Senior executives of Bancomer in Mexico City are unlikely to forget the morning of May 18 when the call came through from the US justice department. Along with two other prominent Mexican financial institutions, and scores of bankers, Bancomer was being indicted on US conspiracy and money-laundering charges. Within a few hours, US treasury secretary Robert Rubin would announce the biggest ever federal money-laundering investigation – and the first US money-laundering indictments against legitimate foreign financial institutions.
Known as Operation Casablanca, the investigation took almost three years and was so circumspect it was done without the knowledge of Mexican public servants. Three big Mexican banks were indicted – Bancomer, Banca SerfIn, and Banca Confía. Bancomer and Serfín are the country’s second- and third-largest banks. All three have significant foreign ownership stakes – held by the Bank of Montreal, HSBC and Citibank, respectively.
Ordered to desist
Twenty-six Mexican and five Venezuelan bankers, among others, were also indicted on money-laundering charges. On June 11, treasury undersecretary of enforcement Raymond Kelly told a house banking committee hearing that $100 million of the dirty money had been seized, and 167 individuals arrested. He also said the investigation is continuing. Although only three institutions were indicted, 12 of Mexico’s largest banks and four Venezuelan banks were allegedly involved. In the indictment’s wake, the US Federal Reserve Board ordered six banks – Banamex, Bital, Banco Santander, Banco Industrial de Venezuela as well as Bancomer and Serfín – to “cease and desist” from such practices. Civil penalties could be levied against them.
The US attorney’s office in Los Angeles, which is prosecuting, declined to explain why certain banks involved were not indicted. All three that were have pleaded not guilty.
But Bancomer’s deputy director general of finance, Javier Fernández, believes the amount of money allegedly laundered by the three institutions is the key to the US case. Bancomer allegedly laundered more than $20 million, Serfín $7.7 million and Confía $11 million – the largest of the amounts claimed to have been laundered by the 12 instititutions. “It makes it seem it’s prevalent at the institution,” says Fernández, who acknowledges that Bancomer officials should have noticed something was amiss. “When you analyze these transactions in retrospect, they should have raised suspicions from supervisory officers at the branch level,” he says.
That type of admission could be critical to the US case. “If you should have known but didn’t or are wilfully blind or purposely sought not to know, then you can be held liable,” says Michael Zeldin, who headed the money-laundering unit of the US justice department until 1992 and now heads Price Waterhouse’s money-laundering investigation unit.
A bank’s specific legal obligations under the money-laundering statutes are murky. Although banks are required by the Fed to “know your customer”, there is no clear definition precisely what that means. However, banks can still be prosecuted on federal charges of conspiracy and aiding and abetting a crime, as occurred in this case.
The indictment against the banks offers some insight into other issues besides the total amounts that may be part of the US case. Such factors as the size of single deposits – one was more than $1.6 million at Serfín – could indicate that supervision was inadequate. The duration of alleged laundering is also significant. At Bancomer, for example, it is said to have gone undetected for more than a year and a Serfín banker was alleged to have been engaged in laundering for several years.
Although the indicted banks have noted that the individuals indicted were lower-level executives, some of them were in management positions at branch level. The prosecution is also likely to point to the indicted bankers’ alleged statements to undercover agents suggesting such activities would pose few problems. The market environment that made money laundering desirable may also undercut the banks’ defence. Comments from the bankers about pressures to increase the level of deposits, or statements that big balances could keep the bank from looking too closely at an account, all bolster the government’s case.
“It could be that the government has a theory that the environment in these institutions was so lax as to allow this to happen,” speculates David Gilles, a money-laundering investigator at Price Waterhouse who previously worked with the Financial Crimes Enforcement Network, another US government agency that tracks money laundering.
Not just warning shots
The sweeping scope of the investigation is a testament to its political importance. “These are real mainstream, legitimate banks with solid reputations,” says Zeldin. “The organized effort to target these banks is not a shot across the bows. It’s a live round telling the international banking community that we [the authorities] view this problem as serious, and international, and you have an obligation to participate in eliminating it.”
Mexican banks have long been suspected of tolerating, if not openly supporting, money laundering. At least a year before the Mexican peso crisis hit world markets early in 1995, tales of official corruption and the rising prominence of Mexico’s drug kingpins began to filter through to US law enforcement agencies. Alarmingly, the authorities began to hear that the newly privatized Mexican banking system had become one of the biggest money-laundering centres in the world. One Mexican bank, the fraud-ridden Banca Cremi-Union, in which the government intervened in the summer of 1994, was believed to be connected to Mexico’s increasingly powerful drug cartels. Others, including the then-troubled Banpaís, were also suspected of such relationships. And there were whispers that even the most respected of Mexico’s banks were not immune to the lure of narco money.
