Primary Regulations
Circular Externa 007 de 1996

Know your customer circular
CARTA CIRCULAR CONJUNTA Nº006
SUPERINTENDENCIA BANCARIA DE COLOMBIA, SUPERINTENDENCIA DE SOCIEDADES
CARTA CIRCULAR CONJUNTA ,SB No. SS No. 06 DE 1998
15 DIC.1998

Recent Modifications affecting casas de cambio
Carta Circular 410 DE 2000 ( Julio 19 )
 

External Circular 007 Section 6 on KYC and AML:

Conozca a su cliente
 
 

United States Customs Service
Black Market Peso Brokerage

United States Senate
 Senate Permanent Subcommittee on Investigations Minority Staff report, February 5, 2001.

United States Treasury and Department of Justice
The National Money Laundering Strategy for 2000

United States Embassy, Bogotá
Money Laundering Page

Dirty-money flow in U.S. banks is huge, a Senate report finds
Many banks have taken steps aimed at preventing abuses

By Paul Beckett

THE WALL STREET JOURNAL

Washington, Feb. 5 — A huge amount of dirty money has flowed through the U.S. financial system through major U.S. banks that provided accounts to high-risk offshore banks, a new U.S. Senate staff report says. Among the major banks named in the report are J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp.

In many cases, the banks themselves were unaware of the nature or background of their own clients because "most U.S. banks do not have adequate antimoney-laundering safeguards in place to screen and monitor such banks, and this problem is longstanding, widespread and ongoing" the report said.

The report was issued by the Democratic staff of the Senate Permanent Subcommittee on Investigations, which has been studying so-called correspondent banking relationships for the past year. Such relationships allow foreign banks to establish accounts at U.S. banks, giving them access to the U.S. banking network. How much of the money that flows through those accounts is dirty or suspicious isn’t known. But 12 offshore banks identified in the report have moved billions of dollars through U.S. correspondent accounts in the past several years.

The vulnerability of the U.S. banking system has been a concern since a scandal involving about $7 billion in suspicious Russian funds that moved through three accounts at Bank of New York Co. came to light in 1999. Bank of New York hasn’t been charged with any wrongdoing. The new report suggests such concerns are far from limited and raises questions about the ability of banks to control the billions of dollars that flow through them electronically each day.

"U.S. correspondent banking provides a significant gateway for rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the U.S.," the report said.

Many of the banks named in the report said they have already taken steps aimed at preventing abuses of their correspondent bank accounts.

Strengthening measures to combat money laundering was a top priority of the Clinton administration’s Treasury Department, even though several efforts by regulators and legislators to impose higher due-diligence standards on U.S. banks have foundered. It remains an open question whether the new U.S. Treasury secretary, Paul O’Neill, will place such an emphasis on trying to crack down on the problem. A Treasury spokesman declined to comment.

Large banks were named in the report as having provided correspondent banking services for banks that are either shell corporations, carry high money-laundering risks, or are based in countries with weak antimoney-laundering regimes. Among U.S. banks that were found to have "weak due-diligence practices and inadequate money-laundering controls" or inadequate responses to troubling information are Citigroup’s Citibank unit, J.P. Morgan Chase, Bank of America and First Union Corp. — four of the six largest banks in the nation.

One J.P. Morgan Chase official who handled 140 correspondent accounts said she had received no training in antimoney-laundering measures or due-diligence analysis from Chase, the report said. It also said that a Bank of America official said there was little attention to antimoney-laundering training for several years as the bank went through a series of mergers. Citibank, acting on a seizure warrant from U.S. authorities alleging drug money-laundering violations, seized $7.7 million from a correspondent account held by a Cayman Islands bank but failed to conduct any further review, according to the report.

"As a result of this episode, we developed a new centralized system for following up on seizure warrants," a Citigroup spokesman said. A spokesman for J.P. Morgan Chase said, "We’ve taken significant steps to strengthen our antimoney-laundering procedures throughout the bank." A spokeswoman for Bank of America said, "We provide training annually to all appropriate people and have never heard any criticism of our antimoney-laundering program." A spokeswoman for First Union said the bank "has taken and continues to take aggressive steps to strengthen our deterrence program."

