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How drug money is finding its way to the bottom line.
Tim Reason, CFO Magazine
March 1, 2001
Last summer, Panamanian officials acting at the request of the U.S. Customs Service seized a Bell model 407 helicopter belonging to Victor Carranza, a Colombian who, according to U.S. and Colombian investigators, has ties to both drug traffickers and the Colombian right-wing paramilitaries who often protect them. But Carranza's checkered past wasn't the reason for the seizure. The helicopter, U.S. Customs agents claimed, had been purchased from Bell Helicopter Textron with the proceeds from a massive Colombian cocaine and heroin operation.
The traffic in illegal drugs is a global problem, and money- laundering schemes take many forms. But for American companies like Fort Worthbased Bell, the Colombian Black Market Peso Exchange (BMPE) poses by far the greatest risk. Described by former U.S. Customs commissioner Raymond W. Kelly as "perhaps the largest, most insidious money-laundering system in the Western Hemisphere," the BMPE enables drug traffickers to use their profits to buy consumer goods in the States, masking the money's illicit origins. For U.S. companies, that's a problem that goes far beyond the public relations nightmare of having their products connected with the narcotics trade, because it is a crime to knowingly accept money that is connected to drug trafficking.
And when it comes to BMPE transactions, "knowingly" is hard to assess. Law enforcement officials insist that these transactions involve obvious red flags, but many U.S. companies claim they are difficult for accounts-receivable departments to detect. The consequences are serious: Companies that accept BMPE payments risk seizure of the money, forfeiture of the goods, fines, loss of their export licenses, and even criminal prosecution. Criminal fines range as high as $500,000 per violation or twice the value of the property involved. If specifically charged as individuals, company officers and employees are subject to the same fines, as well as up to 20 years' imprisonment. Philip Morris, in New York, whose Marlboro-brand cigarettes are a favorite BMPE contraband item, instituted strict rules in March 2000 regarding acceptable forms of payment. Exceptions, the policy notes, "must be approved by the chief financial officer and the chief executive officer of the operating company."
The process that transforms cocaine sales into a CFO's headache is complex. Anxious to quickly pocket drug profits amassed in the United States, drug cartels in Colombia sell the dirty dollars at a 20 to 40 percent discount to a Colombian-based peso broker, who pays them in pesos. With its pesos in hand, the cartel's laundering effort is complete.
Meanwhile, the peso broker's agents in the United States pick up the tainted dollars and salt them away in multiple bank accounts. In Bell's case, according to court documents, an undercover U.S. Customs agent, acting on instructions from indicted Colombian peso broker Armando Mogollon, picked up a suitcase containing $492,500 in Queens, New York, on January 21, 1999. The following day, he deposited the money in four phony business accounts at a Regions Bank in Mobile, Alabama.
In Colombia, there's a ready market among importers for stateside dollars. To buy dollars legally from the country's Central Bank, importers must prove they have paid the necessary duties and taxes on the foreign goods they plan to buy. To evade this requirement--and get a much better exchange rate--they pay the peso broker instead. The broker then authorizes his agents in the United States to pay for the goods the importers have ordered. Just one day after an undercover agent picked up the profits of drug sales on the streets of New York, court documents say, he received instructions from Mogollon to wire five separate payments ranging from about $60,000 to $100,000 to Bell Helicopter Textron.
Officials claim that, including the five payments made by the undercover agent, Bell Helicopter accepted 25 third-party wire transfers and one domestic third-party check from 16 different sources to pay for the $1.5 million helicopter. "The ... remitters of these ... payments have no discernible relationship with the purchasers of the defendant helicopter," note government court documents seeking forfeiture of the helicopter.
That's a classic BMPE pattern. And although a helicopter is an unusually big-ticket item, the BMPE shows little discrimination among types of goods. Common items purchased in bulk include computer equipment, cigarettes, liquor, electronics, home appliances, auto parts, precious metals, and footwear. The investigation that led to Bell's bank account also resulted in seizures from the accounts of public companies, including Intel, Ingram Micro, Microdata Solutions, Federal-Mogul, Merrill Lynch, and SED International. "It's the ultimate nexus between crime and commerce, using global trade to mask global money-laundering," notes Kelly.
Indeed, what made the Bell case particularly embarrassing was that the company had recently received a $130 million contract from the U.S. government for retrofit kits to upgrade 42 Vietnam-era Iroquois heavy- lift helicopters ("Hueys"). The State Department donated the helicopters to Colombia as part of Plan Colombia, a massive aid program designed to help the country combat coca growers and drug traffickers.
