danger in international relations. I would strongly suggest to the Committee that efforts to harmonize enforcement world-wide by sharing data concerning currency transactions and criminal conduct should be combined with a system whereby nations which are entrusting their key institutions to private individuals should be able to rely upon the help of other nations of the world to ensure that their investors and institutions are free from corruption and criminal taint. As an example, our bank regulatory authorities in the United States should feel assured that through Interpol or other appropriate international cooperative mechanisms they can obtain investigative assistance to examine the background of individuals from foreign countries who are attempting to procure financial institutions in the United States. Similarly, if the government of Poland is considering selling all of its electrical production capabilities to a United States enterprise, they should be confident that United States authorities will assist them in providing truthful background information concerning the United States entity which is purchasing that key industry.
Mr. Chairman, despite the improvements made by the criminals and their laundering techniques, we have yet to see corresponding improvements in United States efforts. The situation is the same as it was eleven (11) years ago and I dare say, twenty-one (21) years ago in the United States enforcement community. We have an archaic regulatory structure, insufficient resources, and a division of authority and responsibility among turf-conscience, infighting agencies that frustrates, almost totally, the effective use of our limited resources. Let me give a few illustrations.
In 1984, the Congress passed a statute which was later codified as Section 6050I of Title 26, United States Code. That Section was intended to compliment the reporting requirements made of travelers and banks under "Bank Secrecy Act." 6050I requires the trades and businesses which have a currency transaction or series of currency transactions of $10,000.00 or more file a report called a form 8300. I am confident that Congress, like the law enforcement community, expected that the report would be made and maintained in conjunction with the Currency Transaction Reports (CTRs) and Currency and Monetary Instrument Reports (CMIRs) in a central databank available to all law enforcement for the purpose of generating leads and investigations. This is not true. Due to, what was explained to me as an error by the Editor of the United States Code, that statute was codified in the Internal Revenue Section of the Code. Therefore, the reports are subject to the requirements of confidentiality to which we subject our personal income tax returns.
The requirement of confidentiality means that we are unable to mix and match the form 8300 information with the CTRs and CMIRs to target criminals and criminal enterprises. This mistake occurred thirteen (13) years ago and has not yet been corrected. The most recent effort of partial correction came this past year when Congress amended 26 USC, Section 6103 by adding sub-paragraph l(15) which gave state and federal law enforcement authorities access to form 8300 under the same conditions as they give access to the bank secrecy reports. This is not a solution. The Treasury agencies have treated the bank secrecy reports as their private turf and have purposely not made them generally available to other law enforcement agencies in the field for purposes of targeting criminal enterprises. In essence, if a DEA agent wants to track a narcotics money launderer and needs CTR, CMIR, or Form 8300 information, he cannot use that data to determine the identity of the money launderer. He can only obtain that information after he has through other investigative techniques determined that the subject is a money launderer and thereafter, request reporting information from Treasury. I do not believe this is what Congress intended.
I believe the Congress intended that we would have a databank of reports which would detail currency movement. It was intended that we could use as an investigative starting point the substantial surplus of currency in the Federal Reserve in San Antonio, Texas, for instance. By using the reports and regressive analysis, we should be able to start from the fact that there is a substantial surplus and track that surplus to individual financial institutions. Using form 8300s, we should even go beyond the financial institutions to individual depositors who have excess currency. The investigative access to this information is extremely important. As this Committee is fully aware, the practice prevailing among domestic money launderers is to no longer use legitimate financial institutions for the placement of their massive amount of currency, but to among other things, use businesses which deal in large amounts of currencies such as the gold bullion businesses uncovered in La Mina investigation.
Earlier, Mr. Chairman, I discussed the money laundering typology in which there are immense amounts of cash, usually in small bills which must be introduced into the chain of commerce in order to facilitate the trafficking business. The need to convert mountains of cash to deposits either here or abroad is the point of the greatest vulnerability of the trafficker. We should be using the vulnerability as a fulcrum point upon which to launch coordinated investigations, prosecutions and seizures here and abroad. Apparently, this is not happening. One can only suggest that the United States' failure to take advantage of the vulnerabilities of the traffickers is, in part, because of the lack of coordination between the United States agencies, and in large part, because of the lack of coordination between United States agencies and their counterparts aboard. The reasons for the lack of coordination are many. I am certain that this Committee has heard volumes of explanations.
I would suggest that this a time for strong leadership on our national front which will require that cooperative, non-corrupt law enforcement efforts internationally will become and will remain the cornerstone of the United States international relations. Secondly, strong leadership will require that we domestically account for our law enforcement and regulatory resources. We must give our agencies a clear mission and expect standards of performance to which we hold those agencies in return for the assets which we give them. I regret that I do not see that aggressive leadership in the law enforcement area, least of all in the area of narcotics money laundering investigation and prosecution.
