COVER

HIDING THE DRUG MONEY

CRIMINALS ARE USING CANADA TO LAUNDER BILLIONS OF DOLLARS IN DRUG PROFITS

HOLGER JENSEN October 23 1989
COVER

HIDING THE DRUG MONEY

CRIMINALS ARE USING CANADA TO LAUNDER BILLIONS OF DOLLARS IN DRUG PROFITS

HOLGER JENSEN October 23 1989

HIDING THE DRUG MONEY

COVER

CRIMINALS ARE USING CANADA TO LAUNDER BILLIONS OF DOLLARS IN DRUG PROFITS

The trail of $3 million in crisp currency—much of it in $1,000 bills—led directly back to Canada. It started last April, when U.S. drug enforcement agents smashed their way into a Miami home, where they found the $3 million in Canadian cash being packaged for shipment offshore. It was the biggest single seizure of Canadian drug money anywhere in North America, and it dramatically underscored a growing criminal problem. Maclean’s has learned that, in Miami alone, police now uncover 10 to 15 cases a month of either drug trafficking or money laundering with a Canadian connection. And equally telling, since Jan. 1, Canadian banks have reported 200 suspicious

deposits of what they say may be illegal drug profits, part of an estimated $10 billion in annual illicit drug revenues in Canada alone. Some of it is smuggled out of the country; the rest washes up against the doors of Canada’s major banks.

Illegal: Last week, in Windsor, Ont., the RCMP charged a suburban Detroit man with attempting to launder illegal profits from the sale of prescription drugs at a local bank. And on Nov. 15, Canadians will gèt a clearer picture of the extent of this traffic when two men go on trial in Fredericton for importing 500 kg of cocaine. Although they were caught when their light plane crashed in New Brunswick, agents of the U.S. Drug Enforcement Administration (DEA) say that two or three planeloads of similar size are making it through the Maritimes undetected every month. The millions of dollars in Canadian cash that are now turning up in Miami are payments for such shipments. Moreover, according to narcotics intelligence reports compiled by various drug enforcement agencies in Washington, D.C., more z American cocaine money and cash z from Asian heroin shipments is also moving through Canada. The slow and steady increase has occurred despite Bill C-61—a so-called freeze-and-seize statute designed to stop money laundering—that took effect in January of this year. Maclean’s has learned that the federal government is considering toughening C-61, but for now, Canadian banking practices remain far looser than those in the United States. All available evidence suggests that international drug barons view Canada as a safe place to launder their illegal cash. In fact, DEA agents laughingly refer to Canada as the “Maytag” of the money-laundering industry.

Money laundering—disguising the criminal origins of drug money by investing it in legitimate enterprises to avoid seizure—was not even a crime in Canada before the enactment of C-61. But now, cash and property belonging to

suspected drug traffickers can be confiscated. The challenge is daunting. While police forces in Canada have seized $30 million in cash and property this year, this amounts to only a fraction of drug profits—about 80 per cent of Canada’s $10 billion in drug revenues. In the United States, law enforcement agencies seize about $1 billion worth of drug-financed goods and real estate every year, but this, too, comes to less than one per cent of the estimated $110 billion that is generated by U.S. drug deals.

Defence: The trail of illegal profits respects no international boundary and is as complicated as it is sophisticated. Some of the money is smuggled out of Canada in bulk—the same way the drugs came in. Some of it is used to finance further drug shipments and legal-defence funds for traffickers who get caught. But most of it has to be moved through banks and other legitimate businesses before it can be invested or spent. “Simple arithmetic tells you it’s getting into the banking system,” says Rod Stander, until earlier this year the RCMP’s top specialist on money laundering, and now a partner in the accounting firm of Peat Marwick Thorne.

Canada’s emergence as a haven for international drug smugglers trying to clean their dirty drug money attracted attention last month, when Massachusetts Senator John Kerry quoted from a confidential report prepared 16 months ago by the DEA and the RCMP. The report said that the amount of cash being carried illegally into Canada, and the numbers of electronic transfers of money between American and Canadian banks, are on the increase. And it added that one of the reasons for the increases was that Canadian banks do not have to report transactions of $10,000 or more, as American banks must. Said Kerry, pointedly: “Canada is a friendly country whose bankers are thumbing their noses at our banking laws.” For its part, the Canadian Bankers’ Association responded quickly and angrily. Michael Ballard, the association’s director of security, said that Kerry’s remarks were “offensive and had no basis in fact.” Canadian banks, he added, are making a “credible effort” to police themselves and co-operate with the RCMP on a voluntary basis.

