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But anyway, this is a picture of individuals removing cardboard boxes full of currency from their trunk and it is currently being delivered to the Sonal organization.
And this is a picture of what was contained in one of those cardboard boxes, bundles of 20's.
Now bear in mind, again, the Sonal organization could only de posit to its bank $1 million a day. That is all the bank was willing to take from this Sonal organization.
This is another package of a smaller amount of currency that was delivered to the Sonal organization.
And this is yet another means of delivering money to the Sonal organization, in just a brown paper bag. One of the significant aspects of this particular slide is that, if you look closely, on the bag itself is a red delta sign.
Chairman ST GERMAIN. What is in it?
Mr. WASSENAAR. This same red delta sign subsequently showed up in another case where there was a substantial seizure of cocaine. And that cocaine contained that same label, or what we think is a trademark by whatever organization.
Now since Sonal could only deposit $1 million in currency into their bank, and oftentimes they would receive in excess of $1 million in a given day in their organization, they had-at any given time-a substantial surplus within their business. And so on the day that we decided, along with the Customs Service, to execute a search warrant on the Sonal business, we were fortunate to find that they had such a surplus on hand.
And this is a picture taken of the currency that was seized by Customs and the Internal Revenue Service on the Sonal organization. On the table in front of you is roughly $3.2 million in currenсу.
Chairman ST GERMAIN. He was running a handsome surplus.
In addition to seizing the $3.2 million in currency, we also seized a cashier's check for approximately $4 million. So the one seizure, on 1 day, in this particular organization involved $7.2 million.
Chairman ST GERMAIN. Of course, you have returned that money; have you not?
Mr. WASSENAAR. I hope we did not. I think in this particular case, because we were able to show that it indeed came from narcotics, the Government would prevail in a forfeiture case.
But again, if the Government were not able to prove that it came from narcotics, theoretically, we may have to return money of that nature. And that, again, I think is the real benefit of Congressman Pickle's bill.
Now we switch over to southern California. This case involved a heroin organization known as the Araujo family. In this picture, if you look real closely, you see two individuals carrying a large cardboard box into that Mexican-American National Bank, which is right across the border.
In this particular case, currency transaction reports were indeed filed by these financial institutions. And the banks involved in this particular case were not knowledgable of it—they were not involved in the criminal act.
The bad guys here were providing false or fictitious information to the bank which caused them to file a false currency transaction report.
Chairman ST GERMAIN. Could we go back to Sonal a minute? You said the bank was taking $1 million a day from Sonal. Was that because it was a money exchange operation?
Mr. WASSENAAR. Right.
Chairman ST GERMAIN. Did Sonal have an exception? Were they on the exempt list for reporting?
Mr. WASSENAAR. I am really not certain. I doubt if they were. I do not think that a currency exchange can be granted an exemption to the filing.
Chairman ST GERMAIN. Could you look that up and reply to that in writing? Mr. WASSENAAR. Sure.
STATUS OF SONAL, INC.
Mr. WASSENAAR. This particular case involved, again, a massive heroin distributing organization primarily throughout southern California and this was one of the means by which they were transporting the currency into a bank. But again, in this particular case, the bank did file a currency transaction report. However, it was a false report.
Here are some of the same individuals, who were involved in that case, physically removing from their automobile more currency. If you can focus that a little bit better, the individual that is removing the paper sack from near the driver's door, if you look real closely you can see the currency sticking out of the top of the bag. And of course, they are also removing-
Chairman ST GERMAIN. Things are tough, they could not afford the right size bag.
Mr. WASSENAAR. That is right. There is also some currency in the trunk of the automobile. In the trunk of the automobile, you have small boxes and it looks like another bag full of currency.
When we decided to move in on this case, this was some of the currency that was seized in this particular case. While we were working this particular case, we were aware—from a very early point in time that we, indeed, were working on a narcotics organization. The Araujo family was involved not only in the distribution of the narcotics itself, they were also involved in the laundering of the money
The key here is that this whole investigation was started with a single CTR that we received. It was analyzed and we determined we do not have a taxpayer who files a return by this name. That little bit of suspicion led us on to this massive organization.
