[Senate Hearing 106-198]
[From the U.S. Government Publishing Office]
S. Hrg. 106-198
THE BLACK MARKET PESO EXCHANGE: HOW U.S.
COMPANIES ARE USED TO LAUNDER MONEY
=======================================================================
HEARING
Before the
SENATE CAUCUS ON INTERNATIONAL
NARCOTICS CONTROL
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JUNE 21, 1999
U.S. GOVERNMENT PRINTING OFFICE
60-125 WASHINGTON : 1999
SENATE CAUCUS ON INTERNATIONAL NARCOTICS CONTROL
ONE HUNDRED SIXTH CONGRESS
CHARLES E. GRASSLEY, Iowa, Chairman
JOSEPH R. BIDEN, Delaware, Co-Chair
JEFF SESSIONS, Alabama BOB GRAHAM, Florida
MIKE DeWINE, Ohio DIANNE FEINSTEIN, California
SPENCER ABRAHAM, Michigan
Wm. J. Olson, Staff Director
Sheryl Walter, Minority Staff Director
C O N T E N T S
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Opening Statements
Page
Sen. Charles E. Grassley......................................... 1
Sen. Jeff Sessions............................................... 4
Panel I
James E. Johnson, Under Secretary of Enforcement, U.S. Department
of Treasury.................................................... 5
Prepared Statement........................................... 10
Bonni Tischler, Assistant Commissioner, U.S. Customs Service..... 22
Prepared Statement........................................... 26
Panel II
Al James, Senior Policy Analyst, Financial Crimes and Enforcement
Network........................................................ 47
Prepared Statement........................................... 50
Panel III
``Carlos,'' A Peso Broker........................................ 62
Prepared Statement........................................... 65
Panel IV
Ms. Fanny Kertzman, Director General of Taxes and Customs,
Government of Colombia......................................... 72
Prepared Statement........................................... 75
Ambassador Michael Skol, President, Skol and Associates.......... 95
Prepared Statement........................................... 99
Additional Responses
General Electric Response........................................ 113
THE BLACK MARKET PESO EXCHANGE: HOW U.S. COMPANIES ARE USED TO LAUNDER
MONEY
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MONDAY, JUNE 21, 1999
U.S. Senate,
Caucus on International Narcotics Control,
Washington, DC.
The caucus met, pursuant to notice, at 9:05 a.m., in room
SH-216, Hart Senate Office Building, Hon. Charles E. Grassley
(chairman of the caucus) presiding.
Present: Senators Grassley and Sessions.
Senator Grassley. I would say good morning to everybody and
I want to thank you for being out so early at the beginning of
a week. I hope everybody had a good weekend. I want to welcome
everybody here and obviously those who have traveled long
distances to be with us, some from other countries, to be here,
and also those who are witnesses and for your preparation and
for taking time away from your responsibilities at your
particular agencies for being here.
Before I say a few things in opening, it is usually better
if I would announce some administrative things so that we do
not have to be repetitive. Number one, members may or may not
be in and out. Sometimes Mondays it is difficult to have
members be here, but even when it is convenient for members to
come, they may not be here for the full period of time. So when
that is the case or even for those of us who will be here for
the entire period of time, we may not have time to ask all of
our questions orally so we submit them for answer in writing
and the extent to which we do that, we would appreciate
response within two weeks, and those of you maybe not familiar
with that process, the staff of the caucus I chair would be
very happy to be helpful to you.
Secondly, sometimes people have longer statements than the
time allotted for them for their oral presentations. All of
those oral or written statements will be included in the record
totally so you will not have to ask and then we ask you to
summarize and your total statement will then be printed in the
caucus record of this hearing. It will be available after some
period of time, sometimes longer rather than shorter, for
everybody to have a complete record of today's hearing. And so
from that standpoint, I would appreciate everybody knowing that
that can be included.
I want to, a second time now, thank you for coming. Today
we will examine an issue that is of great concern to me and the
Congress and specifically the work of this International
Narcotics Control Caucus of the United States Senate, money
laundering and how the drug cartels are using U.S. and foreign
companies to launder their drug proceeds. I am concerned also
not only as chairman of this caucus, but also this is a very
big issue in international trade and I serve as chairman of the
Subcommittee on International Trade of the Senate Committee on
Finance.
