by Martin Booth
Created in 1983, the President’s Commission on Organised Crime studied the problem of syndicated racketeering in the USA and came to the conclusion it was in a stage of metamorphosis and that the Mafia was not alone: Puerto Rican, Dominican, Mexican and Jamaican criminal syndicates were also at work on the drug scene, in addition to African–American street gangs. And they were, if anything, more dangerous than the Mafia: the Italian Mob was not generally violent outside its own close-knit society but the other ethnic gangsters were and are prone to more widespread violence, particularly in metropolitan environments. Today, the Mafia may be somewhat suppressed but the other groupings continue.
A new development, which has appeared since 1993, is the emergence of independent traffickers using established routes and distribution networks. Some are from ethnic backgrounds already involved – such as Pakistanis or Nigerians – but others are new to the game, such as Russians who are now moving world-wide.
Regardless of who is dealing, the retail structure remains more or less static. Heroin is sold at street level by the gram or fractions of a gram. In both Britain and the USA, a single package is known as a ‘deal’. It usually comes in a small paper envelope about the size of a large postage stamp although it may also be sold in cellophane or small plastic bags called ‘baggies’. For most of America’s estimated 600,000 addicts, intravenous injection is the means of taking a dose although snorting has become more widespread because addicts fear needle contamination and the concomitant risk of hepatitis or AIDS. Snorters tend to use more heroin than ‘fixers’ (injectors) and a number, in common with fixers, also use cocaine: conversely, crack cocaine users may take heroin to extend cocaine-induced euphoria and lessen the depression caused when the effects of crack start to wear off.
As already indicated, heroin is an immensely profitable enterprise: indeed, it is the most profitable enterprise ever invented. Yet, like any commodity, it has its price fluctuations, supply and demand criteria, market forces, surfeits and paucities. Price controls are affected by dealer profit margins, processing and trafficking costs, losses due to seizure or theft along the distribution chain. An indication of pricing structures may be drawn from the cost in US dollars of Golden Triangle produce in 1993, as published by the DEA in September, 1993:
• raw opium at source in the Shan states: $66–75 per kilogram
• morphine base in Chiang Mai, Thailand: $900–1000 per kilogram
• heroin hydrochloride, Chiang Mai, 70–90 per cent purity: $2900–3200 per kilogram
• heroin in Bangkok, 70–90 per cent purity: $6000–10,000 per kilogram
• heroin, wholesale in the USA, 70–90 per cent purity: $90,000–250,000 per kilogram
• heroin at dealer level in the USA, 30–60 per cent purity (after cutting): $5500–12,000 per ounce (one kilogram when cut and sold by the ounce realised $340,000–745,000)
• heroin at street salesman/pusher level in the USA, 34 per cent purity: $400–600 per gram (one kilogram when cut and sold by the gram realised $940,000–1,400,000).
In the same year in the USA, Golden Crescent heroin (56 per cent pure) fetched $200–500 per gram with Mexican black tar (26 per cent pure) selling for $100–500 per gram.
From whatever source it comes, heroin is cut, which obviously increases profit margins. The list of substances used for cutting today is long and includes glucose powder, chalk dust, icing or powdered sugar, quinine, caffeine, talcum powder, rice powder and flour. The cutting brings about a risk known to early opiate users: the addict cannot judge the purity of his purchase and may be allergic to the cutting substance in his bloodstream. As addicts expect their heroin to be cut, deaths may occur from overdosing: in Britain in 1994, a number of addicts were killed when they purchased only slightly cut supplies.
Such massive profits generate huge sums of illicit money which has to be ‘laundered’ – that is, passed through legitimate channels so its source becomes disguised. The amount of ‘dirty’ money circulating in the world is so vast as to be an alternative economy which is the third largest in the world after currency dealing and oil. Just as there are official petro-dollars, so might there be unofficial dope-dollars. Estimates of the annual size of the drugs-related dirty money market vary upwards from $500 billion. Over $350 billion was laundered through the USA in 1995.
To the common man, such sums are, as the American axiom puts it, telephone numbers. To set it into context, the global drugs financial market exceeds the gross national product (GNP) of 90 per cent of UN member countries and three of the Cali cartel hierarchy are said to be the wealthiest men in the world apart from King Fahd of Saudi Arabia and the Sultan of Brunei.
Money laundering is essential for a number of reasons. Attention needs to be diverted from the source of the money to place it beyond the reach of asset seizure by enforcement agencies. It needs to be ‘washed’ so it might be invested in legitimate business ventures and it needs to be hidden so it might be used to fund further illegitimate business, such as reinvestment in drugs.
The laundrymen are highly efficient and expert accountants, bankers, lawyers or businessmen, usually from a professional background or with considerable business experience and usually without a criminal past. These laundrymen contract out their services at a commission rate which varies between 4 and 20 per cent of the gross sum laundered: it is also common for an up-front fee to be levied, of around £25,000 for every £1 million.
