TIME: Almanac 1993/TIME Almanac 1993.iso/time/121889/12188900.014

Text File | 1992-09-23 | 25.2 KB | 475 lines

                                                                                BUSINESS, Page 50

COVER STORY: A Torrent of Dirty Dollars


Money laundering is a runaway global industry that serves
customers ranging from cocaine cartels to tax-dodging
corporations

By Jonathan Beaty & Richard Hornik


    In Willemstad, the sunny Caribbean capital of the
Netherlands Antilles, a banker ushers an American visitor
through a hotel casino and into a dining room overlooking the
harbor. During refreshments, the prospective customer says he
expects a six-figure cash windfall soon and would like to bring
the money "quietly" into the U.S. At first the banker responds
cautiously. "This money isn't, ah, tainted, is it?" When the
American assures him it is not, the officer of the Curacao
branch of the French-owned Credit Lyonnais Nederland smiles and
orders another tonic water. In that case, says the banker, he
can arrange a so-called Dutch sandwich.

    Under this multilayered plan, the Paris bank would set up
a corporation for the customer in Rotterdam, where he would
deposit his cash in the bank's local branch. The American would
control the newly created Dutch corporation through an Antilles
trust company, but his identity as the owner would be protected
by the island group's impenetrable secrecy laws. The Caribbean
branch would then "lend" the American his own money held in
Rotterdam.

    If the American were questioned by the Internal Revenue
Service or other authorities about the source of his wealth, he
could point to his loan from a respected international bank.
"Many of your largest corporations, many of your movie stars,
do much the same thing here," says the banker. "We wouldn't want
to handle criminal money, of course. But if it's just a matter
of taxes, that is of no concern to us."

    When U.S. drug agents tallied up the amount of cocaine they
seized during fiscal 1989, their haul totaled 89 tons, or 44%
more than last year's. The volume, which is believed to be only
a small percentage of the tons flooding the country, is evidence
of more than just a frighteningly effective drug-smuggling
industry. The wholesale value of the coke, as much as $28
billion, is testimony to another kind of dark genius. This is
the scandalous ability of the coke kingpins to launder billions
of dollars in drug proceeds using many of the same financial
services available to the FORTUNE 500. In a wash cycle that
often takes less than 48 hours, the drug smugglers can turn
coke-tinged $20 and $100 bills into such untraceable,
squeaky-clean assets as money-market deposits, car dealerships
and resort hotels.

    The coke smugglers can accomplish this feat because they
have plenty of help. They rely on a booming money-laundering
industry that serves a clientele ranging from tax-avoiding
corporations to the Iranscam schemers. The system depends on the
collaboration, or often just the negligence, of bankers and
other moneymen who can use electronic-funds networks and the
secrecy laws of tax havens to shuffle assets with alacrity. The
very institutions that could do the most to stop money
laundering have the least incentive to do so. According to
police and launderers, the basic fee for recycling money of
dubious origin is 4%, while the rate for drug cash and other hot
money is 7% to 10%.

    Much is at stake as the powerful flow of narcodollars is
recycled through the world's financial system. Drug lords and
other lawbreakers are believed to be buying valuable chunks of
the American economy, but clever Dutch sandwiches and other
subterfuges make it almost impossible for U.S. authorities to
track foreign investors. A case in point: blind corporations
based in the Netherlands Antilles control more than one-third
of all foreign-owned U.S. farmland, many of the newest office
towers in downtown Los Angeles and a substantial number of
independent movie companies producing films like Sylvester
Stallone's Rambo pictures.

    While businesses and individuals may conceal their assets
for purposes that are completely legal, or dubious at worst,
the systems set up for their convenience can be perversely
efficient at helping drug barons launder as much as $100 billion
a year in U.S. proceeds. "It is hard to understand why we failed
for so long to institute adequate controls," says Massachusetts
Democrat John Kerry, chairman of the Senate's Subcommittee on
Terrorism, Narcotics and International Operations. The state of
regulation is "so lackadaisical," says Kerry, "it's almost
damnable."

