Key Findings

• The physical transportation of bulk cash and monetary instruments is a principal method used by drug traffickers to move illicit drug proceeds from domestic drug markets to other U.S. and foreign destinations. According to EPIC Pipeline, Convoy, and Jetway seizure data from 2001 through 2003, the primary origins of U.S. currency seized in these operations were California, Illinois, New York, and Texas, while Arizona, California, Florida, and Texas were the primary destinations.

• Drug traffickers in the United States frequently use money services businesses (MSBs), particularly money transmittal, currency exchange (casas de cambio), and check-cashing businesses, to launder drug proceeds. MSBs filed 214,966 Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) from October 1, 2002, to December 31, 2003. During that period states with the most MSB SAR filings were New York, California, Arizona, Texas, and Florida.

• In 2003 representatives of depository institutions--banks, thrifts, savings and loans, and credit unions--filed 288,243 SARs.²⁰ Of these, 155,468 indicated a Bank Secrecy Act (BSA)/Structuring/Money Laundering violation, the only specific money laundering violation. According to FinCEN, the states with the highest number of BSA/Structuring/Money Laundering violations during that period were California, New York, Texas, Florida, and New Jersey.
   

Suspect Sentenced for Laundering Colombian Drug Proceeds

On January 5, 2004, the U.S. Attorney's Office for the District of Utah announced the sentencing of a naturalized U.S. citizen from Bogotá, Colombia, to an 87-month term in federal prison for his role in a Utah-based money laundering operation. The defendant pled guilty in June 2002 to money laundering conspiracy, money laundering, and structuring financial transactions to evade reporting requirements. Prosecutors report that between January 1998 and January 2002, the defendant, his wife, and two associates laundered over $5 million in Colombian drug proceeds that were derived primarily from wholesale-level cocaine and heroin transactions in the United States. The defendant and his wife were arrested on January 13, 2002, after FBI agents obtained evidence that they were part of a conspiracy in which Colombian drug traffickers were directing them and coconspirators to travel to U.S. cities such as New York to pick up illicit drug proceeds from anonymous couriers. Once the funds were transported back to Utah, the suspect and his wife and the coconspirators used various methods to launder the cash, including purchasing cashier's checks and money orders, depositing amounts of cash under $10,000 into financial institutions, effecting wire transfers, falsifying invoices, and using the BMPE. (See Informal Value Transfer Systems for information on BMPE.) On occasion, the defendant, his wife, and the coconspirators also smuggled bulk U.S. currency to Colombia on commercial flights.

Source: U.S. Attorney's Office for the District of Utah.

Bulk Cash Smuggling Into or Out of the United States

Prior to the USA PATRIOT Act, an individual smuggling bulk quantities of cash was charged solely with a CMIR (Report of International Transportation of Currency or Monetary Instruments) violation (failing to file appropriate documentation). The smuggling of more than $10,000 was not a criminal act. However, the enactment of Title III, Subtitle C, Section 371 of that Act made it a criminal offense to conceal and smuggle or attempt to smuggle more than $10,000 in currency or monetary instruments out of or into the United States. If convicted of bulk cash smuggling under the USA PATRIOT Act, defendants face a maximum sentence of up to 5 years' imprisonment and the forfeiture of seized cash and any property, real or personal, involved in the offense.

Source: USA PATRIOT Act.

Significant U.S. Currency Seizures in 2004

On January 12, 2004, a deputy with the Bradley County (TN) Sheriff's Office seized over $1.2 million from a rented sport-utility vehicle traveling south on I-75 near Cleveland. According to officials, the deputy initially stopped the vehicle for driving erratically and tailgating. The driver told the deputy that he was traveling from New York to Mexico via Houston. The deputy requested and received consent to search the vehicle. During his search, the deputy noticed foam padding from the rear seats on the floor. Upon further inspection, the deputy found $1.1 million packed inside two suitcases that were concealed in hollowed-out compartments in the vehicle's two backseats. The deputy found additional currency in the rear doors. The driver and a passenger disavowed ownership of the currency but admitted that the money was proceeds from a recent delivery of over 100 pounds of cocaine that they had made to New York City. The driver and passenger were arrested, the vehicle was impounded, and the currency was seized.

