Online money laundering: Tricks of the trade

Via the MIT Technology Review, I was interested to run across this United Nations analysis (pdf) of online money laundering. Some of these methods I'd heard of - including the use of export goods and employment forums to launder drug money -  but the manipulation of multiplayer online gaming communities Grits had admittedly never considered. Here's a notable excerpt from the MIT Tech Review:

A common approach until recently was to use the Costa Rican digital currency service called Liberty Reserve. This converted dollars or Euros into a digital currency called Liberty Reserve dollars or Liberty Reserve Euros, which could then be sent and received anonymously — one of the few services to allow this. The receiver can then convert the Liberty Reserve currency back into cash for a small fee.

In May this year, however, the US authorities shut down the service and charged its founder and various others with money laundering.

But Richet says the closure of Liberty Reserve is unlikely to end these practices because there so many alternatives. These include WebMoney, Bitcoins, Paymer, PerfectMoney and so on.

Another increasingly common way of laundering money is to use online gaming. In a growing number of online games, it is possible to convert money from the real world into virtual goods services or cash that can later be converted back into the real thing.  “Popular games for this type of scam include Second Life and World of Warcraft,” says Richet.

Then there are the money mule scams. Most people will be familiar with the spam in which a high level official from a developing country asks your help to transfer significant amounts of money and are prepared to pay well for your services. But first, they require your banking details which they promptly use to empty your account and then disappear.

In a growing number of cases, however, the criminals do actually transfer large amounts of money into your account and then ask you to forward it. However, since this involves stolen funds that are being laundered, you are accountable for the crime.

Another scam is to offer people jobs in which they can make a substantial income working from home. However, the ‘job’ involves accepting money transfers into their accounts and then passing these funds on to an account set up by the employer. In other words, money laundering!

For those with any professional interest in the subject, the full 19-page report (pdf) is worth a read.

'Cameron County to crack down on money laundering'

The title of this post is the headline of a Sept. 9th story at ValleyCentral.com announcing the receipt of a multi-agency grant for a special money laundering unit. Reported Ashly Custer of Action 4 News:

The DA's office, Brownsville Police and Harlingen PD received over $2.2 million in August from the Southwest Border Anti-Money-Laundering Alliance to specifically combat money laundering across the US - Mexico border.

The money will be used to jumpstart a new taskforce in Cameron County called the Financial Asset Seizure Team or FAST.

“The old method was just cold hard cash surreptitiously being taken back to Mexico. Obviously with the law enforcement as keen as it is, they were apprehending a lot of those loads going south. So they figured out a different way to do I, that’s with money cards, other related matters -- money order, money transfers, and the like,” said Cameron County District Attorney Saenz.

While grant money will be used to activate the taskforce, money seized as a result of illegal smuggling investigations is what will fund it.

That means FAST will operate without additional costs to the taxpayer.

The team will consist of 19 members who will work alongside federal partners like the U.S. Department of Homeland Security and the DEA.

Mixed feelings: On one hand, the "eat what you kill" funding structure where supposedly the task force will operate "without costs to taxpayers" because of seizures amounts to wishful thinking, at best. None of Texas regional drug task forces - including those along the border - could survive under that model. And that approach forces them to focus more on intercepting short-term money transports, which fails to get at the money laundered through local businesses or purchase of legitimate Mexican commodities like fruits and vegetables, etc..

OTOH, as Grits has previously noted, Texas law enforcement barely focuses on money  laundering beyond this constant search for south-bound mules carrying cash that will get them some quick forfeiture income. If Cameron County's new task force focuses on actual money laundering by banks and businesses in the Valley, and does it in a serious, concerted way, that could get interesting pretty quickly. From the press account it sounds like they'll be pleased as punch to chase mules, thank you, but you never know.

Reforming state jails, prosecution as grant management, and other stories

Just a few odds and ends that didn't make it into their own, individual posts:

Narcotics task force cops robbed drug dealers instead of arrest them
Reported the McAllen Monitor, "Two Mission narcotics investigators have been arrested alongside other local law enforcement officers in a federal corruption probe focusing on drug loads stolen from the criminals they had been tasked with taking down." The alleged perpetrators were part of "a joint drug task force made up of Hidalgo County and Mission officers." Long-time readers may recall that multi-county task forces were placed under jurisdiction of the Department of Public Safety back in 2005, with most of them going under within a year, either because they refused DPS supervision or, the rest of them, when Gov. Perry pulled the plug on their funding. But some multi-agency task forces soon formed among agencies all within the same county, as in this example, and clearly some of the same problems still arise. See more on the latest episode from Texas Watchdog.

Conservative plan for reforming state jails
The Texas Public Policy Foundation's Jeanette Moll argued in an Austin Statesman editorial that Texas hamstrung the state jail system "before the first state jail even opened its doors" by implementing direct sentencing instead of using them as a short-term probation sanction. She suggested that, "With hundreds of millions of dollars spent each year on state jails, and outcomes worse than prison, state jails are in dire need of reform." (See related Grits coverage on Ms. Moll's proposals.)

'Texas DPS marks 10,000th match in open cases'
So reported the Texas Tribune. The looming question: Will the Legislature spend money to expand DNA testing capacity at Texas crime labs, not to mention DWI blood testing and other areas where crime labs have backlogs.

Just say "No" to sobriety checkpoints
The Fort Worth Star-Telegram asks "Should Texas have sobriety checkpoints?" For reasons previously stated, Grits votes no.

Strong probation for meth-head driver who hit cyclist
A round of apology letters, an 18-month ban on coaching youth sports teams, and $8,000 in restitution are among "unique" probation conditions for a meth-using driver who struck a stopped motorcycllist from behind in Weatherford.

His only apology is for apologizing
The Waco Tribune interviewed former county tax assessor Buddy Skeen who's currently in jail for misuse of public funds and regrets agreeing to apologize for his actions in open court as a condition of his plea. "I wasn’t punished for my crime. I was punished for my political affiliation."

