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Strangler. The bank permitted the firm to make unlimited deposits without any reports being filed to the federal government. The firm was struck from the list in

1983 by the US Treasury Depar ment because it does not consider law firms as retail businesses that customarily deal in cash.

Bailey has defended several clients, including Joseph Barboza and Peter Limone, who have been described in court records as associates of Gennaro Angiulo, reputed head of organized crime in Boston. Angiulo, who controls two real estate firms that were on the bank's exempt list, was reported to have met with Bailey in 1983 to discuss hiring him as counsel. Angiulo is currently on trial in Boston on federal racke teering charges. but Bailey is not representing him.

But a member of Bailey's law firm recently represented Angiulo in a real estate transaction. Mario Misci aided Angiulo in gaining control of a Revere marina and protecting it from forfeiture by the federal government.

Bailey refused to answer numerous calls to his office. His partner, attorney Kenneth Fishman, said the firm was probably placed on the list in 1975, when it opened an account at Bank of Boston. He said Bailey had not been aware of the firm's exempt status, but was not surprised by

Fishman said that Bailey only received "fee-related" cash from his clients. But he declined to state exactly how much cash the firm deposits each year or to .name clients who paid cash.

If Bailey's firm had not been on the exempt list. Fishman said. bank reports on its deposits over $10.000 might have aided law enforcement efforts. "If a lawyer enters an appearance in a case in a certain week, and he shows sig nificant cash deposits in that week, it might be a step in the Investigative process." he said.

A. PELLEGRINO & SON: The last time that A. Pellegrino & Son did a significant cash business was when it sold wine grapes in the 1950s. according to former owner Joseph Pellegrino. Yet the wholesale firm in the New Eng land Produce Center was on Bank of Boston's exempt list from 1979 to 1982. allowed to deposit 350.000 in cash without any reports being filed.

Pellegrino, who ran the bustness from 1977 until this year. said he had no knowledge of the firm's exempt status until he was subpoenaed last fall by the grand jury. "Ninety-nine percent of our business was checks," he said. Pellegrino said he knew North End branch manager Cushing but there had been a "personality conflict between them.

The firm had no known organized crime ties during the years It was on the exempt list. But in September 1983, when the company had been losing money for two years. Pellegrino hired Marvin Karger, a self-described "flnancial expert."

The new vice president and comptroller had a long record of white-collar crime, according to documents filed in US District Court. Karger had pleaded guilty in 1970 to receiving and dispos ing of stolen Treasury certificates valued at more than $1 million. and served four years in prison. He later spent another year be hind bars after being convicted of passing bad checks. Pellegrino said he and Karger met at some point after 1980 when Karger was on work release from Suffolk County jail and had a job at another produce company.

A. Pellegrino & Son filed for Chapter 11 reorganization in November 1983. A year later, the court approved a plan in which Karger's brother Peter, who runs a North Shore vending company. would lend $500,000 to the firm on the condition that Karger remain as one of its executives.

During the proceedings. A. Pel legrino & Son fled this affidavit: "Many law enforcement authorities consider Mr. Karger to be a notorious white-collar criminal with connections to organized crime. Since joining the company management believes that Mr. Karger has made several significant contributions and has suc ceeded in bringing weekly operating cost under tighter control."

SHARKEY'S MEAT PACKING: A small meat market that catered to a few local restaurants is how long-time North End residents remember Frank Calabraro's Sharkey's Meat Packing Co. Inc. Since Calabraro closed down his storefront operation around 1973. he has run his business out of his West Quincy home, selling meat that he had bought wholesale to selected customers.

"He's a small meat jobber." said one competitor. "I think he has one truck and he does a little business that way, adding a few cents onto every pound he delivers."

Documents filed by Calabraro with the secretary of state's office also reflect the modest size of the business. The company's total as sets ranged between $35.000 and $87.000 in the mid-1970s. The last two financial reports the company filed, in 1977 and 1978. did not list any figures for its assets or liabilities.

The landlord of the building that Sharkey's occupied in the North End said he was surprised to hear that its cash business would have been large enough to Justify inclusion on the bank's list of large cash customers. "He was one of a several [butchers] in this area, everybody scraped by. nobody got rich," said Carl Gaeta.

Yet Bank of Boston considered the company one of its largest cash customers. According to 1982 documents. Sharkey's was authorized to deposit as much as $40.000 at a time, without having the transactions reported to the federal governinent. The Treasury Department ordered Shar

key's dropped from the list in

1983 because it was considered a wholesale company.

Neither bank officials nor Calabraro would explain Sharkey's presence on the list. "I have nothing to say." Calabraro said recently. "Go to work."

