Where World's Crooks Go To Do Their Dirty Laundry

ALMOST from the day it opened, the no-questions-asked policy of the new currency-exchange house in Montreal's Peel Street exchange district made mafia kingpins confident it was perfect for laundering their dirty money.

And it was, for four flawless years. The Montreal mob lugged bundles of small bills to the exchange. Millions were then wired to 200 bank accounts run by front companies in Europe, Latin America, and the US. After that, the funds looked "clean."

But perfection had a price. In this case, Royal Canadian Mounted Police (RCMP) ran the exchange as surveillance cameras recorded each transaction. When the Mounties sprang their trap Aug. 30, 1994, they arrested and charged 57 people with 1,774 criminal counts, including "laundering" at least $71 million.

Such successes, however, only hint at Canada's significant and growing role as an international money-laundering center of choice for drug traffickers and other organized crime groups, according to RCMP, Canadian, and US authorities on global money-laundering.

"Canada is very important to drug traffickers and organized crime, a place where it's easy to take money to, and where American money is widely accepted," says Jack Blum, a Washington attorney, who is an expert on global money laundering. "It's a great place to ship [money] to other destinations - there's not a great deal of scrutiny."

Drug traffickers and organized crime generate huge amounts of cash in small denominations. But tons of cash are nearly worthless to mobsters unless they can be successfully trickled into the international banking system - and thereafter into legitimate investments.

Proximity to US

Canada's international allure, investigators say, stems mainly from its proximity to the US, branch banks throughout the Caribbean, and financial reporting requirements that some regard as lax.

The United States remains the world's top money-laundering center, with estimates of $100 billion laundered annually through its financial system. Canada sees only about $10 billion to $12 billion, according to a 1994 US State Department report. Officials estimate more than $300 billion is laundered worldwide.

Yet with organized crime rapidly transcending national boundaries, there are signs that for some criminal groups, Canada may be preferred over the US as a money-laundering center. A 1995 assessment of international money-laundering by the State Department ranked Canada, along with the US and several other developed nations, as having a "high" amount of dirty money flowing through its financial system.

Latin American, Asian, Russian, and US crime groups have been nabbed in recent years funneling money through the Canadian banking system. A recent Canadian study of money-laundering cases found 80 percent had an international component, says John Evans, an economics professor at the University of British Columbia.

Last month the Criminal Intelligence Service (CIS) of Canada warned in a report on Russian organized crime in Canada of the potential for "vast sums" to be laundered through Canadian financial institutions and then funneled into Canadian businesses. Recently, the favored technique has been to use foreign-exchange houses as intermediaries to the banks.

The State Department report this year described Canada as "a popular money-laundering point" and as "a target for drug-related money-laundering due to the openness of its financial system." It also criticized a "lack of legal reporting requirements for large cash transactions."

Don't ask, don't tell

Unlike the US, Canada has no mandatory reporting requirement for deposits greater than $10,000. There is also no requirement, as there is in the US, to declare large sums of cash to customs agents when crossing into or out of Canada.

Margaret Beare, a professor at York University in Toronto, co-authored a seminal 1990 report on money laundering for the solicitor general She questions the efficacy of the US reporting requirement, which she says has not produced results to justify adding such a huge burden to the Canadian banking system.

"As far as we could see, the slow, US paper-based system was not that useful to law enforcement," she says. "Canada came to the conclusion that billions of pieces of paper aren't useful if it requires a month or more to report to law-enforcement authorities." She suggests Canada look at a computerized mandatory-reporting system like Australia's. In addition, she and others emphasize that quick response by banks to suspicious transactions is still the key to catching money-launderers.

Canadian banks already are required by law to keep records of large deposits. Yet reporting of suspicious activity is purely voluntary. A spokesman for the Canadian Bankers Association says Canadian banks already supply authorities with more voluntary reports than they can handle. Police officials confirm this.

"The US has a crime problem," says Thomas Naylor, an economics professor at Montreal's McGill University, another money-laundering expert. "Why should we change our banking system to solve their crime problem? It's a myth that Canada is this great money-laundering paradise."

Still, Canadian law-enforcement officers say, tougher reporting standards - particularly legislative amendments to permit the tracking of major transactions going in and out of the country - would greatly help them.

"Any legislative tool that would allow police to track funds more closely would be a benefit," says RCMP Cpl. William MacDonald, a spokesman for Canada's CIS, which tracks organized crime. He and others expect Canadian law to continue "evolving." Meanwhile, money-launderers are unlikely to stand by.

Testing the weak link

As US authorities crack down, as they did Sept. 5 by streamlining mandatory-reporting requirements for deposits over $10,000, organized crime may well be enticed to funnel more of its dirty cash northward, officials say.

