As the violence spread, billions of dollars of cartel cash began to seep
into the global financial system. But a special investigation by the
Observer reveals how the increasingly frantic warnings of one London
whistleblower were ignored
On 10 April 2006, a DC-9 jet landed in the port city of Ciudad del Carmen, on the Gulf of
Mexico,
as the sun was setting. Mexican soldiers, waiting to intercept it,
found 128 cases packed with 5.7 tons of cocaine, valued at $100m. But
something else – more important and far-reaching – was discovered in the
paper trail behind the purchase of the plane by the Sinaloa
narco-trafficking cartel.
During a 22-month investigation by
agents from the US Drug Enforcement Administration, the Internal Revenue
Service and others, it emerged that the cocaine smugglers had bought
the plane with money they had laundered through one of the biggest banks
in the
United States: Wachovia, now part of the giant Wells Fargo.
The
authorities uncovered billions of dollars in wire transfers,
traveller's cheques and cash shipments through Mexican exchanges into
Wachovia accounts. Wachovia was put under immediate investigation for
failing to maintain an effective anti-money laundering programme. Of
special significance was that the period concerned began in 2004, which
coincided with the first escalation of violence along the US-Mexico
border that ignited the current drugs war.
Criminal proceedings
were brought against Wachovia, though not against any individual, but
the case never came to court. In March 2010, Wachovia settled the
biggest action brought under the US bank secrecy act, through the US
district court in Miami. Now that the year's "deferred prosecution" has
expired, the bank is in effect in the clear. It paid federal authorities
$110m in forfeiture, for allowing transactions later proved to be
connected to drug smuggling, and incurred a $50m fine for failing to
monitor cash used to ship 22 tons of cocaine.
More shocking, and
more important, the bank was sanctioned for failing to apply the proper
anti-laundering strictures to the transfer of $378.4bn – a sum
equivalent to one-third of Mexico's gross national product – into dollar
accounts from so-called
casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.
"Wachovia's
blatant disregard for our banking laws gave international cocaine
cartels a virtual carte blanche to finance their operations," said
Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than
2% of the bank's $12.3bn profit for 2009. On 24 March 2010, Wells Fargo
stock traded at $30.86 – up 1% on the week of the court settlement.
The
conclusion to the case was only the tip of an iceberg, demonstrating
the role of the "legal" banking sector in swilling hundreds of billions
of dollars – the blood money from the murderous drug trade in Mexico and
other places in the world – around their global operations, now bailed
out by the taxpayer.
At the height of the 2008 banking crisis,
Antonio Maria Costa, then head of the United Nations office on drugs and
crime, said he had evidence to suggest the proceeds from drugs and
crime were "the only liquid investment capital" available to banks on
the brink of collapse. "Inter-bank loans were funded by money that
originated from the
drugs trade," he said. "There were signs that some banks were rescued that way."
Wachovia
was acquired by Wells Fargo during the 2008 crash, just as Wells Fargo
became a beneficiary of $25bn in taxpayers' money. Wachovia's
prosecutors were clear, however, that there was no suggestion Wells
Fargo had behaved improperly; it had co-operated fully with the
investigation. Mexico is the US's third largest international trading
partner and Wachovia was understandably interested in this volume of
legitimate trade.
José Luis Marmolejo, who prosecuted those running one of the
casas de cambio at the Mexican end, said: "Wachovia handled all the transfers. They never reported any as suspicious."
"As
early as 2004, Wachovia understood the risk," the bank admitted in the
statement of settlement with the federal government, but, "despite these
warnings, Wachovia remained in the business". There is, of course, the
legitimate use of CDCs as a way into the Hispanic market. In 2005 the
World Bank said that Mexico was receiving $8.1bn in remittances.
During research into the Wachovia Mexican case, the
Observer
obtained documents previously provided to financial regulators. It
emerged that the alarm that was ignored came from, among other places,
London, as a result of the diligence of one of the most important
whistleblowers of our time. A man who, in a series of interviews with
the
Observer, adds detail to the documents, laying bare the
story of how Wachovia was at the centre of one of the world's biggest
money-laundering operations.
Martin Woods, a Liverpudlian in his
mid-40s, joined the London office of Wachovia Bank in February 2005 as a
senior anti-money laundering officer. He had previously served with the
Metropolitan police drug squad. As a detective he joined the
money-laundering investigation team of the National Crime Squad, where
he worked on the British end of the Bank of New York money-laundering
scandal in the late 1990s.