School discipline roundup

The Texas Education Report has updates on the controversy over RFID use in two San Antonio schools (see related Grits coverage), a report on the hundreds of millions spent by large school districts on disciplinary systems, and another report on a pilot program at Waco ISD aiming to reduce disciplinary referrals, a subject that's lately received national attention. See a related, recent report from the Texas Criminal Justice Coalition titled, "Community Solutions for Youth in Trouble."

Girls' experience in the juvenile justice system
See the Texas Criminal Justice Coalition's recent report.

Prosecution as grant management?
Is there seemingly no failure in public life which cannot be criminally prosecuted?

Peach state criminal justice reform?
Watch what Georgia does on scaling back criminal justice spending. If it can pass in the Peach State, it's got a chance in the Texas Lege.

Private Prison Exec a Grade A Creep
Thomas Weirdsma, the senior vice president of project development at private prison company GEO Group, in my book is a Grad A creep. He's been taking heat lately for a video deposition in which he said that giving false testimony to government agencies "happens all the time." But the real scandal comes from evicting his immigrant daughter in law and allegedly threatening to use his immigration agency connections to have her deported if she pressed charges against his son after she endured "multiple drunken beatings, a near drowning in a bathtub, and an attempted suffocation with a pillow," the Boulder Daily Camera reported earlier this year. Ick! Awarding the daughter-in-law a $1.2 million verdict, jurors found that the Weirdesmas, father and son, each engaged in "outrageous conduct" during the episode, which sounds to me like an understatement.

Huge fine for HSBC money laundering
Finally, a serious punishment for an international bank for money laundering. I'd come to think banks and businesses had been declared effectively exempt from money laundering enforcement, so this is a good sign. A $1.9 billion fine will serve as an actual deterrent for a big company, as opposed to the relatively penny ante "deferred prosecution" cases we've seen in the past. Some despair, though, that no executives are ever personally prosecuted in money laundering cases; particularly at banks like HSBC they're considered "too big to jail." MORE: From Paul Kennedy and Scott Greenfield.

Harsh CIA interrogations ineffective
So concluded the most extensive-ever analysis on the topic, though it's a conclusion I once thought professional interrogators had reached many decades ago following the Wickersham Commission.

Criminal corporations: Prof argues 'corporate criminal liability is a question of corporate power'

The US Supreme Court's Citizens United ruling, famously echoed by GOP presidential candidate Mitt Romney, held that corporations are people (and thus possess free speech rights). But that hasn't stopped some in academic and corporate circles from maintaining that corporations should be exempt from criminal law. This author, for example, in 2009 compared criminal punishment of corporations to punishing animals or inanimate objects (likening it to a biblical practice archaically referred to as "deodand"). Others argue criminal law should focus on the individuals engaged in misconduct instead of punishing a "legal fiction." But the Corporate Crime Reporter alerts us to a rebuttal to such views in a story which opens:

The question of corporate criminal liability is a question of corporate power.

That’s according to Charles R.P. Pouncy, a professor of law at Florida International School of Law in Miami. Pouncy is author of, most recently, Reevaluating Corporate Criminal Responsibility: It’s All About Corporate Power (Stetson Law Review, 2012).

Pouncy tackles head on the increasingly popular idea that we should eliminate corporate criminal liability.

“The notion that corporations, and derivatively, capital, should be exempt from punishment under the criminal law — which expresses societal standards and expectations — is inconsistent with the expectations of most members of the communities that corporations inhabit,” he writes.

“This challenge against using the criminal law to control corporate behavior is a component of a larger struggle . . .to determine which forces will control the shape of future society,” he writes. “It is a struggle about which institutions will structure the nature of the world we live in.”

“Will human societies be controlled by the institutions that have structured their existence for the last few thousand years —  kinship, community, religion/philosophy, and social provisioning?” Pouncy asks. “Or will economic institutions, specifically the institutions of the corporation and capital, dominate society and subordinate its human members to the interests of its artificial citizens and their advocates?”

“The question of the corporation’s and capital’s accountability to the criminal law is one of the frontlines in determining whether the . . . principles organizing human societies are designed to serve the interest of corporations or of people. Therefore, this question is central to whether human power will be supplanted by the power of artificial entities.”

I recall a humorous sign from one of the Occupy Wall Street rallies that declared, "I'll believe corporations are people when Texas executes one."

In truth, though corporations theoretically may be held criminally liable, in practice that itself a legal fiction. When companies are caught engaging in bribery or money laundering, for example, they're inevitably allowed to squeeze out from under criminal charges via civil penalties and financial settlements under "deferred plea agreements." Rarely if ever are the companies themselves or corporate officials who made such decisions held criminally responsible for such behavior. If corporations are people, though, why shouldn't they be subject to criminal sanctions?

Prof. Pouncy contends that, "money alone does not satisfy society’s need to condemn the behaviors it finds damaging to its interests," arguing that "the prospect of having to endure moral condemnation" under criminal law supplies greater deterrent. For my part, I think a) that the idea that corporations are people is BS and b) symbolic condemnation matters much less to corporations than financial liability. I'd rather see individual corporate decision makers held criminally responsible, with corporations punished through regulatory sanctions and civil liability. But in the wake of Citizens United, the personhood of corporations, however absurd, now has been enshrined as the law of the land. And if corporations are people, it follows they can be criminals.

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.

Global banks' role in money laundering probed, but mostly tolerated

A global bank awash in blood money from Mexico's drug wars was called on the carpet in Congress last week, but the episode only highlighted the relative futility of existing anti-money laundering efforts.

The Senate Homeland Security and Governmental Affairs Committee's Permanent Subcommittee on Investigations last week released a massive report (large pdf) on money laundering and held a hearing on the subject, highlighting in particular massive alleged money laundering at HSBC, a $2.5 trillion bank based n London with global affiliates including in Texas. Here's a press release from the subcommittee, here's the hearing page.