The method of money laundering capitalizes on the black
market peso exchange in Colombia and businesses in the United
States, Japan and other countries abroad, as well. Drug cartels
generate large sums of money from this illicit drug trade.
Recent reports show that the drug trade generates maybe over 55
billion a year. This money obviously has to be laundered. One
of the methods traffickers use is the black market peso
exchange network. Drug traffickers use this exchange to help
convert billions in U.S. currency obtained from the street sale
of narcotics into pesos so that they can fuel the drug business
at home.
Reports indicate that approximately $5 billion a year is
being laundered and this figure is rapidly growing. Effective
money laundering is at the root of any successful drug cartel.
It allows cartels to reap the benefits of their ill-gotten
gains by hiding their drug money through a series of
transactions evading detection by law enforcement and banking
officials. Drug traffickers no longer have the ability to
deposit millions of dollars of drug money into bank accounts as
a result of the increased awareness of banks, but we have only
made it just a little more difficult for them to get their
money converted.
We must be sure that we are taking the necessary steps to
protect the citizens of our nation by preventing drug
traffickers from then obtaining the profits of their illegal
activities. Much has been done and much has been said about the
movement of illegal drugs into the United States, but the
opposite side of the business, getting the profits from drug
sales and other illegal enterprises out of the United States
and back into the hands of Colombia drug cartels, does not get
as much publicity but is just as important.
During this hearing, we will hear the names of U.S. and
foreign companies that have unwittingly helped fuel the illicit
drug trade with the sales of goods that are exported and
eventually sold in Colombia. These goods are being sold
legitimately to export companies and businesses in Colombia.
However, the problem is this merchandise, whether it be auto
parts, computers, or refrigerators or a lot of other items, is
being paid for with cash generated by drug sales on our streets
and even in our school yards.
This happens through a middleman, the dollar peso broker.
This directly translates into a safe and effective method that
facilitates the ability of drug cartels to get drug proceeds
back to Colombia and into their pocketbooks. Cartels have
learned a new way to circumvent the safeguard that banks and
the governments have put in place. Today, the black market peso
exchange stands as one of the most potent, effective, and
dangerous forms of money laundering techniques employed by the
drug cartel. It not only makes American corporations
unwittingly helping to accomplish the narcotic trafficking but
perpetuates tax evasion, the growth of contraband, and
ultimately the drug trade itself.
Now this process works this way: cartels collect their cash
from the sale of illegal drugs in our towns and cities; the
cartels then sell their drug money for pesos on the black
market peso exchange. This is accomplished by a dollar/peso
broker, a middleman in the transaction that makes the exchange
of drug dollars and pesos happen very smoothly and very
quickly. Peso brokers have bank accounts in the United States
to facilitate these transactions. The peso broker assumes the
risk of handling the narcotics traffic currency. For this
reason, the dollars are usually sold at discount from the
official Colombian dollar/peso exchange rate. The peso broker
sells the dollars to business associates who deal in contraband
goods. They are Colombian importers that deal in smuggling of
contraband into Colombia.
This contraband consists mostly of U.S. trade goods. The
smugglers need large amounts of U.S. dollars in order to pay
for U.S. and foreign goods that they plan to smuggle into
Colombia to evade Colombian taxes and tariffs. In exchange for
pesos from these smugglers, the peso broker makes payments in
U.S. currency for these goods. The currency for these
transactions is now largely supplied by the drug proceeds. The
bottom line: the cartel gets pesos, the Colombian smuggler gets
currency to pay for the goods that he smuggles, the peso broker
gets rich, and U.S. businesses, Colombian and U.S. citizens pay
the cost. And here is how. Our citizens pay because drug
smuggling is helped, legitimate business in Colombia is forced
to close from this unfair competition, and U.S. companies find
themselves facilitating money laundering.
Now, in preparing for this hearing, I and my staff learned
how dangerous this process can be. Potential witnesses who
initially agreed to testify anonymously later changed their
mind. They declined because of the threat to them and the well-
being of their families, and we understand that. These
witnesses represented not only peso brokers but Colombian
businessmen that can no longer compete with the price of U.S.
goods smuggled into Colombia as a result of this process that I
have outlined. This is despite the guarantee of anonymity that
we gave them.
