SPEAKERS CONTENTS INSERTS
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LAW ENFORCEMENT EFFORTS TO COMBAT INTERNATIONAL MONEY LAUNDERING THROUGH BLACK MARKET PESO BROKERING
WEDNESDAY, OCTOBER 22, 1997
House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to call, at 10:10 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.
Present: Chairman Bachus; Representatives Waters, Kilpatrick, Weygand and Barr.
Chairman BACHUS. We are going to call to order the General Oversight and Investigations Subcommittee of the House Banking and Financial Services Committee. Good morning.
Over the last year, the House Banking Oversight and Investigations Subcommittee has held a series of hearings concerning various forms of money laundering and the law enforcement response to these threats.
In September of last year, the Oversight Subcommittee reviewed the practice of currency smuggling over the Mexican-American border. Due to the almost nonexistent threat posed by law enforcement to currency smugglers, currency smuggling remains one of the primary mechanisms used by the large drug cartels to remove the illegal profits they derive from the street sale of illegal narcotics.
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In March, the subcommittee reviewed the Geographical Targeting Order issued by the Department of the Treasury that focused on money transmitters in New York City. Money transmitters offered the cartels a cheap and safe mechanism for moving hundreds of millions of dollars in drug profits. The GTO made this a much more difficult proposition.
The subcommittee has also reviewed the efforts of the Financial Crimes Enforcement Network, FinCEN, to combat money laundering generally, and specifically, its proposed regulations for money services businesses.
Today, we will review what may be one of the most dangerous forms of money laundering, black market ''peso brokering.'' ''Peso brokering'' is a four-step process that helps the Colombian drug cartels convert millions in U.S. currency obtained from the street sale of narcotics into pesos they can spend at home.
Cartels first gather the cash obtained from illegal narcotics sales. Next, the cartels sell this U.S. currency for pesos to black market peso brokers in Colombia, who deposit the funds in U.S. bank accounts. The peso brokers are motivated by the large handling fees they receive, just like bookies receive in handling bets.
Third, the peso brokers identify Colombian businesses that need U.S. currency in large amounts to pay for imports from the U.S. and other countries. Finally, the broker arranges payment to the U.S. exporter on behalf of the Colombian businesses. The end result: The cartels get pesos quickly and safely and Colombian businesses obtain a cheap source of U.S. currency to pay for their imports.
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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.
As I have said many times before, if we are going to successfully attack the cartels, we have to hit them in their bottom linetheir profit. The use of black market peso brokers, however, makes profiting from drug sales both safe and easy.
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.
U.S. exporters cannot allow themselves to be willfully blind to the realities of the drug trade and international money laundering and allow their sales to be subsidized by drug profits. The war on the illegal narcotics trade must be a comprehensive national effort; it must include everyone, including the individual American citizen, U.S. law enforcement, and national and multi-national corporations.
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The U.S. financial institutions are also being used, knowingly or not, in the peso brokering process. Peso brokers establish checking accounts in U.S. banks and use the accounts to facilitate their transactions. In this regard, I am happy to report that the Financial Crimes Enforcement Network is preparing an advisory to warn U.S. financial institutions of the threats posed by peso brokering and the use of their institutions in this process. I urge FinCEN to issue this advisory as soon as possible. I hope this action will continue the educational process concerning the dangers of money laundering.
Black market peso brokering is obviously very troubling. What we can do about it is not clear. For example, a big part of the problem are the high tariffs imposed in Colombia on U.S. import transactions, around 20 percent. As long as this is the case, there will always be an incentive for legitimate businesses to use money brokers in the search for a cheaper source of U.S. dollars.
It is not always wise to pass new laws or enact new rules. The money launderers are often too quick and agile for Congress. Sometimes, we must rely on law enforcement and be vigilant in making sure they have the tools and resources to get the job done.
At a minimum, I hope that today's hearing can help shed light on the needs of law enforcement and help educate all of us to the threats posed by peso brokering to our country and to our communities and to our youth. If we can better understand the problem, the Congress will be better positioned to provide the support necessary to address the problem.
Our first witness was personally involved in recent years in peso brokering, both in the United States and in Colombia. She is appearing under the name ''Ms. Doe,'' which is obviously not her real name, and is testifying behind a screen in order to protect her identity. The two law enforcement agents at her side will not be testifying and are not to be identified.
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The reason she is testifying behind the screen is because her life has been threatened. She has agreed to testify today, despite these risks, to provide a unique window from which we can view the shadowy world of international money laundering. She has agreed to answer questions as fully as possible without revealing her identity. Her testimony is vital for the subcommittee to understand the threats posed by black market peso brokering.
Our second panel will consist of a panel of law enforcement experts on peso brokering. We will hear from Mr. Allan Doody, Assistant Director, Operations, for the U.S. Customs Service; Mr. Gregory Passic, Senior Special Agent, Financial Crimes Enforcement Network; and Mr. Alvin James, Senior Special Agent, the IRS Criminal Investigations Division. This panel will provide a law enforcement context for this challenge. It is a truly unusual example of law enforcement cooperation. These three agencies have submitted one formal statement for the record.
In conclusion, I note that we have a recent change on the subcommittee. Representative Bob Barr has joined the subcommittee. We look forward to his participation.
At this time, I will ask for any opening statements that Ms. Kilpatrick or Mr. Weygand or others may have. And I appreciate your participation in the hearing.
Ms. KILPATRICK. Thank you, Chairman Bachus, for the opportunity to speak briefly to say how important this issue is, and to thank you for having this hearing.
It is important, in my opinion, that as we move to the new millenium, we get a handle on the cancer that is destroying America, which is illegal drugs. I serve on the Drug Bipartisan Task Force here in this Congress and was told a few months ago by the Drug Czar, General Barry McCaffrey, that 850 tons of drugs leave Colombia, Peru, Mexico, and two or three other countries, destined to America. That 600 tons of drugs get into America and thereby devastate the families, the lives, the young people, the seniors, that are here in this great country of ours.
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I am happy today to be a part of this Banking subcommittee who are going to hear the testimony and I really hope this Congress takes an active, hard stance as we move to eradicate drugs in our society. I believe that we can do that. After all, this is the richest country in the world, the ''Land of the free, the home of the brave.''
And, Chairman Bachus, again, I want to thank you for your leadership on this issue. I think, as dangerous though it may be, the people of this country have sent us to this Congress to look out for their interest. I believe until we eradicate drugs and-or get a handle on them, our country, as we move to the 21st century, will be threatened.
So thank you, sir.
Chairman BACHUS. Thank you.
Mr. Weygand, would you like to make an opening statement?
Mr. WEYGAND. Thank you, Mr. Chairman. I will be very brief.
I am very encouraged by the courage of our witness here today. It takes an awful lot of effort and courageous action to be here. I want to thank her for being here to testify before this subcommittee.
What my colleague, Congresswoman Kilpatrick, has said is so very important. Every community, I don't care whether it is rich or poor, is besieged with the problems of drugs and drug money, and it is infiltrating every part of our environment, our neighborhoods, our communities, our schools, our businesses.
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So I want to thank you again for being here today, and I look forward to your testimony.
Chairman BACHUS. Thank you.
At this time, Ms. Doe, I understand you are going to make a statement.
Ms. DOE. Yes.
Chairman BACHUS. Thank you.
Now, what we have done, we have a voice scrambler to protect your identity.
STATEMENT OF ''MS. DOE''
Ms. DOE. Yes. Good morning. I would like to take the time to thank you for inviting me to testify today.
Money laundering is a vital part of the narcotics trade, and without it, the narco-traffickers could not reap the benefits of their illegal wares.
As many of my fellow black market currency brokers, I tried in my mind to separate the sale of drugs from money laundering, but as you will hear today, I have come to realize that narcotics and greed are what keep the industry going; there is no way to separate one from the other.
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As personal background, I received a formal education in the field of political science and law. Prior to arriving in the United States, I practiced civil and criminal law in my native country, Colombia. With this background, I was able to learn the peso brokering business very quickly.
Recently, I have been cooperating with U.S. law enforcement agencies, assisting them in their understanding of Colombian peso brokering operations. That is why I am here today. I wish to explain to the subcommittee how money laundering is done.
I have experienced the international money laundering operations of the Colombian cartels from several different vantage points.
While in New York, I was employed by a major licensed money remitter and was the owner of a money remitting agency. Money remitters are often used to move drug money off the streets of the U.S. and out of the country.
I also was a money broker in Colombia for several years. As I will discuss today, money brokers provide the cartels an easy avenue of obtaining their drug profits. As a money broker in Colombia, I established accounts in U.S. banks where drug money was deposited. From these accounts, I arranged payments to U.S. exporters on behalf of Colombian businesses.
To facilitate my brokering activities, I utilized accounts in many prominent U.S. and international banks, including Citibank, Chase Manhattan Bank, Chemical Bank, Bank of America, Wachovia Bank, Bank of New York, NationsBank, BarnettBank, Texas Commerce Bank, Republic Bank, Sun Bank, Mega Bank, BancoAtlantico, Atlantic Bank, Philadelphia International Bank, National Westminster Bank, Marine Midland Bank, RHM Trust Bank, International Bank of Miami, City National Bank of Florida, First Union Bank, North Carolina National Bank, National Bank of Miami, Korean Exchange Bank, Swiss Bank Corp, and Bank Leumi.
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I also utilized accounts in Colombian banks such as Banco Occidente, Banco Cafetero, Banco Ganadero, Banco Del Estado, and Banco Industrial Colombiano.
I cannot say that these banks were aware that I and other money brokers were using their accounts for money laundering, but without their services, we could not have brokered drug profits.
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.
For two years, I acted as a money broker in Colombia. I brokered both legally and illegally obtained dollars and pesos along with other licensed and unlicensed money brokers. During this time, I brokered several million dollars on behalf of the cartels.
Upon my introduction to the business, I was amazed at the large number of brokers. In Colombia, brokers often operated in what can best be described as a flea market atmosphere. In Medellin, a shopping mall housed dozens of small offices, each occupied by a money broker. Colombian importers shopped for United States dollars at the mall, traveling from office to office to get the best black market exchange rate on their peso-to-dollar transactions.
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Financial representatives of the cartel, commonly known as ''duros'', which means ''the hard ones,'' would be contacted daily by the brokers in order to ascertain the amount of United States dollars available in the U.S. for brokering on the Colombian black market.
The broker would ask, who ''crowned'' that day? This term is from the game of checkers, where a piece moves across the board, gets ''crowned,'' and starts moving back to his own side. This represents the narcotics going across the border, being sold in the U.S., and the profits being returned to Colombia. Brokers wanted to know who ''crowned'' or who owned the money, so that they would know who in the cartel they would be responsible to in the event of loss or seizure. Often, the broker would be told who crowned the deal, whether or not they asked, to instill the fear of reprisal into the broker, so they would not steal or misappropriate the funds.
I would like to offer my explanation of money brokering. As an example, a coffee grower in Colombia needs to purchase a tractor from a United States tractor maker. He purchases the tractor for $500,000. He receives the tractor in Colombia, but has pesos. He needs to pay the U.S. company in dollars. So the grower takes the pesos to a black market money broker instead of using Colombian banks, because he bought the dollars cheaper and avoided taxes and tariffs of up to 20 percent.
The broker buys the $500,000 in pesos from the grower and charges him a commission for his services. The broker then approaches a financial representative for the cartel who has $500,000 in drug money on U.S. streets. The broker buys $500,000 from the cartel representatives and pays for it with the farmer's $500,000 in Colombian pesos, minus a commission he takes for getting the cash off the cartel's hands. The broker receives the dollars and uses them to pay for the farmer's tractor in the U.S.A. In this manner, the farmer's debt is paid to the U.S. company, the drug dealer has been paid pesos for his narcotics, and the broker has received a commission from both parties.