Source: Bradley County (TN) Sheriff's Office.

On March 30, 2004, the Nebraska State Patrol seized $2,167,688 from a rental van at a truck stop on I-80 west of Omaha and arrested two males. Most of the currency was vacuum-sealed in 40 packages containing $5,000 to $82,000 each and concealed in two suitcases and a backpack, which were placed in the rear cargo area of the van. The backpack also contained currency--in $20, $50, and $100 denominations--that was not vacuum-sealed. One of the occupants denied knowledge of the money; however, the other individual indicated that he had obtained the currency from a man in Chicago and was transporting it to San Diego. A check of their criminal histories revealed that one of the occupants had prior drug-related arrests and the other was associated with previous currency seizures at the San Diego International Airport.

Source: Nebraska State Patrol.

Money Services Business Registration, Reporting, and Customer Identification Requirements

The term money services business (MSB) refers to five distinct types of financial services providers: currency dealers or exchangers; check cashers; issuers of traveler's checks, money orders, or stored value (prepaid debit cards); sellers or redeemers of traveler's checks, money orders, or stored value; and money transmitters. The five types of financial services are complementary and are often provided together at a common location. MSBs have grown to provide a set of financial products that customers traditionally relied on banks to provide. For example, an MSB customer who receives a paycheck can take the check to a check casher to have it converted to cash. The customer can then purchase money orders to pay bills. Finally, the customer may choose to send funds to relatives abroad, using the services of a money transmitter. All these services are available without the customer needing to establish an account relationship with a bank or credit union. These businesses perform valuable services for a wide array of individuals.

MSBs have been subject to currency transaction reporting rules since the inception of the BSA in 1970;²³ subsequently, additional regulatory obligations have been added. In 1988 Congress enacted Section 5324 of the BSA, requiring sellers of monetary instruments for $3,000 or more in currency to verify the identity of the purchasers. The Money Laundering Suppression Act of 1994 mandated a system of registration for MSBs. This was considered a necessary first step toward identifying a universe of financial service providers that was largely unregulated at the federal level, extremely diverse both culturally and in size, and generally unknown to federal regulators beyond the handful of large, well-known corporate entities. FinCEN proposed implementing registration regulations in 1997 with a proposal to require the filing of SARs, and FinCEN finalized the rules in 1999 with a phased-in implementation period so that all initial registrations for existing MSBs were required to be filed by December 31, 2001. MSBs also were required to begin filing SARs in January 2002. In April 2002, in response to the mandate of section 352 of the USA PATRIOT Act that financial institutions institute anti-money laundering programs, FinCEN issued a final rule requiring MSBs to establish anti-money laundering programs reasonably designed to prevent such businesses from being used to facilitate money laundering and finance terrorism.

FinCEN's regulations require most, but not all, MSBs to register with the Department of the Treasury every 2 years. Certain money services businesses are exempt from that registration requirement, including U.S. Postal Service outlets; businesses that are considered MSBs solely as issuers, sellers, or redeemers of stored value; and branch offices and agents of an MSB.²⁴

With the exception of check cashers and issuers and sellers or redeemers of stored value, all MSBs are required to report suspicious transactions. All MSBs are required to establish written, risk-based, anti-money laundering programs; to file currency transaction reports for cash transactions of more than $10,000; and to collect and maintain customer information for purchases of bank checks or drafts, cashier's checks, money orders, or traveler's checks of $3,000 to $10,000 inclusive, as well as for transmittals of funds in the amount of $3,000 or more. The civil penalty for noncompliance with the program, recordkeeping, or reporting requirements of the BSA is a fine up to $5,000 for each violation; the criminal penalty is up to 5 years' imprisonment.

Source: Financial Crimes Enforcement Network.

