Al Capone unwittingly provided the impetus for a financial trade destined to encompass a range of sophisticated techniques that the notorious Chicago mob boss could never have imagined. The trade would become known as money laundering, and it would be more useful than a tommy gun to a big-time criminal.

Capone was convicted of tax evasion and sent to prison in 1931. The Internal Revenue Service got him because he had not concealed the profits from his rackets. When that happened, the kingpins of American organized crime recognized that they needed to develop ways to hide those illicit gains.

This recognition came at an important juncture for the mob. Salvatore "Lucky" Luciano, a visionary hoodlum if ever there was one, had just directed a violent coup against the old-line Mafia leadership. He consolidated the mob's far-flung operations under its first unified leadership and simultaneously broke the taboo against heroin trafficking. It was this entry into the lucrative drug trade that created the mob's demand for sophisticated ways to launder the new wealth.

Enter Meyer Lansky. A business partner of Luciano's, Lansky was the first to come up with the idea of moving the mob's money overseas. In 1932, he opened an account at a Swiss bank for Louisiana Governor Huey Long, who had allowed the mob to open gambling houses in New Orleans. Lansky spent the next four decades perfecting techniques for getting money out of the United States and into nice, clean bank accounts.

Most of the banks he used were in Switzerland, and the route of choice was from mob-run banks in Miami to Swiss banks directly or through branch offices in the Bahamas. In the 1960s, one of Lansky's favorite partners was the Geneva-based International Credit Bank.

ICB, as it was called, was itself an innovator of sorts. Its main legitimate activity was collecting funds for Israel from Jewish communities in Europe. There was a subterranean side to that relationship, however. The bank also financed the purchase and shipment of weapons to Israel and was rumored to serve as the European paymaster for Mossad, the Israeli secret service. It also was banker to the agents of Bernie Comfeld, whose giant Investors' Overseas Services was siphoning hundreds of millions of dollars out of developing countries in violation of currency-exchange restrictions.

For Lansky, ICB served as a convenient depository for the profits rolling in from mob criminal enterprises-profits from the sale of narcotics, skim from the casinos in Las Vegas, proceeds from extortion rackets. Millions of dollars were moved to Switzerland through wire transfers over telephone and telegraph lines from other banks or by cash-carrying courier. And millions came back to the mobsters through legitimate-looking loans and other covers that disguised the origins of the funds.

By the late 1970s, a sophisticated international network of banks and money launderers was in place, moving billions of dollars of dirty money around the globe in the blink of a computer screen. The international network relied on reputable financial institutions and a host of shadowy offshore banks. Its evolution coincided with the rise of a new breed of multinational crime organizations-the Colombian drug cartels.

The permissive attitude toward drugs in the United States during the late 1960s and the 1970s had mushroomed into a veritable blizzard of cocaine by the end of the seventies. In the beginning, cocaine was a fashionable drug, replacing marijuana at jet-set parties and among entertainment stars, but as greater amounts poured into the United States, the drug infiltrated the youth culture and the inner cities. As a result, demand soared.

With rising cocaine sales came a tidal wave of cash. Cocaine trafficking became the richest criminal enterprise in history, its money accumulating by the ton, dwarfing the profits collected by the Mafia. Drug dealers found themselves with suitcases so filled with cash that the handles broke off, money-counting operations so vast that people had to wear protective masks against the high lead content of currency they handled.

And the sheer volume of the money presented a logistical problem, too, because the primary beneficiaries of the trade were not home-grown criminals. They were Colombian drug lords, whose empire was centered in a triangle formed by the three Andean cities of Bogota, Cali, and Medellin, with the latter city dominating. These suppliers banded together in cartels.

In Senate testimony in 1989, David Wilson, a Drug Enforcement Administration expert on financial intelligence, described the fully evolved operation of these organizations:

"The Colombian cartels provide drugs to their wholesale distributors which in turn supply the retail distribution network. The money flows from the neighborhoods where drugs are sold back to central collection points, generally in large cities. The cartels employ specialized money couriers or collectors who are outside the drug distribution network. These individuals collect, sort, count, and package the money for shipment."