In Ottawa, Gilles Loiselle, the minister of state for finance, who administers Bill C-61, said that Ottawa’s antilaundering law is "probably the best of its kind anywhere in the world. It has given us the tools to fight the problem.” But he acknowledged that it is too early to say whether it has been a success.

Sliding: Loiselle also dismissed the DEARCMP report as outdated, pointing out that it was completed in June, 1988, she months before C-61 went on the books. The new law makes laundering a crime punishable by up to 10 years in prison and imposes a sliding scale of fines, which are worked out as a percentage of the amount of money or assets that police believe are held illegally but cannot retrieve. It also permits the freezing of suspicious bank accounts and the seizure of all other drugfinanced assets, and provides statutory protec-

CANADA HAS BECOME THE '

OF THE MONEY-LAUNDERING INDUSTRY

tion for banks that inform on their customers to the police.

Although there is no mandatory reporting requirement, Canada’s major banks have instructed tellers and other front-counter personnel on how to spot money laundering. Tellers at the Canadian Imperial Bank of Commerce (CIBC) watched a bank-produced video showing them how to spot innocent-looking couriers—known as smurfs—or unusual bank transactions that might be the seed of a major money-laundering scam. And the sessions have had some success. The Commerce’s security department manager, Ted Porter, said that the bank helped uncover a multimillion-dollar moneylaundering scheme last year.

The $ 12-million case, currently under investigation by the police, involved a group of money launderers as well as other Canadian banks and their help.

Action: In last week’s action, the RCMP said that it had charged a suburban Detroit doctor with attempting to launder illegal drug money across the Detroit River in a Windsor, Ont., branch of the Royal Bank of Canada. Police said that on Sept. 7, Dr. Kutub Mesiwala, 38, and his wife, Munira, 29, attempted to withdraw some money from their account at the bank. But the assets in all their accounts had been frozen under a Supreme Court of Ontario restraining order. Outside the branch, RCMP officers seized the U.S. doctor and charged him with laundering $460,000 in drug profits from the illegal sale of prescription drugs. The pair, together with Mesiwala’s stepfather, Jaferbhai Pachmarhiwala, 67, allegedly used six accounts at two Royal Bank branches in Windsor— with some of the accounts dating back to 1984. All three are out on bail and have returned to their home in Bloomfield Hills. But Munira Mesiwala denied any wrongdoing. She told Maclean ’s:“It is not true. It is absolutely wrong.”

The first evidence that

Canada had been signalled out as a haven by big-time money launderers occurred in 1983, when Luis Pinto, a Colombian legislator and prominent businessman, was arrested in the United States for his role in a massive conspiracy to disguise cocaine profits. Among the illegal

profits to which he confessed was $726,000 deposited in the main Montreal branch of the Royal Bank of Canada. The RCMP tried to seize the funds under provisions of the Criminal Code that allow the proceeds of crime to be recouped. But in 1985, the Supreme Court ruled that bank deposits, unlike cash found at the scene of a crime, were not a tangible asset and that they could not be confiscated. Still, Pinto never got to enjoy his ill-gotten gains—he was murdered at a motel out^ side St. Petersburg, Fla., in t; 1985—although the money 5? went to his in-laws in Spain.

I But recent developments I suggest that C-61 has done z little to deter the growing use 1 of Canada as an illegal laun-

dromat. Indeed, the annual currency seizures at U.S. Customs posts along the Canadian border have more than tripled—to $22.6 million as of Sept. 30 this year from $7.2 million in 1988. In addition, seizures of unreported U.S.bound cash above the legal limit at customs pre-clearance stations in major Canadian airports now total more than $1 million a month. According to the U.S. Customs service, socalled currency-smuggling hot spots include Seattle, Vancouver International Airport, Toronto’s Lester B. Pearson International Airport and Montreal’s Dorval Airport. Even so, a U.S. Customs official, who asked not be identified—he works at the North-Central Regional Office in Chicago, which administers all inspection stations along the 8,890km Canadian border—said that the risk of detection remains low. He added: “To all intents and purposes, it’s an open border. The sheer volume of traffic makes it impossible to intercept more than a fraction of what is getting through.”

Battle: And the growing battle against the moneylaundering criminals is borne out by the growing case load of the RCMP’s Anti-Drug Profiteering Section. In one recent case, Cpl. Gary Nichols of the section’s Toronto squad tracked down a SwissAmerican drug dealer who brought $1.4 million into Canada. Of that amount, $790,000 in $100 bills was ultimately seized by Cpl. Nichols—the biggest cash seizure in Canada. Said Sgt. Peter Fatijewskyj, head of the same unit: “There are five of us in the Toronto squad, and we’ve each seized more than a million this year.”

