CDR: Know Your Customer

[Marcel Popescu]

> from http://www.nytimes.com/2000/10/10/national/10PESO.html
>
>
> October 10, 2000
>
> U.S. Companies Tangled in Web of Drug Dollars
> By LOWELL BERGMAN
>
>
> On a rainy day last June, a group of corporate executives gathered in a
> conference room at the Justice Department for a meeting with Attorney
> General Janet Reno and other top government officials.
>
> The executives represented some of the pillars of corporate America -
> Hewlett-Packard, Ford Motor Company, Whirlpool. The session was not
> publicized because those at the meeting shared an unlikely and potentially
> embarrassing problem: their companies, they feared, were being singled out
> in the nation's war on drugs, and neither they nor the government was
quite
> sure what to do.
>
> With the intensifying federal crackdown on money laundering, agents had
been
> tracking drug money into the accounts of American corporations and their
> distributors and dealers. In fact, federal officials said, about $5
billion
> a year in Colombian drug money is used to buy goods and services - from
> cigarettes to computer chips - from American companies.
>
> What makes that possible is a system known as the black-market peso
> exchange, a complex money trade that law enforcement officials say has
> become increasingly important to the Colombian narcotics trade.
>
> The system - really a network of currency brokers with offices in New
York,
> Miami, the Caribbean and South America - is essentially an underground
money
> market that lets the traffickers exchange American dollars for Colombian
> pesos. Those dollars, which stay in the United States, are then bought by
> Colombian companies that use them to buy American goods for sale back
home.
>
> But the government's efforts to seize that money have put it on a
collision
> course with corporations, which say they are victims with no way of
knowing
> that they and their distributors are being paid with drug money.
>
> As they met on June 6, those executives, lawyers and law enforcement
> officials found themselves grappling with a conundrum: when does drug
money
> stop being drug money? How far does a company's responsibility go?
>
> The questions have been confronting law enforcement officials for years.
>
> "What are we going to do?" asked Greg Passic, a former drug enforcement
> agent who now advises the government on the economics of the narcotics
> industry. "We've got the Fortune 500 involved in our drug- money
laundering
> process."
>
> For a long time, because of lax enforcement of United States currency
laws,
> the drug traffickers were able to launder billions of dollars through
> American financial institutions. A crackdown in the 1980's pushed
> traffickers to what they saw as a virtually fail-safe system for getting
> back their profits - the black-market peso exchange.
>
> Their growing reliance on that system shows how deeply the drug trade has
> become entwined in the legitimate economies of the United States, Colombia
> and other nations.
>
> Colombian officials said that as much as 45 percent of their country's
> imported consumer goods are bought with money laundered through the peso
> exchange.
>
> On the American side, law enforcement officials said the exchange has
> largely eliminated the trade deficit with Colombia. The market, said the
> customs commissioner, Raymond W. Kelly, "is the ultimate nexus between
crime
> and commerce, using global trade to mask global money laundering."
>
> So far, no large American company has faced criminal charges. And
companies
> have almost always been able to prevent federal officials from keeping
money
> that has been seized.
>
> But in the last few years, as frustration has risen, the government has
> taken a tougher line. There have been Congressional hearings intended to
put
> companies on notice by name. Prosecutors have issued warnings and stepped
up
> efforts to seize laundered money.
>
> At the same time, the government has encouraged companies to institute
"know
> your customer" policies similar to those used in the financial industry.
The
> policies gave dealers and distributors techniques for recognizing money
> laundering. Thus educated, the government thought, the companies would be
> less able to argue that they simply could not have known.
>
> In drawing the line between legitimate and illegitimate profits, the
> government must not only prove that the money came from drug deals; it
must
> show that the recipient "knew or should have known" its source.
>
> In the war on drugs, that line has proved very fuzzy.
>
> Trading Dollars for Pesos
>
> Congress passed the first money- laundering laws in the early 1970's -
> requiring, among other things, that banks report any cash transaction over
> $10,000 - but the laws were loosely enforced. By 1979, the Federal Reserve
> Bank in Miami had more cash than the other federal reserve banks combined.
>
> It took the uproar over the cocaine epidemic in the early 80's for banks
to
> comply with the law. And with the resulting crackdown, traffickers
resorted
> to the black market, which for decades had provided Colombian businesses
> with dollars at less than the official exchange rate of 2,000 pesos to the
> dollar. The rate in Colombia is fixed by the government.
>
> One peso broker recently agreed to describe how the system works.
>
> The process begins when the broker receives a call from a Colombian drug
> trafficker or his American representative. The two negotiate an exchange
> rate for pesos, usually 30 percent to 40 percent below the fixed rate. So
> $10,000 might be worth 12 million pesos instead of 20 million at the
> official rate.
>
> The dollars are then delivered to the broker, who promises to deliver
pesos
> to the trafficker's bank account after the dollars are sold to Colombian
> businesses. The dealer's insurance is the broker's knowledge that to do
> otherwise would almost surely mean death.
>
> The broker maintains several runners - "smurfs," in law enforcement
lingo -
> who deposit the cash into hundreds of United States bank accounts in
amounts
> of less than $10,000, to avoid scrutiny.
