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5 Held in Scheme for Laundering Millions of Dollars in Drug Profits
By JUDITH CUMMINGS
Special to The New York Times
LOS ANGELES, Feb. 10- Govern-rested in Miami and who the investigament agents have arrested five people tors say headed the nationwide operasuspected of involvement in laundering tion; Oswaldo Vera, also arrested in money in connection with a multimillion-dollar drug trade centered in Los Angeles and Miami, Federal prosecutors said today.
According to Robert C. Bonner, the United States Attorney in Los Angeles, and Leon B. Kellner, the United States Attorney in Miami, Federal agents since last September have seized 254 pounds of cocaine and $11.6 million in cash in connection with the case. Mr. Banner said the cash was the largest amount ever seized "in a single coordinated drug case."
The five men include three Venezue lan nationals arrested in Miami Friday, another Venezuelan arrested in Los Angeles the same day and a fifth man, described as a Uruguayan, who was picked up in New York City.
They have been charged with conspiracy in connection with violations of Federal laws on currency reporting and disguising the sources of money.
Agents Posed as Intermediaries Prosecutors described the operation as a "nationwide money-laundering service," saying the suspects tried to manipulate deposits of currency and electronic transfers of money for major narcotics traffickers" dealing in large quantities of cocaine mainly in Florida and California.
In the investigation Federal undercover agents, working secretly with two commercial banks, one in Los Angeles and the other in Miami, posed as American intermediaries having consections with American bankers they said were willing to violate currency reporting requirements, according to documents filed in the case.
From the financial institutions that cooperated in the case, the money was transferred to bank accounts in Panama as well as to banks in Miami and New York, the documents say.
The documents say that the suspects made payments to the undercover
agents to prevent reports of large cur
rency transactions from being filed. But, according to the documents, the cooperating American institutions filed reports on the cash deposits.
Financial institutions are required by law to report any cash transaction of $10,000 or more to the Treasury Depart
ments ranged fro
$103,350 to more than $1 million in a single transaction, the Government said. Since last September, 23 such currency transactions were conducted through the cooperating bank in Callfornia alone, the documents said.
Those arrested were identified as Carlos Sarmiento-Arechederra and Roberto del Pino Sousa, who were ar
Miami; Enrique Fernández, arrested in Los Angeles, and Luis Morales, the man arrested in New York. The latter three are described as employees or couriers.
The case was handled as a joint project by the United States Customs Service, the Internal Revenue Service and Federal prosecutors in Miami and Los Angeles.
Foreign Traffickers Got Profits
According to an affidavit by Lorraine toms Service, the Sarmiento organizaBrown, a special agent with the Custion "moves millions of dollars in United States currency outside the profits back into the hands of drug traf country for the purpose of moving drug fickers outside the United States."
laborator, Mr. del Pino, operating from She said Mr. Sarmiento and his colboth Venezuela and Colombia, had employed Mr. Vera and Mr. Fernandez as their representatives in Los Angeles to receive from Los Angeles drug traf fickers the cash that was to be laun dered.
A Customs Service special agent, Awilda Villafane of Miami, an undercover agent in the case, reported that Mr. Sarmiento offered undercover agents commissions of from 1.5 percent to 2.5 percent of cash transactions for help in circumventing reporting
He said the suspects kept financial records coded with "computer numerals" to disguise the identities of clients and associates.
The financial institutions that cooperated in the case were not identified.
McLean Bank Admits Failing to File Reports on Cash in Major Drug Case
By Elizabeth Tucker Wang Pod Stall Wes
McLean Bank pleaded guilty yesterday to
The bank, but not bank officials, pleaded
fice of the U.S. attorney for the Eastern District of Virginia.
Financial institutions are required by fed-
In January, federal prosecutors issued a
On May 17, Christopher Reckmeyer was
the drug ring. Robert Reckmeyer was sentenced to 14 years in prison.
McLean Bank's guilty plea followed a
Although the maximum penalty for the
Bank officials were not available for com-
"The United States has concluded that no
individual director, officer or employe of the
"Instead, the government's prosecution is
"The bank has decided not to contest the
tions that are five years old, can be put to rest," the bank said.
Bank President Roy L. Browning was on
Assistant U.S. Attorney Robinson said
"The bank is saying people in manage-
McLean Bank Admits Failing to File Reports
MCLEAN, From D1
that gave rise to the need to file. Those two groups of employes never quite hooked up-that's the bank's claim.
There is going to be a sentencng in this case, at which point both the bank and government will be able to say more about their position in this case," Robinson said.
Robinson said his office has inestigated other banks and found no indication that any other banks that the Reckmeyers were using jailed to file currency transaction reports." The Reckmeyers used several banks throughout Northern Virginia," he said, without idenbifying the banks. "Certainly any other cases of this sort which come to our attention will be vigorously prosecuted," he said.
Documents filed with the court disclose details of the cash transactions. Since the early 1970s, more than $2.25 million in cash was deposited on 173 separate occations in an account called Crancy's Inc. and controlled by Christopher Reckmeyer, Robinson said. Beginhing in 1978, many of the cash deposits exceeded $10,000.
