US Fed cash-flow data called underused weapon in war on drugs (Complinet Special Report)

By Guest Contributor
January 31, 2011

U.S. Attorney Jeffrey H. Sloman (C) of the Southern District of Florida speaks at a press conference in Miami, Florida March 17, 2010. Sloman announced a settlement that the Wachovia Bank unit of Wells Fargo & Company has agreed to pay $160 million as part of a deal to settle U.S. allegations that it laundered Mexican drug money. At left is Deputy Chief Counsel Daniel Stipano of the Office of Comptroller of Currency and at right is Mark Trouville, Special Agent in Charge, Drug Enforcement Administration, Miami Field Office. REUTERS/Joe SkipperBy Brett Wolf, Complinet

ST. LOUIS, Jan. 31 – The consumption of illegal drugs generates tens of billions of dollars for Mexico’s drug cartels each year, and the fight against it creates significant challenges for those who oversee and participate in the US financial system. The river of money flows into Mexico mostly in the form of cash, often hidden in secret vehicle compartments. The money feeds cartel operations and stokes conflicts with the government and with rivals that have killed an estimated 35,000 people during the past four years. US authorities have bolstered their efforts to halt the cross-border cash shipments, but their progress has been limited. Policymakers are desperately searching for better ways to fight the flow.

An investigation by Complinet has revealed details of how the money flows, and a potentially underused tool: the closely held “country flow” data maintained by the New York Federal Reserve Bank. The records, only recently made public, document the international flow of US cash and could help to illuminate the shadowy paths taken by drug money. They are so closely guarded, however, that experts say the ground-level investigators who could make the best use of it never see it, and the issue is so sensitive most government officials are unwilling to talk about it for attribution.

Regulations do not always require banks to report incoming bulk cash shipments to the Treasury Department’s Financial Crimes Enforcement Network, but the cash ultimately makes its way to the Federal Reserve, which does record it. The data can offer law enforcers a more complete picture than FinCEN’s relatively patchy intelligence regarding the rate at which cash is flowing into the US, and which US-based financial institutions are handling it. One way to combat the cross-border flow of illicit “bulk cash” is to determine which banks are acting as conduits while turning a blind eye to its origin, according to Complinet sources.

Robert Mazur, a former undercover Drug Enforcement Administration special agent, said: “The movement of cash to the Fed by banks, domestic and foreign, is a key to tracking the repatriation of drug proceeds.” Mazur’s work infiltrating financial institutions involved in drug-money laundering helped bring down the Bank of Credit and Commerce International in the 1980s.Mazur now runs a company that employs former federal agents to conduct financial investigations for clients. He told Complinet that the data was a “soft spot” in tracking illegal cash and called for wider dissemination among law enforcement agents. The Fed said that it cooperated with law enforcement but also handled the data with appropriate caution, given its sensitive nature.

The new public light cast on the data has begun to generate a debate over its use, and has prompted a review of the role played by cash in the drug fight. Large banks are increasingly wary of handling international banknote transfers, while smaller institutions, particularly along the southern US border, are facing increased legal, regulatory and reputational risk as they take up the slack. US banks that accept bulk cash shipments from foreign financial institutions and forward it to the Fed — a lucrative fee-based service — have obligations to ensure they are not laundering drug money. Among other things, regulators require that banks engage in adequate due diligence to determine the source of the funds, and that they report any suspicious activity to FinCEN.

Official sources at relevant law enforcement agencies were unwilling to say whether their agencies received access to the data, let alone comment on the degree to which it was shared within their investigative ranks. A DEA spokesman said that he could not comment on the agency’s use of the data because doing so would reveal “investigative techniques”. A spokeswoman for US Immigration and Customs Enforcement offered a similar response, stating that: “ICE does not discuss what information it has access to and does not offer an opinion on the use or reach of data that ICE does not collect or maintain.” ‬

Complinet did, however, speak to a number of current and former federal authorities from the agencies with primary responsibility for combating the cartels’ money laundering, including the DEA, ICE, and FinCEN, during its research into the role of currency data in the war on drugs. Many only spoke on condition of anonymity, citing the secrecy of the Fed data in question.

ICE EFFORTS AGAINST BULK CASH

ICE is the primary federal agency responsible for intercepting dirty bulk cash shipments before they cross the US-Mexico frontier. The USA PATRIOT Act of 2001 made it a crime to smuggle large sums of cash out of the United States, a clear signal that lawmakers have viewed the “bulk cash” problem as a matter of national security for at least a decade. Still, between fiscal years 2003 and 2009, ICE operations against bulk cash smuggling have led to seizures of just $410m, according to government statistics.

