CHAPTER 7
THE INTERNATIONAL WAR ON DRUGS

CONVERGING WARS

In the aftermath of the September 11, 2001, terrorist attacks on the United States, the federal government's approach to combating drug production and trade beyond our borders—the subject of this chapter—has come to merge with the war on terror. The principal agency charged with this effort is the Bureau of International Narcotics and Law Enforcement Affairs (which abbreviates its name as INL). The INL is a part of the U.S. Department of State. The case for the convergence between the war on drugs and the war on terror is made in the Bureau's Fiscal Year 2004 Budget Congressional Justification (www.state.gov/documents/organization/22061.pdf) as follows:

The September 11 attacks and their aftermath highlight the close connections and overlap among terrorists, drug traffickers, and organized crime groups. The nexus is far-reaching. In many instances, such as Colombia, the groups are the same. Drug traffickers benefit from terrorists' military skills, weapons supply, and access to clandestine organizations. Terrorists gain a source of revenue and expertise in the illicit transfer and laundering of money for their operations. All three groups seek out weak states with feeble justice and regulatory sectors where they can corrupt and even dominate the government. September 11 demonstrated graphically the direct threat to the United States by a narco-terrorist state such as Afghanistan where such groups once operated with impunity. Although the political and security situation in Colombia is different from the Taliban period in Afghanistan—the central government is not allied with such groups but rather is engaged in a major effort to destroy them—the narco-terrorist linkage there poses perhaps the single greatest threat to the stability of Latin America and the Western Hemisphere and potentially threatens the security of the United States in the event of a victory by the insurgent groups. The bottom line is that such groups invariably jeopardize international peace and freedom, undermine the rule of law, menace local and regional stability, and threaten both the United States and our friends and allies.

The same theme is also sounded in INL's International Narcotics Control Strategy Report, 2003 (Washington, DC: Bureau of International Narcotics and Law Enforcement Affairs, March 2004, http://www.state.gov/g/inl/rls/nrcrpt/2003/):

The U.S. campaign against global terrorism since September of 2001 has highlighted the importance of our international drug control programs. As the single greatest source of illegal revenue, the drug trade has long been the mainstay of violent political insurgencies, rogue regimes, international criminal organizations, and terrorists of every stripe. Whether through the heroin that financed the former Taliban regime in Afghanistan or the cocaine that sustains the decades-old insurgency in Colombia, the drug trade generates the money that is the lifeblood of the violence that increasingly threatens global peace and stability.

The President's National Drug Control Strategy (National Drug Control Strategy, Washington, DC: The White House, March 2004, http://www.whitehousedrugpolicy.gov/publications/policy/ndcs04/) sets out three national priorities: 1) stopping the use of drugs before it starts; 2) healing America's drug users; and 3) disrupting the market. The first two priorities are clearly aimed at a goal that is sometimes labeled "demand reduction." The INL is responsible for the international aspects of the third priority, often referred to as "interdiction," a role it shares with the Drug Enforcement Administration, which is responsible for market disruption domestically. There are several other agencies involved in the international effort, including the U.S. Agency for International Development (USAID), an independent government entity that promotes the planting of legal crops to replace drug crops. Also, the new Department of Homeland Security (DHS) has charge of border security and the U.S. Coast Guard operates under its jurisdiction. Finally, the U.S. Department of Defense is active in various roles in Afghanistan, for instance, and elsewhere providing advisors and trainers in counterin-surgency.

The linkage between organized crime, insurgency overseas, and drugs has always been well understood. The linkage to terrorism is a contemporary emphasis. In the older conceptualization, the "recipe" for the drug phenomenon has included as its main ingredients demand for drugs, which acts as the principal motive, and poverty in underdeveloped areas of the world where weak central governments and/or strong tribal loyalties result in corruption fostered by criminal organizations flush with the rich profits of the drug trade.

DRUG ECONOMICS

According to the United Nations' International Narcotics Control Board (INCB), only a very small portion of drug wealth actually ends up in underdeveloped countries (Report of the International Narcotics Control Board for 2004, http://www.incb.org/incb/en/annual_report_2004.html). Only one cent of every dollar spent on drugs at the street level by a user ends up in the hands of a farmer who grows illicit crops; 99 cents go to traffickers and those who provide services to them or purchase intermediate chemicals.

