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Illicit Finance


Drug money laundering is a globalized industry. The majority of DTOs operating in the United States--including launderers working for Mexican and Colombian DTOs that are responsible for most wholesale-level drug trafficking--are transnational organizations with a presence in multiple countries around the world. Illicit transactions cross national borders through various traditional and emerging money laundering methods as drug proceeds are moved from U.S. market areas to foreign destinations.

Strategic Findings

Financial institutions are vital in the money laundering process for both Mexican and Colombian DTOs. Bulk cash smuggling is relied upon to remove significant amounts of drug proceeds from the United States. Much of that illicit bulk cash is used to facilitate international BMPE transactions in which traffickers, peso brokers, and Colombian business owners all benefit. Emerging products and technologies that use Internet-based transactions enable globalization on an even larger scale, since international transactions are executed instantaneously.

Financial Institutions

A priority of drug money launderers is to legitimize their drug proceeds by placing them into financial institutions, either in the United States or in foreign jurisdictions. Many DTOs exploit the services provided by financial institutions to launder significant amounts of illicit drug proceeds, despite provisions in the USA PATRIOT Act that make laundering illicit money through bank and nonbank (money services businesses, or MSBs) financial institutions in the United States more difficult.

Structuring, or "smurfing,"30 is a primary method used by traffickers to introduce drug proceeds into U.S. financial institutions. Although structuring is traditionally accomplished by teams of smurfs visiting multiple banks and making deposits, ATM (automated teller machine) deposits are also employed by traffickers. DTOs also use correspondent, "payable through," and nested accounts to place funds in the U.S. financial system.31

Commercial casinos, which are classified as financial institutions and regulated by the Bank Secrecy Act (BSA)32 are susceptible to money laundering and are used by criminal groups to launder illicit proceeds. Casinos are attractive venues for money laundering schemes because they offer many of the same financial services as banks, regularly process large volumes of cash, and enable money launderers to legitimize illicit proceeds by claiming them as gambling earnings.

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Bulk Cash Smuggling

Bulk cash smuggling is a prominent method used by traffickers to move drug proceeds from U.S. market areas to foreign destinations, particularly Mexico and Colombia. NDIC estimates indicate that Mexican and Colombian DTOs generate, remove, and launder between $18 billion and $39 billion in wholesale drug proceeds annually,33 a large portion of which is believed to be bulk-smuggled out of the United States at the Southwest Border. Further, significant amounts of bulk cash generated from the U.S. sale of Canada-produced drugs also cross the U.S.-Canada border into Canada. Canada-based DTOs primarily Asian DTOs, generate between $33.7 billion and $56.2 billion from drug sales in the United States annually, a majority of which is very likely smuggled across the U.S.-Canada border. The Akwesasne Territory, which straddles the U.S.-Canada border, is one of the most important corridors for bulk cash smuggling along the border.

Analysis of the volume of repatriated U.S. banknotes indicates significant bulk cash smuggling along the U.S.-Mexico border.34 NDIC analysis shows that at least $17.2 billion in U.S. banknotes were transported to Mexico through illicit nonbank channels35 over a 2-year period.36 Similar analysis of banknotes repatriated from Canada does not indicate an excess of unexplained U.S. currency in Canada.

Black Market Peso Exchange

The BMPE serves a significant role in Colombian money laundering operations. Further, some Colombian business owners benefit significantly from the BMPE system because they are able to purchase cheaper U.S. dollars than through legitimate exchange and because the system facilitates tax evasion for those business owners in Colombia. The BMPE is a trade-based money laundering system in which Colombian traffickers receive Colombian pesos in Colombia in exchange for their drug dollars located in the United States. Peso brokers traditionally facilitate this process by selling Colombian trafficker-owned U.S. drug dollars located in the United States at a discount to Colombian merchants seeking cheaper U.S. dollars, who use the funds to purchase goods, typically in Free Trade Zones.37

BMPE peso brokers continue to use structuring, wire remittances from domestic MSBs and other techniques to place drug proceeds into the U.S. financial system; however, enhanced U.S. anti-money laundering regulations have made it more difficult for brokers to do so. Consequently, peso brokers increasingly rely on financial institutions in foreign jurisdictions.

Since 2002,38 DTOs and peso brokers have bulk-smuggled drug proceeds across the Southwest Border into Mexico for placement in Mexican financial institutions (banks, casas de cambio,39 and centros cambiarios40) to facilitate the BMPE system. The illicit proceeds are used for international wire remittances to countries such as China, Panama, Taiwan, and the United States to purchase goods that are later sold on the black market in Colombia. However, increased U.S. and Mexican law enforcement actions against Mexican casas de cambio as well as increased U.S. banking industry scrutiny of such institutions may impact their use in facilitating international BMPE activity.

New Products and Technology

New financial products and technologies, many of which are Internet-based, present unique opportunities for money launderers and unprecedented challenges to the intelligence, law enforcement, and regulatory communities. Prepaid cards, digital currencies,41 mobile payments, Internet gambling, and online games are not yet fully addressed by anti-money laundering regulations in many countries, including the United States; therefore, these products and technologies enable financial transactions to be conducted internationally with very little oversight and a high degree of anonymity.