We also had enough time in this particular case to, in addition to charging them with money laundering, we also charged them with income tax evasion. We were able to show that in the 3 years that this organization was operating in southern California, they had received $27 million in income and filed no income tax return.
Mr. WYLIE. This was a currency exchange operation, was it not? This was not a bank?
Mr. WASSENAAR. No, these were individuals who were actually selling narcotics and laundering their own funds.
Mr. WYLIE. Oh, they were using their own funds?
Mr. WASSENAAR. Right. In this particular case, we obtained arrest warrants on, I think, 17 individuals and were successful in arresting 12 or 13. The rest fled to Mexico. We were able to seize, out of domestic banks, roughly $12 to $13 million in currency plus the income tax charge showing unreported income of some $27 million over a 3-year period of time, all started with a single CTR that was received by the Internal Revenue Service.
Thank God for the Bank Secrecy Act.
Going back to some charts or posters which perhaps will summarize the testimony we heard earlier this morning from Mr. Friedberg. The chart on the left shows the money obtained from narcotics trafficking, and then it is parceled out to the Smurfs. Those individuals up there are Smurfs. They then run, scurry about from bank to bank converting it into a pile of cashiers checks.
Cashiers checks then can be brought to any one of a number of different banks throughout the country because the deposits of cashiers checks do not generate a CTR form. So once this conversion is made from currency to cashiers checks, the cashiers checks are then deposited into a domestic bank account. No trail of a CTR. No CTR is filed whatsoever.
Of course, once the money is deposited into any one of these banks, like in San Francisco, Los Angeles, Denver, or Omaha, it can then be wire transferred down to Miami, and then from Miami it can be wire transferred to Panama, to Colombia, to Switzerland or a variety of different countries throughout the world.
I think we fairly well covered Smurfing this morning. This is to give, I guess, more of a graphic portrayal of how this Smurfing operation works.
One of the keys in most of these money laundering operations, however, is the use of a foreign bank, a foreign financial institution. You find a good part of the money eventually ending up in a foreign bank, in large part those financial institutions located in one of the tax haven countries, countries primarily in the Caribbean, Panama, Grand Caymans, Bahamas, et cetera.
Now, the use of tax havens, however, is not limited to just money launderers. What we are finding with an increase in activity is the use of foreign tax havens to also assist in the fraud generated by illegal tax shelters, and with your permission, I would like to spend just a little bit of time in that area.
At the present time, we have over 400 investigations in process involving illegal tax shelters. In over 50 percent of those investigations, we have tax shelters which have some connection, some transaction involving a tax haven bank--we think intentionally structured in that manner so that it makes it more difficult for us to get behind the true nature of the alleged transaction.
Let me give you an example. We currently have an investigation that, although it is current, I think I can make some reference to because there have been a number of public records brought on it as a result of search warrants executed some time ago. This tax shelter organization is called the USTPS, U.S. Tax Planning Service, headquartered primarily out of the Grand Caymans, structured
primarily to accommodate doctors, physicians, people in the medical field. We think of all of it as fraud.
What USTPS would provide to an interested customer or client was the opportunity to take false contribution deductions on their tax return or false business expenses. If we could imagine for a moment, Mr. Chairman, that you were a physician, through USTPS you could claim $30,000 or $40,000 medical malpractice insurance premium when in fact you had no medical malpractice insurance from this particular firm. But the USTPS organization in the Caymans would provide to you as a doctor a medical malpractice insurance policy, it would provide you a premium notice, and of course, you would pay the amount on that premium notice.
The fraud here was that 90 percent of your premium payment, the $30,000 that was paid to this alleged insurance company, would not be deposited to a legitimate insurance company at all, but 90 percent of that $30,000 payment would be siphoned off and be deposited on your behalf into a corporate account in the Caymans. Again, the money is offshore. Once the money is offshore in that corporate account, which you control or have a substantial interest in, you then can direct that money to be returned to you by a variety of different means, either as a loan from the corporation, or you might perhaps choose to have your children receive a scholarship from this corporation.