David Cohen, Undersecretary for Terrorism and Financial Intelligence, US Treasury Department (testimony here), told the subcommittee that, "by any estimate, the total amount of illicit money moved through and concealed within the U.S. financial system is massive—in the hundreds of billions"

"In one case, failure to effectively monitor foreign correspondent banking relationships with high-risk customers and file suspicious activity reports (SARs) resulted in the processing of $420 billion in cross-border financial transactions with thirteen high-risk Mexican casas de cambio from 2004-2007, through wire transfers, bulk cash and pouch and remote deposits, including millions of dollars subsequently used to purchase airplanes for narcotics traffickers." Said Cohen, "the United States government has instituted criminal fines and forfeitures totaling more than $4.6 billion in approximately 20 ... criminal prosecutions of financial institutions over the past 6 years."

Leigh Winchell, Assistant director of investigative programs, ICE (testimony here), updated the committee on a relatively new initiative based out of El Paso aimed at reducing bulk cash smuggling:

On August 11, 2009, [ICE] officially launched the National Bulk Cash Smuggling Center (BCSC), in cooperation with the El Paso Intelligence Center, as a 24/7 investigative support and operations facility. The BCSC has undertaken a full assessment of the bulk cash smuggling threat and developed a strategic plan to address the problem. By analyzing the movement of bulk cash as a systematic process, HSI develops enforcement operations specifically designed to combat the various methodologies currently employed by trafficking organizations. This targeted approach allows us to more efficiently and effectively utilize our interdiction and investigative resources.

Compared to the hundreds of billions being laundered, though, the bulk-cash center deals in small change: "Since its inception, the BCSC has initiated over 500 criminal investigations resulting in 132 seizures totaling $65.8 million. These investigations have culminated in 319 criminal arrests, 96 indictments, and 68 convictions in both Federal and state courts." The most significant federal effort against bulk cash smuggling, dubbed Operation Firewall, resulted in "6,700 seizures totaling more than $621 million, and arrests of over 1,400 individuals" over the last seen years - hardly a rounding error given the illegal drug industry's enormous gross revenue.

Winchell did mention a positive change in Mexican banking regulations:

One of the most significant developments in recent years was a change in Mexican banking regulations implemented in June 2010 that severely limits the amount of U.S. dollars that can be deposited within Mexican financial institutions. This change has ultimately proven to be a successful tool in combating drug trafficking and the TCOs that control the movement and smuggling of drugs by causing them to change how drug proceeds are laundered. We believe that as a result of this change, TCOs may seek to place these funds into U.S. financial institutions and then wire the proceeds back to Mexico.

So the new Mexican regs are expected to alter how money is laundered - perhaps routing the money through other countries - but nobody thinks it will prevent the practice. And of course, we must wait and see how rigorously those regulations are enforced.

Testimony of the Office of Comptroller of the Currency (see here) reminds us of charges of massive money laundering at Wachovia bank and gave a brief recap of the case. Wachovia paid $270 million in fines, penalties and forfeitures in 2010 after accepting more than $55 billion (with a "b") in laundered deposits.

The OCC found that Wachovia: (a) failed to implement adequate policies, procedures, or monitoring controls governing the repatriation of nearly $14 billion of U.S. dollar (USD) bulk cash for high risk casa de cambio (CDC) and other foreign correspondent customers; (b) failed to conduct monitoring of high volumes of monetary instruments flowing through the CDCs and other foreign correspondent accounts in the form of RDC products, consisting of nearly six million checks worth approximately $41 billion; (c) failed to conduct adequate levels of due diligence of high risk CDC and foreign correspondent customers; (d) failed to appropriately monitor traveler’s checks in a manner that was consistent with the bank’s policy limits over sequentially numbered traveler’s checks for high risk CDC customers; (e) failed to appropriately institute risk-based monitoring of the bank’s foreign correspondent customers, primarily as a result of placing too much emphasis on staffing considerations when setting alert parameters; (f) failed to file timely SARs involving suspicious transactions conducted through certain foreign correspondent accounts at the bank; and (g) failed to adequately report cash structuring activity from review of alerts generated in the bank’s Financial Intelligence Unit. After conducting a voluntary look back, the bank filed over 4,300 SARs involving suspicious transactions conducted through the bank by CDCs and high risk foreign correspondent customers.

Keep in mind that when banks launder money, they're not just clipping a small fee like the bulk-cash smuggler taking money to Mexico in a suitcase. Like other deposits, they're able to loan and invest that money as though it's their own. If Wachovia (which has since been purchased by Wells Fargo) earned greater than a one-half of one percent return on those illegal deposits, then they still made profit from the enterprise despite the fines and forfeitures. Such enforcement actions basically amount to an acceptable cost of doing business.

It was evidence from the Wachovia case, said the Comptroller, that led federal officials to begin investigating HSBC. Reported the UK Guardian, "HSBC continued to operate hundreds of accounts with suspected links to Mexican drug cartels, even after ... executives were told by regulators that HSBC was one of the worst banks for money laundering." The bank was singled out at the hearing not because they're the only ones engaging in such activities, but as a "case study." Who knows what's happening at other, similar institutions?

According to the report, "A senior HSBC executive told the Subcommittee that HSBC acquired its U.S. affiliate, not just to compete with other U.S. banks for U.S. clients, but primarily to provide a U.S. platform to its non-U.S. clients and to use its U.S. platform as a selling point to attract still more non-U.S. clients." In particular, HSBC bought a Mexican bank in 2002 which had virtually no anti-money laundering controls in place and treated it as a "low risk" affiliate until 2009. The bank does not closely apply anti-money laundering controls to transactions from countries with medium or low risk assessments.

Banking regulations enacted so far are inadequate to prevent the same thing from happening again. Said the subcommittee report, "the money laundering risks associated with correspondent banking have not been eliminated. Correspondent accounts continue to provide a gateway into the U.S. financial system, and wrongdoers continue to abuse that entryway."

It's worth mentioning that HSBC's compliance failures went beyond Mexico, Latin America and the drug trade. "From 2001 to 2007, HSBC affiliates sent almost 25,000 transactions involving Iran worth over $19 billion through HBUS and other US accounts, while concealing any link with Iran in 85 per cent of the transactions." The bank proactively deleted references to Iran from documents, presumably to conceal the transactions from regulators.