That sum is just the tip of the iceberg when it comes to drug money. The general consensus among experts is that Latin American cocaine cartels smuggle tens of billions of dollars in cash southward across the US-Mexico border each year. The amount of smuggled cash is thought to exceed considerably the amount of money the cartels are able deposit into US banks using so-called “smurfs”, i.e., individuals who travel from bank to bank making small deposits of dirty cash, always less than $10,000, to avoid the filing of currency transaction reports. “Smurfing” has become less popular because of new US laws cracking down on the practice. As federal banking regulators put it in the 2010 Bank Secrecy Act/Anti-Money Laundering Manual of the Federal Financial Institutions Examination Council: “In recent years, the smuggling of bulk currency has become a preferred method for moving illicit funds across borders.”

US officials have acknowledged that they are losing the battle to control the cash flow across the US-Mexico border. Carlos Pascual, the US Ambassador to Mexico, told a Texas conference on border security in August that current US efforts had put only a “small dent in the $19 billion to $29 billion in illicit cash that we estimate funds the drug trafficking organizations”. John Cassara, a former covert intelligence officer and Treasury special agent, agreed. Cassara worked for the Treasury Department’s Financial Crimes Enforcement Network, which administers the primary US anti-money laundering law, the Bank Secrecy Act. Cassara told Complinet that estimates showed “We are only intercepting five cents of every $100 going south to Mexico.”

Complinet sources were generally in agreement that, short of effectively shutting down US-Mexico border crossings, it was simply not possible to stop a meaningful number of cash smugglers from succeeding at their trade. Given that the cartels’ dirty cash will to make it into Mexico, the important question then becomes what more could the US authorities do to prevent the money from making its way undetected back into US financial institutions, and thereby the global financial system? Current and former law enforcement sources whom Complinet has canvassed did suggest one tool that could make the job a bit more do-able if it were more widely distributed: the elusive Federal Reserve data.

LAUNDERING CHAIN

To comprehend the role of the Fed data, it is first necessary to understand how the Mexican cartels have traditionally been able to convert their cash into electronic currency, or otherwise make use of it, once it arrives in Mexico. As described by law enforcement sources, the lion’s share of this money is either delivered to money changers or to banks. The money changers convert the cartels’ small US banknotes into $100 bills or provide them with Mexican pesos, while the banks allow the cartels to deposit dirty dollars. In either case, the Mexican institution that receives the cash then uses an armored car service or air courier to transfer the cash back to the United States through a correspondent bank at which the Mexican institution holds an account. The bank in the US then forwards some or all of the cash to a Federal Reserve Bank in exchange for a credit of electronic funds, and then wires the funds to the Mexican client. At that point, the funds are thoroughly laundered and ready to be spent around the world as the cartels see fit. In alternative scenarios, the cartels also can move the cash through a third country to obscure its true source before returning it to the United States. In some instances, foreign banks and even central banks transfer bulk cash directly to Federal Reserve Banks near the border.

Peter Djinis, who formerly served as both a federal prosecutor and a regulatory policy official at FinCEN, told Complinet that US banks which accepted bulk cash from Mexican banks and money changers needed to “know something about the nature of these customers’ underlying customers” and the source of their money. He said that the US bank did not have to know the names of its customers’ customers, but ought to know why they were dealing in large sums of cash. Legitimate explanations might involve clients who engaged in tourism-related activity or retail sales near the US border, Djinis said. He added that “enhanced due diligence” efforts, such as onsite visits to the Mexican financial institutions to ensure they were identifying their customers and reporting suspicious activity to Mexican authorities were not cheap, but were advisable in risky relationships involving large sums of bulk cash.

The cartels’ bulk-cash laundering has proved costly of late for US banks that did not take such steps before funneling millions, or even billions, of dollars from Mexican money changers into the global financial system. Both Union Bank of California and Wachovia Bank (now part of Wells Fargo Bank) have been targeted by the US Department of Justice for such AML failures during the past four years, and each paid a hefty price. Wachovia paid the government $160 million in fines and forfeitures, while UBOC paid $31.6 million. These costs do not take into account the banks’ legal expenses nor the damage to their reputations. Both banks admitted the government’s allegations in so-called “factual statements” that accompanied the deferred prosecution agreements, or DPAs, they signed with the Department of Justice. The department also is probing HSBC Bank, which was censured by US banking regulators in October, to determine whether it too should be penalized for taking large sums of bulk cash from Mexican money changers. In a November filing with the Securities and Exchange Commission HSBC stated: “We remain the subject of ongoing inquiries, including grand jury subpoenas and other requests for information, by government agencies, including the US Attorney’s Office and the US Department of Justice. These inquiries pertain to, among other matters, our prior banknotes business and our foreign correspondent banking business.”

