DEA Congressional Testimony

Statement by:
Donnie Marshall
Chief of Domestic Operations
Drug Enforcement Administration
United States Department of Justice

Before the:
Subcommittee on General Oversight and Investigations of the Committee on Banking and Financial Services

Regarding:
U.S. Law Enforcement Response to Money Laundering Activities in Mexico

Location:
Rayburn House Office Building
Room 2128
Washington, D.C.

Date:
September 5, 1996

Note: This document may not reflect changes made in actual delivery.

Mr. Chairman and Members of the Subcommittee: It is a pleasure to appear before the Subcommittee today to discuss the U.S. law enforcement response to current money laundering activities associated with the importation of illegal drugs into the United States via Mexico.

The Southwest border has become the focal point of drug trafficking into the United States. In fact, the majority of the cocaine in the United States is smuggled across our border with Mexico. This 2,000 mile stretch of land along our southern boundaries provides many opportunities for criminals to smuggle cocaine, methamphetamine, and marijuana into the United States. The organized drug traffickers from Mexico, operating along the U.S. and Mexican border, are becoming more brazen and more violent, threatening and intimidating American ranchers, terrorizing local communities, and encroaching on American soil.

Much of the land along the border is desolate and sparsely populated, which creates a formidable challenge for law enforcement in every state sharing the border with Mexico. Murders, crime and violence have become a reality in most communities in the Southwest United States, and many of these crimes are drug related.

During the last five years, the Cali cartel--the most sophisticated organized criminal enterprise in history--has shifted their major drug smuggling operations from the Caribbean corridor, which was the epicenter of drug smuggling activities during the 1980s, to Mexico. Drug traffickers in Mexico have had a long history of polydrug smuggling, and their well-entrenched trafficking routes provided a ready alternative for the Colombian drug lords who were seeking safer avenues into the United States. The leaders of the Cali cartel first employed transporters from Mexico to ship cocaine into the United States, and in so doing, cemented a relationship with their Mexican counterparts.

Early on, the Mexican transportation groups were paid $1,000 to $2,000 dollars per kilogram for their services. They received the cocaine in Mexico from a Colombian transportation group, smuggled it into the United States, and turned it over to a Colombian distribution cell. More recently, the Mexican traffickers have received cocaine instead of cash as payment for services rendered. Receiving up to half of every shipment of cocaine they transported, the Mexican traffickers increased their profit margin significantly.

The introduction of cocaine into the United States is now primarily controlled by organized criminal groups in Mexico. Through their alliance with the Colombian traffickers, 60 - 70 percent of the cocaine entering the United States enters through Mexico. Adding to the wealth being accumulated by the Mexican gangs is their dominance of the methamphetamine market. Mexican traffickers have replaced U.S.- based outlaw motorcycle gangs as the predominant force in methamphetamine production and trafficking. In 1995, methamphetamine seizures along the United States - Mexico border rose from 6.5 kilograms in 1992 to 665 kilograms. Due to lack of chemical controls in Mexico, traffickers have been able to obtain enormous amounts of ephedrine, an essential ingredient in methamphetamine production. In an 18-month period between June 1993 and December 1994, approximately 170 metric tons of ephedrine were diverted from the international commercial trade to Mexico.

Mexico remains the number one foreign source for marijuana in this country, accounting for 50 percent of the marijuana supply in the United States. In addition, Mexican heroin is the most prevalent form of heroin available in the western United States and accounts for 5 percent of the heroin sold in this country. These factors have generated a tremendous amount of wealth that the Mexican trafficking organizations have to launder.

The Mexican Federation

There are four major criminal groups from Mexico under the umbrella of the Mexican Federation which control the vast majority of the heroin and cocaine trade in Mexico. A fifth criminal group, headed by the Amezcua brothers, is responsible for virtually all of the methamphetamine imported into the United States from Mexico.