Whether or not the three Mexican banks indicted in May are found guilty, they know their reputations are at stake. Bancomer’s first action, says Fernández, was to undertake its own internal investigation. Bancomer, which is considered one of Mexico’s better-managed financial institutions, quickly hired William Isaac, the former US Federal Deposit Insurance Corporation chairman who now runs Washington-based consulting firm Secura Group, to find out what went wrong. Isaac’s mission, says Fernández, is threefold: first, find out what happened, second, determine how it could have happened, and third, figure out what the bank should do to ensure it doesn’t happen again.
“The investigation uncovered some problems that the bank wants fixed,” says Isaac. “They want to be the leader in getting these problems cleaned up.” Isaac has brought accountants Arthur Andersen and law firms Cleary Gottlieb Steen & Hamilton and San-Francisco-based Pillsbury, Madison & Sutro on to the case.
An HSBC spokesman said his bank, which owns 19.9% of indicted Serfín, is also conducting an investigation. Executives at Serfín, which had long been the most troubled of the Mexico’s large institutions, did not return calls for comment. Citibank, whose purchase of Confía was only completed a week before the indictments, says only that it was not involved with Confía when the alleged laundering occurred. Shortly after Citibank announced plans to buy Confía, Confía’s former chairman was indicted on fraud charges.
Neither HSBC nor Citibank responded to questions as to why, in the due diligence presumably undertaken before investing in a Mexican bank, they did not establish whether adequate anti-money-laundering procedures were in place. That issue is a particularly sore one for Citibank, given the federal probe into its banking relationship with Raul Salinas, the former Mexican president’s brother, who has been indicted on several counts. Indeed, a money-laundering investigation of both Salinas and Citibank is still unresolved.
For the US government, there is another issue almost as important as taking foreign banks to task. The operation targeted Mexican bank drafts, which have become an instrument of choice for many drug dealers, particularly along the US-Mexico border. In recent years, the US treasury, among others, has become increasingly worried about the proliferation of these bearer-like instruments. The State Department singled them out in the 1996 International Narcotics Control Strategy Report, issued last March, saying that an estimated 500,000 of them enter the US each year, ranging in value from $65,000 to $400,000. That’s more than $3.5 billion annually.
Although the bank drafts are as good as cash, under current US customs rules they do not have to be reported as such when brought across the border. Requiring no identification, they can be cashed, or deposited, at correspondent banks of the foreign institutions they are drawn on. Nor do they fall under the scrutiny of Mexico’s recently enacted anti money laundering law. “Mexican bank drafts are practically invisible,” says Price Waterhouse’s Gilles.
Closing the door on drafts
Bancomer’s Fernández says the bank is working with Isaac to figure out ways to make it more difficult to use bank drafts for illegal purposes and will probably present a plan to the US Federal Reserve Board. “There are measures like making them non-negotiable or limiting the amounts or offering them only to a select group of clients that have been thoroughly investigated,” he explains.
Bringing Mexican bank drafts under the glare of the spotlight took a tortuous and lengthy route. It began in the summer of 1995, when a confidential informant of US customs, one of several federal agencies that investigates drug-money laundering, started to tell authorities about the rampant money-laundering along the Mexico-US border. He offered to hook up the authorities with his contacts in Colombia – money brokers who laundered the Cali cartel’s drug proceeds in the US.
The original contact was made in August with an alleged money broker identified only as Humberto, according to one of four indictments filed in a district court in Los Angeles. During a phone call from the US to Cali, the informant offered to help Humberto and his two associates, Oscar Armando Saavedera and Gustavo Chavarraiaga-Gomez, launder money for the Cali cartel. They allegedly settled on a 10% fee for the informant, who agreed to launder drug proceeds in US cities, including Los Angeles, Chicago, New York and Houston, and in Vancouver, Canada.
The informant’s job was to pick up cash from Cali cartel operatives, deposit it in US banks, then wire the proceeds to cartel members at either offshore banks or directly to Colombia. To facilitate the operation, the Cali money launderers provided phone numbers, pager numbers and nicknames to identify themselves.
A second informant, who professed to be a Colombian businessman and went by the name of Javier Ramirez, soon set up a fake company called Emerald Empire Corporation, based in Santa Fe Springs, California. Allegedly a front to launder money, in fact, it became the heart of the undercover operation and employed several FBI and customs agents.