The laundromat is a three-phase operation. The first, known as ‘placement’, is the hardest and involves getting the money into the financial system. Usually, placement is achieved by making comparatively small cash deposits in a wide range of banks, often in a number of different international locations so as not to arouse suspicion, and by purchasing bankers’ drafts, bonds, cheques or travellers’ cheques with cash. Each operative is known as a ‘smurf’, a term invented by Florida investigators. The diversification process is known as ‘smurfing’ because one needs an army of ‘little people’ to carry it out – like the cartoon characters, the Smurfs.
The drugs trade is cash intensive: most transactions from farmer through to addict are conducted in cash. Some money is ‘pre-washed’ by passing it through the international art, antiques and antiquities trade, travel agencies, gold dealerships (especially in the Far East and South Africa) and general import/export firms.
Fronts, both legitimate firms and shell companies, are used to transfer money between banks. They are, in effect, underground banks themselves. Dirty money is paid into one and, within hours of it being banked, it is available anywhere else in the world. Although commodity markets are enlisted as laundries, their huge hourly international cash flows providing a very good cover, shell companies are more commonly used, providing imaginary services or selling imaginary merchandise. Ready cash is also transported in bulk by traffickers and there are couriers in the business who never carry heroin but cash. The amount of cash involved can be staggering. In February 1995, a couple was arrested by Spanish police near Marbella following a routine drugs enquiry. Their apartment was found to contain over £50 million’s worth of foreign currency in sacks.
The second phase is called ‘layering’, which creates a confusing banking paper-chase. Once in the world banking system, the small deposits are shifted from bank to bank and country to country, stopping in each only a little while to avoid detection and sometimes being consolidated on the way.
The last phase is ‘integration’, by which the now heavily disguised money is returned to the legitimate world by investment in legal businesses, property, stocks and bonds. The money is now laundered. The size of the laundry business may be guessed at when one considers it has been estimated that at least 25 per cent of all Hong Kong commercial property investment is based in part or totally upon laundered finance.
Drugs enforcement agencies have long been aware one of the most effective ways to attack traffickers and producers is to hit them in their wallets and a variety of measures have been es
tablished.
The US RICO statute, by which courts could confiscate assets acquired through criminal activity, was effective but had a number of loopholes which were addressed in 1986 by the Money Laundering Control Act, which made money laundering a federal offence when carried out in conjunction with other illegal activities. Even this was not legally water-tight so, in 1990, the Depository Institution Money Laundering Amendment Act was ratified, placing the responsibility of reporting laundering transactions on banks’ directors. A transaction reporting system was also introduced whereby cash deals exceeding $10,000 have to be notified.
The laws, allied to the DEA Kingpin strategy, produced results. In just one fiscal year (1992), the DEA seized assets within the USA to the value of $857.3 million: overseas, it aided in confiscating another $53.4 million.
In Britain, the Drugs Trafficking Offences Act of 1986 provides for the freezing of assets with confiscation upon conviction. As the act makes it an offence to aid and abet a trafficker, it is also illegal to handle, hold, invest or otherwise dispose of drug-related money. Nevertheless, the law is not as strong as its American equivalent because of the complexities involved in tracing and liquidating drug dealers’ assets and the inadequate expertise of British enforcement agencies. There is also a flaw in the system for British bank officials only have to report cash transactions if they are considered ‘suspicious’ which depends too much on personal integrity and is open to wide interpretation. Of 4500 seizures made to 1994, involving over £42 million, less than £14 million was actually confiscated. Another anomaly is that, in America, all seizures are ploughed back into anti-narcotics work whilst in Britain any money gained is merely added to the general exchequer, reducing law enforcement agents’ morale and incentive. The final move in Britain is the Criminal Justice (International Co-operation) Act (1991) which has given customs officers the power to seize cash from travellers suspected of trafficking.
A good many other countries have followed America’s example. Australia introduced money laundering and conspiracy legislation in 1987. Hong Kong, the origin of so much heroin and the world’s densest banking district, has its Drug Trafficking (Recovery of Proceeds) Ordinance (1989). Since the introduction of this ordinance, assets totalling over HK$16 million have been confiscated from local drug traffickers in Hong Kong, with a further HK$185 million owned by them being sequestered from overseas sources with international co-operation. Thailand, Malaysia, Singapore, South Korea, Japan and most European Union countries have followed suit with similar legislation although the efficacy of it has yet to be thoroughly tested over time and there are sure to be weaknesses.
The Declaration of Basle, signed in 1988, is a commitment by the central banks of a dozen major industrial countries to identify money laundering and laundrymen. The same year, the Vienna Convention organised by the United Nations proposed money laundering become an internationally indictable and extraditable crime. Eighty countries, but less than half the UN member states, agreed in principle but the Convention was a repetition of history. Just as had occurred when international moves were being made against opium, a number refused to sign and, by 1992, only four had actually put their signatures to the paperwork. Countries with interests in particularly secretive or offshore banking chose not to take part. Amongst these were Liechtenstein, the Cayman Islands, Luxembourg and the Dutch Antilles (all offshore banking bases), along with Panama (also filled with offshore banks and an important cocaine and potential future major heroin transit point), Uruguay, Pakistan (a major producer), Russia, Hungary and Bulgaria (all transit route countries or involved in money laundering).