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Every day I would check the official exchange rate established by the Bank of the Republic in Colombia. As an example, I purchased $60,000 in United States dollars from the duro for 800 pesos per U.S. dollar. The money was located in a New York stash house. The duro instructed me to pay him the pesos in Colombia by four checks. One check was made payable to his company, and the remaining three to other individuals. All checks were deposited into their respective bank accounts in Colombia. By receiving four checks, the duro avoided the Colombian law of unlawful enrichment. And the duro's U.S. courier deposited the $60,000 to three United States bank accounts under my control.
I contacted a Colombian importer and sold him the $60,000 in pesos for 890 pesos per dollar. Accordingly, my profit was 90 pesos per U.S. dollar. This importer owned Colombian book stores and instructed me to wire transfer the $60,000 to his United States book supplier. I instructed the importer to issue five checks in payment for the $60,000. Four were made payable as instructed by the duro, and the fifth check was my commission.
The importer deposited the duro's checks in the designated accounts. In turn, I instructed my U.S. bank to wire transfer the $60,000 to the account of the U.S. book supplier. At the exchange rate of 890 pesos per U.S. dollar, I made a profit from this transaction of over $6,000.
Due to the large sums of narco-currency, it is a regular practice to split or share the transactions with other Colombian money brokers. Money brokers are held responsible for the narco-dollars they accept and, accordingly, reduce their risk of loss by splitting or sharing their transactions with other brokers. By splitting or sharing their transactions, they also benefit by increasing their access to importers seeking U.S. dollars and U.S. bank accounts held by other brokers.
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It is important to understand that the broker's fee is determined by a number of factors, including the amount of narcotics and money on U.S. streets, the form of the money, and the location of the money. The more dollars on the streets, the more risk to the narco-trafficker, and, accordingly, the money broker can charge a higher commission to launder their funds. If the dollars are already in U.S. financial institutions, the less risk it presents to the narco-trafficker, and, accordingly, the broker charges a smaller commission. If there is an abundance of dollars available, the broker charges a higher commission.
The further along the money is in the laundering stage, the less commission the broker will receive. The form of the fundsthat is, bulk currency, money on deposit in U.S. accounts, checks, money orders, and wire transfersalso determine the amount of commission the broker receives. Generally speaking, the forms of funds that present the least risk of being seized generate more of a commission for the brokers. For example, wire transfers present the least risk and therefore bring the highest rate. Checks and money orders are next and hold an intermediate rate. Bulk currency, presenting the highest risk, brings the lowest rate.
A single transaction could typically involve several brokers and also allow the multiple use of various types of funds. An example of this was when I purchased 15 checks, totaling $64,105, drawn on several U.S. bank accounts from another money broker. I purchased these signed checks with the payee portion left blank for 790 pesos per dollar. I sold these checks to a third broker who owns a jewelry company in the U.S. at a rate of 802 pesos per dollar. He then deposited these checks into his U.S. account. He then sold wire transfers from these accounts at a rate of 820 pesos per dollar.
Page 13 PREV PAGE TOP OF DOC Now I am going to talk about sale of export papers. It is another way of money laundering called ''reintegros.''
When goods are shipped from Colombia to buyers around the world, Colombian companies must obtain export papers through a Colombian bank. These papers are similar to a letter of credit. They allow the goods to be exported and payment for the goods to be placed into the corresponding bank account. In the U.S., export papers can remain valid for up to one year. The export papers allow the placement of funds into bank accounts through the Colombian banking system and provide the official bank rate for the money being deposited. This rate offers a higher exchange rate.
After the initial use of the documents by the original company, the export papers are sold to others. This is known as a ''reintegro,'' which means ''reintegrate papers.'' The holder of the papers will either sell the use of the papers on a flat rate or a commission basis to other users, usually through a broker.
Each time the papers are sold, the buyer goes to a different bank and opens an account for the money to be transferred to. Because the papers are still in the name of the original company, the funds are transferred to the original holder for further credit to the account of the buyer.
An example of a reintegro is as follows: I bought $1.3 million in wire transfers for about 815 pesos per dollar from a money broker/launderer. I then sold the $1.3 million to two customers. The first one, because of a debt, I sold $505,000 to a Colombian company at a discounted rate of 808 pesos per dollar. I was instructed to wire transfer the funds to a Panamanian company. I sold the remaining $765,000 to another broker who specializes in the sale of reintegros at a rate of 825 pesos per dollar and was instructed to send these funds in these three wire transfers.
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I transferred $217,000 through a New York bank account for further credit to a Colombian bank account controlled by a Colombian exporter, transferred $283,000 through a New York bank account in the name of a Colombian bank for further credit to the same Colombian exporter, and transferred another $265,000 through a New York bank account for further credit to a Colombian account.
In my experience, Colombian bankers protect the money brokers. On three separate occasions, I was forewarned by three different banks of potential government investigation into ''unlawful enrichment.''
How are the checking accounts established in the U.S.? Colombian money brokers hire individuals in both Colombia and the U.S. to open checking accounts in the United States. Those hired in Colombia visit the U.S. and open several checking accounts at various banks using many variations of their Spanish surnames. They may also open several checking accounts at banks in numerous cities using fictitious names.
These individuals working in the U.S. for the Colombian brokers are called ''smurfs.'' The smurfing accounts I used were located in New York City, Miami, Houston, Los Angeles, and Chicago. These smurfs arrive in the U.S. carrying various pieces of identification, both real and fake. Brokers also purchase identification from relatives of dead Colombian citizens to be utilized by smurfs. The living expenses of the smurfs, who are usually unemployed, are paid by the money broker. The smurfs deposit the narco-dollars into these accounts in small amounts, thus avoiding the U.S. currency reporting requirements.
Page 15 PREV PAGE TOP OF DOC As an example, I purchased narco-dollars in the amount of $30,000. I then sold the currency to a money broker. At my direction, my smurf deposited the $30,000 into the buyer's personal checking account in Miami, Florida. The entire $30,000 was deposited on two consecutive days by six separate deposits. The buyer paid me the $30,000 in pesos in Colombia.
Blank checks: Checks drawn on the smurf checking accounts are sold on the black market. After opening the accounts, the smurfs receive the checkbooks from the bank, utilizing mail drop locations as their addresses. The smurfs sign the checks and deliver them to the money brokers in Colombia via the United States Postal Service. Colombian money brokers believe that other delivery servicesnamely, DHL and Federal Expressare searched by Government agents but feel safe with the U.S. mail.
The date, amount, and payee are left blank pending the sale of the check by the money broker. The balances in the accounts are allowed to accumulate to only a few thousand dollars and then routinely cleared by checks drawn on the accounts. These checks are sold on the black market.
The money brokers often possess more than 20 of these smurf checking accounts. Many of the blank checks are sold to Colombian importers and used to pay for U.S. exports. Many of the checks are also negotiated in the Republic of Panama, where U.S. currency is legal tender.
As an example, a smurf deposited $25,000 narco-dollars into a money broker's U.S. bank account. I sold this $25,000 to another Colombian money broker. He instructed me to send him blank checks totalling the $25,000. I sent him checks which contained only a signature and the amounts.
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The financial institutions that detect smurfing accounts close them and provide the customer with an explanation. These explanations inform the smurfs that the checks drawn on these personal checking accounts are not in payment of typical household expenses such as utilities, rent, insurance, medical, and so forth. In response, the money brokers are now paying the smurf's living expenses with these checks to make the activity in the account appear legitimate.
Money remitters: As an employee of a licensed money transmitter working in the U.S., I witnessed the ease with which agents working for brokers could structure and launder currency. With this knowledge, I opened up my own private money transmitting agency, at first remitting legitimate money. This proved to be unprofitable. Through my contacts with Colombian money brokers, I then began receiving bulk currency from money brokers acting on behalf of narcotic traffickers. At the instruction of these brokers, large amounts of currency, ranging in amounts up to $500,000, were delivered to me on a constant basis. A mule would deliver the cash in bags to me.
I opened up a second business checking account under the same name in the same bank. This account was utilized to deposit the narco-dollars. I used an armored car service to pick up and deliver the narco-dollars to the bank for deposit. At the instruction of the money broker, I transmitted the narco-dollars, less my commission of about 5 percent, from my account to various American exporters. The dollars would be either wire transferred or paid as blank checks.
The Colombian money brokers provided me with the amounts and the beneficiary's accounts for the wire transfers. The beneficiary accounts included individuals, manufacturing/exporting companies, credit card companies, security brokers, and both real and fictitious charitable organizations. The accounts were located in Panama, Colombia, Spain, Germany, Italy, and throughout the United States. On occasion, I was instructed to wire transfer the Colombian broker's commission, ranging between 2 and 5 percent, to an account in the United States.
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My bank provided me with the computer software to conduct my own wire transfers. I was also provided with a list of the ABA numbers of other financial institutions and was given personalized instruction by bank employees. The total amount of narco-dollars I laundered while I was in the United States in a one year period was approximately $14 million.
As this subcommittee knows, a Geographical Targeting Order was imposed on New York City Colombian money transmitters. Based upon my contacts, I know the GTO has had a devastating effect on the ability of the cartels to launder their drug profits through money remitters.
In closing, I would like to thank you for the opportunity to testify today. I realize I have committed a grave error in my life, and for this I am truly sorry. I hope that my testimony and the efforts of the law enforcement professionals will help remedy an evil which plagues both the U.S. and Colombia.
I will now attempt to answer any questions you may have.
Chairman BACHUS. Ms. Doe, we thank you very much for your testimony. And I am glad to hear that the GTO has had a devastating effect on the drug cartels and their ability to move money back to Colombia.
Ms. Doe, you gave testimony about large U.S. corporations which export to Colombia and how they are many times dealing with black market peso brokers who are paying them with illegal drug proceeds.
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If these companies wish to take steps to ensure that they are not dealing with black market peso brokers, in other words, are not being paid in illegal narco-dollars, what are some steps that they would take? I want to ask you some questions in that regard. One of them is, should these exporters be concerned when they receive checks drawn on individual accounts as opposed to corporate accounts?
Ms. DOE. Yes. The American exporters, I believe they have to be aware of where the source of the money comes from at the moment they receive the payment, especially checks, because they can find out when they look at a check, the top of the check has an individual's name, not even the name of the importers that are selling their goods. And there are several different handwritings on one check. The signature is different than the amount and the payee, it is very easy to see it.
Also, when the checks come from corporations, they can answerthey can askI'm sorry, they can ask the importer in Colombia if they know this corporation, what relationship they have with this corporation. They have to ask the importer from where they got the money and why the check or the wire transfer never came through a bank institution in Colombia.
Chairman BACHUS. You mentioned if the check has two different handwritings, that ought to be a tip-off that something is wrong.
Ms. DOE. Yes. It is definitelythere are three things there: If there are two different handwritings on the check, if the check top is an individual's name and it is different than the importer's name, and if it is a company and the importer doesn't know who the company is.
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Chairman BACHUS. So they would ask the importer, ''What connection does your business have with this particular company?'' And the importer ought to be able to give an explanation and some information about the company for the corporation who is supplying the check.
Ms. DOE. Yes.
Chairman BACHUS. Can a U.S. exporter verify the source of funds?
