Drug Laws: Financial Analysis in Enforcement

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DRUG LAWS: FINANCIAL ANALYSIS IN ENFORCEMENT

The application of financial investigative techniques to sophisticated forms of Crime began decades ago in campaigns to bring underworld bosses to justice. They were charged not with the underlying offenses of bootlegging or extortion, but for reaping financial windfalls from activities that either were not federal offenses at the time or that prosecutors just could not prove. Beginning with the federal tax case against Al Capone in 1931, Treasury investigators had to find ways around both the lack of federal laws proscribing racketeering activity and the difficulties in catching underworld bosses for their offenses. The approach was creative but simple: Internal Revenue agents gathered evidence to prove that the racketeers spent more income than they reported on their tax returns. The differential between what was reported and what the government alleged they earned would establish that their target received substantial amounts of unreported income. In an underworld without pay stubs and annual wage statements, how did the government know what the racketeers earned? To tax investigators, it was simple: Show how much the person spent—or at least the portion of income spent that could be substantiated.

As Prohibition gave way to different forms of industrial racketeering, syndicated gambling, and drug trafficking, federal agents grew more frustrated over their poor showing against criminals who were developing increased sophistication. Investigators turned more and more to financial analysis as an alternative. They reasoned that what worked against Al Capone and his cohorts would probably work against other high-profile racketeers too insulated by their underlings to be implicated in syndicate transactions.

Proving that individuals—whether they were Mafia bosses or Colombian drug importers—received more income than they could substantiate was easier said than done. Typically, there were no records that acted as a smoking gun by pointing directly to one large unreported sum of yearly income. Rather, evidence of unreported income was gathered from a variety of sources and was traced to documented purchases that left a paper trail of deposit slips, bank statements, advices, credit card receipts, and mortgages. As investigators soon came to find out, moreover, financial analyses frequently turned up large amounts of money in the possession of people who recently had approved plans for a lucrative drug deal or some other illegal transaction.

For investigators struggling to tie drug traffickers to crimes they only planned, finding the proceeds of those transactions was welcome evidence. For one thing, it could tie their target to the drug or other transactions that other evidence showed they had planned or approved. Drug traffickers and other racketeers who never touch drugs do touch, or otherwise control, the money that was exchanged for the drugs. Hundreds of criminals have been sent to prison on the basis of financial analyses tying large sums in question to the defendants and alleged criminal transactions.

As organized crime began to wane in national prominence in the 1970s, its place was quickly taken by an amalgam of homegrown and foreign-based drug traffickers. Often just as smart and insulated as Mafia bosses, drug traffickers were surprised to find themselves equally vulnerable to cases built on financial evidence. Passage of a number of federal drug reform laws (in 1970, 1978, 1984, 1986, and 1988) added the remedy of asset forfeiture to the government's arsenal of weapons. In order to show that their targets acquired assets with tainted funds that rendered them forfeitable, investigators resorted to the same financial investigative techniques that had helped build criminal tax cases against the same kinds of underworld leaders.

In the mid-1990s, virtually all federal enforcement agencies provide some type of basic training in financial investigation, and several—such as the Drug Enforcement Administration, Federal Bureau of Investigation, and Internal Revenue Service—have highly specialized programs at their academies. DEA and FBI, expert investigators and financial analysts support major drug-trafficking cases by providing evidence of unexplained income to prove the drug charges, and to tie the money to drug activity for the purpose of forfeiture.