Unlicensed Money Transmittal Business Prosecuted in New York

On February 23, 2004, the Manhattan District Attorney announced that an unlicensed Manhattan money transmittal business was convicted of conducting illegal offshore transactions worth billions of U.S. dollars--including transactions involving drug proceeds--at various locations including the Caribbean, Middle East, and South America. The corporation, which operated from April 1994 to February 2003, was convicted on four counts of operating as an unlicensed money transmitter in violation of New York banking laws. Evidence presented at trial revealed that the corporation transmitted funds from numerous sources including individuals, shell corporations, and South American exchange houses known as casas de cambio. The Manhattan District Attorney's Office showed that from 1997 through February 4, 2003, the business made more than $6 billion worth of illegal wire transfers to or from approximately 40 of the corporation's accounts. The District Attorney has initiated asset forfeiture proceedings against more than $13 million that was frozen in the corporation's bank accounts. Law enforcement officials learned of the corporation's illegal activity during a separate investigation.

Source: Manhattan District Attorney's Office.

Verification of Identification

The USA PATRIOT Act, Title III, Section 326, increased scrutiny of financial accounts by requiring certain financial institutions to implement and customers to comply with the following three provisions:

• Verify the identity of any person seeking to open an account to the extent reasonable and practicable;

• Maintain records of the information used to verify a person's identity, including name, address, and other identifying information; and

• Consult lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency to determine whether a person seeking to open an account appears on any such list.

Source: USA PATRIOT Act.

Bank Accounts Used to Launder Illicit Drug Profits

On January 13, 2004, the U.S. Attorney's Office for the District of New Jersey announced the indictment and arrest of five members of a drug trafficking/money laundering organization who conspired with two Ecuadorian nationals to launder illicit drug profits by structuring currency transactions at banks in New Jersey and New York. From January 1998 through November 2000, five defendants allegedly conspired with the two Ecuadorians to deposit over $11 million into 54 bank accounts at several banks for various corporate entities, including the accounts of a supermarket franchise. Most of the cash deposits were less than the $10,000 CTR reporting requirement. The bank deposits and money transfers were eventually transmitted to Ecuador and Colombia.

Source: U.S. Attorney's Office for the District of New Jersey.

Record Business Used as Front Company

On February 17, 2004, the U.S. Attorney's Office for the Northern Division of the District of Maryland announced the conviction of four individuals on charges of conspiracy to distribute crack cocaine and money laundering. From September 2002 to July 2003, the defendants operated a crack distribution network throughout the Baltimore metropolitan area and used the profits to finance and maintain a record production and sales company through which they laundered drug proceeds. Specifically, the group commingled crack cocaine proceeds with proceeds generated at the business when making bank deposits.

Source: U.S. Attorney's Office for the Northern Division of the District of Maryland.

Funds Electronically Transferred Through Shell Companies

According to the New York/New Jersey HIDTA, the initial recipients of large wire transfers of illicit drug profits from the New York metropolitan area are shell companies. Identifying shell corporations via wire transfer records is extremely difficult considering that U.S. banking regulators estimate that over $1 trillion is electronically transferred through the New York metropolitan area daily.

Source: New York/New Jersey High Intensity Drug Trafficking Area.

Informal Value Transfer Systems

Drug traffickers use various IVTS, including the BMPE, hawala, hundi, and hui khan to launder and transfer illicit drug proceeds. These systems are similar in that each provides a means to transfer value from one location to another without the details of each transaction being recorded at a traditional financial institution, such as a bank or a registered money transmittal service. The BMPE is used primarily by South American, particularly Colombian, traffickers, while the hawala, hundi, and hui khan are used primarily by Southwest and Southeast Asian traffickers. The following paragraphs describe these systems in more detail. (Also see FinCEN Advisory 33, "Informal Value Transfer Systems," March 2003.)