A decade earlier, in the beginning of the cocaine bonanza, the chief means of moving money simply involved walking into a bank carrying a suitcase or a grocery bag full of cash. Sometimes the money would be neatly counted and banded; at other times it would be stuffed in, willy-nilly. A friendly banker would accept the deposit and transfer the funds to a bank account in Colombia or some other country outside the reach of prying law enforcement authorities and bank regulators, all for a fee, of course.

Miami was the chief American link in this mushrooming drug operation, a city that became synonymous with cocaine and money laundering. Astronomical amounts of tainted cash, deposited in Miami's banks, stoked the city's economy. In 1979, the Federal Reserve Bank of Miami reported a cash surplus of $5.5 billion, greater than the combined surpluses of every other Federal Reserve Bank branch in the country.

The government's response to the epidemic of drugs, crime, and money was a pioneering attack on the laundering of drug proceeds. It was called Operation Greenback, a joint investigation by the U.S. Customs Service and the Internal Revenue Service that started in early 1980 with volunteer agents from around the country. Naturally, the starting point was Miami.

The challenge and excitement of this new war was captured in the emblem created for the investigators. Against a bright green background was a cloudburst and beneath the cloud, in small letters, were the words "In the beginning." Circling the edge of the emblem was: GOD CREATED

GREENBACK.

In some ways, the pickings were easy. Since the money launderers had been operating with near impunity, they had not bothered to hide much. The probe's initial success came that first year. A young Colombian woman was arrested at Miami International Airport trying to smuggle $1.5 million out of the United States in six Monopoly boxes. Three months later, police at a small Florida airport seized $1.6 million from a private plane bound for Colombia.

Investigators soon began to concentrate on South Florida's banks. The Bank Secrecy Act of 1970 required financial institutions to file a currency transaction report, or CTR, for every deposit or withdrawal of $10,000 or more in cash. However, many bankers simply looked the other way when traffickers brought in suitcases, cardboard boxes, and duffel bags filled with cash. In 1981, Customs investigators estimated that banks in South Florida had failed to report $3.2 billion in cash.

Early in 1981, Greenback agents searched a branch of Landmark Bank in Plantation, a bedroom community near Fort Lauderdale. They discovered that Hernan Botero Moreno, a soccer team owner from Medellin, had laundered $56 million through the bank. Less than a month later, Greenback scored another goal: Raids on two Miami banks resulted in charges that Isaac Kattan Kassin of Cali had laundered $71 million through one of the banks.

Another Greenback target was a convicted marijuana smuggler named Robert Walker, who owned a fleet of six airplanes, a yacht, his own island, and a so-called brass-plate bank in the Thrks and Caicos Islands off the southernmost end of the Bahamas. His background in drug trafficking and his apparent lack of legitimate income earned Walker the distinction of becoming the object of Greenback's first undercover operation.

Until Greenback, the few money-laundering arrests were spin-offs from drug cases and other so-called underlying crimes. This operation turned a spotlight on the money men and the banks, to the extent it could. Equally important for the future of such investigations, however, was the use of the undercover strategy against money launderers. Long after Greenback, federal agents would concede that they could rarely make the big money-laundering cases without the help of an informant inside the ring or an undercover operation of their own. This would prove to be a vital lesson in the war against the people who handle the dirty dollars for the world's drug trade.

In the case of Robert Walker, the undercover operation was a last resort. Dennis Fagan, one of the Customs agents involved in Greenback, had been nosing around Walker's empire for months, but his best informant was getting cold feet. His quarry was well guarded. A private investigator screened Walker's employees, presumably looking for law enforcement connections. His planes could outrun the good guys' aircraft. A sophisticated radio room monitored traffic on the frequencies used by the DEA and FBI. And Walker was developing friendships with some politicians in the Caicos that would provide an extra layer of security.

Watching Walker operate, Fagan had determined that one of the suspect's weaknesses was women. "He was a sucker for women," said the agent. Up until this point, few women had played major roles in undercover operations. They were involved occasionally, but only posing as girlfriends or secretaries. Perhaps, Fagan figured, this was a way to get through Walker's vaunted defenses.