>
> At the same time, the broker's office in Colombia negotiates with business
> people there who want cheap dollars to buy everything from consumer goods
to
> helicopters.
>
> Usually, that exchange rate is 20 percent below market, so a business
owner
> in Colombia might pay 16 million pesos, instead of 20 million pesos at the
> fixed rate, for $10,000.
>
> The pesos are then transferred - in this example, 12 million pesos - to
the
> traffickers' accounts. The broker keeps the difference, 4 million pesos in
> this instance. Then at the businessman's direction, the dollars in the
> American banks are used to pay for American goods.
>
> The peso brokerage is one part of the process that supplies Colombia with
> inexpensive goods from the United States and around the world. Colombian
> authorities said the goods were often smuggled into the country, costing
> Colombia more than $300 million a year in tax revenue.
>
> Colombia has made collecting that lost revenue a priority. But the black
> market has considerable appeal because it puts a lot of inexpensive
foreign
> goods on the Colombian market.
>
> The exchange has also increased American exports to Colombia.
>
> "This is positive for U.S. business, there is no doubt about it," said
Mike
> Wald, who runs a consortium of law enforcement agencies in Florida
focusing
> on the peso exchange. "The Colombian, if he pays less for his dollars, can
> buy more goods. That's a pretty obvious economic fact. But we have to
> realize where this money originates. It's drug money."
>
> Tangled With Drug Money
>
> Two companies that have turned up in the American government's
> anti-laundering efforts are Phillip Morris and Bell Helicopter Textron.
>
> Phillip Morris products in particular have been a major presence in
> Colombia. Marlboro cigarettes are readily available at prices investigator
s
> said indicated that they were bought with black market dollars and
smuggled
> into the country.
>
> Earlier this year, Phillip Morris was sued in the Eastern District of New
> York by the Colombian tax collectors. The federal lawsuit accused the
> company of being involved in cigarette smuggling and in the laundering of
> drug proceeds.
>
> Phillip Morris has denied the allegations, saying that it did not know its
> products were being exploited for money laundering. In addition, without
> admitting wrongdoing, it recently signed an agreement with Colombia,
> pledging to stop its products from entering the black market or being used
> to launder money.
>
> In 1995, in Federal District Court in San Juan, Puerto Rico, Phillip
> Morris's former distributors in northern South America were indicted for
> laundering $40 million in black market pesos.
>
> A member of the defense lawyers said the money was used to buy Phillip
> Morris cigarettes, liquor and other products for the Colombian market. But
> the defense team member said the defendants did not know that the money
came
> from drug sales.
>
> Phillip Morris severed its relationship with the defendants in 1998 and
said
> it did not know that its products were being smuggled or that black market
> money was used to buy them.
>
> In another case, Bell Helicopter is challenging the seizure of $300,000
from
> its accounts, money, according to court documents, that was generated by
> drug smuggling.
>
> It was part of more than $1 million that the United States believed was
> supplied a peso-exchange broker to buy a Bell aircraft. The helicopter was
> seized in Panama at the request of the United States.
>
> The case has become a sore point for American law enforcement in part
> because the helicopter was sold to a Colombian businessman linked to the
> country's right-wing paramilitaries.
>
> Seeking Cooperation
>
> The deepening struggle between prosecutors and business executives is what
> led to the meeting with Attorney General Reno and other government
> officials, including Deputy Attorney General Eric H. Holder and Deputy
> Treasury Secretary Stuart E. Eizenstat. The companies invited were
> Hewlett-Packard, Ford, General Motors, Sony, Westinghouse, Whirlpool and
> General Electric Company, Treasury officials said.
>
> None of the companies returned phone calls seeking comment, except General
> Electric and Sony. Sony said it would have no comment. But General
> Electric's counsel, Scott Gilbert, said his company instituted a strict
> compliance program five years ago, after reports that its refrigerators
were
> being used in money-laundering operations.
>
> As part of its policy, Mr. Gilbert said General Electric warns dealers to
be
> aware of "red flags" - a customer's lack of interest in discounts, an
> unwillingness to give information about the company, or unusual forms of
> payment like large amounts of cash or checks written on the account of a
> third party.
>
> The new policy has cut sales of appliances to Latin America by 23,000
units,
> or over 20 percent, said an executive at General Electric.
>
> Alan Dooty, a customs official, said the companies had been selected for
the
> June meeting because their products had shown up in the black market in
> Colombia. The exception was General Electric, which he singled out as a
> "good citizen."
>
> Before the meeting, some of the companies expressed concern that they
would
> be punished. But once they arrived, Mr. Dooty said, they were assured that
> the government was seeking cooperation.
>
> A follow-up session in July bogged down in legal murk.
>
> An industry representative familiar with the meeting said: "The Justice
and
> Treasury Departments realized that they were trying to identify drug money
> that had morphed, been transformed, in layers of transactions involving
> distributors, authorized dealers, financing arrangements with unregulated
> money lenders called `factors' and the other realities of commercial
life."
>
> More meetings are scheduled for this fall.