Woods talks like a police officer – in
the best sense of the word: punctilious, exact, with a roguish humour,
but moral at the core. He was an ideal appointment for any bank eager to
operate a diligent and effective risk management policy against the
lucrative scourge of high finance: laundering, knowing or otherwise, the
vast proceeds of criminality, tax-evasion, and dealing in arms and
drugs.
Woods had a police officer's eye and a police officer's
instincts – not those of a banker. And this influenced not only his
methods, but his mentality. "I think that a lot of things matter more
than money – and that marks you out in a culture which appears to
prevail in many of the banks in the world," he says.
Woods was set
apart by his modus operandi. His speciality, he explains, was his
application of a "know your client", or KYC, policing strategy to
identifying dirty money. "KYC is a fundamental approach to anti-money
laundering, going after tax evasion or counter-terrorist financing. Who
are your clients? Is the documentation right? Good, responsible banking
involved always knowing your customer and it still does."
When he
looked at Wachovia, the first thing Woods noticed was a deficiency in
KYC information. And among his first reports to his superiors at the
bank's headquarters in Charlotte, North Carolina, were observations on a
shortfall in KYC at Wachovia's operation in London, which he set about
correcting, while at the same time implementing what was known as an
enhanced transaction monitoring programme, gathering more information on
clients whose money came through the bank's offices in the City, in
sterling or euros. By August 2006, Woods had identified a number of
suspicious transactions relating to
casas de cambio customers in Mexico.
Primarily,
these involved deposits of traveller's cheques in euros. They had
sequential numbers and deposited larger amounts of money than any
innocent travelling person would need, with inadequate or no KYC
information on them and what seemed to a trained eye to be dubious
signatures. "It was basic work," he says. "They didn't answer the
obvious questions: 'Is the transaction real, or does it look synthetic?
Does the traveller's cheque meet the protocols? Is it all there, and if
not, why not?'"
Woods discussed the matter with Wachovia's global
head of anti-money laundering for correspondent banking, who believed
the cheques could signify tax evasion. He then undertook what banks call
a "look back" at previous transactions and saw fit to submit a series
of SARs, or suspicious activity reports, to the authorities in the UK
and his superiors in Charlotte, urging the blocking of named parties and
large series of sequentially numbered traveller's cheques from Mexico.
He issued a number of SARs in 2006, of which 50 related to the
casas de cambio
in Mexico. To his amazement, the response from Wachovia's Miami office,
the centre for Latin American business, was anything but supportive –
he felt it was quite the reverse.
As it turned out, however, Woods
was on the right track. Wachovia's business in Mexico was coming under
closer and closer scrutiny by US federal law enforcement. Wachovia was
issued with a number of subpoenas for information on its Mexican
operation. Woods has subsequently been informed that Wachovia had six or
seven thousand subpoenas. He says this was "An absurd number. So at
what point does someone at the highest level not get the feeling that
something is very, very wrong?"
In April and May 2007, Wachovia –
as a result of increasing interest and pressure from the US attorney's
office – began to close its relationship with some of the
casas de cambio.
But rather than launch an internal investigation into Woods's alerts
over Mexico, Woods claims Wachovia hung its own money-laundering expert
out to dry. The records show that during 2007 Woods "continued to submit
more SARs related to the
casas de cambio".
In July 2007, all of Wachovia's remaining 10 Mexican
casa de cambio
clients operating through London suddenly stopped doing so. Later in
2007, after the investigation of Wachovia was reported in the US
financial media, the bank decided to end its remaining relationships
with the Mexican
casas de cambio globally. By this time, Woods
says, he found his personal situation within the bank untenable; while
the bank acted on one level to protect itself from the federal
investigation into its shortcomings, on another, it rounded on the man
who had been among the first to spot them.
On 16 June Woods was
told by Wachovia's head of compliance that his latest SAR need not have
been filed, that he had no legal requirement to investigate an overseas
case and no right of access to documents held overseas from Britain,
even if they were held by Wachovia.
Woods's life went into
freefall. He went to hospital with a prolapsed disc, reported sick and
was told by the bank that he not done so in the appropriate manner, as
directed by the employees' handbook. He was off work for three weeks,
returning in August 2007 to find a letter from the bank's compliance
managing director, which was unrelenting in its tone and words of
warning.
