American Banks and the War on Drugs


Stephen Bender


When discussing the war on
drugs, the political class and hence the mainstream media focus their collective
heft on military intervention in the South and mass incarceration in the North.
The targets, almost invariably, are the poor and brown. Yet, an understanding of
the drug trade’s machinations is incomplete without an analysis of the crucial
role transnational banks play in the laundering of drug proceeds. Indeed,
Washington is proclaiming its readiness to take the “drug war” to the jungles of
Colombia in an El Salvador-style intervention, while the real beneficiaries of
the drug trade repose much closer to home.

That was the
finding by none other than a minority report written by House Democrats on the
Permanent Subcommittee on Investigations last year. “Despite increasing
international attention and stronger anti-money laundering controls, some
current estimates are that $500 billion to $1 trillion in criminal proceeds are
laundered through banks worldwide each year, with about half of that amount
moved through United States banks.”

A large
proportion of the conservatively estimated $250 billion in ill-gotten funds is
derived from the drug trade, predominantly cocaine. That enormous sum, the
Subcommittee determined, makes Uncle Sam’s banks collectively the world’s
largest financial beneficiaries of the drug trade.

James F. Sloan,
Director of the Financial Crimes Enforcement Network, (FinCEN) a subdivision of
the Department of the Treasury, was also less than sanguine, when commenting on
the current state of affairs. Testifying before the Congressional Subcommittee
on Criminal Justice, Drug Policy and Human Resources in June of 2000, Sloan
stated, “money laundering is the lifeblood of narcotics trafficking and other
financial crimes. These criminal organizations now dwarf some of the world’s
largest legitimate business enterprises, laundering enormous sums of money
throughout the international financial system.”

Raymond Baker, a
career international businessperson and analyst associated with the Center for
International Policy and the Brookings Institution, testified before the same
Subcommittee. Noting “An absolute explosion in the volume of dirty money during
this, the first decade of the globalizing world,” Baker quoted U.S. Treasury
Department estimates that “99.9 percent of the laundered criminal money that is
presented for deposit in the United States gets comfortably into secure
accounts.”

So, we find
testimony before Congress exploding the pious rhetoric about the drug war. If
Uncle Sam is capable of interdicting only 0.1 percent of the dreaded drug
kingpin’s “life blood,” then what exactly are we getting for our nearly $20
billion in drug war largesse?

The key
institution in the enabling of money laundering is the “private bank,” a
subdivision of every major U.S. financial institution. Private banks exclusively
seek out a wealthy clientele, the threshold often being an annual income in
excess of $1 million. With the prerogatives of wealth comes a certain regulatory
deference.

The General
Accounting Office, (GAO), the research arm of Congress, reported in late 1999 on
the difficulties surrounding the regulation of private banks. “It is difficult
to measure,” the report comments, “precisely how extensive private banking is in
the United States, partly because the area has not been clearly defined and
partly because financial institutions do not consistently capture or publicly
report information on their private banking activities.” As a result, estimates
at the cumulative value of “private banking” assets are difficult to estimate,
but the total undoubtedly reaches well into the trillions of dollars.

That U.S.-based
private banks operate in a regulatory twilight zone enabling the laundering of
drug profits is confirmed by the GAO. Private banks are “not subject to the Bank
Secrecy Act,” thus exempting banks from complying with “specific
anti-money-laundering provisions…such as the one requiring that suspicious
transactions be reported to U.S. authorities.”

Instead of
monitoring formal compliance, U.S. banking regulators “try to identify what
efforts the branches are making to combat money laundering.” In determining
whether the offshore branches are doing an adequate job in screening for money
laundering, regulators “must rely primarily on the banks’ internal audit
functions to verify that the procedures are actually being implemented in
offshore branches where U.S. regulators may be precluded from conducting on-site
examinations

Not only is
government oversight lax, but banks are willfully ignorant about their own
client’s account holdings, an outgrowth of the cult of secrecy surrounding
private banking. The Subcommittee on Investigations report continued: “The
reality right now is that private banks allow clients to have multiple accounts
in multiple locations under multiple names and do not aggregate the information.
This approach creates vulnerabilities to money laundering by making it difficult
for banks to have a comprehensive understanding of their own client’s accounts.”
Some banks go so far as to forbid their employees to keep information linking
clients to their accounts and shell corporations. One private banker told the
Subcommittee that he “had 30-40 clients, each of which had up to fifteen shell
corporations and, to keep track, he and other colleagues in the private bank
used to create private lists of their clients’ shell companies. He said that he
and his colleagues had to hide these ‘cheat sheets’ from bank compliance
personnel who, on occasion, conducted surprise inspections to eliminate this
information from bank files. When asked why the bank would destroy information
he needed to do his job effectively, the former private banker simply said that
it was bank policy not to keep this information in the United States.”

The report then
quoted the Federal Reserve’s 1998 “system wide study,” which analyzed the
practices of seven private banks. The study concluded, “That internal controls
and oversight practices over private banking activities were generally strong at
banks that focused on high-end domestic clients, while similar controls and
oversight practices were seriously weak at banks that focused on higher risk
Latin American and Caribbean clients.”