The INCB report points out that farmers' income from coca and opium production (approximately $1.1 billion in 2001) was equivalent to 2% of global development assistance expenditures of $53.7 billion in 2000. This might suggest that a 2% increase in development funds, channeled to farmers who now grow poppy and coca, could eliminate opium and cocaine production. By way of comparison, according to the Office of National Drug Control Policy (ONDCP), costs in the United States related to drugs were projected to be about $181 billion in 2002, including $129 billion in lost productivity and $16 billion in health care expenditures related to drug use (The Economic Costs of Drug Abuse in the United States, 1992-2002, Washington, DC: Executive Office of the President, December 2004).

INCB reports that the growing of drug plants and local distribution of drugs in producing countries averaged less than 1% of Gross Domestic Product (GDP) in most countries in 2000, and even in countries where the proportion was high, it is less than 20%. In Afghanistan and Myanmar, the opium trade was estimated to have been between 10 and 15% of GDP, in Colombia (coca) and the Lao People's Republic (opium) between 2 and 3%, and in Bolivia (coca) slightly over 1%.

The INCB's conclusion is that, measured in flows of money, the bulk of the drug trade is international in character and most of the profit is realized in the developed countries where drugs are sold rather than in the underdeveloped or developing countries where they are initially produced.

INTERDICTION STRATEGY

The federal effort internationally is concentrated on what INL calls the Andean Ridge, the northwestern part of South America where Colombia, Ecuador, and Peru, running north to south, touch the Pacific and where land-locked Bolivia lies east of Peru. According to the INL, an estimated 90% of all cocaine and 40% of heroin entering the United States comes from Colombia. The remaining cocaine comes from Bolivia and Peru. INL also concentrates on Mexico, not only because the country is a major transmission route of drugs to the United States, but because Mexico is a significant source of heroin, marijuana, and methamphetamine. The centerpiece of the effort is eradication of coca and poppy by providing airplanes and funds for spraying herbicides that kill the plants. Efforts also include assisting law enforcement and, delivered by USAID, financial support for planting licit crops and improving infrastructure for delivering farm goods to market (roads and bridges).

Elsewhere INL is concentrating on South Asia (Afghanistan and Pakistan). The INL programs, however, extend to some 150 countries the world over and involve assistance in law enforcement and in the fight against money laundering. What follows is a brief encapsulation of the INL strategy in selected high-focus areas.

Colombia

According to the INL, the U.S.-assisted aerial eradication program destroyed 122,000 hectares of coca in Colombia in 2002, up 45% over 2001, which was also a record year. Around three thousand hectares of opium poppy were also destroyed. Colombian military forces captured 129 cocaine processing labs and 1,247 cocaine base labs (where precursors are made). Data on how these moves affected coca leaf production, however, were not published by INL because, beginning in 2001, measurements of leaf production in Colombia were not compatible with reports from other countries; in Colombia leaf weight was calculated as fresh weight and elsewhere as dry weight.

Along with eradication, USAID has also been active in Colombia. This agency conducts what is known as the "alternative development" program aimed at providing drug farmers with alternative crops. USAID began operations in the country late in 2000. Since then, the agency has helped twenty thousand families, supported the planting of fifteen thousand hectares of legal crops, and has funded two hundred infrastructure projects, including roads, bridges, sewer facilities, and school rehabilitations.

Colombia, however, illustrates some of the fundamental dilemmas of interdiction. The drug trade there is in part a symptom of a festering civil war. The CIA's The World Factbook 2005 (http://www.cia.gov/cia/publications/factbook/geos/co.html) provides this summary:

A 40-year insurgent campaign to overthrow the Colombian Government escalated during the 1990s, undergirded in part by funds from the drug trade. Although the violence is deadly and large swaths of the countryside are under guerrilla influence, the movement lacks the military strength or popular support necessary to overthrow the government. An anti-insurgent army of paramilitaries has grown to be several thousand strong in recent years, challenging the insurgents for control of territory and the drug trade, and also the government's ability to exert its dominion over rural areas.

With an internal conflict that has managed to last more than forty years, quite some time may pass before civil order is restored in Colombia and economic development has advanced enough to make drug plant cultivation unattractive.