Like Wachovia before it, Grits suspects HSBC will receive a relative slap on the wrist, at most, probably as part of a deferred prosecution agreement which prevents individuals involved from being held accountable. So HSBC's shareholders take a minor hit, but that was more than made up for by profits made from illicit deposits and money transfers over the last decade.

Ironically, HSBC was one of the few global banks that did not experience a major liquidity crisis in 2008: Perhaps now we know why.

Investigate this: Export businesses play big role in cartel money laundering

Grits mentioned how pleased I was to see the Senate Criminal Justice Committee assigned money laundering as one of its interim charges (subjects they're assigned to study during the year between Texas' biennial sessions), and a Dec. 19 headline from the Los Angeles Times, "Cartels use legitimate trade to launder money, US, Mexico say," prompts me to suggest the committee consider focusing on the state's export sector as they investigate how money laundering occurs and what Texas-side facilitation the state might conceivably disrupt. This notable excerpt from the Times story captures the key mechanism to examine:

Here's one way it works: Instead of smuggling the money the old-fashioned way, by simply carrying it south in bags and trucks, teams of money launderers working for cartels use dollars to purchase a commodity, and then export the commodity to Mexico or Colombia. Paperwork is generated that gives a patina of propriety. Drug money is given the appearance of legitimate proceeds from a trade transaction.

By turning their mountain of proceeds into tomatoes, say, or bolts of Chinese fabric shipped and resold in Mexico, cartels accomplish two goals at once: They transfer earnings back home to pay bills and buy new drug supplies while converting dollars to pesos in a transaction relatively easy to explain to authorities.

The focus on goods exported to Mexico jumped out at me in particular because of another recent article, this one from Texas Monthly, on the causes of Texas' economic "miracle" which included this notable tidbit: "Of the $207 billion worth of goods Texas exported in 2010, more than a third were sold to Mexico, which adds up to an amount three times greater than those of our fellow border states (California, Arizona, and New Mexico) combined."

So exporting goods to Mexico is a key money laundering technique and Texas leads the other border states, by a wide margin, in exports to Mexico. In fact, Texas exports more, by dollar amount, than any other state.

For my part, I doubt that's a complete coincidence. Over the summer, Grits published a post titled, "The real secret behind Texas' economic boom: Drug trafficking." If I had it to do over I'd have put a question mark on the end of that title, since Texas' economic success is caused by a confluence of factors. But my main argument stands: That Texas' role as a drug distribution and money laundering hub funneled billions of dollars into the economy over the last decade, much of which propped up "legitimate" businesses laundering money for cartels. As I wrote then:

Not just cartels but also mid-level distributors set up front companies that lose money as a practical matter but serve as vehicles through which they can launder drug cash, making it a lot easier to distribute either back to Mexico or to other stakeholders in the US. This is happening today on a fairly widespread basis and it means a lot more marginal businesses stay afloat - how many, no one can tell - to perform what amount to retail-level money laundering functions.

Adding the Times' analysis into the mix, it's a small leap to guess that many Texas businesses propped up by drug money are likely in the export business. As it turns out, reports the Times, dollars are harder to spend in Mexico these days than in the past, and cartels have a pressing need need to convert their holdings to pesos, for a variety of reasons discussed in the story. So bringing dollar bills across the border in a suitcase isn't good enough anymore. Thus the increased reliance on the export trade.

Examining the details arising from criminal cases is probably the best way to study how money laundering is occurring on the ground, and a significant number of those involve export businesses. Of all the examples I've heard of, though, one recent export-based money laundering scheme stands out above all others in Texas centered around the federal Ex-Im Bank. The story was well-covered for a time back in 2007 by reporter Byron Harris at WFAA in Dallas (but hardly anyone else) and Grits has written about it extensively. But somehow it never got traction the way Fast and Furious did; there were no Congressional hearings to investigate, and the people involved not only didn't lose their jobs but got promoted, while "reforms" resulted in only "voluntary guidelines" for lenders that did not forbid the same practices in the future. (Selling guns to cartels makes bigger ruckus, for whatever reason, than the government making nine-figure loans to drug runners that we never collect, or the DEA conspiring to launder their profits.)

The Ex-Im Bank is a federal agency that gives loans to businesses, including foreign companies, to purchase US exports. They made hundreds of millions in bad loans to Mexican companies during the Bush Administration, many of which went to non-existent front companies or outfits associated with drug cartels. Soon after the problems were discovered, and papered over, ironically, the chair of the Ex-Im Bank was named chief investment officer of the TARP fund that bailed out Wall Street. I'm only aware of one criminal prosecution stemming from the episode - a federal money laundering case (pdf) out of San Antonio that has now had time to play out.

To seriously tackle money laundering, then, the focus perhaps shouldn't be as much on suitcases of cash crossing checkpoints - a tactic that's already relatively well policed and less optimal for drug cartel liquidity - so much as crates of cargo leaving DFW Airport or in ships from the Port of Houston. Unlike investigations into drug smuggling, the Texas-side targets in money laundering schemes are more likely members of the local Chamber of Commerce, or else perhaps corporate or government bureaucrats, than tattooed gangbangers..

But will a "less government" Legislature be willing to proscribe, regulate or criminalize activities of seemingly legitimate export businesses, only a fraction of which engage in money laundering, in order to get to the bad eggs? For that matter, can a state regulate exports sufficiently to make a dent in the problem, or is that more properly and practically a federal role? Which reaches the even larger question: Besides southbound checkpoints aimed at seizing cash, what is the state role in investigation and prosecution of transnational money laundering? What can Texas do that the feds can't, or aren't doing? I suppose that's what the Senate Criminal Justice Committee will be discussing at the hearing on their interim charge.

Money laundering added to Criminal Justice Committee charges

The Lt. Governor is leaking out the Texas Senate's interim charges in dribs and drabs, but the Criminal Justice Committee picked up one recently (pdf) that sounds like it will lead to an interesting and informative hearing: "Review statutes and regulations relating to money laundering to enhance state, federal, and local efforts to combat money laundering and enforce administrative and criminal actions against perpetrators of money laundering." Looking forward to that discussion.