We also learned that a New York fabric company in Manhattan
under investigation by Customs knowingly accepted drug money as
payment for its fabric sales to Colombia. Last year, five
people pleaded guilty to money laundering charges in this
particular case. These cases are very difficult to detect and
the investigations are complex, very long-term and very
manpower intensive. An example that demonstrates this is last
year's culmination of one of the most successful undercover
operations in the history of the Customs Service. Known as
Operation Casablanca, this effort infiltrated and dismantled a
group of international bankers involved in laundering drug
money. The investigation revealed a top money launderer for the
Cali Cartel provided instructions to make a series of deposits
into accounts of cellular phones, computers and other wholesale
companies in Miami. This is typical.
This morning we will hear from several panels that will
discuss how the process works, what can be done about it here
in the United States, but also what can be done about it in
Colombia. There are many courageous people in Colombia fighting
this illegal drug trade. Today we are honored to have Ms. Fanny
Kertzman, Director General of Taxes and Customs of Colombia.
One of our witnesses will be anonymous and talk firsthand
specifically about his work as a peso broker with drug cartels
and how the cartels conduct the money laundering portions of
their drug trade. He has agreed to testify despite risk and he
will answer questions as fully as possible as long as his
identity is not revealed.
We need to address how to deal with this problem. U.S.
companies cannot allow their companies to be used, whether
knowingly or not, as a way to fuel the illicit drug trade. I
continue to stress the need for a comprehensive
counternarcotics strategy. I urge not only the administration
and U.S. law enforcement and citizens, parents, clergy, and
professionals, all of the above and more, to help in this
fight, but also we must involve U.S. and foreign businesses as
well.
It is essential that we in Congress help build an awareness
within the business community to better understand this problem
and how to fight it. I am in favor of voluntary compliance
rather than reporting requirements and even more so than more
regulations. It is more or less an enforcement of what is on
the books as complicated as that enforcement might be. We must
also look to U.S. law enforcement and the difficulty that they
have in detecting these process. So I hope today that this
hearing helps to bring U.S. companies and others to the table
to address this problem and that is an open invitation from me
not only to facilitate that process but what can we do in
government to be better cooperative to U.S. companies and other
entities to help accomplish our goal.
Now, if the senator from Alabama would like to have an
opening comment, I would turn to you at this point.
Senator Sessions. Thank you. Briefly, Mr. Chairman, I would
like to thank you for looking into this issue. I think it is
important. I have always felt as a prosecutor for a lot of
years and a federal anti-drug prosecutor that has indicted
quite a number of Colombians for various crimes involving drugs
primarily that you follow the money. That is a key way to do
it. There are some things that we can do that are effective
such as forfeiting the assets of drug dealers. I strongly
believe that that is a key thing and I am somewhat concerned
that there is legislation afoot that would reduce the capacity
of the federal government to do that. I think that would be
very unwise. I am open to see what we can do with regard to
this market, peso market, but I am not certain that there is a
great deal that we can rightly achieve in this aspect of our
efforts. But if it is, it would certainly be a good thing
because if you follow the flow of the money, you can usually
find where the criminality occurs. Thank you, Mr. Chairman, for
your leadership.
Senator Grassley. Thank you for being a consistent
participant in the work of the caucus and also through our
joint membership on the Judiciary Committee in which a lot of
this legislation would find itself to be enacted and to
consider.
Now, our first panel is already at the table. I thank them
for being very prompt. So we welcome James E. Johnson, who is
Under Secretary of Enforcement from the Department of Treasury,
and also testifying is Bonni Tischler, the Assistant
Commissioner for the Office of Investigations, U.S. Customs,
and I know that Commissioner Kelly was originally supposed to
testify and that he is recovering from surgery and we all wish
him a speedy recovery, but he has also been very cooperative
with this caucus, not only in testifying but in working very
closely with us on the issue of legislative authorization as
well as our working together to try to meet the needs of
Customs for more money to help them do their job better. So I
thank you both for being here, and Mr. Johnson, I will start
with you and please begin at this point.
STATEMENT OF JAMES E. JOHNSON, UNDER SECRETARY OF ENFORCEMENT,
U.S. DEPARTMENT OF THE TREASURY
Mr. Johnson. Thank you. Mr. Chairman, Senator Sessions,
good morning. It is a privilege for me to be able to appear
before this, the Caucus on International Narcotics Control, to
speak about a very important issue, and I am happy to be joined
by Assistant Commissioner Bonni Tischler. I have submitted a
rather lengthy statement for the record and with your
permission, Mr. Chairman, I would like to summarize.
