U.S. Companies Tangled in Web Of Drug Dollars

New York Times, 10 Oct. 2000

On a rainy day last June, a group of corporate executives gathered in a conference room at the Justice Department for a meeting with Attorney General Janet Reno and other top government officials.

The executives represented some of the pillars of corporate America-Hewlett-Packard, Ford Motor Company, Whirlpool. The session was not publicized because those at the meeting shared an unlikely and potentially embarrassing problem: their companies, they feared, were being singled out in the nation's war on drugs, and neither they nor the government was quite sure what to do.

With the intensifying federal crackdown on money laundering, agents had been tracking drug money into the accounts of American corporations and their distributors and dealers. In fact, federal officials said, about $5 billion a year in Colombian drug money is used to buy goods and services-from cigarettes to computer chips-from American companies.

What makes that possible is a system known as the black-market peso exchange, a complex money trade that law enforcement officials say has become increasingly important to the Colombian narcotics trade.

The system-really a network of currency brokers with offices in New York, Miami, the Caribbean and South America-is essentially an underground money market that lets the traffickers exchange American dollars for Colombian pesos. Those dollars, which stay in the United States, are then bought by Colombian companies that use them to buy American goods for sale back home.

But the government's efforts to seize that money have put it on a collision course with corporations, which say they are victims with no way of knowing that they and their distributors are being paid with drug money.

As they met on June 6, those executives, lawyers and law enforcement officials found themselves grappling with a conundrum: when does drug money stop being drug money?

How far does a company's responsibility go?

The questions have been confronting law enforcement officials for years.

"What are we going to do?" asked Greg Passic, a former drug enforcement agent who now advises the government on the economics of the narcotics industry. "We've got the Fortune 500 involved in our drug-money laundering process."

For a long time, because of lax enforcement of United States currency laws, the drug traffickers were able to launder billions of dollars through American financial institutions. A crackdown in the 1980's pushed traffickers to what they saw as a virtually fail-safe system for getting back their profits-the black-market peso exchange.

Their growing reliance on that system shows how deeply the drug trade has become entwined in the legitimate economies of the United States, Colombia and other nations. Colombian officials said that as much as 45 percent of their country's imported consumer goods are bought with money laundered through the peso exchange.

On the American side, law enforcement officials said the exchange has largely eliminated the trade deficit with Colombia. The market, said the customs commissioner, Raymond W. Kelly, "is the ultimate nexus between crime and commerce, using global trade to mask global money laundering."

So far, no large American company has faced criminal charges. And companies have almost always been able to prevent federal officials from keeping money that has been seized.

But in the last few years, as frustration has risen, the government has taken a tougher line. There have been Congressional hearings intended to put companies on notice by name. Prosecutors have issued warnings and stepped up efforts to seize laundered money.

At the same time, the government has encouraged companies to institute "know your customer" policies similar to those used in the financial industry. The policies gave dealers and distributors techniques for recognizing money laundering. Thus educated, the government thought, the companies would be less able to argue that they simply could not have known.

In drawing the line between legitimate and illegitimate profits, the government must not only prove that the money came from drug deals; it must show that the recipient "knew or should have known" its source.

In the war on drugs, that line has proved very fuzzy.

Trading Dollars for Pesos

Congress passed the first money-laundering laws in the early 1970's-requiring, among other things, that banks report any cash transaction over $10,000 -- but the laws were loosely enforced. By 1979, the Federal Reserve Bank in Miami had more cash than the other federal reserve banks combined.

It took the uproar over the cocaine epidemic in the early 80's for banks to comply with the law. And with the resulting crackdown, traffickers resorted to the black market, which for decades had provided Colombian businesses with dollars at less than the official exchange rate of 2,000 pesos to the dollar. The rate in Colombia is fixed by the government.

One peso broker recently agreed to describe how the system works.

The process begins when the broker receives a call from a Colombian drug trafficker or his American representative. The two negotiate an exchange rate for pesos, usually 30 percent to 40 percent below the fixed rate. So $10,000 might be worth 12 million pesos instead of 20 million at the official rate.

The dollars are then delivered to the broker, who promises to deliver pesos to the trafficker's bank account after the dollars are sold to Colombian businesses. The dealer's insurance is the broker's knowledge that to do otherwise would almost surely mean death.

The broker maintains several runners-"smurfs," in law enforcement lingo-who deposit the cash into hundreds of United States bank accounts in amounts of less than $10,000, to avoid scrutiny.

At the same time, the broker's office in Colombia negotiates with business people there who want cheap dollars to buy everything from consumer goods to helicopters.

Usually, that exchange rate is 20 percent below market, so a business owner in Colombia might pay 16 million pesos, instead of 20 million pesos at the fixed rate, for $10,000.

