Spotlight Money Laundering Drug barons hide billions Criminals like Katz operate almost entirely in cash. Laundering the cash to conceal its illegal origins is as much a part of their business as off-loading drugs from mother ships or using personal threats to collect on bad loans. Altogether. America's criminals launder $40 billion annually, according to government estimates. Their success is a testimony to their easy access to financial institutions both in the United States and overseas, and to the government's failure to block the flow of illicit cash through legitimate banks and businesses. Although their laundering trails are often long and winding, criminals have encountered few obstacles along the way. Investigators have only recently begun tracking criminals by following their financial footprints. They have belatedly recog Easy access to banks, firms nized that top criminals devote as much First in a series When Bob Hope appeared in Worcester during his last Massachusetts tour. Mayor Jordan Levy gave the comedian the keys to the city. But the main investor in the firm that recruited Hope and paid his perfor mance fee avoided the limelight. Arnold Katz didn't even attend the show. At the time. Katz was one of the leading cocaine dealers in the United States. Although he lost money on the Hope show and on other events he produced. he gained something else from his career in promotions- a cover story and a way to launder some of the bundles of cash he was reaping from cocaine. effort to hiding illegal income as they do to "First we went after the product, but now Adds Janis M. Berry, a Boston-based assistant US attorney: "There'll be no winning the war against drugs until as much time is spent looking at what a dealer did with his money as is spent looking at how he made But the task of tracing illicit cash has proven difficult, and has often clashed with Americans' desire for financial privacy. hile criminals ordinarily deal in large Amounts of cash, so do businesses, like supermarkets and parking garages. To distinguish criminal profits from legitimate gain. investigators need information about all major cash transactions. Yet legitimate bustnessmen have objected to such scrutiny as an invasion of private dealings. And banks that handle large amounts of cash have been unwilling to grill customers about the sources of their money. Lacking the information from banks and businesses. Investigators have not attacked laundering vigorously. They took more than a decade to start enforcing the 1970 Bank Secrecy Act, which requires banks and many other businesses to report cash transactions over $10.000 to the Internal Revenue Service. They have sent only four American bankers to prison for aiding launderers by not filing the reports. Even when they have uncovered a laundering scheme. they often have failed to seize the culprit's cash and property. In an earlier era, criminals could use simple methods to hide illegal cash. But as the government has become more sophisticated, so have criminals, matching their pursuers move for financial move. Back in the 1940s, bookmakers like the late Maurice Lynch of Revere had no problem laundering illegal cash. Lynch, who was named in mobster Vincent Teresa's 1974 autoblography as the second-in-command of organized crime in Revere, set up a paycheck cashing service at local bars where he offered workers cash he had earned from bookSPOTLIGHT. Page 24 Drugs and money How the leaders of New England's largest drug Drug lords hide billions in banks, businesses SPOTLIGHT Continued from Page 1 making. In reurn, they signed over their paychecks to him. Both sides benefited from the arrangement. Lynch got rid of cash that he would have otherwise had a hard time explainang to the IRS and replaced it with legiti mate checks that he could deposit at a bank without arousing suspicion. And it saved the workers a trip to the bank. 2, Lynch used a similar technique at Wonderland and Suffolk race tracks. Bettors who did not want to cash winning tickets in at the track because large payoffs were reported to the IRS sold them to Lynch instead. By selling to Lynch. the bettors avoided paying taxes on their winnings, and Lynch ended up with tickets that he could use to cover up His bookmaking profits. If the IRS questioned him about his wealth. Lynch could always point to the tickets as evidence that he had gotten lucky at the race track. Thirty years later, when reputed Mafla boss Gennaro Anglulo needed to hide cash from various enterprises, he had to devise a more elaborate method. Anglulo managed to place two of his real estate companies on a list of exempt companies at the First National Bank of Boston. guaranteeing that the cash he and his associates brought in shopping bags to the bank's North End branch was never reported to the government. This arrangement worked until 1983. when the government discovered it while investigating the bank for failing to report cash transactions. Still more recently, marijuana importer Thomas N. Rhoad 3d used a circuitous route through foreign banks and dummy corporations to buy property on Nantucker Island, where he spent his boyhood summers. Rhoad carried $1.6 million in cash on commercial flights to the Babamas and England's Channel Islands. then had anonymous corporations wire money back to him for the real estate purchases. Rhoad is now in federal prison on a drug conviction. Businessmen help Criminals like Anglulo and Rhoad cannot wash their illegal cash by themselves. They need the quiet help of bustness people who, in