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Illicit Finance

Tens of billions of dollars are laundered each year by drug traffickers operating in the United States. There are no current estimates for the annual amount of money either laundered domestically or smuggled out of the United States by DTOs. However, a 2007 NDIC study shows that from 2003 through 2004, at least $17.2 billion was smuggled into Mexico in bulk cash shipments alone.24 Additionally, drug proceeds (perhaps totaling several billion dollars) are laundered each year through various techniques such as the use of the Black Market Peso Exchange (BMPE), money transmissions, front companies, real estate transactions, and structured deposits in traditional depository institutions. Because the predominant techniques used by DTOs to launder illicit drug proceeds have proved relatively successful, DTOs continue to rely on these methods to launder illicit drug proceeds. Nevertheless, there are some emerging developments related to money laundering.

Mexican DTOs smuggle bulk cash totaling tens of billions of dollars from specific domestic cash consolidation areas to and through POEs for eventual placement into foreign financial institutions.

Since 2001, enhanced U.S. anti-money laundering (AML) regulations such as the USA PATRIOT Act and law enforcement actions have made it more difficult to place drug proceeds into U.S. financial institutions. As a result, Mexican and, to a lesser extent, Canadian and other DTOs have adapted by smuggling bulk cash from drug sales out of the United States to countries where placement of the cash into financial institutions is much easier. In fact, bulk cash smuggling has become the primary method used by Mexican DTOs to move their U.S. drug proceeds. The exact amount of bulk cash smuggled out of the country by DTOs is unknown; however, it is at least tens of billions of dollars annually.

The movement of bulk cash by Mexican DTOs from U.S. drug markets, through key consolidation areas, to Mexico is a complex nationwide system. Millions of dollars in bulk cash is transported each week from U.S. drug markets to relatively few consolidation areas such as Atlanta, Chicago, Los Angeles, New York City, and North Carolina, where a Mexican DTO bulk cash cell leader takes direct control of the money. These drug proceeds are subsequently shipped to or across the Southwest Border. For example, law enforcement reporting and seizure data indicate that the volume of illicit bulk cash transported to and from Atlanta far exceeds that of any other city in the eastern half of the United States. In fact, the amount of cash seized from 2006 through June 2009 that was destined for Atlanta exceeded the amount destined for any other U.S. city outside the Southwest Border during that period. Mexican DTOs are the predominant drug traffickers in the Atlanta area, where they are able to coordinate large drug and money shipments. Because Atlanta is between major eastern drug markets and the Southwest Border, bulk cash is transported to stash houses in Atlanta, as well as a number of counties in northern Georgia, from across the southeastern United States and from as far away as New York City. As a result of increased law enforcement scrutiny, bulk cash consolidation operations have shifted from some of these major drug market areas into more rural areas or regional drug markets.

Canada-based DTOs smuggle bulk cash drug proceeds from the United States into Canada, often through remote areas of the U.S.-Canada border.

Canadian DTOs smuggle significant amounts of cash generated from the U.S. distribution of Canada-produced drugs into Canada. The Akwesasne Territory, which straddles the U.S.-Canada border, is one of the most important smuggling corridors for Canada-bound bulk cash. Overall, the topography of the U.S.-Canada border facilitates bulk cash smuggling because currency interdiction by law enforcement officials is often hampered by the border's length and vast expanses of rugged terrain.

The loss of Hong Kong Shanghai Banking Corporation (HSBC) Mexico for the placement of licit and illicit U.S. currency has had no long-term effect on BMPE placement activity in Mexico, since money launderers have repeatedly demonstrated their ability to quickly adapt to actions on the part of law enforcement and financial institutions.

The January 2009 implementation of the new HSBC Mexico AML policy, which stopped the deposit and exchange of foreign currency, has had no long-term effects on U.S. currency placement activity in Mexico. Drug proceeds in the form of bulk cash continue to be smuggled from domestic drug market areas to and across the U.S.-Mexico border as a principal placement method for BMPE transactions. Launderers operating in Mexico on behalf of BMPE peso brokers most likely have placed U.S. currency at Mexican financial institutions other than HSBC Mexico.

The potential for increased drug money laundering through the use of prepaid cards has prompted Nevada to enact state law SB-82 to aid law enforcement investigations involving this method of money laundering.

Prepaid card investigations and prosecutions are challenging because law enforcement officials must often secure warrants before accessing prepaid card account information, such as account balances and transaction records, or seizing funds stored on prepaid cards. As a result, law enforcement agents cannot efficiently determine whether the total value associated with a card is suspicious. It is also difficult for law enforcement officials to seize funds stored on prepaid cards, because those funds can be removed from the card by the criminal or a coconspirator while the card is in the possession of a law enforcement agency and before a seizure warrant can be obtained and executed.

Officials in Nevada have attempted to address these challenges with SB-82, which took effect July 1, 2009. This law makes it easier for Nevada law enforcement officials to investigate prepaid card money laundering and fraud cases that occur in the state each year. For example, SB-82 allows Nevada law enforcement to freeze the funds on a prepaid card for up to 10 days, until a judge authorizes a warrant, to prevent criminals from removing the funds while the card is in the possession of law enforcement authorities. In limited circumstances, SB-82 authorizes the seizure of funds without a warrant.

Changes to SWIFT25 Message Format MT 202 will reduce money launderers' ability to disguise the origin and destination of wire transfers when wiring money through intermediary accounts.