Near the middle of 1981, an informant in Puerto Rico agreed to introduce two undercover Customs agents to Robert Walker. They told Walker they represented a Chicago organization with Mafia ties that needed help laundering money. Walker agreed to a second meeting at a hotel in Atlanta where he would meet the organization's head. Arriving at the hotel, Walker met a short blond woman. Her real name was Bonni Tischler, but Walker would not find that out until too late. She had become the lead undercover agent in Greenback's biggest case.

"He was just an unattractive old guy, but he liked me," Tischler said later in describing Walker. "He just took the whole bait, hook, line, and sinker. I mean, it wasn't the hardest thing I ever had to do in my life."

Indeed, Walker responded by trying hard to impress the young woman. He described in great detail how he had created a blind trust in his offshore bank and named as trustee his lawyer in the Bahamas, yet another jurisdiction profiting from its strict bank secrecy laws.

"So what you have," he told her, "is, you have an attorney's confidentiality there, plus the secrecy of the banking act. Most everything that we have is buried in that trust. If somebody ever came and looked at the corporate structure, they're going to find that all of the stock ends back, is in that trust, locked up in a safety deposit box in Nassau."

Walker said that he was moving money through the Nassau branches of two big Canadian banks, the Bank of Montreal and the Bank of Nova Scotia, but he sang the praises of Panama and its ruler at the time, General Omar Torrijos.

"One thing about Panama is that you can get to the general and he'll cut a deal," said Walker.

His bragging was providing Greenback agents with more than the secret of Robert Walker's operation. They were getting a blueprint for state-of-the-art money-laundering techniques. The only part of the financial seminar that had an unwelcome, even chilling note for Tischler and the agents monitoring the Atlanta meeting from the next hotel room was a story that Walker told about security at the private airfield he maintained outside Tampa.

"The only time that I've ever known of a problem is I got a phone call from a guy, and he said, 'I'm not gonna tell you who this is but I make a hobby of listening to the Feds.' He says, 'I've got every conceivable thing to listen to them with and I figured I better call you up and tell you your airport's staked out.'"

The bust of Robert Walker was scheduled for a steamy morning in July of 1981. Tischler and an agent posing as her Mafia boss borrowed a suitcase of cash from the Federal Reserve Bank of Miami and traveled down two miles of dirt road, through stands of scrub pine, and arrived at the private airstrip. The agents had figured that Walker was planning to fly them in one of his Cessna 414's to Nassau to launder the money. Tischler handed Walker $25,000 in cash as his fee and he walked into a nearby office.

Once the money was passed, her undercover partner, a Customs supervisor named William "Blue" Logan, stepped away, saying he had to make a last-minute call. With that telephone call, he was supposed to alert a raiding party waiting nearby in helicopters to swoop in and make the arrests. Somehow, and no one ever found out what happened, the phone message never got through. The raiding party was left sitting in their helicopters just a few minutes away from the airfield.

Wondering where the hell help was, Tischler and Logan were put into separate Cessnas for the flight to Nassau with Walker and two of his pilots. As the planes started to taxi down the runway to take off, Blue Logan took matters into his own hands. He was in the first plane and he pulled his service revolver and shouted, "Police." Pointing the gun at the control panel, he told the pilot, "I'm putting a bullet through the control panel if you don't stop the plane."

The Cessna stopped on the runway and so did the second plane. Logan ordered the pilot in his plane out. In their confusion, Walker, Tischler, and the pilot of the second plane got out, too. Just then the helicopters swooped in over the trees and landed, and armed agents jumped out. Dennis Fagan had gotten worried waiting for the message that never came and decided to break up the party anyway.

Within minutes the airport was under the control of the federal agents. They were slapping handcuffs on everyone in sight, including the much-relieved Bonni Tischler. Now her only worry was what had happened to the $25,000, which also had been borrowed from the Federal Reserve. It was not until the following day that agents discovered it inside Walker's safe at the airport.

Tischler had learned a great deal in a short, intense period. Undercover work was exciting and scary. Some agents were natural actors, able to slip easily into their new roles. Tischler, however, had remained nervous and tense for weeks. She also learned that physical danger was secondary. The biggest danger was psychological.