    President Bush, for his part, has declared money launderers
a critical target in the war on drugs, allocating $15 million
to launch a counteroffensive. While the sum is minuscule for the
task, the declaration signals a change in philosophy for the
Administration, which had resisted calls for tighter banking
regulations. Only hours after Bush unveiled his antidrug
offensive last September, a federal task force began taking
shape. The Financial Crimes Enforcement Network (FINCEN) hopes
to zero in on money launderers with computer programs capable
of spotting suspicious movements of electronic money.

    In a high-tech game of cat and mouse, the Justice
Department said last week that it had found and triggered the
freezing of $60.1 million in bank accounts in five countries
that contained the personal income of Jose Gonzalo Rodriguez
Gacha, a leader of the Medellin cartel. Using financial records
and computer disks captured by the Colombian government, U.S.
agents traced Rodriguez money to accounts in the U.S.,
Luxembourg, Switzerland, Austria and Britain.

    Drug Enforcement Administration officials told TIME that
one of Rodriguez's purported financial advisers, Panama-based
Mauricio Vives, tried desperately to keep moving the money one
step ahead of the agents. Vives called a British banker and told
him to move several million dollars, fast, to an account in
Luxembourg. If the bank were to delay, his Colombian client
would kill him, Vives pleaded. The banker refused, and British
authorities cooperating with the DEA froze the account. Not all
countries were as helpful. U.S. agents said they tracked
Rodriguez's money to the Cayman Islands, Spain and Montserrat,
but local authorities said they could not cooperate, citing
rigid bank-secrecy laws as an excuse.

    What makes enforcement so difficult is a financial
murkiness that has long frustrated tax collectors as they search
for dirty money afloat in the world's oceans of legitimate
payments. The multibillion-dollar flow of black money, the
profits from criminal enterprise, moves through the world's
financial institutions as part of a vastly larger quantity of
gray money, as bankers call it. This dubious, laundered cash
amounts to an estimated $1 trillion or more each year. Often
legitimately earned, this money has an endless variety of
sources: an Argentine businessman who dodges currency-control
laws to get his savings out of the country; a multinational
corporation that seeks to "minimize" its tax burden by dumping
its profits in tax-free havens; a South African investor who
wants to avoid economic sanctions; an East German Communist
leader who stashed a personal nest egg in Swiss bank accounts;
or even the CIA and KGB when they need to finance espionage or
covert activities overseas.

    The world's prosperity depends on a fluid and unfettered
financial system, yet the lack of supervision is producing a
large shadow economy. The IRS estimates that tax cheats skim as
much as $50 billion a year from legitimate cash-generating
businesses and launder the money to avoid detection. Banking
experts calculate that the private citizens of debt-choked Latin
American countries have smuggled more than $200 billion of their
savings abroad in the past decade.

    The money-laundering process, especially in the drug trade,
begins with greenbacks. Much of the cash simply leaves the U.S.
in luggage, since departing travelers are rarely searched.
Larger shipments are flown out on private planes or packed in
seagoing freight containers, which are almost never inspected.
That explains, in part, why U.S. officials are unable to locate
fully 80% of all the bills printed by the Treasury. Once
overseas, the cash is easy to funnel into black markets,
especially in unstable economies where the dollar is the favored
underground currency.

    But hauling cash out of the U.S. has its drawbacks. The
interest revenue lost while cash is in transit pains a drug
dealer as much as it would a corporate financial officer. And
since narcotraffickers see America as a safe and profitable
haven for their assets, they often launder and invest their cash
in the U.S. The first and trickiest step is depositing the hot
cash in a U.S. financial institution. Reason: the IRS requires
all banks to file Currency Transaction Reports for deposits of
$10,000 or more. During the early 1980s, launderers got around
this scrutiny by employing couriers called Smurfs, named for the
restless cartoon characters, who would fan out and make multiple
deposits of slightly less than $10,000.

    The Government now requires banks to keep an eye out for
Smurfs, but launderers have developed new techniques. Since
retail businesses that collect large amounts of cash are often
exempt from the $10,000 rule, launderers have created front
companies or collaborated with employees of such outlets as 7
Elevens and Computer-Land stores. To drug dealers, "an exempt
rating is like gold," says a Wells Fargo Bank vice president.
A restaurant that accepts no checks or credit cards can be an
ideal laundering machine. Even a front business with no
exemption is valuable because launderers can file the CTRs in
the knowledge that they are unlikely to attract scrutiny, since
the Government is swamped with 7 million such reports a year,
up from fewer than 100,000 a decade ago. Other places where drug
dealers can often dump their cash include the currency exchange
houses along the Southwest border and urban check-cashing and
money-transmittal stores.