In addition, the Transportation and Homeland Security Committee will: "Examine the impact of border violence and illegal trafficking on the Texas economy, including the infringement on Texas property rights. Make recommendations for enhancing Border security and maximizing federal resources targeted for this purpose."

Relatedly, the Criminal Justice Committee received a charge in conjunction with a "Joint Interim Committee to Study Human Trafficking" to examine services and supports available to sex trafficking victims, "including analysis of the appropriate criminal penalties associated with prostitution." That could be an interesting discussion as well.

Anatomy of a sweet smelling cartel money laundering front

Earlier this year, Grits argued in a post both lauded and criticized that money laundering of drug profits artificially boosted Texas' economy by propping up seemingly legitimate front businesses, contributing to the so-called Texas economic "miracle." The Texas Tribune's Julian Aguilar has an excellent feature describing one such company - a Laredo-based perfumeria, of all things - exemplifying that dynamic.

Photo by the Texas Tribune's Jennifer Whitney

The real secret behind Texas' economic boom: Drug trafficking

Brilliant observation, and true: What's the secret ingredient to Texas' much-ballyhooed job creation boom that you'll never hear from Rick Perry on the presidential campaign stump? Drug Trafficking, says Joe Tone at the Dallas Observer's Unfair Park blog, offering this quote first reported by Tina Rosenberg in New York magazine:

Jack Schumacher, a recently retired Texas-based DEA agent, says that at least half the drug shipments coming from Mexico stop and offload in Texas. The product is repackaged in small units and resold at a considerable markup, with a share of the gross staying in the state. Even some of the money that gets expatriated to Mexico winds up back in Texas, laundered through Mexican currency exchanges. The state's relative security is the draw. "If you have a few million," says Schumacher, "would you invest in a war zone or a bank in San Antonio?" The DEA warns that traffickers are cleaning up their proceeds by buying businesses in South Texas. They also spend on guns, warehouses, security guards--and on luxury cars and houses. "In San Antonio, a high-dollar trafficker can buy a $2 million or $3 million place and exist for a long time," he adds.

Further, adds Rosenberg:

Mexicans in Texas are hardly new, but in recent years it’s middle- and ­upper-class families in Mexico’s north who have also made the exodus, bringing their savings and businesses with them. While most seem to be fleeing the kidnapping and extortion back home, one observer has a different take: “Some people, including me, suspect that some of these people come with funds from the drug trade,” says Michael Lauderdale, a professor of criminal justice at the ­University of Texas.

After all, picking up your money on the Texas side means avoiding the border checkpoints and customs officials altogether. The US-side infrastructure of drug cartels is a subject that seems almost willfully ignored by policymakers and the media. The Texas Department of Public Safety has maintained for years that "command and control" of much so-called Mexican cartel activity is actually on the US side of the border, and so is much of their money. Not just cartels but also mid-level distributors set up front companies that lose money as a practical matter but serve as vehicles through which they can launder drug cash, making it a lot easier to distribute either back to Mexico or to other stakeholders in the US. This is happening today on a fairly widespread basis and it means a lot more marginal businesses stay afloat - how many, no one can tell - to perform what amount to retail-level money laundering functions.

Then there's just the fact that rich people spend more money, including Mexican cartel thugs and others getting rich from drug money. Tone adds that "Last week's drug bust demonstrated some of that on a smaller scale. Dealers in Fort Worth ran a body shop with the proceeds, owned several homes and dumped truckloads of cash into their local bank (in just-low-enough amounts not to attract suspicion). Dallas's kingpins kept multiple residences, rented a storage space and, presumably, shoveled down copious tacos after doing hand-to-hands in the Lupita's parking lot."

It requires almost nothing to create a legal business structure in Texas - pay $15 for a DBA at the county courthouse and you can open a bank account and start to make cash deposits. Apply for a federal tax ID number and you can put employees on the payroll. Setting up a corporation requires only slightly more paperwork. Multiply that process by hundreds or even thousands of businesses backed by billions in liquid cartel capital, and it's no wonder the state's economy looks so much better than the rest of the country's.

There's an ironic sense in which it's a good thing for Texas' economy that "winning" the drug war is a senselessly impossible task - at least banking solely on a prohibitionist law-enforcement strategy. If it were ever actually possible to eliminate the flow of illegal drugs, our state economy would be like the dog who caught the car - lucky if not dead, much-disfigured, and walking forward into the future with a permanent limp.

Southbound checkpoints won't catch banks laundering drug funds

Regular readers know Texas legislators hope to raise revenue through asset forfeiture from money seized at proposed southbound checkpoints, but that assumes most drug money is being transported in cash south of the border. In fact, law enforcement pursuing drug money arguably would do better to focus on Wall Street banks than low-level couriers on the highway. The Guardian (UK) has an extensive article on a story Grits was focused on 3-4 years ago regarding money laundering for drug cartels through some of the largest banks in the nation. The Guardian article hones in on activities at Wachovia, which was later acquired by banking giant Wells Fargo, noting that "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." The consequence? "[T]he total fine was less than 2% of the bank's $12.3bn profit for 2009." Barely even a slap on the wrist.

I'd add that Wachovia wasn't the only major bank involved, by a longshot. Others implicated in the past include Israel Discount Bank of New York; Harris Bank in Chicago; and J.P. Morgan Chase. And it's not just private banks, either: Grits has described how the federal Ex-Im Bank gave loans to cartel figures; when the loans were discovered, new guidelines promulgated to stop the problem weren't made mandatory. Money laundering is one of those stories where, even among the most ardent drug warriors, the folks in power would mostly prefer that unpleasant truths never came out. It's much more politically comfortable to blame low-level couriers instead of high-level bank executives. But by doing so, law enforcement is likely ignoring the bulk of money laundering activities.

DeLay's three year sentence probably much shorter

Former Congressman Tom DeLay was sentenced to three years in state prison for money laundering yesterday by a Republican judge, who said he agreed with the jury that convicted him.

Doug Berman questioned whether three years was an unusually stiff sentence. However, according to parole attorney Bill Habern, "He will be eligible for parole in 4 mos 8 days. On top of that, do you really think TDCJ wants to deal with holding Tom DeLay? -- [they] certainly can't put him in general population."