Bolivia and Peru

Similar problems, if not outright insurrection, have hampered efforts to bring coca production under control in Bolivia. The country is very poor and has had an unsettled history (nearly two hundred coups since its independence in 1825). The country has been under democratic rule since the 1980s, but successive governments have been reluctant to support eradication programs energetically. Coca growing is traditional and coca leaf is chewed by the inhabitants; eradication has resulted in a popular antiestablishment movement. Despite ongoing eradication efforts in 2002, coca cultivation in that year increased 23% according to the INL. Eradication efforts are paralleled by replanting, and eradication is sometimes violently opposed by the population.

Peru also has organized bodies of cocaleros (coca growers) who enjoy sufficient popular support to hamper government action. In 2002, for example, cocaleros succeeded, for a time, in halting eradication efforts in places, although by year's end some seven thousand hectares had been put out of commission. In Peru, as in Bolivia, replanting frequently follows eradication efforts. In both Bolivia and Peru USAID has active alternative development programs.

Mexico

INL estimates that twenty-seven hundred hectares in Mexico were dedicated to the cultivation of opium poppy in 2002. Climate and terrain are such that up to three growing seasons are possible and capable of producing—despite active eradication programs—eleven tons of black tar heroin. The Mexican government, under President Vicente Fox, has been energetic both in the eradication of the poppy crop and in the arrest and prosecution of members of drug cartels, though efforts have been hampered by the dispersed nature and small size of most poppy fields, requiring manual eradication.

Afghanistan

Under the Taliban, poppy acreage cultivated dropped precipitously from 64,510 hectares in 2000 to 1,685 hectares in 2001, and estimated production of opium latex (the poppy's white milky substance from which opium is made) fell from 3,656 metric tons to seventy-four metric tons in the same two years. With the fall of the Taliban, control over outlying regions of the country slipped from the fingers of the relatively weak U.S.-backed government. Poppy cultivation resumed, rising to 30,750 hectares in 2002 and production to 1,278 metric tons, the highest in the world. According to the INL, these figures rose even higher in 2003: 61,000 hectares and 2,685 metric tons. Recultivation of poppy was in part a response to continuing drought in the region: opium poppy is hardy and can grow under adverse conditions.

Afghanistan's new government officially banned opium poppy cultivation and has pressured its regional governors to suppress the drug trade. USAID has been active in the country, mounting alternative development programs. The United Kingdom has conducted some eradication efforts. Germany has provided training and equipment to establish an Afghan security force; Italy has been involved in strengthening the country's judicial system; and the UK has also been active in establishing a counternarcotics mobile force.

Despite these efforts, the situation in Afghanistan was, in the immediate post-Taliban era, similar to the situation in Colombia, with a weak central government unable to assert itself in areas where autonomous warlords hold de facto power. For a brief period only, the Taliban, by draconian methods, almost stopped poppy cultivation.

TRANSIT-ZONE AGREEMENTS

Other countries are frequently reluctant to cooperate with the United States to stop drug traffickers. In the Caribbean Basin, while most of the islands have bilateral agreements with the United States, these agreements are limited to maritime matters that permit American ships to seize traffickers in the territorial waters of particular Caribbean islands. Other problems revolve around the transit zone, the area between the South American continent and the twelve-mile contiguous zone offshore the United States within which U.S. interdiction forces can operate. Very few transit-zone countries permit American planes to fly in their airspace to force suspected traffickers to land. Twelve transit-zone countries have no maritime agreements with the United States, including Ecuador and Mexico.

Bilateral agreements are not the same in each country, and some provide very limited rights to U.S. law enforcement authorities. For example, a U.S.–Belize agreement allows the U.S. Coast Guard to board suspected Belizean vessels on the high seas without prior notification. The agreement with Panama requires U.S. Coast Guard vessels in Panamanian waters to be escorted by a Panamanian government ship.

DRUG CERTIFICATION PROCESS

To promote international cooperation to control drug production and trafficking, the United States uses the drug certification process, which involves the threat of, or application of, sanctions for noncompliance. Sanctions range from suspension of U.S. foreign assistance and preferential trade benefits to curtailment of air transportation. Another major sanction is public criticism for failing the standard.