    Once the money is in a financial institution, it can be
moved with blinding speed. Communicating with the bank via fax
machine or personal computer, a launderer can have wire
transfers sent around the world without ever speaking to a
banking officer. The goal of many launderers is to get their
money into the maelstrom of global money movements, where the
volume is so great that no regulators can really monitor it all.
Such traffic has exploded because of the globalization of the
world economy, which has multiplied the volume of international
trade and currency trading. On an average working day, the
Manhattan-based Clearing House for Interbank Payments System
handles 145,500 transactions worth more than $700 billion, a 40%
increase in just two years.

    Much of the electronic money zips into a secret banking
industry that got its start in Switzerland in the 1930s as
worried Europeans began shifting their savings beyond the reach
of Hitler's Third Reich. Later the country's infamous numbered
accounts became a hugely profitable business. Chiasso, a quaint
Swiss town of 8,700 inhabitants on the Italian border, has 18
banking offices. But during the past few years, Swiss secrecy
has been weakened by a series of cases involving money
laundering. Switzerland is now preparing a new law that will
make money laundering a crime punishable by prison terms.
Explains Jean-Paul Chapuis, executive director of the Swiss
Bankers Association: "Our hope is that the criminals will go to
another country."

    They apparently are, since many small countries have
successfully attracted banking business by creating discreet,
tax-free havens. In Luxembourg total bank deposits have grown
from $40 billion in 1984 to more than $100 billion last year.
In the wake of a drug-money scandal involving the Florida
operations of Luxembourg-based Bank of Credit and Commerce
International, the country has tried to burnish its public image
by declaring money laundering a criminal offense, even while it
has fortified its bank-secrecy rules.

    The most inventive havens allow investors to set up shell
corporations with invisible owners, which means that high
rollers can secretly stash their money in real estate, corporate
stock and other assets. The Netherlands Antilles, with cash
flowing steadily from banking centers in Amsterdam and
Rotterdam, is a favorite financial center for investors seeking
a low profile. Many Hollywood filmmakers love the arrangement,
since movie profits can be diverted to a nearly tax-free
setting. Many actors, producers and directors set up so-called
personal-service companies in the Antilles so they can collect
their paychecks through such corporations and avoid U.S. taxes.
"It has to be structured very carefully, since the rules are
tortuously complicated, but it is legal," says a top
entertainment lawyer. However, the IRS may take a closer look
after your story comes out."

    Just as Hollywood paychecks pour into these havens to avoid
taxes, mystery money flows out in search of well-paying
investments. "The man I'm working with now," says a prominent
screenwriter, "is an American representing vaguely described
movie and cable interests in Europe who seem to have a waterfall
of money from banks in Luxembourg and Amsterdam. He's all over
town offering unlimited financing, but he won't show up himself
at any of the meetings with the networks or studios."

    Dozens of islands, from Britain's chilly Isle of Man to
Vanuatu in the South Pacific, have boosted their economies by
turning into havens for money. While narcotics traffickers
launder their dollars through so-called brass-plate companies
on these islands, the main business of the tax-free offshore
havens is servicing some of the world's largest multinational
corporations. "The idea is to put profits where there are the
least taxes. Everybody does it," explains the president of a
major U.S. corporation's foreign subsidiary.

    One technique for minimizing taxes is a quasi-legal
fabrication called reinvoicing, a paper shuffle that enables
companies to rebook sales and profits into tax havens. For
example, one FORTUNE 500 corporation imports raw materials
through an offshore dummy company, which buys shipments at the
lowest possible price and resells the material to the parent
firm at a high markup. This dumps profits in the tax haven,
while the U.S.-based company can boost its apparent costs to
reduce taxes on the mainland. The profits can then be
repatriated in the form of tax-free "loans" from offshore
entities to the U.S. parent corporation.

    While the IRS tolerates such schemes up to a point, the
U.S. Government has tried to choke the river of drug money
flowing through the same channels. Yet laundering hot spots tend
to be moving targets. After the U.S. negotiated new treaties
with Bermuda and Cayman authorities to allow limited access to
banking records in narcotics cases, many of the launderers found
new havens.