The pesos are then transferred-in this example, 12 million pesos-to the traffickers' accounts. The broker keeps the difference, 4 million pesos in this instance. Then at the businessman's direction, the dollars in the American banks are used to pay for American goods.

The peso brokerage is one part of the process that supplies Colombia with inexpensive goods from the United States and around the world. Colombian authorities said the goods were often smuggled into the country, costing Colombia more than $300 million a year in tax revenue.

Colombia has made collecting that lost revenue a priority. But the black market has considerable appeal because it puts a lot of inexpensive foreign goods on the Colombian market.

The exchange has also increased American exports to Colombia.

"This is positive for U.S. business, there is no doubt about it," said Mike Wald, who runs a consortium of law enforcement agencies in Florida focusing on the peso exchange. "The Colombian, if he pays less for his dollars, can buy more goods. That's a pretty obvious economic fact. But we have to realize where this money originates. It's drug money."

Tangled With Drug Money

Two companies that have turned up in the American government's anti-laundering efforts are Phillip Morris and Bell Helicopter Textron.

Phillip Morris products in particular have been a major presence in Colombia. Marlboro cigarettes are readily available at prices investigators said indicated that they were bought with black market dollars and smuggled into the country.

Earlier this year, Phillip Morris was sued in the Eastern District of New York by the Colombian tax collectors. The federal lawsuit accused the company of being involved in cigarette smuggling and in the laundering of drug proceeds.

Phillip Morris has denied the allegations, saying that it did not know its products were being exploited for money laundering. In addition, without admitting wrongdoing, it recently signed an agreement with Colombia, pledging to stop its products from entering the black market or being used to launder money.

In 1995, in Federal District Court in San Juan, Puerto Rico, Phillip Morris's former distributors in northern South America were indicted for laundering $40 million in black market pesos.

A member of the defense lawyers said the money was used to buy Phillip Morris cigarettes, liquor and other products for the Colombian market. But the defense team member said the defendants did not know that the money came from drug sales.

Phillip Morris severed its relationship with the defendants in 1998 and said it did not know that its products were being smuggled or that black market money was used to buy them.

In another case, Bell Helicopter is challenging the seizure of $300,000 from its accounts, money, according to court documents, that was generated by drug smuggling.

It was part of more than $1 million that the United States believed was supplied a peso-exchange broker to buy a Bell aircraft.

The helicopter was seized in Panama at the request of the United States.

The case has become a sore point for American law enforcement in part because the helicopter was sold to a Colombian businessman linked to the country's right-wing paramilitaries.

Seeking Cooperation

The deepening struggle between prosecutors and business executives is what led to the meeting with Attorney General Reno and other government officials, including Deputy Attorney General Eric H. Holder and Deputy Treasury Secretary Stuart E. Eizenstat. The companies invited were Hewlett-Packard, Ford, General Motors, Sony, Westinghouse, Whirlpool and General Electric Company, Treasury officials said.

None of the companies returned phone calls seeking comment, except General Electric and Sony. Sony said it would have no comment. But General Electric's counsel, Scott Gilbert, said his company instituted a strict compliance program five years ago, after reports that its refrigerators were being used in money-laundering operations.

As part of its policy, Mr. Gilbert said General Electric warns dealers to be aware of "red flags"-a customer's lack of interest in discounts, an unwillingness to give information about the company, or unusual forms of payment like large amounts of cash or checks written on the account of a third party.

The new policy has cut sales of appliances to Latin America by 23,000 units, or over 20 percent, said an executive at General Electric.

Alan Dooty, a customs official, said the companies had been selected for the June meeting because their products had shown up in the black market in Colombia. The exception was General Electric, which he singled out as a "good citizen."

Before the meeting, some of the companies expressed concern that they would be punished. But once they arrived, Mr. Dooty said, they were assured that the government was seeking cooperation.

A follow-up session in July bogged down in legal murk.

An industry representative familiar with the meeting said: "The Justice and Treasury Departments realized that they were trying to identify drug money that had morphed, been transformed, in layers of transactions involving distributors, authorized dealers, financing arrangements with unregulated money lenders called 'factors' and the other realities of commercial life."

More meetings are scheduled for this fall.

"HOW IT WORKS-Dollars for Pesos: A Black Market"


A Colombian trafficker sells drugs in the United States.


The trafficker contacts a black-market peso broker to launder the dollars.


The broker deposits the dollars into banks in the United States and sells the trafficker Colombian pesos at 30 percent to 40 percent below market value.


The broker negotiates currency exchanges with Colombian businesses that want to sell American goods at home. The rate is usually 20 percent below market.


The businesses instruct the broker to send the dollars to United States companies, which then ship the goods, often through a network of smugglers who avoid paying tariff. (Source: U.S. Customs Service)

By Lowell Bergman

© 2000, New York Times