Sections 489 and 490 of the Foreign Assistance Act (FAA) of 1961 (PL 87-195), as amended, established the drug certification process. The process was most recently amended as a result of the Foreign Relations Authorization Act, 2002-2003, signed into law on September 30, 2002. The president is required to submit to Congress an annual list of major drug-producing and drug-transiting countries, and also to certify the countries that have been fully cooperative with U.S. or United Nations (UN) narcotics-reduction goals (and are, therefore, fully eligible to receive U.S. foreign aid). Congress has the option of disapproving the president's certification within thirty days. If Congress does that, financial aid permitted to flow under the president's certification may be stopped by Congress.

In 2003 President George W. Bush determined that twenty-three countries were major drug-producing or drug-transiting countries: Afghanistan, the Bahamas, Bolivia, Brazil, Burma, China, Colombia, Dominican Republic, Ecuador, Guatemala, Haiti, India, Jamaica, Laos, Mexico, Nigeria, Pakistan, Panama, Paraguay, Peru, Thailand, Venezuela, and Vietnam. In 2001 Cambodia had been on the list. President Bush also determined all but three of these countries to be in full compliance with the goals and objectives of the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. Burma, Guatemala, and Haiti were designated as failing demonstrably "to adhere to their obligations under international counternarcotics agreements and take the measures set forth in section 489(a)(1) of the FAA" (Presidential Determination No. 2003-14, The White House, January 31, 2003, http://www.whitehouse.gov/news/releases/2003/01/20030131-7.html). The president further determined that assistance to Guatemala and Haiti were of vital interest to the United States, thus denying aid only to Burma.

Two years earlier, in the first months of 2001, Afghanistan as well as Burma were denied aid by the certification process. Since that time, the Taliban ruling Afghanistan was removed from power and a government cooperating with U.S. and international objectives was elected by a tribal process under UN supervision. The new administration, led by Hamid Karzai in Kabul, the capital, had not been able to stop the opium trade as of 2005. The certification process, however, appears to reward or to punish other countries not for actual performance, but for their attempts. Under the Taliban, a regime hostile to the United States, poppy growing had been all but eliminated, whereas poppy cultivation reached new highs under the Karzai regime. At the same time, most of the cocaine and heroin reaching the United States now comes from Colombia and Mexico, but both of these countries have been actively involved with the United States in eradication and alternative development programs, both of which require U.S. aid.

HAVE INTERDICTION AND
ERADICATION HELPED?

Budgetary Perspective

The federal budget request to Congress for all drug control activities for fiscal year 2005 was $12.6 billion. (See Table 7.1.) The two largest components of the requested overall program were treatment, including research ($3.7 billion, 29.4%) and domestic law enforcement ($3.2 billion, 25.3%). Again, still looking at the big picture, the majority of federal funds are dedicated to stopping the supply (nearly $7 billion, 55%) rather than curbing of demand for drugs ($5.7 billion, 45%). The 2005 budget request distributes funding among federal departments in the following way: $3.7 billion to the Department Health and Human Services; $2.7 billion to the Department of Justice; and $2.5 billion to the Department of Homeland Security. The Departments of State, Defense, Education, and Veterans Affairs are also targeted for significant funding. (See Table 7.2.)

Of the total federal budget request for all drug control activities for fiscal year 2005, $1.15 billion (9.1%) was requested for international operations, and of that, according to the ONDCP, $731 million was for the Andean Counterdrug Initiative (ACI). The ACI includes the lion's share of the government's international eradication and interdiction programs; the government requested $54.3 million for all regional programs for Asia, Africa and the Middle East for fiscal year 2005. Eradication and interdiction are thus enfolded in pockets of funding that make up a very small portion of the total federal drug control program.

The overall federal budget for drug control has roughly doubled since 1996. (See Table 7.3.) The greatest growth in terms of percentage of the federal budget has been in international operations, which made up 3.9% of the budget in 1996 and 9.1% in the 2005 request. Demand reduction, domestic law enforcement, and interdiction as percentages of the overall drug control budget have all remained fairly stable. The question arises whether this increased focus on international operations is stimulated by the government's concern with terrorism or whether it is a sign that eradication/interdiction programs overseas are working.

