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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 – Govera-rested in Miami and who the investigaDent agents have arrested five people tors say headed the nationwide opera. suspected of involvement in laundering ton; Oswaldo Vera, also arrested in money in connection with a multimil-Miami; Enrique Fernandez, arrested lion-dollar drug trade centered in Log in Los Angeles, and Luis Morales, the Angeles and Miami, Federal prosecu man arrested in New York. The latter tors said today.

three are described as employees or According to Robert C. Bonner, ebe couriers. United States Attorney in Los Angeles. The case was handled as a joint and Lion B. Kellner, the United States project by the United States Customs Attorney in Miami, Federal agents Service, the laternal Revenue Service since last September have seized 254 and Federal prosecutors in Miami and pounds of cocaine and $11.8 million in Los Angeles. cash in connection with the case. Mr. Bonner said the cash was the largest Foreispo Tratfickers Got Profits amount ever seized on a stngle coordisated drug case."

According to an affidavit by Lorraine The five mea include three Venezuecoms Service, the Sarmiento organiza

Brown, a special ageat with the cus lan nationals arrested in Miami Fnday. another Venezuelan arrested in

tion "moves millions of dollars in Los Angeles the same day and a fifth country for the purpose of moving drug

United States currency outside the man, described as a Uruguayan, who vas picked up in New York City.

probits back into the hands of drug trala

ickers outside the United States." They have bees charged with conspiracy in connection with violadors of laborator, Mr. del Pino, operating from

She said Mr. Sarmiento and his colo Federal laws on currency reporting boch Venezuela and Colombie, had em. and disguising the sources of money.

ployed Mr. Vera and Mr. Fernandez as Agents Porod us lotermediaries Their representatives in Los Angeles to

Prosecutors described the operation receive from Los Angeles drug traf. 3 2 "pationwide mcosy-laundering Ackers the cash that was to be laun service," saytag the suspects tried to dered. manipulate deposits of curreacy and

A Customs Service special ageat, electronic transters of money for Awilda VWatane of Miami, an undermajor marcoda traffickerg" dealing cover ageat to the case, reported that in larre quantides of cocaine mainly in Mr. Sarmieato ottered undercover Florida and California.

agents commissions of trom 1.5 perIn the investigation Federal wader cent to 2.5 percent of cash transactions cover agents, wortdng secrety wted for help in circumveeting reporting muro commercial banks, one in Los ADseles and the other to Mlami, posed as

He said the suspects kept financial American intermediaries having can records: coded with computer nu sections with American bankers they merals" to disguise the identities of said were willing to violate currency clients and associates. reporting requiremeats, according to

The floancial institutions that coop documents nied in the case.

wuted in the case were not identified. From the financial institutions that cooperated in the case, the money was transferred to bank accounts in Panama as well as to banks to 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. reacy transactions from being nied. But, according to the documeats, the cooperating American Institutions hled reports on the cash deposits.

Financial institutions are required $70,000 or more to the Treasury Departby law to report any cash transaction of ment. The transactions intercepted by the undercover agents ranged from $100,350 to more than 1 million in a sinEle transaction, the Governmeat said.

Since last September, 23 such cur. rency wansactions were conducted through the cooperating bank in Call fornia None, the documcats said

Those arrested were idendfied as Carlos Sarmiento Arechoderma and Ro berto del Ploo Sousa, who were ar.

laws.

I Money Launderung

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McLean Bank Admits Failing to File Reports on Cash in Major Drug Case

By Flizabeth Tucker

Mclean Bank pleaded guilty yesterday to
charges that it failed to tell the Internal
Revenue Service about sizable cash trans-
actions that helped drug ringloader Chris-
fopher F. Reckneyer launder millions of
dollars from illegal drug sales.

The bank, but not bank officials, pleaded
guilty in U.S. District Court in Alexandria
to intentionally failing to file reports ou 23
occasions between July 16, 1980, and April
27, 1981. The cash involved totaled
$620,000-part of more than $2.25 million
deposited at the bank in an account con-
trolled by Reckmeyer beginning in the
1970s, according to a statement by the of

fice of the U.S. attorney for the Eastern the drug ring. Robert Reckmeyer was sen-
District of Virginia.

tenced to 14 years in prisou.
Financial institutions are required by led- McLean Bank's guilty plea followed a
eral law to tell the IRS about cash transac- grand jury investigation conducted by As-
tions exceeding $10,000. The IRS uses the sistant U.S, Attorney Kent S. Robinson dur-
information for criminal investigations, ing the last six months. The Drug Enforce-

la January, federal prosecutors issued a ment Administration, the Internal Revenue
122-page indictment of Virginia brothers Service and U.S. Customs also worked on
Christopher and Robert Reckoreyer and 24 the case. Sentencing is set for Jan. 24 be-
others, alleging that from a few marijuana lorę U.S. District Judge James C. Cacheris,
sales in 1972 at Langley Iligh School in Although the maximum penalty for the
Mclean, the Reckmeyers built a marijuana

bank's violation is a $500,000 fine, terms of
and hashish empire that stretched from an agreement between the government and
coast to coast and grossod more than $100 the bank limit the possible fine to $100,000.
million over a decade.

Bank officials were not available for com-
On May 17. Christopher Reckmeyer was ment yesterday, but an unsigned statement
sentenced to serve 17 years in federal pris- was issued by the bank.
on after pleading guilty to mastermining The United States has concluded that no

individual director, officer or employe of the
bank has committed any criminal violation
of the currency reporting requirements of
the U.S. Code, the bank's statement said.

