Illicit Finance

Overview

Diversification is a vital component of drug money laundering operations in the United States. 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--rely on multiple methods to move and launder illicit proceeds. Law enforcement investigations initiated since January 2006 indicate that most DTOs use two or more techniques to launder drug proceeds. Even in Southwest Border states, where bulk cash smuggling is the predominant method of moving drug proceeds, most organizations use a variety of drug money laundering techniques, including wire remittances through MSBs and the use of front companies, real estate purchases, and structured deposits in traditional depository institutions.

Strategic Findings

• Bulk cash smuggling from the United States to Mexico has increased.
   
• Money services businesses (MSBs) have become a critical component to the ability of DTOs to launder illicit drug proceeds.
   
• Many DTOs exploit traditional depository institutions, sometimes innovatively.
   
• Structuring in unusually small amounts is being employed by DTOs as a money laundering technique.
   
• Emerging technology is equipping DTOs with novel money laundering techniques.

Bulk Cash Smuggling

Bulk cash smuggling from the United States to Mexico has increased. Bulk cash smuggling from U.S. drug markets through the Southwest Border area to Mexico has increased. This is most likely the result of enhanced U.S. anti-money laundering (AML) regulations and law enforcement actions, which have made it more difficult for drug traffickers to launder drug proceeds through many U.S. financial institutions. Bulk cash smuggling is the primary technique used by Mexican DTOs. Typically, bulk cash is transported by Mexican DTOs to consolidation points throughout the United States and moved overland to the Southwest Border. Consolidation points are often major metropolitan areas or larger drug markets, such as Atlanta, Charlotte (NC), Chicago, Denver, Detroit, Miami, and New York. For example, law enforcement officials in Chicago estimate that between $10 million and $24 million in bulk cash drug proceeds are moved from that city each month, destined for Southwest Border locations. Additionally, law enforcement agencies have made several large bulk currency seizures from passengers traveling from U.S. drug markets dominated by Mexican DTOs to Southwest Border areas on Mexican bus lines. A number of Mexican bus lines operate daily service between Mexico, Southwest Border states, and many of the known bulk cash consolidation points used by Mexican traffickers. Once bulk cash crosses the Southwest Border, one or a combination of the following occurs:

• The cash is deposited into Mexican financial institutions (banks, casas de cambio,²¹ and centros cambiarios²²), with portions of the money electronically wire-transferred to:
  - the United States
  - other Mexican financial institutions
  - other Latin American countries for placement into the financial systems
  - other countries, such as Panama, Korea, China, Taiwan, and Hong Kong, where it is used to facilitate the Black Market Peso Exchange (BMPE)
   
• The cash is repatriated to the United States by Mexican financial institutions for reintroduction into the U.S. financial system.
   
• The cash is smuggled in bulk farther south to Guatemala, Panama, Colombia, or other Latin American countries.
   
• The cash is used in Mexico for operational expenses.

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Money Services Businesses

MSBs have become a critical component to the ability of DTOs to launder illicit drug proceeds. Many DTOs use U.S.-based MSBs--particularly money transmittal and check-cashing businesses as well as casas de cambio²³--to launder drug proceeds, frequently in conjunction with bulk cash smuggling. The diversity of services offered at many MSBs accommodates launderers' needs. Mexican DTOs often wire illicit proceeds in structured amounts through MSBs to collection points in Southwest Border states, where the wires are cashed, and most of the money is then smuggled across the border. In some cases, DTOs wire money directly to Mexico. Law enforcement reporting reveals that Mexico is the primary destination for suspicious funds sent through MSBs; however, law enforcement officials also report that significant amounts of money are also sent through MSBs to Colombia, the Dominican Republic, Russia, and various locations in Central America and South America. Money orders purchased at MSBs and U.S. Post Offices are also commonly used by drug traffickers to launder money. A review of OCDETF case initiations indicates that approximately 20 percent of its newly initiated money laundering investigations contain a money order component. Law enforcement officials, especially those from U.S. Immigration and Customs Enforcement (ICE) and DEA and the regulatory community, have noted the continuous movement of money orders to Mexico and other Latin American countries in money laundering schemes. Additionally, open-system prepaid cards, also a product provided by MSBs, are used by drug money launderers. These cards can effectively be used to remit money across borders because card value can be added or withdrawn at automated teller machines (ATMs) worldwide.

