Wachovia Bank Drug Cartel Money-Laundering Business

[Kravitz]

How a big US bank laundered billions from Mexico's
murderous drug gangs.
As the violence spread, billions of
dollars of cartel cash began to seep into the global
financial system. But a special investigation by the
Observer reveals how the increasingly frantic warnings of
one London whistleblower were ignored
The Guardian.co.uk
by Ed Vulliamy
The Observer, Sunday 3 April 2011

On 10 April 2006, a DC-9 jet landed in the port city of
Ciudad del Carmen, on the Gulf of Mexico, as the sun was
setting. Mexican soldiers, waiting to intercept it, found
128 cases packed with 5.7 tons of cocaine, valued at
$100m. But something else – more important and far-
reaching – was discovered in the paper trail behind the
purchase of the plane by the Sinaloa narco-trafficking
cartel.


During a 22-month investigation by agents from the US
Drug Enforcement Administration, the Internal Revenue
Service and others, it emerged that the cocaine smugglers
had bought the plane with money they had laundered
through one of the biggest banks in the United States:
Wachovia, now part of the giant Wells Fargo.


The authorities uncovered billions of dollars in wire
transfers, traveller's cheques and cash shipments through
Mexican exchanges into Wachovia accounts. Wachovia was
put under immediate investigation for failing to maintain
an effective anti-money laundering programme. Of special
significance was that the period concerned began in 2004,
which coincided with the first escalation of violence
along the US-Mexico border that ignited the current drugs
war.


Criminal proceedings were brought against Wachovia,
though not against any individual, but the case never
came to court.


In March 2010, Wachovia settled the
biggest action brought under the US bank secrecy act,
through the US district court in Miami. Now that the
year's "deferred prosecution" has expired, the bank is in
effect in the clear. It paid federal authorities $110m in
forfeiture, for allowing transactions later proved to be
connected to drug smuggling, and incurred a $50m fine for
failing to monitor cash used to ship 22 tons of cocaine.
More shocking, and more important, the bank was
sanctioned for failing to apply the proper anti-
laundering strictures to the transfer of $378.4bn – a sum
equivalent to one-third of Mexico's gross national
product – into dollar accounts from so-called casas de
cambio (CDCs) in Mexico, currency exchange houses with
which the bank did business.


"Wachovia's blatant disregard for our banking laws gave
international cocaine cartels a virtual carte blanche to
finance their operations," said Jeffrey Sloman, the
federal prosecutor. Yet the total fine was less than 2%
of the bank's $12.3bn profit for 2009. On 24 March 2010,
Wells Fargo stock traded at $30.86 – up 1% on the week of
the court settlement.


The conclusion to the case was only the tip of an
iceberg, demonstrating the role of the "legal" banking
sector in swilling hundreds of billions of dollars – the
blood money from the murderous drug trade in Mexico and
other places in the world – around their global
operations, now bailed out by the taxpayer.



At the height of the 2008 banking crisis, Antonio Maria
Costa, then head of the United Nations office on drugs
and crime, said he had evidence to suggest the proceeds
from drugs and crime were "the only liquid investment
capital" available to banks on the brink of collapse.
"Inter-bank loans were funded by money that originated
from the drugs trade," he said. "There were signs that
some banks were rescued that way."

Wachovia was acquired by Wells Fargo during the 2008
crash, just as Wells Fargo became a beneficiary of $25bn
in taxpayers' money. Wachovia's prosecutors were clear,
however, that there was no suggestion Wells Fargo had
behaved improperly; it had co-operated fully with the
investigation. Mexico is the US's third largest
international trading partner and Wachovia was
understandably interested in this volume of legitimate
trade.


José Luis Marmolejo, who prosecuted those running one of
the casas de cambio at the Mexican end, said: "Wachovia
handled all the transfers. They never reported any as
suspicious."
"As early as 2004, Wachovia understood the risk," the
bank admitted in the statement of settlement with the
federal government, but, "despite these warnings,
Wachovia remained in the business". There is, of course,
the legitimate use of CDCs as a way into the Hispanic
market. In 2005 the World Bank said that Mexico was
receiving $8.1bn in remittances.


During research into the Wachovia Mexican case, the
Observer obtained documents previously provided to
financial regulators. It emerged that the alarm that was
ignored came from, among other places, London, as a
result of the diligence of one of the most important
whistleblowers of our time. A man who, in a series of
interviews with the Observer, adds detail to the
documents, laying bare the story of how Wachovia was at
the centre of one of the world's biggest money-laundering
operations.