Laundry legislation is easily evaded. When the Colombian authorities put a 10 per cent tax on imported cash, the cartels merely shifted their banking operations to Venezuela: when Venezuela brought in controls, banking was moved to Argentina. As throughout the history of opium, when one door closes, the traffickers open another.
Another means of washing ‘dirty’ money is to use non-bank-based services, such as money-changers, money transfer organisations like American Express or Western Union, credit-card firms and cheque-encashing companies. The former are much used by traffickers in Mexico, both Mexican and foreign. In every town along the US border there are casas de cambio – currency exchange companies. Like Mexican banks, they keep no records, Mexico has no cash transfer controls, no laws aimed at illegal profit-making and no asset seizure legislation. In short, Mexico is a laundryman’s paradise. A money laundering scheme uncovered by US Customs agents and the Department of Justice in late 1993 may implicate certain officials in the Mexican Attorney-General’s office. The Mexican cartels’ influence has spread to the total economy of the nation. Drug barons are using the country’s booming tourist industry to launder profits, a development of the laundry business which is growing fast across the world. Billions of dollars are laundered per annum by investing huge sums in beach resorts, financial markets, shopping malls and other commercial enterprises such as Punta Diamante, a resort in the Mexican state of Guerrero which many investigators believe is financed with drug money. The former Dutch colony of Aruba, a Caribbean island resort, is said to be entirely funded and owned by Sicilian mafia interests. Through such legitimate investments, the barons have become integrated into the fabric of society.
A favourite method of cleaning money is by passing it through a casino where it is impossible to prove how much cash a croupier handles during a gaming session. This method was much favoured by the Mafia who had and, to some extent, retain an interest in Las Vegas. Nevada’s casinos still being exempt from Federal Currency Transaction reporting makes them very valuable laundries. Although Vegas is still a favourite spot, Macau is even more so. Only 45 miles from Hong Kong and served by high-speed ferries every fifteen minutes, it is an ideal laundromat for over 80 per cent of its revenue comes from a massive gambling monopoly providing superb money-cleaning facilities. It is said up to $2 billion may be laundered monthly. In addition, there is a small but very active Russian gangster element now operating in the enclave. Quite what will happen here in 1997 and 1999, when Hong Kong and Macau respectively revert to Chinese sovereignty, remains to be seen.
Throughout the world, banks claim they have an obligatory client confidentiality responsibility. In truth, they have not. Many countries have removed it. However, lawyer/client confidentiality has not been addressed and civil liberties groups are against the undermining of this right. Therefore, lawyers often hold funds for their trafficker clients, hiding them under the cloak of privileged information.
Laundrymen are always on the look-out for private bankers, secretive financial institutions, countries which turn a blind eye to financial transaction or which might even encourage the importation of ‘dirty’ money. The former Yugoslavia, for example, contains a number of private banks which offer higher than average interest rates on hard currency deposits. A number of these are secretively owned by prominent Serbian politicians who used profits from laundered heroin money to fund the war against the Bosnian Muslims who, without such financial backing, were comparatively ill-equipped. The private banks laundered their money through shell companies in Austria, regardless of the UN-imposed sanctions against Serbia: with sanctions lifted it will no doubt be business as usual.
Provision exists in Pakistan to hit heroin traders hard. The Forfeiture of Assets Act (1985) allows for confiscation of property and money. However, banks in Pakistan readily take in huge deposits without question, the financial sector protected by a presidential decree (instigated by President Zia) guaranteeing secrecy. Billions of dollars have flowed through Pakistan since the decree with an underground, highly secretive private bank network existing with ‘offices’ in Kashmir, the Punjab and London which handles heroin finances coming out of Pakistan.
Former Eastern bloc countries, where hard currency is much sought after, are also now awash with dirty money. Banks, ungoverned by restrictions, readily accept foreign currency without demur. Colombian and Turkish drug
barons frequently bank in Bucharest and Sofia, though where the latter is concerned, this is of course not new.
American criticism of international banking is loud and pointed. The US State Department has openly attacked the Bahamas for laundering cocaine and marijuana money, Panama for cocaine finances and Hong Kong for being the Pacific Rim centre of Golden Triangle heroin profit washing. Yet, despite their indignation, the USA does not have a squeaky clean record in this field of activity. The CIA has admitted involvement with a money laundry known as the Shakarchi Trading Company which had handled both Kintex and Globus transactions as well as acting for the Mafia in Sicily. The owner of the company, Mohammed Shakarchi, declared his firm had cleaned $25 million for the CIA between 1981 and 1988, which was used to support Mujaheddin insurgents fighting the Russian occupation army in Afghanistan.