TRIULZI JEWELRY STORE: Located two doors away from the Bank of Boston's North End branch, this store was authorized to deposit $25.000 in cash regularly, according to the bank's 1962 exempt list. Yet owner Louis Triula said in a recent interview that he sells only $150 to $300 worth of jewelry per week.

"I don't sell any gold. I'm wasting ." he said. "My store's closed almost at the time! Jon't even have jewelry. the window."

Triulad said he did not know he had been placed on the exempt list. "Gloria Cushing was a friend of mine, and she must have put me on," he said.

State Police searched Triulz's store in 1980 because they suspected that his safe contained a stack of stolen $20 bills. No such bills were found. "Somebody said I had bank robbery money." Triulzi said. "That was nothing but a hoax.... Somebody was just trying to break my testicles."

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Money Laundering

SPOTLIGHT

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●Federal bank regulators, who are supposed to ensure that the nation's banks comply with the cash reporting law, no longer do more than cursory exams at most banks and are sharply cutting both the number of examiners and the number of banks they regularly check.,

• The US Treasury Department. which is supposed to administer the reporting law, has until recently assigned just one person to the task. Files in a Treasury Department computer that is supposed to study cash reports from banks and other businesses to spot money laundering schemes are so full of holes that some analysts doubt many of the computer's results.

• Five federal law enforcement agencies, including the US Attorney's office, which are supposed to use the computer studies to track down laundering, either fail to get copies of the studies or fail to use them. When investigators do uncover a scheme, they ar rest participants, but then seize only their most obvious assets, leaving them with the means to revive their criminal enterprises.

The five agencies have established more than 40 task forces throughout the country to investigate drug trafficking, but insufficient staff has hampered their efforts to trace drug profits. The head of one task force said that it needed twice as many investigators in order to combat money laundering

We've got all the pieces for a system to track bad guys' money. What we need is somebody to run it." said an exasperated Charles H. Morley, chief investigator for the Senate Permanent Subcommittee on Investigations, which has issued a stream of reports on international money laundering.

The government has had some successes. This year in Boston, for example. investigators traced, then destroyed. the multimillion dollar financial network of Marshfield drug dealer Frank J. LePere. In Miami, they tracked down a certified public accountant who flew so much criminal cash to Panama that when he was finally stopped in 1983. Panamanian supplies of US dollars dropped by $200 million.

More often. Investigators only skim the surface of a criminal's finances. Prosecutors with the Boston US Attorney's office, for instance, won drug convictions against Erwin O. Monsalve this July and seized more than $350.000 he had stashed in safe deposit boxes at the Bank of Boston and the Home Savings Bank in Boston. But they have not been able to do anything

about the rest of Monsalve's financial network which they believe stretches from Boston to his native Colombia. "We know it's out there." said an official close to the case. "We just don't have the resources to go after it."

The criminal financial system should be vulnerable to attack because of its most distinctive feature: It runs almost entirely on cash. Because cash is bulky, conspicuous and inviting to thieves, criminals must launder it into the safer, more manageable forms of bank deposits, stocks, bonds and property. To laurer it, the criminals must depend on th ankers and business

men of the above-ground economy. But when they come above ground. they expose themselves.

Law enforcement officials and legislators recognized as early as 1970 that cash is the weak link in the criminal financial system, and started to do something about it. They won congres sional passage of the cash reporting law. And they began to treat investigations that they had originally thought of as straightforward drug or racketeering cases as financial probes. In another era, that might have been enough to ensure a systematic attack on the criminal financial system.

But law enforcement authorities suffered a series of setbacks in the 1970s. The banking industry blocked virtually all financial probes for several years with a blizzard of lawsuits that charged the probes were unconstitutional. Then the Nixon administration appointed an Internal Revenue Service commissioner. Donald C. Alexander, who banned the one federal agency equipped to conduct financial probes from doing any.

Finally, the Watergate scandal per suaded many Americans that government officials would intrude on individual privacy to settle political scores. One of Congress responses was to pass laws that effectively prohibited financial Investigators from talking to each other about what they had found.

"That set us back 15 years. "Robert J. Stankey, head of the Treasury De partment's financial investigations office, asserted recently. "We're only getting back to where we were in 1970."

Today, the federal guernment has a three-part system för attacking underworld finances. But it has yet to operate the way it was designed to. It was supposed to work like this:

The first stage involves reporting. The government's five bank regulatory agencies, the Securities and Exchange Commission and the IRS are responsible for ensuring that American banks and businesses comply with the Bank Secrecy Act. The act requires banks and most businesses to file reports with the IRS on any cash transaction involving more than $10.000. It also requires anyone carrying more than $10.000 in or out of the country to report it to the US Customs Service.