Martin Woods, a Liverpudlian in his mid-40s, joined the
London office of Wachovia Bank in February 2005 as a
senior anti-money laundering officer. He had previously
served with the Metropolitan police drug squad. As a
detective he joined the money-laundering investigation
team of the National Crime Squad, where he worked on the
British end of the Bank of New York money-laundering
scandal in the late 1990s.

[Kravitz]

Woods talks like a police officer – in the best sense of
the word: punctilious, exact, with a roguish humour, but
moral at the core. He was an ideal appointment for any
bank eager to operate a diligent and effective risk
management policy against the lucrative scourge of high
finance: laundering, knowing or otherwise, the vast
proceeds of criminality, tax-evasion, and dealing in arms
and drugs.
 
 
Woods had a police officer's eye and a police officer's
instincts – not those of a banker. And this influenced
not only his methods, but his mentality. "I think that a
lot of things matter more than money – and that marks you
out in a culture which appears to prevail in many of the
banks in the world," he says.
 
 
Woods was set apart by his modus operandi. His
speciality, he explains, was his application of a "know
your client", or KYC, policing strategy to identifying
dirty money. "KYC is a fundamental approach to anti-money
laundering, going after tax evasion or counter-terrorist
financing. Who are your clients? Is the documentation
right? Good, responsible banking involved always knowing
your customer and it still does."
 
 
 
When he looked at Wachovia, the first thing Woods noticed
was a deficiency in KYC information. And among his first
reports to his superiors at the bank's headquarters in
Charlotte, North Carolina, were observations on a
shortfall in KYC at Wachovia's operation in London, which
he set about correcting, while at the same time
implementing what was known as an enhanced transaction
monitoring programme, gathering more information on
clients whose money came through the bank's offices in
the City, in sterling or euros. By August 2006, Woods had
identified a number of suspicious transactions relating
to casas de cambio customers in Mexico.
 
 
 
Primarily, these involved deposits of traveller's cheques
in euros. They had sequential numbers and deposited
larger amounts of money than any innocent travelling
person would need, with inadequate or no KYC information
on them and what seemed to a trained eye to be dubious
signatures. "It was basic work," he says. "They didn't
answer the obvious questions: 'Is the transaction real,
or does it look synthetic? Does the traveller's cheque
meet the protocols? Is it all there, and if not, why
not?'"
 
 
 
Woods discussed the matter with Wachovia's global head of
anti-money laundering for correspondent banking, who
believed the cheques could signify tax evasion. He then
undertook what banks call a "look back" at previous
transactions and saw fit to submit a series of SARs, or
suspicious activity reports, to the authorities in the UK
and his superiors in Charlotte, urging the blocking of
named parties and large series of sequentially numbered
traveller's cheques from Mexico. He issued a number of
SARs in 2006, of which 50 related to the casas de cambio
in Mexico. To his amazement, the response from Wachovia's
Miami office, the centre for Latin American business, was
anything but supportive – he felt it was quite the
reverse.
 
 
 
As it turned out, however, Woods was on the right track.
Wachovia's business in Mexico was coming under closer and
closer scrutiny by US federal law enforcement. Wachovia
was issued with a number of subpoenas for information on
its Mexican operation. Woods has subsequently been
informed that Wachovia had six or seven thousand
subpoenas. He says this was "An absurd number. So at what
point does someone at the highest level not get the
feeling that something is very, very wrong?"
In April and May 2007, Wachovia – as a result of
increasing interest and pressure from the US attorney's
office – began to close its relationship with some of the
casas de cambio. But rather than launch an internal
investigation into Woods's alerts over Mexico, Woods
claims Wachovia hung its own money-laundering expert out
to dry. The records show that during 2007 Woods
"continued to submit more SARs related to the casas de
cambio".
 
 
 
In July 2007, all of Wachovia's remaining 10 Mexican casa
de cambio clients operating through London suddenly
stopped doing so. Later in 2007, after the investigation
of Wachovia was reported in the US financial media, the
bank decided to end its remaining relationships with the
Mexican casas de cambio globally. By this time, Woods
says, he found his personal situation within the bank
untenable; while the bank acted on one level to protect
itself from the federal investigation into its
shortcomings, on another, it rounded on the man who had
been among the first to spot them.
 
 
 
On 16 June Woods was told by Wachovia's head of
compliance that his latest SAR need not have been filed,
that he had no legal requirement to investigate an
overseas case and no right of access to documents held
overseas from Britain, even if they were held by
Wachovia.
 