Drug war runs on oceans of cash: A big fish swims free

I was amazed in 2007 when the Mexican police found more than $200 million in US currency linked to a drug cartel stacked up in the suburban Mexico City residece owned by a Chinese businessman living in New York, but I'm even more astonished to learn that American prosecutors don't want to pursue the case.

The cash was allegedly generated from selling raw materials to Mexican meth manufacturers, but the Dallas News speculated two years ago prosecution would be difficult because of the businessman's ties to high-level officials in the Mexican government.

Too often, it's hard not to feel like the big fish get off and the little fish get eaten when it comes to drug war prosecutions. In this case, it's possible the reasons have to do with some sort of official misconduct. AP reports that "In a hearing two months ago, the judge questioned whether the Justice Department has a pattern of mishandling evidence "

While the United States incarcerates hundreds of thousands of people on drug charges - tens of thousands in Texas - it's clear to me we're not really pursuing (at least successfully) the folks at the top of the food chain raking in the really big bucks from drug smuggling, as evidenced in this case.

How much are we talking about? In the big picture, $200 million was a drop in the bucket. I ran across some data this morning providing some big-picture estimates about the economic scope of the American black market in illicit drugs.

According to this source, cocaine sold in the United States has a 50-1 price markup compared to its origin countries, generating about $63 billion per year (American) in revenue for drug smugglers.

Amazingly, the market for drug enforcement is nearly as large as the market for drugs themselves. According to Harvard economist Jeffrey Miron estimated (pdf) last year that the United States spends $44.1 billion annually on drug enforcement at all levels - $30.3 billion of that is spent by state and local governments, he says, and another $13.8 billion by the feds.

By that count, Americans are spending more than $100 billion per year combined on drug demand and demand reduction. That's a massive sector of the economy dependent on the illegal drug trade. Of course, the folks making multi-billion dollar profits from drugs all live in the wealthiest neighborhoods like the one in Mexico City where they found all that cash. They don't usually get prosecuted, while the folks filling up prisons on drug charges typically come from poorest parts of town.

Ex-Im Bank chief who oversaw cartel loans now chief investment officer for bailout funds

Let's turn out attention to a national subject that's slightly off topic for Grits (and perhaps a little above my pay grade), but that I've thought deserved attention ever since I noticed a particularly odd connection regarding the much-ballyhooed Wall Street bailout and a story I've written about on Grits. According to Forbes:

The U.S. Treasury on Wednesday named U.S. Export-Import Bank chairman James Lambright as the interim chief investment officer of the Treasury's new Troubled Asset Relief Program, reversing a previous appointment.

The Ex-Im Bank came onto my radar screen last year after a Dallas TV news reporter discovered they were giving loans to Mexican cartel subsidiaries which then defaulted. I haven't paid much attention to multinational banking institutions since I was an economics major in college, but when most of the agency's defaulted loans in one country went to drug-cartel affiliated figures, you don't need an accounting degree to know something's wrong. According to WFAA-TV:

The federally funded Ex-Im Bank apparently backed loans to people affiliated with both cartels and the Mexican drug trade.

Under the Freedom of Information Act, News 8 asked for all documentation related to defaulted small business loans made to Mexico from 2002 to 2005. Although there were nearly 200 bad loans, so far, information on only 34 cases has been turned over.

But the bank did give a list of the defaulted loans and the names and addresses of the people who got them in Mexico.

"They have drug connections, which is very disheartening to think that the U.S. government is lending money to documented traffickers in the drug trade that are tied into the cartels in Mexico," said Phil Jordan, the former head of the El Paso Intelligence Center for the DEA and Border Patrol in El Paso.

Jordan ran background checks of the borrowers with two federal sources and found borrowers from Juarez and Sinaloa with criminal ties to money laundering, organized crime or drugs in Mexico. Jordan said he was surprised to find that the Ex-Im Bank didn't do similar checks before guaranteeing the loans.

Reporter Byron Harris was able to show that "Out of $243 million in the medium-sized loans the Ex-Im Bank backed in Mexico from 2003 through 2005, less than $25 million was ever repaid."
That's bad enough, but what disturbs me most (given that this is a guy we're putting in charge of handing out $700 billion in borrowed money like lollipops on Wall Street) is that the Ex-Im Bank under Lambright responded to the scandal by minimizing it, making few substantive changes, and issuing voluntary due-diligence suggestions instead of requiring more rigorous background checks. As I wrote when the guidelines came out:

the due diligence non-checklist itself doesn't go far enough: Suppliers and key financiers for loan applicants should also be checked in those databases before making loans to be sure that Ex-Im Bank money isn't falling into the hands of organized crime. It's pretty easy to form a company whose top officers come up clean, but who do business with much shadier characters if the "due diligence" delved just a little deeper.

Only one arrest has been made regarding shady Ex-Im Bank loans to Mexico, and it was a San Antonio businessman, not a loan recipient in Mexico or a bank employee who gave out hundreds of millions of taxpayer money to a bunch of drug cartel thugs.

For whatever reason (perhaps the presidential campaign had captured all their attention), the MSM never picked up Harris' story more widely, and Mr. Lambright's weak-kneed reaction to the scandal turned out to be enough to placate Congress and the media, or at least deflect its attention, for a time.

Lambright may be just the right guy for the job, but now that we've elevated the Ex-Im Bank chief to lead the bailout effort, I think it's time to revisit my suggestion last February that:

I'd like to see the Government Accounting Office or some independent auditor follow up on WFAA's revelations about Ex-Im Bank loans to drug cartels. Their self policing obviously is insufficient, and my guess is that Mr. Harris has only uncovered the tip of the iceberg.

Lambright's permissive approach, especially his issuance of voluntary guidelines to prevent loans to transnational crime gangs, doesn't give me a lot of confidence that the money allocated for the Wall Street bailout will be effectively policed.