The big break for the US authorities came in November when the informant, now accompanied by a US customs official working undercover, went to Chicago for the first cash pick-up. There, government agents were allegedly introduced to a Mexican citizen, Victor Manuel Alcala-Navarro, who handed them $1.1 million in cash that they were scheduled to launder for the Cali cartel.
Dr Navarro’s network
Alcala-Navarro – cited as Dr Navarro in the indictment – would eventually lead the US authorities to the Mexican banks. Dr Navarro didn’t work exclusively for the Cali cartel, the agents soon learnt. At their first meeting, says the indictment, he casually noted that Mexico’s Juarez cartel was a big player in the US cocaine trade. Over the next 18 months, as their relationship developed, Dr Navarro became the operation’s link to that cartel, operating under the direction of Amado Carillo-Fuentes, the infamous drug lord whose reported death in mid-1997 is widely believed to have been a hoax. Shortly before Carillo-Fuentes’ death was reported, informant Ramirez spoke to him on the phone, the indictment claims. Carillo-Fuentes allegedly said he was “pleased” with Ramirez’s work and looked forward to more dealings with him.
In addition to talking about the arrangements the Juarez cartel had with Mexican bankers, Navarro also allegedly bragged that the cartel bribed officials in Mexico, including a Mexican general and anti-drug chief who was arrested in early 1997. US law enforcement authorities, worried about the safety of their undercover agents, decided to keep their Mexican counterparts in the dark. (It was a controversial decision – and one that tested US-Mexican relations when the indictments were announced. Afterwards, Mexico announced it would seek to indict the US undercover agents involved in the operation.)
Dr Navarro was definitely a player. According to treasury undersecretary Kelly, he was not just a launderer, but the cartel’s money manager. To gain his confidence, the undercover operatives and informants working through Emerald Empire allegedly spent over six months laundering the Cali cartel’s cash.
Their efforts were crucial. One of the biggest problems for money launderers is getting the cash from street sales into the US banking system. Cash deposits of more than $10,000 have to be reported to the Fed. That usually forces the launderers to hire street punks to make small deposits, a process called “smurfing”, to get the cash into the banking system. But since the US government was in charge, that problem didn’t arise. With the cooperation of selected US banks, undercover bank accounts were set up in the cities where drug money was being collected.
From late 1995 until May 1998, just before the indictments were handed down, the undercover agents and informants travelled all over the country, allegedly picking up some $12 million in drug proceeds and sending it to the Cali cartel members. According to the indictment, they even went to Milan in Italy and Caracas in Venezuela to meet in person with Saavedera, who arranged most of the pick-ups and faxed most of the instructions telling the agents where to send the money.
As a result of a steady stream of money flowing into the cartel’s offshore bank accounts, the reputation of the Emerald Empire operation as one that could deliver without a hitch was established. It was easy for the informants and their undercover colleagues, of course. “Since the government is arranging the pick-ups of money, we can ensure that the cartel members are going to get it,” explains assistant US attorney Duane Lyons in Los Angeles, who is involved in the case.
Having gained renown as Cali cartel money launderers, the team of undercover agents and informants were allegedly approached by Navarro. Unknown to him, his interest allowed the now burgeoning undercover operation at Emerald Empire to set up a sting against Mexican bankers and the institutions that employed them.
It was more than six months after meeting Navarro in Chicago that Ramirez and the undercover agents heard from him again. On July 15 1996, he called to suggest they meet in California, at a restaurant in Santa Fe Springs, near Emerald Empire’s warehouse, according to the indictment. Navarro had a proposition for them. The success of their work had received the attention of the Juarez cartel, a partner but also something of a competitor to the Cali group. The Mexican cartel was also well represented in the US, with drug operations in Houston, Chicago, Dallas and Los Angeles. Although Navarro allegedly had to get approval from his immediate boss, José Alvarez-Tostado, who was based in Mexico and wanted to meet the agents before entrusting them with millions of dollars of drug money, he was excited about going into business with his new partners.
“Play it again, Sam,” the agents said to each other, thinking of their previous infiltration of the Cali Cartel money-launderering business, and the name Operation Casablanca was born.
According to the indictment, Dr Navarro agreed to put Ramirez and the agents in touch with bankers at Bancomer and Banamex who were, he said, already helping the Juarez cartel. The agents, who said a previous Mexican banking contact had died, eagerly agreed.