Ms. DOE. Verify the source of funds, yes, because if you are dealing with a Colombian importer, the importer is supposed to have their peso money in a bank in Colombia. So the bank in Colombia can do the wire transfer through the corresponding bank in the United States to the American exporter. And if it is a check or another wire transfer different than that, it is because the source of the money is not a good source.
Chairman BACHUS. So if all these transactions went from bank to bank?
Ms. DOE. Sorry?
Chairman BACHUS. If these transactions went from bank to bank, if there were a requirement that it go through a bank in the United States to a bank in Colombia, it would very much handicap this process, would it not?
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Ms. DOE. If it is a wire transfer, wire transfer departments inside, theywhen you receive a wire transfer, you can check through your wire transfer department, as an exporter, which person conducted the transaction, which ABA, which means which bank conducted the transaction to wire. So the receiving account can provide that information. It is called ''routing.''
Chairman BACHUS. I noticed, just for the record, that several corporations in the last day or two have commented on this particular problem, and two of them have actually acknowledged that they realized that there was a problem. And the Whirlpool Corporation has actually announced that they are not exporting to Colombia anymore, which is a pretty drastic step. Procter and Gamble was quoted in this morning's Christian Science Monitor saying that they were aware of the problem and that they were taking procedures and instituting steps to avoid being paid in illegal narcotics money. So at least we have two major corporations that have acknowledged the problem and have, in one way or another, set up procedures to address it.
I noticed some other corporations are simply saying that they comply with the law, or that they are unaware of a problem. So we still have apparently the majority of U.S. companies in denial. Obviously, they hadn't addressed their social responsibilities at this time, or their unwitting participation or not unwitting participation, in aiding the sale of illegal drugs on our streets.
So we hope your testimony will give us more information and give them more information on steps that they can take to avoid assisting the sale of illegal drugs on our streets and being a partner with the drug cartels by failing to ask questions and make inquiries.
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At this time, Ms. Kilpatrick, do you have questions?
Ms. KILPATRICK. Thank you, Mr. Chairman. And for your testimony, thank you very much.
As you know, this is the U.S. House of Representatives Banking Committee, Subcommittee on Oversight. Our job is to work with, monitor and evaluate the financial institutions in this country so that they provide assistance for the people that we represent, and that the financial industry in this country can be sound, perpetuating, and all the good things that it is intended to be.
I appreciate much of what you said. In your opinion, do the financial institutions that you have outlined here, and you have got quite an array here, both in the country and out, that you use or have used in the past
Ms. DOE. Sorry. A little bit slower.
Ms. KILPATRICK. Oh, slower. I am sorry.
Ms. DOE. Sorry.
Ms. KILPATRICK. In your opinion, the financial institutions that you worked with during your tenure, three years and you laundered $14 million through these banks per year, were they awarecould they have been aware, that they were receiving or involved in drug transfers?
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Ms. DOE. You are asking about the bank institutions here?
Ms. KILPATRICK. Yes.
Ms. DOE. No. There is little chance to be aware of it.
Ms. KILPATRICK. There is no chance that they would be aware of it?
Ms. DOE. Little chance.
Ms. KILPATRICK. Little chance?
Ms. DOE. Little chance.
Ms. KILPATRICK. Talk to me a bit about that, because I need to understand that better.
Ms. DOE. It is a little chance, because when you open accounts with them, they just provide a service, OK? But it is the chance it hasyou ask about the smurf's account?
Ms. KILPATRICK. Yes.
Page 23 PREV PAGE TOP OF DOC Ms. DOE. They found it in the beginningas I said in my testimony, they found, for example, $5,000 coming in today and $5,000 coming out next day by wire transfer or check, and the balance used to be zero or just up and down.
Ms. KILPATRICK. OK. I want to stop you on that. The smurfs, I can do that. I am not talking about the smurfs' account. They are probably at the lower end of the ladder where the $14 million was involved. I know that we have laws that used to require $10,000 reporting, now it is $3,000 that has to be reported.
Ms. DOE. On wire transfers, I have an individual account, and I received a wire transfer as an individual from another money broker, and then I sold the wire transfer. I called the bank, and I said, ''Listen, wire this money for me next day.'' So I receive $100,000 today, and I wire next day the $100,000.
Ms. KILPATRICK. And because the money is there, and you have been doing business, that is all that is required?
Ms. DOE. And they would never complain. I did it.
Ms. KILPATRICK. OK. Let's stay on that one right there. Is there anything that this subcommittee, or this Congress, could do as it relates to what you just described, money transfers, for example, that would better help the American society get at this practice?
Ms. DOE. Yes.
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Ms. KILPATRICK. What is that?
Ms. DOE. Yes. I think for example, where I just exposed to you, if the bank, when they open individuals' accounts from Colombianshold on one second. I want to make sure I understood the question.
OK. For example, as a bank, when they open a tourist account, a Colombian tourist is to come here, and they open different accounts, they use their name, middle name, and they mix up three or four different accounts, or they go to another bank to open accounts.
So what happens is, then they go to Colombia, they give these checkbooks to the money broker or the person who paid for that, and those accounts are used to receive wire transfers, or the smurf. So these people, they sign a paper to this money broker, and the money broker many times calls the bank and says, ''I am the person who was the person who opened the account here, and I want to wire transfer $100,000 to this particular account.''
And then the person says, ''OK, fax to me the order and instruct me the ABA, the account number, and the amount.''
So, this broker in Colombia faxes information to the bank and then the bank conducts the transaction. They don't even say, ''I want you to come here and sign the paper,'' the wire transfer paper, or they don't even say, ''I want information who you are, give me the Social Security, or anything, your date of birth.''
Page 25 PREV PAGE TOP OF DOC It is different if you call to ask for a balance. They ask for then.
Ms. KILPATRICK. OK. Stop on that. You just gave a very good example. I have got the money. I call. And I can do by telephone now where a person in Colombia can call my U.S. bank and tell me to transfer $100,000 there.
Ms. DOE. Yes.
Ms. KILPATRICK. And I tell you, ''OK, fax me A, B, and C.'' You fax it. And what you just said, that is all that is required. I don't have to come into that bank. I don't have to give a Social Security number. I don't have to further verify it. Then, in your opinion, would not the bank be in cahoots?
Ms. DOE. I want to
Ms. KILPATRICK. All right. You don't know ''cahoots.'' I am sorry. OK, that is rhetorical; you don't have to answer that. I am trying to get at legislation and other kinds of administrative things that the bank could do on its own, number one, or that legislatively, we could do it. You don't have to answer that. But that is a good illustration that you just gave.
Ms. DOE. It is easy for the money brokers to use your institutions.
Ms. KILPATRICK. That shouldn't happen. They shouldn't be able to, in my opinion, use banks here to do that. I want to go back to your testimony.
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Ms. DOE. Oh, definitely not.
Ms. KILPATRICK. Mr. Chairman, I see the red light, but if you would just allow me justOK.
I am trying to find out, you say your bank provided you with a computerwell, software; you may have brought your own computersoftware to conduct your own wire transfers and giving you the list of ABA numbers. Why?
Ms. DOE. This is a service response to corporations, and now they are doing to individuals.
Ms. KILPATRICK. Because you are a qualified corporationor we thought you were?
Ms. DOE. Yes. Because I asked for that service.
Ms. KILPATRICK. You asked for that service. And I want to go back to that service. Because you are a good depositing customer, you have $14 million, give or take, in the bank, you and the illegitimate business that you operated can go to my financial institutionI mean ''my,'' America's, good financial institutionand because you have the dollars, they can issue the software and other ABA numbers.
Again, I am thinking legislatively and administratively, things that banks and financial institutions can do to cut down on some of this. So in my mind, it almost looks like they are a willing partner.
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Now, you don't have to answer that; I am not asking that you answer that. The banking community is in this room. This is the Banking Committee. It is our responsibility to work with them and they with us, so that some of this doesn't happen. And it almost looks like to me, just as I described that 600 tons of drugs coming into America and somebody not doing their job on the border, that the banks are a willing partner in this. And that is what I want to get out.
You are a brave woman for coming here to testify. As you do that, and the bankers in this room, and the banks know who they are, and others who are not bankers in this room, it is a dangerous thing to get into. But unless we doand we have all taken the oath to uphold the Constitution of this country and protect the citizens who live herenobody is safe.
So, as a Member of this Banking Committee, it is my responsibility to work with them and the ABA, who really doesn't support me, to see that something is done.
How can we continue to perpetuate all this $14 million per year? And you are locking up young boys in the street and putting them in jail for 20-, 30-years. What kind of sense does that make? I am outraged, Mr. Chairman.
Chairman BACHUS. Thank you, Ms. Kilpatrick.
Page 28 PREV PAGE TOP OF DOC Mr. WEYGAND. Thank you, Mr. Chairman.
First of all, I am very impressed with your testimony. Again, thank you for being so courageous to come here today and give us this very informative piece of testimony that, I think, really strikes at many of the things that many of us are concerned about.
Let me ask you this. You dealt with, and you gave a great litany of the number of banks, and I breathed a sigh of relief that my own personal bank wasn't on that list. But I want to ask you, with regard to all the things that you are talking about in the United States, what is Colombia doing with regard to peso brokering? What are they, or what could they do within their own country, to crack down on this problem?
Ms. DOE. OK. Two things in here about what Colombia can do. Number one is, I believe they have to not allow any money broker to get a license to be a correspondent for a money transmitter and only let the banks, the commercial banks regulated by them, to be a correspondent for money transmitters from the United States. That is one issue.
The second thing I believe is, if you are a money broker in Colombia, illegal one, because you don't have a license, and the government fines you, the penalty is a civil penalty, they are not criminal penalties. So if these people can face jail, or more serious forms of punishment, they would probably be a little more fearful of that.
Mr. WEYGAND. Should those wire transfers and the monies that are coming from an account in a Colombian bank to an account in a United States bank require that one provide a license, other forms of identification, all the things to track a broker before they will allow transfers to the United States?
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Ms. DOE. The legal way is the way you said, an importer has to go to a licensed money broker or a bank institution, commercial institution regulated by Banco de la Republica of Colombia. But what happens is, this importer, even if it is a money broker, is a legal one.
Mr. WEYGAND. Is a legal one?
Ms. DOE. Is a legal one. He, the importer, goes to his broker, because he wants to avoid the taxes. And the money broker doesn't put the information of this importer into the books. He, instead, searches for dollars in the United States through the drug dealers, or the duros, to see who can provide the dollars to pay this importer debt.
Mr. WEYGAND. So you are saying that legal and illegal money brokers are all working together; there is not much difference between either one of them?
Ms. DOE. There is not.
Mr. WEYGAND. With all the money dealing that you did, and I am assuming with the larger accounts when you wire transferred from Colombia to accounts in the United States banks, were they in your name, or other names like smurf accounts?
Ms. DOE. They were smurf accounts and other people and companies contracted by me. I never used my name.
Page 30 PREV PAGE TOP OF DOC Mr. WEYGAND. Paper companies.
Ms. DOE. Paper companies.
Mr. WEYGAND. Paper companies that were just set up as a shell game.
When you wire transferred from Colombian banks to U.S. banks, were they large amounts?
Ms. DOE. Right. When I transferred
Mr. WEYGAND. When you transferred money from a Colombian bank to a U.S. bank
Ms. DOE. OK.
Mr. WEYGAND.To a smurf account, or paper account, or whatever it may be, the dollar amount of the money transfer, large dollars, $100,000, $200,000, or were there smaller amounts?
Ms. DOE. Less than $500,000, because when the Colombian money brokers, and I used to believe that they see $600-$700,000 is like a big amount for one day, but less than $500,000 is easy to not be noticed.