Traditionally, of course, money-laundering has been a problem for banks, not manufacturers. Just last year, high-profile laundering scandals at Bank of New York and Citibank sparked renewed congressional scrutiny of the banking industry, notes former Assistant U.S. Attorney and money-laundering expert Betty Santangelo, now a partner at New York law firm Schulte, Roth & Zabel LLP. This February, a highly publicized Senate report noted that the U.S. bank accounts held by offshore financial institutions are still a major source of laundered money.
Congressional scrutiny is nothing new for banks. Individual account activity has been monitored since the Bank Secrecy Act of 1970 required that banks report any cash transaction over $10,000. In 1986, Congress specifically made money-laundering a crime. And in 1992, the Annunzio- Wyley Anti-Money-Laundering Act authorized the Treasury Department to require money-laundering compliance programs at banks.
The rise of the BMPE as an alternative laundering channel is clear evidence that this approach worked. But law enforcement officials insist that similar tactics will not be applied to nonbank businesses. "Our focus was not to try to impose more regulation on the business community," says U.S. Customs special agent Allan J. Doody, whose testimony in 1997 first brought the BMPE to the attention of Congress. To date, the only similar reporting regulation for U.S. companies has been IRS Form 8300. Companies must file this form whenever they receive payments exceeding $10,000 in cash or cash equivalents, says Matt Magnone, the former district counsel for the Internal Revenue Service in New Jersey. Wire transfers, he adds, are not considered a cash equivalent.
Instead of regulations, Doody and other officials emphasize voluntary cooperation, and praise the aggressive anti-money-laundering programs at such companies as General Electric and Whirlpool. That's probably a pragmatic approach for the government to take outside the homogeneous banking industry. Whirlpool senior counsel Debra Clawson says the rhetoric of regulation was common in early congressional hearings, "but, frankly, I think they realize they can't do that. The distribution channels for each industry are very different."
Doody agrees. "To come up with two or three regulations to resolve this thing would be extremely difficult," he says.
Bank controls failed to protect Bell Helicopter, which apparently relied on them for protection when it wrote the contract for the helicopter sale with Carranza's representative in Colombia. "We required that the money be in amounts greater than $10,000 and come from established U.S. banks," explains Bell spokesman Michael Cox. "We believed that existing U.S. policies served to help protect us, and that the bank has a responsibility to check that."
In court documents, Bell attorneys also note that Regions Bank should have stopped the funds long before they got to Bell's account, "because Regions Bank knowingly transferred to Bell funds which it knew were transferred in violation of the money-laundering statutes."
Although they wouldn't comment directly on the pending Bell case, officials at several federal agencies scoff at the idea that Bell could have considered this a normal transaction. "When a U.S. company receives payment for its exports in the form of wire transfers, checks, or cash from third parties with no connection to the underlying transaction, alarm bells should go off," notes Kelly. "This is not how standard business deals are done."
IN THE KNOW?
Indeed, while they plead for industry cooperation, the agencies involved in drug enforcement are taking a more jaundiced view of companies that claim ignorance as a defense.
In October 1997, former peso broker "Ms. Doe" testified before a House banking subcommittee about the staggering number of well-known companies that had received drug money as payments. Concealed behind a screen and with her voice electronically distorted, she named such companies as Sony, Procter & Gamble, John Deere, Whirlpool, Ford, Kenworth, Johnny Walker, Swatch, Merrill Lynch, and Reebok. "These companies were paid with U.S. currency generated by narcotics trafficking," she testified. "They may not have been aware of the source of this money, but they accepted payments from me without questioning who I was or the source of the money."
But when does accepting payments without question constitute participation in money-laundering? This is the crux of the debate between federal prosecutors and corporations. To seize payments in a company's bank account, "all the government has to do is prove that they are drug proceeds," says Lester M. Joseph, assistant chief of the Asset Forfeiture and Money Laundering section of the Department of Justice. Companies can sue for the return of the money on the grounds that they didn't know its source, he notes, but "the burden of proof of 'innocent ownership' is on the company." In legal parlance, that means the company had to prove it was not "willfully blind."
Willful blindness, explains Santangelo, "means the company showed a reckless disregard in setting up its procedures, or didn't pay enough attention to them." Increasingly, government prosecutors agree to return some percentage of forfeited funds to first-time offenders if the company signs a consent decree stating that its executives and employees understand how the BMPE works. Repeat offenders face certain prosecution. But even without a consent decree, says Joseph, "if the red flags are there and a company consciously chooses to disregard them, the government can establish knowledge."
A JOB FOR THE LAW
Not surprisingly, many companies have a sharply different view. Spokesman Cox says that attitude is exactly why Bell is fighting the seizure of its money. "We have been accused of knowingly being involved in an illegal activity," he says. "It is a shame to have a name like Bell besmirched by something that is very malleable in its interpretation."