As this caucus is aware, international crime constitutes a
national security threat. It also is a threat brought home to
us directly on our streets, in our schools, within our
communities. Such crime, particularly as it relates to drugs,
is the work of international criminal enterprises. I am here to
talk today about one of the systems that these international
criminal enterprises uses which is the Colombian black market
peso exchange system. This system is perhaps the most dangerous
and damaging form of money laundering that we have ever
encountered.
Today I wish to share with you how the Department of the
Treasury in concert with other law enforcement agencies,
regulators and private sector representatives, is working to
disrupt and dismantle this money laundering system. Mr.
Chairman, I would like to thank this caucus for its leadership
and its efforts on this very important matter. Since the House
hearing in 1997, the federal government has maintained its
focus on the black market peso exchange as a major component of
its anti-money laundering strategy.
We have taken several steps designed to enhance our efforts
in this fight. We have worked to design and implement smart and
tough law enforcement initiatives that are focused on the choke
points of the black market peso exchange system. The successes
resulting from these initiatives have built upon a foundation
of close cooperation with our international partners in this
effort including and most importantly the government of
Colombia.
Here I must acknowledge the outstanding efforts of Ms.
Fanny Kertzman, Colombia's Director of Revenue and Customs
Service. Ms. Kertzman has worked closely with us, sharing
information that has enabled us to not only understand but to
effectively begin to move against the black market peso
exchange. In order to place these initiatives in their proper
context, I would like to take just a few moments to briefly
summarize the operations of this system. A more detailed
account of the workings of the exchange system will be provided
by Alvin C. James, who is a senior policy adviser for Money
Laundering Enforcement at the Financial Crimes Network. He is
also an IRS special agent.
The Colombian black market peso exchange system is
primarily an exchange of currencies, the selling and buying of
U.S. dollars. The two major customers of this system are drug
traffickers who amass millions of U.S. dollars which they are
unable to use unless they are converted to pesos and Colombian
importers who need U.S. dollars in order to pay for illegal
imports. Basically we have a Colombian drug cartel with U.S.
dollars in the United States who need pesos and, on the other
hand, you have Colombian importers with pesos in Colombia who
want to very often smuggle goods into Colombia in contravention
of Colombian laws, and they are looking for United States
dollars to pay for those goods. Enter the peso broker. The
Colombian importer or smuggler pays for the dollars by
providing pesos to the broker in Colombia.
For purposes of this example, and I would just give you a
quick example, let us assume that this peso broker is a small-
time operator. He gives the importer an IOU in exchange for the
pesos. The IOU will be payable in dollars. The broker then
sells the pesos to the drug trafficker who pays for them by
effecting the transfer of United States dollars to an operative
of the broker working in the United States. Now the peso broker
has dollars to pay the Colombian importer for the pesos. But
instead of having the peso dealer deliver the dollars in
Colombia and exchanging them for the IOU, the importer
instructs the peso broker to use the dollars that have been
deposited often in a United States financial institution to pay
a U.S. merchant or a U.S. exporter for goods that he has
ordered and that will be smuggled into Colombia.
That completes the transaction and at the end the drug
trafficker has laundered his illegal profits and gets clean
pesos in exchange for dirty drug money. The Colombian importer
is paid for merchandise in U.S. dollars purchased on the black
market, which allows him to circumvent Colombian laws, and the
peso broker has collected a handsome commission from both the
drug trafficker and the importer.
Now with that as a backdrop, what I would like to do is
with the remainder of my time is focus on what we have done,
what we are doing and what we intend to do to combat this
intricate and complex form of money laundering. As I said
earlier, in putting together, in assembling and formulating our
response to the black market peso exchange, we have worked to
design and implement smart and tough law enforcement
initiatives that are focused on the choke points of the
exchange system. Through these initiatives, we have ensured our
ability and have continued to make solid cases hitting the
black market peso exchange at every choke point. In fact, Mr.
Chairman, you identified one, just one example of Customs very
successful approaches in dealing with this problem.