The reasons for
the disparity are not complicated, the Subcommittee concluded. “Federal Reserve
officials told the Subcommittee staff that private banking has become a ‘profit
driver’ for many banks, offering returns twice as high as many other banking
areas. Private banks interviewed by the Subcommittee staff have confirmed rates
of return in excess of 20 percent.”

In such a
profitable business, competition is fierce, which leads to a whole host of other
problems as outlined in a 1997 Federal Reserve report on private banking. “As
the target market for private banking is growing, so is the level of competition
among institutions that provide private banking services. Private banks
interviewed by the Subcommittee staff confirm that the market remains highly
competitive; most also reported plans to expand operations. The dual pressures
of competition and expansion are disincentives for private banks to impose tough
anti-money laundering controls that may discourage new business or cause
existing clients to move to other institutions.” In short, a rising tide of coca
funds lifts all banks.

Apart from the
institutional competitive forces at work, the Subcommittee found that private
bankers and their clientele operate under a symbiotic relationship in which the
banker identifies more closely with the client than with the duty to uphold the
law.

The textbook case
of this shady entente came in 1995 in a massive money laundering scandal
involving the former president of Mexico’s brother, Raul Salinas de Gotari, and
Citibank. The case only came to light after Salinas was implicated in the
assassination of Ruiz Massieu, a prominent member of Mexico’s corrupt and now
largely discredited Institutional Revolutionary Party (PRI). Subsequent
investigations linked Salinas to the cocaine cartels that paid staggering bribes
in the hundreds of millions to the political class in the early 1990s.

Citibank’s
private banker catering to Salinas was Amy Elliot. As the most senior private
banker in New York dealing with Mexican clients, Elliot took the word of Carlos
Hank Rohn (an oligarch recently linked by the Mexican press to the drug trade)
in setting up the Salinas accounts. Salinas’s only known source of income was
his annual government salary of $190,000 in addition to funds derived from his
work in the “construction business” and his proximity to the president. In
testimony before the Subcommittee, Elliot recounted that she estimated in June
1992 that the Salinas accounts had “[p]otential in the $15-$20M range.” After
multiple appeals, Salinas now sits in a Mexican prison.

In a June 29,
1993 email, shortly after the account passed the $40 million mark, Elliott wrote
to a colleague in Switzerland: “This account is turning into an exciting
profitable one for us all[.] [M]any thanks for making me look good.” Salinas
eventually deposited “in excess of $87 million” by way of Citibank’s New York
headquarters.

 Although the
case of Citibank and Raul Salinas generated some media interest and nudged banks
to revise their internal regs, the Subcommittee found that banks had “set up
systems to ensure that private banker activities are reviewed by third parties,
such as supervisors, compliance personnel or auditors. The Subcommittee staff
investigation has found, however, that while strong oversight procedures exist
on paper, in practice private bank oversight is often absent, weak or ignored.”

Another bark
worse than bite facet of the drug war lies in the punishment meted out by our
“zero tolerance” drug warriors to high level money laundering bankers, such as
Amy Elliot and her superiors. This was a point not neglected by Kenneth Rijock,
testifying before the aforementioned Government Reform Subcommittee. Rijock
spoke before Congress with a background as a former “career money launderer”
whose operations were based in Florida. Now a government consultant on dirty
money matters, Rijock obliquely touched on the drug war’s hypocrisy. “No
federally chartered commercial bank has ever lost its charter for money
laundering violations, no matter how serious the crime. Senior bank officers
themselves are rarely indicted for money laundering; the institution simply pays
a multi-million dollar fine…Only now are we going to name and ostracize the most
blatant offshore tax haven banks; we still don’t indict their presidents and
directors for violations of the Money Laundering Control Act.” That, likely is a
manifestation of the standard practice in the American justice system that
“suite crime” is punished much less harshly than “street crime.”

 


In recent years,
government efforts to more effectively intercept laundered funds have been
rebuffed. In 1998, the Clinton administration proposed new rules governing the
reporting of banks to the government on suspicious financial transactions. The
government correctly insisted that more invasive regulations were necessary to
make headway against money launderers. Opponents, across the political spectrum,
from the ACLU to the Cato Institute (cheered on by the banks who played a
low-key role) created a firestorm of public opposition. John J. Byrne, senior
council for the American Bankers Association, responded tersely to the proposed
preliminary reporting to the government on suspicion of illegal activity. “We
don’t support the notion that we need to investigate, profile, and monitor
account activity.”

A subsequent
attempt by the Clinton administration in January 2001 to monitor the accounts of
foreign leaders laundering funds in American banks fell flat. As the New York
Times
put it: “Citigroup was among a consortium of leading New York banks
that led an effort in late December to water down the new guidelines. The banks,
members of the New York Clearing House, complained that the guidelines were too
‘sweeping’ and were based on ‘unrealistic’ expectations…” Although law
enforcement authorities considered the proposed regulation “too weak,” Justice
Department officials “signed off on the voluntary guidelines.” At issue was the
monitoring of accounts held by foreign leaders and their families, based on the
experiences of the Salinas case and others.

