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Volume 12, Number 3 - January/February 2003
Where Does the
Money Come From?
Illegal Drugs, Due Diligence and Company
Accounts
By David L. Goldberg
Related Article:
What You Can Do
American bank accounts are brimming with the proceeds of illegal narcotics
trafficking. The surprising news is that many of these bank accounts belong to
well-respected American corporations that are several degrees of separation
removed from the illegal drug trade, and would never knowingly participate in
illicit activity of any kind.
This news comes as a particular shock to executives at some of these
corporations, when announced by federal or state prosecutors who knock on the
corporate door, implicate the corporation in the international drug trade and, on
occasion, seek to seize and forfeit corporate bank accounts.
The confluence of legitimate international trade and illegal narcotics trafficking has
ensnared American corporations, large and small, in an unwelcome swirl of
controversy. The purpose of this article is to explain the relatively simple steps
that law-abiding businesses can take to prevent their bank accounts from
becoming the unwittingly recipients of drug proceeds.
To do so, it is necessary to describe the Black Market Peso Exchange (the BMPE),
a term that is used by law enforcement officials to describe a complicated series
of international trade transactions by which narcotics money launderers co-opt
CALENDAR
foreign currency markets to route drug proceeds into the mainstream American
banking system.
The story begins in unlikely places, like the sales department at Philip Wilson Inc.,
a major American consumer products distributor. Steve Salesman, a sales
manager at Philip Wilson, has booked an order to sell stereos (or cigarettes,
refrigerators, tennis rackets or candy bars) to Super Mercado, a reputable and
well-known South American retailer. Super Mercado has 90 days to pay for the
goods.
Super Mercado has no problem selling the stereos, but does have a problem
paying Phillip Wilson, since Super Mercado's sales were made in local currency,
whereas the receivable is payable in dollars. Hence, Super Mercado will have to
tap into the currency exchange market to pay its supplier.
The BMPE exists in numerous countries in Latin and South America, Asia and
other parts of the world where illegal narcotics are produced. The Republic of
Colombia hosts the largest and best-developed BMPE in the world, however, and
information about the workings of the Colombian BMPE is more readily available
than it is in other narcotics-producing countries. For this reason, we will assume
that Super Mercado is based in Colombia for purposes of our hypothetical. This
assumption is not intended to suggest that all international commerce in Colombia
is tainted by the BMPE; indeed, much is not.
Colombia, like many countries, has two markets on which Super Mercado can
purchase dollars to pay foreign debts. The Colombian national bank sells dollars at
an "official" rate (2,750 peso to the dollar as of this writing). Colombia also hosts
a parallel or "free" market that sells dollars at significantly lower rates. Discounts
for currency purchases on the parallel market can range from 5-10 percent or
more, depending on seasonal and other factors that affect supply and demand.
Needless to say, Super Mercado is likely to make its currency purchases on the
parallel market, or it will be forced out of business by a lower-cost competitor.
The legality, under Colombian law, of tapping the parallel market depends on the
size of the currency purchase, its intended purpose, whether the seller is licensed
and documents its transactions properly, and various other factors beyond the
scope of this article. Despite these restrictions, the use of the parallel market for
currency purchases is prevalent and not inherently suspect to many of its
participants. Market participants frequently note, with great vigor but to little
effect, the fact that the price of a parallel-market dollar is published on the front
business pages of Colombia's leading newspapers as evidence of the legitimacy of
the parallel market.
Parallel-market currency sellers (known as "money brokers") have numerous
dollar-based products to offer, at various price points. The most-expensive
product is a dollar-denominated wire transfer, made from an account holder at a
reputable U.S. bank, and payable at the buyer's direction. The price for this
product, like all products sold by the money broker, will vary widely based on
seasonal and other factors that influence supply and demand, but will always be
less than the "official" price charged by the Colombian national bank. Lower cost
products include dollar-denominated money orders, third-party checks or,
cheapest of all, bulk American currency.
In the 1980s and 1990s, Super Mercado might have opted for the lowest- priced
product, assured that Steve Salesman would be delighted to accept payment on
the open receivable in any form. Indeed, a 1998 newspaper article from the
Bergen (N.J.) Record vividly described packages of money orders and U. S.
currency arriving at the offices of one prominent American retailer from
anonymous sources. The article quoted an executive of that company as stating:
"It really doesn't matter to us where it comes from, as long as we get paid. . . We
would have no way of knowing it's drug money."