Past History Shows Poor Results

According to a paper published in 1998 (Phillip Coffin, "Foreign Policy in Focus: Coca Eradication," Foreign Policy in Focus, October 1998), drug crop eradication proposals in the U.S. go back to 1925 and have been used in the Andes since the 1970s. Since that time, cocaine production has increased enormously in South America and cultivation of the heroin poppy has been introduced. Coca leaf production appears to be climbing, not declining, despite energetic eradication efforts. Opium gum production dropped briefly between 2000 and 2001. This was due to the ruthless actions of the Taliban rulers of Afghanistan—the only case on record of a brief but successful eradication effort. Since the Taliban's departure, things in Afghanistan have "returned to normal."

The rise of Colombia as a major drug producer has drawn the attention of Congress to that country. Congress has requested the U.S. Government Accountability Office (GAO) to conduct a number of studies of developments there. One report, published in 1999, suggested that eradication and interdiction programs have not had much success (Drug Control: Narcotics Threat from Colombia Continues to Grow, Washington, DC: GAO, June 22, 1999). Another, published in 2004, suggested that some headway was being made in Colombia but that the program suffered from management and budget oversight problems and called its sustainability into doubt. ("U.S. Nonmilitary Assistance to Colombia Is Beginning to Show Intended Results but Programs Are Not Readily Sustainable," GAO, August 2004, http://www.gao.gov/new.items/d04726.pdf).

The 2004 GAO report concluded that U.S. strategy, based on a combination of interdiction, aerial eradication, and alternative development, has "resulted in a 33% reduction in the amount of coca cultivated in Colombia over the last 2 years—from 169,800 hectares in 2001 to 113,850 hectares in 2003—and a 10% reduction in the amount of opium poppy cultivated over the last year. However, according to Drug Enforcement Administration officials and documents, cocaine prices nationwide have remained relatively stable—indicating that cocaine is still readily available—and Colombia dominates the market for heroin in the northeastern United States."

Some of the problems reported by the GAO provide an insight into the difficulties faced by a country attempting to work its will on another distant country, which is itself embroiled in an insurgency. Among those cited by GAO were 1) widespread corruption, e.g., the seizure of

a Colombian Air Force plane in Florida carrying cocaine and heroin ferried by officers and enlisted persons of the Colombian Air Force; 2) human rights violations by the Colombian military, which have made it difficult to support Colombian military efforts; and 3) control by insurgents (Revolutionary Armed Forces of Colombia and the National Liberation Army) of areas where coca and heroin poppy are grown.

Measurement Is Difficult

A UN report (Global Illicit Drug Trends 2003, New York, NY: United Nations Office for Drug Control and Crime Prevention, 2003) points out a problem with accurate reporting—namely that total production may be underestimated by governments reporting to the UN, thus potentially distorting data on the effect of interdiction programs. The report states that in 2001 the amount of cocaine reported seized was equivalent to 44% of estimated world production. The amount of opiates (heroin and precursors) seized was 45% of supply, a much higher percentage than in previous years, but largely due to dramatically decreased production. The agency gave as its opinion that actual production of cocaine may have been well over what was reported by member states.

When estimates are too low, amounts seized can give the public a false sense of progress. In data reported by the State Department's INL for coca leaf production, Colombian production was omitted for 2001 through 2003 because measurement had changed from dry to fresh weight in Colombia. But this omission causes a serious gap in statistical measurement in that Colombia is, by far, the largest producer of coca leaf in the world.

Another indication of the measurement problem—in tracking the success of eradication programs—is that no

data have ever been produced for estimating marijuana production domestically in the United States against which U.S. eradication efforts can be measured. Further-more, U.S. marijuana eradication is tallied by plant whereas Mexican eradication is counted by hectare, so that U.S. and Mexican efforts cannot be compared effectively.

Cost-Effectiveness Critique

In a 1994 study, Controlling Cocaine: Supply versus Demand Programs (http://www.rand.org/publications/MR/MR331/), the RAND Corporation took a look at different public policy options for controlling cocaine. The study was funded by the Office of National Drug Control Policy, the U.S. Army, and RAND's Drug Policy Research Center with support from the Ford Foundation. The study concluded that the least costly program for decreasing cocaine use would be treatment of individuals, and the most costly would be what RAND's analysts called source-country control; next highest in cost was the option of interdicting the drugs at the borders. Based on this study, the question is not whether eradication and interdiction work but how cost-effective they are. According to the study, treatment of individuals appears to be the most effective, eradication the least.