Page 31 PREV PAGE TOP OF DOC Mr. WEYGAND. So under $100,000?
Ms. DOE. $500,000.
Mr. WEYGAND. $500,000. It gets under the radar screen. There is really not much problem with it whatsoever?
Ms. DOE. Well, if the money brokers believing, you know, when they do their transfer, $300,000, $100,000it also depends on how many importers there are and how much money is available to wire.
Mr. WEYGAND. With all the dealings with all the U.S. banks you talked about, with all the money, $14 million in just one year and a lot more in over three years, were you ever refused or questioned by any U.S. bank?
Ms. DOE. No, not at all.
Mr. WEYGAND. With regard to Federal Express and some of the other parcel handlers, you mentioned that many people felt far more comfortable with the U.S. mail. Why is that, specifically? Why did they feel so comfortable using the U.S. mail?
Ms. DOE. Because they faced experiences with DHL and Federal Express mailing money orders and dollars and retained by these institutions, and they never had a problem with the American post office when they mailed it.
Page 32 PREV PAGE TOP OF DOC Mr. WEYGAND. So there was more scrutiny or questioning by DHL and Federal Express versus the U.S. Post Office?
Ms. DOE. I am sorry?
Mr. WEYGAND. Was there more scrutiny or review of what they were doing by DHL and Federal Express versus the U.S. mail?
Ms. DOE. Yes. Why, yes. DHL and Federal Express opened and scrutinized them.
Mr. WEYGAND. What would you suggest toif you could have someone here from the U.S. mailwhat would you suggest they should be doing with regard to the transfer of money and packages and other things like this?
Ms. DOE. Well, I believe U.S. mail has to open and look what is going on there, open the package and look around.
Mr. WEYGAND. Thank you very much.
Ms. DOE. A blank check for $100,000.
Mr. WEYGAND. I just wanted to get that on the record.
Thank you, Mr. Chairman.
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Chairman BACHUS. Thank you.
You have mentioned these peso brokers' flea markets. How many illegal market brokers are there in Colombia? Do you have an estimate of how many?
Ms. DOE. It is hundreds, but I can't give you a number. I can't.
Chairman BACHUS. But in the hundreds, at least.
Ms. DOE. Yes.
Chairman BACHUS. How many of these deal with the drug cartels?
Ms. DOE. All of them.
Chairman BACHUS. All of them?
Ms. DOE. Yes. The ones I dealt with, all of them.
Chairman BACHUS. OK. So we are talking about a very large enterprise that is functioning in Colombia?
Ms. DOE. Yes, sir.
Page 34 PREV PAGE TOP OF DOC Chairman BACHUS. How about the Colombian businessmen that deal with these black market peso brokers? They have to be aware that that is an illegal activity, do they not?
Ms. DOE. They definitely are. That is why they go to the black market.
Chairman BACHUS. All right. So this is common, it is widespread, and it is obviously illegal. The Colombian businesses know that what they are doing is illegal?
Ms. DOE. Yes, sir.
Chairman BACHUS. And as long as they can find a willing seller in the United States, that illegal activity will keep happening?
Ms. DOE. Yes, sir.
Chairman BACHUS. Were you ever questioned by an exporter or a U.S. company in all your dealings as to who you were, or why you were using a peso broker to import goods?
Ms. DOE. No, I have never been questioned. And I never got any payment back.
Page 35 PREV PAGE TOP OF DOC Chairman BACHUS. All right.
Ms. KILPATRICK. Mr. Chairman.
Chairman BACHUS. Ms. Kilpatrick, do you have another?
Ms. KILPATRICK. Mr. Chairman, just finally, is there any end in sight? I know you are working with authorities. We appreciate that. And it has to be a two-way street. And I know you come here with your life threatened and all. Is there any hope or optimism that anything can change at this time?
Ms. DOE. I think the hope is you.
Ms. KILPATRICK. Pardon?
Ms. DOE. The hope is your country, and there is something else I want to add. It is money transmitter licenses here. I believe you have to prohibit it to be money brokers, because what they do is they have the money, they receive the money from the people, and then they speak through telephone to do the payment to the corresponding countries brokering the money. And there are banks, regulations, like fines and everything, so that is an important issue. I believe you can work on it.
Chairman BACHUS. If U.S. money transmitters were required to wire transfer all money received via a U.S. bank to a Colombian bank and weren't allowed to engage in brokering transactions on behalf of Colombian brokers, would that solve the problem?
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Ms. DOE. It definitely does. I saw a company, a large company in this country. I heard, though, that sending wire transfers to money brokers to respond up therenow these employees, they are using a commercial bank in Colombia, and the money brokers, those groups disappeared because they have no more business, so they couldn't search for no more dollars, and the U.S. could just buy this from the authorities in Colombia, and I believe that is the main issue.
Chairman BACHUS. So that would basically shut down the process?
Ms. DOE. Definitely.
Chairman BACHUS. Mr. Barr, do you have any questions?
Mr. BARR. Thank you, Mr. Chairman, and I appreciate the opportunity. I apologize for running a little bit late. It is good to be back on the subcommittee.
I appreciate the witness appearing today. As a former U.S. Attorney, having handled money laundering cases, including those involving the cartel back in the late 1980's, I know the risk that the witness is taking being here today, even though extraordinary measures are taken to protect her identity, and I appreciate her courage in coming forward very much.
Is this something thatthe problem of money launderingis this something that could benefit from an international effort, as opposed to just bilateral U.S.-Colombia or U.S.-Panamanian initiatives?
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Ms. DOE. Yes. One of the things these money brokers used to do is, they sell the checks to Panamanian accounts, and the money broker is checked again and again, and they pay American supporters with those checks after they are used many times and giving profits to different money brokers.
Mr. BARR. One of the major cases that we handled, I think, was back in 1989, out of Atlanta, a wire service, U.S. Attorney, was Operation Polar Cap, which may be still ongoing in some respects. At least I hope that it is. There have been other cases like that, but it strikes me that some sort of international effort to coordinate banking regulations, banking laws, money laundering laws between the different countries, particularly those that you have identified, Panama, Colombia, would be very, very helpful. And I know that Senator Coverdell from Georgia also is interested in pursuing that.
I have traveled within the last several months to Colombia, Panama and several of the other countries heavily involved in drug trafficking and money laundering, and I think also that there would be a lot of support for tackling this problem in an international, multilateral way, as opposed to just the individual relations between different countries and individual prosecutions.
I know it is the sort of thing that will be very complex, because the banking laws and the banking regulations, the privacy laws between different countries don't always match up. As a matter of fact, a lot of times they don't even come near to matching up. But I think if we are going to solve this problem over the long term, it is going to take more than simply individual prosecutions or individual treaties, and your testimony today is, I think, an important first step in that direction. And again I want to commend you for being here today and for testifying before this subcommittee.
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Chairman BACHUS. Thank you.
At this time we are going to recess our first session. For security reasons we are going to ask that the public leave the room, and at that time our witness can leave, and in that way we will protect her identity, and we will, I guess, reconvene in about 15 minutes.
Chairman BACHUS. The hearing is called back into session.
Our second panel will consist of a panel of law enforcement experts on peso brokering. As I said earlier, we will hear from Mr. Allan Doody, Assistant Director, Operations, U.S. Customs Service; from Mr. Greg Passic, Senior Special Agent for FinCEN; and Mr. Alvin James, Senior Special Agent, IRS Criminal Investigation Division.
This panel will provide us with a law enforcement context for dealing with this challenge, and as I said earlier, in a truly unusual example of law enforcement cooperation, the three agencies jointly submitted one formal statement for the record. I am sure that was somewhat difficult, but I am not going to ask you what you went through before it hit our desk. But I do appreciate your doing that. I don't know that I have ever seen these three agencies submit a joint statement on anything.
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It is my understanding, Mr. James, you are going to testify first, give an opening statement, then Mr. Doody and then Mr. Passic. Is that correct?
Mr. DOODY. That is correct.
Chairman BACHUS. All right, so at this time, Mr. James,
we welcome you to the subcommittee and appreciate your testimony.
STATEMENT OF ALVIN C. JAMES, SENIOR SPECIAL AGENT, IRS CRIMINAL INVESTIGATION DIVISION
Mr. JAMES. Thank you, Mr. Chairman and Members of the subcommittee. I appreciate the opportunity to be here today to address you on this important money laundering issue, specifically on the workings of the Colombian black market peso exchange and how it is used by the cartel to launder their drug proceeds.
The Colombia cartel, the
Chairman BACHUS. You might want to move your mike a little closer.
Mr. JAMES. Thank you. Is that better?
As you said, I am a special agent with IRS Criminal Investigation, and the financial expertise of my agency has been instrumental, along with that of the United States Customs Service, the Drug Enforcement Administration and other law enforcement agencies, in developing our knowledge to date on this money laundering system.
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We began in the early- to mid-1980's with a question about the currency that appeared to be awash in drug distribution centers in the United States, especially southern Florida, and through our investigations along those lines we have developed the level of knowledge of this system that we bring to the table today.
With that, I would like to begin to explain the black market peso exchange. I find it is necessary to understand the workings of that system before we can understand how, in fact, it is used to launder money by the cartel. So if I may, I will use the slides to help with that. Thank you.
Basically what we are going to be talking about, what I am going to be presenting here today, and what Mr. Passic and Mr. Doody will be expanding on once I have more or less laid out the basics, is a system where cocaine is imported into the United States by narcotics traffickers. That cocaine is then converted to currency.
Chairman BACHUS. Let me interrupt at this time. If maybe we could turn everything a little more toward the middle of the room. You may have to move the projector a little bit. Just move the projector over toward the audience a little more if we could.
Mr. JAMES. Thank you, Mr. Chairman.
The point that I was making is that the only thing that really crosses the border in this system is cocaine coming into the United States and, through an ingenious process, trade goods going back out of the United States to Colombia. That is a very basic view of what we are going to come to understand here through this process.
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The black market peso exchange operates to facilitate trade. The Colombian black market peso exchange facilitates international trade for Colombia to a large degree with the United States or collateral markets. To understand this process, if we look at it first from the point of view of the trade, first from the point of view of a U.S. businessman, let's say someone who wishes to purchase coffee from a Colombian coffee grower. The deal would be struck between these two individuals, and then the U.S. businessman would go to his U.S. bank to facilitate the transfer of U.S. dollars through a correspondent Colombian bank, giving the Colombian businessman pesos. The transaction would be completed, and the goods would be shipped.
If we look at this same transaction from the point of view of a Colombian businessmanand let me state that the coffee industry or the tractor manufacturer here are strictly hypothetical businesses. I don't mean to indicate directly that these businesses are any more involved than any other. It is just for the purposes of example at this stage.
At any rate, the Colombian businessman, as has been pointed out to you by the first witness this morning, has a lot of reasons to not go to his Colombian banker to facilitate the purchase, say, of a U.S. tractor to run his coffee farm. There are all sorts of taxes, trade barriers, limitations that may cause that individual to wish to avoid the government scrutiny of his transaction. So the way that he gets around that is to go to a peso exchanger to purchase the U.S. dollars necessary to complete the transaction with a U.S. merchant.
The peso exchanger facilitates that transaction normally with two bank accounts termed ''parallel'' bank accounts. One of those bank accounts is a U.S. dollar account in the United States, and the other would be a Colombian peso account in Colombia. For purposes of illustration here, for our example, we are just going to use one U.S. dollar account, although actually it may be a more complex, layered version, as we will explain as we go along.