See prior, related Grits posts:

• Who are the big American drug bosses? How about the Ex-Im Bank?
• Voluntary guidelines don't ensure Ex-Im Bank won't give more loans to drug cartels
• New Ex-Im Bank guidelines won't prevent loans to drug cartels
• Ex-Im Bank stonewalling media on weak, new anti-corruption guidelines
• Ex-Im Bank scandal looks like tip of corruption iceberg
• First arrest made involving fraudulent Ex-Im Bank loans

Has the 3rd Court of Appeals found a solution to the liquidity crisis?

Speaking of Judge Diane Henson and the Third Texas Court of Appeals, she spoke up recently to criticize her colleagues' decision in the Tom DeLay money laundering case - a ruling that's an almost caricatured, extremist example of appellate judges identifying the outcome they want, then crafting a contorted opinion to get that result.

In order to exonerate defendants in the Tom DeLay money laundering case, a three-judge panel (all Republicans, Henson is a Democrat) came to the conclusion that "money laundering" under Texas' law does not include transactions involving checks! I can't imagine that standard applied to any other type of money laundering, can you?

Now that I think of it, though, perhaps the judges hoped to solve the nation's raging liquidity crisis with this decision? It might work! Given the current credit crunch, perhaps if Texas excludes checks from its money laundering statutes it would encourage billions in new deposits from drug dealers around the planet into Texas banks and miraculously save the economy. I'm sure that was their intention, don't you think? ;)

SCOTUS: Just finding hidden cash not enough to justify asset seizure

It's a truism in Texas drug enforcement that dope runs north on the highways while money and guns flow south, so much so when the Department of Public Safety took over Texas' now-defunct drug task force system, they discovered some agencies were only working southbound lanes, ignoring the drug supply in hopes of making a big asset forfeiture score.

In case after case, courts have deemed simply finding large amounts of hidden, unexplained cash sufficient to justify state seizure, often when no associated crime is prosecuted. That should change, though, after the US Supreme Court just ruled in a Texas case this week that more investigation is required to justify asset seizures. Reports the Christian Science Monitor ("Harder task to nail money launderers," June 3):

Ruling against federal prosecutors in two cases on Monday, the high court reversed the conviction of a man caught with cash hidden in his car in Texas near the Mexican border, and the court refused to reinstate a money-laundering conviction in a case involving an illegal gambling operation in Indiana.

Both decisions hold potentially important implications for crime fighting. In both cases the justices rejected the Justice Department's expansive reading of the federal money-laundering statutes.

In the hidden cash case, the court ruled 9 to 0 that prosecutors had failed to prove their case when Humberto Fidel Regalado Cuellar was convicted of money laundering after authorities discovered $81,000 in a secret compartment in his car.

An appeals court upheld the conviction, but the Supreme Court on Monday reversed it.

Writing for the court, Justice Clarence Thomas said: "We agree with the petitioner that the government must demonstrate that the defendant did more than merely hide the money during its transport.

Uh, Clarence Thomas writing for the defense? Wow! That's the kind of ruling that makes you glad federal judges have lifetime appointments. Anyone worried about their political future would never make that determination, but SCOTUS supported it 9-0. (See a fuller discussion of the ruling at SCOTUSblog.)

The other ruling mentioned in the article might also have significant ripple effects if support for the majority weren't so shaky and disputed. SCOTUS ruled much more narrowly (4-1-4, with JP Stevens, the one, siding with Scalia's faction) that a law allowing seizures of "proceeds" from illegal gambling applied only to profits, but not payouts for winning bets or employee wages. Stevens and Alito cannot agree if the interpretation applies beyond gambling cases.

That's a good ruling in my view; it reduces incentives significantly for speculative forfeiture actions, making it more likely forfeiture decisions will be based on justice interests, not profit motives.

UPDATE: Scott Greenfield at Simple Justice says I misunderstood the implications of the ruling; they can still seize the cash, they just can't charge a defendant with money laundering for hiding it, he said. Check out his post.

First arrest made involving fraudulent Ex-Im Bank loans; Did money lent to boost trade wind up in hands of drug cartels?

Somehow I'd missed that the first arrest has been made in Texas regarding fraudulent Ex-Im Bank loans. Byron Harris at WFAA TV in Dallas in December reported that the federal agency gave loans to figures associated with Mexican drug cartels that were never repaid, but until now no arrests had been made. Here's a report from The Financial:

On May 1, 2008, the United States Attorney for the Western District of Texas (USAO) announced the arrest of Andrew M. Parker, owner of San Antonio Trade Group, Inc., on conspiracy, wire fraud, money laundering, false statements and tax charges.

The Bank said an indictment returned this week by a federal grand jury sitting in San Antonio, Tex. alleges that from February 2003 to November 2006, Parker schemed to defraud the Export-Import Bank of the United States (Ex-Im Bank) by stealing millions of dollars in loan proceeds obtained by Mexican business owners from private U.S. lenders and causing multi-million dollar losses to Ex-Im Bank, which guaranteed or insured those loans based on false applications and supporting documentation submitted by Parker. The indictment also charges Parker with defrauding lenders in transactions not insured or guaranteed by Ex-Im Bank.

The information which started the investigation was provided by Ex-Im Bank. Ex-Im Bank will continue to work closely with law enforcement authorities to combat attempts to steal from the taxpayer.

See also the press release from the US Attorney on the arrest (pdf). It's impossible to tell from available information whether this is one of the individuals identified by WFAA, but I'm glad to see the US Attorney investigating fraudulent loans by Ex-Im Bank. It's clear they're not willing to effectively police themselves.

I've long contended on Grits that money spent cleaning up corruption, whether among police or in the financial sector, generates much greater marginal return (i.e., a "bigger bang for the buck") in the short term than just spending money on guns and overtime. If Byron Harris' report was accurate, there's still more to do. WFAA alleged multiple loan recipients with connections to multiple, competing cartels received loans totaling $243 million, so one hopes this arrest marks the first volley by the US Attorney, not the last.