Nowadays, however, Steve and the other good folks at Philip Wilson are more
discerning, and less likely to accept an anonymous package containing hundreds
of thousands of dollars in money orders, third-party checks, or just plain cash for
credit to Super Mercado's account. Philip Wilson will, however, gladly accept a
wire transfer originating from a reputable U.S. bank.
Super Mercado is delighted, as it can avoid the expense of buying dollars from the
Colombian national bank, and instead buy a dollar-denominated wire transfer
from its local parallel-market money broker, at a 5-10 percent discount, or more.
Super Mercado has an additional motivation to use the BMPE if it is cheating on
Colombian taxes by smuggling Phillip Wilson's stereos into the country without
paying import duties (which can range from 7-25 percent). Colombian banks will
not make large currency exchanges without documentation demonstrating the
need for the exchange. Smugglers lack these documents, and are shut off from
the official market.
For either or both of these reasons, Super Mercado buys a dollar- denominated
wire transfer from the money broker in pesos, and instructs the money broker to
route the wire transfer directly to Philip Wilson's bank account in the United
States. Super Mercado's purchasing manager contacts Steve Salesman, and tells
him to expect a wire transfer in dollars the following day.
Experts have found that upwards of 90 percent of the dollars for sale on the
Colombian parallel-market derive from the illegal drug trade. (The prevalence of
illicit dollars in parallel currency markets of Venezuela and other countries with
BMPE transactions is the subject of some dispute among experts.) A description of
the methods used by money brokers to obtain dollar-denominated monetary
instruments can be found in the 1997 congressional testimony of one money
broker:
In Colombia, brokers often operated in what can best be described as a fleamarket atmosphere. In Medellin, a shopping mall housed dozens of small offices,
each occupied by a money broker. Importers shopped for U.S. dollars at the mall,
traveling from office to office to get the best black market exchange rate.
Financial representatives of the cartel, commonly known as "Duros" (the hard
ones), would be contacted daily by the brokers, in order to ascertain the amount
of U.S. dollars available in the United States for brokering on the Colombian black
market. The broker would ask who got "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
board, being sold in the United States, 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.
As this testimony graphically illustrates, money brokers in Medellin and other
Colombian cities exchange pesos that Super Mercado lawfully obtained by selling
Philip Wilson's stereos for dollars derived from the sale of illegal narcotics. The
money brokers supply pesos; the "duros" supply dollars, which they obtain from
narcotics sales in the United States. It is unlikely that anyone at Super Mercado is
directly involved in these transactions, as their parallel market dealings likely
occurred with money brokers several times removed from the ultimate exchanges
between the money broker and the "duro." It is also unlikely that these
transactions occurred with the direct knowledge of Philip Wilson.
The scene now shifts to the offices of ABC Bancorp (ABC), Philip Wilson's bank,
where a wire transfer for the open receivable is received, and credited to Philip
Wilson's bank account. The documents accompanying the wire transfer identify
ABC and Philip Wilson, so that the wire transfer can be properly routed through
the banking system and credited to ABC and Philip Wilson. The documents also
identify, directly or by code, the sending bank and its customer, so that the
source of the wire can be traced if problems arise during transmission.
Steve Salesman is eager to confirm that Super Mercado has paid the open
receivable — because Philip Wilson's credit manager is on his back, and because
Super Mercado has ordered more stereos, which cannot be shipped until payment
is received. Steve asks Annie Accounts, Philip Wilson's accounts receivable
manager, to call ABC and obtain a receipt that the wire transfer has been
received. Annie does so, and she provides Steve with documents, received from
ABC, demonstrating that a wire transfer in the requisite amount was credited to
Philip Wilson's account. The wire transfer was sent by Third Party Inc. (Third
Party), from its account at XYZ Bank (XYZ) in Nowheresville, U.S.A.
If Steve, Annie or anyone else at Philip Wilson stopped to think about it, they
might ask themselves two questions that American prosecutors frequently view as
both obvious and necessary: (1) "Who is Third Party?" and (2) "Why is Third
Party sending a large wire transfer to Philip Wilson in payment for a receivable
that is owed by Super Mercado?"
