Narcotics Financing

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In the past month, the Government Accountability Office (“GAO”), a non-partisan legislative agency that monitors and audits government spending and operations, has issued a series of reports urging banking regulators and certain executive branch agencies to adopt recommendations related to trade-based money laundering (“TBML”) and derisking. These reports underscore (1) the importance of TBML as a key, although still inadequately measured, component of money laundering worldwide, and (2) that the GAO remains interested in assessing how banks’ regulatory concerns may be influencing their willingness to provide services.

Taken together, the GAO’s recent activity signals that even in the face of unprecedented public health and regulatory challenges posed by COVID-19, the GAO still expects banking regulators and agencies alike to fulfill its prior commitments on other, unrelated topics.

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Arrest is Culmination of Elaborate FBI Sting Targeting Banker Who Allegedly Catered to Drug Dealers

On November 12, 2019, the U.S. Attorney for the Southern District of Florida announced two key money-laundering developments concerning high-profile Guatemalans: the arrest of Alvaro Estuardo Cobar Bustamante, the director of a national Guatemalan bank, and the unsealing of a case against and guilty plea of Manuel Antonio Baldizon Mendez, a former presidential candidate in Guatemala who cooperated in the FBI and DEA sting operation against Cobar.

The government’s press release, coupled with its charging documents discussed below, underscore Guatemala’s strategic importance to drug traffickers and, by extension, money launderers. These developments likewise emphasize: (1) the increasing degree of international coordination often required to root out and prosecute both crimes; and (2) the United States’ willingness to prosecute alleged bad actors abusing the financial system, of which we have blogged about here.

Guatemala’s Strategic Importance to Central and South American Drug Trafficking Organizations

Since at least as early as 2013, the FBI and DEA have conducted extensive and numerous investigations into Drug Trafficking Organizations (“DTOs”) in Guatemala. Both agencies have emphasized the strategic importance of Guatemala for large-scale DTOs because it is a key transportation hub in the cocaine trafficking pipeline that begins in Colombia and moves through Central America and Mexico before branching off into various locations in the United States. Colombian and Mexican DTOs, seeking to avoid detection from U.S. law enforcement, often buy and sell multi-ton quantities of cocaine in Guatemala which, in turn, creates a plethora of opportunities for Guatemalan DTOs to serve as intermediaries receiving and re-selling cocaine.…
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On August 21, 2019, FinCEN issued an advisory (the “Advisory”) alerting financial institutions to various financial schemes and mechanisms employed by fentanyl and synthetic opioid traffickers to facilitate the illegal fentanyl trade and launder its proceeds.

As defined by the Centers for Disease Control and Prevention (“CDC”), “fentanyl is a synthetic (man-made) opioid 50 times more potent than heroin and 100 times more potent that morphine.” In 2017, more than 28,000 deaths involving fentanyl and other synthetic opioid occurred in the United States. As noted in the Advisory, fentanyl traffics in the United States from two principal sources: from China by U.S. individuals for personal consumption or domestic distribution or from Mexico by transnational criminal organizations (“TCOs”) and other criminal networks. In turn, these trades are funded through a number of mechanisms, including: purchases from a foreign source made using money servICES businesses (“MSBs”), bank transfers or online payment processors; purchases from a foreign source made using convertible virtual currency (“CVC”); purchases from a domestic source made using MSBs, online payment processors, CVC or person-to-person cash sales.

Recognizing fentanyl traffickers’ modus operandi is critical to detecting and preventing these illicit transactions. Thus, the Advisory provides detailed illustrations of each of the above-identified forms of transaction in order to assist financial institutions to detect and prevent facilitating fentanyl trafficking.…
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The Financial Crimes Enforcement Network (FinCEN) issued a press release today, entitled “New FinCEN Division Focuses on Identifying Primary Foreign Money Laundering Threats.”

The announcement states that this new Division will focus on topics about which we have blogged repeatedly:  Section 311 of the USA Patriot Act and threats posed to the financial system by…

Address Emphasizes Role of SARs in Fighting Illegal Activity, Including Drug Dealing Fueling the Opioid Crisis

Kenneth Blanco, the Director of the Financial Crimes Enforcement Network (“FinCEN”), discussed last week several issues involving virtual currency during an address before the “2018 Chicago-Kent Block (Legal) Tech Conference” at the Chicago-Kent College of Law at Illinois Institute of Technology. Although some of his comments retread familiar ground, Blanco did offer some new insights, including the fact that FinCEN now receives over 1,500 Suspicious Activity Reports (“SARs”) a month relating to virtual currency.…
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Commonwealth Bank of Australia (“CBA”), the largest bank in Australia, has agreed to a proposed civil settlement — subject to court approval — of historic proportions, involving a fine of approximately $700 million Australian dollars (roughly equivalent to $530 million U.S. dollars) regarding numerous alleged Anti-Money Laundering (“AML”) and Counter Terrorism Financing (“CTF”) violations.  The settlement is with the Australian Transaction Reports and Analysis Center (“AUSTRAC”) – a government financial intelligence agency whose counterpart in the U.S. would be the Financial Crimes Enforcement Network (“FinCEN”) — and represents the largest such enforcement action in the history of Australia.  Under the settlement, AUSTRAC also will recoup its legal costs of $2.5 million Australian dollars.

