Drug Money Laundering

Strategic Findings

• Wholesale-level drug distribution in the United States generates between $13.6 billion and $48.4 billion annually. 
    
• Between $8.3 billion and $24.9 billion in drug proceeds is smuggled out of the United States by Mexican and Colombian DTOs across the U.S.-Mexico border, primarily in bulk through South Texas POEs. These proceeds often are repatriated to a Mexican bank account but sometimes are commingled with legitimate proceeds at Mexican money services businesses (MSBs), then transported back into the United States via legitimate courier companies. Funds transported back to the United States typically are deposited into the MSBs' U.S. bank accounts. From those accounts, the funds are most likely wire-transferred worldwide to correspondent accounts for use by the trafficker or money brokers. 

Recent U.S. government analyses conducted at the request of ONDCP suggest that wholesale level drug distribution generates between $13.6 billion and $48.4 billion annually.⁵ This range, while broad, indicates the magnitude of revenues generated through wholesale drug distribution in domestic drug markets. Substantially more revenue is generated through midlevel and retail drug transactions; however, significant intelligence gaps concerning the volume and value of these transactions preclude precise and reliable estimative analysis as to the extent of the revenue generated through midlevel and retail drug transactions. 

Most drug transactions, whether wholesale, midlevel, or retail, are conducted in cash. As such, large quantities of money generated through drug sales must be laundered in order to insulate traffickers from detection and, further, to minimize the risk that drug proceeds will be seized by law enforcement and forfeited. Most wholesale drug distribution in the United States is conducted by or on behalf of foreign DTOs and criminal groups whose bases of operation generally are located in their home countries. As such, drug proceeds generated by traffickers in the United States must be repatriated by the traffickers to their home nations.⁶ 

All DTOs and criminal groups operating at the wholesale level must either launder or repatriate the proceeds they derive through their transactions. However, Mexican and Colombian DTOs, who conduct most of the wholesale drug distribution in the country, carry out most of the wholesale-level drug money laundering in the United States. These DTOs adhere to specific techniques to transport and launder their illicit proceeds, including bulk cash smuggling, use of MSBs and currency exchanges, and the structuring of deposits in traditional depository institutions. Additionally, some Colombian DTOs use the Black Market Peso Exchange (BMPE) to launder their drug proceeds. 

Mexican and Colombian DTOs transport their drug proceeds principally in bulk from drug market areas to other U.S. areas and then on to foreign destinations in an attempt to repatriate their proceeds to their home nations. Recent U.S. government analyses estimate that between $5.1 billion and $17.7 billion in wholesale drug Mexico-produced marijuana, methamphetamine, and heroin is transported out of the United States annually, presumably destined for Mexico. It is further estimated that an additional $3.2 billion to $7.2 billion generated through the wholesale distribution of cocaine and South American heroin is transported out of the United States annually, presumably destined for repatriation to Mexico and Colombia. The proceeds destined for Mexico and Colombia are generally transported out of the country across the U.S.-Mexico border, primarily through South Texas POEs. In some cases, drug proceeds smuggled across the U.S.-Mexico border are commingled with legitimate proceeds at Mexican MSBs, then transported back into the United States via legitimate courier companies; they are then deposited into the MSBs' U.S. bank accounts. From those accounts, the funds typically are wire-transferred worldwide on behalf of a trafficker--either to an account maintained by the trafficker or to business associates of the trafficker as payment of a debt. 

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While a large percentage of wholesale drug proceeds are transported across the U.S.-Mexico border, a significant amount is transported in bulk across the U.S.-Canada border, most likely by Asian DTOs and criminal groups. Recent U.S. government analyses estimate that between $5.2 billion and $21.2 billion generated by the wholesale distribution of Canada produced marijuana is transported out of the United States annually across the U.S.-Canada border, presumably destined for repatriation to Canada. DEA investigations also reveal that some MDMA and marijuana proceeds generated by Vietnamese criminal groups are sent directly from the United States to Vietnam. 