Chairman ST GERMAIN. Let me ask. Did you say 90 percent of the money?
Mr. WASSENAAR. Ninety percent.
Mr. WASSENAAR. Ten percent went to the promoters or the sales people that were involved in this particular scheme.
Chairman ST GERMAIN. So, as a result thereof, the doctor has not bought any medical malpractice insurance.
Mr. WASSENAAR. Absolutely. But if the doctor is audited and the auditor is zeroing in on the business deductions and asks the doctor to provide substantiation relative to this deduction, the doctor can show to the auditor an alleged insurance policy, an alleged premium notice, a real check made out to an alleged insurance company, fairly persuading evidence that the deduction on the tax return is indeed legitimate.
Chairman ST GERMAIN. But are you telling me that that doctor is taking a chance to launder, so to speak, this money and to go without medical malpractice insurance?
Mr. WASSENAAR. Well, in some cases they were taking that risk. In other cases, they had two medical malpractice insurance companies that they were dealing with.
In addition to the medical malpractice scheme, if one of these doctors wanted to take a sizable charitable contribution, they could make out a check for $20,000 or $30,000 to this alleged church, and again, that check would go over to the Caymans, again 90 percent of the alleged contribution would be siphoned off and put into the doctor's bank account or into a corporate account under the doctor's control, and again, the promoters and the salespeople would keep the remaining 10 percent.
Chairman ST GERMAIN. How does the doctor then prove that he donated that money to a church?
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Mr. WASSENAAR. Because he has a canceled check made out to the Church of Human Morality.
Chairman ST GERMAIN. The Church of Human Morality was part of the U.S. Tax Planning Service?
Mr. WASSENAAR. Right. That was all part of the scheme. They had a variety of different schemes like that that would enable you, regardless of what kind of business you were in, to take false or fictitious business expenses.
Chairman ST GERMAIN. The check was made out to the Church of Human Morality, not to Tax Planning Services.
Mr. WASSENAAR. That is right. The check was made out to the Church of Human Morality. It was then negotiated by the individuals behind the USTPS shelter promotion. It was never deposited or given to the church.
Chairman ST GERMAIN. Did any such church exist?
Chairman ST GERMAIN. What did you do, check with the church and see if they received the money?
Mr. WASSENAAR. I believe that was an offshore church.
Mr. WASSENAAR. We are not very welcome in the Grand Caymans. In fact, I think we are forbidden to travel there on official purpose.
Chairman ST GERMAIN. OK. But if Doctor So and So or John Doe here in the United States is contributing to the Church of Human Morality, that does raise a little suspicion in your mind; doesn't it?
Mr. WASSENAAR. Yes. Chairman ST GERMAIN. That is not too well conceived. Mr. WASSENAAR. We certainly might be very suspicious to see a $30,000 or $20,000 contribution to the Church of Human Morality, but unless you can prove that it didn't exist, that that contribution was not made, I think for all practical purposes it would be an allowable deduction so long as indeed we could not disprove it being a church.
Chairman ST GERMAIN. If there are any doctors in the audience, you can contribute to the Church of Human Morality.
Mr. WASSENAAR. You get into some real constitutional questions when you attempt to determine what is and what is not a church.
Now, the magnitude of this particular scheme, USTPS, I think can be demonstrated by the fact that this scheme was being marketed in some 12 cities throughout the United States, and upon obtaining probable cause, which enabled us to execute search warrants in most of these cities, and having executed those search warrants, we were able to determine that there were roughly 3,000 U.S. citizens investing in this USTPS scheme, and at least half of that number involved physicians or doctors throughout this country.
Mr. WYLIE. Nobody involved in this scheme was required to file a
Mr. WASSENAAR. No.
Mr. WASSENAAR. I'm just making a connection that in money laundering cases in almost all cases, it involves the use of a foreign bank. The point I'm trying to make is that the use of a foreign