Money Laundering: Follow the Hedge Funds

Major money laundering can be carried out far more securely and efficiently through hedge funds, whose activities are subject to virtually no government scrutiny, than through the commercial banks.

With combined cash flows surpassing $1 trillion, Dope, Inc. requires enormous access to the global financial system, and its access is from the top down, as evidenced by the Grasso visit to the FARC jungle. A Senate Permanent Investigations Subcommittee study by the Democratic staffers, commissioned by Sen. Carl Levin (D-Mich.), revealed that the private banking units of most of the major New York commercial banks maintained a strict “see no evil” attitude toward their wealthy clientele. And the same banks engaged in the worst kinds of criminal collusion through their corresponding banking relationships with offshore British Commonwealth banks and branches, that operate totally outside the law.

The pivotal role of international financial institutions in the laundering of drug money was underscored by a report released by the United Nations Office for Drug Control and Crime Prevention on May 29, 1998, titled “Financial Havens, Banking Secrecy, And Money-Laundering.” The authors were four leading experts on money laundering: Jack Blum, Michael Levi, R.T. Naylor, and Phil Williams. Blum is particularly well-known for his work as Special Counsel to the Senate Foreign Relations Committee’s Kerry Commission, which exposed the role of U.S. intelligence agencies in the 1980s in a global guns-for-drugs operation, associated with the Iran-Contra Affair and the Afghan mujahideen program, and which revealed the role of the Bank of Credit and Commerce International (BCCI) in laundering the proceeds of Golden Crescent opium and heroin trafficking to finance the war against the Soviet Army in Afghanistan.

That United Nations report shed light on the role of offshore banks, the Euro-market, hedge funds, and other commodity traders, in laundering the proceeds of the underground economy of drugs and weapons, facilitating tax evasion, and other criminal activity. The study also endorsed the financial estimates, published two years earlier by EIR, to a great extent. The UN report estimated that, in 1997, the proceeds from illegal drug sales were more than $400 billion, and the total revenues of the criminal underground were above $1 trillion.

The report identified four factors, as contributing to the vast expansion of drug-money laundering in recent years. First, the global black market has been dollarized. The report noted: “Although most illegal transactions at the retail level are conducted in the currency of the country where they occur, around the world there has been a steadily growing appetite for United States high-denomination bank notes as a vehicle for conducting covert wholesale transactions, for hiding international financial transfers, and for holding underground savings. This applies to the full spectrum of illicit and underground activity, but it also has direct implications for the proceeds of serious crimes, including drug trafficking. A foreign currency black market exchanging local currency for United States $100 bills is going to be equally accommodating to cigarette smugglers and tax evaders, dealers in banned wildlife, or traffickers in heroin. The more popular the use of the United States dollar, the more easily someone can bring United States currency to parallel money markets, convert it to local currency, deposit the local currency in a financial institution and wire it anywhere else, while attracting considerably less attention than the direct deposit of the United States currency would attract.” The report added that the dollars also are frequently used to purchase hard commodities, which are then resold, creating the impression that the narco-dollars are actually the proceeds of legitimate commerce. Dollarization, the report concluded, poses a grave challenge to international law enforcement and crime control.

As of the writing of the UN study, $400 billion in United States currency notes were in circulation, with $300 billion of those dollars circulating outside the United States. This global circulation of U.S. currency is officially supported by the Federal Reserve Bank, which annually prints $16 billion in new currency, for shipment abroad—at a near 100% profit. So long as those bills never return to the United States, they constitute an interest-free loan with no terms of repayment. At the height of the growth of the Russian mafia during the Boris Yeltsin Presidency, the New York Federal Reserve Bank was shipping planeloads of $100 bills to mafia-run Russian banks on a daily basis.

Second, the report highlighted the “trend towards financial deregulation” as a thorn in the side of efforts to stop drug-money laundering. The UN team emphasized that, domestically, deregulation has created the new phenomenon of “financial service supermarkets,” which provide their large clients with a full range of financial services, including banking, commodity brokerage, insurance, and fiduciary services, “along with departments skilled in creating foreign shell corporations and offshore trusts.” The report highlighted the tremendous growth of “private banking,” once the exclusive domain of a handful of Geneva banks that catered to very wealthy clients. Today, every major commercial bank in the industrialized sector competes for this high-profit business, and all standards of due diligence have been abandoned.

The case of Citibank and its role in laundering drug money for Raúl Salinas, the brother of former Mexican President Carlos Salinas de Gortari, is but the most notorious of the recent cases of private banking, under deregulation, facilitating the laundering of drug money.