the absence of any federal law prohibiting money laundering. can legally accept unlimited amounts of cash. There is the contractor who has fallen on slow times and prefers cash payments that he need not report on his income tax. There is the banker who fears that if he rejects anybody's cash it will be deposited with a competitor. And there is the lawyer who is sworn to protect his client's confidentiality and forms corporations without asking the name of the true own er. th Katz's case, for example, some lawyers who represented the cocaine distributor and his street dealers were offered cash for their services. One lawyer, who spoke only on the condition that he not be identified, said he did not inquire about the source of the cash. "A cilent would come in with $2,500 in cash and tell me. Thank God for Arnie or I couldn't afford you." the Boston law yer recalled, adding, "I have heard stories of people who paid their attorney $1 mil lion in cash." increasingly in recent years, many criminals have laundered money in for eign countries where attorneys ask even `fewer questions than their American counterparts and stringent secrecy laws protect bank accounts from US investiga tors. Drug dealers routinely break US law by carrying more than $10.000 in cash on international flights without reporting it. because they know that the US Cus toms Service rarely searches outbound passengers. Cars, boats and private planes carry cash out of the United States. Maine. for example, has 60 unguarded border crossings with Canada and more than 200 remote airstrips: a plane seized in July 1983 at Sanford Airport was equipped with 10 extra fuel tanks for nonstop flights to Colombia. Once the money is deposited in an overseas bank, the criminal has the choice of writing checks on the foreign account or wiring funds to a US account. Either way, the cash has now been converted to check, and its history has been erased. 'As repositories of drug money. Carib bean countries such as the Panama, Bahamas and the Cayman Islands have largely replaced the traditional secrecy haven of Switzerland, which has cooper ated with US investigators since a treaty between the two countries took effect in 1977. Economies at risk US investigators need banking records In these Caribbean countries to follow the cash trail. Yet Panamanian officials say their country would risk economic suicide by divulging financial information, because frightened depositors - including foreigners who maintain dollar accounts abroad to avoid taxes, as well as drug traffickers might remove their money. Panamanian banks have never cooperat ed with US investigators, and treaty nego tiations on the issue of access to banking records have dragged on for four years.. "There is no such thing as good or bad money," said Jorge Riba, minister of goverriment and justice in Panama. "To me. money is neutral." Once the money goes offshore." lamented one US Senate investigator. "It's gone." Stashing money abroad was a favorite device during the past decade among a group of major drug traffickers that included Katz, Robert L. Frappier. Timothy L Minnig, Salvatore Michael Caruana, Frank J. LePere and Kevin R. Dailey. They formed one of the biggest drug rings federal officials have ever busted, one that smuggled in most of New England's marijuana and cocaine. Wherever they hid the cash they earned from drug sales. they had the same purposes in mind: protection against US investigators, and freedom from American cash reporting laws. Frappier and Minnig Imported 167.000 pounds of marijuana to New Eng land between 1974 and 1983. Both have pleaded guilty and given evidence against other traffickers. They are currently negotiating forfeiture of $6.7 million in as sets to the government. The pair testifled in 1984 that they de posited hundreds of thousands of dollars in cash in the Bank of Nova Scotia in the Bahamas. Minnig also bought a Bahamian island through cash payments to a local businessman who acted as a front for him. "All transactions were made in cash in this business." Minnig has testifled. Caruana. a high-level organized crime figure who assisted Minning and Frappier in their marijuana smuggling moved at least $1 million to the Bahamas. He deposited the money in the bank ac counts of front corporations there and later wired $800,000 to a Plymouth precious metals company he controlled. Indicted on drug charges. Caruana, a former Nahant resident, is now a fugitive. • LePere, a Marshfield businessman. earned an estimated $25 million by buying Colombian marijuana and un-. loading it from mother ships anchored off the coast. He and his South Boston-based partner. Dailey, pleaded guilty to narcotics smuggling charges in June. According to court documents, LePere carried $3.5 million in cash to Pariama last year, and formed a Panamanian corporation. Video Products International. But Investigators have not established how he used the corporation or where he disposed of the cash. An attempt to trace LePere's money ran into the barriers of Panama's banking and corporate sectors. Even confirming LePere's ownership of the corporation from Panamanian public records alone was impossible. According to documents at the public registry in Panama City. Video Products International issued "bearer" stock. In other words, there was no owner of record: whoever held the stock certificates controlled the corporation. The directors listed were nominees paid by the law firm of Porras and Valdes, which organized the corporation. The address given was the law firm's. The purpose