Spotlight

¡Money Laundering

SPOTLIGHT Continued from Page 1

●Federal bank regulators, who are supposed to ensure that the nation's banks comply with the cash reporting jaw 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 regular ly 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 fuil of holes that some analysts doubt many of the computer's results

●Five federal law enforcement agencies. Including the US Attorney's affice, which are supposed to use the computer studies to track down laun. dering, either fail to get copies of the studies or fail to use them. When inves tigators 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 avestigator for the Senate Permanent Subcommittee on Investigations, which has issued a stream of reports on international money laundering.

The government has had some suecesses. 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 offi-
cial 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 launder it, the criminals must depend on the ikers and businessmen 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 suf fered 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 of fice, asserted recently. We're only getting back to where we were in 1970.

Today, the federal government has a three-part system for 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 Seerecy 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 nowing 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 move ments 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 legitimate 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 flied: 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 primarily responsible for conditions hampering success of the system because it has not aggressively and effectively 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 pri vate 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 examinie. 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 pro vide 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 wome and wor it's just too few people chasing too many prob

lems."

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. ! 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 complfance with a computer. It's not possible.

ing reports.

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 transactions 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 Department'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-quarters 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.

Starting in the late 1970s. the GAO criticized law enforcement agencies for failing to investigate cash trends spotted by the Treasury's computer cash now studies. Officials who have been briefed on the GAO's current study of the system say that GAO auditors have found some improvement but be jeve more needs to be done. In interviews with investigators and prosecutors across the nation this summer. the Globe found dozens who had never heard of the studies or used them.

As originally envisioned, several federal agencies - including Customs. DEA the FBI. the IRS's Criminal Investigation Division the Justice De partment and the US Attorneys of fices were supposed to pick up where Treasury computer analysts left off. They were to take the unusual cash flows spotted by the analysts and track them back to their source. If they found a criminal behind the currency. they were supposed to prosecute hum and seize his assets.

Investigators and prosecutors are now taking their first steps toward dong just that. But their actions come 15 years after they noticed the need for going after both crime and cash.

Until recently, according to Richard Jarretr DEA's intelligence chief in San Francisco. Law enforcement. was looking for the powder on the tabie. You know, that's what makes it sexy gets the headlines."

One reason that most law enforce ment officials failed to focus on criminal finances is that they were not. trained to use the Treasury cash flow studies or work with financial figures. As one West Coast official explained You know most of my guys weren't numbers people to begin with. They signed on as agents, not accountants."* Adds a local prosecutor 1 tell a DEA agent to check the Registry of Deeds on a drug dealer and he boks at me ke I'm crazy

However, until recently investigators could not have used the studies even if they had training or interest because they did not know the studies existed or if they did, were not given easy access to them A 1981 GAO surver of 27 law enforcement offices

found officials at six were unaware of The studies or did not know how to obtain them. Officials at another 12 had almost never used them. Recent interviews suggest that much the same is true today

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But there is another reason that officials have not mande much use of currency flow inforination: they don't believe that regulators ensure it is accurate or that the analysis make sure it is complete. As Jarrett put it: "The people we want aren't filing, and nobody's making them."

This skepticism can translate into a less-than-energetic attack on criminals assets. Even when investigators pierce a narcotics ring and arrest its leaders, they often neglect to identify and seize any but their most obvious pos sessions. The investigation into a 14-member drug ring led by Eliner Rodriguez and Donaldo Rengifo, both of Brookline, is a case in point.

After the ring was busted last December, Investigators set about confiscating its profits. So far. they have seized $300.000 worth of properties, mainly the homes and cars of the suspects. However. they overlooked several other assets that were somewhat harder to locate.

One member of the ring. Felix Rengifo of New York was able to sell a taxi medallion for $75.000 a month after his arrest. Not real

izing that Rengilo owned the medallion investigators were unable to stop him from hiding the profits of the sale.

in another example. ringleader Rodriguez and Helmer Mosquera bought the three story apartment building at 77 Highland st. in September 1983 for $6.500 - in cash. During the next 15 months. Rodriguez, one of the two alleged ringleaders of the operation. spent an estimated $100.000 in renovating the building All the work materials and the salaries of the dozen or so workmen on the job was paid for with cash. according to sources familiar with the renovation project.

One workman said he received approximately $20.000 on the project: since he was paid in cash, he did not report the money to the IRS. and paid no taxes on It was all gravy, heavy gravy for more than a year. he said. "Elmer would come every Friday to pay us and he'd have these bags of cash. I've never seen anything like it.

it

Rodriguez spent more cash. according to sources fainillar with his business, renovating the Hyde Park house of a friend

Although seizure law allows for the seizing of any property bought or renovated with drug money, neither property was tak en by the government Asked why, one prosecutor on the case said: "We just didn't talk to the same people you did.

A week after their arrest last December. Rodriguez and Mosquera signed their interest in the house over to their wives. Last May the wives sold the apartment building for $75.000 to a Wellesley developer.

Shortly after buying the property, the developer received a visit from the DEA agent who led the investigation into the drug case. "He wanted to make sure that ! bought the property legitimately. and I showed him that I had. said Arthur Jacobsen of Genesis Properties of Needham. When Jacobsen asked the agent why the government hadn't placed a lien on the property to advise prospec tive buyers of its past owners criminal case, he said the agent told him:

It's too long of a story to get into "

NEXT: The international money trail

This report was prepared by The Globe Spotlight Team. which consists of editor Stephen A. Kurkjtan, reporter Daniel Golden, economics reporter Peter G. Gosselin, and researcher ME. Malone.

Fifth in a series

EL PROGRESO, PERU This dusty town on the Upper Huailaga river, so remote it does not appear on most maps of Peru, sees more American cash in a day than many Boston banks collect in a week.

Every few hours, small-engine planes touch down at the 25 clandestine airstrips within 10 miles of the town. They unload American bills and pick up cocaine paste made from coca leaves that grow on 80.000 acres in the river valley Then they return to Colombia. where labs process the paste for smuggling to the United States.

The dollars as much as $4 million on a busy day - have Invigorated El Progreso's economy. Japanese cars navigate its unpaved, potholed streets. and concrete houses are replac ing ramshackle wooden ones. Radios, electrical appliances and outboard motors are piled high at the outdoor market: they are bought and sold with thousands of dollars in cash. Two of Peru's largest banks plan to open branches in the town later this year.

Other bankers can't wait that long. Carrying footlockers stuffed with Peruvian currency, they fly into the airstrips in search of the dollars that the Colombians left behind. The coca growers, who need local. currency for their daily expenses, sell the dollars cheaply. In Lima, where American

Gulf of Мехсо

dollars are in great demand. the bankers make a killing selling the tainted cash.

These banks are actually laundering money." Peruvian businessman Jorge Baptista Carrion said in ar interview. "There are no questions asked. There is a law that says that banks can buy or sell any amount of dollars without having to check where they came from."

As in Peru, banks in several Latin American countries actively lure drug dollars. These porous financial systems channel the expenses of narcotics operations and hide the profits of dealers from both North and South America. Cash paid for the cocaine on Roxbury's Sonoma Street or marijuana smoked at Back Bay parties may wind up anywhere from Peru's black market to Bahamian bank accounts, from Colombia's stock exchange to the safes of jewelry wholesalers in Panama's Free Trade Zone.

Drug money has become an unofficial form of American for eign aid. Beset by inflation and foreign debt, some Latin American countries need dollars so desperately that they have turned into a launderer's paradise. They have rarely conflscated fllicit cash. They have resisted pressure from Washington to monitor cash themselves or to sign treaties requiring them to turn over banking records.

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