Banks, businesses central to money laundering but mostly ignored by Texas law enforcement

After British banking giant HSBC was called on the carpet by Congress for alleged money laundering this summer, two American banks which received among the largest bailouts from the federal government back in 2008 - Bank of America and J.P. Morgan - are under investigation regarding similar allegations, reported the New York Times on Friday:

The surge in investigations, compliance experts say, is coming now because authorities were previously inundated with problems stemming from the 2008 financial turmoil. “These issues may have been put on hold during the financial crisis, and now regulators can go back to focus on money-laundering and other compliance problems,” said Alma M. Angotti, a director at Navigant, a consulting firm that advises banks on complying with anti-money-laundering rules. 

Until now, investigators have primarily focused on financial transactions at European banks, most recently Standard Chartered. The authorities accused several foreign banks of flouting American law by transferring billions of dollars on behalf of sanctioned nations. 

As the investigation shifts to American shores, the Justice Department and the Manhattan district attorney’s office are moving beyond those violations to focus on money-laundering, in which criminals around the globe try to hide illicit funds in United States bank accounts. If these new cases follow the pattern of previous ones, prosecutors could follow up on regulatory actions with their own complaints.

Readers may recall that another bailout recipient, Wells Fargo (through their now-defunct subsidiary Wachovia), was alleged along with Bank of America as having been involved in laundering money for Mexican drug cartels back in 2010. Another banking giant which received an enormous bailout in 2008, Citigroup, earlier this year was also cited for lax oversight in this area, reported the Times:

In April, the regulator issued a cease-and-desist order against Citigroup for gaps in its oversight of cash transactions. The order cited “internal control weaknesses including the incomplete identification of high-risk customers in multiple areas of the bank.” A person close to the bank attributed part of the problem to an accident when a computer was unplugged from anti-money-laundering systems.

Citi did not admit or deny wrongdoing, but said in April that it had already undertaken many of the reforms required.

So now the four US banks which received the largest federal bailouts - $25 billion each for Wells Fargo,  J.P. Morgan, and Citigroup, and $15 billion for Bank of America - have all been implicated in alleged money laundering activities.

Indeed, one of the reasons such investigations were likely "put on hold" during the 2008 banking crisis, as the Times put it, is that, according to the United Nations Office on Drugs and Crime, during that period laundered drug money was one of the few remaining sources of liquidity for global banks. Reported the UK Guardian in 2009, "Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were 'the only liquid investment capital' available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result."

Back in April, the Texas Senate Criminal Justice Committee held a hearing on money laundering, which Grits finally listened to online yesterday after reading these latest news stories. But if one were to judge from law enforcement testimony at that hearing, you'd never think banks were remotely involved in the practice. Instead, their focus was almost exclusively on bulk smuggling of cash, which DPS Col. Steve McCraw claimed is the number one technique of the six major cartels operating in Texas for repatriating funds to Mexico. However, even from testimony provided at that hearing, to this writer it didn't seem credible that that's the main method. After all, the cartels need to exchange bulk cash for Mexican pesos (usually), and for that it needs to be laundered.

While DPS focuses mainly on seizures by troopers, said McCraw, David Maxwell, deputy director of law enforcement at the Attorney General's office and a former Texas Ranger, told the committee their office has just 11 investigators who "concentrate on the financial end of it," but "that is miniscule compared to the overall scope of the problem," which he called "just amazing." Huge sums of money he said, are siphoned through front companies, citing one investigation alone where more than 100 corporations linked back to a cartel.

Maxwell said the main trigger for financial investigations are "SARs," or Suspicious Activity Reports. There were 70-90,000 SARs in Texas last year, he said, and out of those approximately 130 people were prosecuted statewide. In addition, he said, businesses must report on IRS form 8300 if they take in cash $10,000 or greater, but he admitted that nobody seriously investigated cash deposits below that threshold.

State Sen. Juan "Chuy" Hinojosa questioned Maxwell whether that omission left out a wide swath of money laundering activity: "I see businesses, for example, in the Valley that we know they are not making a profit but they take in a lot of cash and then they report it and pay their taxes or whatever." (Viewers of the hit TV show Breaking Bad will recognize this model from Walter White's car wash.) Maxwell said that unless deposits exceed $10,000, or someone reports the illicit activity of their own volition, those types of transactions are seldom prosecuted.

Indeed, all the suggestions offered for improving anti-money laundering enforcement at the Texas hearing in April focused on the lowest folks on the cartel totem pole - so-called "mules" carrying bulk cash, often for as little as a 1% fee. Justin Wood of the Harris County District Attorney's office said that most cases they prosecute involve small-time mules at airports or bus stations. Practically speaking, he said, when someone is detained with large sums of cash, they are questioned and hopefully they admit it. Otherwise, in many cases, without an admission, their "hands are tied." Often mules are chosen because they have no history of drug involvement. And even if drug dog alerts on the cash, he said, there's research that says there is drug residue on much of the money in your wallet. Law enforcement can still seize the money, he said, but often can't prosecute without an overt admission.

His solution: Reduce the level of mens rea - or criminal intent - that prosecutors are required to prove in bulk seizure cases. Wood wanted to change the "intent element" in such cases to include a "duty to inquire." State Sen. Glenn Hegar asked what good it would do to prosecute mules, who Wood admitted are typically extremely poor and very "low on the totem pole." Even if such individuals had a duty to inquire, said Hegar, they likely wouldn't be cognizant of it. "You're probably right," Wood replied.

Houston PD narcotics detective Martin Skeen granted that his department focused mainly on bulk cash instead of commercial money laundering, but considered it justified because "We not only fund our own initiatives, we actually make a profit." For every dollar spent on interdiction activities, he said, they seize $2-3. However, he admitted, the people they deal with are typically lowest link in the food chain, often smuggling $50K in cash for just $500, he said.

Over the years, I've come to view this focus by law enforcement on bulk cash smuggling as all but willfully ignoring the larger problem, which of necessity given the vast sums involved must implicate multinational banks and businesses. Impoverished mules, who as Sen. Whitmire noted can be "replaced overnight," make relatively easy targets compared to bankers with a cavalcade of attorneys at their beck and call. And as Skeen noted, focusing on such low hanging fruit generates "profit" whereas marshaling resources to go after well-heeled banks and businesses has a higher cost-benefit ratio for law enforcement from a funding perspective.

Also, just as with the banks during the financial crisis, focusing on money laundering at businesses would risk harming the state economy, whereas seizing bulk cash transfers has fewer domestic economic implications. If a cartel front company buys a crate of tomatoes in the Rio Grande Valley, for example (or really, any commodity), and resells them in Mexico, that generates income for Texas businesses, taxes for the government, etc.. I've often wondered if the failure to more aggressively pursue such activities doesn't stem mainly from a desire not to kill the goose laying golden eggs.