 
 
Woods's life went into freefall. He went to hospital with
a prolapsed disc, reported sick and was told by the bank
that he not done so in the appropriate manner, as
directed by the employees' handbook. He was off work for
three weeks, returning in August 2007 to find a letter
from the bank's compliance managing director, which was
unrelenting in its tone and words of warning.
The letter addressed itself to what the manager called
"specific examples of your failure to perform at an
acceptable standard". Woods, on the edge of a breakdown,
was put on sick leave by his GP; he was later given
psychiatric treatment, enrolled on a stress management
course and put on medication.
 
 
 
Late in 2007, Woods attended a function at Scotland Yard
where colleagues from the US were being entertained.
There, he sought out a representative of the Drug
Enforcement Administration and told him about the casas
de cambio, the SARs and his employer's reaction. The
Federal Reserve and officials of the office of
comptroller of currency in Washington DC then "spent a
lot of time examining the SARs" that had been sent by
Woods to Charlotte from London.
 
"They got back in touch with me a while afterwards and we
began to put the pieces of the jigsaw together," says
Woods. What they found was – as Costa says – the tip of
the iceberg of what was happening to drug money in the
banking industry, but at least it was visible and it had
a name: Wachovia.
 
 

[Kravitz]

In June 2005, the DEA, the criminal division of the
Internal Revenue Service and the US attorney's office in
southern Florida began investigating wire transfers from
Mexico to the US. They were traced back to correspondent
bank accounts held by casas de cambio at Wachovia. The
CDC accounts were supervised and managed by a business
unit of Wachovia in the bank's Miami offices.
 
 
 
"Through CDCs," said the court document, "persons in
Mexico can use hard currency and … wire transfer the
value of that currency to US bank accounts to purchase
items in the United States or other countries. The nature
of the CDC business allows money launderers the
opportunity to move drug dollars that are in Mexico into
CDCs and ultimately into the US banking system.
 
 
 
"On numerous occasions," say the court papers, "monies
were deposited into a CDC by a drug-trafficking
organisation. Using false identities, the CDC then wired
that money through its Wachovia correspondent bank
accounts for the purchase of airplanes for drug-
trafficking organisations."
 
 
 
 The court settlement of 2010
would detail that "nearly $13m went through correspondent
bank accounts at Wachovia for the purchase of aircraft to
be used in the illegal narcotics trade. From these
aircraft, more than 20,000kg of cocaine were seized."
All this occurred despite the fact that Wachovia's office
was in Miami, designated by the US government as a "high
-intensity money laundering and related financial crime
area", and a "high-intensity drug trafficking area".
 
 
 
Since the drug cartel war began in 2005, Mexico had been
designated a high-risk source of money laundering.
"As early as 2004," the court settlement would read,
"Wachovia understood the risk that was associated with
doing business with the Mexican CDCs. Wachovia was aware
of the general industry warnings. As early as July 2005,
Wachovia was aware that other large US banks were exiting
the CDC business based on [anti-money laundering]
concerns … despite these warnings, Wachovia remained in
business."
 
 
On 16 March 2010, Douglas Edwards, senior vice-president
of Wachovia Bank, put his signature to page 10 of a 25-
page settlement, in which the bank admitted its role as
outlined by the prosecutors. On page 11, he signed again,
as senior vice-president of Wells Fargo. The documents
show Wachovia providing three services to 22 CDCs in
Mexico: wire transfers, a "bulk cash service" and a
"pouch deposit service", to accept "deposit items drawn
on US banks, eg cheques and traveller's cheques", as
spotted by Woods.
 
 
 
"For the time period of 1 May 2004 through 31 May 2007,
Wachovia processed at least $$373.6bn in CDCs, $4.7bn in
bulk cash" – a total of more than $378.3bn, a sum that
dwarfs the budgets debated by US state and UK local
authorities to provide services to citizens.
 
 
 
The document gives a fascinating insight into how the
laundering of drug money works. It details how
investigators "found readily identifiable evidence of red
flags of large-scale money laundering". There were
"structured wire transfers" whereby "it was commonplace
in the CDC accounts for round-number wire transfers to be
made on the same day or in close succession, by the same
wire senders, for the … same account".
 
 
 
Over two days, 10 wire transfers by four individuals
"went though Wachovia for deposit into an aircraft
broker's account. All of the transfers were in round
numbers. None of the individuals of business that wired
money had any connection to the aircraft or the entity
that allegedly owned the aircraft. The investigation has
further revealed that the identities of the individuals
who sent the money were false and that the business was a
shell entity. That plane was subsequently seized with
approximately 2,000kg of cocaine on board."
 
 
 
Many of the sequentially numbered traveller's cheques, of
the kind dealt with by Woods, contained "unusual
markings" or "lacked any legible signature". Also, "many
of the CDCs that used Wachovia's bulk cash service sent
significantly more cash to Wachovia than what Wachovia
had expected. More specifically, many of the CDCs
exceeded their monthly activity by at least 50%."
 
