Legal Affairs: FINANCIAL CRIME
CORPORATE AMERICA'S COLOMBIAN CONNECTION
How "peso brokers" use U.S. manufacturers to wash the narcotics cartels' cash
To her neighbors in Cucuta, a city of 480,000 in northern Colombia, Myriam Arana appeared to be the picture of upper-middle-class respectability. Married to a prominent obstetrician, she had two teenage daughters and owned a stylish clothing boutique in a downtown hotel.
But Arana, 46, also ran another, far less reputable business. Working with two compatriots in Colombia and three in the U.S., she helped the Cali cartel and other local drug gangs launder millions of dollars, according to U.S. law-enforcement authorities.
Their method was, in the often labyrinthine world of money laundering, relatively simple. First, Arana's organization would buy drug money, located in "stash houses" in U.S. cities, from the cartels at a discount of 15% to 25%. Then, using operatives in the U.S., her team would gradually ease the money into legitimate bank accounts. Finally, Arana would find Colombian businesspeople who needed dollars to import such U.S. goods as fabric and handbags. Giving these importers a small discount off the official dollar-to-peso exchange rate, she would sell them the recycled drug money.
DIRTY BILLIONS. Arana, who pleaded guilty to money-laundering in 1996, was a so-called peso broker. In recent years, these brokers--whose comparatively small criminal organizations are independent of the massive drug cartels--have become an increasingly important money-laundering tool for the Colombian narcotics gangs. A battery of recent international financial regulations has made it much harder for drug dealers to transfer money through the banking system. So now, the crooks aren't sending as much money to Colombia. Instead, they are sending products--and the peso brokers, with their contacts in the Colombian and Venezuelan business communities, are critical to the process.
The U.S. Treasury Dept. estimates that peso brokers help to launder some $2 billion to $3 billion worth of drug money annually, or about 30% to 40% of all U.S. drug proceeds. Put another way, nearly half of all U.S. trade with Colombia is thought to be funded by dirty, peso-brokered money. Arana, one of a small handful of peso brokers ever apprehended, dealt almost exclusively in apparel. But others are buying everything from liquor to computers to tractors--and are obtaining products from some of the biggest names in Corporate America.
In testimony on Oct. 22 before the U.S. House Banking & Financial Services Committee, an ex-peso broker who is cooperating with federal law-enforcement authorities--and who spoke from behind a partition to hide her identity--told legislators that she had bought goods from Sony, Procter & Gamble, Ford, Whirlpool, Deere, Reebok, Kenworth, and several others.
There's no evidence these companies knew their goods were being purchased with drug money. In some cases, the companies first sold the goods to South American distributors, who then resold them to the peso brokers. But law-enforcement authorities are nonetheless convinced that many large corporations are ignoring obvious red flags. These include a sudden, inexplicable jump in sales to Latin American distributors, the presence of large quantities of their products in Colombia at suspiciously low prices, and checks drawn on the accounts of companies other than the ones receiving the goods. "Whether it's through ignorance or not, some [U.S. companies] are assisting the drug cartels. And that should horrify the stockholders of those corporations," says Representative Spencer T. Bachus III (R-Ala.), chairman of the Banking & Financial Services Committee's subcommittee on general oversight and investigations.
To combat peso brokering, Treasury's Financial Crimes Enforcement Network (FinCEN) is about to launch an initiative that will soon touch dozens of U.S. manufacturers--including many companies that probably have no idea they are receiving drug money. By the end of November, FinCEN plans to distribute an alert about peso brokering to banks and some companies that are major exporters to Latin America. It will describe typical laundering techniques and warning signs for executives.
Then the feds plan to deliver the message in person to some companies whose products are particularly popular with peso brokers. Until recently, the feds didn't even bother to keep track of which products brokers were purchasing with drug money. But that's about to change. For the first time, the Colombian government in October gave FinCEN a list of 300 Colombian companies that do business with peso brokers and the brand names of U.S. products they have bought. Before the end of the year, FinCEN will begin contacting the manufacturers of these goods to discuss ways they can avoid drug money. While FinCEN special agent Gregory Passic declined to identify specific companies, he said the list will include some companies identified at last month's hearing.
"MORAL OBLIGATION." Passic and other law-enforcement authorities insist there are no plans to bring legal actions against the companies or even to impose the type of reporting requirements now facing financial institutions. They do, however, plan to put Corporate America on notice about what peso brokers do--and they don't mince words about what will happen to companies that ignore obvious warning signs in the future. Too many executives "say to themselves, `I am a legitimate businessperson, I am selling to a legitimate businessperson, and that is where my responsibility ends,"' says Bonnie S. Klapper, the assistant U.S. Attorney in Hauppage, N.Y., who brought the Arana case. "My response to them is that they have a moral obligation, and sooner or later they are going to end up with a financial obligation. At some point, we are going to go after their accounts." (If prosecutors can prove that businesspeople had reason to suspect they were receiving drug money, the funds can be seized.)
