Battling Drugs, Dirty Dollars in Colombia

(International Relations and Security Network, 05/10/2005)


The amount of US dollars entering the country during the last 18 months "practically equals the size of Colombia's external debt," the Colombian daily El Tiempo reported on 18 September. Recent seizures of cocaine in tonnes (as opposed to kilograms) indicate that an increased amount of cocaine continues to be exported. Speculation surrounding this large influx of dollars and export of cocaine points to one conclusion. The country's paramilitary forces are selling off stockpiles of cocaine ahead of their planned disarmament at the end of this year - and they are laundering every penny of it.


This sell-off highlights the negative effects the cocaine trade could have on the Colombian economy, as well as a need for new strategies to combat money laundering in South America.


The United Self-Defense Forces of Colombia (AUC) controls some 55 per cent of the Colombian drug trade. The paramilitary group has vertically integrated its position in the drug trade and controls the production line from coca leaf plantations to production labs and export routes. Over the past decade, the group has grown in number and in capacity to export more with each load and absorb interdictions.


Now, as some 70 per cent of the AUC plans to disarm by the end of this year, it is logical that such a dramatic downsize of manpower would be accompanied by a liquidation of assets. And the AUC's most profitable asset, aside from guns and ammunition, is cocaine.


Tonnes, not kilos


Colombian authorities seized 14 tonnes of cocaine in the Caribbean port of Punta Estero in Narino Department on 13 May 2005. Officials linked the drugs, worth some US$350 million, to AUC operations in that area. It was one of the largest seizures in history, as well as solid proof that the AUC retains massive amounts of cocaine in storage.


There have been over 12 major cocaine hauls in the past two months. Each seizure has surpassed one tonne or more. Colombian officials seized more than 3.5 tonnes of cocaine in Bogota on 1 September, according Colombia's Office of the Attorney-General. The Colombian navy apprehended a boat loaded with more than 1 tonne of cocaine on 20 September, and another boat carrying six tonnes of cocaine the next day.


Colombian officials seized some 66,000 liters of liquid cocaine and 132,000 liters of precursor chemicals on 27 September. The lab belonged to the AUC, according to Colombian navy officials who seized the property. They claim the lab housed up to 50 workers and could produce up to ten tonnes of cocaine a month. It is likely the AUC has dozens of these labs.


There have been over 12 major cocaine seizures in the past two months. And Colombian officials have seized some 84 tons of cocaine so far this year.


"This has been a record year by far," Adam Isacson, the Center for International Policy's director of programs, told ISN Security Watch. "Officials consider that they are capturing roughly 30 per cent of the cocaine that leaves Colombia."


The inter-agency task force for the US Southern Command, which monitors cocaine seizures in transit from Colombia to the US, estimates that their forces interdicted some 120 tonnes of cocaine in 2004. The estimates of the Colombian National Police, which only measure cocaine seized within the country, are a little higher, at some 178 tonnes for the same year.


This year's mid-year spike in exports threatens to raise those numbers significantly.


Placing, layering, and spending


Organized crime in Colombia uses money-laundering techniques to hide the source of wealth gained from the sale of cocaine and heroin. Lawyers, bankers, brokers, and other actors involved in this system launder the money in three stages.


Dollars earned by selling cocaine enter the financial system in the placement stage. A bank deposit is the most simple and most risky method. Usually, banks will flag cash deposits that are larger than US$10,000.


Bank tellers file Suspicious Transaction Reports (STRs) that authorities use to track possible money-laundering activity. To prevent detection, organized crime cartels may employ dozens of individuals to make random cash deposits to a number of interconnected bank accounts. These deposits are all under US$10,000 and are not flagged. This system, referred to as "smurfing", has been used for over a decade.


If dirty money is not interdicted during the placement stage, it is close to impossible to detect during the layering stage. Once the money enters a bank account, it is digitalized and can be filtered through a number of accounts, sometimes up to dozens, before finally landing in an account through which criminals have access to their clean money.


Clean money can be used to purchase items that secure wealth. Land and commercial real estate top the list of purchases made by members of organized crime, who would rather put their wealth in land or other personal assets instead of a bank where it may be seized or lose value. Often, part of this clean money is reinvested in the money-laundering system through the purchase of small businesses that facilitate the layering stage, bankers who help cover tracks, and lawyers who take advantage of weak legislation.