 
 
 
Recognising these "red flags", the US attorney's office
in Miami, the IRS and the DEA began investigating
Wachovia, later joined by FinCEN, one of the US
Treasury's agencies to fight money laundering, while the
office of the comptroller of the currency carried out a
parallel investigation. The violations they found were,
says the document, "serious and systemic and allowed
certain Wachovia customers to launder millions of dollars
of proceeds from the sale of illegal narcotics through
Wachovia accounts over an extended time period. The
investigation has identified that at least $110m in drug
proceeds were funnelled through the CDC accounts held at
Wachovia."

[Kravitz]

The settlement concludes by discussing Wachovia's
"considerable co-operation and remedial actions" since
the prosecution was initiated, after the bank was bought
by Wells Fargo. "In consideration of Wachovia's remedial
actions," concludes the prosecutor, "the United States
shall recommend to the court … that prosecution of
Wachovia on the information filed … be deferred for a
period of 12 months."



But while the federal prosecution proceeded, Woods had
remained out in the cold. On Christmas Eve 2008, his
lawyers filed tribunal proceedings against Wachovia for
bullying and detrimental treatment of a whistleblower.
The case was settled in May 2009, by which time Woods
felt as though he was "the most toxic person in the
bank". Wachovia agreed to pay an undisclosed amount, in
return for which Woods left the bank and said he would
not make public the terms of the settlement.



After years of tribulation, Woods was finally formally
vindicated, though not by Wachovia: a letter arrived from
John Dugan, the comptroller of the currency in Washington
DC, dated 19 March 2010 – three days after the settlement
in Miami. Dugan said he was "writing to personally
recognise and express my appreciation for the role you
played in the actions brought against Wachovia Bank for
violations of the bank secrecy act … Not only did the
information that you provided facilitate our
investigation, but you demonstrated great personal
courage and integrity by speaking up. Without the efforts
of individuals like you, actions such as the one taken
against Wachovia would not be possible."



The so-called "deferred prosecution" detailed in the
Miami document is a form of probation whereby if the bank
abides by the law for a year, charges are dropped. So
this March the bank was in the clear. The week that the
deferred prosecution expired, a spokeswoman for Wells
Fargo said the parent bank had no comment to make on the
documentation pertaining to Woods's case, or his
allegations. She added that there was no comment on
Sloman's remarks to the court; a provision in the
settlement stipulated Wachovia was not allowed to issue
public statements that contradicted it.



But the settlement leaves a sour taste in many mouths –
and certainly in Woods's. The deferred prosecution is
part of this "cop-out all round", he says. "The
regulatory authorities do not have to spend any more time
on it, and they don't have to push it as far as a
criminal trial. They just issue criminal proceedings, and
settle. The law enforcement people do what they are
supposed to do, but what's the point? All those people
dealing with all that money from drug-trafficking and
murder, and no one goes to jail?"


One of the foremost figures in the training of anti-money
laundering officers is Robert Mazur, lead infiltrator for
US law enforcement of the Colombian Medellín cartel
during the epic prosecution and collapse of the BCCI
banking business in 1991 (his story was made famous by
his memoir, The Infiltrator, which became a movie).




Mazur, whose firm Chase and Associates works closely with
law enforcement agencies and trains officers for bank
anti-money laundering, cast a keen eye over the case
against Wachovia, and he says now that "the only thing
that will make the banks properly vigilant to what is
happening is when they hear the rattle of handcuffs in
the boardroom".



Mazur said that "a lot of the law enforcement people were
disappointed to see a settlement" between the
administration and Wachovia. "But I know there were
external circumstances that worked to Wachovia's benefit,
not least that the US banking system was on the edge of
collapse."



What concerns Mazur is that what law enforcement agencies
and politicians hope to achieve against the cartels is
limited, and falls short of the obvious attack the US
could make in its war on drugs: go after the money.



"We're thinking way too small," Mazur says. "I train law
enforcement officers, thousands of them every year, and
they say to me that if they tried to do half of what I
did, they'd be arrested. But I tell them: 'You got to
think big. The headlines you will be reading in seven
years' time will be the result of the work you begin
now.' With BCCI, we had to spend two years setting it up,
two years doing undercover work, and another two years
getting it to trial. If they want to do something big,
like go after the money, that's how long it takes."