"You start thinking these people aren't so bad," she said. "It becomes difficult to bring a case down sometimes, if you get too close to them. Denny Fagan calls it the 'Bambi syndrome.' You just can't shoot Bambi in the end." That was one reason, she decided, that it was a good idea to have a case agent overseeing an undercover operation, providing some distance and some objective judgment. For Bonni Tischler, the fear and psychological impact of working undercover would be something that she would never forget, and something that, years later, would alter the way she would handle an even more important undercover operation.

As for Walker, the case brought good luck and bad luck. Twenty-two people were indicted as part of the drug-and-money ring, and eighteen of them went to jail. Walker managed to get the charges against him dismissed on a technicality and then he disappeared. A month later, his corpse was discovered alongside a stream just north of his Tampa airfield. The cause of death, the county coroner said at an inquest, was "a fourteen-inch cord around a fifteen-inch neck."

The Greenback crew learned later that Walker had planned to use some of their money as payment for a load of cocaine that had already been delivered to him. The Colombians apparently had decided to set an example for others who might try to avoid paying for their drugs on delivery.

The Walker case was Operation Greenback's biggest success, for it had given them a glimpse at the rising level of sophistication available to clean the dirty dollars of the drug trade. Among those who learned those lessons were Bonni Tischler and the agent who supervised the Walker undercover operation for the IRS. His name was Robert Mazur.

Despite such victories, Greenback was riddled with frustration. There was rivalry between the Customs and IRS agents, and there was a rivalry between Greenback agents and the Drug Enforcement Administration. Customs and the IRS shared the limited jurisdiction over financial crimes involved in drug dealing; the DEA was supposed to handle the drug cases themselves. This led to inevitable conflicts because the DEA agents thought there was never a case until drugs were on the table, whereas the Customs and IRS agents viewed the DEA personnel as unsophisticated.

But the biggest problem was that the federal agents lacked the legal muscle to do much about the laundering by financial institutions. They could bust a dozen Colombian money launderers a day, and there would be a dozen more the next day to take their place. The same was true with street dealers and couriers and pilots. Bodies were not the vulnerable point. Banks were "It is a money business, and if you intercept the flow of money, you've seriously damaged the business," says Senator Donald Riegle, the Michigan Democrat who heads the Senate Banking Committee.

Yet there was no federal law against money laundering when Green back started. The only weapon that the agents had to use against the banks was violation of the CTR law, which required banks to report cash transactions of $10,000 or more. Bankers often escaped prosecution by filing CTR reports but claiming they had no idea the money was from drugs. Other money launderers caught in Operation Greenback were charged only with violating the reporting requirements.

"Sometimes it was a misdemeanor to do a $10 million deal," Roger Markley, who prosecuted some of the first Greenback cases, complained later.

The money launderers also got wise to the limitations of the law. They began to structure transactions to avoid the $10,000 cash-reporting requirement. Called "smurfing," the practice involved having individuals make numerous cash deposits just under the reporting limit. Some smurfs would travel to a dozen or more banks in a day, depositing $9,800 or so in cash. This relieved the banks of the responsibility for filing a CTR and made it even tougher to prosecute financial institutions that were funneling drug cash into the world's money system.

Smurfing, however, was time-consuming for the launderers, especially the big guys dealing in multimillion-dollar payoffs. For them, it was far easier to find an accommodating banker in the United States or even to physically transport the cash to an offshore location, such as Panama or the Bahamas.

If investigations such as Operation Greenback were to really have an impact on the drug trade, there had to be a way to stop the money before it entered the banking system, for once there, criminal money looks the same as all other kinds of money. With the push of a computer button and the speed of light, funds can be spirited out of reach of U.S. authorities and regulators.

"I can hide money in the twinkling of an eye from all of the bloodhounds that could be put on the case, and I would be so far ahead of them that there would never be a hope of unraveling the trail," William Mulholland, chief executive officer of the Bank of Montreal, explained to a committee of the Canadian Senate examining the adequacy of bank regulations.

The proof of Mulholland's warning can be found in the heart of the American financial capital. It is a place where billions of dollars move with the speed of light and with unsurpassed secrecy, a place that sophisticated money launderers could not have designed better had they created it themselves. This place is not the creation of the criminal world, but of the banking world.