But to pull together the various strands and to pull
together the various efforts against this exchange, a single
approach was not required, much more than that. And to that
end, in 1998, at Treasury in Treasury Enforcement I established
the Black Market Peso Exchange Working Group. This working
group devoted to the development of a comprehensive action plan
to combat the black market peso exchange brings together in a
coordinated effort the tools of the Treasury Department, the
tools of the Justice Department, and all of our enforcement
bureaus and regulatory agencies, not only within the Treasury
Department but also external to the department.
This group has developed an internal but innovative action
plan that serves as a blueprint for coordinated, effective
attack on the black market peso exchange. The plan, which is
not publicly available, will continue to evolve. The action
plan is premised on three basic principles: coordination and
consultation among government agencies in order to ensure smart
and tough enforcement of existing laws against participants in
the black market peso exchange; international cooperation with
our key allies; and finally outreach to the private sector.
Since the early 1980s, we have successfully investigated
and successfully prosecuted individuals laundering drug
proceeds through the black market peso exchange. In the past
eight years alone, Customs undercover operations have led to
the seizure of $800 million, approximately 2,100 arrests, and
the seizure of 100,000 pounds of cocaine. In addition, the IRS
has investigated approximately 250 cases also related to the
black market peso exchange.
The working group integrates law enforcement and regulatory
efforts with intelligence data support. Through the Black
Market Peso Exchange Working Group, we have ensured that each
of the participating agencies is aware of information available
to the others, as well as has means of accessing such
information. Additionally, and in close coordination with Ms.
Kertzman, it has created an analytical subgroup devoted to the
analysis of shared information, not only our information that
has been shared, but information that has been shared and
received from Colombian authorities. This subgroup comprised of
representatives from the Financial Crimes Enforcement Network,
Customs, Justice, the IRS, and NDIC, the National Drug
Intelligence Center, will join their counterparts in a
bilateral task force initiative in Colombia, in Colombia, to
review, analyze and discuss specific data that may well further
the investigation and prosecution of cases against the black
market peso exchange.
For this and other reasons, I am particularly pleased that
Ms. Kertzman is here with us today and look forward to hearing
her confirmation that this task force will meet in Bogota in
the very near future. Such interagency work at home and abroad
complements other resources. Customs, for example, in
coordination with FinCEN has recently established a national
Money Laundering Coordination Center to coordinate and make
available to other agencies the intelligence generated from
Customs undercover operations targeting the black market peso
exchange. And about that, I expect you will hear a great deal
more from Assistant Commissioner Bonni Tischler.
There is growing recognition that governments must deal
firmly and effectively with increasingly illusive,
sophisticated and well organized criminals adept at exploiting
opportunities and vulnerabilities in any anti-money laundering
regime. One of the reasons that the peso exchange has become so
prominent is because of the efficacy, the effectiveness, as,
Mr. Chairman, you pointed out, of the Bank Secrecy Act in
trying to keep and keeping out dirty money from our system. It
is not easy for them to put dirty money in our financial
system, and the exchange has developed, at least in part has
expanded in response to that.
We must strive to work together, all governments, in a more
coordinated fashion. And we must establish mechanisms that ease
the exchange of information, permit, encourage and increase
collaboration, and improve cooperation bilaterally and
multilaterally. The department has made important progress in
this area. There is improved internal coordination of
international anti-money laundering efforts across a broad
range of federal agencies and regulators and programs with
regard to the black market peso exchange efforts. For example,
the departments of Treasury and Justice co-chaired two days of
talks with senior officials from Colombia's Customs, Foreign
Trade and Banking Superintendents offices on the black market
peso exchange. We have not only discussed what is going on, but
we have discussed what steps each could take separately as well
as steps that we could take collectively to combat the problem.
These informal discussions represent an important
breakthrough, ushering in a number of cooperative initiatives
and programs important to the law enforcement efforts in both
countries. In addition, Treasury in close consultation with
Justice and the State Department has begun to work with
governments and officials from the Free Trade Zones of Aruba
and Panama. Bringing together all of these key players in order
to bring the collective weight of our resources, experience and
insights to bear on this money laundering system is integral to
our overall black market peso exchange strategy.