The second stage involves analysis. Once cash reports are filed, the Treasury Department is responsible for using them to get a birds-eye view of where large blocks of cash are flowing around the country and the world, who controls them and for what purpose. The department is supposed to produce studies of cash trends based on the reports and distribute them to law enforcement agencies.

The third stage involves investigation. The secrecy act and an asset forfeiture law passed last year by Congress give law enforcement officials the tools to track down the cash movements Treasury Department studies uncover. distinguish which ones are legal and which ones are illegal and then crack down on the illegal ones.

The job of making sure that the whole system reporting, analysis and investigation - works smoothly is assigned to the Treasury Department be cause it is the only government agency that deals with both regulators and investigators.

Ideally, the system would give the government the means to crack underworld finances by inserting itself between cash-laden criminals and the le gitimate banks and businesses on which they depend for money laundering. But so far it hasn't worked.

Failures uncovered

The General Accounting Office. Congress' watchdog agency, has uncovered failures at every stage of the process. In a series of reports starting In the late 1970s. GAO criticized the failure of regulators to ensure cash reports were filed: the failure of the Treasury Department to produce and distribute useful studies of currency flows based on reports that were filed: and the failure of law enforcement off!cials to use the studies that were produced.

GAO officials reserved special criticism for the Treasury Department. which they said had failed to make all of the parts of the system work together. The Treasury Department is primartly responsible for. conditions hampering success of the system because it has not aggressively and effec tively implemented the Bank Secrecy Act." a 1981 GAO report concluded.

Following hearings last March on the Bank of Boston case. the GAO was ordered to begin yet another review of the system. Officials who received private briefings its progress this summer said that GAO auditors are turning up many of the same problems they first spotted almost a decade ago.

The problems start with the regulators. especially bank regulators, who are supposed to ensure that American business reports all of its large cash

transactions.

In recent years. the federal government's five bank regulatory agencies have suffered substantial cuts in the number of bank examiners they have. To cope with the cuts. the agencies have turned to computers to replace examiners and slashed the number of banks they regularly examine. The result: the regulators cannot ensure that most American banks the nation's heaviest handlers of cash are report. ing their large cash transactions.

Figures gathered by the Globe show that between 1980 and 1984 the five regulatory agencies the Comptroller of the Currency. Federal Reserve System. Federal Deposit Insurance Corp.. Federal Home Loan Bank Board, and National Credit Union Administration - reduced their staffs of examiners by 11 percent. Over the same period, the figures show that total bank assets the very thing examiners are supposed to check have increased almost 40 percent.

New England and the Northeast have been particularly hard hit. The comptroller's office. for example. closed its Boston operation in 1983 and assigned Boston-based examiners to New York. Last year, the New York office lost more than 14 percent of its 330 examiners to resignations and retirements. By contrast. the average departure rate among other government agencies is three percent.

Traditionally, regulators sent their examiners into every bank in the country about once a year. "We counted the cash. verified the accounts and checked the assets," said Paul M. Homan, until recently one of nation's top examiners as deputy comptroller of the currency.

However, as the regulators have cut back on examiners. they have also had to reduce the number of banks that they regularly examine. Exact figures are hard to come by However. from officials comments. It appears that examiners now check less than 2.000 of the nation's 28.500 banks. savings and loan associations and credit unions on a regular schedule. Examiners may not perform fullfledged exams at any of the other 26.500 institutions for as long as three years at a stretch.

Increasingly, the regulators have tried to replace examiners with computers. By demanding that banks provide them with up-to-date information and by assigning computer analysts to study the information. they hope to catch problems without sending anyone into most banks.

Advocates say that automation allows regulators to do more regulation with fewer people. But the advent of the computer has had an unfortunate side effect: It has made it almost impossible for regulators to check on whether banks are complying with the Bank Secrecy Act.

Computers are not as effective at spotting banking problems as an examiner "on-site inside a bank." Homan said in an interview. So the overall quality of federal bank regulation has gotten worse and wore it's just too few people chasing too many problems."

Computers ire particularly limited. according to Himan, when it comes to checking a bank's compliance with the government's cash reporting rules. It's very hard as a matter of fact. I don't know how you would examine for cash reporting without being in a bank." he said. "You have to look at the files to know whether they are filYou can't check compllance with a computer. It's not possi

ing reports.

ble.

Homan's contentions are supported by the GAO's findings. From the late 1970s on, the GAO has accused regulators of doing no more than cursory cash reporting exams at most banks. In a 1981 report, the GAO said that it discovered one regulatory agency did no formal cash exams at all.