The first meeeting with Mexican bankers occurred in the border town of Tijuana on August 7 1996. Accompanied by Navarro, Ramirez allegedly met three Bancomer mid-level branch executives: They were Jorge Reyes Ortega González, a manager of banking operations in Tepatitlan; Carlos Escoto Alcala, a manager of financial operations in Chapala; and Manuel Barraza León, a manager in Tijuana. Navarro and Ramirez explained that they wanted to launder millions of dollars of the Juarez cartel’s drug proceeds.
As with the Cali operation, the scheme they laid out involved depositing the money picked up in the US via wire transfers into phoney accounts set up at the Mexican banks and their offshore operations in the Cayman Islands. But this time, they complicated the process. To complete the laundering, the undercover agents allegedly convinced the Mexican bankers to withdraw the money from the Mexican banks by issuing Mexican bank drafts. These highly liquid negotiable instruments were to be sent back to the US, typically via courier or mail.
Those cheques would be deposited at the Mexican banks’ US correspondent banks, where they could either be transferred to another bank account, or cashed for dollars. The elaborate plan was purportedly designed to break any traceable paper trail (or in this case wire transfer). But that wasn’t the undercover operation’s true intent. So while the bankers were told that the money would be exchanged for cash in the US, instead it was deposited in Emerald Empire’s account and then wired to Juarez cartel members’ accounts – setting up a trail that would help the authorities indict the bankers and other cartel money launderers and operatives.
As time went by
After a number of meetings with Bancomer’s Ortega, also attended by undercover law-enforcement agents, the first money transfer finally went through. On October 10 1996, $54,850 was allegedly deposited in Bancomer’s Grand Cayman operation, Mercury Bank & Trust, in the name of Sergio Alcala Navarro, another indicted Mexican.
Within a month, almost $650,000 of the Juarez cartel’s US drug proceeds had been deposited in undercover US bank accounts, then transferred to Mercury Bank & Trust, according to the indictment. By November 21, the transfer into bank drafts, which would be transported physically to the US, began. Ortega allegedly informed Ramirez that he was preparing 11 bank drafts, with a total value of $623,870, that would arrive in two days.
Ortega, who is alleged to have laundered $19 million through Bancomer’s accounts, left Bancomer at the end of 1997 for Banco Santander, where he allegedly continued to launder the cartel’s drug proceeds. Escoto is alleged to have laundered $660,000, and Barraza is alleged to have laundered $928,245. Altogether, that came to more than $20.5 million, the largest amount that went through any single instititution targeted by the sting.
Some of the Mexican bankers were worried, however, about new regulations that were to go into effect in 1997. According to the indictment, a banker told Navarro “it would be difficult to conduct these types of transactions beginning in January 1997”. Some of that concern related to new tax rules on offshore bank accounts that would require disclosure. However, the new Mexican money-laundering regulations were also a concern. Other Mexican bankers were more sanguine about the regulatory changes, and seemed to suggest that they also had contacts in the finance ministry. According to the indictment, Ortega told Ramirez that he would “handle any investigation performed by the hacienda [the finance ministry]”.
The new regulations did prove futile in stopping money laundering. Indeed, market realities worked in just the opposite direction. As all of Mexico’s banks continued to struggle, the pressure to garner deposits apparently made it easier for Bancomer’s executives to avoid scrutiny. Bancomer’s Escoto allegedly told Ramirez and an undercover officer that his duty was to increase the funding of Bancomer, and said he hoped to “bring the bank up” by accepting the narco dollars.
While the scheme with Bancomer went ahead, the US undercover agents and Ramirez argued with Navarro and others that it would be better to spread the wealth around. “We explained that there would be a risk of the money being seized if we put all our eggs in one basket,” says a source involved in the investigation. “We wanted him to introduce us to as many bankers as he could find who could launder money for us.”
It wasn’t difficult to get new clients, all signing on to the scheme of accepting wire transfers in the accounts of fictious companies or individuals, then converting the proceeds into Mexican bank drafts and sending them back to the US.
Banoro and lots more
In December 1996, a representative of Banoro allegedly offered to visit Empire employees in the US and agreed to accept deposits of $200,000 every two days. The money was dutifully transferred, going into the phoney account of Comercial Textile de Los Altos. Some $1 million was laundered through Banoro, according to the indictment.
By February 1997, Confía was drawn into the net. By that time, Confía was under the supervision of the Mexican government, having come close to failure. (It was later sold to Citibank.) But neither government supervision nor a pending sale stopped the money launderers. By June, accounts had been set up in Confía’s Cayman Islands subsidiary, with the first wire transfer of $504,875.80. Over the next year, $11 million had been laundered through Confía.
