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U.S. Companies Tangled in Web of Drug Dollars
http://www.nytimes.com/2000/10/10/national/10PESO.html
October 10, 2000
By LOWELL BERGMAN
On a rainy day last June, a group of corporate executives gathered in
a conference room at the Justice Department for a meeting with
Attorney General Janet Reno and other top government officials.
The executives represented some of the pillars of corporate
America Hewlett-Packard, Ford Motor Company, Whirlpool. The
session was not publicized because those at the meeting shared an
unlikely and potentially embarrassing problem: their companies,
they feared, were being singled out in the nation's war on drugs,
and neither they nor the government was quite sure what to do.
With the intensifying federal crackdown on money laundering,
agents had been tracking drug money into the accounts of American
corporations and their distributors and dealers. In fact, federal
officials said, about $5 billion a year in Colombian drug money is
used to buy goods and services from cigarettes to computer chips
from American companies.
What makes that possible is a system known as the black-market
peso exchange, a complex money trade that law enforcement officials
say has become increasingly important to the Colombian narcotics
trade.
The system really a network of currency brokers with offices in
New York, Miami, the Caribbean and South America is essentially
an underground money market that lets the traffickers exchange
American dollars for Colombian pesos. Those dollars, which stay in
the United States, are then bought by Colombian companies that use
them to buy American goods for sale back home.
But the government's efforts to seize that money have put it on a
collision course with corporations, which say they are victims with
no way of knowing that they and their distributors are being paid
with drug money.
As they met on June 6, those executives, lawyers and law
enforcement officials found themselves grappling with a conundrum:
when does drug money stop being drug money? How far does a
company's responsibility go?
The questions have been confronting law enforcement officials for
years.
"What are we going to do?" asked Greg Passic, a former drug
enforcement agent who now advises the government on the economics
of the narcotics industry. "We've got the Fortune 500 involved in
our drug- money laundering process."
For a long time, because of lax enforcement of United States
currency laws, the drug traffickers were able to launder billions
of dollars through American financial institutions. A crackdown in
the 1980's pushed traffickers to what they saw as a virtually
fail-safe system for getting back their profits the black-market
peso exchange.
Their growing reliance on that system shows how deeply the drug
trade has become entwined in the legitimate economies of the United
States, Colombia and other nations.
Colombian officials said that as much as 45 percent of their
country's imported consumer goods are bought with money laundered
through the peso exchange.
On the American side, law enforcement officials said the exchange
has largely eliminated the trade deficit with Colombia. The market,
said the customs commissioner, Raymond W. Kelly, "is the ultimate
nexus between crime and commerce, using global trade to mask global
money laundering."
So far, no large American company has faced criminal charges. And
companies have almost always been able to prevent federal officials
from keeping money that has been seized.
But in the last few years, as frustration has risen, the
government has taken a tougher line. There have been Congressional
hearings intended to put companies on notice by name. Prosecutors
have issued warnings and stepped up efforts to seize laundered
money.
At the same time, the government has encouraged companies to
institute "know your customer" policies similar to those used in
the financial industry. The policies gave dealers and distributors
techniques for recognizing money laundering. Thus educated, the
government thought, the companies would be less able to argue that
they simply could not have known.
In drawing the line between legitimate and illegitimate profits,
the government must not only prove that the money came from drug
deals; it must show that the recipient "knew or should have known"
its source.
In the war on drugs, that line has proved very fuzzy.
Trading
Dollars for Pesos
Congress passed the first money- laundering laws in the early
1970's requiring, among other things, that banks report any cash
transaction over $10,000 but the laws were loosely enforced. By
1979, the Federal Reserve Bank in Miami had more cash than the
other federal reserve banks combined.
It took the uproar over the cocaine epidemic in the early 80's for
banks to comply with the law. And with the resulting crackdown,
traffickers resorted to the black market, which for decades had
provided Colombian businesses with dollars at less than the
official exchange rate of 2,000 pesos to the dollar. The rate in
Colombia is fixed by the government.
One peso broker recently agreed to describe how the system works.
The process begins when the broker receives a call from a
Colombian drug trafficker or his American representative. The two
negotiate an exchange rate for pesos, usually 30 percent to 40
percent below the fixed rate. So $10,000 might be worth 12 million
pesos instead of 20 million at the official rate.
The dollars are then delivered to the broker, who promises to
deliver pesos to the trafficker's bank account after the dollars
are sold to Colombian businesses. The dealer's insurance is the
broker's knowledge that to do otherwise would almost surely mean
death.
The broker maintains several runners "smurfs," in law
enforcement lingo who deposit the cash into hundreds of United
States bank accounts in amounts of less than $10,000, to avoid
scrutiny.