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So, the Colombian businessman would then give the value of the transaction in pesos to the peso exchanger. Those pesos would be deposited in the Colombian account, and the peso exchanger would then cause the U.S. dollar value in the United States to be transferred to the U.S. merchant, either in the form of a check or a wire transfer in most cases. The transaction is complete, and the goods are shipped to the Colombian businessman.
Now, if we look at the peso exchanger's position in this situation, if he is going to perform this service for the next businessman who comes along, he is left with the problem of replenishing his U.S. dollars in order to have more dollars to sell to the next businessman.
Prior to the narcotics industry becoming involved in this peso exchangeand I might note at this point that the peso exchange has been around for a long time in Colombia, and although one might think, based on our conversation so far here this morning, that this is an outgrowth of the narcotics industry, it is not. It has been an institution in Colombia for a long time.
At any rate, the peso exchanger, prior to the involvement of the narcotics industry, would replace those U.S. dollars on the international market, either buying them in the United States, or at least buying them through some international market outside of Colombia and replacing them in his U.S. dollar bank account.
That is where the cartel enters the picture in our model here. The cartel needs Colombian pesos to continue to operate in Colombia, to maintain the high life-style, and so forth, that they lead in Colombia. What they have is currency, the proceeds of narcotics transactions amassed in ''stash houses,'' we call them in law enforcement, in major drug distribution centers in the United States. Their problem then becomes, as far as the cartel is concerned, how to get that currency into a usable format or into a format that they can make use of it in Colombia.
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The link between these two individuals becomes obvious here. The peso exchanger needs U.S. dollars in the United States, and he has Colombian pesos in Colombia. Basically the peso exchanger agrees to purchase the cartel's U.S. dollars. This is done in Colombia and is normally accomplished by an exchange of codes whereby employees of the peso exchanger receive instructions as to where to meet employees of the distribution organization that is running the stash house. Literally, they contact each other by way of pagers usually, and eventually cellular phones, and they exchange code names or numbers, and they make an agreement to meet at a particular street corner or shopping center, parking lot or whatever in the city that the stash house is maintained. Of course, they don't trust one another, so the cartel is not going to give up the location of this stash house, but they agree to meet on a street corner, and they basically exchange this currency once the codes are given out.
Once the peso exchanger is informed that he has received the U.S. dollars, the pesos of the equivalent amount, less his fee, are transferred to the cartel account in Colombia, and it is notable, for law enforcement purposes at this point, that the drug nexus to these dollars begins to dissipate. The cartel has received their pesos, the actual value for the drugs has been transferred, and now the peso exchanger's job is to inject those dollars profitably for him back into U.S. commerce.
The smurf organization that has been discussed here is the most common form, and the first form of taking the large volumes of drug currency, structuring the amounts of that currency into amounts below the Bank Secrecy Act threshold, and depositing that into one or many bank accounts maintained by the peso exchangers.
Page 44 PREV PAGE TOP OF DOC The previous witness explained another means of getting the currency into theI will come back to that in just a secondinto the financial system, which is to go to a money transmitter. The value of the money transmitter to the peso exchange system is that they have an excuse to deposit large amounts of currency into a bank account so that the peso exchanger who buys the currency would then ask the money transmitter, ''Well, take my drug currency that I have just purchased and deposit it along with your proceeds, and then I will tell you where to wire transfer it to one of my accounts that I can control it.''
We also have the direct delivery on occasion of currency to U.S. merchants, where the peso exchanger will still buy the currency, but rather than deposit it directly into a bank and then have a check or a wire transfer directed to the U.S. merchant on behalf of his Colombian client, the U.S. merchant will actually accept the currency directly. They would then be required to file a Form 8300 if the currency is over $10,000, and they are in compliance with the law, and then they would deposit the proceeds directly to their account. That is currently not the major means of transaction here, but it is one of the ways that are used.
We can see through this whole process that the U.S. dollars stay in the United States, and the Colombian pesos stay in Colombia. As I said, neither of these monies cross the border; that is one of the beauties of this system.
Project ''Oro Dinero'' is the project that was adopted by the Interagency Coordination Group, which is made up of the Internal Revenue Service Criminal Investigation, U.S. Customs Service, Drug Enforcement Administration, FBI, Department of Justice and FinCEN, to facilitate the sharing of narcotics money laundering intelligence and expedite the working of these cases together. That project cooperated with a task force out of South Florida to get the final pieces to the puzzle that we present to you here today.
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This is a model now of the final working of this process filled in with the spokes in both wheels, the necessary elements to convert the cocaine to currency, the currency to a more usable form of dollars, and the dollars to trade goods through the black market peso exchange.
With that, unless you have any questions for me at this point, that is the basic workings of this system, and I would be glad to answer any questions you have on it, or I would introduce Mr. Passic. Mr. Doody is going to be next?
Chairman BACHUS. And what we will do is we will reserve the questions for all three panelists until after they have finished giving their statements. I appreciate that, Mr. James.
Mr. DOODY. Thank you, Mr. Chairman.
Chairman BACHUS. Are we through with the slide presentation?
Mr. JAMES. Yes.
Chairman BACHUS. So we can turn the lights back on.
STATEMENT OF ALLAN J. DOODY, ASSISTANT DIRECTOR, INVESTIGATIVE OPERATIONS, U.S. CUSTOMS SERVICE
Page 46 PREV PAGE TOP OF DOC Mr. DOODY. Thank you, Mr. Chairman, Mr. Barr, for the opportunity to address you on this important topic, black market peso exchange. As you have heard, the system of laundering drug proceeds has been utilized by Colombia's drug syndicates for a number of years; however, its existence until today was not widely known or understood outside of Federal drug money laundering investigators and, of course, money launderers. We are pleased to have the chance to describe how the system works and what Customs, IRS, FinCEN, in partnership with DEA and other law enforcement agencies, regulators and members of the financial community, are doing to disrupt and dismantle it.
Money is a commodity. As with any other commodity, it can be bought, sold or traded. The U.S. dollar is the preferred currency worldwide, and as such facilitates trade and tourism between countries. The combination of the worldwide demand for dollars and the ability to buy, sell and trade them translates to huge profits for money transmitters, brokers and others involved in the movement of narcotics proceeds throughout the world.
Just as any other commodity that is bought, sold or traded, money is handled by brokers or ''cambistas,'' who, for a fee, arrange the transactions. My colleague, IRS Special Agent Al James has described in some detail how the system works and explained why it has evolved into one of the most efficient methods currently available to launder drug money. Ms. Doe has also provided details of her personal involvement as a black market peso exchanger, bringing valuable insight from an industry insider. I would urge you to take note of her observations on the use of the U.S. mail to illegally export drug proceeds, and specific use by drug launderers who feel safe utilizing it over DHL and Fed-Ex.
In sum, this system exploits the demand for U.S. dollars generated by the narcotics industry and is a ready and cheap source of money to fund trade with Colombia, Panama and other countries.
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I would now like to describe both historical and ongoing means utilized by law enforcement to combat this system.
The Customs Service and the IRS have been involved in investigations of this type of scheme since the early 1980's. In 1980, Customs and IRS formed the first task force to investigate large currency transactions. The task force, dubbed ''Operation Greenback,'' was created to investigate unusual currency deposits in cash smuggling occurring in South Florida. It was also charged with establishing a link between these funds and the narcotics industry. Through its early investigations of Isaac Kattan and Bheno Ghitis, agents of ''Operation Greenback'' began to develop an early understanding of the Colombian black market peso exchange.
As a result of these early law enforcement efforts, the money launderers began to change and adapt. Currency brokers deployed more people to complete the tasks that, prior to these investigations, were done by one individual.
As law enforcement pressure continued, we began to see the immergence of ''smurfing.'' This process was identified through other Greenback cases, such as the investigation into Alberto Barrera. ''Smurfing,'' a phrase coined by law enforcement, described the cash placement process that utilizes workers to structure large pools of illicit drug money into amounts beneath the reporting threshold, either depositing these monies into bank accounts, or purchasing checks or money orders, thereby evading the CTR requirements. As with earlier cases, these deposits, money orders or other negotiable instruments purchased through this process were sold through the Colombian black market peso exchange to businessmen and others in Colombia who were in need of U.S. dollars. In addition, they began to recognize that U.S. currency was being delivered to U.S. businesses engaged in the export of goods to Colombia.
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Another common form of placement involves U.S. currency which has been smuggled to Colombia as well as to Mexico. As part of this process, drug money is smuggled out of the U.S. by core Mexican and Colombian drug trafficking organizations. Once in Mexico, the currency is placed in Mexican banks either directly or via Mexican currency exchange businesses. Once in the Mexican bank, the depositor requests the dollar denominated financial instruments drawn on the Mexican bank's correspondent U.S. bank account. The smuggled currency is generally returned to the U.S. banking system, often by armored car, and deposited in border banks on behalf of Mexican financial institutions. These instruments, Mexican bank drafts, are then transported to Colombia and represent the proceeds owed to Colombian traffickers by core Mexican drug traffickers for cocaine and heroin that is been smuggled into the United States. The checks are sold by the brokers to the Colombian importers as U.S. dollar monetary instruments, and the traffickers are provided with pesos. The Colombian businessmen wishing to buy goods in various markets in the Western Hemisphere with dollars utilizes these checks and subsequently smuggles his goods into Colombia.
Other examples of this type investigation were the Bank of Credit and Commerce International, conducted by Customs and IRS, which identified the corruption of a worldwide financial institution by traffickers and money brokers. In the ''Polar Cap'' investigations, the IRS, Customs and other Federal and State law enforcement agencies identified how the precious metals industry had been corrupted and used to launder money, again in conjunction with Colombian-based black market exchangers.
Customs has a broad grant of authority in the conduct of international financial crime and money laundering investigations. Our jurisdiction is triggered by the illegal movement of criminal or unreported funds, services or merchandise across our borders. Combined with our border search authority, Customs' enforcement efforts focus on significant international criminal organizations whose corrupt influence often impacts global trade, economic and financial systems.
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Customs and IRS special agents have implemented an aggressive strategy to combat money laundering utilizing the black market peso exchange. Our approach involves criminal investigations by Customs and IRS special agents, interdiction efforts by Customs inspectors, and, in a partnership with Treasury, FinCEN and others, the design and implementation of innovative regulatory interventions unique to Treasury that dismantle and disrupt systems, organizations and industries that launder ill-gotten gains.
The Customs Service dedicates some 500 special agents worldwide to money laundering investigations of this type and conducts some 4,700 criminal money laundering investigations in a year. Our global network of attachés posted in 26 countries, including seven offices in Central and South America, is the most extensive in Treasury.
As an example, Customs undercover operations directed at peso brokering systems have resulted in the seizure of more than $763 million in cash and monetary instruments in the last eight years. The aforementioned operations have also produced more than 2,000 arrests and the seizure of 94,534 pounds of cocaine. The two largest single seizures of cash in the history of Federal law enforcement were made as a result of Customs undercover operations ''Casacam'' in Miami, some $22 million, and ''Omega'' in Los Angeles, $19 million, targeting the Colombian peso exchange. The largest cash seizure at the U.S. border also was conducted by Customs, $15 million in Miami in 1996, based upon information provided by DEA, State and local police. Moreover it was Customs undercover operations that first exposed the criminal money laundering activities of the Bank of Credit and Commerce International and the American Express Bank International.
In a major IRS operation, Criminal Investigation special agents, along with other law enforcement agencies, identified and attacked both the Colombian narcotics and the black market components of this process. As a result of this case, which lasted approximately seven years, IRS seized more than $217 million in drug proceeds, 9,701 kilograms of cocaine, and arrested some 450 violators on narcotics and money laundering-related charges.