Still, according to the RCMP, bulk shipments of cash, whether in suitcases, laundry bags, cars, trucks, planes or motor homes, account for only a small share of the drug profits being smuggled in and out of Canada. The largest amounts of drug money now move electronically. Typically, illegal money is placed in the account of a bank in a foreign country and then moved by wire or electronic transfer to a series of banks in other countries. A white paper released by the American Bankers Association last April says that electronic bank transfers have emerged as the primary method by which high-volume launderers ply their trade.

Police: Ottawa-based RCMP Insp. Bruce Bowie, who heads the 60-officer Anti-Drug Profiteering Section of the RCMP and holds a bachelor of commerce degree from the University of Calgary, says that such electronic transactions are impossible to detect unless investigators already know what they are looking for. Even

Ballard of the Canadian Bankers’ Association concedes: “We’re not saying that there isn’t some drug money in Canadian banks. There’s just no way of knowing how much.” And finding it could grind the banking system to a halt: the total of electronic money transfers in Canada was $1 trillion in 1988.

Smuggle: Once the laundered money is in the banking system, it can be used in a variety of sophisticated corporate layering techniques that further disguise its origins. One case now being prosecuted in Toronto involves a 12person marijuana-smuggling gang that created 46 dummy corporations in seven different countries to launder $100 million over the past five years. Their plan was so complex that the launderers kept track of the funds by using a flow chart, aptly named the “Spaghetti Jungle.”

Another bank money-laundering case involved some Caribbean branches of the Bank of Nova Scotia. In the early 1980s, U.S. federal authorities determined that the offshore branches had been unknowingly accepting cocaine money. And, in 1986, several Montreal financial institutions served as unwitting conduits for heroin money in the so-called Pizza Connection. Heroin traffickers who operated out of North American pizzerias purchased cashiers’ cheques in Montreal and flew them to Hong Kong, where banks then transferred the funds to Zurich.

And banks in Toronto and Vancouver have also served as innocent conduits of drug money in a worldwide laundering scheme, involving the Luxembourg-based Bank of Credit and Commerce International, which led to the indictment of 80 bankers and drug traffickers in 1988.

This year, a U.S. DEA investigation known as Polar Ice Cap, which involved the Medellin cartel, a drug ring operated out of palatial headquarters in Bogotá and headed by kingpin Pablo Escobar, identified Swiss Bank Corp. (Canada), a Toronto-based subsidiary of Swiss Bank Corp., as a repository of $14 million in drug money. It was part of a $1.4-billion case that is still unravelling in the United States. Terrence Burke, the DEA’s deputy assistant administrator in Washington, said that when details of the operation were first divulged in April, one of the implicated banks, Banco de Occidente of Panama, started to clean out its U.S. accounts and wired two large sums of money to Toronto and Switzerland.

Burke said that the DEA received full co-operation from Canadian and Swiss authorities and the banks involved, securing the return of the funds to the United States, where they were frozen.

Banco de Occidente subsequently pleaded guilty to money laundering in the Atlanta federal district court -

and was fined $5 million on top of the forfeited funds.

Constraints: RCMP money-laundering experts say that Canada has an ideal laundering profile—geographic proximity to the world’s biggest drug market, a stable government, a stable currency, a sophisticated financial infrastructure that permits unrestricted movement of funds and democratic constraints on its

police. Explained former RCMP officer Ständer: “Legitimate businessmen try to cheat the tax man. It’s called good business practice. Drug traffickers try to do the opposite—they want to pay taxes because that further legitimizes their income. The most successful money-laundering operation is one that uses existing systems and is fully taxed.”

Battery: Ständer adds that U.S. drug money can enter Canada for investment purposes or simply pass through the Canadian banking system to a third country. Money launderers use a whole battery of devices, from socalled smurfing to underground banking (page 54). Says Stander: “If it’s invested here, the RCMP has more time to try to trace it and seize it. But if it is just passing through, we usually hear about it only after it is gone.”

Once the money has moved to such foreign banking capitals as Zurich, Paris or London, Canadian authorities must first secure the cooperation of other governments. Still, if the final destination is a tax haven such as the Cayman Islands or Hong Kong, pursuing the trail is almost impossible. As well, the RCMP acknowledges that it has even more difficulty tracing Asian and Middle Eastern heroin money, which often relies on an underground banking system. “If a Chinese heroin trafficker gives $10 million in any negotiable currency to a money changer in Hong Kong and collects a like amount in Canadian dollars, less commissions, _ in Vancouver, he’s home 2 free,” explained Stamler. g Canadian bankers, mean| whde, insist that they are ^ doing their part to stop illegal 2 transfers and can do it within g existing legislation. They u maintain that, because Canada has a highly centralized

banking system, it does not

need strict, U.S.-style regulation. William Smythe, head of security for the TorontoDominion Bank, cites the voluntary reporting of suspicious deposits carried out by all the major banks and many of the smaller ones. And at the Toronto-Dominion, he adds, “If we don’t know you, or where your money came from, we won’t take it.”