    As the financial center of gravity in the world has shifted
toward the Pacific Rim, new tax and secrecy havens have
multiplied on such remote islands as Nauru in the western
Pacific and Palau and Truk in Micronesia. Citizens of Vanuatu,
a volcanic archipelago of some 80 islands formerly known as the
New Hebrides, have found that international finance beats
coconut and taro farming. In Port Vila, the capital, it is not
unusual for a $100 million transaction between major
international banks to take place on any given day.

    Still, Hong Kong remains the pre-eminent laundering center
in the Pacific. Almost everyone there does it, usually
legitimately, at least according to the laws of Hong Kong, where
even insider trading is no crime. By the puritan standards of
the U.S., says one American banker, "the lack of public
disclosure here is scandalous." The city is a mecca for arms
dealers, drug traffickers and business pirates of every
description. "Where else could I broker a deal that involves
machine guns from China, gold from Taiwan and shipments traded
in Panama City?" says a Brazilian arms merchant who maintains
an apartment in Hong Kong.

    In the U.S. a money-laundering center can be spotted by the
huge surplus of cash that flows into the local branch of the
Federal Reserve System. In 1985 the Miami branch posted a $6
billion excess. But after several years of intense federal
probes of South Florida banks, Miami's cash glut fell last year
to $4.5 billion. Much of the business went to Los Angeles, where
the cash surplus ballooned from $166 million in 1985 to $3.8
billion last year. Despite such rocketing growth, the staffing
of federal law-enforcement offices in L.A. still lags far behind
the levels in Miami or New York City.

    Both in the U.S. and abroad, financial businesses and even
governments are often reluctant to impose regulations to keep
out launderers. One reason is that a thriving financial industry
brings jobs and income. South Florida's 100 international banks
employ 3,500 workers and pump $800 million into the local
economy. Even more appealing is the inflow of foreign capital.
During the spend-and-borrow era of the 1980s, the gusher of
flight capital into the U.S. from Latin America helped finance
America's deficits. As in Hollywood, not many politicians were
concerned about where the money was coming from. Alarmed by the
tide, House Democrat John Bryant of Texas has long pushed for
legislation to require disclosure of the identity of foreign
investors. But for years, the Reagan Administration refused to
go along, claiming that such openness might scare away capital.

    Now that a consensus is building that the U.S. must pick
out the black money from the gray, the tools at hand seem
minimal for the task. Says Jaime Chavez, an international
banking consultant: "The people who will probably be searching
for it have a very limited knowledge of what money movement is
all about. How is a third-rate employee of the Justice
Department going to dissect the entire financial system to
pinpoint the drug money correctly?" During the Reagan years, the
budgets of agencies in charge of catching financial cheats
failed to keep pace with the changing world of money
manipulation. Even IRS agents are largely unprepared for the
task of tracking transactions that can involve four or five
banks, several shell companies and two or more currencies.

    Few agents can be spared because IRS employees are working
overtime to contain an explosion of smaller-time
money-laundering cases involving car salesmen, ordinary
investors, real estate agents and other entrepreneurs. In
Florida undercover IRS agents operating a sting operation that
they touted as a "full-service financial-investment corporation"
have nabbed 50 would-be money launderers in the past year. "Some
are lawyers and businessmen who are skimming cash from their
businesses, and they've heard about what you can do through an
offshore bank," says Tampa IRS supervisor Morris Dittman.
"Others have cash that rolls out of the drug trade. When a
druggie buys a big home and car for cash, you have a real estate
agent and a salesman with sudden cash, and they begin wondering
if they have to share it with the Government."

    Such amateurs are running afoul of laws that professionals
have already discovered. The statutes began tightening in 1986,
when money laundering became a specific crime. Later it became
illegal to evade the $10,000 currency-reporting requirements by
making groups of smaller deposits. Banks have begun to exercise
more internal supervision as well, prodded by a series of
investigations in the mid-1980s in which such institutions as
Bank of America and Bank of Boston were forced to pay hefty
fines for their involvement in laundering schemes. Yet many
major banks are still participants, witting or not, in ever more
sophisticated laundering operations.