"Our banks too often are asleep at the switch or, even worse, just don’t care," said Sen. Carl Levin of Michigan, the ranking Democrat on the investigations subcommittee. "They have got to tighten up their controls."

The report recommends that U.S. banks be barred from opening correspondent accounts with foreign "shell" banks that have no physical presence, and says the U.S. banks should heighten their due diligence and safeguards for banks with offshore licenses or in high-risk jurisdictions.

One offshore bank named in the report is British Trade & Commerce Bank on the Caribbean island of Dominica, which keeps all of its funds in correspondent accounts. The report said the bank is "surrounded by mounting evidence of deceptive practices and financial fraud." For instance, according to the report, it provided banking services for a New Jersey man who pleaded guilty in February 2000 to a conspiracy to launder money. The man used BTCB to bilk hundreds of U.S. investors out of millions of dollars over two years by falsely promising high-yield investment opportunities, the report said.

Among the banks that operated accounts for BTCB was First Union. The report said BTCB had an account at First Union's securities affiliate from September 1998 to February 2000 and moved more than $18 million through the account before First Union became suspicious and closed it. The report said the First Union affiliate opened the account "without any due-diligence review." The First Union spokeswoman said, "This is a very unusual circumstance." BTCB officials didn’t return calls.

Making it even more difficult for U.S. banks to monitor the flow of funds is the fact that some offshore banks with U.S. correspondent accounts in turn offer other high-risk banks use of those services and access to the U.S. financial network. American International Bank, an Antigua-licensed bank that is now in liquidation, engaged in some activities that show a "high probability of money laundering," the report said, including servicing accounts linked to a "highly questionable investment scheme." AIB had correspondent accounts with at least five North American banks in the mid-1990s. It moved more than $240 million through accounts at Bank of America and J.P. Morgan Chase.

But, the report says, AIB also served as a correspondent bank to other offshore banks. One of those was established by convicted U.S. felons, according to the report. At least two were "the centers for financial frauds and money-laundering activity," the report said.

"In a number of instances, AIB’s client banks utilized their accounts with AIB to launder funds and take advantage of AIB’s correspondent accounts with U.S. banks to work the illicit funds into the U.S. financial system," the report said.

"As soon as we found the problem, we terminated the account," the Bank of America spokeswoman said. J.P. Morgan Chase declined to comment on the matter.

"Watching and trying to make sure you’re always dealing with the types of people you want to deal with is sometimes difficult, even impossible," William Cooper, AIB’s founder, said in an interview. "When you are dealing with that many clients, you’re going to have some dubious accounts." Mr. Cooper himself faces money-laundering charges in federal court in Florida. He denies the allegations.
 
 
 

NEW YORK TIMES
October 10, 2000

U.S. Companies Tangled in Web of Drug Dollars

By LOWELL BERGMAN

On a rainy day last June, a group of corporate executives gathered in a conference room at the Justice Department for a meeting with Attorney General Janet Reno and other top government officials.

The executives represented some of the pillars of corporate America — Hewlett-Packard, Ford Motor Company, Whirlpool. The session was not publicized because those at the meeting shared an unlikely and potentially embarrassing problem: their companies, they feared, were being singled out in the nation's war on drugs, and neither they nor the government was quite sure what to do.

With the intensifying federal crackdown on money laundering, agents had been tracking drug money into the accounts of American corporations and their distributors and dealers. In fact, federal officials said, about $5 billion a year in Colombian drug money is used to buy goods and services — from cigarettes to computer chips — from American companies.

What makes that possible is a system known as the black-market peso exchange, a complex money trade that law enforcement officials say has become increasingly important to the Colombian narcotics trade.

