Cartels use Legitimate Trade to Launder Money, U.S., Mexico Say

Fruit, fabric and toys are purchased and then exported south, generating paperwork that gives drug money the appearance of lawful proceeds from a transaction, authorities say.

By Tracy Wilkinson and Ken Ellingwood,
Los Angeles Times

Los Angeles County prosecutors indicted Blanca Cazares in 2008 on charges of heading a vast operation dedicated to “processing illicit proceeds” for the Sinaloa drug cartel. (handout photo / December 18, 2011).

Reporting from Mexico City— It's fast becoming the money-laundering method of choice for Mexican drug traffickers, U.S. and Mexican officials say, and it involves truckloads not of cash, but of fruit and fabric.

Faced with new restrictions on the use of U.S. cash in Mexico, drug cartels are using an ingenuous scheme to move their ill-gotten dollars south under the guise of legitimate cross-border commerce.

U.S. and Mexican authorities say trade-based money-laundering may be the most clever — and hardest to detect — way in which traffickers are washing and distributing their billion-dollar profits.

"It's such a great scheme," said an undercover agent with the U.S. Immigration and Customs Enforcement, or ICE, agency. "You could hide dirty money in so much legitimate business, and they do. You can audit their books all day long and all you see is goods being imported and exported."

Here's one way it works: Instead of smuggling the money the old-fashioned way, by simply carrying it south in bags and trucks, teams of money launderers working for cartels use dollars to purchase a commodity, and then export the commodity to Mexico or Colombia. Paperwork is generated that gives a patina of propriety. Drug money is given the appearance of legitimate proceeds from a trade transaction.

By turning their mountain of proceeds into tomatoes, say, or bolts of Chinese fabric shipped and resold in Mexico, cartels accomplish two goals at once: They transfer earnings back home to pay bills and buy new drug supplies while converting dollars to pesos in a transaction relatively easy to explain to authorities.

Long used by Colombian cartels, the scheme is becoming more popular with Mexican traffickers after new efforts here to combat laundering by restricting the use of dollars. Those restrictions, plus proposed limits on cash purchases of big-ticket items such as houses and boats, make it less attractive for traffickers to hold trunks full of U.S. cash.

After many years of using dollars to buy luxury items and pay their suppliers and dealers, cartel capos have suddenly found themselves in need of pesos. Trade-based money-laundering solves that problem.

"It's a better way to conceal proceeds," said Raymond Villanueva, head of an ICE unit that investigates international money-laundering. "It's not going to raise so many flags."

The pioneer in the trade-based technique in Mexico may have been Blanca Cazares, the alleged queen of money-laundering for the multibillion-dollar Sinaloa cartel. Los Angeles County prosecutors indicted her in 2008 on charges of heading a vast operation dedicated to "processing illicit proceeds" for the cartel; a onetime resident of Bell, she remains at large, presumably in Mexico.

Several years ago, U.S. federal investigators allege, Cazares started using the import of silk from Asia to hide and launder drug dollars and turn them into pesos. She'd import bolts and bolts of Asian fabric to the Los Angeles area, investigators say, then export it to Mexico.

Back in Mexico, Cazares would sell the cloth at high prices in pesos in her chain of Chika's boutiques in the drug heartland state of Sinaloa and seven other states, investigators say.

The U.S. government placed her (along with her husband and three adult children) on its "designated kingpin" list, meaning U.S. firms and individuals are barred from doing business with her and her companies.

Although Mexican cartels are only now beginning to regularly employ trade-based laundering, Colombian traffickers perfected the scheme long ago, authorities say.

"The Mexicans are progressing rapidly. They have a fairly robust interaction with the Colombians, so they learn from the Colombians," said a senior U.S. law enforcement official based in Mexico City. "You're going to see them [Mexican cartels] going more and more toward the product [trade-based laundering]. They have to."

Not only is the tactic effective, but it is also difficult to prosecute.

Last year, U.S. federal officials indicted Los Angeles-based Angel Toy Corp., a firm better known for churning out plush teddy bears and Easter bunnies, on money-laundering charges. The company's three top executives were arrested.