The Tijuana organization is headed by the Arellano Felix brothers-- Benjamin, Francisco, and Ramon. It is headquartered in Tijuana, Baja California Norte. This group controls smuggling across the border to California and is among the most violent of the Mexican organizations.

The Sonora cartel is run by Miguel Caro Quintero. This group operates out of Hermosillo, Agua Prieta, Guadalajara and Culiacan, as well as the Mexican states of San Luis Potosi, Sinaloa, and Sonora. Rafael Caro Quintero, Miguel's brother, is in jail for his role in the murder of DEA Special Agent Enrique Camarena in 1985.

The Juarez cartel is headed by Amado Carillo Fuentes, currently the most powerful figure in the Mexican drug trade. His organization is linked to the Rodriguez Orejuela organization in Cali and has family ties to the Ochoa brothers in Medellin, Colombia, as well. For many years, this organization ran transportation services for the Cali Cartel and used aircraft, including 727's, to fly drugs from Colombia to Mexico.

The Gulf Group was headed by Juan Garcia Abrego until his arrest on January 14, 1996, as one of the FBI’s Ten Most Wanted Fugitives. After his arrest, Mexican authorities worked quickly to expel Abrego to the United States. He awaits trial in U.S. District Court in Houston on charges including conspiracy to import cocaine, the management of a continuing criminal enterprise and money laundering offenses. The Gulf Group is based in Matamoras, Tamualipas State. This organization has smuggled well over 30 tons of cocaine into the United States and has distributed it as far north as Michigan, New Jersey, and New York.

The Amezcua brothers are responsible for huge quantities of methamphetamine smuggled into the United States from Mexico. There is an enormous demand for methamphetamine in the United States and the abuse problem is reaching epidemic proportions. Methamphetamine deaths have risen dramatically in cities such as Phoenix, Los Angeles and San Diego. In Phoenix, deaths attributable to methamphetamine abuse rose 510 percent between 1992 and 1994. The dramatic increase in demand for methamphetamine has garnered even more profits for drug syndicates in Mexico.

A Money Laundering Assessment

As with any other illegal venture, the driving force behind drug trafficking is the profits that it allows the trafficker to enjoy. Drug trafficking is a multi-billion dollar business, and these organizations are fueled by huge profits. Without the profits, they cannot finance the manufacturing, transportation, smuggling, distribution, murder and intimidation that are essential to the drug trade. With the tremendous profit comes an absolute necessity for the trafficker to launder his funds.

In order to operate their organizations and maintain their power, the traffickers must return the cash proceeds from their drug sales to areas where the proceeds are easily accessible, make the proceeds appear to be legitimate income, and protect this money from discovery and seizure by law enforcement.

Due to geographical considerations, Colombian traffickers face many difficulties and vulnerabilities during the initial placement phase of the money laundering process that Mexican syndicates do not face. Colombian drug organizations have in the past relied on a multi-faceted collection process, amassing currency in strategic locations and using a variety of methods to introduce the cash into the U.S. banking system and then ultimately transferring it to Colombia. Much of this is due to the organizational structure which separates the drugs from the drug proceeds into different cells, thus compartmentalizing the organization to insulate it from threats by rival traffickers and law enforcement. Currently, the vast majority of outbound currency attributable to the Colombian drug lords, leaves the United States either through air cargo or outbound freighter. This makes their operations less complicated, as well as less vulnerable, to discovery by law enforcement due to the enormous amount of commercial trade the United States has with Colombia.

Several joint DEA, USCS, IRS, and FBI undercover money laundering investigations, responsible for the infiltration and dismantling of Colombian money laundering organizations, have made significant seizures of bulk currency shipments.

The Mexican Federation drug groups do not experience these same logistical dilemmas in returning their profits to Mexico. Due to the vast land border separating the United States from Mexico, Mexican traffickers sometimes simply smuggle bulk shipments of cash across the border in vehicles. Often, the same vehicles which are used to smuggle cocaine into the United States are used to transport currency back into Mexico. During the months of April, May, and October, 1995, Mexican authorities made three seizures of outbound U.S. currency which totaled nearly $20 million.