The system — really a network of currency brokers with offices in New York, Miami, the Caribbean and South America — is essentially an underground money market that lets the traffickers exchange American dollars for Colombian pesos. Those dollars, which stay in the United States, are then bought by Colombian companies that use them to buy American goods for sale back home.

But the government's efforts to seize that money have put it on a collision course with corporations, which say they are victims with no way of knowing that they and their distributors are being paid with drug money.

As they met on June 6, those executives, lawyers and law enforcement officials found themselves grappling with a conundrum: when does drug money stop being drug money? How far does a company's responsibility go?

The questions have been confronting law enforcement officials for years.

"What are we going to do?" asked Greg Passic, a former drug enforcement agent who now advises the government on the economics of the narcotics industry. "We've got the Fortune 500 involved in our drug- money laundering process."

For a long time, because of lax enforcement of United States currency laws, the drug traffickers were able to launder billions of dollars through American financial institutions. A crackdown in the 1980's pushed traffickers to what they saw as a virtually fail-safe system for getting back their profits — the black-market peso exchange.

Their growing reliance on that system shows how deeply the drug trade has become entwined in the legitimate economies of the United States, Colombia and other nations.

Colombian officials said that as much as 45 percent of their country's imported consumer goods are bought with money laundered through the peso exchange.

On the American side, law enforcement officials said the exchange has largely eliminated the trade deficit with Colombia. The market, said the customs commissioner, Raymond W. Kelly, "is the ultimate nexus between crime and commerce, using global trade to mask global money laundering."

So far, no large American company has faced criminal charges. And companies have almost always been able to prevent federal officials from keeping money that has been seized.

But in the last few years, as frustration has risen, the government has taken a tougher line. There have been Congressional hearings intended to put companies on notice by name. Prosecutors have issued warnings and stepped up efforts to seize laundered money.

At the same time, the government has encouraged companies to institute "know your customer" policies similar to those used in the financial industry. The policies gave dealers and distributors techniques for recognizing money laundering. Thus educated, the government thought, the companies would be less able to argue that they simply could not have known.

In drawing the line between legitimate and illegitimate profits, the government must not only prove that the money came from drug deals; it must show that the recipient "knew or should have known" its source.

In the war on drugs, that line has proved very fuzzy.

Trading Dollars for Pesos

Congress passed the first money- laundering laws in the early 1970's — requiring, among other things, that banks report any cash transaction over $10,000 — but the laws were loosely enforced. By 1979, the Federal Reserve Bank in Miami had more cash than the other federal reserve banks combined.

It took the uproar over the cocaine epidemic in the early 80's for banks to comply with the law. And with the resulting crackdown, traffickers resorted to the black market, which for decades had provided Colombian businesses with dollars at less than the official exchange rate of 2,000 pesos to the dollar. The rate in Colombia is fixed by the government.

One peso broker recently agreed to describe how the system works.

The process begins when the broker receives a call from a Colombian drug trafficker or his American representative. The two negotiate an exchange rate for pesos, usually 30 percent to 40 percent below the fixed rate. So $10,000 might be worth 12 million pesos instead of 20 million at the official rate.

The dollars are then delivered to the broker, who promises to deliver pesos to the trafficker's bank account after the dollars are sold to Colombian businesses. The dealer's insurance is the broker's knowledge that to do otherwise would almost surely mean death.

The broker maintains several runners — "smurfs," in law enforcement lingo — who deposit the cash into hundreds of United States bank accounts in amounts of less than $10,000, to avoid scrutiny.

At the same time, the broker's office in Colombia negotiates with business people there who want cheap dollars to buy everything from consumer goods to helicopters.

Usually, that exchange rate is 20 percent below market, so a business owner in Colombia might pay 16 million pesos, instead of 20 million pesos at the fixed rate, for $10,000.

The pesos are then transferred — in this example, 12 million pesos — to the traffickers' accounts. The broker keeps the difference, 4 million pesos in this instance. Then at the businessman's direction, the dollars in the American banks are used to pay for American goods.