But the McLean Bank filed only x reports to the IRS on the Crancy's account, involving about $200,000 in deposits, the U.S. attorney's office said. No reports were filed on 61 transactions involving more than $1.5 million.
Forty of the 61 transactions oc
curred before July 7, 1980, when the Federal Deposit Insurance Corp. put into effect new regulations concerning the filing of transaction reports, said Robinson.
Up until that date, it is "arguable" whether the bank was required to submit reports, he said.
McLean, a federally insured and state-chartered commercial bank, is in the process of being acquired by James Madison Ltd.
In 1984, in a case that indirectly involved McLean Bank, a federal
The bank, but not
bank officials, pleaded guilty in U.S. District Court
bankruptcy judge in Alexandria appointed a trustee to manage the affairs of the Port Royal Development Corp. after witnesses brought by Mount Vernon Savings & Loan Association testified that the development company had mismanaged accounts for the Port Royal Condominiums on North Pitt Street in Alexandria.
Testimony at the bankruptcy hearing from a certified public ac countant revealed that more than $50,000 in earnest-money deposits from persons with contracts to buy
condomimum units at Port Royal had been deposited in a savings account at the McLean Bank, instead of in escrow accounts as required by Virginia law.
At that time, documents showed that less than $10 remained in that account on Dec. 31, 1983, and that withdrawals had been made to finance other developments directed by Port Royal's principal officers, Eugene Lawson and Charles H. Schools. Schools, who had been chairman of the board for the McLean Bank until shortly before the controversy surfaced, was replaced by Roy L. Browning, but no one had been willing to say at the time why the change had been made.
Now, Browning is president, and the chairman is John G. Broumas, according to a bank employe.
In 1974, McLean Bank nearly collapsed under the weight of a wine mvestment scandal that touched its two top officers, bank officials said at the time. About $2.5 million in loans had been made to investors in the venture, which subsequently collapsed, leaving the young bank with a potential loss of $1.8 million.
The chairman, J. Michael Burry, was an investor in the scheme, which the Securities and Exchange Commission was to describe as fraudulent. Only the overnight infusion of $600,000 in cash by an investors group saved the Northern Virginia bank from having to be liquidated or merged with a holding company.
The bank's president, Walter P. Johnson, was removed from office for approving the wine loans and was indicted in 1977. He pleaded guilty to embezzlement and misuse of bank funds and was sentenced to six months in federal prison.
By Howard Kurtz
Washington Pat Staff Writer
Robert L. Schwind and David L. Hill carefully counted the cash that had been dumped on the bed in Room 1532 of Atlanta's RitzCarlton Hotel.
It was all there: $100,000 to be laundered through a dummy company in the Cayman Islands, and $16,000 for their fee. Hill said his hands often turned black from counting money, but that this cash was unusually clean.
The Atlanta attorneys placed the money in a laundry bag and gave their two clients a receipt. There's no use in paying taxes," Hill told them. That's what you're setting up these things
for, so you can get around paying taxes on the transactions."
What Schwind and Hill didn't know is that their April 11, 1984, meeting was secretly recorded by their clients, who were working under cover for the Internal Revenue Service. Nor did they suspect that they were targets of the largest fraudulent-tax-shelter investigation in IRS history.
Schwind and Hill were working with the United States Tax Planning Service (USTPS), a mass-marketing operation that officials describe as the McDonald's of the illegal tax shelter business. According to IRS affidavits filed in court, USTPS sold exclusive franchise See SHELTER, A10, Col 1
WP. 12/9/85 (A1/AIC) 10F4
ALL YOU NEED
VIDEO TAPE PRESENTATION
A SPECIAL TWO HOUR SEMINAR FOR U.S.TAXPAYERS SEEKING LEGAL METHODS TO REDUCE. DEFER OR ELIMINATE PERSONAL OR CORPORATE INCOME TAX
US$25.00 PER PERSON
CASH. CHECK, AX, VISA, MC ACCEPTED
3 SEMINARS PER DAY 10.00 A.M., 12 NOON, 2:00 PM
SHELTER, From Al
nights to American promoters, offered an innovative menu of tax avoidance schemes and attracted lots of customers.
One popular plan involved bogus medical malpractice insurance, in which doctors would take big tax deductions for their “premiums" and secretly get most of the money back, according to the documents. Another called for the client to buy phony consulting studies, again recouping most of the money after deducting the cost, the documents say.
Most IRS investigations involve a single promoter, but this money-laundering probe has attempted to track a loose network of about 20 USTPS associates from Massachusetts to California. The 22-month inquiry has involved more than 30 IRS officials in 10 cities.
This account was pieced together from hundreds of pages of IRS documents filed in various courts and made available by the agency, as well as interviews with IRS officials, shelter promoters, prosecutors and lawyers in the case.