Until recently, drug money launderers were able to take advantage of a vulnerability that existed in the wiring of money between banks without a direct banking relationship. When a bank needs to wire a customer's money to another bank, one of the several types of SWIFT messages may be used as instructions for the transfer. This message is sent through SWIFT separately from the actual settlement of the funds. When a customer's bank does not have a direct relationship with the ultimate receiving bank (a situation that occurs frequently, especially in international transfers), banks may use either cover payments26 or serial payments27 to send the money through one or more intermediate banks.28

In cases where cover payments are used, two separate SWIFT message instructions are sent. The first set of instructions, called MT 103, contains all of the originating customer and ultimate beneficiary information, but is seen only by the originating bank and the beneficiary bank. A second message, the MT 202, is sent to the intermediary banks. Previously, the SWIFT MT 202 messages that accompanied cover payments between intermediary banks did not retain originator and beneficiary account information.

This lack of information allowed money launderers to disguise their identity by sending wire transfers through intermediary banks. When a SWIFT 202 was used, only the originating and beneficiary bank, which could be foreign-based banks, could see the originator and beneficiary information. The intermediary banks, which would typically be U.S. banks, would not know this information.

This money laundering vulnerability has been eliminated by the new SWIFT Message Format, called MT 202 COV, which took effect November 21, 2009. The new format retains both originator and beneficiary information on all transfers made through intermediary banks, allowing intermediary banks to better investigate or block suspicious transactions.

The recent acquisition of a banking license by a virtual world company (online role-playing game) offers drug money launderers the ability to access the global financial system anonymously; however, large-scale use of virtual world banks to launder drug money is unlikely, since launderers remain encumbered by placement of drug proceeds.

In March 2009, a virtual world company (see text box) received a license from the Swedish Financial Authority to conduct banking activities. This license enables the game's virtual economy to interact with and carry out the functions of real-world banks, such as offering interest-bearing savings, Automated Clearing House (ACH) transactions, and lending.29 The ability to anonymously access the international financial system through this virtual world's bank creates a money laundering threat, particularly because rigorous know-your-customer procedures will be difficult to enforce. In virtual environments, role-playing games are built around the premise of players pretending to be other people. Establishing the actual identity of players will be very challenging for financial institutions and law enforcement.

What is a Virtual World?

Virtual worlds, also referred to as Massively Multiplayer Online Role-Playing Games, are Internet-based computer games characterized by a player assuming the role of a fictional character within the game, customizing that character, and interacting with other players of the game. Most games involve players cooperating with other players to complete tasks or quests in order to develop and advance their characters. However, some games are based around social interaction and have few, if any, specific tasks to complete or ways to advance character development.

Many online games have some form of in-game economy that allows players to buy and trade virtual items within the game. A few games let players transfer real-world money into and out of the virtual world, usually by means of credit card payments. This function has allowed players to start businesses in the virtual world and to transfer the profits out of the game to the real world.

Although there is a risk of abuse by drug money launderers, that risk is somewhat lessened because this virtual world bank will be subject to the same regulations and AML controls as real world banks. The usefulness of this virtual world's bank to money launderers also is limited by the need to first place cash into the financial system and the size of the online economy. In 2008, this game's economy was about $420 million generated from 820,000 players. Typically, users spend between $.50 and $1.50 per hour in the game. Large or very frequent transactions would stand out from normal players' transactions.

A U.S. Supreme Court decision that differentiates between bulk cash smuggling and money laundering will likely inhibit future money laundering prosecutions of bulk cash couriers.

On June 1, 2008, the Supreme Court ruled that a suspected bulk cash courier who was arrested while transporting $81,000 to Mexico in the hidden compartment of a passenger vehicle was not guilty of money laundering. The decision establishes a separation between bulk cash smuggling and money laundering. In the ruling, the court wrote, "Although the evidence showed intent to avoid detection while driving the money to Mexico, it did not show that the petitioner intended to create the appearance of legitimate wealth, and accordingly no rational trier of fact could have found the petitioner guilty."

The ruling will most likely limit prosecutions against bulk cash smugglers; therefore, bulk cash smuggling in the United States will likely continue unabated. Despite this ruling, DTO leaders are unlikely to challenge bulk cash seizures or arrests for fear of exposing their financial infrastructures through legal proceedings. Currently, most couriers who are stopped during suspected drug cash interdictions deny knowledge of the cash and are released, at which point law enforcement officials are able to seize the currency.


24. The $17.2 billion estimate is based on a review of U.S. banknotes repatriated from Mexico. The estimate represents only U.S. currency returned to the United States, not all U.S. currency that was smuggled to or through Mexico. This estimate is based on analysis of U.S. banknotes purchased by U.S. financial institutions from Mexican financial institutions from 2003 through 2004.
25. SWIFT--Society for Worldwide Interbank Financial Telecommunication--is one of several payment messaging systems operating in the United States. SWIFT provides a secure communications platform for banks but does not actually hold or transfer funds.
26. The cover payment method divides the message into two parts. Detailed funds-transfer instructions are sent directly to the beneficiary's bank via a SWIFT MT 103, while a second message, the SWIFT 202, is sent through all intermediary banks.
27. Using serial payments, one financial institution transmits the funds-transfer instructions via a SWIFT MT 103 message to the intermediary bank. Each institution involved in this process receives the same level of detail about the transaction at each step.
28. Intermediary banks, also called correspondent banks, allow banks to do business with each other if they do not have a direct relationship.
29. In the past, other virtual worlds have included "virtual banks," but these functioned only as an element of the game and were not part of the real-world financial system. Prior to the issuance of this banking license, players of this virtual world could exchange real money for the virtual currency used in the game. Players could also earn money in the game by buying and selling objects or completing tasks such as hunting and mining. Earned virtual currency could be cashed out of the game at a fixed exchange rate to the U.S. dollar.

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