The peso brokerage is one part of the process that supplies Colombia with inexpensive goods from the United States and around the world. Colombian authorities said the goods were often smuggled into the country, costing Colombia more than $300 million a year in tax revenue.

Colombia has made collecting that lost revenue a priority. But the black market has considerable appeal because it puts a lot of inexpensive foreign goods on the Colombian market.

The exchange has also increased American exports to Colombia.

"This is positive for U.S. business, there is no doubt about it," said Mike Wald, who runs a consortium of law enforcement agencies in Florida focusing on the peso exchange. "The Colombian, if he pays less for his dollars, can buy more goods. That's a pretty obvious economic fact. But we have to realize where this money originates. It's drug money."

Tangled With Drug Money

Two companies that have turned up in the American government's anti-laundering efforts are Phillip Morris and Bell Helicopter Textron.

Phillip Morris products in particular have been a major presence in Colombia. Marlboro cigarettes are readily available at prices investigators said indicated that they were bought with black market dollars and smuggled into the country.

Earlier this year, Phillip Morris was sued in the Eastern District of New York by the Colombian tax collectors. The federal lawsuit accused the company of being involved in cigarette smuggling and in the laundering of drug proceeds.

Phillip Morris has denied the allegations, saying that it did not know its products were being exploited for money laundering. In addition, without admitting wrongdoing, it recently signed an agreement with Colombia, pledging to stop its products from entering the black market or being used to launder money.

In 1995, in Federal District Court in San Juan, Puerto Rico, Phillip Morris's former distributors in northern South America were indicted for laundering $40 million in black market pesos.

A member of the defense lawyers said the money was used to buy Phillip Morris cigarettes, liquor and other products for the Colombian market. But the defense team member said the defendants did not know that the money came from drug sales.

Phillip Morris severed its relationship with the defendants in 1998 and said it did not know that its products were being smuggled or that black market money was used to buy them.

In another case, Bell Helicopter is challenging the seizure of $300,000 from its accounts, money, according to court documents, that was generated by drug smuggling.

It was part of more than $1 million that the United States believed was supplied a peso-exchange broker to buy a Bell aircraft. The helicopter was seized in Panama at the request of the United States.

The case has become a sore point for American law enforcement in part because the helicopter was sold to a Colombian businessman linked to the country's right-wing paramilitaries.

Seeking Cooperation

The deepening struggle between prosecutors and business executives is what led to the meeting with Attorney General Reno and other government officials, including Deputy Attorney General Eric H. Holder and Deputy Treasury Secretary Stuart E. Eizenstat. The companies invited were Hewlett-Packard, Ford, General Motors, Sony, Westinghouse, Whirlpool and General Electric Company, Treasury officials said.

None of the companies returned phone calls seeking comment, except General Electric and Sony. Sony said it would have no comment. But General Electric's counsel, Scott Gilbert, said his company instituted a strict compliance program five years ago, after reports that its refrigerators were being used in money-laundering operations.

As part of its policy, Mr. Gilbert said General Electric warns dealers to be aware of "red flags" — a customer's lack of interest in discounts, an unwillingness to give information about the company, or unusual forms of payment like large amounts of cash or checks written on the account of a third party.

The new policy has cut sales of appliances to Latin America by 23,000 units, or over 20 percent, said an executive at General Electric.

Alan Dooty, a customs official, said the companies had been selected for the June meeting because their products had shown up in the black market in Colombia. The exception was General Electric, which he singled out as a "good citizen."

Before the meeting, some of the companies expressed concern that they would be punished. But once they arrived, Mr. Dooty said, they were assured that the government was seeking cooperation.

A follow-up session in July bogged down in legal murk.

An industry representative familiar with the meeting said: "The Justice and Treasury Departments realized that they were trying to identify drug money that had morphed, been transformed, in layers of transactions involving distributors, authorized dealers, financing arrangements with unregulated money lenders called `factors' and the other realities of commercial life."

More meetings are scheduled for this fall.