A law enforcement source familiar with the changing practices told Complinet that, like HSBC, a number of large banks operating in the United States had exited the banknote business, but some small banks in the Southwest had taken it on. Given that such diminutive institutions typically spend less on due diligence, it may be more important than ever than law enforcers be aware of who is handling vast sums of Mexican bulk cash if they hope to head off drug money laundering operations, the source said.

FED DATA

Court documents filed as part of the Department of Justice’s case against Wachovia suggested that federal investigators had relied on the Federal Reserve’s “country flow” data when documenting the US dollars that flowed from Mexico to UBOC, Wachovia and HSBC. The New York Fed’s International Cash Department maintains this data to document Federal Reserve Banks’ bulk cash shipments to, and receipts from, foreign jurisdictions. It has maintained a basic set of cash-in/cash-out data for decades because the government wanted to know how much of its currency was in circulation outside the United States, how it was used, and how it flowed. In recent years, however, as software has become more advanced, the Fed has begun to record data at a more “granular” level, adding a level of detail, and user value, that was not previously possible, sources told Complinet. For instance, in some cases, serial number data is now kept to allow authorities to track the movement of banknotes globally.

The existence of the Fed data was publicly suggested, evidently for the first time, in the DPA between Wachovia and the Department of Justice. The agreement’s review of the allegations stated that once in the United States, the millions of dollars in dirty cash funneled through Wachovia “would ultimately be deposited at the Federal Reserve”. This indicated that department’s forensic investigators charged with documenting Wachovia’s misdeeds had been granted access to the Fed’s records on incoming cash: the coveted “country flow” data. This caught Mazur’s eye. He said the data was a critical enforcement tool and that its greatest value lay in the fact it could help investigators detect the flow of cartel cash through banks, not just document it after the fact as in the recent cases. “Some banks may have cash needs that enable them to disperse repatriated bulk cash within their branch or other systems, but most are going to send that money to the Fed so they don’t leave it sitting idle where it doesn’t earn a return. This is a soft spot in the tracking of illicit funds, and I’ve been screaming about this for decades, ever since 1988, when the BCCI officers informed me of how the Colombian central bank was shipping billions of dollars in drug money to the Fed annually,” Mazur said.

Given the utility of such data in illuminating flows of drug money, one might assume that all federal law enforcers who played a significant role in impeding the Mexican cartels’ laundering efforts would have ready access to it. That is not necessarily the case, however, according to Complinet sources. The Fed uses the data to generate periodic reports that it shares with one or two high-level individuals at each of the relevant federal law enforcement agencies, such as ICE and the DEA. Those gatekeepers decide who within their agency gets to see it. Some law enforcers outside the agencies’ leadership circles say it is extremely difficult to get a peek at the reports despite their involvement in relevant probes. In fact, a DEA source who was eager to review the Fed data regularly, as it could expose telltale “spikes” in the amount of cash being repatriated from specific countries and through certain banks in the US, told Complinet that gaining access was akin to “pulling teeth”.

That grievance was echoed by Mazur, who said that based on his recent experiences with frontline investigators, it appeared to him that the data “had to be pried from those who had it”. Mazur would like to see the data land in the hands of “troops on the ground” who could use it to chase down high-value targets, including financial institutions “that are either directly or indirectly taking in the cartels’ cash. Once you ID the source institution by following the trail backward from the point of delivery at the Fed, you’ll find a trail that will lead you to who is taking in the currency. This will require not only examining the records of the Fed, but also examining the records of various banks that send cash to the Fed,” Mazur said.

Sources told Complinet that the latter was true because, while the data included information about the banks which deposited the currency and the foreign country from which it had come, it typically did not identify the foreign financial institutions that originally accepted the cash from customers and forwarded it to the United States. Enhanced efforts of this sort would therefore mean more subpoenas for financial institutions and would likely spell serious trouble for those with weak anti-money laundering regimes or rogue employees who welcome drug money.

A veteran ICE financial investigator who has recently left the agency, and whose duties had included combating money laundering, told Complinet that he never had never seen the Fed data. He and his team instead relied on FinCEN’s Bank Security Act data to track currency flows, despite the fact it was not as “all-inclusive” as the Fed figures. Individuals and groups within law enforcement agencies are sometimes “territorial” with high-value data, the source said.

WHO GETS ACCESS?