At the same time, the broker's office in Colombia negotiates with
business people there who want cheap dollars to buy everything from
consumer goods to helicopters.
Usually, that exchange rate is 20 percent below market, so a
business owner in Colombia might pay 16 million pesos, instead of
20 million pesos at the fixed rate, for $10,000.
The pesos are then transferred in this example, 12 million pesos
to the traffickers' accounts. The broker keeps the difference, 4
million pesos in this instance. Then at the businessman's
direction, the dollars in the American banks are used to pay for
American goods.
The peso brokerage is one part of the process that supplies
Colombia with inexpensive goods from the United States and around
the world. Colombian authorities said the goods were often smuggled
into the country, costing Colombia more than $300 million a year in
tax revenue.
Colombia has made collecting that lost revenue a priority. But the
black market has considerable appeal because it puts a lot of
inexpensive foreign goods on the Colombian market.
The exchange has also increased American exports to Colombia.
"This is positive for U.S. business, there is no doubt about it,"
said Mike Wald, who runs a consortium of law enforcement agencies
in Florida focusing on the peso exchange. "The Colombian, if he
pays less for his dollars, can buy more goods. That's a pretty
obvious economic fact. But we have to realize where this money
originates. It's drug money."
Tangled With Drug Money
Two companies that have turned up in the American government's
anti-laundering efforts are Phillip Morris and Bell Helicopter
Textron.
Phillip Morris products in particular have been a major presence
in Colombia. Marlboro cigarettes are readily available at prices
investigators said indicated that they were bought with black
market dollars and smuggled into the country.
Earlier this year, Phillip Morris was sued in the Eastern District
of New York by the Colombian tax collectors. The federal lawsuit
accused the company of being involved in cigarette smuggling and in
the laundering of drug proceeds.
Phillip Morris has denied the allegations, saying that it did not
know its products were being exploited for money laundering. In
addition, without admitting wrongdoing, it recently signed an
agreement with Colombia, pledging to stop its products from
entering the black market or being used to launder money.
In 1995, in Federal District Court in San Juan, Puerto Rico,
Phillip Morris's former distributors in northern South America were
indicted for laundering $40 million in black market pesos.
A member of the defense lawyers said the money was used to buy
Phillip Morris cigarettes, liquor and other products for the
Colombian market. But the defense team member said the defendants
did not know that the money came from drug sales.
Phillip Morris severed its relationship with the defendants in
1998 and said it did not know that its products were being smuggled
or that black market money was used to buy them.
In another case, Bell Helicopter is challenging the seizure of
$300,000 from its accounts, money, according to court documents,
that was generated by drug smuggling.
It was part of more than $1 million that the United States
believed was supplied a peso-exchange broker to buy a Bell
aircraft. The helicopter was seized in Panama at the request of the
United States.
The case has become a sore point for American law enforcement in
part because the helicopter was sold to a Colombian businessman
linked to the country's right-wing paramilitaries.
Seeking Cooperation
The deepening struggle between prosecutors
and business executives is what led to the meeting with Attorney
General Reno and other government officials, including Deputy
Attorney General Eric H. Holder and Deputy Treasury Secretary
Stuart E. Eizenstat. The companies invited were Hewlett-Packard,
Ford, General Motors, Sony, Westinghouse, Whirlpool and General
Electric Company, Treasury officials said.
None of the companies returned phone calls seeking comment, except
General Electric and Sony. Sony said it would have no comment. But
General Electric's counsel, Scott Gilbert, said his company
instituted a strict compliance program five years ago, after
reports that its refrigerators were being used in money-laundering
operations.
As part of its policy, Mr. Gilbert said General Electric warns
dealers to be aware of "red flags" a customer's lack of interest
in discounts, an unwillingness to give information about the
company, or unusual forms of payment like large amounts of cash or
checks written on the account of a third party.
The new policy has cut sales of appliances to Latin America by
23,000 units, or over 20 percent, said an executive at General
Electric.
Alan Dooty, a customs official, said the companies had been
selected for the June meeting because their products had shown up
in the black market in Colombia. The exception was General
Electric, which he singled out as a "good citizen."
Before the meeting, some of the companies expressed concern that
they would be punished. But once they arrived, Mr. Dooty said, they
were assured that the government was seeking cooperation.
A follow-up session in July bogged down in legal murk.
An
industry representative familiar with the meeting said: "The
Justice and Treasury Departments realized that they were trying to
identify drug money that had morphed, been transformed, in layers
of transactions involving distributors, authorized dealers,
financing arrangements with unregulated money lenders called
`factors' and the other realities of commercial life."
More meetings are scheduled for this fall.
The New York Times on the Web
http://www.nytimes.com
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