In conclusion, may I suggest to this Committee that some of the following steps might be appropriate. First, Congress should carefully examine the statutory and regulatory framework concerning financial reports required by Congress. Are those reports adequate to trace the gross movements of monies all the way from the vendor to the national financial institution? Can we investigate surpluses in the national institutions to determine whether that money came from criminal sources? Secondly, the regulatory and statutory structure needs to be examined to determine whether our regulations and statutes permit all of our law enforcement resources to take advantage of the reports required by the law. Third, Congress must determine that sufficient law enforcement action is being taken to requiring that all reports dictated by law are indeed being filed. You will remember the intense scrutiny under which I and other prosecutors put our national banking system. After great expense and expenditure of energy by all involved, not the least of which were the banks, the institutions are in large part aggressively complying with the laws. My present clients, some of which are financial institutions, are demanding that we give other businesses which may be involved in narcotics money laundering, the same intense scrutiny that we gave to banks.
It is a fact that the United States law, while it makes the failure of a bank to file a currency transaction a very serious felony, makes the failure to file the analogous report by a trade or business a misdemeanor. In fact, this report is termed an "information return" by the Internal Revenue Service. It is my understanding that misdemeanor prosecutions for failure to file these information returns are rare, if not nonexistent.
Next, I would suggest that the Congress express its expectation to the Executive Branch that strong leadership is expected in coordinating our enforcement efforts and avoiding petty, unproductive turf wars.
In addition, Congress should increase its dialogue with the foreign affairs community and express Congress' expectation that international law enforcement cooperation to address international narcotics trafficking is at the forefront of our expectations in international relations. As a subset of those expectations, it should be Congress' demand that our partners participate in corruption free, aggressive sharing of information and coordination of investigations.
In line with our other international efforts, I suggest that Congress critically examine our efforts to obtain information and evidence of off shore criminal money laundering. I suspect that such an examination will show that our efforts at collecting information and evidence are far less profitable than our needs. Therefore, I would suggest that we take advantage of three vulnerabilities the traffickers and launderers all exhibit. The drug trade at some point or other needs United States dollars. All United States dollar accounts are cleared in the United States. The Congress has the power to regulate the interstate and international movement of dollars. Therefore, I suggest a system of laws which require that if a bank does business in the United States which to all intents means doing business in United States dollars, then that bank must provide to United States authorities upon appropriate demand all books, records and other information as would be required of a United States bank in a similar situation. If the bank does not now collect such information, it must do so and produce it upon demand or forego doing business, such as having a corresponding account in the United States.
I would also suggest that the Committee might critically examine the Money Laundering Control Act of 1986. The statutes then passed have changed little since 1986. There are several possibilities for improving the statute. The statute could be improved by modifying the requirement to prove that the funds laundered were derived from a specified unlawful activity. At present, the offense of money laundering is unnecessarily obtuse and burdensome for the prosecutor and difficult for the jury to understand. The government must prove that the Defendant knew that the property involved in the criminal transaction represented the proceeds of some form of unlawful activity and that the Defendant purposely conducted or attempted to conduct a financial transaction and that the money which was involved in the transaction was, beyond a reasonable doubt, the proceeds of a specified unlawful activity. This raises a couple of problematic issues.
One issue is that the money must have been already derived from a prior unlawful activity. Therefore, if the money is brought into the United States for the purpose of purchasing an aircraft which will later be used to smuggle drugs, although the transaction is designed to promote an unlawful activity and although the transaction may well be structured in such a way to conceal the identity of the principals, it is not money laundering. That is because the money was not derived from a prior unlawful activity. Therefore, one adjustment to the statute would be that the money be either criminally derived or intended to further a criminal enterprise or criminal activity.
A second fix to the statute would be to abandon the requirement of proof beyond a reasonable doubt that the funds involved in the transaction were, in fact, derived from a specified unlawful activity. In the real world, professional money launderers do not inquire into nor discuss the source and origin of the money brought to them by their clients. The only thing material to them is that the clients are willing to pay a substantial amount of money to maintain their anonymity regarding these transactions. Thus, whether the money was derived from or intended to addict every child under twelve (12) in Des Moines to heroine or blow up the federal building in Oshkosh is immaterial to the money launderer and in many instances, he is unaware of the source or ultimate use of the money.
In the undercover conversations, United States agents typically try to address the source of the money with the bad guys. The crooks look extremely surprised and express a supreme disinterest in the source of the money. The only thing important to them is that they are willing to pay or receive a substantial commission to have the money laundered.
In conclusion, I would like to suggest that it is adequate to show that the Defendant know that the funds are derived from or intended to further some form of unlawful conduct, as well as the other elements of the offense other than the specified unlawful activity.
Lastly, I salute this Committee for its examination of this area of the law. I regretfully note that more can be done and greater supervision can be exercised. In this light, I applaud every effort by this Committee to determine whether the citizens of this country are being adequately protected and whether the government is using all of its powers and resources to their fullest and best effect.