According to the indictment and ICE investigators who worked the case, men arrived over the years at the company's downtown workshop toting duffel bags full of cash — wads of $5, $10 and $20 bills that investigators said was money from cocaine sales.

The men would refer to the money as "papers" or "candy" or "tires," with no mention of toys, court documents say.

In the workshops, employees divided the cash into stacks of just under $10,000, the amount at which banks must report the deposit, according to the indictment. Some of the money was sent to Asia to purchase toys, and the toys were shipped to Bogota, Colombia, where they were sold for pesos, court documents say. The pesos in turn were handed over to a broker and eventually delivered to Colombian drug bosses, prosecutors and investigators alleged.

After a long surveillance operation involving undercover informants and bank security tapes, federal agents raided Angel Toy in 2009. Last year, the three company executives and a Colombian toy salesman were indicted in U.S. federal court on charges of "structuring," the practice of dividing and depositing money in sums less than $10,000. Money was deposited in Angel Toy accounts, sometimes several times a day, and clients also made direct deposits into the accounts, but always at less than $10,000 a pop, court documents say.

"The investigation tracked, during a four-year period, over $8 million in cash deposits — not a single one of which was over $10,000," prosecutors said in sentencing papers filed this month. "This egregious pattern of structuring is a hallmark of money-laundering."

Still, prosecutors have agreed to drop the money-laundering charge against Angel Toy as part of a plea bargain in which the four defendants pleaded guilty to structuring and agreed to pay $3 million in fines and forfeitures. Their attorneys say the government never established that the defendants were knowingly processing money for drug cartels.

In trade-based money-laundering operations, often a third country is added (Taiwan, allegedly, in the case of Angel Toy, and China for Cazares) to further obscure the source of the illicit cash.

The Mexico-based U.S. law enforcement official said investigators are seeing the traffickers and their launderers employ increasingly sophisticated tricks, such as overvaluing and undervaluing invoices and customs declarations.

In a recent operation, money launderers were exporting from the U.S. to Mexico polypropylene pellets that are used to make plastic, the official said. But the inflated value declared on the high-volume shipments eventually attracted suspicion of U.S. bank investigators, who shut down the export operation by discontinuing letters of credit that the suspected launderers were using. Bank investigators estimate that the operation was hiding $1 million every three weeks, according to the official.

"You generate all this paperwork on both sides of the border showing that the product you're importing has this much value on it, when in reality you paid less for it," the official said.

"Now you've got paper earnings of a million dollars," the official said. "You didn't really earn that, but it gives you a piece of paper to take to [Mexican financial authorities] to say: 'This million dollars in my bank account — it's legitimate. It came from this here, see?'"

Trade-based laundering takes advantages of blind spots in international commerce. And the huge, and growing, volume of legitimate trade between Mexico and the U.S. — now nearly $400 billion a year — makes it extraordinarily hard to detect.

"You're trying to catch tens or hundreds of millions of dollars within that," said Shannon O'Neil, an expert on Mexico at the U.S.-based Council on Foreign Relations. "It's quite difficult to sort out the good trade from this bad trade."

Mexican authorities have been slow to act on trade-based money-laundering schemes in part because of their novelty and their opacity. An inspector also needs access to customs paperwork at both ends of the transaction. The United States has a customs-data-sharing agreement with seven countries, including Mexico, and U.S. agents have begun training Mexican inspectors.

As a result, a new interdepartmental team of Mexican investigators is focusing on four trade-based money-laundering cases as part of a confidential pilot program, involved officials told The Times.

The growing shift of Mexican traffickers to trade-based laundering illustrates the fact that cartel bosses, among the world's most expert transnational entrepreneurs, are ever at work developing new systems that will maximize their profits while thwarting the legion of federal agents deployed against them on both sides of the border.

"Can you imagine all the [money-laundering] avenues they're going to have with trade?" said Villanueva, the ICE officer. "They have an industry there that gives the ability to conceal that money and separate it from the illegal activity.... Millions and millions and millions of dollars, and containers, that move around the world on a daily basis."