The point is not
to apply the level of 4th Amendment protection currently enjoyed by street
dealers and casual users to bankers. Rather, it is to recognize the struggle
facing governments attempting to meaningfully deter drug-related money
laundering. From there, consideration of decriminalization is crucial.

The problem goes
deeper than one government’s futile struggle. The drug trade has successfully
learned to mimic the tricks of international banking and commerce, copying the
methods of “legitimate” business. The favored tool in this endeavor is the use
of tax havens—often used to disguise sundry forms of financial swindling. As
Raymond Baker commented: “In fact, the easiest thing for criminals to do is to
make their criminal money look like it is merely corrupt or preferably
commercial tax-evading money, and when they do it passes readily into foreign
accounts. With American and European banks and corporations aggressively
competing to service gains from corruption and illegal flight capital, money
laundering is almost universally successful.”

The State
Department admits as much when they annually categorize the world’s nations
based on their adherence to Washington’s ground rules for drug war probity.
Unsurprisingly then, Foggy Bottom finds among its “high priority” money
laundering countries, the leading “free market” states: the U.S., UK, Germany,
Italy, the Netherlands, Canada, and Switzerland.

While decrying
the undermining of “democratic market economics” by the hemorrhaging of capital
from the South, Baker conceded that the wealthy countries ultimately benefit.
“The costs and benefits of the components of dirty money which we facilitate,
i.e., yields from corruption and commercial tax evasion, merit clear analysis.
The benefit is that it spreads several hundred billion dollars annually across
North America and Europe, in bank accounts, markets and properties. The
cost can be seen in the impact on both our domestic and foreign interests.”
Baker, the former international businessperson, then very succinctly elucidates
the issue, sounding rather like a leftist. “The foreign cost of our pursuit of
corrupt riches and illegal flight capital is that it erodes our strategic
objectives in transitional economies and impairs economic progress in developing
countries, draining hard currency reserves, heightening inflation, reducing tax
collection, worsening income gaps, canceling investment, and hurting
competition, all contributing to political instability.”

The essential
issue is neither the lack of adequate government oversight, nor the malfeasance
of banks individually or collectively, although they are symptoms of the
problem. Rather, the problem lies in the triumph of market forces over
government and civil society.

As the late
British academic Susan Strange pointed out in her 1998 book Mad Money,
there are three distinct market forces driving the drug trade. The first is the
“market for banking services” which has exploded in this era of intensified
globalization of capital and integration of world markets. The second relates to
the “market for hallucinatory or mood altering drugs,” which has remained
consistently strong for some 30 years. The final component, Stange comments, “is
often overlooked in transnational organized crime…the market for [licit]
tropical crops.” To an impoverished peasant attempting to feed his family, it is
economically irrational to grow coffee, cocoa or bananas (whose values fluctuate
at meager levels) at a subsistence level when coca growing enables a
substantially better livelihood. Moreover, it is hypocritical for the leaders of
the rich countries to expect them to do so.

A further dodge
lies in placing the blame on “offshore” banks. The Cayman Islands for instance,
according to Ken Silverstein writing in Mother Jones, “with 570 banks
holding $670 billion is now the 6th largest financial center in the world after
London, Tokyo, New York, Berlin, and Zurich.” Then again, what other options do
these otherwise economically stagnant countries have? Lacking land and labor,
the ability to attract capital is their “comparative advantage,” and its pursuit
is conducted with the otherwise much lauded “entreprenuerial spirit.” It is
further worth noting another facet of what Le Monde Diplomatique last
year called the “dirty money archipelago.” Namely, that money launderers among
others “take advantage of the existence of 250 free [trade] zones and tax
havens, 95 percent of which are former British, French, Spanish, Dutch or U.S.
colonies or concessions that remain dependent on the former colonial powers.”


Analyzed in the broadest
sense, the drug war has unleashed horrendous destruction on the very people it
is supposedly designed to save. The wages of this war are eroded civil
liberties, incarceration as a preferred social policy, a steady stream of
violence as various gangs compete for a share in an illicit market, and the
further corruption of many Latin American governments. Note however, that the
powerful uniformly benefit from it. Banks reap massive profits, the military is
given a further rationale for its ballast, the corporate sector obtains new
investment opportunities (prisons) and markets (para-military gear and
counterinsurgency weaponry), and the state obtains a post-Cold War justification
for foreign intervention. In short, a class war by other means.

The drug war,
understood as a campaign to ameliorate the scourge of drug addiction, is a
fraud. The greatest scandal, beyond even the connivance of the great banks in
the drug trade, is that this fraud is today being deployed as a justification
for war. The United States is sending $1.3 billion to Colombia to fight the
“narcoterrorists,” Americans are told. It was not a coincidence that Clinton
accompanied 30 CEOs when he visited Cartagena to inaugurate “Plan Colombia.”
Unless enough Americans can see through this audacious propaganda, a lie
fortified by a fraud, our government may well carry out the bloodiest
pacification program since Vietnam.       Z

Stephen Bender has written on topics of interest for the San Francisco
Bay Guardian and Salon.com.