Black Market Peso Exchange

Innovative South American narco-traffickers have recently expanded their cocaine smuggling repertoire with the use of diesel-electric submarines capable of handling ten-ton loads, replete with conning tower, periscope and air-conditioning. Such stealthy shipping vessels demonstrate clearly that well-funded drug cartels can approach the transportation of their product imaginatively.

Yet, when it comes time to the laundering of billions generated from the sale of cocaine, it would appear that ‘…what is old is new again.’ Law enforcement has been disrupting Black Market Peso Exchange money laundering networks for decades, but a recent case in Los Angeles adds a new twist to a proven method of reducing ill-gotten cash into clean financial instruments that are employed to pay the narco-trafficker’s tuition bills at top private schools.

The operation of a Black Market Peso Exchange is rather ingenious, as it relies on a transfer of title and not a movement of funds across borders, a perilous exercise that can be intercepted by the authorities, thereby limiting financial gains.

Generating millions in cash is a by-product of selling cocaine. In theoretical terms, the cocaine wholesaler can then ship the cash to his suppliers in South America, an exercise fraught with risk. Alternatively, the wholesaler can slowly place his cash into various retail banking accounts (known as smurfing) and then wire it to South America, a high-risk exercise made even more difficult by the coordianted efforts of financial institutions, law enforcement and financial intelligence units.

Originating in Colombia during the 1970s, the Black ­Market Peso Exchange relied on a restricted domestic currency – the Colombian peso (COP) – and domestic trading firms unwilling to pay the artificial USD/COP exchange rate set by the government to purchase goods overseas and import them into Colombia and other South American countries, usually through the free trade zone in Panama.

A broker in a Black Market Peso Exchange transaction is an individual who matches a seller of USD currency – either cash or deposits placed into the financial system – with a seller of Colombian pesos. In a typical transaction, the seller of the USD is the narcotics wholesaler, who receives USD but has operating expenses in Colombian pesos. The seller of the Colombian pesos is the importer in South America, seeking to acquire hard currency with which to purchase goods for import.

The broker can be any one of a number of people; however, history shows they are usually professionals, either bankers, ­foreign exchange dealers or operators of money services ­businesses (MSBs) or currency exchange houses seeking to boost their revenues by dabbling in illicit currency markets.

The broker quotes the price of USD to the importer and the cost of COP to the narco-trafficker. The broker maintains a ‘spread,’ whereby he earns his profits. Once the terms of the deal have been agreed upon by all parties, the broker arranges for the USD to be swapped from the narcotics wholesaler to someone trusted by the importer. In some cases, the broker assumes control of the USD and sends it to the exporter nominated by the importer.

In larger cases of a Black Market Peso Exchange, the narcotics trafficker who sells his USD will collect his pesos in Colombia shortly thereafter. The broker is then long on dollars and must find an individual or company importer in Colombia that wishes to transmit money overseas without the scrutiny of tax authorities, shareholders or spouses.

A recent event in Los Angeles demonstrates that Black Market Peso Exchange money laundering, much like the many methods and mechanisms employed to launder the proceeds of crime, is evolving into new and more advanced directions.

The United States Immigration and Customs Enforcement recently laid charges against several individuals operating an import/export business in Los Angeles. Three top-level executives of the Angel Toy Corporation were arrested on 2 July 2010, on various federal charges, including money laundering.

The Angel Toy Corporation was in the business of representing Chinese manufacturers to importers in North and South America. The proceeds of crime from the sale of narcotics in the United States were placed by executives of Angel Toy Corporation in the American banking system in a manner that eluded mandatory reporting of deposits in excess of USD10,000 per day, otherwise known as structuring.

The proceeds of crime would be collected and concentrated by the Angel Toy Company into payments for goods to be exported from China, namely teddy bears and Topo Gigio dolls (a European television character from the early 1960s) and other toys, into South America.

The toys would be shipped into either the free-trade zone of Panama or directly into Colombia. The toys would then make their way to the shelves of toy stores, department stores and the like, sold through a regular distribution network for retailers.

Unlike a normal import/export transaction, the toy shipments to South America were paid in USD generated from cocaine sales in the United States. The entire revenues generated from selling the toys to retailers would be sent domestically to the drug cartels. In other words, the shipments were sent free of charge to South American distributors (perhaps under control by the drug cartels) where the entire revenues generated from sales to retailers would be passed on to the drug cartels in compensation for their shipments of cocaine north into the United States.

It seems a rather roundabout way to remit value from the sale of cocaine back to the original exporters in South America, however such a variant of the Black Market Peso Exchange produces transactions whereby no funds are transmitted from the United States to South America, as China becomes the intermediary in the transaction.

The vast anti-money laundering resources of the United States would be hard pressed to defend against such transfers of value from the United States to South America, as the transaction’s indirect route through Chinese exporters adds a layer of complexity that may throw investigators off. As evidenced by the arrests in Los Angeles, this method of laundering is not a foolproof.

Canadian exporters face the same risks of becoming embroiled in a similar transaction. Even the most prominent firms with sterling reputations could be unwittingly sending goods to South America after receiving payment from a trading company in Los Angeles or any number of cities in the United States. Where problems occur is the seizure of goods or payments involved in the transaction, a scenario that may leave the Canadian firm’s goods or funds in an evidence locker at the Drug Enforcement Administration. If the sums are large enough, the damage could prove crippling to a Canadian exporter’s cash flow cycle.

For Canadian financial institutions, many risks lie in such a transaction where they offer trade finance or supply chain finance risk mitigation to the Canadian exporter. They face credit risk if the exporter’s financial position becomes hobbled by a seizure of either goods or payments and regulatory risk if they allow such a transaction to flow past their anti-money laundering defences.

As part of its mandate to defend Canada against money laundering activity, the nation’s financial intelligence unit – the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) – should consider educating Canadian exporters on the perils of such transactions, perhaps in conjunction with export promotion activity carried out by Canada’s export credit agency, the Export Development Corporation or the associations for Canadian importers and exporters.

By increasing awareness of the risks associated with such transactions, Canada increases its defences against international money laundering and bolsters its image as a responsible nation where organized crime will face difficult hurdles in mounting successful operations. Inaction on this front runs the risk of inviting the very activity the nation’s law enforcement and financial intelligence apparatus seeks to deter.

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Kim R. Manchester is the Managing Director of ManchesterCF, a financial crime risk management firm based in Toronto that offers training programs, advisory services and project management to financial institutions and public sector agencies in Canada and around the globe.
© FrontLine Security 2010