But Mazur warns: "If you look at the career ladders of
law enforcement, there's no incentive to go after the big
money. People move every two to three years. The DEA is
focused on drug trafficking rather than money laundering.
You get a quicker result that way – they want to get the
traffickers and seize their assets. But this is like
treating a sick plant by cutting off a few branches – it
just grows new ones. Going after the big money is cutting
down the plant – it's a harder door to knock on, it's a
longer haul, and it won't get you the short-term riches."

The office of the comptroller of the currency is still
examining whether individuals in Wachovia are criminally
liable. Sources at FinCEN say that a so-called "look-
back" is in process, as directed by the settlement and
agreed to by Wachovia, into the $378.4bn that was not
directly associated with the aircraft purchases and
cocaine hauls, but neither was it subject to the proper
anti-laundering checks. A FinCEN source says that $20bn
already examined appears to have "suspicious origins".
But this is just the beginning.

[Kravitz]

Antonio Maria Costa, who was executive director of the
UN's office on drugs and crime from May 2002 to August
2010, charts the history of the contamination of the
global banking industry by drug and criminal money since
his first initiatives to try to curb it from the European
commission during the 1990s.
 
 
 
"The connection between
organised crime and financial institutions started in the
late 1970s, early 1980s," he says, "when the mafia became
globalised."
 
 
 
Until then, criminal money had circulated largely in
cash, with the authorities making the occasional,
spectacular "sting" or haul. During Costa's time as
director for economics and finance at the EC in Brussels,
from 1987, inroads were made against penetration of banks
by criminal laundering, and "criminal money started
moving back to cash, out of the financial institutions
and banks. Then two things happened: the financial crisis
in Russia, after the emergence of the Russian mafia, and
the crises of 2003 and 2007-08.
 
 
 
"With these crises," says Costa, "the banking sector was
short of liquidity, the banks exposed themselves to the
criminal syndicates, who had cash in hand."
 
 
 
 
Costa questions the readiness of governments and their
regulatory structures to challenge this large-scale
corruption of the global economy: "Government regulators
showed what they were capable of when the issue suddenly
changed to laundering money for terrorism – on that, they
suddenly became serious and changed their attitude."
 
 
 
Hardly surprising, then, that Wachovia does not appear to
be the end of the line. In August 2010, it emerged in
quarterly disclosures by HSBC that the US justice
department was seeking to fine it for anti-money
laundering compliance problems reported to include
dealings with Mexico.
 
 
 
"Wachovia had my résumé, they knew who I was," says
Woods. "But they did not want to know – their attitude
was, 'Why are you doing this?' They should have been on
my side, because they were compliance people, not
commercial people. But really they were commercial people
all along. We're talking about hundreds of millions of
dollars. This is the biggest money-laundering scandal of
our time.
 
 
 
"These are the proceeds of murder and misery in Mexico,
and of drugs sold around the world," he says. "All the
law enforcement people wanted to see this come to trial.
But no one goes to jail. "What does the settlement do to
fight the cartels? Nothing – it doesn't make the job of
law enforcement easier and it encourages the cartels and
anyone who wants to make money by laundering their blood
dollars. Where's the risk? There is none.
 
 
 
"Is it in the interest of the American people to
encourage both the drug cartels and the banks in this
way? Is it in the interest of the Mexican people? It's
simple: if you don't see the correlation between the
money laundering by banks and the 30,000 people killed in
Mexico, you're missing the point."
 
 
 
Woods feels unable to rest on his laurels. He tours the
world for a consultancy he now runs, Hermes Forensic
Solutions, counselling and speaking to banks on the
dangers of laundering criminal money, and how to spot and
stop it. "New York and London," says Woods, "have become
the world's two biggest laundries of criminal and drug
money, and offshore tax havens. Not the Cayman Islands,
not the Isle of Man or Jersey. The big laundering is
right through the City of London and Wall Street.
 
 
 
 
"After the Wachovia case, no one in the regulatory
community has sat down with me and asked, 'What
happened?' or 'What can we do to avoid this happening to
other banks?' They are not interested. They are the same
people who attack the whistleblowers and this is a
position the [British] Financial Services Authority at
least has adopted on legal advice: it has been advised
that the confidentiality of banking and bankers takes
primacy over the public information disclosure act. That
is how the priorities work: secrecy first, public
interest second.
 
 
 
"Meanwhile, the drug industry has two products: money and
suffering. On one hand, you have massive profits and
enrichment. On the other, you have massive suffering,
misery and death. You cannot separate one from the other.
 
 
 
"What happened at Wachovia was symptomatic of the failure
of the entire regulatory system to apply the kind of
proper governance and adequate risk management which
would have prevented not just the laundering of blood
money, but the global crisis."
 
---
guardian
 
.co.uk/world/2011/apr/03/us-bank-
mexico-drug-gangs