Drug cartels have an offer you can (and should) refuse
The Mexican army seized 26.2 million dollars from a house in northwestern Sinaloa state in September 2008 -- and U.S. businesses may have been involved in those stacks of cash.
More and more, Mexican drug cartels are partnering with small American businesses. The U.S. companies don't ever come in contact with drugs. Instead, they help the cartels launder dirty drug money.
In Mexico, the cartels have a money problem. They literally have more cash than they know what to do with.
If you bring a lot of cash to a Mexican bank, the teller will insist on an invoice or a receipt for deposits of more than $10,000.
It's gotten harder to deposit cash because of new Mexican banking laws. The cartels end up warehousing mountains of money in various stash houses around the country.
When Mexican police confiscated the loot from a cartel business partner, U.S. agent Jere Miles got closer than most of us ever will to $200 million in cash.
"Wall-to-wall, three feet high, to within like a foot-or-two-feet of the entryway to the room. Just stacks of money," says Miles, a deputy special agent with Homeland Security Investigations.
To keep those walls of cash from being confiscated by police, the cartels need a way to legitimize their drug money and show that their revenues were made legally. That's what we know as money laundering. And the cartels do a lot of it here in the U.S.
"We're seeing money come back into the United States as part of the scheme to launder money," says Miles.
He co-manages the Los Angeles office that investigates what is known as trade-based money laundering. In its most basic terms, the scheme involves buying and selling consumer goods to disguise the criminal origins of the money.
For example, imagine the cartel buys a shipment of widgets in the U.S. and pays $100,000. But on the Mexican customs form, the representative of the cartels will lie and report that the widgets cost $200,000.
The widgets are then sold in Mexico.
"I've seen organizations that are willing to invest their money in a product and wait for it to sell. And then they absolutely can make a profit, consistent with the market," says Miles. "But in most cases, the cartels aren't interested in a profit. All they're really interested in is really recouping their money."
Often, the products are sold at a slight loss. But for the sake of example, let's say the widgets get sold at cost. That's $100,000.
From that point, Miles says the cartels "take the $100,000 where they really sold the widgets. Then they take another $100,000 of their own money – the dirty money – and they say, 'See? I sold all these widgets for $200,000. Here's $200,000.' It's a lot more complicated than that. But that is like the basic concept of it."
The law enforcement strategy is similar to the way the Feds went after Al Capone for tax evasion. The Mexican drug cartels make money by selling drugs and murdering their competition. But it is the fraud on the customs paperwork that could compromise them.
"Every crime that they commit just increases the chances of them getting caught," says Miles. "So, I've often asked myself: Why would they do that? Just to beat the duties? Even though it's a minor crime, they still could lose all their product, they could lose all their investment. And I've yet to get anyone to give me a legitimate answer as to why they do it, other than greed. They just want to make a few extra pennies."
Nonetheless, Miles says it would be a mistake to underestimate the business savvy of the guys running the Mexican cartels. Even though the cartel leaders usually have little or no formal education, Miles says, "I would say they are on a par with any CEO of a Fortune 500 company."
Others in law enforcement make similar comparisons.
"We've always believed that cartels operate as if they were a corporation," says special agent Hector Colon, who works for a special branch of Immigration and Customs Enforcement.
Colon says Mexican drug cartels use a criminal version of the chief financial officer.
"They employ people that you could consider to be CFOs, or those people who are responsible for laundering their money," says Colon. "Basically, these individuals... their role and their purpose is to find licit ways to move money, so that they can continue to layer the money through different schemes, so the cartels can then get access to their illicit funds."
He says a cartel CFO will open corporations, or partner with businesses that are willing to move money for the cartels. That brings us back to trade-based money laundering.
Colon runs something called the Trade Transparency Unit, where elite customs agents pour over international trade data. The U.S. has partnerships with nine countries that have agreed to share customs data, and it is developing partnerships with two more countries.
The trade information allows agents to identify inconsistencies.
"In its simplest form, what the system allows us to do is determine that what was actually shipped from one country is what was actually delivered in another," says Colon. "Anomalies that we find in the comparison of that trade data is what allows us to then investigate for trade-based money laundering."
As an example, Colon looks at the trade of gold bullion and scrap gold on his computer. The data is represented by dots on a graph.
"What I'm noticing in this graph is that the value of gold bullion down here is being declared well below the value of scrap gold," says Colon. "And we know that gold bullion is more pure than scrap gold."
Those discrepancies in the paper trail often trip up the criminals and help law enforcement identify money launders.
But what about merchants? Is it easy for them to spot cartel intermediaries trying to launder money?
To find out, I stick with the example of gold, and I visit the jewelry district in downtown Los Angeles. I spend two days cold-calling wholesale and retail jewelers.
Several tell me that they frequently get propositions for major cash transactions on the condition that the deals would be off the books. But they're afraid to speak on the record.
In one building, where retail jewelers sell gold necklaces and bracelets and rings, many merchants tell me that business is bad. As the price of gold has increased, consumer demand has decreased.
You can imagine how desperate retailers teetering on bankruptcy might rationalize bags of questionable cash.
And it's not just the gold and jewelry businesses. The cartels are diversified. In the past, they've invested in products ranging from kids' toys to plasma TVs.
"We expect this is going to become a bigger problem in the near- to mid-term future," says agent Miles.
Homeland Security Investigations predicts significant arrests and prosecutions related to trade-based money laundering schemes in the coming months.