Many companies note that while they support the law, they are not in the business of enforcing it. "First and foremost, contraband is a problem of law enforcement, and the fight against it will remain a police and government function," notes Cathy Leiber, vice president of corporate affairs for the Latin American region of Philip Morris. In Spain, she adds, the government reduced cigarette smuggling "without feeling the need either to attack manufacturers or impose responsibility on them."
Asked if he thinks finance organizations are responsible for detecting BMPE payments, Stephen Key, the former CFO of Bell parent Textron, said, "Unless you employ a bevy of clairvoyants in your organization, I don't know how you could control that." Adds Cox, "You have to stop short of making businesses [into] law enforcement agencies." Even GE and Whirlpool, cited by law enforcement officials as model corporate citizens, admit that the system is challenging. "There are many cases when customers have a legitimate reason to pay by third- party check," notes GE attorney Scott Gilbert, who is responsible for the company's anti-money-laundering program. Whirlpool attorney Debra Clawson adds that retail appliance dealers often finance their showroom and warehouse inventories, which results in a third-party payment from the finance company. "That kind of third-party check is welcome, but trying to explain that to the government has gotten confusing," she notes.
As leading members of the Association of Home Appliance Manufacturers, a Washington, D.C.-based lobbying group, GE and Whirlpool take an active role in explaining their position to the BMPE Working Group--a consortium of law enforcement agencies with jurisdiction over drugs and money-laundering. They've also gone further than many companies in adopting the guidelines that result from those discussions.
GE already had a know-your-customer policy and payment restrictions in place in 1994, when executives began hearing complaints from a Colombian distributor who claimed contraband goods were undercutting his sales. A closer look at GE's U.S. distributors revealed that some of them were violating provisions of their contracts that prohibited export of GE products. "We found some violations, and either educated, warned, or, in some cases, terminated dealer agreements," notes Gilbert. The company also began to educate its distributors about proper know-your-customer policies.
Compliance came with a price. "There was a significant reduction of sales in the South Florida market," says Gilbert. Between 1995 and 1999, he says, GE's compliance program caused a 20 to 25 percent market- share loss in the area. While some of the lost sales were unauthorized exports, he says, "we also lost domestic sales by talking to [distributors] about the need for their own internal controls. I think we tried their patience." Whirlpool also prohibited its dealers from exporting its products. "There were sales lost as a result," notes Clawson. "It was a big change, and it was not easy for some of these dealers to accept."
Compliance policies are far from foolproof. The investigation that led Customs to Bell Helicopter's bank account also turned up $47,840 in payments to Southfield, Michigan-based auto-parts maker Federal-Mogul. Spokeswoman Lisa Weber says Federal-Mogul has had formal policies and safeguards in place for years, and audits them on a regular basis. "Money-laundering is a major problem," she says. According to court documents, Federal-Mogul cooperated with the government's investigation, but it still fought the government's seizure, noting in court documents that it "has an established history of ... similar financial transactions ... and that all such transactions represent legitimate business transactions."
Ironically, cooperating with the government doesn't eliminate a company's risk of prosecution, particularly in the multiagency world of drug enforcement. "No matter what the Treasury Department says, the Department of Justice still tries to make cases," says Santangelo. "You have one part of the government trying to work with you, and another part of the government trying to prosecute you."
Of course, the U.S. government is not the only party involved here. With rebel guerrillas controlling a Switzerland-size chunk of the country and with their economy in shambles, Colombian officials take a dim view of U.S. company claims that they cannot help stop the estimated $5 billion in goods that flow through the BMPE. With legal imports in 1998 of $15 billion, contraband accounted for 25 percent of all imports. In 1998, this cost the Colombian government a precious $840 million in taxes and tariffs.
"We have guerrillas surrounding the city and terror bombings here in Colombia, but we won't give up this fight. We are just asking the international community to help us. As long as drug dealers can launder their money, they will continue their operations," says Enrique Giraldo, chief of international investigations for DIAN, Colombia's customs and excise agency. "Companies should be more concerned about their payment operations," he adds. "Why do they wait until they're in court to be concerned about this? It is more expensive at that point."
DIAN's former director, Fanny Kertzman, was even more critical. In 1999, she testified before the U.S. Congress that "the Colombian government believes that many of the multinational companies perfectly know the mechanism described above [the BMPE], and are aware of the fact that their products finally enter Colombia." Recently, however, such companies as Sony and Philip Morris have signed agreements with DIAN promising to help shut down rogue dealers if DIAN provides documentation and serial numbers for seized goods. That's a breakthrough, says Giraldo, although it's too early to see results.
Philip Morris signed its agreement in March 2000. But just two months later, a New York law firm filed a RICO suit on behalf of 25 Colombian states and the city of Bogota, claiming Philip Morris knowingly conspired with smugglers for more than 20 years, and cost the Colombian states billions of dollars in tax revenues and other fees.