But Peter Appleton, director of the corpo-

rate Alliance for a Drug-Free Canada, a nonprofit organization funded by 50 of Canada’s largest corporations, says tougher measures are still needed. “Policing yourself does not really work, because there are no penalties for noncompliance,” he said.

“At best, it encourages carelessness; at worst, criminal complicity.”

Still, Canadian bankers claim that the U.S. requirement of reporting all transactions of $10,000 (U.S.) or more has achieved little beyond creating a huge backlog of data. Michael McDonald, chief of the Internal Revenue Service’s criminal investigation division in Miami, disagrees. He says that the law is effective—his agents have seized more than $100 million over the past five years as a result of tips stemming from currency-transaction reports, which are required by law. The CTRs, as they are known, are fed into an 1RS computer in Detroit at the rate of about seven million a year. There, analysts look for unusual banking activity, such as heavy deposits in previously dormant accounts or a sudden flurry of small deposits in a certain geographic area. Said McDonald: “CTRs are very useful in tracking drug money. And of course they turn up all sorts of other scams.”

Bigger: Because their problem was much bigger and became apparent much sooner than Canada’s, the Americans had a head start in going after drug profits. Even before money laundering was outlawed, U.S. law enforcement agencies were armed with the Bank Secrecy Act and a host of other taxevasion, racketeering and conspiracy provisions allowing for the confiscation of crime proceeds. In 1984, laws governing seizures, both civil and criminal, were broadened to include real property (page 49).

Money laundering in the United States became a crime in 1986, and the Anti-Drug Abuse Act of 1988 contains almost draconian measures that opened a whole new front in the war on traffickers and their profits. As a result, the DEA’S total asset seizures in the past 12 months amounted to $930 million, about 60 per cent of it in cash, representing a 42-per-cent increase over the previous year.

In comparison, the Canadian legislative anti-drug effort is not as extensive. Although Canada has a four-yearold Mutual Legal Assistance Treaty

with the United States, the U.S. Senate has not yet ratified it. And while Canadian representatives discussed stricter controls during the economic summit in Paris in September, Loiselle told reporters in Ottawa last month that he did not favor forcing banks to comply as long as they co-operate voluntarily. Still, Loiselle

told Maclean 'slast week that he may buttress C-61, perhaps even imposing mandatory reports on currency deposits similar to the ones used in the United States. Explained the minister: “We have looked at imposing similar limits three times. But we are not convinced that it works there—or that it would work here.”

Devotes: The United States also provides more manpower and dollars for fighting money laundering. In contrast to the multiplicity of U.S. federal agencies—the DEA, FBI, CIA, 1RS, U.S. marshals, Treasury, Customs, the state department, National Security Council and even the postal service—buttressed by state and local police—Canada has a national drug strategy that devotes only $46 million to law enforcement and must rely primarily on the 60 officers in the RCMP’s Anti-Drug Profiteering Section, backed up by a few municipal drug squads. Still, the RCMP has scored some amazing successes— this year’s seizures of $30 million account for more than half the total assets confiscated in the past eight years under the old proceeds of crime laws.

But opinion is divided on whether this is the result of more effective legislation or simply reflects the burgeoning flow of drug money into Canada. Peat Marwick’s Stander and some of his former RCMP colleagues contend that C-61 is seriously flawed by a clause that holds the Crown liable for any losses suffered by a property owner whose assets are seized improperly or returned as the result of an acquittal. “When you’re dealing with drug assets, that could amount to millions of dollars,” said Stander. “Understandably, prosecutors are not too eager to invoke the law unless they have a rock-solid case,” he added. Even so, with the number of money-laundering cases expected to grow dramatically as massive cocaine shipments continue to pour into Canada, both prosecutors and police will be forced to step up their use of C-61. And as the global battle against the drug lords heats up, the federal government may be forced to toughen C-61— the crucial weapon in its arsenal.

WILLIAM LOWTHER

JOHN DEMONT

ANN WALMSLEY

HOLGER JENSEN in Miami with WILLIAM LOWTHER in Washington and JOHN DEMONT and ANN WALMSLEY in Toronto