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Customs recently established a National Money Laundering Coordination Center at FinCEN to coordinate the intelligence it generates out of the more than 20 undercover operations it conducts annually targeting the black market pesos exchange. Intelligence on the identities, locations and methodologies of peso brokers facilitating drug money laundering is collected and synthesized for future enforcement efforts. Moreover, Customs has employed a powerful database, the Numerically Integrated Profiling System, that is has used for years to identify trade fraud and related anomalies in an effort to identify export commodities and businesses that supply the contrabandistas with merchandise that is financed by the brokers' drug dollars.
Finally, New York's El Dorado Task Force combines the resources and expertise of Customs, IRS, both CI and Eximbank, the Secret Service, New York Police Department and the New York State banking regulators and focuses on money laundering. Its most recent success has been with the wire remitter industry, which is estimated to have transmitted some $1.5 billion to Colombia in the past year. Applying a combination of law enforcement and regulatory pressure, the Task Force has prevented this system and industry from being exploited by drug kingpins to launder money and subsequently process wired funds on the black market peso exchange. In fiscal year 1996, the Task Force seized in excess of $46 million, made 170 arrests and indicted 95 money launderers.
Law enforcement, through their traditional means, has been successful in arresting and prosecuting many individuals involved in this system. We have seized and forfeited huge amounts of drug cash linked to the peso exchange, causing the costs to launder money to rise significantly over the past several years. Nonetheless, to date we have not been able to stop its use with traditional tactics alone.
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It should be noted that this system also damages the Colombian economy. Availability of discounted narcotics dollars gives an additional competitive advantage to importers willing to use the black market system. Colombian importers are thus encouraged to fund their purchases of black market dollars, avoiding Colombian import duties and sales tax. Colombian government sources have stated that although they have drastically reduced trade barriers, the availability of cheap narco-dollars continues to fuel their contrabandista markets.
To conclude, Treasury law enforcement agencies represented at this hearing, along with the other Federal law enforcement agencies, have long been aware of the black market peso exchange. Through our law enforcement efforts we have not only prosecuted a significant number of individuals and seized an enormous amount of assets and narcotics, we have also over time, built an understanding of the role, operations and vulnerabilities of the black market peso exchangers and the illicit narcotics industry.
Despite our efforts and successes, there is still a lot of work left to do. Collectively law enforcement regulators, prosecutors in both the United States and Colombia, Members of this subcommittee, as well as private industry, need to build on work that has been done in the past and that is presently being done in an effort to systematically address the black market peso exchange and related contraband trade as a means to launder drug money.
A similar, yet valuable lesson was learned from Treasury's efforts in Operation El Dorado in New York, which was described in detail by Treasury Under Secretary Kelly to this subcommittee in March of 1997. As you may recall, the behavior of an entire industry was modified as a result of combining the resources and expertise of a number of Treasury and other law enforcement agencies, as well as utilizing both a regulatory and law enforcement approach to the problem of pervasive money laundering in the ethnic wire remitter industry. We believe that the same basic approach can be effective with the black market peso exchange as well, although somewhat more difficult, in that the system is based in Colombia, not in New York. Nevertheless, we have begun to approach this problem with the benefit of the GTO/El Dorado experience under our collective belts and have initiated the process, through the ICG and other bodies, to reach out to our Colombian counterparts in a joint effort to address the problem.
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Mr. Chairman, Members of the subcommittee, we would like to thank you again for holding this hearing and focusing some much needed attention on this important system of laundering drug proceeds. We look forward to working with you, the subcommittee, members of your staff on this issue and appreciate your support for our law enforcement efforts and programs currently and in the future. We also appreciate your leadership and accomplishments with legislative initiatives that are in the forefront of fighting money laundering, and we intend to work closely with you as we identify potential areas of mutual interests.
Chairman BACHUS. Thank you.
Mr. Passic, we will hear from you at this time.
STATEMENT OF GREGORY PASSIC, SENIOR SPECIAL AGENT, FINANCIAL CRIMES ENFORCEMENT NETWORK
Mr. PASSIC. Good morning, Mr. Chairman, Ms. Waters. Thank you very much for inviting me to be here on behalf of FinCEN with my brothers out of the Treasury Department.
I kind of wish Mr. Barr had a moment to stick around because I wanted to answer his question. During ''Polar Cap'' we looked at his office in Atlanta. They were virtual pioneers in the undercover approach to money laundering, and a lot of what we learned about this system of laundering, we have to thank Mr. Barr and his office down there.
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I think the question that remains to be answered is what have we done to further our investigative successes? I compare it to the Baltimore Oriole season, in particular, last week's game. They put a lot of runners on base, but they couldn't score. And the way I look at it, we have had some tremendous enforcement successes in this area over the past ten years. We have loaded the bases on numerous occasions, and what I would like to talk about briefly is how do we get those runs home. How do we exploit the success of the investigators, the men and women who have really put their hearts and souls, and many times their lives, in danger to provide us with this type of intelligence?
My colleagues have told you about a very complex system, one that presents us with a lot of challenges. It shows us a very complex side of money laundering that we were ill-prepared to face when we first ran into it. They are very highly organized, they are businesslike, they have cloned themselves into business-type operations. They have developed a very ingenious way of moving monies around today that we did not initially recognize when we bumped into this system. But the most dangerous thing I see is these people have learned how to manipulate and use to their purposes, legitimate international trade. We have got to come up with clearly new approaches to counter this organized system that you have heard today described by the witnesses and by our group.
I would like to address briefly how we at FinCEN can play some kind of a role in attacking what I consider to be the most efficient money laundering system in the Western Hemisphere, if not in the entire world.
In the spring of 1996, the Interagency Coordination Group was established here in Washington to enable the law enforcement entities a vehicle for sharing intelligence that came from the active cases so we could promote at a neutral site, investigative efforts that went beyond traditional arrest, prosecution, and seizure. We learned to leverage what we gained through those investigations to impact on organizations and systems outside of the United States.
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The ICG reps, in addition to the Customs Service and to IRS Criminal Investigation, is made up of DEA, FBI, the Department of Justice, FinCEN, and the U.S. Postal Service. In fact, a question was raised earlier about the post office role. I would like to note that our Postal representative of the ICG is in Panama this morning discussing with Panamanian authorities what can be done to take a look at postal packages and postal money orders from Colombia to Panama, and also from the U.S. to Panama. He is presently furthering ICG objectives by being on location in Panama.
Our Director, Stanley Morris, has spoken to this subcommittee and other committees about the need of law enforcement to think smarter, to be more like our adversaries in developing creative new ways to counter these criminal organizations. We need to learn to venture outside of our box, so to speak. Our effort to counter this black market exchange system, I think, is a wonderful illustration on how we in law enforcement are exploring different ways, and we are looking for new partners. Unless we are able to do this effectively, we are not going to achieve the results we want.
We want to stop this. We don't want to identify it for you and just talk about it, we want to stop it.
I think this approach mirrors what FinCEN has been trying to achieve over the past few years, and that has been to strengthen the ability to conduct domestic and international money laundering efforts beyond investigations and to address all aspects of solutions to the money laundering question.
Page 55 PREV PAGE TOP OF DOC We have a unique name in that we are referred to as a ''network.'' We want our law enforcement counterparts to be able to use that network. We developed some ''highways,'' as I refer to them, developing into partnerships in both the public and private sectors. We want to make those partnerships available, and we want to sponsor and support any investigation that can be expanded beyond the traditional sense of what we call success of the past.
We are looking at a system of money laundering that virtually knows no borders. It means that we cannot recognize or be limited by borders in any fashion if our approach is to be successful. We have to expand our network to all regions of the globe. We need to provide the Interagency Coordination Group with nontraditional avenues that go beyond our traditional investigative sandbox.
I think a good example of what we can do has taken place in just the past year. We used FinCEN's ''highway'' basically to open up ''roads'' into the banks, and to the merchants, the Colombian Business Association, and the Panamanian Free Zone Users Association, to the Mexican Government and also Panamanian and Colombian officials. Some of these officials are here in the audience today, which I think is a wonderful sign of some positive steps that have been taken.
One of the first challenges we faced was how to support the Interagency Coordination Group who brought a case to us that was being conducted by the Impact Interagency Group in South Florida. They had gained some tremendous intelligence on bank accounts used by Colombian money launderers. We felt that it was necessary to go beyond our approach of pursuing these accounts in the old fashioned way.
Page 56 PREV PAGE TOP OF DOC I don't want to indicate that we have abandoned the old approach in any fashion. In fact, DEA this morning is executing 76 administrative subpoenas in Miami, going after what we consider to be significant accounts described by the witness that was here earlier today. So we are not giving up on that. We are just trying to leverage what DEA is going to be gaining this morning.
We were able to convince the Task Force in South Florida that we needed to share the information they gained on these accounts. We needed to share how the accounts were opened and utilized with the banking community. The Interagency Coordination Group went to South Florida, met twice with the bankers, and basically indicated how the drug funds are being deposited in a fashion which circumvented the Banking Secrecy Act. Our old defense mechanism that the banks were using to try to keep drug money out of the system wasn't working with this system. As the witness described, most of the people were foreign nationals, primarily Colombians, that were using various passports and variations of their names. Just a simple thing like requiring a Colombian to use their full name presented on the passport, I think, is a major step forward.
The bankers were asked to take a look at what we are sharing with you, take a closer look at these accounts. Some accounts will be requested later via subpoena, but these accounts we identify to you are basically ''freebies.'' All we are asking you is, if you confirm our suspicions that these are accounts open to facilitate money laundering, that you meet with us again in the future, meet with each other, start discussing this, and share what you have learned through your review with the other banks here in South Florida. Let's see if we can come up with a method of stopping this method of laundering, or preventing account openings at the onset, right at the bank.
Page 57 PREV PAGE TOP OF DOC The banks' willingness to cooperate, I think, has been outstanding. You are going to hear a lot of good and bad about the bankers today, but my personal opinion is that they welcome law enforcement's outreach in this fashion, and they have been responsive thus far.
One of the other things that we felt we at FinCEN could do to support and exploit what the Interagency Coordination Group had learned through their investigations, was to get them together with Colombia and Panama. Not just the Colombian and Panamanian governments, but also with the merchants in Colombia and in Panama's Free Zone. The vast majority of the monies described by the witness today actually end up buying goods and services in Panama's Free Trade Zone, so we needed to go directly to those individuals affected, and we needed to ask for their assistance. Basically, we indicated directly to them what the carrot and what the stick were.
We told these individuals the same thing we told the U.S. banks: ''We have got a big problem here. We know a little bit more about it now than we did before. We are going to share it with you. We ask only that you work with us to find solutions, that we do this together.''
Panama and Colombia sent representatives to Washington. We invited the Interagency Coordination Group, and other elements of our Government that have a dog in this fight, to meet with them. We had some pretty hardball discussions on the issues, on how we could do some things jointly. They went back with a different attitude, I think, toward our approach in combatting this form of money laundering, in that we were including them at the front end.
Colombia and the United States have got a lot in common right now. Their legitimate business sector is being threatened by what was described earlier this morning. It is in their best interest to work together with us. They have taken some steps, they have criminalized that type of activity, and they have shared with us businesses, bank accounts, subjects and individuals that are involved in that illegal process. We have a chance now to start digging, sharing, developing those leads and getting it back to the Colombian group which is going to spill back into Panama and ultimately into Mexico.