A preliminary analysis of all transactions between the San Antonio Federal Reserve and area depository institutions show a currency surplus of $2.96 billion dollars in 1995, up nearly $900 million from the surplus measured in 1994. In order to satisfy a growing economic demand for cash, Federal Reserve Banks often disperse more cash to depository institutions than they receive in deposits. Thus, Federal Reserve Banks with unexplained cash surpluses are considered worthy of closer scrutiny. Mexico returns more surplus currency to the United States than any other country. Millions of dollars are being laundered by these Mexican trafficking organizations.

The OCDETF investigation known as Zorro II, which was conducted as part of our Southwest Border Strategy, clearly documented the methodology used by the Mexican syndicates to return their narco-dollars to Mexico. This investigation targeted, in part, a Mexican transportation group that was smuggling cocaine into the Los Angeles area for the Colombians. The Colombians paid the Mexicans for their services with cocaine. This is the first time law enforcement has simultaneously dismantled both the United States infrastructure of a Colombian organization responsible for the production of cocaine and the Mexican organization responsible for the transportation of cocaine.

This investigation clearly showed the Mexican and the Colombian traffickers working side-by-side in the wholesale distribution of cocaine throughout the United States. During the course of this multi-agency case, more than 90 court-ordered wiretaps were monitored, and the investigation resulted in the arrests of 156 people, the seizure of approximately 5,600 kilograms of cocaine and over $17 million dollars U.S. currency. The majority of this $17 million dollars was seized as it was being staged, in preparation for shipment to Mexico or from vehicles as they were in route to Mexico.

Money Laundering Objectives

The primary goal of the money launderer is to legitimize the income which is derived from an illegal source. The successful drug trafficker needs a front to explain the source of his income. Service oriented businesses, with a high cash flow, have long been used to successfully funnel drug proceeds, which then are claimed as legal profit. Businesses on both sides of the United States and Mexican border are being used to facilitate money laundering by the practice of over- invoicing to legitimize drug-related proceeds.

Getting volumes of cash into the U.S. banking system is also a primary goal. We are quickly becoming a cash-less society where the majority of our expenses are either paid by check or credit card. To deal exclusively in cash would raise suspicion as to the source of the income. Also, once the cash is moved into the banking system, it can very easily be manipulated throughout the financial infrastructure, to areas all over the world. Mexican authorities recently passed money laundering legislation that awaits implementation.

Another problem for the Mexican trafficker is converting small denominations to larger denominations, primarily to disguise these small bills as street sale currency and to allow for easier bulk transportation of currency into Mexico.

The need to convert U.S. currency derived from the sale of drugs, to source foreign currency is also a problem for the Mexican trafficker. Traffickers need to exchange the profits being returned to them in the denominations that are collected on the streets of the United States, mostly in $5, $10 and $20 bills. Even though the U.S. dollar is the most sought after means of exchange in the world, Mexican traffickers need pesos to make payments and payoffs, in country, to support the workings of the organization.

Finally, the trafficker needs to convert his funds into tangible assets. But in order to do this, he must devise some scheme to launder his proceeds.

Money Laundering Methods

According to the FinCEN Reference Series, money laundering activities can be divided into three stages: placement, layering, and integration.

In the placement stage, the money launderer disposes of the criminally derived proceeds. The trafficker attempts to: 1) place the funds into the financial system unnoticed, or 2) physically transport the cash outside of the United States. For the Mexican trafficker, this can be accomplished through relatively simple and direct means. Bulk shipment of U.S. currency is one of the most widely used methods. Currency is concealed and transported either by money courier or secreted in outbound cargo. This is done by using air freight forwarders, overland, and commonly in the same vehicles that transported drugs northward into the U.S. Often times, Mexican traffickers use women and children to transport their currency to alleviate suspicion at check points along the border.