"The bad guys will move to the weakest link, the area of most vulnerability," says Stanley Morris, director of the Financial Crimes Enforcement Network operated by the US Treasury in Vienna, Va. "Canada has not had the same level of problems with money-laundering and so has not developed the same level of response," Mr. Morris continues.

A similar warning is sounded by Mr. Blum, who, while an adviser to the US Senate Committee on Finance, uncovered money-laundering and other clandestine banking activities of the Bank of Commerce and Credit International.

"Do I say, 'Canadian law enforcement is not trying hard to catch money launderers?' Certainly not," he says. "But there's a substantial difference between the attitudes of people in law enforcement and those in the business of bank regulation, who tend to be a lot less exercised and vigorous about this issue."

Canada has passed several anti-money-laundering laws, beginning in 1989 with the Proceeds of Crime Act, which allows police to seize financial assets. But it didn't set up a mechanism to manage those assets or to share proceeds among prosecuting districts - nor did it require banks to keep records. Those laws were strengthened in 1993 to add teeth to them.

Prior to 1989, a robber could steal from one bank and deposit his take in another. Even if police knew about it, little could be done to reclaim the money.

Canadian anti-money-laundering prosecutions have been stepped up, but remain relatively tiny in terms of dollars and manpower. The government in 1992 funded a five-year $5 million project that established three centers in Vancouver, Montreal, and Toronto, the RCMP says. The project, aimed at coordinating efforts nationwide, involves 41 people from the Canadian Department of Justice, Revenue Canada (Canada's tax agency), and the RCMP. About 200 more regional and local police investigators assist this core group.

Despite its small size, these three units have produced surprising results.

Exchange-house sting

"We targeted the [foreign currency] exchanges because they were such a problem," says Vancouver-based RCMP Inspector Bruce Bowie. "Our idea was to test the degree of compliance with the new [record-keeping] legislation."

The RCMP sting operation was simple: In phase 1, an undercover officer would simply go in and exchange money - but refuse to supply his identity for record-keeping purposes. In phase 2, he would also say point-blank: "This is drug money."

The response was startling, Inspector Bowie says. In phase 1, depending on the city, between 40 and 70 percent of the exchange houses were willing to forego record-keeping.

In phase 2, some exchanges no longer wanted to do business. But many others simply charged more money to do the exchange. In many instances, exchange clerks advised the undercover officers to break down a large deposit into less-suspicious smaller amounts.

The RCMP sting simultaneously hit 32 exchange houses involving 36 corporations in Vancouver, Victoria, Calgary, Edmonton, Toronto, Montreal, and Quebec City. On June 21, 1994, a police roundup resulted in 65 people being charged.

Currently before the courts is a huge case in which the RCMP seized $21 million in assets, a 220-foot freighter, 14 boats, 11 luxury homes, bank accounts, and $450,000 in cash.

Last year Canadian money-laundering investigations netted $37 million. In the first six months of this year, they have uncovered $22 million. Is that enough to stop or intimidate money launderers? Most authorities privately say "no."

"We think our program is increasing in terms of effectiveness," says Paul Kennedy, who heads the Canadian Justice Department's national strategy for drug prosecutions. "The Americans have had legislation since 1986. We've had it since '89, so they've had a head start."

Also, only so much can be done from the federal perch in Ottawa, Mr. Kennedy says. But so far provincial prosecutions have been disappointing. Provincial prosecutors have little experience with the new legislation and worry about being sued in civil court for damages if the money launderers and drug traffickers are acquitted of criminal charges.

"If we're able to structure our affairs [in the federal government] in such a way [as] to permit us to carry on these prosecutions, I would have to think it would be possible for the provinces to do so as well," Kennedy says.

He recommends that provinces create a contingency fund for civil suits, but adds that the federal government has rarely been sued because of its care in developing cases.

Global influences

Given the danger of being sued and the difficulty of weeding out international wire transactions of ill-gotten funds - is it really that important to deal with money-laundering, which some would argue is a victimless crime?

"Organized crime cannot succeed, cannot develop beyond local small groups unless they're successful in laundering their money," Morris says. "I think the major nations of the world are beginning to understand that. That was not the case 10 years ago."

And others point to the massive financial clout of Colombian drug traffickers that has so undermined the integrity of Colombia's judicial, police, and political systems.

Recognizing the threat, the Group of Seven industrialized nations in 1989 established its own Financial Action Task Force to focus on the growing problem. The US is beefing up its own efforts.

Meanwhile, Canada is studying whether to put in place mandatory reporting requirements, officials say. But will that be enough?

Lee Lamothe, a Canadian and co-author of a book on global organized crime, says Canada's money-laundering cops are doing a good job, but that more and stronger legislation is needed to help them. "The government has never taken any steps I know of to see just how big the money-laundering problem is," he says. "We have parliamentary commissions on everything else in this country. We badly need one on this."