was to conduct "any lawful business." More than any other figure in this major drug network. Arnold Katz took pains to distance himself from his cash. A mayor's son and the one-time owner of a popular Worcester restaurant, Katz grossed an estimated $50 million by distributing cocaine and marijuana nationwide from 1979 to 1981. "He was by far the biggest we've ever seen [In New England. said regional Drug Enforcement Administration head Robert M. Stutman. Arrested in 1981. Katz has provided information as a government witness that has helped obtain a dozen convictions. He is expected to testify at several upcoming drug trials. While Katz has described his narcouCS on to investigators, less has come to light about his laundering methods. Retraced through interviews and docu-. mets. Kaiz'e transactions suggest that he followed the advice of several volumes on money laundering that he kept in his bookshelves, arranging his finances so he could dispose of cash without triggering the federal reporting law. Along the way. he was helped - sometimes unwittingly by a number of businessmen who accepted his cash without asking questions. In the summer of 1980, for example. Katz bought a 39-foot boat called the Solftary Bird from Wells Yachts in Marble head. He faced this problem: If he paid the $127.800 purchase price in cash. Wells would deposit the cash in a bank, which would report the amount to the government since it was greater than $10.000. Alternatively, if he paid Wells with a $127.800 cashier's check that he had purchased in cash. the bank that sold him the check would report the transac tion to the IRS. Either way. Katz risked having federal investigators pick up his financial trail and begin asking questions about how he had obtained the cash. Katz solved his problem by buying a series of cashier's checks, each for under $10.000. According to Wells company re cords. Katz paid for the yacht with eight cashier's checks of $9.000 each. one check for $9,500 and one for $7,000. Only one cashier's check for $15.500 was above the $10.000 reporting limit, and it alone would not have been enough to draw investigators attention. (The company's records do not account for the other $23.800 of the purchase price.) This technique of buying a series of checks worth less than $10.000 aplece. now commonly known as "smurfing. has become a popular laundering method on the West Coast. Drug traffickers pay a small commission to couriers who rush from one bank branch to another, buying the checks. In one California scheme. runners bought 2,000 cashier's checks at 513 different banks in one day. Clinton Wells, owner of Wells Yachts, said in a recent interview that his wife suspected Katz was a drug trafficker even though Katz told the couple that he had inherited money from his father. While Wells was familiar with the requirements of the cash reporting law, he said, he did not prese Katz to explain the use of multipie cashier's checks under $10.000. "Basically, it was none of my bustness." Wells said. Dealers avoid law At a court hearing last year, Katz acknowledged he was well aware of the danger to drug dealers posed by the cash reporting law. He testified that he once had told a partner, John Hamlet, to sell an airplane on the West Coast for cash and then use the cash to buy 22 cashier's checks of less than $10.000 apiece. Hamlet was arrested before he could make the deal, and is now in jail. Asked under cross-examination why the checks had to be under $10,000, Katz said. Cashier's] checks of $10.000 are reported immediately to the IRS." 9. And so you did not want this money to be revealed to the US government, correct? A. That's correct. 9. You were familiar enough with banking regulations so that you took precautions against leaving a trail that could possibly be traced back to you, correct? A. Yes. Katz did not always replace cash with cashier's checks in order to evade the cash reporting law. On one occasion. The Globe Spotlight Team found, he paid. $185.000 in cash for an airplane. But, in this instance, he made the purchase under an alias. Even if the plane's seller reported the transaction to the government, federal investigators would have no way of knowing that Katz was involved since his name did not appear on the deal. In August 1980. Katz and a pilot named Charles D. Schrein flew to Atlanta to buy the airplane. a Piper Navaho. Three months later, the plane crashed in Long Island Sound, reportedly while heading to Bridgeport, Conn., to collect cash from marijuana sales. Schrein and two passengers were killed. The plane. was never recovered, and Katz replaced it with a Cessna 421 that he bought from LePere for $260,000 in cash. A federal probe followed the crash, as did a lawsuit by the estates of the two passengers against Schrein's estate and Katz, alleging negligence. But investigators and plaintiffs. had an unexpected problem - establishing Katz's legal own ership. It turned out that the plane had been purchased under the name of Lee Duncan, an alias given by Schrein. Katz's name was nowhere to be found. Neither Schrein nor Katz registered their ownership with the Federal Aviation Adminis tration. Gary Hunter, the Atlanta salesman who sold the plane to Schrein and Katz. said in a telephone interview that he did not ask them for identification. Hunter said that the pair told him they promoted rock concerts and were accustomed to dealing in cash. "I was more interested in. selling the plane than in their business." Hunter said, ".. I've never met anybody in the rock business, but