In recent months, Schwind and Hill have pleaded guilty to tax fraud conspiracy, and a USTPS associate in South Carolina has been barred from peddling the tax shelters. More charges are expected. Prosecution of Investors Planned
In a major break with past policy, IRS officials say they plan to prosecute not only the promoters but some of those who invested with USTPS. The agency says at least 3,000 wealthy taxpayers-a third of them doctors-invested with American promoters, who bought their franchises for up to $25,000.
The company was founded in the Cayman Islands, a tiny British colony of 17,000 with strict business secrecy laws that have transformed it into the Caribbean's leading tax haven. Half of all IRS criminal investigations now involve such offshore money centers.
The founders aggressively-marketed their smorgasbord of tax plans. They took out full-page ads in The Wall Street Journal and paid prominent speakers, including former senator Eugene McCarthy (D-Minn.), to draw people to their tax seminars in the Cayman Islands. McCarthy says he was just a speaker and knew nothing of the company's operations.
IRS officials contend that the company's offerings went far beyond the legal shelters strewn throughout the tax code. They charge in court papers that USTPS advocated the use of bogus transactions to produce fraudulent deductions, largely by moving investors' money through Cayman banks and returning it to them in disguised form.
Each plan involved setting up a Cayman Islands corporation to invest money provided by the American client. The offshore firm is placed under foreign directors, but the client, who is listed as a “consultant," gives the marching orders, according to the IRS. Even if the company does nothing more than invest in bank certificates, the client can hide the account from the IRS and avoid paying taxes on the money.
"You have to be a little deceitful to get involved in this shelter," a USTPS promoter in St. Paul told an undercover IRS agent.
Lynford R. Evans, an accountant who was president of USTPS and now runs a new investment company out of the same Cayman Islands office, said the IRS allegations are untrue and greatly exaggerate the size of USTPS. He described himself as "an innocent bystander” who had only a loose affiliation with the American promoters.
The IRS has no jurisdiction over Cayman citizens such as Evans and is barred by Cayman law from conducting investigations on the islands.
Evans said USTPS was a small firm that never made a profit and was put out of business by the IRS last year. He called the estimate that it had 3,000 clients "so off the wall it's just incredible."
"We dealt with tax avoidance, not tax evasion," Evans said. "We never recommended tax evasion."
IRS affidavits and tape transcripts paint another picture of how offshore shelters are promoted behind closed doors. According to the documents, prime selections on the USTPS menu include:
The Mastercard Account-This is one of several ways an American client can gain access to his money after it is placed in a Cayman bank. The client is issued a special credit card to tap the funds, but the account is not listed in his name or reported to the IRS. The money can also be brought back to the United States through loans, gifts and scholarship funds.
■ The Medical Malpractice Plan-An American doctor writes a large check to a small Caribbean insurance company selected by USTPS. The doctor deducts the insurance "premium" as a business expense, although the IRS says no real insurance was involved.
The Caribbean company keeps 10 percent as its fee and forwards the rest to a "friendly" reinsurance company, which is secretly directed by the doctor. He can reclaim 90 percent of his money at any time through loans and other means.
A USTPS promoter in Dallas with 300 doctors as clients told an IRS agent that he refers to this plan as "naked insurance" because nothing exists.
The Consulting Study-The client buys a bogus study of European video games or some other topic, deducts the fee as a research expense and secretly gets most of his money back. A promoter in Humble, Tex., told an IRS agent that USTPS had companies in six countries to do the studies, including "a Swiss corporation with a German name, a Bahamian corporation with a French name, a Liberian corporation with a South African name, a Panamanian corporation with a Spanish name."
The Congregational Church of Human Morality--The client buys a "parish" at this church, whose address is a post office box in South Carolina. The tax-deductible "donation," minus a 10 percent handling fee, is deposited in a Cayman Islands account and can be reclaimed at a later date.
The Payroll Plan-The client enrolls in a plan that purports to transform his wages into tax-free "gifts." His salary, minus the standard 10 percent, is moved to an offshore trust and then secretly returned to him. The Justice Department recently obtained a court order barring George D. Sprague, a USTPS associate in Charleston, S.C., from operating this and other tax shelters.
Evans said that if some of his American associates promoted illegal shelters, they did so without his knowledge or after they had broken off relations with him. He said the medical malpractice plans promoted by USTPS involved bona fide insurance, and that many of the offshore shelters he recommended were backed by legal opinions.
Richard Wassenaar, assistant IRS commissioner for criminal investigations, called such arguments “a bunch of hogwash."
"Not every offshore corporation is illegal, but the vast majority are," Wassenaar said. "If you or I set up a
bank account in the Caymans, chances are we would do. it only for the purpose of evading taxes. Why would we want an account 3,000 miles away when we could have one around the corner?"
USTPS was born several years ago when California economist James G. Bryan moved to the Cayman 19lands and teamed up with Evans. They began holding daily tax seminars at the Grand Cayman Holiday Inn. where visiting Americans got to see a videotape of Bryan touting various tax avoidance schemes.
Early last year, an IRS agent on vacation noticed magazine and billboard advertisements for the seminars and stopped in at one of the sessions. It wasn't long before an investigation was under way.