"Instead, the government's prosecution is
based on the novel legal theory that the
bank can be criminally liable for 'knowingly
and willfully' failing to file currency trans-
action reports based on the 'collective
knowledge of its employes-in effect that
some employes of the bank were aware of
the bank's obligation to file such reports,
but different employes were aware of the
particular currency transactions,

"The bank has decided nok ko contest the
government's interpretation of the law so
that this matter, which involves transac-

Lions that are five years old, can be put to
rest, the bank said.

Bank President Roy L. Browning was on
vacation and not available for comment,
according to a bank secretary. One bank
employe said the problem was due to lack
of communication It has nothing to do
with anything ... underhanded.

Assistant U.S. Attorney Robinson said
the charge was not based on a "novel legal
theory.

The bank is saying people in manage-
ment knew that currency transaction re-
ports were suppoged to be filed," he said.
"The tellers who actually received the cash
deposits were aware of the transactions

Bee MeLEAN, D8, Col. 1

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McLean Bank Admits
Failing to File Reports

condomimum units at Port Royal
had been deposited in a savings ac-
count 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 fi-
nance 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 re-
placed 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 mvestnient 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 liguidated 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 embezziement and misuse of bank tunds and was sentenced to six inonths in federal prison.

MCLEAN, From Di

curred before July 7, 1980, when

the Federal Deposit Insurance that gave rise to the need to file. Corp. put into effect new regulaThose two groups of employes nev- tions concerning the filing of transer quite hooked up—that's the action reports, said Robinson, bank's claim.

Up until that date, it is "arguable" There is going to be a sentenc- whether the bank was required to ng in this case, at which point both submit reports, he said. the bank and government will be McLean, a federally insured and Able to say more about their posi- state-chartered commercial bank, is pon in this case," Robinson said. in the process of being acquired by

Robinson said his office has in- James Madison Lid. Festgated other banks and found In 1984, in a case that indirectly no indication that any other banks involved McLean Bank, a federal that the Reckmeyers were using failed to file currency transaction reports." The Reckmeyers used The bank, but not Iseveral banks throughout Northen Virginia," he said, without iden bank officials, bifying the banks. "Certainly any ocher cases of this sort which come pleaded guilty in to our attention will be vigorously prosecuted," he said.

U.S. District Court Documents filed with the court disclose details of the cash trans in Alexandria. Actions. Since the early 1970s, more than $2.25 million in cash was

bankruptcy judge in Alexandria ap deposited on 173 separate occa

pointed a trustee to manage the tions in an account called Crancy's affairs of the Port Royal Develop Inc. and controlled by Christopher ment Corp. after witnesses brought Reckmeyer, Robinson said. Begin- by Mount Vernon Savings & Loan king in 1978, many of the cash de- Association testified that the develposats exceeded $10,000.

opment company had mismanaged But the McLean Bank filed only

accounts for the Port Royal Condor reports to the IRS on the

miniums on North Pitt Street in Crancy's account, involving about Alexandria. $200,000 in deposits, the U.S. at- Testimony at the bankruptcy Torney's office said. No reports hearing from a certified public acPuere filed on 61 transactions in- countant revealed that more than volving more than $15 million. $50,000 in earnest-money deposits

Forty of the 61 transactions oc- from persons with contracts to buy

.

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SPECIAL
VIDEO TAPE PRESENTATION

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

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 fraud-
ulent-tar-shelter investigation in
IRS history.

It was all there: $100,000 to be laundered through a dumray 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

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 legal tax shelter business. According to IRS affidavits filed in court, USTPS sold exclusive franchise

Seo SHELTER, AIQ, Cal 1

A SPECIAL TWO HOUR SEMINAR
FOR U.S. TAXPAYERS SEEKING LEGAL METHODS
TO REDUCE. DEFER OR ELIMINATE PERSONAL

QR CORPORATE INCOME TAX

US$25.00 PER PERSON
CASH, CHECK, AX, VISA, MC ACCEPTED

3 SEMINARS PER DAY
10.00 AM, 12 NOON, 2:00 PM

1

SHELTER. From Al nghts to American promoters, offered an innovative menu of tax avoidance schemes and attracted lots of customers

One popular pian involved bogus medical malpractice insurance, in which doctors would take big tax deductons for their premiums and secretly get most of the money back, according to the documents. Another called for the chient to buy phony consulting studies, again recouping most of the money after deducting the cost, the documents say.

Mose 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 ingury 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 Dade available by the agency, as well as interviews with IRS officials, shelter promoters, prosecutors and law yers 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- third of them doc. tors invested with American promoters, who bought their tranchises for up to $25,000

The company was founded in the Cayman Islands, a tiny British colony of 17.000 with strict business secre cy laws that have transformed it into the Caribbean's leading tax haven. Half of all IRS criminal investigations Dow invoive such offshore money centers

The founders aggressively marketed their smorgas bord of tax plans. They took out full page ads in The Wall Street Journal and paid prominent speakers, in chuding former senator Eugene McCarthy (D-Minn.), to dras people to their tax seminars in the Cayman I landa McCarthy says he was just a speaker and knew nothing of the company's operations.

IRS officials contend that the company's offerings vent 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 pian 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 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 deceithid to get involved in this shelter,' a USTPS promoter in St Paul told an un dercover 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 afflution with the American promoters.

The IRS has no jurisdiction over Cayman citizens such as Evans and is barred by Cayman law from com ducting investigations on the islands

Evans said USTPS was a small firm that never made a profit and mos put out of business by the IRS lage 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."

How Ottshore Shelters Ar romoted

IRS affidavits and tape transcripts paint another picture of how offshore shelters are promoted behind closed doors. According to the documents, prime se lections 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 Plas-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 com pany, 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 corpo ration 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 MoralityThe 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 de posited in a Cayman Islands account and can be reclaimed at a later date. • The Payroll Plas-The client corolls 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 vant 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 Islands 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.

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