it looked like they might have been." In fact, Katz was a director of an enter tainment promotion company, R.J. Heppenstall Productions Inc., which was organized in Worcester in the same month that he and Schrein bought the Piper Navaho in Atlanta. Richard Heppenstall, president of the new company, was an old friend of Katz's. He was convicted on narcotics charges last year along with seven other defendants. Katz was a government witness in the case. "I went into the amusement business. sponsoring concerts and groups. Katz has testified. "And I lost somewhere between $125,000 and $150.000 over a period of months." In addition to bringing Bob Hope to the E.M. Loew's Theatre, Katz's company helped produce a children's Christmas show and a Lewiston, Maine, rock con cert in September 1980 by The Grateful Dead. Besides the promotion firm. Katz invested in other "young growth businesses that needed investment capital," a lawyer who once represented him said in an interview. It could not be determined whether Katz maintained sizeable bank accounts in the names of Heppenstall Productions, or his other businesses. If he did. he was using one of the oldest of laundering techniques. People involved in allegedly criminal activities, like Lynch, the late Revere bookmaker, have often bought moneylosing "front" companies and then pumped dirty cash through the firms' bank accounts. so that the money appeared to come from legitimate sales. Besides his check-cashing service. for example. Lynch ran a toy and novelty shop in Revere. He bought goods for the store cheaply and sold them at a loss so that the store did not produce much cash itself. Then he made up the loss with cash from his bookmaking and deposited that money in a bank account under the store's name. To authorities, it must have looked as if the cash were part of the store's normal profits. "He'd buy $20.000 worth of watches one day. 1.000 of them at $20 apiece." one of Lynch's advisers recalled. "They should have retailed at $40 to $60. But he'd be up and down Revere Beach for the next couple of days unloading them at $15 to $20. "He didn't care if he lost money, as long as he could show that he had bought and sold them," the adviser said. "Then he would push his bookmaking money through (the bank account)." A Boston bookmaker. Francis J. VItello of Jamaica Plain, who was involved in a laundering scheme in the early 1960s, also owned a Roslindale bar that apparently did an extraordinary amount of cash business. Vitello's Fireside Tavern had an account with First National Bank of Bos ton, according to records made available to the Globe. În 1972, bank officials identifled the tavern as one of 74 customers. Including only two other bars, that regularly used enough cash to qualify them for a list that exempted their transactions from being reported to the IRS. The real estate firms controlled by Angulo later received the same exemption from the bank. Vitello set up Swiss bank accounts in the early 1960s and deposited $1.2 mil. lion in them. After a lawsuit revealed that a Washington lawyer had tried to steal more than $700.000 from the accounts. Vitello was convicted of tax evasion. Shortly after his bar was put on the exempt list. Vitello was indicted for tax f evasion charges stemming from his deposit of the money in the foreign bank ac counts. The bar was dropped from later lists. Whether Katz washed drug cash through front companies in the United States, there is no doubt that he used for- .. eign front companies and banks in his laundering schemes. He even claimed to have perfected a technique for smuggling money out of the United States. He discov ered that men could wear women's panty hose stuffed with bundles of cash and then put clothes on over the hose. AL though the men might look a little fatter because they were swaddled in cash. they did not attract the attention of US Customs agents. Continued on next page Baston Glake 9/22 374 No Customs checks on cash smugglers Spotlight Money Laundering Continued from preceding page Katz frequently carried cash out of the United States. violating the law that required people who carry more than $5000 in cash across the US border to report it. (The limit has since been increased to $10.0001 But he was never caught The one time he was nabbed under that law, he was carrying $30.000 into the United States from Aruba from a cocaine deal he had just completed. He paid a fine. One Customs official in Miami acknowledged in an interview that there is no routine Inspection of outbound passengers and baggage. Certain flights to Panama or Colombia are targeted for inspec tion Katz maintained bank accounts in the Bahamas and the Cayman Islands. a group of three islands under English control that have one bank for every 42 resi dents. Only his arrest Interrupted his plans to open accounts in more distant lands. "I had spoken. to a lot of people and gotten a lot of ideas on how to move money in Liechtenstein corporations and Philippines. and Taiwan. and Hong Kong, and Singapore. and this was what I was going to do." Katz said at his 1981 sentencing hearing I was going to send the money out. Katz's purchase of a Back Bay condoniinium in 1981 via a Caribbean corporation illustrates how offshore laundering works Despite the financial contortions It Involves, its success is guaranteed once the cash is taken out of the United States. By using a Cayman Islands corporation. Katz disposed of $185.000 in cash. avoided cash reporting by US banks, and kept his own name out of the transac tion In 1981. Katz