[15 August 2012]
Mexico seeks to fill drug war gap with focus on dirty money
The evolving anti-laundering campaign could change the tone of the Mexican government's battle by striking at the heart of the cartels' financial empire, analysts say.
By Ken Ellingwood and Tracy Wilkinson, Los Angeles Times
Piles of greenbacks, enough to fill dump trucks, are transformed into gold watches, showrooms full of Hummers, aviation schools, yachts, thoroughbred horses and warehouses full of imported fabric.
Officials here say the tide of laundered money could reach as high as $50 billion, a staggering sum equal to about 3% of Mexico's legitimate economy, or more than all its oil exports or spending on prime social programs.
Mexican leaders often trumpet their deadly crackdown against drug traffickers as an all-out battle involving tens of thousands of troops and police, high-profile arrests and record-setting narcotics seizures. The 5-year-old offensive, however, has done little to attack a chief source of the cartels' might: their money.
Even President Felipe Calderon, who sent the army into the streets to chase traffickers after taking office in 2006, an offensive that has seen 43,000 people die since, concedes that Mexico has fallen short in attacking the financial strength of organized crime.
"Without question, we have been at fault," Calderon said during a meeting last month with drug-war victims. "The truth is that the existing structures for detecting money-laundering were simply overwhelmed by reality."
Experts say the unchecked flow of dirty money feeds a widening range of criminal activity as cartels branch into other enterprises, such as producing and trading in pirated merchandise.
"All this generates more crime," said Ramon Garcia Gibson, a former compliance officer at Citibank and an expert in money-laundering. "At the end of the day, this isn't good for anyone."
Officials on both sides of the border have begun taking tentative steps to stem the flow of dirty money. For Instance, last year Calderon proposed anti-laundering legislation, after earlier announcing restrictions on cash transactions in Mexico that used U.S. dollars.
The evolving anti-laundering campaign could change the tone of the government's military-led crime crusade by striking at the heart of the cartels' financial empire, analysts say. But the effort will have to overcome a longtime lack of political will and poor coordination among Mexican law enforcement agencies that have only aggravated the complexity of the task at hand now.
"If you don't take away their property, winning this war is impossible," said Sen. Ricardo Garcia Cervantes of the Senate security committee and Calderon's conservative National Action Party. "You are not going to win this war with bullets."
The good news for Mexican and Colombian traffickers is that drug sales in the United States generate enormous income, nearly all of it in readily spendable cash. The bad news is that this creates a towering logistical challenge: getting the proceeds back home to pay bills, buy supplies — from guns to chemicals to trucks — and build up the cartels' empires without detection.
Laundering allows traffickers to disguise the illicit earnings as legitimate through any number of transactions, such as cash transfers, big-ticket purchases, currency exchanges and deposits.
Much of that money still makes its way back into Mexico the old-fashioned way: in duffels stuffed into the trunks of cars. But Mexican drug traffickers are among the world's most savvy entrepreneurs, and launderers have proved nimble in evading authorities' efforts to catch them, adopting a host of new techniques to move the ill-gotten wealth.
For example, Mexican traffickers are taking advantage of blind spots in monitoring the nearly $400 billion of legal commerce between the two countries. The so-called trade-based laundering allows crime groups to disguise millions of dollars in tainted funds as ordinary merchandise — say, onions or precious metals, as they are trucked across the border.
In one case, the merchandise of choice was tons of polypropylene pellets used for making plastic. Exports of the product from the United States to Mexico appeared legitimate, but law enforcement officials say that by declaring a slightly inflated value, traders were able to hide an average of more than $1 million a month, until suspicious banks shut down the operation.
The inventive ploys even include gift cards, such as the kind you get your nephew for graduation. A drug-trafficking foot soldier simply loads up a prepaid card with dollars and walks across the border without having to declare sums over the usual $10,000 reporting requirement, thus carrying a car trunk's worth of cargo in his wallet.
Tainted cash is almost everywhere. In western Mexico, a minor-league soccer club known as the Raccoons was part of a sprawling cross-border empire — including car dealerships, an avocado export firm, hotels and restaurants — that U.S. officials said was used by suspect Wenceslao Alvarez to launder money for the Gulf cartel. Alvarez was arrested by Mexican authorities in 2008 in a rare blow against laundering and remains in prison while fighting the charges.
Even the most unlikely street-corner businesses may be used to scrub money. A pair of tanning salons in the western state of Jalisco were among 225 properties seized from drug suspect Sandra Avila Beltran, the so-called Queen of the Pacific and one of the few women allegedly to reach upper cartel echelons.
Avila, arrested in 2007, is still behind bars on the money-laundering charges as she also fights extradition to the U.S., but she has been exonerated of organized-crime and weapons charges.
The salons, with their all-cash, high-volume turnover, were allegedly used to hide drug money. The chain, called Electric Beach, has outlets all over Mexico City.
Mexico's efforts against money-laundering are hobbled by staff shortages, a failure to investigate adequately and skimpy laws that have exempted from scrutiny a number of industries often used to clean dirty money, independent assessments by financial experts and academics have found.
Javier Laynez Potisek, Mexico's fiscal prosecutor, lamented during a September conference on money-laundering, "Our system allows someone to come in with a suitcase full of money and buy four armored pickups for 600,000 pesos [about $42,000], and we don't have a minimum requirement to identify or report them."
A 2009 report issued by the Financial Action Task Force, an international anti-money-laundering agency, noted that Mexican authorities had won only 25 convictions for money-laundering in the two decades it has been a crime. From the beginning of 2009 to mid-2010, as overall drug-war arrests soared, prosecutors won convictions of only 37 people for money-laundering.
