BUSINESS, Page 50COVER STORY: A Torrent of Dirty DollarsMoney laundering is a runaway global industry that servescustomers ranging from cocaine cartels to tax-dodgingcorporationsBy 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
