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In the mid-1980s, Greg Baldwin traveled across Florida, informing groups of bankers that they had become central to the financial success of many Columbian drug cartels. Invariably, the bankers didn’t get it. “This is the problem that drug dealers have,” Baldwin, then a federal prosecutor, would patiently explain, pointing to a photo of a 6-foot pile of small bills totaling $6 million. Then, reaching into his pocket, he would pull out a checkbook. “To a drug dealer,” he would say, “this can be $6 million, too … if I can get the money into your bank.” “The whole room would gasp,” Baldwin recalls. “It was then that they understood money laundering.” Some $600 billion in U.S. currency is laundered annually. Of that, $60 billion is used to buy illicit drugs in the United States. Charles Winwood, acting commissioner of the U.S. Customs Service, recently told Congress that his agency had seized only $204 million of that in 2000. Despite this, the Bush administration this month said it wants to lighten the suspicious-transaction reporting requirements that have been imposed on banks over the years. But at the Justice Department, prosecutors have other ideas. They are in the midst of a war against the sophisticated, $6 billion-per-year money-laundering mechanism known by authorities as the “black market peso exchange.” Though the mechanism has been used in some form for more than a decade, Assistant Attorney General Michael Chertoff recently named money laundering and the peso exchange as a top priority, prosecutors say. Last month, U.S. Securities and Exchange Commission officials also announced an effort to combat money laundering in the securities industry. “[It] is the biggest target we have,” one DOJ official, who declined to be identified, says of the “peso exchange.” “It utilizes every different type of financial system we can think of.” “[It] is the largest drug-money laundering system in the Western hemisphere,” adds James E. Johnson, who until December served as undersecretary for enforcement at the U.S. Department of the Treasury. Now a partner at the New York office of San Francisco’s Morrison & Foerster, he helped develop the government’s initial strategy to combat the “peso exchange.” THE PESO EXCHANGE The use of U.S. industry to hide drug money is nothing new, says Baldwin, now a partner with the Miami office of Holland & Knight. In 1985, he ran Operation Greenback, the first federal multiagency task force dealing with money laundering. He said the operation provided an initial look at how U.S. industry was being drawn into the drug trade. He recounts subpoenaing boxes of checks from a Florida bank that had accepted $242 million in cash from a Colombian exchange house. “We thought we were going to get a Who’s Who of Florida drug dealers,” he says. “Instead we found checks payable to Ford, GE, Westinghouse — perfectly legitimate businesses.” That was the beginning of the black market peso exchange. Since then, the method of turning dollars into pesos has been refined into a cycle that goes like this: After selling drugs in the United States, the cartels give their cash dollars to U.S.-based individuals the feds have nicknamed “smurfs.” They live in or travel to the United States but are employed by peso brokers in Latin America. Some smurfs open accounts here and others make deposits, usually less than $5,000 at a time, far below the $10,000 level that triggers bank transaction reporting regulations. The accounts are controlled by the peso brokers. They use the money — in the form of checks, wire transfers, money orders and sometimes cash — to buy merchandise as varied as refrigerators and U.S.-made helicopters. The purchases are made on behalf of Colombian wholesalers who are unable to obtain enough dollars on their own. They pay the brokers in pesos for the goods purchased with cartel dollars in the U.S. The brokers then pay those pesos to the drug cartels, making their profit on the currency conversion, which is still better than the official exchange rate. The cartels complete the cycle by using the pesos to buy supplies and pay workers to produce and export more drugs to the United States. “Most of the action, the traffickers, the brokers and principals are outside the U.S.,” says another Justice Department official. “Here, you’re looking at the smurfs who are moving the money in and out of the accounts, and the businesses who are willfully blind or ignorant to the fact that they are moving this money out of the U.S.” The key, say prosecutors, is that cash dollars almost never leave the United States, and the pesos never leave Colombia. It is a much less risky financing mechanism than bulk shipments of currency over borders or through airports. The new DOJ initiative aims to educate U.S. businesses that the way in which they are paid, and by whom, can be a clear indication of whether they are receiving dirty money. The Justice Department hopes to force the movement of drug dollars back into the open again, where it is more vulnerable to law enforcement. “Teaching the banks was teaching by terror,” says one former prosecutor. “They’ve learned it’s more effective to go to people and explain things. Someday they are going to pass a law requiring compliance from manufacturers, but for now the government is trying to understand the various problems manufacturers face.” An adviser to companies seeking to avoid taking in drug dollars says that most are eager