OIG Audit Alleges DEA Ignored Oversight, Misunderstood Digital Currency, Didn’t Actually “Follow the Money,” and Overstated Accomplishments

A recent audit conducted by the Department of Justice (“DOJ”)’s Office of Inspector General (the “OIG”) revealed that the Drug Enforcement Agency (“DEA”) acted outside the scope of its authority while transacting tens of millions of dollars involving illicit activity during undercover operations from fiscal years 2015 to 2017.

The focus of the audit was a specific type of undercover operation known as Attorney General Exempted Operations (AGEOs). AGEOs are particularly risky because they are income-generating operations, designed to infiltrate and dismantle drug trafficking and money laundering organizations. Because of the sensitive nature of these investigations and the amount of money at stake, AGEOs are meant to be heavily supervised by the Attorney General (AG), other lawyers within DOJ and Congress.

The 72-page, partly redacted audit clearly found that the DEA repeatedly ignored its reporting policies, neglected its internal controls, and flagrantly violated the statutes governing AGEOs. This audit an important reminder that law enforcement agencies, even when pursuing the laudable goal of investing criminals through the often highly successful tool of undercover investigations, are still subject to legal limitations and standards, because agencies themselves are susceptible to fraud and abuse. This audit shows the importance of oversight and accountability, and reveals how bad actors sometimes can exist on both sides of an investigation.  Finally, the audit also suggests that the DEA often failed to pursue investigative leads and did not examine whether businesses and other third parties knowingly laundered the illicit money being transacted through AGEOs: once the target of the AGEO was “in the bag,” spin-off money laundering investigations did not occur.

During an AGEO, DEA agents go undercover to participate in the financial transactions surrounding drug trafficking. The goal is to trace the money to the point of origin, while building a case against drug trafficking organizations and money laundering organizations along the way. The fact that the DEA is partaking in illicit drug trafficking, as well as transacting large sums of money through its investigation, makes it critical for the agency to document and report all of the AGEO activities.

One major theme of the audit was the DEA’s failure to update the AG or DOJ with any change in scope, target, or length of an AGEO. In one instance, a narco-terrorist organization was added to an existing operation without the proper approvals. The addition of a nacro-terrorist organization as a target drastically changed the risk profile of the operation, and thus required separate authorization. In numerous other instances, operations stretched on for years without ever employing the undercover tactics that the operation was approved for. Further, while the DEA is legally obligated to report details of its undercover operations to Congress on an annual basis, the audit found that it had not done so since 2006 or earlier. The DEA is also required by statute to inform the Attorney General and Congress of all of the AGEO-associated authorized illegal activities that it undertakes—a legal obligation which it totally ignored.

Another deficiency exposed by the audit was the DEA’s techniques involving virtual currency. The audit found that the DEA did not employ any special methods for the complex and nuanced world of virtual currency, and had no additional training for its agents. For example, DEA agents relied on their peers for information, rather than getting expert advice on how to conduct a virtual currency investigation. Further, when documenting its virtual currency operation, the DEA was using forms for traditional money laundering investigations. The audit also found that the DEA was not able to distinguish between drug trafficking targets and non-target users of virtual currency, such as brokers.

Somewhat scathingly, the audit noted that “[t]his deficiency occurred more than two years after a former DEA special agent was convicted of stealing $700,000 in virtual currency during a joint task force investigation of the dark web marketplace Silk Road.” The Silk Road was ultimately busted by a multi-agency task force, and the accused mastermind behind the dark web marketplace for drugs, weapons, and other illicit trading was sentenced to life imprisonment. In 2015, as part of the government’s investigation, an undercover DEA agent used fake online accounts to steal virtual currency from the investigation and to extort the mastermind behind the Silk Road. While the OIG’s audit did not focus on the Silk Road scandal itself, this reference served to remind the DEA that it was already on thin ice with respect to its lack of controls and inadequate supervision over undercover operations.

The audit also suggests that the DEA often did not creatively or aggressively pursue potential money laundering investigations relating to AGEOs.  Although law enforcement agencies often like to emphasize that they will “follow the money,” the audit actually observes that the DEA frequently failed to pursue investigative leads and the financial trail leading to potential third-party money launderers:

We also found that the DEA did not always leverage AGEO information and strategically evaluate the laundering connections among AGEOs. Indeed, some AGEOs operated for many years and facilitated [drug trafficking organizations’] money laundering transactions for extensive periods without the DEA consistently ascertaining what entities were complicit in [their] money laundering activities . . . .

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While the DEA needs investigative flexibility to follow leads and evaluate investigative information, it also has a duty to ensure that the ultimate outcomes of the investigations outweigh the risks of its activities that contribute to [drug trafficking organizations’] ability to traffic illegal drugs. In fact, AUSAs from the Southern District of New York (SDNY) told us that they had expressed concern to the DEA in 2015 that entities were not held accountable or investigated for their potential involvement in criminal money laundering schemes. According to these AUSAs, the DEA had not pursued this line of investigation because the DEA was focused on the results of individual AGEOs and not on identifying overlapping AGEO activity.

Money laundering in the drug trafficking world is a multi-billion dollar industry. The audit estimates that in 2017 alone, illicit drug sales in the United States totaled $64 billion. Drug trafficking organizations of course must figure out how to launder all of that money in order to spend it without raising suspicion of its origins. From the DEA’s perspective, AGEOs are critical tools that allow the DEA to infiltrate and try to reach the top echelons and drug kingpins of the organizations laundering these vast sums of money. However, and consistent with the critique regarding the lack of follow-up investigations, the audit also challenged the DEA’s assertion that AGEOs yield high levels of arrests and seizures, stating that “we found inflated statistics and significant errors in the achievements that the DEA reported.” Overall, the audit certainly calls into question the DEA’s reliance on AGEOs, and the future of how AGEOs will be conducted.

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