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I think we have taken some positive steps. As my colleague, Mr. Doody said, we have got a long way to go on this laundering process. I think we are taking the proper steps in developing an inclusive strategy, especially with the business community and people that we really need to have on our side if we are going to effectively address this problem. The private sector is going to be very crucial in winning this money laundering war. We have got to bring them on board. We have to look at them as allies, and we have to work with them.
I would just like to thank you on behalf of FinCEN for your efforts to shine some light on this very significant problem we have, and thank you for inviting me to attend your hearing this morning.
Chairman BACHUS. Thank you. I appreciate that.
Let me ask you this question. We talked about Colombia and their cooperation. I have been told that the Colombian government estimates that 50 percent of all imports into Colombia are financed through black market peso brokering. Do you think that figure is accurate?
Mr. JAMES. The figures in this regard are problematical. We can tell you that the Colombian government, the Colombian trade people, have told usthe figure that was quoted to us was 30 to 35 percent of their import consumer goods were fundedwere part of their contrabandista system, which is funded by the black market peso exchange, which is narco-dollars. So we have that figure from them.
Page 59 PREV PAGE TOP OF DOC Chairman BACHUS. So that means that their economy to some extent is dependent on narco-dollars; is that a fair statement?
Mr. PASSIC. I think they have gotten used to using the narco-dollars. Our message is Colombia doesn't need to be dependent on narco-dollars, they are just going to have to bite the bullet, and they are going to have to pay a little bit more for these imports.
And I would like to add if I might shed some additional light. We talked about American companies today being involved in the process, but it would be unfair to single only our companies out, because the United Kingdom, Germany and Japan are also big players in this cycle of commodities that are being smuggled into Colombia and being paid for by drug money.
Chairman BACHUS. I did notice, though, that we are their largest exporter. You know, they import more goods from us than anyone else. But the European Union does export an awful lot. Are they selling drugs in Europe?
Mr. DOODY. Yes. They are selling. You can probably get more money in Europe for a kilo of cocaine than you can here in the United States, although I am not an expert on pricing. But over time there has been a shift of sales of cocaine and other drugs in Europe because of the price it commands there.
Chairman BACHUS. When you look at their imports, you see 36 percent of them are from the United States and about 20 percent from Europe, about 9 percent from Japan, which is low compared to what you see in other countries.
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Mr. DOODY. I think one of the things you have to consider, and I don't have the figures in front of me, but a lot of, for instance, consumer electronics are obviously made in Japan. A lot of them go to the Panama Free Trade Zone and from the Trade Zone go to Colombia. And it is all, again, fueled with black market brokered dollars. So what is exported direct to Japan and what is actually Japanese product that eventually gets to Colombia are like two different things.
Chairman BACHUS. I see.
I saw another figure from your combined statement, Mr. James, that peso brokering is used to launder 30 to 40 percent of drug proceeds earned in the U.S.
Mr. JAMES. That is our estimation based on statements from informants running these stash houses and that sort of thing, yes, sir.
Chairman BACHUS. How much money are we talking about annually? What kind of drug proceeds are earned in the United States every year? What is the total?
Mr. JAMES. Once again, putting exact numbers on this is outside my area of expertise. I can tell you again that assuming that this process primarily funds these imports to Colombia, once again the Colombian government has told us that they estimate that about $4.5 billion is imported annually through legal processes from the United States, and about another $5.5 billion comes through this contrabandista black market peso system, and that does not account for the amounts that might be coming through the Free Trade Zone, which might be as much as another roughly $2 billion.
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So that is my best handle on the amounts we are talking about that is going through this system.
Chairman BACHUS. You said $5.5 billion plus maybe another $2 billion. Taking their total imports, which they themselves have estimated as 50 percent purchased with drug proceeds in 1994. Their trade has grown since then. Would that mean that this amount could now be even more? And if you took that $7.5 billion, and you estimated that it was maybe 30 to 40 percent of the total illicit drug proceeds in the U.S., you are talking about at least $17- or $18-billion in drug proceeds that has to be disposed of. Is that right? $18 billion? $18 billion.
That is an incredible amount of money. Regardless, that means that somewhere between $4- to $6-billion is moving by peso brokering now.
Mr. JAMES. I think that is a fair estimate, yes, sir.
Chairman BACHUS. It seems like somebody would have to be aware of that, because that is not the normal way of financing exports to other countries.
Mr. JAMES. I was going to respond, and also I would like tothis goes back to an earlier question that you had, Mr. Chairman, about the degree of dependence on drug dollars by the Colombian economy. The black market peso exchange has been the preferred means of getting U.S. dollars to purchase Colombian imports for a long time.
Page 62 PREV PAGE TOP OF DOC Chairman BACHUS. And it is all illegal.
Mr. JAMES. Not in our country, sir.
Chairman BACHUS. The black market peso program.
Mr. JAMES. It has recently been criminalized in Colombia, I believe. It was previously a regulatory violation. It is not illegal in our country to engage in these transactions as long as there is no knowledge that it is, in fact, drug money.
Ms. WATERS. Excuse me, if I may, Mr. Chairman. Don't we have a policy in this country for documentation of transactions of like $10,000 or more for purchase of anything?
Mr. JAMES. If the transaction is conducted in currency, and then it is often required to be documented, yes, ma'am.
Ms. WATERS. But you are saying most of this is wire transfer?
Mr. JAMES. Well, most of this starts out as currency. That is one of the risks that the black market peso exchanger assumes in converting that currency into some means which can be passed by check or wire transfer. So it begins in currency, yes, ma'am.
Ms. WATERS. Well, I know, but from what I can understand, and I came in on this late, people are going around setting up bank accounts with cash, is that true; $30-, $40-, $50-whatever thousand dollars?
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Mr. JAMES. Yes. The deposits into those accounts are often structured below the $10,000 Bank Secrecy Act threshold, or actually the banks have been very vigilant trying to stop these smurfing operations as well, so now the deposits are often in the $1- to $3,000 range to stay below the bank's own thresholds.
Chairman BACHUS. When we are talking about moving $6 billion, you are talking about an awful lot of accounts, an awful lot of transactions and an awful lot of wire transfers.
Mr. JAMES. That is right.
Chairman BACHUS. And as you said, down in Colombia the black market peso brokering is illegal.
Mr. JAMES. That is my understanding.
Chairman BACHUS. Now in other countries that we trade with, are our exports paid for in that manner, too, or is this just something unique to Colombia?
Mr. DOODY. Well, generally speaking, most trade transactions are paid through letters of credit, which is a guarantee by a bank to deliver certain goods at a certain time under certain circumstances.
Chairman BACHUS. So it is a transaction between two banks?
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Mr. DOODY. It would be a letter of credit between the buyer's bank and the seller's bank basically, yes.
Chairman BACHUS. So these ought to stand out, these types of transactions, particularly the volume of them, and, of course, they do.
Mr. DOODY. I think to some extent you are correct, but what we are doing here is part of the education process to bring this to the American business community's attention, as well as banks and what-have-you, to educate them on how this process could be corrupted.
Chairman BACHUS. I would agree. I am just fascinated with what we have looked at in the last two or three years, and the American people, I don't think, have a great appreciation. They think of the illegal drug problem as basically a one-way street where the drugs come in. But the profitable part, the most necessary part, the most important part as far as the drug cartels, is getting that money or getting paid for those drugs. And even with law enforcement, our efforts have really lagged behind on that part of the process. In fact, I think that there is ICG interagency cooperation. I mean, it has come now, but as you have said, we have had this peso brokering, and it is bound to have been going on for years and years.
Now I know it is greater now because you have hit them with their money smuggling, which still accounts for over half of it, and with your money transmissions, your wire remittances, the GTO has hit them there. So it is pushing them into this. It is actually making this probably their safest method. But it has been going on for years.
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Mr. PASSIC. If I might add, Mr. Chairman, you raised a good point. We have pushed them around, and sometimes it is just a simple thing like telling someone what the heck is going on.
A good example: Panama was in Washington with members from their Free Trade Zone and Banking Commission. We had been throwing rocks in their direction for years, and basically they challenged us and said, ''OK, well, tell us exactly how we launder money.'' And our response was, ''OK, if a Colombian buys computers in the Free Zone with a Mexican's check, it is drug money. Do you have any questions? Drug money.'' And they went back to Panama, and they told their banks, and they told the Free Zone User Association, ''No more Mexican checks from Colombians.'' A Mexican check now is the cheapest vehicle of payment you can buy in Cali, Colombia on the Black Market. Nobody wants it because it will not be accepted in the Panama Free Trade Zone.
I think the latest trend we have seen caused by the ICG efforts thus far is a shifting to wire transfers. We are seeing fewer third-party checks. The large Mexican bank drafts have dropped off the radar scope. So there are definitely things that we can do to cause changes in laundering systems.
And to answer one of your colleagues' earlier questions, is there any hope for this type of laundering? Yes, there is hope. We just have to fight smarter, and we have to harness the energy that is out there in the investigative field and leverage it in efforts outside our country.
Page 66 PREV PAGE TOP OF DOC Chairman BACHUS. But I guess there is more potential in hitting the drug cartels here than any other place, because it is largely undeveloped by law enforcement. It is really a focus that most law enforcement doesn't take.
The other thing I am struck by is that this has been going on for tens of years, and think of how many young city kids and real young teenagers have been involved in the drug trade and are in our jails and prisons today. As long as you have got something that generates, as I said, $7.5 billion through this one process per year, there is an awful lot of profit for our teenagers out there and our young people to get drawn into, and we have literally filled our jails and penitentiaries in this country with a lot of those young people.
If we concentrate a lot of efforts here, I would think we would certainly not only affect the sale of narcotic drugs, but we could certainly address some of our overcrowded prisons.
Ms. WATERS. Mr. Chairman.
Chairman BACHUS. I am going to yield to Ms. Waters for her statements and then to Mr. Barr.
Ms. WATERS. Thank you you very much. I am sorry I could not be here this morning, and I have got to leave right back out. I have a whole caucus that is waiting for me, but I would like to submit this for the record with your unanimous consent.
Chairman BACHUS. Without objection.
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Ms. WATERS. Thank you. And I would just like to thank you for holding this hearing and for the the work that you have done looking at this whole issue, which is, indeed, very complicated. And I think you raised the significant question about the length of time that this has been going on. So it is not comforting to hear that we are just still learning about some of the very elementary ways by which drug money is laundered.
You are absolutely right about all the people who are going to jail and the destruction to our cities. And you know this is an issue for the Congressional Black Caucus. We have made this our number one issue.
One of the things that we hear all of the time in the community is that ''You can arrest youngsters on the corner with one rock of cocaine, but you can't get the big boys.'' These are the big boys, and this is what people resent so very much.
I heard some reference to how hard the banks are trying and some of our corporations. Are you aware of the two big cases of Citicorp, of money laundering that are now in the courts? Anybody?
Mr. DOODY. What we have read in the papers, yes.
Ms. WATERS. Well, why don't you know more about it?
Mr. DOODY. I am actually not conducting the investigation, so I don't know much about it.
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Ms. WATERS. Aren't you just interested, though, how they do it, where it comes from? This is not very complicated. The brother of the ex-President of Mexico, the drug dealer, just put the money in the bank, and they wire transferred it all offshore. That is what the information is. And I guess Citicorp is trying to defend itself saying that, yeah, they took the money and, yeah, they are the bankers. They were the bankers. And I want to tell you, I know in many places in this country, if you walk in with a thousand dollars in cash, people want to know where you got it from, but he deposited multimillions of dollars, and nobody asked any questions.
So, I would just look at some of this stuff. Even though it is not your area of responsibility, everybody has got to be kind of concerned and interested.