Regulators, caught short by the 1981 report. reacted by saying they did not have enough examiners to do more than cursory checks of cash reporting. So the GAO proposed a compromise. If regulators could not check cash reporting at all banks they examined each year, then they should pick a random sample of 10 percent of the banks and perform checks at those. None of the regulatory agencies has taken the department up on. Its proposal.

The failure of regulators to examine banks for cash reporting made news earlier this year in the aftermath of the Bank of Boston case. Under congressional grilling. then-Comptroller C. Todd Conover acknowledged that his

examiners had failed to spot more than $1.22 billion in large cash transactions that the Bank of Boston conducted with foreign banks over four years. Perhaps worse. Conover also admitted that some of his examiners did not even know that a 1980 change in the law required foreign bank transac tions be reported.

In the two months following the Bank of Boston disclosures, more than 50 banks, including at least eight of the nation's largest 25. notified the Treasury Department that they too had failed to report many large cash transactions. Department officials say the regulators missed the reporting problems in all but a handful of cases. (A notable exception was Crocker National Bank in San Francisco where comptroller examiners discovered that the bank had failed to report almost $4 billion in big cash transactions over four years. The bank received a $2.25 million fine last month, the larg est handed out for cash reporting violations.)

The regulators are not the only ones responsible for problems with the government's system for attacking underworld finances. The system's troubles extend beyond ensuring that the banks and businesses file reports on large cash transactions to the analysis of the reports. This is the Treasury De partment's special domain.

The Treasury Department. together with Customs and the IRS, which are both divisions of the department, is charged with making sure the government receives all of the information it. needs to track large currency flows across the country. And it is supposed to use computers to analyze the information for suspicious trends.

But until recently the quality of information the department was feeding into its computer files was so poor that many analysts believed the computer was incapable of spotting any trends.

In its 1981 report, for example, the GAO concluded that up to 40 percent of cash reports filed by banks and other businesses were either incomplete or just plain wrong. Information as simple as a person's Social Security number was missing on more than three-quar-ters of the forms studied in one GAO sample. Misuse of abbreviations like "ME." so confused the computer that it sent information about transactions conducted by people liv ing in Mexico to investigators in Maine.

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The GAO recommended in mid1981 that the Secretary of the Treasury order department officials to improve computer files and then submit proposals to Congress by mid-1983 on how to ensure that the problems would not crop up again. Although Treasury officials agreed to clean up their files. they never told Congress how they would prevent the problems from recurring.

The Treasury Department has improved its computer files since 1981 but serious problems remain.

Huge discrepancies

A Globe review of the files this summer. for example. turned up huge discrepancies in cash numbers for 1984 and early 1985. The review prompted the Treasury Department to launch a probe that discovered someone at its computer center in Detroit. had been randomly adding zeros to some cash figures so the files overstated the dollar volume of transactions for those years. To correct the prob lem, officials had to reduce the dollar figures for those two periods by more than $59 billion.

The review also indicated that up to half of all the reports fed into the computer lack anything about the business or occupation of the person conducting the cash transaction-information that investigators need to pinpoint the uses of large blocks of cash. A confidential study of currency flows in California completed last month found that the business/occupation space on almost one-third of 156.000 reports was left blank. Those reports covered $1.75 billion in cash transactions.

GAO's harshest criticism was that the Treasury Department failed to act quickly when it discovered flaws in the regulations adopted to make the system work. The department has still not corrected at least one of those flaws:

When the Treasury Department first issued regulations in the early 1970s. It did not say what a bank should do if it found that a customer was breaking large cash transactions Into many smaller ones to avoid the reporting requirement, a technique called "smurfing."

The GAO told the Treasury Department to correct the problem, and on several occasions including three be tween October 1975 and March 1977top Treasury officials promised they would order Stankey, the department's financial crimes and frauds adviser, to draw up the necessary revisions. But Stankey did not finish drafting the revisions until late 1979, the department didn't issue them until July 1980, and the newly issued regulations still did not solve the problem.

With rare exceptions, the government's reporting requirements can still be avoided in a manuever that remains entirely legal by breaking up cash transactions of over $10.000 Into ones of under $10.000.

The GAO traced many of the Treasury Department's problems both with computers and regulations to a lack of staff. Treasury officials - especially former Assistant Treasury Secretary John M. Walker have won national prominence recently by declaring allout war on underworld finances. But until last year. Walker assigned only one person - Stankey to administer the system. He recently gave Stankey two assistants. Stankey and one of the assistants expect to retire shortly.