According to DEA, South American drug traffickers launder between $3 billion and $6 billion a year through the BMPE. There are many varied elements within the system; however, currency brokers are critical to its operation. Black market currency brokers serve as intermediaries between traffickers who need their home countries' currencies to pay expenses and finance drug operations and foreign consumers (primarily South American merchants) who desire U.S. currency to conduct international business transactions. Brokers typically accept bulk cash from traffickers and charge a percentage fee on each end of the transaction--that is, the seller (trafficker) and the purchaser (merchant) of the funds. Brokers also attempt to profit from differences in exchange rates. South American merchants, particularly those in Colombia, often resort to the BMPE to obtain dollars since it is generally more efficient and less costly than purchasing currency through the official banking system. Many merchants who use the BMPE attempt to smuggle or falsely invoice goods purchased into their home countries to avoid taxes and tariffs or because they have no documentation that the funds used to purchase the commodities came from a foreign country. (For more information, please see FinCEN Advisory 9, "Colombian Black Market Peso Exchange," November 1997, and Advisory 12, "Black Market Peso Exchange Update," June 1999.)

Black Market Peso Exchange System Used to Launder Drug Proceeds

On May 4, 2004, the U.S. Attorney's Office for the Southern District of New York announced the indictment of 34 members of a money laundering organization that operated in the United States, Canada, and Colombia using the BMPE system. The indictment charged five individuals as "first-tier peso brokers" who made contracts directly with DTOs, two as "second-tier peso brokers" who arranged the pickup of drug proceeds and placed the funds into financial accounts, and nine as "third-tier peso brokers" who made contracts directly with Colombian merchants interested in purchasing U.S. dollars at discounted prices. The indictments resulted from a 2-year OCDETF investigation dubbed Operation White Dollar. The investigation also resulted in the forfeiture of $20 million in laundered funds and the subsequent seizure of more than $1 million from 20 separate bank accounts.

Source: U.S. Attorney's Office for the Southern District of New York.

Heroin Traffickers Use Hawalas to Transfer Illicit Drug Proceeds

In August 2003 the U.S. Attorney's Office for the District of Maryland announced the indictment of 11 individuals in connection with an international heroin trafficking and money laundering operation with ties to Canada, Pakistan, the United Kingdom, and the United States. Suppliers in Pakistan transported heroin via commercial aircraft from Pakistan through the United Kingdom for further transport to the United States and Canada. Funds generated through the sale of the heroin in the United States were provided to illegal hawaladars (individuals operating hawalas) operating in Maryland, Virginia, and California and transferred to recipients in Pakistan.

Source: U.S. Attorney's Office for the District of Maryland.

Informal Value Transfer System Registration Requirements

Prior to the passage of the USA PATRIOT Act of 2001, hawala, hundi, and hui khan businesses were not explicitly defined as money transmitters under the BSA. However, Section 359 of the USA PATRIOT Act amended the BSA definition of a money transmitting business to include "any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institution system." Assuming these entities are not acting as agents of another MSB, such businesses must register with FinCEN as money services businesses; even if these businesses are not required to register, they are required to comply with the anti-money laundering program, recordkeeping, and reporting requirements of the BSA applicable to MSBs. Businesses that are required to be licensed by a state or that are required to register as MSBs with FinCEN but fail to do either may be in violation of the BSA and may be criminally liable pursuant to 18 USC 1960. Violators may face both criminal and civil penalties.

Source: USA PATRIOT Act.

Insurance Products Used to Launder Drug Proceeds

On December 6, 2002, a 2-year federal investigation dubbed Operation Capstone revealed that Colombian drug traffickers were purchasing and quickly liquidating investment-grade insurance policies to generate income that appeared to be the proceeds of legitimate insurance products. Investigators estimate that $80 million in drug proceeds was laundered via this technique. Since December 2003 Operation Capstone resulted in numerous enforcement actions including the seizure of approximately $9.5 million by ICE officials in Miami, Florida; the indictment of five Colombian nationals in Miami for laundering approximately $2 million in drug proceeds through insurance companies; the seizure of approximately $20 million in insurance policies, bonds, and cash; and the arrest of nine individuals in Colombia by Colombian officials.

Source: U.S. Department of State.