The hypothetical inquiry triggered by these two simple questions likely would
unfold as follows:
Annie Accounts would contact Super Mercado and learn that Super Mercado had
provided pesos derived from selling Philip Wilson's stereos to Cambio Dinero
(Cambio), a money broker, in return for the promise that Cambio would pay
Super Mercado's receivable to Philip Wilson;
Annie would learn further that Super Mercado dealt solely with Cambio; that
Super Mercado has never heard of Third Party; and that Super Mercado cannot
vouch for Third Party's legitimacy;
Inquiries from Super Mercado or Philip Wilson to Cambio to learn the identity of
Third Party would be met with silence or obfuscation;
Annie would learn, from subsequent inquiries to XYZ Bank, that Third Party's
account was funded, either directly or indirectly, from illicit sources connected
with the "duro."
Unfortunately, the Steves and Annies of corporate America rely all too
frequently on the perceived legitimacy of their customers, and fail to ask the
two questions set forth above. From the perspective of law enforcement,
Steve, Annie and Philip Wilson are thus disqualified from invoking the
"innocent owner" doctrine to insulate Philip Wilson's bank account from
seizure. See 18 U.S.C. § 983(d)(1) ("An innocent owner's interest in
property shall not be forfeited under any civil forfeiture statute."). In the
present context, an "innocent owner" is defined to include a person who "did
not know and was reasonably without cause to believe that the property was
subject to forfeiture." Id. at § 983(d)(3)(a)(ii).
On occasion, American exporters do ask their customers to explain thirdparty transactions, and receive false, misleading or essentially meaningless
answers; that is, "Third Party is my American affiliate/paying agent." In such
cases, the American exporter may argue that they have established a
justifiable basis to rely on the perceived legitimacy of the third-party
transaction. More likely, they have merely proven their willful blindness to the
truth.
More rarely, American exporters receive tainted payments directly from their
customers, who use the parallel markets independently and without the direct
knowledge of their suppliers. From the standpoint of the exporter, such cases
present the best prospects for the successful defense to a forfeiture action,
although prosecutors may be able to establish that the customer's behavior
itself placed the exporter on notice of the prospects for a dubious transaction.
The workings of the Colombian BMPE have been well documented since the
late 1990s, and the day has now passed when American corporations can
simply throw up their collective hands and say: "It's not my problem" or "I
didn't know." Nor can American corporations discount the prospect of
governmental action. Dismantling money-laundering enterprises is a priority
of the U.S. Customs Service and other American law enforcement
organizations, particularly in the wake of the recent terrorist attacks. Host
countries are also cracking down on BMPE activity. In March 2002, the United
States, Colombia, Aruba, Panama and Venezuela signed a multi-lateral
agreement to expand their cooperation against BMPE activities.
Moreover, departments of the Republic of Colombia recently filed a civil RICO
suit in U.S. District Court for the Eastern District of New York claiming that
several major tobacco suppliers facilitated or engaged in money laundering by
their alleged complicity in BMPE-related transactions. The Colombian entities
claim that the defendants are liable for depriving Colombia of tax revenue by
their sales of cigarettes to smugglers who then re-sell the cigarettes in BMPE
transactions in exchange for narcotics dollars. The suit was dismissed (it is
now on appeal), but it further demonstrates the increasing attention being
given to BMPE transactions.
In summary, the BMPE is a pervasive arrangement that leaves honest
American exporters at a great risk of complicity in the international drug
trade. At this time of heightened national security concerns, law enforcement
is particularly interested in interrupting the BMPE, which can serve as a backchannel for funding not only the illegal narcotics trade, but also other illicit
conduct, including terrorist activities.
To avoid becoming ensnared in the BMPE, corporations should be scrupulous
in determining exactly who is paying for goods or services shipped overseas,
and should not rely merely on the perceived reputations or legitimacy of their
foreign customers. Corporations doing business in high-risk foreign countries
should insist on the right to audit the accounts of the companies that
purchase their goods or services, or take the other steps outlined in the
sidebar to protect themselves against becoming unwitting recipients of illicit
proceeds.
Goldberg practices in New York City. His e-mail is [email protected]. From
July 1995 through March 2002, he served as an assistant U.S. attorney in the
U.S. Attorney's Office for the Eastern District of New York. The views
expressed are entirely those of the author.
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