The study was controversial. In 1999 the National Research Council (NRC) published a critique of the RAND study, which RAND in turn answered by saying that the NRC did not fully grasp RAND's model. The NRC critique is available as Assessment of Two Cost-Effectiveness Studies on Cocaine Control Policy (Washington, DC: National Academies Press, 1999, http://books.nap.edu/html/cocaine_control/).

The RAND study continues to play a role in the policy debate between those who favor supply eradication and those who favor a treatment-based approach to the drug problem. The budgetary presentation at the beginning of this section appears to indicate that in federal expenditures at least, treatment receives a much larger share of resources than international eradication/interdiction programs.

WHY IS THE "WAR ON DRUGS" SO DIFFICULT?

The goal of the international "war on drugs" is to stop the flow of a product that is in high demand, generally cheap to produce, and offers enormous profits. While certain traffickers may dominate for a time, the drug trade is generally characterized by a large number of participants. Capturing one or two major figures or hundreds of lesser traffickers does little to slow the trade.

Production costs are so low and the profit so great that even if a trafficker loses most of his product, he can earn a huge amount of money on the remainder. When one drug policy is put in place, drug traffickers change their operations to circumvent it. When one route is blocked or one method of production shut down, traffickers change to another.

Since 90 to 95% of the street price of drugs is directly based on the costs of wholesale and retail distribution within the United States, even if half the cultivated drugs were destroyed and the price of coca leaf doubled, this doubling would probably not be reflected in the street price of the drug.

Furthermore, if the United States cannot successfully interdict the flow of drugs through its closest neighbors, upon which the United States can exert substantial political and economic influence and even introduce advisors and equipment, how successful can it be in attempts to stop the trafficking of drugs in places like Afghanistan or Burma? The resurgence of opium production in Afghanistan after the U.S.-engineered regime change there is an indication of the limits of U.S. reach when dealing with distant, inaccessible parts of the world dominated by very different cultures.

Finally, foreign countries—the producing nations—are being asked to solve a problem that is America's own dilemma. Americans want drugs, are affluent, and thus create a vast market for drugs. So long as this demand persists, suppliers will find a way to deliver the product. Many producer nations feel that a "war on drugs" would be more successful if it focused on lowering demand rather than eradicating or interdicting the supply.

MONEY LAUNDERING

Background

Money laundering is a special aspect of the war on drugs. Simply put, money laundering is the attempt to make funds earned illegally appear as if they were earned legally. The cash that drug traffickers collect, usually in small-denomination bills (five, tens, and twenties), must be deposited in banks so that the funds can be transferred, paid out again, spent, or invested. Traffickers cannot simply haul their cash to banks by the truckload for deposit without arousing suspicion. Money launderers hide the fact that funds deposited in banks have been illegitimately obtained. The U.S. attorney general defines money laundering as "all activities designed to conceal the existence, nature, and final disposition of funds gained through illicit activities." The crime is codified under Title 18 of the U.S. Code, Section 1956. Money laundering can range from things as simple as mailing a packet of money out of the country or as complex as a series of international bank transactions involving speed-of light transfer of money by wire.

Before 1986, the Bank Secrecy Act of 1970 (PL 91-508) served as the main tool against money laundering. The act required financial institutions to file a currency transaction report (CTR) on all cash deposits of more than $10,000. Institutions also had to file reports on international transactions exceeding $10,000. Launderers avoided these regulations by keeping each transaction under $10,000 (known as "smurfing"). They would, for instance, split a $100,000 deposit into twelve smaller deposits. Smurfing is now illegal as well. Until the early 1980s, bank compliance with the law was lax and penalties were lenient. As a result of the Eduardo Orozco case (Orozco laundered approximately $151 million in drug profits through eighteen New York banks), compliance became stricter.

The Money Laundering Control Act of 1986 (PL 99-570) made laundering a federal crime. The act prohibits engaging in financial transactions or transfers of funds or property derived from "specified unlawful activity" and engaging in monetary transactions in excess of $10,000 with property derived from proceeds of "specified unlawful activity." In addition, the act prohibits the structuring of currency transactions to evade the CTR reporting requirement.