The department is also promoting several multilateral
initiatives that build upon these bilateral efforts and
complement important work being undertaken by organizations
such as the Financial Action Task Force. FATF, which is what
the Financial Action Task Force is often referred to, brings
legal, financial, and law enforcement experts into the
policymaking process. Our action plan intends to build on this
critical aspect of FATF's anti-money laundering programs by
proposing expansion of the process to incorporate trade and
business represents and focusing upcoming meetings on trade
related money laundering, a point, Mr. Chairman, that you made
in your opening statement.
Mr. Chairman, it is important for us to keep in mind that
money laundering is a global problem with serious repercussions
in other countries. The United States is not alone in facing
this challenge and we are increasingly dependent on the
cooperation of our neighbors. We have a lot of work to do at
home, too, particularly in the private sector. The first step
in forming an effective partnership with the private sector
must be to educate the public and the business community about
this exchange, this system. FinCEN took an important first step
in July of 1997 by initiating a series of meetings with local
and national banks in the Miami area.
These meetings culminated in a final meeting in November
1997, after which FinCEN published its first advisory
describing the black market peso exchange to the law
enforcement and financial communities. FinCEN is issuing a
follow-up to its advisory this very day that updates the
financial community on what we have learned as a result of
regulatory measures and investigative efforts undertaken
recently.
Also, as a part of our effort to work with the business
community, United States Customs Service is launching a
national campaign today alerting businesses to the black market
peso exchange system and what to look for in order to avoid
being used as part of the money laundering scheme. In support
of these efforts, this week I will be speaking to the
Association of Home Appliance Manufacturers to educate them
about this important issue. The Department of Treasury has also
begun an education process in the business communities of
Colombia, Aruba and Panama. I am pleased to report that all
three governments have displayed great willingness to work with
us in developing a coordinated approach to this problem.
Mr. Chairman, by holding this hearing and recognizing the
significance of a highly complex and systematically invasive
criminal operation, the caucus is making an important
contribution towards further informing our country's debate
about one of our most serious national security threats:
narcotics related money laundering.
In closing, I believe that our strategy paves the way to
make significant inroads against this system. We will seek to
employ our most effective tools to attack the black market peso
system at its choke points. We will work with our international
partners and we will reach out to the financial and business
communities to emphasize the important role they can and must
continue to play in this fight. I would be happy to answer any
questions you or any other members of the committee have. Thank
you very much.
[The prepared statement of Mr. Johnson follows:]
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Senator Grassley. We will wait till Ms. Tischler testifies
before having a series of questions, but just let me make a
statement and in a sense asking you if this is a fair
assumption. As I indicated in my opening remarks, I do not see
this hearing, unless something dramatic comes out of it
contrary wise, to be a call for new laws or new regulations,
and I think your testimony implies the same thing, that we are
talking about the enforcement of existing law, that we are
talking about how do we develop cooperation between the private
and public sectors within the United States and also
bilaterally with other countries and also between the private
sector and the governments of those countries and government to
government, and enhancing that cooperation to make sure that we
get maximum cooperation in solving this problem.
Mr. Johnson. Mr. Chairman, we have many tools available to
us to address this problem and our initial step in developing
this plan and moving forward is to see what we can do to
maximize the use of those tools, the regulatory tools we have,
the statutory tools we have, to maximize the resources of our
international partners, and to get the business community very
much engaged in this process.
This has been the primary focus. There may be areas and we
would discuss those with the committee at a later time where we
could tweak the existing laws, but that is not our effort at
this time.
Senator Grassley. And the extent to which usually you look
to Congress for direction, this is also an instance that if the
Congress, and particularly this caucus, and particularly the
senators that are on this caucus individually or collectively
can be helpful, also do not be bashful about suggesting certain
things.
Mr. Johnson. We will not be.
Senator Grassley. Ms. Tischler.
STATEMENT OF BONNI G. TISCHLER, ASSISTANT COMMISSIONER, U.S.
CUSTOMS SERVICE
Ms. Tischler. Thank you, Mr. Chairman and Senator Sessions,
for the opportunity to address you on the black market peso
exchange or, as we call it, the BMPE. This trade based system
of laundering drug proceeds has been utilized by Colombia's
drug syndicates for a few years. Its existence, however, has
not been widely publicized or understood outside of the highly
specialized world of federal drug money laundering
investigators and drug money launderers.
