Drug Profits Crossing Border Plague U.S., Mexican Officials
By Molly Moore and John Ward Anderson
Washington Post Foreign Service
Monday, July 8 1996
Mexico City -- Amparo Solis Espinoza is a 79-year-old retired government clerk from a poor neighborhood here in the capital. But on paper she is one of Mexico's wealthiest widows, with numerous planes, luxury homes and a fortune worth hundreds of millions of dollars.
The diminutive, gray-haired Solis has an incredible explanation for her riches, which include a $25 million Acapulco mansion once owned by the shah of Iran and a private jet bought from H. Ross Perot -- complete with a set of his monogrammed china. A few years ago, Solis said in a U.S. court deposition, she looked into a chest that had sat in her government-subsidized apartment for 40 years and discovered a treasure of gold coins and jewelry left by her deceased husband.
But U.S. and Mexican law enforcement officials have a different theory. The grandmotherly Solis, they charge, is one of the many "straw company" fronts set up to launder hundreds of millions of dollars in drug proceeds for Mexico's wealthiest and most powerful drug mafia, the Juarez cartel.
And while one prosecutor involved in the case described Solis's tale as "inexcusable silliness," it demonstrates how massive laundering of drug money is distorting business, politics and lives in Mexico.
Thanks to the burgeoning wealth of the Mexican drug organizations, the growing availability of high-tech electronic financial transactions, loopholes in money-reporting laws of Mexico and the United States, and deepening economic ties between the countries, Mexico's importance as a center for illicit recirculation and investment of profits from narcotics trafficking is expanding.
With financial empires on both sides of the 2,000-mile border, drug lords -- sitting atop a $30 billion-a-year business, according to the Mexican attorney general's office -- are using their fortunes to corrupt police, politicians and legitimate financial institutions in a way that is threatening the growth of democracy in Mexico and perpetuating the flood of drugs into the United States.
"Mexico has become one of the most important money-laundering centers in the Western Hemisphere," according to the State Department's 1996 drug report on Mexico. The major reasons cited by law enforcement officials are:
The porous and heavily traveled border with the United States facilitates smuggling of bulk loads of cash into Mexico -- America's third-largest trading partner.
Increasing economic ties between the two countries following passage of the North American Free Trade Agreement make illegal monetary transactions harder to detect.
Growing sophistication of drug mafias and world financial systems makes it possible to transfer electronically the same funds dozens of times between multiple countries in a matter of hours.
Relatively weak Mexican banking regulations and criminal and financial laws have attracted dirty money.
Mexican drug cartels are corrupting not only their own country's financial systems. The U.S. Justice Department, forced to act on mounting evidence gathered by Swiss investigators over the last year, is probing whether one of America's premier banks -- New York-based Citibank -- knowingly helped Raul Salinas, the brother of Mexico's former president, launder tens of millions of dollars from drug deals or illegal business transactions by transferring money through Citibank to accounts in Switzerland. Citibank has denied any wrongdoing in the case.
Criminals launder money raised from illegal activities -- drug deals, extortion or kickbacks, for instance -- to make it appear that their income has a legitimate source. They can then use the laundered money with less fear that law enforcement agencies will detect their illegal activities or seize the money for being the proceeds of crime.
With the growth in wealth and power of Mexico's major drug mafias, kingpins have a problem of plenty. They receive huge amounts of cash in the United States, generated by street sales of drugs, and must find ways to return the money to Mexico or deposit it in the U.S. banking system without attracting attention from law enforcers.
Most critical to any money-laundering system is getting cash into a financial institution on either side of the border. Once the cash is in a bank, electronic international banking complicates law enforcement officials' efforts to follow the money trail. U.S. authorities are concerned about the potential of money launderers using encrypted "e-cash," or computer e-mail transactions, as well as smart-card technologies to "transfer funds around the world," according to U.S. Deputy Treasury Secretary Lawrence J. Summers.
"With today's sophisticated banking techniques, including the electronic transfer of money, once the money enters into the banking system, it can be transferred among dozens of banks within a 24-hour period, making the paper trail either impossible or extremely time-consuming to follow," Harold D. Wankel, chief of operations for the U.S. Drug Enforcement Administration, told the House Banking and Financial Services Committee earlier this year.