The placement stage is where the trafficker and the currency is most vulnerable to detection and seizure. This stage is currently the main focus of law enforcement efforts along the Southwest border. Once the money is smuggled across the border, Mexican traffickers can place it in Mexican financial institutions with relative ease.

Once the funds reach a financial institution, the second stage of the laundering activity, layering, begins. Through layering, the money launderer further insulates the illicit proceeds from its illegal source. This occurs by conducting a series of financial transactions, that in their frequency, complexity, and volume, often resemble legitimate financial activity. The ultimate goal of this phase is to make tracing the funds back to its dirty source virtually impossible.

Lastly, the integration stage is where the launderer integrates the illicit funds into the economy. Once this occurs, the trafficker has laundered his money. Now he is able to increase his wealth and power by purchasing land, businesses, luxury items, and making payoffs to corrupt law enforcement and political officials that facilitated his illegal activities.

Money Laundering in Mexico

As drug organizations in Mexico become more powerful in the international drug trade, so does their demand for and influence in the money laundering circles. The proximity of Mexico to the United States readily allows for the movement of drug profits through bulk shipments back to the drug syndicates in Mexico with relatively little risk. DEA has found through years of money laundering investigations that traffickers are most vulnerable prior to the funds reaching the banking system, and then again, when they reach the concealment stage. Without human intelligence to identify couriers, and with minimal outbound search at the border, there is little chance of discovery of bulk shipments.

Once the currency is delivered to Mexico, a variety of alternatives for laundering are available to the drug syndicates. The Casa de Cambio system (money exchange house) is readily available for the exchange of dollars to pesos. The Casas also function as a parallel banking system in Mexico, which in addition to currency exchange, has the capability of wire transferring funds into the worldwide banking system.

Casas de Cambio

The exchange of dollars for pesos is frequently used as a money exchange mechanism in many Latin American countries. This method of exchange has become an accepted, and often vital, business transaction. Due to the laws which regulate the holding, exchange, and transportation of foreign currencies, many Latin American economies have established the Casa de Cambio.

These exchange houses serve as an alternative to the official banking system in many countries. They provide currency conversion, exchanges and money movement services for a fee. Mexican immigrants have traditionally used this system to send American earned dollars back to Mexico to support their families. The services of the cambios are sought by legitimate businesses as well as the narco-trafficker. In Texas alone, 75 money exchange houses have been licensed by the state banking commissioner. Additionally, California has licensed 35 such exchanges. A dramatic rise in Casas de Cambio has been brought about by the huge demand for conversion of U.S. dollars into pesos derived from drug trafficking.

This growth can easily be seen in the number of Cambios which operate along the United States and Mexican border. When much of the cocaine entered the U.S. through Caribbean routes, relatively few Cambios were in operation along the Southwest border. At that time, the Cambios serviced migrant workers who sought a familiar means of exchanging their U.S. earned dollars for pesos. Today, Cambios along the border in the Southwest United States are a significant factor in the laundering of drug proceeds where Mexican traffickers intermingle cash derived from drug sales with legitimate exchange business.

Large scale criminal organizations have developed systems such as this to launder large amounts of currency throughout the world. As long as there is someone in one location with excess cash, and another person needing it, there will always be someone in the middle to broker the deal for a profit.

Just as in the United States, Mexico has no reporting requirements for wire transfers, regardless of the amount. The net result is, that once the drug proceeds are deposited into either the Mexican banking system or a Casa de Cambio and the wire transfer process begins, the funds are nearly impossible to track.

The sophistication of the modern banking system allows for the transfer of funds around the world in literally seconds, which these groups capitalize on by setting up conduit accounts around the world. Once these funds are transferred through multiple conduit accounts and front companies, they have effectively been laundered and the process of tracing them and proving their illegitimacy is extremely difficult.