Behind a series of unmarked steel doors in a nondescript office building in midtown Manhattan sits a large room where the temperature is always seventy-two degrees Fahrenheit. Within that room, banks of computers and a handful of technicians control the flow of American dollars around the world. As much as $1 trillion a day changes hands inside the memory banks of a computer network that stretches around the world.

The place is called the New York Clearing House Interbank Payment System, or CHIPS. Its existence is virtually unknown outside the international financial community. Yet ninety-five percent of the world's U.S. dollar transactions between banks flow through its Unisys A-is mainframe computers.

Since going electronic in 1970, CHIPS has made the world's payment system far more efficient. So dependent has the global financial system become on CHIPS that a complete duplicate center, including main frame computers and waiting desks, has been set up across the Hudson River in New Jersey. A visitor to the New York City location can walk over to a window and, with proper guidance, pick out the small office building across the river where the clone stands ready in case some calamity shuts down the New York system.

The room in Manhattan that contains the Unisys computers is hospital white and about half the size of a football field. The temperature is kept constant and humidity is carefully controlled to provide the best possible working environment for the computers.

On a typical day, a white-coated technician sitting at a computer terminal punched in a command: SHOW VOL. Onto the screen popped the figure $815,880,067,480, the volume of dollars that had been trans ferred through CHIPS that day. Twenty seconds later, the technician typed in the command again. The new figure was a staggering billion dollars higher.

Here is how CHIPS works: A bank in Spain is instructed by a customer to transfer $1 million to an account at a bank in Panama. The Spanish bank transmits electronic instructions to its correspondent bank in New York, where a computer operator enters the transaction into the CHIPS computer through a secure link over private telephone lines. The CHIPS computer authenticates the transaction codes and automatically deducts the $1 million from the Spanish bank's account and adds it to the account of the bank in Panama. It also sends a message notifying the Panamanian bank of the transaction. At the end of the day, the transaction is included in summary reports of all the day's transactions, showing which banks owe money and which have money due.

This happens in a matter of seconds 150,000 times each business day at CHIPS and involves banks in almost every country of the world. In processing a transaction, the CHIPS computer knows and records only four scant pieces of information: the account number of the sender, the identity of the sending bank, the identity of the receiving bank, and the number of the receiving account. Often there are no names for the account holders. When one or both of the banks involved is situated in a country with strict bank secrecy laws, anonymity is guaranteed.

The importance of CHIPS in money laundering schemes was demon strated in 1987. Drug Enforcement Administration agents involved in a major undercover operation deposited $500,000 in cocaine proceeds in the bank account for the traffickers. The agents then watched as the money was moved out of Los Angeles through CHIPS to a bank account in an Asian country. The Asian account was held in the name of a phony company.

In a second wire transfer, the money was sent to Miami, where it was disguised as a loan to a phony business there. The business then used most of the $500,000 to buy three tractor-trailer trucks that were used for hauling cocaine and cash around the country.

Do big-time drug suppliers use CHIPS? Consider the case of Jose Gonzalo Rodriguez-Gacha, a top member of the Medellin cartel who was killed in late 1989 by police in Colombia. Before he was shot, authorities raided Rodriguez-Gacha's ranch and discovered twenty-two rooms containing seven computers and lots of other high-tech equipment and records. Using the seized data, the DEA traced and obtained court- ordered freezes on some $61.5 million in drug proceeds in banks around the world.

Before all the accounts could be frozen, however, the drug lord's financial advisers were able to transfer $23 million of the money out of accounts in such places as the British Virgin Islands, Hong Kong, and the Cayman Islands. The system used for the transfers was CHIPS, and the safe haven for the funds was a bank in Panama.

John Lee, a pleasant, gray-haired man whose business card bears neither a phone number nor an address, is the president of the New York Clearing House Association. Its members are the eleven largest banks in New York. Together, they operate CHIPS as a nonprofit service for the world's 132 largest banks. Thousands of smaller banks worldwide have access to CHIPS through correspondent banking affiliations with the larger institutions.