Open-system prepaid cards are payment mechanisms that allow cardholders to access global credit and debit payment networks. The manner in which existing regulations apply to these financial products is unclear, and cardholders may use some of these products without forming a traditional accountholder relationship with a depository institution. This lack of an accountholder relationship could enable cardholders to anonymously transfer unlimited amounts of money across global payments networks.

Digital currencies can be used by traffickers to anonymously fund digital currency accounts, send those funds (sometimes in unlimited amounts) to other digital currency accounts worldwide, and effectively exchange the funds for foreign currencies--often bypassing U.S. regulatory oversight.

The money laundering threat posed by mobile payments42 corresponds to the financial services to which they allow access. Through the use of cell phones, most mobile payments provide traffickers access to existing payment mechanisms such as bank and credit card accounts and prepaid cards, allowing them to use financial services remotely. Further, mobile payments are particularly useful to traffickers when they facilitate payments using new products or technologies for which regulations are emerging or unclear.

Online role-playing games, also referred to as "Virtual Worlds," afford traffickers a number of unique money laundering opportunities. Many online games include an in-game currency that can be bought and exchanged for real currencies. Drug traffickers can legitimize their income through accounts established with online game companies in various ways, such as accepting virtual money in exchange for illicit drugs or buying and selling game items between multiple accounts controlled by them or their associates in a cyber version of trade-based money laundering.

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End Notes

30. Smurfing involves persons or teams of persons (“smurfs”) who, acting in conjunction with or on behalf of other persons, structure financial transactions by conducting or attempting to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on 1 or more days, in any manner, for the purpose of evading the reporting requirements under Title 31. “In any manner” includes but is not limited to the breaking down of a single sum of currency exceeding $10,000 into smaller sums, including sums at or below $10,000. The transaction or transactions need not exceed the $10,000 reporting threshold at any single financial institution on any single day in order to constitute structuring within the meaning of this definition.
31. A correspondent account enables financial institutions to provide banking services, including interbank fund transfers, to one another. A "payable through" account at a U.S. bank involves a foreign bank that holds a checking account at the U.S. institution. The foreign bank can then issue checks to its customers, who are considered signatories, allowing them to write checks and wire funds through the U.S. account. A nested account involves the use of a foreign bank's correspondent account at a U.S. bank by other foreign banks, an action that provides these second-tier banks and their customers indirect access to the U.S. financial system and results in an exponential increase in the number of individuals having signatory authority over a single account at a U.S. bank.
32. A casino or a card club that is duly licensed or authorized to do business as such and has gross annual gaming revenue in excess of $1 million is a financial institution under the Bank Secrecy Act (BSA).
33. These figures were derived by multiplying the total quantity of Mexico- and Colombia-produced drugs available at the wholesale level in the United States by the wholesale prices for those drugs.
34. The term "repatriated" as used here refers to the process of returning U.S. banknotes held in foreign jurisdictions to the United States and, therefore, to the U.S. financial system through formal banking channels.
35. Currency moved through "illicit nonbank channels" refers specifically to cash proceeds of criminal activity that are physically transported to Mexico (without the services of traditional financial institutions) by criminal organizations for the purpose of laundering the funds. In order to estimate the amount of repatriated U.S. currency laundered in Mexico, currency transported to Mexico through illicit nonbank channels must be separated from legally earned currency transported through licit nonbank channels, such as currency carried into Mexico by tourists and migrant workers.
36. The $17.2 billion is based on analysis of 2003 to 2004 BSA data of U.S. banknotes purchased by U.S. financial institutions from Mexican financial institutions, the most recent data available to NDIC. There is no other evidence indicating that repatriation has decreased.
37. Trust is a primary factor that fuels the BMPE. Colombian financial institutions share much of their account information with the Colombian Government. This practice creates a lack of trust between Colombian businessmen and traditional financial institutions because many businesspeople do not want government oversight of their financial/business activities. Unlike Colombian financial institutions, peso brokers do not maintain official records. In many cases the peso brokers are well known within the community and are close associates of the importer and his or her family. This association solidifies a trust between businesspeople and brokers, which traditional Colombian financial institutions lack. Income tax evasion is another primary motivation for Colombian businesspeople to use the services of a peso broker. Income tax in Colombia is based on net worth. Because peso broker transactions are anonymous and are not officially recorded, many Colombian businesspeople avoid high income taxes through the use of peso brokers.
38. The anti-money laundering regulations delineated in Title III, Subtitle B, of the USA PATRIOT Act, which was signed into law on October 26, 2001, have made it more difficult for drug traffickers and other criminal organizations to launder proceeds through many U.S. financial institutions, compelling these groups to circumvent regulated financial institutions as much as possible.
39. Casas de cambio are nonbank financial institutions (currency exchangers) that perform various financial services, including international wire remittances, and are highly regulated by the Mexican Government.
40. Centros cambiarios are nonbank financial institutions in Mexico that generally perform a variety of financial services, including currency exchange and money remittances. Centros cambiarios are often located with other businesses, such as grocery stores and pharmacies.
41. Digital currencies are privately owned online payment systems that facilitate international payments without use of the transmittal services of, or direct contact with, traditional financial institutions.
42. Mobile payments are any payments activated or confirmed by a mobile device such as a cellular telephone.

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