Mexican and Colombian DTOs and criminal groups as well as other ethnic traffickers also remove wholesale drug proceeds from the United States using a variety of other money laundering techniques. Money transmitters as well as issuers, sellers, and redeemers of money orders are common MSBs used by traffickers to launder illicit drug proceeds. Of the 297,048 Suspicious Activity Reports by Money Services Businesses (SAR-MSBs) filed with the Financial Crimes Enforcement Network (FinCEN) in 2004, 183,728 resulted from money transfers and 90,954 resulted from the purchase, sale, or redemption of money orders. From October 1, 2002, to December 31, 2004, most SAR-MSBs were filed in California, New York, Arizona, Texas, and Florida.⁷ Law enforcement reporting and other available data indicate that Mexican DTOs and criminal groups often wire-transfer drug proceeds generated in U.S. market areas to southwestern states--primarily Arizona and Texas--where the transfers often are converted to cash and then physically smuggled across the U.S.-Mexico border. Some of this wire-transfer activity reportedly is associated with illegal alien smuggling organizations.⁸ 

Currency exchanges (including casas de cambio) also are frequently used by traffickers to launder wholesale drug proceeds. Such businesses in the United States are used to launder illicit proceeds via wire transfer to foreign destinations or by commingling illicit proceeds with legitimate business earnings, which are then deposited into a U.S. bank account. 

Traffickers continue to launder drug profits through traditional depository institutions--banks, savings associations, and credit unions--typically through various structured transactions, including deposits. Depository institutions also are used by traffickers to purchase bank drafts and cashier's checks that can be transferred to any location in or outside the United States. SARs filed by depository institutions increased from 288,343 in 2003 to 381,671 in 2004. From April 1, 1996, to December 31, 2004, approximately half of such SARs were filed in California (24%), New York (11%), Texas (6%), Florida (5%), and Illinois (3%).⁹ 

Colombian DTOs and criminal groups also use the BMPE to launder drug proceeds. The BMPE, a process by which money brokers exchange U.S. currency for pesos within the Colombian black market, is most frequently used in cities where Colombian DTOs are active, such as Miami and New York. U.S. government estimates indicate that approximately $3 billion to $6 billion may be laundered via the BMPE annually; however, a former Chief of Colombian Customs narrows that estimate to approximately $5 billion. 

Asian DTOs and criminal groups often use informal value transfer systems (IVTS) such as hawala, hundi, and the Chinese Underground Banking System (CUBS) to launder illicit drug proceeds generated in the United States. These systems provide not only anonymity but also a means to transfer funds overseas without using the formal financial systems that are subject to regulatory reporting requirements. Both legally and illegally operated IVTS businesses function in the United States--legally operated IVTS bankers are registered with FinCEN and are subject to regulatory reporting requirements mandated by the Bank Secrecy Act (BSA).¹⁰  

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End Notes 

5. This estimate was derived by multiplying the total quantity of foreign-produced drugs available at the wholesale level in the United States (acquired from the Office of National Drug Control Policy (ONDCP) Drug Availability Steering Committee reporting) by the wholesale prices for these drugs (derived from NDIC's December 2004 Narcotics Digest Weekly Illicit Drug Prices Special Issue). 

6. Comparably, most midlevel and retail distributors keep their drug proceeds in the United States. As a result, the methods used by these distributors to launder their funds are generally different from those employed by wholesale distributors. 

7. Financial Crimes Enforcement Network (FinCEN), The SAR Activity Review By the Numbers, May 2005. 

8. Arizona Attorney General's Office and SAR data. 

9. FinCEN, The SAR Activity Review By the Numbers, May 2005. 

10. The Bank Secrecy Act (BSA) of 1970 was designed to do the following: deter money laundering and the use of secret foreign bank accounts; create an investigative paper trail for large currency transactions by establishing regulatory reporting standards and requirements; impose civil and criminal penalties for noncompliance with its reporting requirements; and impose detection and investigation of criminal, tax, and regulatory violations.
 

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