Part of the problem is that only Mexico's Finance Ministry has had access to financial data crucial to potential money-laundering inquiries, and prosecutors have not been allowed to open their own money-laundering investigations without a complaint from finance officials.
There is also stubborn resistance among those who profit from their role as middlemen for big transactions.
One such group is notaries, who in Mexico have a function much like attorneys in the U.S. They handle nearly all real estate transactions and have battled a proposal that would require them to report how each purchase was paid for. Notaries say launderers would probably respond by skipping the paperwork altogether when buying cars and houses, only adding to the black-market economy.
"The only thing that worries us notaries is that [the proposed reporting requirements] would create an alternative market … that brings benefits to no one," said Hector Galeano, finance secretary of Mexico's notaries association.
Some observers suggest that one reason previous Mexican governments were slow to attack money-laundering was fear of harming the rest of the economy.
Edgardo Buscaglia, a scholar who studies organized crime, estimates that in a nation where three-quarters of all transactions are cash, drug money has infiltrated 78% of the sectors constituting the formal economy.
In Sinaloa, the prosperous coastal state considered the cradle of the Mexican narcotics trade, economist Guillermo Ibarra estimates that drug money sustains nearly a fifth of the region's economy, from fancy subdivisions dotted with "narco-mansions" to vast farms.
Sinaloa is a well-known produce grower; in fact, its license plate features a tomato. But it would take an awful lot of tomatoes to account for the kind of over-the-top opulence on display in the state.
The moves to turn the tide in dirty money have generally taken place out of public view. But they could mark an important shift in the drug-war strategy.
A year ago, a small group of Mexican officials and U.S. counterparts met and selected six money-laundering cases to investigate jointly in an experimental offensive. U.S. agents here say the first arrests, involving a network in the northern border state of Chihuahua, could come by year's end.
Separately, U.S. Customs officials familiar with sophisticated money-laundering techniques have begun training Mexican tax inspectors who will be assigned to ferret out launderers. In addition, nearly 500 individuals and Mexican companies, from mines to milk producers, have been placed on a U.S. Treasury Department blacklist for alleged laundering activities.
And the Mexican Congress, after years of government inaction on the issue, is weighing a series of legislative proposals based on Calderon's anti-laundering package that would make it more difficult to cleanse dirty money. In the meantime, the restrictions on the use of U.S. cash in Mexico appear to be altering the flow of drug-tainted dollars for the first time, officials on both sides of the border say.
Under the proposed legislation, a specialized unit added to the attorney general's office, with advice from U.S. officials, would be authorized to take the lead in money-laundering cases and inspect a wide variety of businesses in search of illicit profits.
In addition, the government nearly a year ago replaced the Finance Ministry official in charge of such cases with a veteran Washington-based diplomat, Jose Alberto Balbuena, who had spent many months working with U.S. financial officials and is said to have a better grasp of what's at stake and a good working relationship with top prosecutors.
To date, Mexican reporting requirements have applied only to banks. Under legislation approved by the Senate last year and now before the lower Chamber of Deputies, a range of other industries would also be required to report large cash or suspicious transactions using unexplained funds.
These include real estate, car dealerships, betting parlors, art galleries, notaries, and, possibly, religious institutions. Mirroring "know your customer" regulations in the banking world, the rules would require disclosure of cash purchases for more than 200,000 pesos, or about $14,000, of numerous goods and place a cap of 1 million pesos, or about $70,000, on cash purchases of real estate.
Law enforcement experts say the proposed legislation could fill a yawning gap in Mexico's crime fight.
"It's going to counteract the financial and economic power of the criminals," said Ricardo Gluyas, a professor at the National Institute of Criminal Sciences, which trains Mexico's organized-crime prosecutors. "The new law has teeth. It covers a broad spectrum."
One potentially powerful tool, an asset-forfeiture law that allows authorities to seize property and accounts of traffickers and launderers, was approved by Congress in 2008. A similar law made a big difference in crime fights in Colombia and Italy, allowing authorities in those countries to confiscate and resell properties of drug traffickers and Mafiosi.
"Without firing a shot, you can generate a lot more results by seizing the fortunes of the big capos," Gluyas said.
But critics say the Mexican asset-forfeiture law threatens the due-process rights of owners. So far, it has been little used: Courts had approved only two cases by late this summer, with more than a dozen pending.
Perhaps more than any other measure, the government's move last year to restrict bank deposits of U.S. cash appears to have slowed the entry of dollars to Mexico's financial system. Bank-account holders were no longer allowed to deposit more than $4,000 a month.
In response, traffickers and their launderers are shifting tactics, including keeping money in the United States, officials say. And U.S. officials say that since Mexico announced the new rules, more money appears to be going elsewhere, especially to the Caribbean and Guatemala, where officials have detected a surge in circulating U.S. bank notes.
"That's the big question," Balbuena said. "Where is the money?"
A possible explanation can perhaps be gleaned from an Oct. 5 incident: Customs inspectors in Tijuana stopped an armored car full of plastic bags stuffed with $915,000 in cash. There was no documentation for the money, law enforcement sources familiar with the discovery said.
But it wasn't headed into Mexico. It was headed north, into San Diego.
Calderon's military surge was backed by more than $1.2 billion in drug war aid from former President Bush, and by several hundred million more from the Obama administration.
Read more: http://www.nydailynews.com/news/world/2010/08/20/2010-08-20_mexico_drug_war_boosts_us_firms.html#ixzz0xaCMzkz0
Washington Post Staff Writers
Wednesday, August 25, 2010; 7:12 PM