A spokesman for the Federal Reserve Bank of New York said that the bank “routinely” cooperated with law enforcement agencies seeking information on bulk cash shipments. In response to the criticism that gaining access to the data was too difficult for some, the spokesman added: “The law enforcement agencies agree that the information is sensitive, and therefore, the New York Fed has processes in place for access to the information.”

Robert Rowe, vice president and senior counsel with the American Bankers Association, was supportive of the Fed’s approach. He told Complinet that while ABA member banks had not complained about how the Fed shared the cash flow data, “as a general rule, data security is a very high priority for banks”. This view was also bolstered by a high-level federal law enforcement source interviewed by Complinet who has had access to the data for years. He said it “has been responsible for generating major money laundering investigations and identifying or corroborating money laundering mechanisms used by organized criminal organizations”. The source suggested the practice of distributing the data to a couple of people who sit atop the relevant federal law enforcement agencies ensured that the information  ”only lands in the hands of those who know how to analyze it together with sensitive law enforcement intelligence in order to identify anomalies”.

Mazur disagreed. “Frankly, the people at the top don’t have the insight to know why this information is so valuable in the identification of high-level targets,” he said. He added: “There are very small pockets of those involved in investigative work that really get it,” and suggested that his recent contact with such individuals suggested they still did not enjoy adequate access. “My appeal to law enforcement about the value of this information was basically ignored. This is a systemic problem that has gone on for decades and, without shining a light on it, will go on for decades more,” he said.

Mazur pointed out that between 2003 and 2008, $420 billion (including more than $4 billion in bulk cash) had flowed through Wachovia Bank from Mexico, at least $110 million of which was cartel drug money, and was unseen by law enforcement. “Not one piece of paper from the Fed about Wachovia’s bulk cash repatriation trickled through the hands of anyone in the government to alert anyone about the admitted criminal conduct of Wachovia. Nor did one piece of that information trigger investigations concerning UBOC or HSBC,” Mazur said.

One publicly available document supported Mazur. The review of facts that accompanied Wachovia’s DPA with the Department of Justice stated that the probe which ultimately zeroed in on the bank began in June 2005 after a drug transport aircraft was seized by law enforcers. At that time, Miami-based investigators with the DEA and other federal agencies began examining the flow of millions of dollars from Mexico to the US to pay for the aircraft. Only then did investigators discover the money trail that led to Wachovia.

SHARING THE DATA

The Treasury Department’s FinCEN, which is responsible for sharing with law enforcers the BSA data submitted by financial institutions and other businesses and individuals, is a recipient of the Fed’s periodic cash flow reports. While it uses the information for analytical projects, it is not permitted to share the data with its law enforcement clients. Sources told Complinet that, if granted ownership rights, FinCEN, could then share the data in a secure manner, ensuring it made its way into the hands of all investigators who needed it.

Djinis, an authority on US law and regulation aimed at combating money laundering, said: “There is nothing I am aware of that would prevent FinCEN from both sharing the data and also utilizing its various databases, such as suspicious activity reports, currency activity reports, reports of foreign bank accounts, to massage the data and perhaps pinpoint potentially suspicious connections.” He added that because the data was unlikely to identify specific customer accounts at domestic or foreign financial institutions, its dissemination would be unlikely to fall foul of any US or Mexican privacy laws. Well-placed sources told Complinet that the Fed viewed the data as proprietary information belonging to its member banks, and would not agree to transfer ownership to FinCEN. A spokesman for the Fed declined to comment on this issue, as did a spokesman for FinCEN.

To resolve such obstacles, Mazur has urged the Department of Justice to create a taskforce that would work with grand juries in relevant jurisdictions, such as New York. The grand juries could go after top money laundering targets, including corrupt financial institutions, around the world. Mazur suggested that federal authorities in New York could exert global jurisdiction because the US dollar was “the global currency of the underworld”. Grand juries could subpoena the Fed data each year with support from the DEA and ICE agents who needed it, he said. The federal government has consistently asserted a broad legal reach to pursue transactions involving US currency.

Mazur said: “We don’t need huge bureaucracies analyzing and pontificating about what to do with this information. Just give it to the frontline troops — grand jurors and agents — in the trenches that are given this responsibility.” Mazur was not alone in his concern about the availability of cash-flow data to investigators. A DEA source voiced a similar view about the difficulty of obtaining the data, but declined to comment further.

No one interviewed by Complinet was aware of any initiative currently underway to broaden the dissemination of the data. Nevertheless, in October, Lanny Breuer assistant attorney general, publicly touted a Department of Justice plan to ramp up its pursuit of bankers and other professionals who aided drug-money launderers. This could mean that more widespread use of the data, whether via Mazur’s proposed taskforce or some other means, will one day receive consideration.

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