The letter addressed itself to what the manager called
"specific examples of your failure to perform at an acceptable
standard". Woods, on the edge of a breakdown, was put on sick leave by
his GP; he was later given psychiatric treatment, enrolled on a stress
management course and put on medication.
Late in 2007, Woods
attended a function at Scotland Yard where colleagues from the US were
being entertained. There, he sought out a representative of the Drug
Enforcement Administration and told him about the
casas de cambio,
the SARs and his employer's reaction. The Federal Reserve and officials
of the office of comptroller of currency in Washington DC then "spent a
lot of time examining the SARs" that had been sent by Woods to
Charlotte from London.
"They got back in touch with me a while
afterwards and we began to put the pieces of the jigsaw together," says
Woods. What they found was – as Costa says – the tip of the iceberg of
what was happening to drug money in the banking industry, but at least
it was visible and it had a name: Wachovia.
In June 2005,
the DEA, the criminal division of the Internal Revenue Service and the
US attorney's office in southern Florida began investigating wire
transfers from Mexico to the US. They were traced back to correspondent
bank accounts held by
casas de cambio at Wachovia. The CDC accounts were supervised and managed by a business unit of Wachovia in the bank's Miami offices.
"Through
CDCs," said the court document, "persons in Mexico can use hard
currency and … wire transfer the value of that currency to US bank
accounts to purchase items in the United States or other countries. The
nature of the CDC business allows money launderers the opportunity to
move drug dollars that are in Mexico into CDCs and ultimately into the
US banking system.
"On numerous occasions," say the court papers,
"monies were deposited into a CDC by a drug-trafficking organisation.
Using false identities, the CDC then wired that money through its
Wachovia correspondent bank accounts for the purchase of airplanes for
drug-trafficking organisations." The court settlement of 2010 would
detail that "nearly $13m went through correspondent bank accounts at
Wachovia for the purchase of aircraft to be used in the illegal
narcotics trade. From these aircraft, more than 20,000kg of cocaine were
seized."
All this occurred despite the fact that Wachovia's
office was in Miami, designated by the US government as a
"high-intensity money laundering and related financial crime area", and a
"high-intensity drug trafficking area". Since the drug cartel war began
in 2005, Mexico had been designated a high-risk source of money
laundering.
"As early as 2004," the court settlement would read,
"Wachovia understood the risk that was associated with doing business
with the Mexican CDCs. Wachovia was aware of the general industry
warnings. As early as July 2005, Wachovia was aware that other large US
banks were exiting the CDC business based on [anti-money laundering]
concerns … despite these warnings, Wachovia remained in business."
On
16 March 2010, Douglas Edwards, senior vice-president of Wachovia Bank,
put his signature to page 10 of a 25-page settlement, in which the bank
admitted its role as outlined by the prosecutors. On page 11, he signed
again, as senior vice-president of Wells Fargo. The documents show
Wachovia providing three services to 22 CDCs in Mexico: wire transfers, a
"bulk cash service" and a "pouch deposit service", to accept "deposit
items drawn on US banks, eg cheques and traveller's cheques", as spotted
by Woods.
"For the time period of 1 May 2004 through 31 May 2007,
Wachovia processed at least $$373.6bn in CDCs, $4.7bn in bulk cash" – a
total of more than $378.3bn, a sum that dwarfs the budgets debated by
US state and UK local authorities to provide services to citizens.
The
document gives a fascinating insight into how the laundering of drug
money works. It details how investigators "found readily identifiable
evidence of red flags of large-scale money laundering". There were
"structured wire transfers" whereby "it was commonplace in the CDC
accounts for round-number wire transfers to be made on the same day or
in close succession, by the same wire senders, for the … same account".
Over
two days, 10 wire transfers by four individuals "went though Wachovia
for deposit into an aircraft broker's account. All of the transfers
were in round numbers. None of the individuals of business that wired
money had any connection to the aircraft or the entity that allegedly
owned the aircraft. The investigation has further revealed that the
identities of the individuals who sent the money were false and that the
business was a shell entity. That plane was subsequently seized with
approximately 2,000kg of cocaine on board."
Many of the
sequentially numbered traveller's cheques, of the kind dealt with by
Woods, contained "unusual markings" or "lacked any legible signature".
Also, "many of the CDCs that used Wachovia's bulk cash service sent
significantly more cash to Wachovia than what Wachovia had expected.