In addition to the domestic implications of deregulation, the UN study highlighted the global dimensions, particularly the complete breakdown of exchange controls and currency controls. As the result of this, flight capital has become a source of grave instability, as highlighted in the 1997-98 hedge-fund assault on the “Asian Tiger” economies. To counter the devastating consequences of unbridled capital mobility, many countries have been forced to facilitate the inflow of drug money as a means of offsetting the losses. In a discussion in 2000 with this author, Blum observed that, while the Colombian economy has been in a state of collapse for years, Colombia is the one country in South America that has never gone to the International Monetary Fund for a bailout. Colombian governments have facilitated the repatriation of narco-profits, going so far as to contract out management of the national lottery to a company in a Caribbean hot-money haven.

The third trend highlighted in the UN study was the expansion of the Euro-market, which coincided with the expansion of offshore banking centers that specialize in handling financial transactions of non-citizens. In these offshore banking centers, wealthy individuals hide their taxable earnings, multinational corporations dodge securities regulations by hiding their profits and dodging tax obligations, and criminals launder their profits. According to the UN report, these offshore banking centers house $5 trillion in assets: $1 trillion in bank deposits and $4 trillion in stocks, bonds, real estate, and commodities. The $1 trillion in annual revenues from the black market in narcotics, weapons, gold, diamonds, etc. is, thus, commingled with other money, much of which originates in the legal economy, further adding to the challenge posed to criminal investigators. So long as the system of globalization exists, the hot-money flows will make the task of shutting down drug-money laundering a most daunting challenge.

The fourth trend noted by the UN report was the proliferation of offshore centers that offer the protection of bank secrecy.

Another feature of globalization that the study identified was the growing role of “megabyte money” in the world economy, another factor that blurs the distinction between legitimate global commerce and the drugs-for-weapons trade. Today, most of the world cash flow is electronic, not the physical transfer of currency. The study noted: “The massive growth of electronic payments has been made possible by the development of the electronic transfer mechanisms operated by the Society for Worldwide Interbank Financial Telecommunications System (SWIFT), the Federal Reserve (Fedwire), and the Clearinghouse Interbank Payments System (CHIPS). The volume and value of the transactions that move through these mechanisms are staggering.”

The UN study cited estimates of $2 trillion in daily electronic financial transfers by Fedwire and CHIPS alone, involving approximately 465,000 separate transactions. SWIFT conducts an estimated 220,000 transfer messages a day (dollar figures were not available). The U.S. Office of Technology Assessments, now defunct, estimated in 1997 that 0.05-0.1% of the daily transactions involve laundered funds, for a daily estimate of at least $300 million. Compared to the $2-3 trillion a day in total electronic movements of money, the $300 million is a small component, easily buried—unless the drugs-for-weapons trade is tackled in a top-down, comprehensive fashion.

Regional drug cartels have established global alliances, to take full advantage of the offshore and related money-laundering facilities at their disposal. Russian crime money, in one intricate set of transactions, was recently traced to Israel, on to Antwerp, to Gibraltar, to Spain, eventually winding up in a London commercial real estate purchase. The Russian, Colombian, and Italian syndicates conduct joint operations. Poland has become a hub for drug-money and other criminal laundering. As of the time the UN study was published, Poland had a population of 39 million people—and 49 million bank accounts! Poland has become the Liechtenstein of Central Europe, with strong ties to the continent’s most notorious bank-secrecy havens.

Furthermore, every major commercial bank in the world today has a branch in one or more of the offshore and bank-secrecy havens. Offshore banks have accounts at the big American, European, and Japanese commercial banks, enabling them to transfer funds from all of their clients to onshore banks, through corresponding relations that constitute one more big loophole in the system—encouraged from the top down.

The UN report concluded with a ringing endorsement of the findings of the authors of EIR‘s Dope, Inc. more than 20 years ago: “The time has come to connect the dots. The common denominator in all of these problems is the enabling machinery that has been created in the financial havens. The effectiveness of these centers in helping people and companies hide assets is not the result of any single device. Changing bank-secrecy rules alone will not help. Rather, the centers have created a tool kit composed of new corporate instruments, foundations, trusts, trust companies, banks, and bank accounts. The tools are mixed and matched with jurisdictions that have made a point of non-cooperation with the rest of the international community in criminal and tax investigations.

“What started as a business to service the needs of a privileged few has become an enormous hole in the international legal and fiscal system. It is estimated that there are now more than a million anonymous corporations. Consultants for the offshore banking centers say that the centers are home to more than $5,000 billion in assets.
“If the international community is to develop a rule of law to match the globalization of trade and the global movement of people, the issues raised by this hole will have to be addressed. The approach will have to be systemic.”

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