Traditional Depository Institutions

Many DTOs exploit traditional depository institutions, sometimes innovatively. Traffickers exploit the services provided by traditional depository institutions to launder significant amounts of illicit drug proceeds, despite provisions in the USA PATRIOT Act that tightened AML programs for such institutions. According to Financial Crimes Enforcement Network (FinCEN) reporting, Suspicious Activity Report (SAR) filings for Bank Secrecy Act (BSA)/Structuring/Money Laundering continue to be high (302,818 filings in 2006) and remain the leading violation type by far of all suspicious activity reported by depository institutions. In addition to structuring, DTOs, primarily Colombian and Mexican, move illicit drug proceeds by depositing money in U.S. bank accounts and then quickly withdrawing the money from ATMs located in other states or countries; they also move these funds by wire transfer. Additionally, DTOs use correspondent, "payable through," and nested accounts to covertly access the U.S. financial system and move money within the United States and throughout the world.²⁴

Emerging Methods and Technology

Structuring in unusually small amounts is being employed by DTOs as a money laundering technique. Structuring in unusually small amounts is gaining in prominence among DTOs as a money laundering technique. It is similar to traditional structuring; the principal difference is that this method of structuring involves numerous deposits of cash, purchases of money orders, or transfers of money through MSBs in amounts that are so far below normal BSA or AML thresholds--usually under $1,000--that they do not trigger the filing of SARs. For example, a recent federal investigation revealed that collusive money remitter agents in New York City recommended that customers divide their drug proceeds among other collusive agents to reduce the amount of money that a particular agent was transferring, thus reducing suspicion. In a separate investigation in New York, an MSB employee structured more than $83,000 through money orders and wire transfers in amounts between $800 and $900. Such structuring may necessitate the use of more banks, more bank accounts, more smurfs, or some combination of all three.

Emerging technology is equipping DTOs with novel money laundering techniques. New technologies, including online and mobile payment systems and online role-playing games, may provide drug traffickers with more innovative ways to launder illicit proceeds. Mobile payments,²⁵ which by some financial analyst estimates will total $55 billion in 2008, provide traffickers greater access to existing payment mechanisms such as bank and credit card accounts and prepaid cards through web-enabled cell phones, allowing them to use financial services remotely. Online payment systems, including digital currencies, offer anonymity, versatility, and convenience and will continue to gain in popularity with international drug money launderers because such systems have a global reach and reduce issues linked to fluctuating exchange rates. Some online payment services are unable to definitively authenticate customer identification, and others openly promote anonymous payments. In fact, in April 2007 a federal grand jury indicted two companies that were operating digital currency businesses for money laundering violations, alleging that the defendants failed to conduct due diligence on their customers and charging them with operating an unlicensed money transmitting business. Additionally, online role-playing games, also referred to as "Virtual Worlds," afford traffickers a number of unique money laundering opportunities. Drug traffickers can legitimize their income through accounts established with online game companies through the following methods:

• Selling virtual game items to other players for a credit to their account; the game company periodically settles the account by issuing a legitimate check to the account owner/launderer for the virtual items sold in the game.
   
• Accepting virtual money in exchange for illicit drugs, thereafter receiving a legitimate check from the game company.
   
• Maintaining multiple game accounts through which they can buy items from and sell items to themselves, in a cyber version of a trade-based money laundering scheme.
   
• Selling virtual currency in exchange for real money to other players.

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End Notes

21. Casas de cambio located in Mexico are nonbank financial institutions (currency exchangers) that provide a variety of financial services and are highly regulated by the Mexican Government. As of March 2007, 24 casas de cambio were registered with Mexico's Federal Income Secretary.
22. 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 colocated with other businesses such as grocery stores and pharmacies. One of the chief differences between centros cambiarios and casas de cambio is that the casas may also engage in international money remittances.
23. Casas de cambio located in the U.S. are generally very small money services businesses (MSBs) and have no affiliation with casas de cambio located in Mexico. The primary function of U.S. casas de cambio is to provide currency exchange services, although many engage in other financial services, including selling money orders and cashier's checks, wire-transferring funds, and making payments for customers from casa accounts.
24. A correspondent account enables financial institutions to provide banking services, including interbank funds 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, which 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.
25. According to the Institute of Electrical and Electronics Engineers, Inc., mobile payment systems are defined as "any payment where a mobile device is used to activate and/or confirm the payment."