American Banks and the War on Drugs

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.