RELATED: From the SA Express News:

• SA exporter indicted for fraud
• Indicted Texas exporter tied to woman at bilked bank
• High roller will remain in jail

See also prior, related Grits posts:

• Who are the big American drug bosses? How about the Ex-Im Bank?
• Voluntary guidelines don't ensure Ex-Im Bank won't give more loans to drug cartels
• New Ex-Im Bank guidelines won't prevent loans to drug cartels
• Ex-Im Bank stonewalling media on weak, new anti-corruption guidelines
• Ex-Im Bank scandal looks like tip of corruption iceberg

What is money laundering? SCOTUS to rule whether merely concealing cash is the same as laundering it

A Texas case before the US Supreme Court last week, Cuellar v. US, in which SCOTUS will determine what activities the government must prove to charge someone with "money laundering," had its oral arguments this week before the Wise 9. The feds would like the term to be broadly interpreted to include merely concealing money, but some of the Justices weren't so sure. Reported DRCNet:

Cuellar was ... convicted of money laundering, but appealed, arguing that the simple act of concealing money did not constitute money laundering under the 1986 federal money laundering law. Under that law, it is a crime to take the profits from "some form of unlawful activity" out of the country while hiding or disguising its nature, location, source, ownership, or control. The question the court must decide is whether merely hiding the money is sufficient to support a money laundering conviction.

While the Justice Department argued that concealing money as part of a plan to illegally take it out of the country indeed constitutes money laundering under the 1986 law, several justices suggested that it was simply going too far.

"I don't know why they call this statute 'Laundering of Monetary Instruments,'" Justice Stephen Breyer commented, wondering aloud if it would make it a crime to walk across the border with a few dollars hidden in a shoe. "Why didn't they call it 'shoe hiding'?"

"On the government's theory, anyone who transports hidden money to get it out of the country, who drives the car, just the driver, is a money launderer," noted Justice Ruth Bader Ginsberg.

"No matter how you see it, this was precisely the conduct that Congress was getting at," assistant solicitor general Lisha Schertler told the court.

But Cuellar's attorney, Jerry Beard, told the court it should interpret the law to mean something more than merely hiding cash. "The statute does not criminalize concealing money's existence," Beard said. Instead, he argued, it requires that someone must seek to minimize the criminal nature of the funds. While Cuellar "may have in fact concealed money itself, he did not conceal the 'nature, source, location, ownership or control' of the unlawful proceeds," Beard argued.

Chief Justice John Roberts Jr. challenged Beard on whether Cuellar was attempting to conceal the money, but later seemed to be equally skeptical of the government's position. When Schertler suggested that putting money in a suitcase in the trunk of car could be evidence of a "design to conceal," Roberts retorted: "When I use a suitcase, I'm using it to carry my clothes, not to conceal them."

Justice John Paul Stevens added that the government's broad position seemed to make the whole concept of money laundering irrelevant. "Is this just a total wild goose chase?" he asked.

The federal money laundering statute, most often used against presumed drug traffickers, carries a maximum 20 year sentence and fines of up to $500,000. Nearly a thousand people were convicted under the statute in 2006. But if Monday's oral arguments are any guide, the Justice Department may soon have to actually prove money laundering to gain a money laundering conviction, not just that someone was hiding cash.

Chief Justice Roberts' retort to the state that his suitcase is for carrying his clothes, not concealing them, calls into question the whole tactic of trolling the highways looking for drug money couriers. If the driver exercises their right to remain silent, what evidence do you really have that hidden cash came from drugs?

Before Texas' Byrne-grant funded drug task forces were shut down, one of the bones of contention between the task forces and the Department of Public Safety was that DPS wanted officers to work roughly 50% of their time on either side of the road. You see, drugs run north, while money and guns run south, so the task forces preferred to only work the southbound lanes of the highway, hoping to maximize the benefit from any forfeiture of money they found, like in Mr. Cuellar's case.

The case before SCOTUS shows some police and prosecutors may be pushing the bounds of propriety, pursuing forfeiture cases when there's no discernible evidence the money is related to drug trafficking. Whatever SCOTUS does won't finally solve this complex problem, which in my opinion could be ripe for a legislative fix after SCOTUS rules on Cuellar.

The easiest solution could be only allowing asset forfeiture in cases where the defendant is finally convicted of a related crime. Until then, they would remain shielded by the presumption of innocence that protects us all. Asset forfeiture cases are civil proceedings, and not infrequently funds are seized even when prosecutors don't have enough evidence to convict the driver. Why not link the proceedings?

It doesn't seem unreasonable to require prosecutors to prove someone committed a crime before allowing the state to seize their money, does it?

Voluntary guidelines don't "ensure" Ex-Im Bank won't give more loans to drug cartels

According to the Sarbanes-Oxley Compliance Journal, the Ex-Im Bank's new "Know Your Customer" initiative - which Grits readers will recall was created after WFAA-TV reporter Byron Harris in Dallas revealed the agency had given loans to figures associated with drug cartels - will be "ensuring that Ex-Im Bank supports creditworthy and legitimate transactions."

The problem is, the Know Your Customer background checks that would notify authorities of drug-related loans aren't mandatory under the guidelines.

So how does that "ensure" anything? It's one thing to identify "best practices"; it's quite another to require them to be implemented before your loanmakers give taxpayers' money to criminal smuggling gangs.

I'd like to see the Government Accounting Office or some independent auditor follow up on WFAA's revelations about Ex-Im Bank loans to drug cartels. Their self policing obviously is insufficient, and my guess is that Mr. Harris has only uncovered the tip of the iceberg.

Lots of MSM coverage of multinational drug cartels

Since I've been posting a great deal recently on the Mexican border wars and multinational drug cartel activity, I wanted to point readers to some related recent MSM coverage:

• Hunting El Puma, The McAllen Monitor
• Mexico, US step up drug war cooperation, The Christian Science Monitor
• Mexico says crackdown is pressuring cartels, The Houston Chronicle
• Mexico's Narco-Insurgency, Time Magazine
• Arrests, slayings underscore Mexico's drug crisis, The Washington Post
  
• Seized cash likely drug related, The El Paso Times
• Chertoff quote to 'grow up' way off base, The El Paso Times
• Fear grows with violence in Peru's cocaine trade, Reuters
• For sale to the highest bidder: A little bit of a drug lord's empire, The Guardian (UK)