The indictment details similar patterns established with a slew of other banks: Bital, brought into the scheme in April 1997, allegedly laundered $2.7 million between April and May 1998; Banamex, allegedly laundered $1.85 million between May 1997 and May 1998 and Banpaís allegedly laundered a little more than $2 million between July 1997 and May 1998.
The undercover operation’s final big catch was Serfín, whose accounts were set up by Armando Medrano Rayas, an official at Serfín’s Tijuana branch who was introduced to Ramirez by Dr Navarro on June 25 1997, according to the indictment. For years, Serfín had been one of Mexico’s most troubled banks and was in the process of being sold to HSBC. While the due diligence surrounding such a huge transaction might have been expected to uncover improprieties, Medrana told Ramirez that he had been laundering money for four years and charged 2.5% for receiving cash.
The Serfín banker allegedly said he could receive deposits of up to $300,000 a week. He also allegedly said his boss had told him to increase deposits by the year-end. It would be easier to avoid detection, he allegedly said, if high balances were maintained. Assisted by another indicted Serfín banker, Manuel Pazzi Salas, the men allegedly laundered $7.7 million through the bank. Two transfers of $1.6 million – the largest single transactions revealed in the indictment – apparently went through unquestioned. Indeed, Medrana said that his boss was “pleased” with the deposits, according to the indictment.
Despite insisting that the banks were being more closely watched by the finance ministry, Mexican bankers appear to have been emboldened by the success of the Emerald Empire’s operation. New institutions continued to be interested. In a little over a month, between November and December of 1997, bankers employed at Banorte allegedly laundered almost $5.3 million, Bancapromex allegedly laundered $1.5 million in February 1998, Banca Santander allegedly laundered $1.1 million between January and February, Banco Bilbao Vizcaya allegedly laundered $237,000 during February, and Bancrecer allegedly accepted a single $1.2 million wire transfer in May, shortly before the operation was exposed.
Operation Casablanca even spread its tentacles into the Venezuelan banking system, another one long considered by US authorities to be a haven for dirty money. Starting in early 1997, cartel money launderers based in Caracas allegedly offered to introduce Emerald Empire’s Ramirez to several Venezuelan bankers. According to an indictment filed after the original one against the Mexican banks and bankers, the scheme was the same as that proposed to the Mexican bankers: drug proceeds would be deposited in their branches in the US and elsewhere. Then bank drafts payable to third parties would be sent back to the US.
Venezuelan bankers, including Miami-based Esperanza de Saad, a vice-president at Banco Industrial de Venezuela’s agency in Miami, and Caracas-based Marco Tulio Henriquez, a vice-president at Banco Del Caribe, as well as a vice-president at its Netherlands Antilles subsidiary, the Caribbean American Bank in Curaçao, allegedly agreed to the job for a 4% fee. The Caribbean American Bank laundered $4.3 million and Banco Industrial de Venezuela laundered $4.1 million, according to the indictment. Other Venezuelan banks also were enticed into the scheme: Banco Consolidado allegedly laundered $650,000, and International Finance Bank allegedly laundered $744,600.
Round up the usual suspects
US authorities brought the sting to a close early in May, luring Mexican bankers to the US on a variety of pretences. Some were arrested in San Diego, where they thought they were going to attend a conference on money laundering. Others were planning a more exciting venture: they were invited to a casino in Mesquite, Nevada, where they could continue to launder their cash. Instead, when they landed in the US, the 22 bankers were greeted by justice department officials and arrested.
How could the Mexican and Venezuelan banks have avoided becoming embroiled in the biggest money-laundering case in history? Investigators say that stringent reliance on the “know your customer” rule should help stop illegal activity from occurring.
Of course, in the alleged money laundering laid out in the indictment, at least some of the Mexican bankers knew their customers all too well. The onus for complying with the “know your customer” rules then shifts to the corrupt bankers’ supervisors. As investigators point out, all they had to do was to try to track down the real owner of one of the phoney accounts.
Even so, the operation was designed to avoid detection. Fernández at Bancomer says that 100 bank drafts were issued in approximately 25 phoney accounts. “That’s only four bank drafts per account,” he points out. “It’s not that each one of the accounts issued 400 bank drafts, and therefore you could have detected it.”
But rigorous compliance procedures might have done so, say the experts. “There have to be multiple layers of oversight, and there have to be computerized systems to watch for this,” says Gilles. If bank draft activity is 100-fold what it was the previous month, he says, that should be viewed as suspicious.