Increasingly, the government has been monitoring all transactions of those known or suspected of money laundering or drug trafficking—and, since 9/11, those suspected of terrorist linkages. U.S. banks today must have "know your customer" policies. They must verify the business of a new account holder and monitor the activity of all business customers so that activities inconsistent with a client's type of business can be spotted.

The Mechanics of Laundering

Drug dealing creates a lot of cash. Drug users don't like to pay by check or credit card (even if they could), lest their habits become known. To hide the illegitimate origin of drug funds, dealers pass them through legitimate businesses, which pretend, for a cut of the profits, that these funds were earned legitimately. Dealers also deposit money in cooperating offshore banks, or smuggle cash out of the country. Once drug cash has been deposited without detection in the legitimate banking system, it can be used freely. While the actual amount of drug money laundered in the United States is unknown, federal law enforcement officials across agencies estimated in 2003 that drug traffickers laundered between $100 billion and $300 billion, much of it through legal financial institutions.

A preliminary step in laundering is to convert masses of small bills into larger bills by exchanging them at a bank, post office, or check cashing service. The larger bills are then smuggled out of the country or deposited in a domestic financial institution. The usual route is to deposit funds into foreign accounts. Getting the money into the financial system is called the placement stage. Laundered money is most vulnerable at this stage. Regulations and reporting requirements are designed to detect unusual deposits.

After the funds are in the financial system, they are moved from institution to institution to hide their source and ownership. This is known as the layering stage. To circumvent the reporting requirements, numerous deposits just under the $10,000 cash transaction threshold may be made. The high volume of wire transfers and the speed with which they are accomplished make it difficult to distinguish an illegal transfer from a legal one except by patterns of activity such as frequent transfers when made by or at the behest of unlikely individuals. A typical major bank in New York will handle about forty thousand transfers every day, moving about $3 billion.

The third stage involves the investment of illegal funds into legitimate businesses, known as the integration stage. It must be possible for drug lords to extract this money again as "profits" dividends, commissions, bonuses, salaries, or in the form of property. Drug organizations create and maintain dummy or "front" corporations for this purpose. Such "fronts" can be art dealerships, precious metal stores, casinos, jewelry shops, real estate investment companies, car and boat dealerships, or banking institutions—any type of business that can easily justify the pay-out of large amounts of money.

Targeting the consolidated earnings of drug kingpins is the most effective way to reach the top layers or at least to disrupt their operations. Drug lords are well insulated from street-level dealers but must keep close to their money. Laundering invariably leaves a paper/electronic trail of transactions that authorities can trace, although such tracing may involve massive investigative effort.

Operation Casablanca, completed in 1998 by the U.S. Treasury and the U.S. Department of Justice, was such an operation, dubbed by Treasury "the largest drug money laundering case in U.S. history" ("Operation Casablanca Continues Its Sweep," Press Release, U.S. Department of the Treasury, May 20, 1998, http://www.treas.gov/press/releases/rr2467.htm). The indictment charged Mexican bank officials and Venezuelan bankers. Several American banks, including Citibank and Bank of America, testified or were cited for failure to supervise their own operations. The international ring was linked to the Colombian Cali cartel. The operation seized more than $100 million in domestic bank accounts and cash.

Operation Casablanca resulted in more than 160 arrests, including those of dozens of Mexican and Venezuelan bankers. In May 1998, forty-four individuals were arrested in the final takedown. Of these, forty-one either pled guilty or were convicted. In addition, two Mexican banks pled guilty to criminal money laundering charges, and a third forfeited $12 million.

Money Laundering in the Post-9/11 Era

The September 2001 terrorist attacks on the United States produced changes in domestic and international efforts to stop money laundering, making it more difficult for drug traffickers to operate. As noted earlier, U.S. government policy now links drug trafficking and terrorism. The new international rigor came from the fact that terrorists also move money around and must hide its origins. The State Department's INL notes one significant difference between terrorist and drug-related money laundering ("Money Laundering and Financial Crimes," International Narcotics Control Strategy Report—2002, Washington, DC, March 2003, http://www.state.gov/g/inl/rls/nrcrpt/2002/html/17952.htm). It is that the amounts of money terrorists need to funnel to their cells are relatively small. The 9/11 attack had estimated funding of $500,000—mere pocket change in the drug world. The implication is that techniques for detecting terrorist money movements must be capable of pinpointing small transactions.