One of the simplest and most popular methods of disposing of drug dollars remains loading them in the trunk of a car and driving across the border to Mexico, where the cash can be deposited in Mexican banks. But the sheer volume of the cash -- which can outweigh the drugs it buys -- is making the simplest method the most risky. More drug lords are looking for ways to stash their cash at least temporarily on the U.S. side of the border. Mexican drug lords employ armies of "smurfs" -- couriers who visit a dozen banks a day, converting just under $10,000 in cash (the level at which banks are required to file a report to the Internal Revenue Service) into cashier's checks, which are easier to smuggle out of the country than cash.
Another way to dispose of cash north of the border is the use of money exchanges that serve the tens of thousands of Mexicans who migrate to work in the United States and send money back to their families in Mexico. Workers give dollars they have earned to the exchange houses, which in turn remit pesos to accounts inside Mexico. Drug mafias take advantage of this system by intermingling cash from drug transactions with the legitimate dollars that are converted to pesos by the exchanges.
Cash "smurfing" and use of money exchanges pump massive quantities of currency into American financial institutions along the southwestern border. Officials say one measure of the quantity of money being laundered through the region is the billions of dollars in surplus currency reported by U.S. Federal Reserve offices along the border.
Each year the Federal Reserve puts billions of dollars of new money into circulation, and in the vast majority of cities across the nation, its regional offices do not receive nearly as much money back. But in El Paso, San Antonio and Los Angeles -- all key stops on drug trafficking and money laundering routes -- up to 77 percent more money was returned than was distributed. Those figures were exceeded only by Miami, another major trafficking center, where 2 1/2 times more money was returned to banks than was paid out by the Federal Reserve.
"When there's that much cash surplus, it's not from legitimate businesses," said Travis B. Kuykendall, program director for the El Paso-based High Intensity Drug Trafficking Area, a U.S. government organization that monitors anti-narcotics efforts.
But ultimately the goal for most Mexican drug mafias is getting their illicit money back onto their home turf, where financial reporting laws are more lax and corruption more rampant, making it easier to disguise narco-money. One popular method is through "dollar discounting," in which mafia bosses offer to buy American products for Mexican businessmen with drug dollars already in the United States. The businessmen then deposit 80 percent of the cost of the product in the dealer's Mexican bank account. As a result, the Mexican businessman obtains his product at a 20 percent discount while the drug trafficker transforms dirty dollars held in the United States into legitimate pesos in Mexico.
Once the money is funneled through a Mexican bank, its origins are hidden and the drug lord can begin a new cycle of deception, returning his profits to the United States for investments or for transferring to other countries.
While U.S. financial laws are far stricter than Mexican regulations, they also have loopholes that facilitate money laundering. Most significantly, when the U.S. reporting regulations originally were written, bank drafts were not included in the list of financial transactions that must be reported if they are $10,000 or more.
According to the DEA, 500,000 bank drafts drawn on Mexican banks enter the United States each year. One Arizona bank, for example, estimated the average Mexican bank draft was valued at $65,000, but said it was not unusual to clear drafts of more than $400,000, according to DEA operations chief Wankel.
Although Congress approved a law two years ago plugging the loophole that allowed the bank drafts to go unreported, the Treasury Department has not yet finished writing the regulations to implement the change. "We want to do it in a way that does not get in the way of legitimate commerce," a Treasury official said. "Meanwhile," said Rep. Henry B. Gonzalez (D-Tex.), ranking minority member of the House Committee on Banking and Financial Services, "foreign bank drafts remain a tool at the disposal of money launderers."
Once they shuffle their cash, bank notes or electronic transfers enough to make their money appear legal, drug traffickers frequently start or buy legitimate businesses in the United States and Mexico to help launder other money. The most popular are hotels, discos, restaurants, airlines, car dealerships and trucking companies.
In other cases, companies are set up as fronts to buy lavish properties, airplanes and nightclubs for drug kingpins and their families. Operations like the one allegedly employing Solis use phony businesses and straw companies with bogus invoices and other falsified documents.