to follow government advice on how to spot money laundering. “Corporations have not focused on the [peso exchange] the way financial institutions have,” says Ellen Zimiles, a partner at KPMG’s forensic and litigation practice, who says she has seen a steady increase in clients over the past year. A former chief of the asset forfeiture unit at the U.S. Attorney’s Office for the Southern District of New York, Zimiles says that companies who fear being caught accepting drug dollars need only avoid the perception of willful blindness. “If you have a distributor who is buying lots of product, and it doesn’t make sense either geographically or because of the market, you investigate.” But Zimiles concedes that large companies are better able to afford casting off profits than smaller exporters. “It was the same point that smaller banks made in comparison to large banks, but they’re still going to have an axe hanging over their head,” she says. That axe comes in the form of two federal statutes that constitute the teeth of the Money Laundering Act of 1986. The act punishes anyone who conducts a financial transaction, with either the intent to conceal or further a crime, knowing that the money involved was derived from a criminal act. Each count can carry a fine double the amount of the cash involved, or $500,000, whichever is higher, and a 20-year sentence. Often cited as the best example of a U.S. business with effective anti-money-laundering safeguards, General Electric Co. has instituted a comprehensive “Know Your Customer” program. E. Scott Gilbert, GE’s counsel for litigation and legal policy, urges U.S. companies to “recognize the hot potato” by restricting customer use of multiple money orders or unrelated third parties to provide payment. And for companies caught red-handed with questionable funds, there are the new consent decrees. Developed at the U.S. Attorney’s Office for the Southern District of Alabama, the decrees allow companies that have exchanged products for tainted dollars to keep most of the funds in exchange for agreeing to a series of protocols to prevent the future intake of drug money. The provisions include promises to: � Admit that they accepted drug dollars as payment. � Refuse unrelated third-party payments for exports to Latin America, especially in the form of money orders, cash or third-party negotiable instruments, unless they have verified the legitimacy of the source. � Tell the IRS if they receive an unrelated third-party payment for goods. � Forfeit the money the government returns and be barred from exporting if they are caught again. “We are creating a record — you’re on notice how it works, you’re going to take steps to prevent people from using you to launder money,” says a Justice official. But defense lawyers say that as long as Colombia has high import-export taxes and limited access to dollars, and U.S. importers demand dollars as payment, the “peso exchange” will flourish. THE ‘NEW RICO’ Just as organized crime led to the Racketeer Influenced and Corrupt Organizations Act (RICO), the proliferation of drug trafficking spurred Congress to pass money-laundering laws, which some defense lawyers bitterly call the “new RICO.” Just as prosecutors expanded RICO beyond mob prosecutions, lawyers say money-laundering laws are now regularly applied in nondrug crimes. Like RICO, federal appeals courts have broadly interpreted the application of money-laundering statutes. “Originally money laundering was limited to drug cases where people were structuring drug transactions to avoid detection,” says Gary S. Lincenberg, a partner at Los Angeles’ Bird, Marella, Boxer & Wolpert. “But when you take the leap to business crimes, because money was sent to this bank account or that bank account … many times it’s an offense that should not have been charged.” “The government has been able to convince courts to expand money laundering such that the underlying crime and the money-laundering count itself are virtually indistinguishable,” says defense lawyer Holly R. Skolnick, a partner at Miami’s Greenberg Traurig. “I think it’s more dangerous than RICO because that’s charging for a pattern of crimes. Here one crime becomes two.” She cites precedent from the 3rd U.S. Circuit Court of Appeals that says that the “completed phase” of an underlying fraud, such as the use of a wire transfer, can be called a separate count of money laundering. She says fraud cases are the most popular venue for prosecutors who tack on money-laundering counts. Lincenberg says the 1st and 8th circuits allow a money-laundering charge to stand even if the underlying charge can’t be proven. The 2d, 3d and 9th circuits say that simply depositing illegally obtained funds into a bank satisfies the element of money laundering requiring that the movement of money promote the underlying crime. Defense bar warnings notwithstanding, data provided by the Transactional Records Access Clearinghouse at Syracuse University shows no significant increase in the use of money-laundering laws, 18 U.S.C. 1956 and 1957, as lead counts in federal indictments between 1992 and 1998. But Skolnick counters that money-laundering counts often follow those for the underlying crime, and that the statutes often serve their purpose before an indictment. “Where you see these money-laundering counts is mostly in plea negotiations,” she says. “You’re not going to find a hell of a lot of these cases litigated.”

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