USA PATRIOT ACT.

The Patriot Act, passed in October 2001, revised provisions of the Bank Secrecy Act and modified the criminal code. The INL, in the 2002 International Narcotics Control Strategy Report cited above, sums up the changes as follows:

On the financial side, the USA PATRIOT Act expands the scope of pre-existing forfeiture laws; broadens compliance, reporting and record keeping requirements for certain types of financial institutions; encourages information sharing mechanisms between the government and the private sector; and restricts the ability of shell banks to do business in the United States. The USA PATRIOT Act also amends existing law to make it easier to pursue federal prosecutions of money remitters who fail to comply with state licensing or registration requirements.

A "shell" bank is a bank that does not have a physical presence in the country. Regulations implementing the Patriot Act did not issue until 2002; the more demanding provisions of the act are thus very new.

Statistical Tracking in the United States

Under the Bank Secrecy Act, financial institutions are required to file Suspicious Activity Reports (SARs) with the U.S. Department of the Treasury. The SARs reporting system provides a statistical view over time of activities that banks and other financial institutions have felt were of a suspicious nature and the proportion of these judged to be connected with money laundering. (See Table 7.4.)

Based on Treasury data, activities that looked like money laundering are the most reported suspicious activities—and have been increasing. In 1997 (in the months following April 1), 35,625 cases, representing 40.1% of all cases, were reported under the money laundering category. In the first half alone of 2003, 72,462 SARs filed were connected with money laundering suspicions, 47% of all cases.

The following is INL's listing of methods used by drug traffickers for decades to hide the sources of their money—the kinds of activities that result in the filing of SARs:

• Financial activity inconsistent with the stated purpose of the business;
• Financial activity not commensurate with stated occupation;
• Use of multiple accounts at a single bank for no apparent legitimate purpose;
• Importation of high dollar currency and traveler's checks not commensurate with stated occupation;
• Significant and even dollar deposits to personal accounts over a short period;
• Structuring of deposits at multiple bank branches to avoid Bank Secrecy Act requirements;
• Refusal by any party conducting transactions to provide identification;
• Apparent use of personal account for business purposes;
• Abrupt change in account activity;
• Use of multiple personal and business accounts to collect and then funnel funds to a small number of foreign beneficiaries;
• Deposits followed within a short period of time by wire transfers of funds;
• Deposits of a combination of monetary instruments atypical of legitimate business activity (business checks, payroll checks, and social security checks); and
• Movement of funds through countries that are on the FATF list of NCCTs.

FATF.

Money laundering is an international activity that can be fought only with international cooperation. As more countries have tightened their controls and shared information, narcotics dealers have become more sophisticated in their techniques. International criminals are not tied to geographic boundaries and can operate in jurisdictions that permit, or even encourage, money laundering in their territories. In addition, cyberbanking and digital cash are two methods used by money launderers to keep ahead of legislation.

The 1988 Vienna Convention made the laundering of money an international crime. The Financial Action Task Force on Money Laundering (FATF) is a multilateral governmental organization founded in 1989 with thirty-one member nations from around the world that extended the Vienna Convention to include the proceeds from all crimes. The INL describes the task force as "the flagship of international anti-money laundering/anti-terrorist financing efforts." FATF conducts what is known as the Non-Cooperative Countries and Territories (NCCT) process, under which FATF members can apply sanctions against countries that have failed to pass anti-money laundering legislation and to implement effective enforcement efforts. Following 9/11, FATF imposed sanctions on Nauru (an island in the South Pacific) and Ukraine, which had been on the NCCT list for a long time. In response, and presumably in order to avoid similar sanctions, Dominica, Hungary, Israel, Lebanon, the Marshall Islands, Niue (also in the South Pacific), Russia, and St. Kitts and Nevis introduced changes in their money laundering processes so that they were removed form the NCCT list in 2002. Nigeria had made changes in its legislation earlier at FATF's instigation. The Ukraine responded to sanctions by changing its laws so that it was also removed from the list in 2003.