The Solis case began with the seizure last year of five airplanes in the United States allegedly belonging to the Juarez cartel -- the largest seizure ever of aircraft from an international drug organization by U.S. law enforcement officials. Because the case involved the civil forfeiture of airplanes allegedly purchased with drug profits (rather than more difficult to prove criminal charges), U.S. authorities have had unprecedented access to the business records of companies set up by Mexico's most powerful drug cartel.
Court documents filed in the case allege that several straw companies with holdings of up to $800 million were established by Rafael Aguilar Guajardo, a leader of the Juarez cartel until he was gunned down on a Cancun beach three years ago. Solis appeared in documents as full or partial owner of one of the most popular nightclubs in Mexico City, a fleet of airplanes -- including the $12 million Dassault Falcon-50 purchased from Perot -- and the shah's former beach mansion.
Company records detailed minutes of board meetings signed by Solis, who according to U.S. officials now lives with relatives in northern Mexico. After questioning Solis and others, prosecutors alleged that the meetings were never held and that Solis signed blank sheets of paper that were later filled with bogus details. Court documents describe her as "completely ignorant" of business operations and said other persons listed as company shareholders "deny ever attending any stockholder or board of directors meetings."
The documents allege that Aguilar set up the elaborate network of straw companies in Solis's name so that he could funnel money into the businesses, then create a paper trail that would allow him to inherit the properties when she died.
"It was like peeling an onion," said one U.S. attorney working the case. "When you got to the bottom, nothing was there. The companies were shams."
In other cases, Mexico's program to privatize government-owned businesses, launched by former president Carlos Salinas de Gortari to attract foreign capital, has become, instead, a favorite shopping ground for drug kingpins, according to James Moody, who just retired as chief of the FBI's organized crime division.
"The FBI notes that many of these firms are being purchased by Mexican and Colombian drug trafficking organizations," Moody said in a paper delivered to a CIA-FBI symposium on drug trafficking two years ago. "These semi-state firms are comprised of significant financial institutions, factories and leading industrial and service-oriented businesses which are worth billions of dollars," said the paper, which was obtained by the Mexico City daily El Financiero.
"It is no exaggeration to say that drug money is invested in industry, banking, agriculture, tourism and possibly in the Mexican stock market," said a report on Mexican drug trafficking issued in April by the Washington Office on Latin America. The report listed a variety of companies and individuals it said were tied to drug traffickers, including a former president of the Mexican Banking Association; a Ford Motor Co. agent; an air taxi business and a resort hotel in the Pacific beach resort of Puerto Vallarta.
Mexican authorities acknowledge the inadequacy of currency laws and say they are working to tighten them. Until recently the most glaring problem was that money laundering was considered a tax offense and not a criminal act, meaning that the police agencies charged with enforcing drug laws could not investigate it.
A new law was approved in May, making money laundering a criminal offense punishable by up to 15 years in jail. But even so, the new code has what Mexican law enforcement officials concede is a critical shortcoming: It does not require banks to report large currency transactions.
In Mexico, opposition to currency transaction reports is being led by banks and financial institutions, some of which allegedly have been infiltrated by drug mafias.
"DEA sources report that many Mexican traffickers have purchased large shares of banks and placed members on the boards of directors," said Wankel of the DEA in congressional testimony. "As a result, many banks keep two sets of books and bank examiners are paid off by corrupt bank officials."
In the best-known example of infiltration of a bank, the jailed former head of the Guadalajara cartel, Miguel Felix Gallardo, who was convicted in the 1985 murder of DEA agent Enrique Camarena, was on the board of directors of SOMEX bank.
Moises Moreno Hernandez, a top official in the Mexican attorney general's office, said the government hopes to adopt currency transaction regulations. But of equal importance, he said, are proposals pending in Mexico's Congress to give police here better tools to combat organized crime. The proposals would legalize wiretapping, the use of confidential sources and reduced sentences for gang members who testify against their bosses. The bill would also create a witness protection program, he said.
"The problem is that you have 19th-century tools trying to deal with 21st-century criminals," DEA chief Thomas Constantine told members of Congress several weeks ago.
© Copyright 1996 The Washington
Post Co.