US Firms Unwittingly Aid Drug Lords

Congressional hearings today to warn businesses of new money-laundering scheme.

Columbian drug lords have quietly brought a new unwitting player into their illicit trade: brand-name American corporations.

Billions of dollars of illegal drug profits made in the US are now surreptitiously funneled into legitimate American businesses, according to a confidential Colombian informant and federal law-enforcement officials. These companies unknowingly accept the laundered drug dollars as payments for goods they sell for export to Colombia.

"Anybody that sells anything that goes into that arena is vulnerable to this system of money laundering," says Greg Passic of the Treasury Department's Financial Crimes Enforcement Network (FINCEN).

US law-enforcement officials estimate that as much as 50 percent of the trade between the two countries now involves drug money laundered through a new technique that pivots on black-market peso brokers.

The problem will be the subject of hearings on Capitol Hill today. "Corporate America needs to be very careful with whom it does business and from whom their profits are coming," says Rep. Spencer Bachus (R) of Alabama, who will chair the hearings.

Getting the cash for the cocaine and heroin they sell on the streets of New York or Los

Angeles into bank accounts in Bogat, Colombia has long bedeviled the world's largest drug suppliers. For years, Colombian cartels simply smuggled it down in crates or wired through American banks.

But a concerted crackdown by US authorities has curbed much of the flow of illicit money through traditional routes. So drug traffickers came up with a new money-laundering scheme: peso brokering. Currency brokers and "financial advisors" in Colombia act as middlemen between the Colombian drug lords and legitimate businesses looking for the least expensive way to trade pesos for dollars.

There are several ways the drug dollars are funneled into American corporate coffers, says a confidential informant who was a black-market currency broker operating in Colombia. But all start with a simple transaction between the currency broker and the cartel member.

How it works

For example, the Colombian drug dealer may have $500,000 in cash sitting in New York from the sale of drugs to various street gangs. The stacks of bills are stuck in "stash" houses. His challenge is to get the money back to Colombia.

Step 1: The drug dealer turns to the peso broker who has offices in Bogat and agents operating New York. The dealer sells his $500,000 stashed in the US to the currency trader for $450,000 worth of pesos. The drug dealer loses $50,000 on the deal, but considers it the price of walking out of the Bogat office with his profits now in the form of "clean" money.

Step 2: The currency broker then has his agents in the New York pick up the $500,000 from the stash houses and deposit it in dozens of small US bank accounts to circumvent US laws that require reports of cash transactions of $10,000 or more.The money then is slowly deposited in small amounts into a single account or recorded as "profits" in a fake corporation.

Step 3: This is where legitimate American and Colombian businesses become involved.

Normally, a Colombian business importer who wants to buy large amounts of American goods in dollars would turn to a Colombian bank to wire the money to the US. But there's a fee and a 6.5 percent tax on the peso-to-dollars currency transaction. On top of that, the importer has to prepay a hefty sales and importation tax. All this takes a big, upfront, bite out of profits.

Enter the peso broker, again.

The Colombian importer pays the broker in Bogat $550,000 worth of pesos to buy the $500,000 sitting in a US bank account, thereby bypassing the hefty Colombian bank fees and taxes.

The importer now places his order for $500,000 worth of auto parts from an American manufacturer. Instead of sending the company a check through the normal Colombian banking channels, he tells the peso broker to pay the company with the $500,000 in the US bank account.

Evading fees

Because the deal hasn't gone through official bank channels in Colombia, the parts can be quietly smuggled into the country, thus avoiding the sales and importation taxes.

That robs the Colombian government of hundreds of millions of dollars. It also undermines legitimate businesses that can't compete with the lower prices offered by companies that trade in the black market.

In the US, hundreds of American businesses have become unwitting accomplices. "I don't believe most corporations understand this process or know where this money is coming from," says John Forbes, a US Customs Service agent who heads the El Dorado Task Force, a New York based anti-money-laundering unit made up of federal, state, and local law enforcement agencies.

Money transfers from corrupt Colombian peso brokers have been traced to dozens of American wholesalers, exporters and several major corporations, including Ford Motor Co., Sony, and Procter & Gamble, say informed sources.

A Ford spokeswoman says the company is in full compliance with all banking laws. Procter & Gamble spokesman Terry Loftus says the company is aware of the problem and "has put some initiatives in place to try to prevent it." Sony did not respond to inquiries.

Law enforcement officials will soon call on all companies to be careful with whom they do business in Colombia. "Businesses should also know their customers, know how their receipts are satisfied, know who's paying them," says Lt. Ronald Rose, a New York Police Department money-laundering expert assigned to the El Dorado Task Force.

Ten years ago, when the federal government cracked down on American banks that routinely accepted large cash deposits, no questions asked, they also urged the banks to institute know "your customer regulations."

At the time the banks said, "We can't possibly do what you're expecting us to do," says Michael Zeldin, a former chief of the Justice Department's money laundering section who's now a principal at Price Waterhouse in Washington. "Now they do a very good job, and businesses and trades could, too."

In Colombia, law-enforcement officials are aware of the problem and are looking at ways to stop the black-market peso brokers. In the US, Congress is banking on US businesses to voluntarily join in the fight against money laundering, so they won't have to impose new regulations to ensure it happens.

"It's not a question of regulation, it's a matter of social responsibility," says Representative Bachus.

"We can't let economic interests allow us to turn a blind eye to the fact that millions of promising young lives are being destroyed by the flow of drugs into our ... communities."