Black Market Peso Exchange


The "Black Market Peso Exchange" (BMPE) is the largest money-laundering operation in the Western Hemisphere. It is a sophisticated broker system that has grown over the years because, while law enforcement may take out one or more nodes in this network, the system is not affected. Its continued effectiveness over the years shows that many anti-money laundering techniques have not been effective over time.


In the case of the AUC and its recent spike in cocaine sales, the paramilitary group's need for the BMPE has increased as millions of dollars in proceeds from the sale of cocaine on US streets need to be converted into Colombian pesos.


Peso brokers in Colombia work with partners in the US to facilitate the movement of this illicit wealth from north to south and from dollars to pesos. The US peso brokers receive dollars from AUC employees in the US who collect the large amounts of cash. The dollars are assigned a value in pesos, and the peso broker in Colombia deposits these pesos in a bank account used by AUC chieftains. At this point, the placement stage is complete for the AUC. The group's money is then passed through the layering system before it is used to purchase real estate, votes, guns, land, etc. The dollars that the US peso-broker retains then re-enter the US monetary system.


At this point, the US peso broker assumes the risk of the dirty dollars. He employs a number of methods, including smurfing, to deposit this money in the US banking system. The risk assumed by the peso brokers in both Colombia and the US is offset by their earnings on black-market peso exchange rates. By avoiding the formal system, they can set their own rate at a premium. The AUC will happily pay black-market rates to have its dirty dollars exchanged for clean pesos.


Once the dirty dollars are placed in the US banking system, the US-based peso broker layers this money by making it available to Colombian businessmen who need to exchange pesos for dollars to purchase goods for import.


The number of peso brokers is unknown, as is the size of the BMPE. As long as cocaine is sold in the US, the BMPE will continue to provide clean pesos for the dirty dollars traded for cocaine on US streets. Invariably, as large amounts of dollars are exchanged for pesos, the value of the peso rises.


Economic effects on the side


The value of the Colombian peso has increased over the past few months, setting off alarm bells for the potential of inflation in Colombia's economy. There is some disagreement among observers, however, over whether or not this increase in the value of the Colombian peso is linked to the drug trade.


The Strategic Forecasting private intelligence firm claims that if the AUC was "cashing out en masse", the Colombian economy would be in a far worse state than it is right now. "The AUC does have incentive to sell off large amounts of cocaine," Strategic Forecasting Latin American Analyst Julian Lumer told ISN Security Watch, arguing that "this sell-off has not affected the Colombian economy so far".


Meanwhile, the Colombian government has been buying dollars to slow down the increase in value of the Colombian peso. Colombian government dollar reserves have reached record levels.


It is too soon, however, to conclude that a large cocaine sell-off will negatively affect the Colombian economy. There is certainly a potential for this scenario, though.


What is more likely is that AUC money-laundering activity will disrupt local economies in Bogota, Barranquilla, Calí, Medellin, and other AUC strongholds. Inflationary increases of real-estate prices in these cities would indicate miniature real-estate bubbles. Such a bubble occurred in Medellin in the late 1980s, when money earned from participating in Pablo Escobar's cocaine export enterprise found its way through the BMPE into the hands of dozens of local businessmen. Their collective investments, using laundered funds, created a building boom in Medellín not seen before or since.


A need for new strategies


Money-laundering is alive and well in Colombia because the same unworkable strategies have been pursued for decades to counter the phenomenon. They currently rely too much on hundreds of bank tellers, who must take action to file suspicious transaction reports (STRs). These tellers are the most important asset in the anti-money laundering structure because they are at the front line in the placement stage.


They are the target of "know thy customer" strategies pushed by anti-money laundering experts. Yet in some cases, they know their customer all too well.


These bank tellers are the most likely to take a bribe to look the other way. In some cases, it is likely these tellers are friends and relatives of the men and women who play an integral role in the "smurfing" technique. And the manager who has the task of organizing and filing STRs that do make it to his desk is equally likely to take a bribe rather than processing a load of paper work.


The target of breaking up the BMPE network will continue to be as elusive as disrupting the cocaine trade as long as government officials do not take seriously the important task of interdicting dirty money when operators place it in the system.


At the same time, financial controls restrict open markets. This is a conundrum that plagues security officials across the Americas. It is time for new ideas and a new strategy. Otherwise, the system that keeps the Colombian drug trade alive and well will continue to contribute to the cocaine trade long after the AUC has disarmed and the current chieftains are dead.