Lee estimates that ninety-nine percent of the transactions passing through CHIPS are legitimate, but it is only an estimate, based on extrapolations that are themselves educated guesses. Lee arrives at his figure by dividing the estimated total profit from drug trafficking into the total volume of dollars going through CHIPS. The total for CHIPS is precise; the drug money is not.

No one knows how much money is laundered around the world. A 1989 report by the U.S. State Department estimated that drug profits in the United States were $110 billion a year. Others have put the figure as low as $10 billion. A report in 1990 by the seven leading industrial nations said drug dealers in the United States and Europe earn $232,115 a minute. Some of the smartest minds in law enforcement, people such as Treasury Department financial crimes expert Brian Bruh, believe there is no way to come up with an accurate measure of the underground money market. Yet it is known that untold billions of that money move through CHIPS, quickly and anonymously.

"There is no way to deter illegal money transfers," says Lee, with the resignation of one who has worked long and hard at the problem. "It's like putting a drop of ketchup in a gallon of milk-it may turn pink for a minute, but then it will disappear."

The trick, according to Lee and others who know, is to stop the funds before they get into the system, before they pass the teller's window and become a drop of ketchup in an ocean of milk.

The U.S. government's crackdown on banks involved in laundering money went big-time in 1985. Instead of an obscure bank in Florida, the scandal centered on the Bank of Boston, at the time the nation's sixteenth-largest bank. It also had the third-largest overseas network among American banks.

Loan sharks and racketeers, it seems, had been bringing shopping bags filled with cash to the bank for deposit. In what the institution said were unrelated transactions, more than $1.2 billion in cash was transferred through Swiss banks and returned to the United States. All went unreported to the authorities. In addition, the bank acknowledged that it had failed to report $110 million in transfers between its Miami branch and the Caribbean.

In the wake of the scandal, dozens of major U.S. banks, hoping to avoid charges, admitted that they had neglected to file some of the required CTRs. Among them were such pillars of the New York financial community as The Chase Manhattan Bank, Chemical Bank, Irving Trust, and Manufacturers Hanover Trust Company. On the West Coast, Crocker Bank paid a fine of $2 million for failing to report $4 billion in cash transactions between itself and six Hong Kong banks as well as similar transactions with its branches on the Mexican border. And Bank of America, which had provided such a timely lift to Agha Hasan Abedi, negotiated a fine of $4.75 million for its failure to disclose cash transfers of more than $12 billion.

The American Bankers Association, the banking community's professional organization, was reported to be negotiating with the U.S. Treasury Department on behalf of forty-five banks, and dozens more were under investigation.

The Reagan administration's Treasury Department had gotten the message across to America's bankers: Report cash transactions, beware of suspicious deposits, or face substantial fines and big embarrassment. Congress got into the act, too. Hearings were held on the growing problem of money laundering. Among the witnesses were veterans of Operation Greenback, including Bonni Tischler. Responding finally to the pleas of law enforcement authorities, Congress approved a series of changes in the laws that culminated in 1986 in a much stronger statute that made money laundering a federal crime.

Among the provisions of the Money Laundering Control Act of 1986 was a requirement that bankers report transactions deemed "suspicious." No longer would they be able to turn a blind eye to drug deposits and escape punishment. For the first time, money laundering itself became a crime with the creation of two new federal offenses. One was a financial "transactions" offense, which covered such activities as "smurfing" and other means of evading reporting restrictions. The other was a "monetary transportation" offense, which covered the international movement of funds. Another section of the law made it a crime to knowingly engage in financial transactions of more than $10,000 involving money derived from criminal activity. Violations of the law could bring up to twenty years in prison.

Finally, Congress had supplied law enforcement with a broad weapon for attacking banks and bankers involved in money laundering as well as the money launderers themselves. It also tossed gasoline on the smolder ing rivalry between agencies.

The Treasury Department, which includes the Customs Service and the IRS, argued that it had developed the expertise to handle the new breed of money-laundering cases. Fearing the loss of some of its turf, the Justice Department replied that its agencies, principally the DEA and FBI, controlled investigations of most underlying crimes that would produce money-laundering prosecutions, so the primary jurisdiction should rest with it. The dispute grew so heated that Justice and Treasury were forced to sign a memorandum of understanding concerning investigative jurisdiction under the act.