"The suit is wholly without merit," responds Philip Morris's Leiber. "The factual allegations of the complaint contain falsehoods, fabrications, distortions, and misleading half-truths.... We certainly do not engage in and have not engaged in 'smuggling activities,' 'money- laundering,' 'wire fraud,' or 'mail fraud.' Nor do we do business with so-called peso brokers."
Despite this heated protest, the fact is, Philip Morris products frequently turn up in money-laundering and smuggling cases. In her testimony before Congress, Kertzman noted that if all the cigarettes arriving in Aruba and Panama-- both notorious transshipment sites for contraband bound for Colombia--were actually consumed locally, "each Panamanian or [Arubian]--men, women, and children--would have to smoke 10 packs of cigarettes per day." And one of the firms that had its money seized in the Carranza case was Panamanian company Marlex S.A.--a former distributor of Philip Morris products. "Philip Morris terminated its sales to Marlex in 1997," notes Leiber, "and has taken steps since the end of 1998 to assure that Marlex is not supplied with any products that we sell to our customers."
FIRST LINE OF DEFENSE
Ultimately, the first line of defense for any company is its employees, who must balance a natural desire to make sales and please the customer with the seemingly remote possibility that they will suddenly find themselves awash in cocaine money.
That's exactly what happened to salesman Dwayne Kahl at GE's Louisville-based appliance division. His delight at landing a $40,000 sale of air conditioners quickly turned to suspicion when the payment arrived. "I had requested a certified check," he says, "and they sent me about 35 money orders. I was really confused. I'd never had that happen."
Kahl turned to his risk manager, David Purdie, who called the customer. "[He] answered on a cell phone [at what] sounded like a dock," says Purdie. "He was very short, very abrupt." Thanks to GE's anti-money-laundering policy, Purdie asked only a few questions before he hit the mute button and told Kahl they couldn't accept the sale.
Kahl and Purdie now star in GE's corporate integrity training video, which not only emphasizes GE's formal know-your-customer and acceptable- payment policies, but also encourages employees to report any concerns about suspicious activity. "We walk away from business, I'm sure, every day around the world," CFO Keith Sherin notes in the video. "And that's OK."
Tim Reason is a staff writer at CFO.
A FISTFUL OF PESOS
The Colombian Black Market Peso Exchange (BMPE) was formed more than 50 years ago, not to launder drug money, but to offer Colombian importers in need of U.S. dollars an alternative to the Colombian Central Bank exchange, which enforces import duties and tariffs. It is technically illegal but widely tolerated. There are six basic steps to laundering drug money through the BMPE:
1. Colombian drug cartels smuggle narcotics into the United States, where they are sold for dollars at profits as high as 5,000 percent.
2. With the dollars in safe houses in the United States, the Colombian cartels contact a peso broker, or cambista.
3. The cambista sends his agents in the States to collect the dollars, and pays off the drug cartel in Colombian pesos--minus a steep discount of as much as 20 to 40 percent.
4. The cambista then instructs his contacts in the United States-- known to law enforcement officials as "smurfs"--to deposit the money in banks in amounts less than $10,000, to avoid triggering suspicious- activity-reporting requirements.
5. Colombian importers place orders for U.S. goods, but make their payments in pesos to the cambista. The broker instructs his smurfs to pay for the goods with the dollars in their bank accounts, typically via money orders or wire transfers, and often with multiple payments.
6. The goods are typically smuggled into Colombia via transshipment points such as Panama, Aruba, or even Europe or Asia, then sold in contraband markets in Colombia known as "San Andrecitos." --T.R.
AN OUNCE OF PREVENTION
Here are suggestions from company executives and law enforcement officials about how to guard against the Black Market Peso Exchange and other money-laundering schemes:
RED FLAGS. Beware of commercial customers that have no interest in price discounts, or that lack normal business infrastructure and credit history. Beware of individual consumers making large purchases that are inconsistent with personal use (three washing machines, for example).
PAYMENT RESTRICTIONS. Prohibit cash or wire-transfer payments from third parties, or payments through travelers' checks, foreign bank drafts, or money orders not drawn on the account of the entity that made the purchase. Payments in cash or money orders should raise red flags.
KNOW-YOUR-CUSTOMER RULES. Investigate and document the legitimacy of customers, particularly commercial resellers and distributors.
DISTRIBUTOR CONTRACTS. Prohibit distributors from selling goods for export, and audit and enforce these contract provisions (particularly in high-risk regions like South Florida).
EMPLOYEE TRAINING AND REPORTING. Explain to employees how money-laundering works, and provide them with an ombudsman channel to report suspicious transactions.
CUSTOMER TRAINING. Educate customers (such as retail dealers) on your payment restrictions and know-your-customer policies, and provide them with information to help them comply. --T.R.