The feds' saber-rattling comes from a growing view inside law-enforcement circles that peso brokering is representative of a much broader worldwide problem. Although they use different methods from the peso brokers and the Colombian drug cartels, the Russian mafia, the Asian triads, and other international crime rings appear to be increasingly washing their dirty funds through trade. That means the cops have no choice but to try to bring Corporate America into the war against money laundering. At a time when international trade is expanding, new policing methods may be needed to prevent organized crime from piggybacking on legitimate commerce.
In spite of the high stakes, only a few major corporations appear to be taking steps to combat money laundering. Whirlpool Corp. last year stopped selling through independent distributors in Colombia after it appeared that peso brokers were buying refrigerators and other appliances. Instead, the Benton Harbor (Mich.) company is distributing its own products to dealers and registering its exports with Colombian and U.S. authorities. "We're proud we're doing something, but it's not really something we want to talk about," says spokesman Christopher Wyse.
At this point, however, peso brokering isn't on most companies' radar screens. That means the brokers are likely to continue playing a large role in Colombian trade. Their survival is assured by their ability to offer Colombian drug cartels what they most covet: squeaky-clean pesos safely deposited in Colombian bank accounts.
In exchange for the clean pesos, the cartels give the brokers mounds of $1, $5, and $20 bills from stash houses in cities such as Houston, New York, and Los Angeles. To throw off the local police, stash houses are usually owned by families with kids and often have indoor garages where money can be safely unloaded, Klapper says. During a six-week period in August and September, 1996, federal witnesses participating in a sting operation saw Arana's operatives pick up more than $800,000 from a variety of stash houses throughout the New York metropolitan area.
TAX DODGE. Peso brokers inject the cash into the U.S. financial system by using runners known as smurfs. Typically unemployed Latin Americans, the smurfs open multiple bank accounts in differing names, often using identity papers that have been forged or purchased from relatives of deceased Colombians. To avoid arousing the suspicions of bank officers, smurfs at first use the checking accounts to pay ordinary household expenses. Then, they gradually deposit cash at levels well below the $10,000 threshold that would trigger a bank report to the Treasury Dept. In a criminal case filed in October in Brooklyn, a ring of seven alleged smurfs is said to have funneled more than $2.5 million into 19 bank accounts. They allegedly did it over a four-month period, making more than 1,000 separate cash deposits that never exceeded $2,400. (The defendants in that case have pleaded not guilty.)
To Colombian businesspeople, peso brokers offer an almost unbeatable bargain. To obtain U.S. dollars through legitimate commercial banks, Colombians must pay a tariff of at least 6.5% above the official exchange rate. Sales and import taxes can boost the cost of U.S. products by an additional 23% to 41%. Using a peso broker can help businesspeople sidestep some taxes. More important, they're able to buy U.S. dollars for less than the exchange rate--currently, 1,298 pesos per dollar.
The exact exchange rate they receive depends on the method being used to pay the U.S. manufacturer or distributor. "If I walk into a Colombian money broker, and I want to buy 100 computers, and I need $1 million, he'll say...`What [form of payment] will your supplier accept without raising a red flag?"' says Passic. According to Treasury Dept. sources, the going rate six months ago for a peso-dollar swap was 975 pesos per dollar for a money order, 1,010 pesos for checks drawn on U.S. bank accounts, and 1,030 pesos for wire transfers.
Like Arana, most peso brokers work in small organizations of fewer than a dozen people. Located throughout the country--though concentrated in the big cities--they frequently team up with other peso brokers when drug cartels have large quantities of street cash to unload or when a customer needs an unusually large quantity of dollars to buy U.S. goods.
RESISTANCE. While the Colombian government has taken strong steps in recent years to prevent money laundering at commercial banks, it has done little to halt the peso brokers. Government officials and banking executives point out, however, that the U.S. has not done much to combat the problem, either. Rather than pressuring Colombia to crack down on peso brokers, Washington would do better to "concentrate on stopping laundering at the grassroots level" in the U.S., says Colombian Banking Superintendent Maria Luisa Chiappe.
For their part, many U.S. manufacturers are also resisting being dragged into the war against peso brokering. They note that it is common for even legitimate businesses in Latin America to use third-party payments and other unusual methods and that any attempt to force South American customers to change their ways will drive business to overseas competitors, Passic says. Other companies complain that, given the sophistication of money launderers, it is impossible to expect U.S. businesspeople to sniff out dirty funds.
These arguments aren't likely to keep the feds from trying. For peso brokers to launder money for Colombian narcotics gangs, "the money has go through a complete cycle, and one of the spokes on that cycle is frequently American business. Without that spoke, the whole thing collapses," says Stefan D. Cassella, assistant chief of the Justice Dept.'s money-laundering section. Cassella and other law enforcers feel they have no choice but to target Corporate America. That means that from now on, money laundering won't just be the banking industry's headache.By Mike France in New York, with Victoria Burnett in BogotaReturn to top