As we have blogged, AUSTRAC filed on August 3, 2017 a claim seeking civil monetary penalties against CBA for over 53,000 alleged violations of Australia’s AML/CTF law.  Although the case involves several types of alleged AML violations, it fundamentally rests on the bank’s use of so-called intelligent deposit machines (“IDMs”), a type of ATM which allowed customers to anonymously deposit and transfer cash.  Unfortunately, and perhaps not surprisingly, the IDMs also became an alleged favored conduit for money laundering by criminals involved in drug trafficking and illegal firearms.…
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We previously have observed that financial institutions face an increasing risk that alleged Anti-Money Laundering (“AML”) and Counter-Terrorism Financing (“CTF”) violations will lead to follow-on allegations of securities law violations – allegations brought not only by the government, but also by investor class action suits (see here and here).

This phenomenon of AML law and securities law converging is not limited to the United States, as reflected by a recent class action lawsuit filed against one of the biggest banks in Australia – Commonwealth Bank – which arises out of claims by the Australian government that the bank failed to act adequately on indications that drug rings were using its network of “intelligent” deposit machines to launder tens of millions of dollars.…
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Describing him as a “longtime Mexican Drug Kingpin,” the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury has designated Raul Flores Hernandez and the “Flores Drug Trafficking Organization,” or  “Flores DTO,” as a Specially Designated Narcotics Trafficker under the Foreign Narcotics Kingpin Designation Act (Kingpin Act).  OFAC also has used the Act to designate 21 other Mexican nationals and 42 entities, including a casino, a soccer club, a music production company, and various bars and restaurants, for allegedly supporting or being controlled by Flores and the Flores DTO. According to the government’s press release, Flores “has operated for decades because of his longstanding relationships with other drug cartels and his use of financial front persons to mask his investments of illegal drug proceeds[.]”

Although Mr. Flores may not be well known outside of Mexico, other individuals designated by OFAC certainly are. OFAC designated soccer superstar Rafael “Rafa” Márquez Alvarez, who plays defense for the Atlas Fútbol Club in Guadalajara, Mexico, and who served as captain of the Mexican team in four FIFA World Cups from 2002 to 2014.  Mr. Márquez is not necessarily beloved throughout the United States, where he is remembered for having head-butted a U.S. player during the 2002 World Cup quarterfinals.  OFAC also designated Norteño singer Julio Cesar Alvarez Montelongo, better known as Latin Grammy-nominated musician Julion Alvarez. According to OFAC, “[b]oth men have longstanding relationships with Flores Hernandez, and have acted as front persons for him and his DTO and held assets on their behalf.”  As for the rest of the Flores DTO, OFAC asserts that it is comprised of “a significant number of Flores Hernandez’s family members and trusted associates, upon whom he heavily relies to further his drug trafficking and money laundering activities and to maintain assets on his behalf.”…
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Department_of_Justice_Office_of_the_Inspector_General_seal_svgIn this post, we consider the Department of Justice’s (DOJ) Office of the Inspector General report (OIG Report), released on March 29, 2017, evaluating the DOJ’s oversight of its cash seizure and forfeiture operations.  This post is a companion to yesterday’s piece addressing the Treasury Inspector General for Tax Administration (TIGTA)’s recent report on IRS civil forfeiture for structuring violations.  Read in tandem, the OIG and TIGTA Reports suggest that many forfeitures occur without conclusive information about the details of the potential underlying crime, or even whether an underlying crime was involved at all.  The OIG Report concludes that more robust investigations and data collection on forfeitures would both allow DOJ monitor the effectiveness of its forfeiture efforts and increase public confidence in the forfeiture process.  Improved investigations and data collection also may lead to greater enforcement opportunities by tying forfeitures to ongoing investigations or initiating new enforcement actions based on findings in forfeiture investigations.

This OIG Report is the latest in a series of recent OIG evaluations of DOJ forfeiture initiatives which respond, at least in part, to civil liberties concerns raised by forfeiture reform advocates. (See OIG’s January 2015 report on so-called “cold” consent encounters at mass transit facilities, and its September 2012 investigation of forfeiture enforcement by a local Florida police department).  Both of those investigations concluded that more data analysis was needed to ensure that forfeiture operations were serving legitimate law enforcement interests.

The most recent report continues with the same theme, finding that the DOJ and its investigative components do not collect or use sufficient data to properly oversee seizure operations, or to determine whether those operations relate to or benefit criminal investigations. The OIG report focuses on three main topics:  (1) the lack of data assessing the relationship between seizure and forfeiture activities and investigative outcomes; (2) in the absence of such data, the OIG itself sampled 100 DEA cash seizures that had characteristics OIG believed made them “particularly susceptible to civil liberties concerns”; and (3) the DOJ’s relationship to state and local law enforcement, through both training and equitable sharing arrangements.  This post addresses topics (1) and (2).  As we have previously written, equitable sharing arrangements raise their own issues of balancing individual property rights against law enforcement objectives, which are conceptually distinct from the issues addressed here.…
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The Philippines has been identified by the U.S. as a “major money-laundering country” in the 2017 International Narcotics Control Strategy Report (“Report”), published this month. The country now joins 87 others as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.” See 22 U.S.C. § 2291(e)(7).

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