More specifically, many of the CDCs exceeded their monthly activity by
at least 50%."
Recognising these "red flags", the US attorney's
office in Miami, the IRS and the DEA began investigating Wachovia, later
joined by FinCEN, one of the US Treasury's agencies to fight money
laundering, while the office of the comptroller of the currency carried
out a parallel investigation. The violations they found were, says the
document, "serious and systemic and allowed certain Wachovia customers
to launder millions of dollars of proceeds from the sale of illegal
narcotics through Wachovia accounts over an extended time period. The
investigation has identified that at least $110m in drug proceeds were
funnelled through the CDC accounts held at Wachovia."
The
settlement concludes by discussing Wachovia's "considerable co-operation
and remedial actions" since the prosecution was initiated, after the
bank was bought by Wells Fargo. "In consideration of Wachovia's remedial
actions," concludes the prosecutor, "the United States shall recommend
to the court … that prosecution of Wachovia on the information filed …
be deferred for a period of 12 months."
But while the federal
prosecution proceeded, Woods had remained out in the cold. On Christmas
Eve 2008, his lawyers filed tribunal proceedings against Wachovia for
bullying and detrimental treatment of a whistleblower. The case was
settled in May 2009, by which time Woods felt as though he was "the most
toxic person in the bank". Wachovia agreed to pay an undisclosed
amount, in return for which Woods left the bank and said he would not
make public the terms of the settlement.
After years of
tribulation, Woods was finally formally vindicated, though not by
Wachovia: a letter arrived from John Dugan, the comptroller of the
currency in Washington DC, dated 19 March 2010 – three days after the
settlement in Miami. Dugan said he was "writing to personally recognise
and express my appreciation for the role you played in the actions
brought against Wachovia Bank for violations of the bank secrecy act …
Not only did the information that you provided facilitate our
investigation, but you demonstrated great personal courage and integrity
by speaking up. Without the efforts of individuals like you, actions
such as the one taken against Wachovia would not be possible."
The
so-called "deferred prosecution" detailed in the Miami document is a
form of probation whereby if the bank abides by the law for a year,
charges are dropped. So this March the bank was in the clear. The week
that the deferred prosecution expired, a spokeswoman for Wells Fargo
said the parent bank had no comment to make on the documentation
pertaining to Woods's case, or his allegations. She added that there was
no comment on Sloman's remarks to the court; a provision in the
settlement stipulated Wachovia was not allowed to issue public
statements that contradicted it.
But the settlement leaves a sour
taste in many mouths – and certainly in Woods's. The deferred
prosecution is part of this "cop-out all round", he says. "The
regulatory authorities do not have to spend any more time on it, and
they don't have to push it as far as a criminal trial. They just issue
criminal proceedings, and settle. The law enforcement people do what
they are supposed to do, but what's the point? All those people dealing
with all that money from drug-trafficking and murder, and no one goes to
jail?"
One of the foremost figures in the training of
anti-money laundering officers is Robert Mazur, lead infiltrator for US
law enforcement of the Colombian Medellín cartel during the epic
prosecution and collapse of the BCCI banking business in 1991 (his story
was made famous by his memoir,
The Infiltrator, which became a movie).
Mazur,
whose firm Chase and Associates works closely with law enforcement
agencies and trains officers for bank anti-money laundering, cast a keen
eye over the case against Wachovia, and he says now that "the only
thing that will make the banks properly vigilant to what is happening is
when they hear the rattle of handcuffs in the boardroom".
Mazur
said that "a lot of the law enforcement people were disappointed to see a
settlement" between the administration and Wachovia. "But I know there
were external circumstances that worked to Wachovia's benefit, not least
that the US banking system was on the edge of collapse."
What
concerns Mazur is that what law enforcement agencies and politicians
hope to achieve against the cartels is limited, and falls short of the
obvious attack the US could make in its war on drugs: go after the
money. "We're thinking way too small," Mazur says. "I train law
enforcement officers, thousands of them every year, and they say to me
that if they tried to do half of what I did, they'd be arrested. But I
tell them: 'You got to think big. The headlines you will be reading in
seven years' time will be the result of the work you begin now.' With
BCCI, we had to spend two years setting it up, two years doing
undercover work, and another two years getting it to trial. If they want
to do something big, like go after the money, that's how long it
takes."