    To close the gap, Bush's offensive against drug-cash
handlers is being placed in the hands of a newly created task
force that includes the CIA, the National Security Agency and
the Pentagon, as well as a team of drug, tax and customs agents.
FINCEN is already at work in a crowded Virginia office littered
with discarded coffee cups, overflowing ashtrays, computer
terminals and maps of the world. "We're going to be a financial
think tank to help train cops who are deluged in financial
data," says Gene Weinschenk, acting director of FINCEN's
research-and-development division. "We're looking for money, not
dope."

    The biggest problem may be in deciding how to handle all
the borderline illegality the task force will find. "How do you
separate drug money from capital-flight money?" asks one of the
mavens. "It will be more than drug money we come up with, and
what happens when we stumble over a really major company and
hold up its dirty linen? Maybe the banks will start turning in
the narcotics people rather than lose their biggest customers."

    To make a dent in the money-laundering trade, authorities
will need more support from the financial community. "They're
now willing to tell us about people coming in with bags of
cash," says a regulator, "but as far as anything else goes, you
can forget it." Yet many bankers think the feds have become
indiscriminate in their crackdown. "They are characterizing
traditional, ordinary, international banking transactions as
money laundering," gripes Gerald Houlihan, a Miami attorney who
represents financial institutions in money-laundering and
forfeiture cases. "They are not going after money launderers,
but are attempting to terrorize banks in an effort to give the
impression they are doing something about drugs."

    U.S. bankers rightly point out that they must abide by
relatively strict currency-reporting laws, while their
counterparts in other countries play fast and loose. That
discrepancy has prompted Washington to try to persuade the rest
of the banking world to adopt the record-keeping system used by
American institutions.

    The biggest push could come from the provisions of the
Kerry Amendment to the 1988 anti-drug abuse act. The law
requires the Treasury Secretary to negotiate bilateral
agreements on money-laundering detection and prevention with all
U.S. trading partners. Countries that refuse to participate or
that negotiate in bad faith could conceivably be excluded from
the U.S. banking network and clearinghouses. Yet in hearings
earlier this year, Assistant Treasury Secretary Salvatore
Martoche indicated that the Bush Administration is reluctant to
enforce the law zealously for fear of hampering the U.S. banking
industry.

    But there is more at risk than the dislocation of business
as usual. Many experts believe the financial stability and
national security of whole countries will be in jeopardy until
the problem is solved. Says the head of the Italian treasury
police, General Luigi Ramponi: "Now that they are too rich, the
drug lords will start investing everywhere: in industry, in the
stock market." In the U.S. some lawmakers have begun worrying
about the impact of billions of drug dollars invested in U.S.
institutions and wonder what influence the drug barons might
eventually exert.

    The money-laundering game is also creating a mess for
investigators of other crimes, who are running into dead ends
when they try to identify the players in fraud cases. Beverly
Hills police are stymied by last August's Mob-style
assassination of Hollywood entertainment executive Jose Menendez
and his wife Kitty, who were shotgunned in the front room of
their mansion. Menendez had been an executive and director of
Carolco Pictures, an independent movie company that produced
Sylvester Stallone's Rambo movies, and police have been unable
to unravel his business affairs or identify all his partners.
Carolco is controlled by a Netherlands holding company that is,
in turn, owned by a tangle of offshore family trusts.

    Financial experts are beginning to recognize that
Washington will be unable to control drug money unless the U.S.
compels offshore financial institutions to make their books
"transparent" enough to show the true owners of the money. In
the end, the Colombian drug cartels are about to force the world
to re-examine the international financial system that has
developed haphazardly over the 60 years since the Swiss first
popularized secret banking. Countries may not yet be willing to
make their banking transactions fully "transparent," but some
light must be shed on everyone's books. Says Kerry: "It will
take significant leverage and leadership. The President has to
have the top bankers in and say, `Unless you are part of the
solution, you are part of the problem.'"

    Yet there is still a deep-seated reluctance to take drastic
measures. Briefing reporters after a Paris conclave on money
laundering last September, a senior U.S. official declared that
global efforts to trace drug money will have to be balanced
against the freedom from unnecessary red tape. Too many
controls, he declared, could "constipate" the financial
exchanges. That is the kind of attitude that has brought the
system to its current state, in which drug money freely mingles
with the life force of the world economy, like a virus in the
bloodstream.