Now, one question. Did any of you know, or were you involved in any discussion about what would happen with NAFTA if it was passed and the opportunity that it would create for the cartels to launder money through corporations that were created by NAFTA? It would allow the easier shipment of drugs across our border through so-called ''produce trucks'' that wouldn't be inspected, and on and on and on? Any of you know about that stuff?
Mr. DOODY. I guess that is going to fall to me since I am from Customs.
Ms. WATERS. All right. Did you hear about this, and do you know about how you waved the trucks through with tomatoes and drugs in them and all this other stuff?
Page 69 PREV PAGE TOP OF DOC Mr. DOODY. I guess it is a difficult question, and I will answer it in two ways. Number one
Ms. WATERS. Just tell me what you know, and make it as plain as you can.
Mr. DOODY. The discussions that you refer to are policy level discussions to a large extent. And what you have before you are three working agents on the street who worked investigations and those types of things.
Ms. WATERS. That is OK. Get brave and talk. Just tell us for a change. It would be wonderful for somebody to take that seat and just tell us something instead of protecting themselves. Did you know about the discussions at all that warned that with NAFTA, it was going to create more opportunities for not only the transport of drugs, but laundering of drug money also?
Mr. DOODY. No.
Ms. WATERS. No.
Mr. DOODY. I didn't participate in those discussions. Thank for you the opportunity.
Ms. WATERS. I won't put you on the spot, Mr. Doody. But if you ever hear of anything, write me an anonymous note and let me know, OK?
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Mr. DOODY. I will.
Chairman BACHUS. Thank you, Ms. Waters.
Mr. BARR. Thank you, Mr. Chairman.
On page seven of you all's testimony, it makes reference to Operation Polar Cap. What major cases have cropped up since Polar Cap? That one goes back to the late 1980's.
Chairman BACHUS. And, Mr. Barr, while you were gone, Mr. Passic referred to one of your investigations, and you may want to comment on that, too.
Mr. PASSIC. It was an honor to be here with you, because I consider you to be a pioneer. Your office, with Buddy Parker, Bill Bruton, and Skip Latson actually started an undercover approach to look at the Colombian organizations that really opened my eyes.
And the question you had, what happened after Polar Cap? What did we gain out of it? I compare it to putting a runner on base in a baseball game and not getting him home to score and tried to explain what we intend to do to make sure that individual investigative successes and the prosecutions be exploited and that somewhere in Washington, we can learn from that process, and we can leverage intelligence to really have impact in Colombia and Panama and Mexico and answer your question. Maybe I can let my colleagues answer the second part.
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But ''Operation Green Ice'' was another Polar Cap-type operation out of San Diego. It resulted in seven Colombian major money launderers being arrested in the United States and in Costa Rica. ''Operation Pisces'' was also successful. And then I will let Allan talk about Customs and Al talk about the IRS successes, since these are out of my old DEA days.
Mr. BARR. Are the ones you mentioned, are those post-Polar Cap?
Mr. PASSIC. Yes. Well, Polar Cap lived on. It went through Polar Cap Phases 1 through 5. And as a result of Polar Cap, actually, the Interagency Coordination Group was created. We met on your case once a week in Washington, and we discussed how we were going to coordinate it at the Federal level. And we learned that once a week wasn't enough. And it was a result of that learning experience that we now have a collocated group in Washington of FBI, Customs, IRS, Postal, DEA, DOJ, and FinCEN.
Mr. BARR. Are the laws under which we are currently operating to tackle these source of problems, whether it is Title 18, 21 or 26, sufficient?
Mr. PASSIC. I will refer to my enforcement counterparts here.
Mr. JAMES. I think at this point that, yes, the laws that we are utilizing are sufficient.
Mr. BARR. How about in terms ofI have particular concernwe have had earlier testimony concerning possible changes to our money laundering statutes and some of the constrictions, the restraints that pertain to Title 26 information. Is that a problem in terms of sharing information and being able to get the information out to prosecutors?
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Mr. JAMES. That is an area outside of my expertise. It is more of a policy consideration. And so I we will be glad to get you that information, but I don't feel competent to respond to that.
Mr. BARR. I mean, does this come up in any investigations? I mean, we have had former Government officials, Chuck Saphos was up here, for example, a couple of months ago, and indicated that there are some areas here that could behe recommended that we look at to strengthen the ability to coordinate and share information so that it doesn't get locked off somewhere as Title 26 information, for example. This isn't a problem that you all are aware of?
Mr. JAMES. I am aware of the problem you are referring to. If IRS criminal investigators are part of the task force investigating a particular area, then it is not a problem. And I believe that the Internal Revenue Service, as a whole, is addressing the need to share that information more fully to the extent that they are able to do so within the law as it stands right now.
Mr. BARR. You are not in a position to indicate whether there are some particular changes that might facilitate these problems that have been identified?
Mr. JAMES. No, sir.
Mr. BARR. OK. Is anybody? One of the things that we are trying to do, while we are having these and other hearings, is to identify if there are some changes that could be made to our existing laws to strengthen you all's ability to conduct these types of operations and to share information and coordinate even better than we are now. That is the reason I am asking.
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Mr. DOODY. I think one thing thatalthough it does impact Title 26 information to some extentthat Congress has already done, I think it made 8200 information available to us through FinCEN, and I think that was very helpful. We are in the process now, Customs is in the process now, of working with the IRS on how that information will be given to Customs criminal investigators in their investigation. So that is something that has already been done. It is very helpful, and it is information that we need and we will use in the future.
Mr. BARR. OK. One of the things that our earlier witness discussed, and I think you all were here for that, she talked about, in facilitating her brokering activities, utilizing accounts in various U.S. and other national banks, banks from other countries, utilized accounts in Colombian banks. And then she listed a number of U.S. corporations.
And she said: ''As a money broker, I arranged payments to many large U.S. international companies on behalf of Colombian importers.'' She lists them. And then she went on to say, ''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.''
Does this get close to an area that we, you know, we used to refer to as blind indifference?
Mr. DOODY. I think it depends on each individual investigation and each individual circumstance whether it is willful blindness or something approaching willful blindness. We talked earlier, part of this process is to educate U.S. businesses on what to look for, much as it is now with banks, on what to look for in a trade transaction that is not, I suppose, normal or indicators they can look for that may indicate that the money is drug money.
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It is something as simple as I think the confidential witness mentioned, that was the relationship between parties conducting the transaction and the person actually making the payment. If there is no relationship between the three, then, you know, more questions ought to be asked. And that is the type of thing that we are striving to do through the ICG and other bodies to try and educate, in our instance, the American exporting public on some kinds of things to ask.
Mr. BARR. What sort of general reaction have you gotten generally that business wants to be cooperative, that they are receptive to learning more about this and perhaps being a little more aware of what is going on, maybe asking some questions? Or is their reaction simply that, you know, ''These are all legitimate transactions, it is going to hurt our bottom line if we start to look behind them,'' and so forth?
Mr. DOODY. I think the Chairman pointed out earlier that there were some remarks in the The Washington Post today wherein some of the businesses indicated that they were willing to do those kinds of things, ask questions, or suspend trade with Colombia or do other types of things to look further into those transactions.
So I would like to think that there are many multinational corporations out there that will, in fact, cooperate and want to do the right thing down the road.
Mr. BARR. But you haven't developed this process sufficiently enough to say whether you have gotten any reaction yet?
Page 75 PREV PAGE TOP OF DOC Mr. DOODY. That would be correct.
Mr. BARR. You are just starting.
Mr. DOODY. That would be correct.
Mr. BARR. Thank you, Mr. Chairman.
Chairman BACHUS. Thank you.
Do these businesses know that they are dealing in drug dollars? And I would ask you, is it realistic to conclude that these exporters are being paid by an unrelated party in Colombia for these items and, you know, with a knowledge of Colombia's drug past, doesn't that at least raise questions?
Mr. DOODY. To you and I, it does. ButAl.
Mr. JAMES. I was really going to just reiterate what Mr. Doody said. I think it is a matter of degree. To be fair to the U.S. businesses, Colombian businesses have been doing business and have been purchasing U.S. dollars as a commodity and then arranging those dollars to be transferred to the exporter, supplying them with goods for a long time. That is the way business has been done.
Depending on the degree of the unusualness, if you will, of the transaction, I mean, if U.S. business accepts tens of thousands of dollars in actual currency, rather than having it go through a financial institution at all, then I would agree with you, Mr. Chairman. My eyebrows would go up. I would begin to wonder where that money was coming from. And then it goes as a matter of degree all the way up to a wire transfer, which may appear to them to be totally legitimate.
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Chairman BACHUS. Well, this whole setup is unusual in international trade. It is a setup that Colombia basically uses in their trade with us and in European countries. So it is very unusual. And I don't know why it was set up and how long they have done it, but it appears apparent to me that it facilitates the sale of narcotic drugs on our streets and allows the drug cartels to recoup their profits.
And it also seems to me thatand I am preaching to the crowdI mean, I am not admonishing you. I am saying that our Government should have a policy that says we are not going to allow this unusual situation that exists between the United States and Colombia to keep flourishing when it is basically facilitating the drug trade.
And the only excuse that I seem to hear is that this might destabilize the economy of Colombia. Well, you know, I think it is a choice between destabilizing their economy and destabilizing our social structure in the United States. If the choice is between economic disadvantage for them or social disadvantage to us, I would think it could be an easy choice. This is the system they have set up, they tolerate, they could change, and yet they won't. It facilitates the drug cartels' jobs or their profits. And it seems like it would be an easy choice for our Government that we choose us as opposed to them.
I will say this, the other argument I hear is if we stop trading with Colombia, then the Europeans will just increase their trade. Well, what that means is the drugs will just increase going there, and they will quit coming here, and I think that would be something that we ought to jump on. I think the Europeans can make a decision whether they want to swap drugs for exports.
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A policy of our country, unintended or not, is apparently that we are going to swap drugs for exports to Colombia. That is probably an oversimplification. Law enforcement ought to be enraged by this whole thing, because we send law enforcement officers out every day in our country to make raids on pot houses in the middle of the night where they risk their lives. They search thousands of cars on our highways every day trying to interdict drugs, and not a day goes by when some police officer somewhere in America isn't killed doing that.
And, yet, we are talking about 40 percent of the drug proceeds in our country being returned to the cartels with this one type transaction. And we could shut a lot of that down without risking the lives of one law enforcement agent, because where you go into a stash house, and you could get killed, you go into a bank and the bank enforces the regulation. There are not a lot of people shot over that. So it is a much safer way of stopping the drug trade. And to me, it is where our efforts ought to go.
I appreciate that you all are leading that fight. And you know, I don't think it is as romantic as putting on the bulletproof vest and kicking in a door at two o'clock in the morning, but it sure is more effective.
But I would say to our Government agencies, this subcommittee stands ready to address the problem. We can either address it through a better regulatory scheme, or we can continue to arrest young folks every day on our streets for being involved in the drug trade. And that is necessary. And we can continue to put our law enforcement agencies at risk. So I appreciate your testimony.
Page 78 PREV PAGE TOP OF DOC Mr. DOODY. Thank you.
Chairman BACHUS. And any recommendations that you have I would not worry about being too bold. I would not worry about the fact that, if we require that Colombia change the way they are trading with us, we are going to lose a lot of exports. As I have said, we are losing an awful lot more by not requiring that today.
Thank you very much.
Mr. DOODY. Thank you, Mr. Chairman.
Mr. JAMES. Thank you, Mr. Chairman.
Chairman BACHUS. This hearing is adjourned.
[Whereupon, at 12:55 p.m., the hearing was adjourned.]