But Mazur warns: "If you look at the career ladders of law
enforcement, there's no incentive to go after the big money. People
move every two to three years. The DEA is focused on drug trafficking
rather than money laundering. You get a quicker result that way – they
want to get the traffickers and seize their assets. But this is like
treating a sick plant by cutting off a few branches – it just grows new
ones. Going after the big money is cutting down the plant – it's a
harder door to knock on, it's a longer haul, and it won't get you the
short-term riches."
The office of the comptroller of the
currency is still examining whether individuals in Wachovia are
criminally liable. Sources at FinCEN say that a so-called "look-back" is
in process, as directed by the settlement and agreed to by Wachovia,
into the $378.4bn that was not directly associated with the aircraft
purchases and cocaine hauls, but neither was it subject to the proper
anti-laundering checks. A FinCEN source says that $20bn already examined
appears to have "suspicious origins". But this is just the beginning.
Antonio
Maria Costa, who was executive director of the UN's office on drugs and
crime from May 2002 to August 2010, charts the history of the
contamination of the global banking industry by drug and criminal money
since his first initiatives to try to curb it from the European
commission during the 1990s. "The connection between organised crime and
financial institutions started in the late 1970s, early 1980s," he
says, "when the mafia became globalised."
Until then, criminal
money had circulated largely in cash, with the authorities making the
occasional, spectacular "sting" or haul. During Costa's time as director
for economics and finance at the EC in Brussels, from 1987, inroads
were made against penetration of banks by criminal laundering, and
"criminal money started moving back to cash, out of the financial
institutions and banks. Then two things happened: the financial crisis
in Russia, after the emergence of the Russian mafia, and the crises of
2003 and 2007-08.
"With these crises," says Costa, "the banking
sector was short of liquidity, the banks exposed themselves to the
criminal syndicates, who had cash in hand."
Costa questions the
readiness of governments and their regulatory structures to challenge
this large-scale corruption of the global economy: "Government
regulators showed what they were capable of when the issue suddenly
changed to laundering money for terrorism – on that, they suddenly
became serious and changed their attitude."
Hardly surprising,
then, that Wachovia does not appear to be the end of the line. In August
2010, it emerged in quarterly disclosures by HSBC that the US justice
department was seeking to fine it for anti-money laundering compliance
problems reported to include dealings with Mexico.
"Wachovia
had my résumé, they knew who I was," says Woods. "But they did not want
to know – their attitude was, 'Why are you doing this?' They should
have been on my side, because they were compliance people, not
commercial people. But really they were commercial people all along.
We're talking about hundreds of millions of dollars. This is the biggest
money-laundering scandal of our time.
"These are the proceeds of
murder and misery in Mexico, and of drugs sold around the world," he
says. "All the law enforcement people wanted to see this come to trial.
But no one goes to jail. "What does the settlement do to fight the
cartels? Nothing – it doesn't make the job of law enforcement easier and
it encourages the cartels and anyone who wants to make money by
laundering their blood dollars. Where's the risk? There is none.
"Is
it in the interest of the American people to encourage both the drug
cartels and the banks in this way? Is it in the interest of the Mexican
people? It's simple: if you don't see the correlation between the money
laundering by banks and the 30,000 people killed in Mexico, you're
missing the point."
Woods feels unable to rest on his laurels. He
tours the world for a consultancy he now runs, Hermes Forensic
Solutions, counselling and speaking to banks on the dangers of
laundering criminal money, and how to spot and stop it. "New York and
London," says Woods, "have become the world's two biggest laundries of
criminal and drug money, and offshore tax havens. Not the Cayman
Islands, not the Isle of Man or Jersey. The big laundering is right
through the City of London and Wall Street.
"After the Wachovia
case, no one in the regulatory community has sat down with me and asked,
'What happened?' or 'What can we do to avoid this happening to other
banks?' They are not interested. They are the same people who attack the
whistleblowers and this is a position the [British] Financial Services
Authority at least has adopted on legal advice: it has been advised that
the confidentiality of banking and bankers takes primacy over the
public information disclosure act. That is how the priorities work:
secrecy first, public interest second.
"Meanwhile, the drug
industry has two products: money and suffering. On one hand, you have
massive profits and enrichment. On the other, you have massive
suffering, misery and death. You cannot separate one from the other.
"What
happened at Wachovia was symptomatic of the failure of the entire
regulatory system to apply the kind of proper governance and adequate
risk management which would have prevented not just the laundering of
blood money, but the global crisis."