Mexican Bank Drafts

Many money launderers have found the Mexican Bank Draft to be the instrument of choice for repatriating dollars to the United States as legitimate income for a variety of reasons. Each year, over 500,000 bank drafts drawn on Mexican banks enter the U.S. One bank in Arizona determined that the average Mexican bank draft was valued at $65,000, however, it was not unusual to regularly clear drafts in excess of $200,000 to $400,000. In Mexico, when a large amount of U.S. currency is deposited, no currency transaction report is required. The bank in turn issues a bank draft which is drawn on an account with a U.S. bank that is held by the Mexican bank.

Through a loophole in the U.S. money laundering statutes, Mexican bank drafts are not considered to be negotiable instruments. Therefore, it is not necessary to file a Currency and Monetary Instruments Report (CMIR) or a Currency Transaction Report (CTR) when the bank draft is deposited into a U.S. bank. Traditionally, banks operating in the United States have been responsible for notifying law enforcement when suspicious activity was occurring in a financial institution. However, if the transaction goes unreported, and most drug profits are not reported, the laundering process is complete and the origin of the funds is concealed. The United States Congress passed The U.S. Money Laundering Suppression Act of 1994, requiring that foreign bank drafts be reported on CMIR forms. However, implementation regulations have not yet been issued.

Mexico's Response

The Mexican banking sector easily and conveniently absorbs the cash from traffickers who have established commercial fronts throughout Mexico. There are no CTR requirements in Mexico. Therefore, monitoring and reporting suspicious transactions is virtually nonexistent. Although illicit enrichment is illegal and money laundering is a criminal offense in Mexico, money laundering is widespread.

During May 1996, the Government of Mexico made significant changes in its current anti-money laundering legislation. Mexico criminalized money laundering in a two-part package. The Penal Reform Code made money laundering illegal with enhanced penalties of imprisonment for 5-12 years for violation of the statute. The second part of the legislation, The Organized Crime Bill, would authorize wire taps, undercover operations, the use of informants, a witness protection program, and other investigative tools. Passage of this portion of the overall legislation was scheduled for review this summer, although we have been advised that it was not passed and will again be on the agenda for the fall session which resumes in September.

Current Mexican legislation lacks a Currency Transaction Reporting (CTR) requirement, which has increasingly become problematic for Mexican and United States law enforcement authorities. Opposition to a CTR provision comes from the banking community as well as from close-knit family groups who have controlled the majority of business in Mexico for many years.

During July of this year, a U.S. Government team met with officials in Mexico. Officials from the various agencies that oversee the Mexican banking industry are in favor of regulations requiring the reporting of suspicious transactions and have indicated that they expect the regulations to be drafted by late summer or early fall and enactment is expected by December of this year.

One issue that arose during these meetings is that there are currently no sanctions against financial institutions who fail to report suspicious transactions. To be truly effective and to adequately address the problem with the Mexican Federation, who are taking advantage of the financial system, it will be necessary for the Government of Mexico to establish sanctions for non-reporting of suspicious transactions and mandate a Currency Transaction Reporting requirement. This will allow law enforcement authorities in Mexico to attack these groups while their profits are still vulnerable.

Conclusion

For close to 30 years, Mexican trafficking organizations have been adaptable, persistent, and savvy in the ways they have met drug market dynamics. The Mexican trafficking groups are becoming as powerful and insidious as their Colombian counterparts. The Government of Mexico needs to be vigilant and maintain relentless law enforcement pressure against these major trafficking organizations. Unless tough law enforcement measures are in place to arrest and imprison major traffickers, seize their assets, and halt money laundering, Mexico will continue to face threats posed by international drug organizations.

Our Southwest Border initiative, which integrates Mexican forces with Federal, state and local law enforcement agencies from the United States, is moving forward to target the activities of major drug traffickers operating along the United States and Mexican border. This commitment of manpower and resources will be DEA’s top priority for the next 5 years, as we work with our Mexican counterparts to dismantle the trafficking organizations responsible for much of the crime and violence plaguing our country today.

The leaders and members of the five major trafficking groups in Mexico must be arrested, jailed in secure prisons, and prohibited from continuing their enterprises from within prison walls.