visited the Caymans, where he formed Schesslera Holding Co.. opened a bank account in its name and deposited cash. A short time later. Schesslera wired the money to Katz's lawyer. Alan L. Jacobs, who used the money to buy a townhouse in the Back Bay with a law firm check. Jacobs declined to discuss the transaction. but said he had not known of Katz's involvement in drugs. Katz had explained to Jacobs that he had a lot of money because he was liquidating the real estate investments of his late father At that time, banks in the Cayman Islands accepted unlimited amounts of cash, and promised total secrecy to depositors. As a re sult. many drug traffickers brought cash to the Caymans. Under US pressure. the Caymans agreed last year to release banking Information to American investigators in drug-related cases. Major banks in the Cayman Is lands have also stopped accepting cash deposits above $10.000. However a number of small Caymanian institutions still take We will acany amount of cash. one cept whatever you have. banker told a Globe reporter who Inquired about bank policy In a similar offshore transac tion. Katz purchased a 53-foot boat named "Pegasus" through a Bahamian attorney. He and a French couple carried cash on their bodies from Florida to the Bahamas and gave it to the lawver. who then wired payment for the boat Given Katz 's sophisticated use of foreign banks, some investigators wonder whether he still has money salted away overseas Be cause they lack the time and resources to hunt for money worldwide. they must accept his say-so that the $1 million in assets he forfeited to the government consti tuted all of his profit from drug trafficking "What reason do I have to believe that. just because you've made some disclosure you've. made total disclosure? US Dis trict Judge Marilyn Hall Patel asked Katz at his sentencing hear ing "I mean, you've got everything to gain by making partial disciosure and thereby appearing to have complied, appearing to be cooperative, and secreting a nice small bundle away somewhere to which you can return at some oint And how bould it ever be traced? Katz answered. Money is not that important to me any more NEXT: Laundering s newest hot spots This report was prepared by The Globe Spotlight Team. which consists of editor Stephen A Kurkjian. reporter Daniel Golden, economics reporter Peter G. Gosselin, and researcher M.E Malone Katz home seized but unsold Four years after it was seized by the government. the expensive Back Bay townhouse remains vacant. Outside, the back yard is a jungle of weeds that choke off the dogwoods and rhododendrons. Inside. the pipes burst some time ago, ruining the first floor. In good condition. the three-story brick building on Keswick Street would be worth $300,000. Instead, the deteriorating house has become ar eyesore, a source of complaint at every meeting of the Audubon Circle Neighborhood Association. It is also a prime example of how real estate bought by a criminal through a laundering scheme can remain in limbo long after his arrest, despite the government's efforts to dispose of the property. Cocaine distributor Arnold Katz bought the house through a Caribbean corporation in May 1981, and lived there until he was arrested a month later. He surrendered his claim on the house that August to authorities in San Francisco. where he was on trial. Since then, the government has neither fixed up the property nor sold it, although there are prospective buyers. "It's a huge statement about the ineffi ciency of government," said neighbor Kathy Schultz. Schultz said she called the US Drug Enforcement Administration in 1982 after the roof of 12 Keswick St. began leaking. She found that federal authorties in California had forgotten to forward forfeiture papers to Boston. Former Assistant US Attorney Greg ory C. Flynn, who eventually received the papers, said he was unable to dispose of the property because he could not prove that Katz had the right to forfeit it to the government. Although Katz had told the government that the house belonged to him, there is no documentation of his ttle. Katz purchased the house through a corporation he set up in the Cayman Is lands in the Caribbean, where financial records are secret. Without access to the records, authorities cannot show that Katz owned the corporation. "It's very difficult to determine the relationship between Katz and that corporation. Flynn said. "Real estate is very technical, and you need to show a clear chain of title. Otherwise, you could be convicted of a crime and say. I forfeit the Prudential Center."" Boston Globe 444 West Coast cash surge linked to drug dollars What big cash is buying (Page 11) and another $1.4 billion by August of this year. Federal Reserve officials say they do not have a "We're the bad guys', new frontier." If Lassart and others are right, San Francisco is an example of how quickly criminals can shift their financial operations to outwit opponents. Its unex pected emergence as a national cash center follows a money laundering crackdown in Miami that has driven Florida criminals westward. The city is also an example of how businesses Indifference and government delay can combine to create ideal conditions for laundering. A Boston Globe study shows that Bay area banks fall to report one In every four cash transactions of more than $10,000, a fallure rate far higher than other major cities, including Miami. The 1970 Bank Secrecy Act requires banks to file the reports. which aid the government in tracking down laun dering. SPOTLIGHT. Page 12 |