The BMPE process starts with a peso broker. For a fee,
these brokers arrange the financial transactions necessary to
launder the drug cartel's money. Broker activities include
receiving and coordinating orders for money, locating sources
of U.S. dollars, arranging pick-ups and directing the placement
of funds. Within the broker's network are others who perform
various services for a percentage of the broker's earnings.
Those working for the brokers pick up cash, buy money orders
and checks, open checking accounts, transport and smuggle money
among other things.
The primary market in Colombia for large blocks of U.S.
dollars is the Colombian importer. In order to purchase goods
for import, the Colombian importer must first acquire U.S.
dollars, which are the recognized instrument of trade in the
Western Hemisphere. Access to U.S. dollars is regulated by
Colombian law and administered by their central bank. Before
the Colombian Central Bank will convert pesos to dollars, they
require certification that government import permits be
obtained, thereby ensuring that the requisite Colombian duties
and taxes have all been collected.
The Colombian Foreign Exchange and Trade regime tends to be
expensive and naturally results in exposure to government
scrutiny. An alternative, of course, is the underground system
of BMPE brokers which offers the businessman a choice and the
drug trafficker an opportunity. A key component to the BMPE
money laundering process involves international trade. This is
Customs core business and we are uniquely seated to address
this issue. Today I am announcing a Customs initiative designed
to identify and educate those businesses involved in
international trade which are at risk of being victimized by
drug money launderers.
An integral part of this program is a brochure which I have
both on display and available to the caucus, developed jointly
by the Customs Office of Investigations and the Office of
Strategic Trade. The brochure will be utilized by Customs
special agents and trade specialists in the business community
to do the following: describe the BMPE process for the trade;
highlight red flag or indicators of BMPE activity; provide U.S.
businesses with a point of contact if they suspect they have
been victimized by BMPE related activity.
Customs special agents, intelligence analysts and trade
specialists have been analyzing outbound trade data, financial
and payment data, including CTRs, CMIRs and the SARs, through
the use of advanced targeting software such as the Numerically
Integrated Profiling System, or as we refer to as NIPS. This
will allow us to target this education and compliance program
at those businesses who are likely to benefit from and utilize
this important information.
Moreover, Customs intends to get the word out via other
forms, such as trade publications, industry associations and
via our world wide web site. I am pleased to have the occasion
of this hearing to roll out this initiative and the brochure.
The Customs Service intends to aggressively pursue this
educational compliance initiative. However, we are prepared and
have indeed employed other tools available to us to detect and
disrupt drug money laundering utilizing the BMPE. Among those
tools are Customs undercover operations that are directed at
the peso brokering system and which have over the last eight
years resulted in the seizure of more than $800 million in cash
and monetary instruments. These operations have also produced
more than 2,100 arrests and the seizure of 100,000 pounds of
cocaine.
Through an analysis of Customs BMPE investigations, we have
demonstrated that they are 35 times more effective, i.e.,
seizure values versus expenditures, than that of all U.S.
government counternarcotics programs. It is worth noting that
civil forfeiture is a critical tool in these types of
investigations. As a side note, were legislation such as H.R.
1658, the Civil Asset Reform Bill, offered by Chairman Hyde,
enacted, this aspect of our enforcement efforts would be
virtually shut down.
Customs intends to enhance and improve our undercover
investigations by collecting and analyzing the intelligence
they produce through a single entity designated the Money
Laundering Coordination Center or, as we call it, the MLCC. In
addition to coordinating leads, information, and undercover
activity and existing investigations, the MLCC will identify
and compile a list of active Colombian money brokers along with
the traffickers they service; identify and compile a list of
banks, accounts and businesses utilized by those brokers and
the traffickers; identify and track trends and patterns such as
the amount and number of contracts let for money pick-ups in
U.S. cities, seizures of money and drugs, as a result of BMPE
operations, and the cost of doing business in each city and
region in the U.S. as well as Europe and Asia. And the last,
but not least, is to deconflict situations where different
investigative entities are unknowingly targeting the same
suspects, bank accounts or organizations.
The Customs Service also plans to invite other agencies who
are involved in money laundering investigations to participate
in the MLCC. In November 1998, a working group was convened at
Customs to develop a strategy to assist Colombia on a number of
issues including the BMPE. The working group has developed a
strategy for training programs and assistance projects to
further expand cooperation between the U.S. and Colombia.
Specific steps have been designed to improve the Colombian
customs infrastructure, thereby strengthening their ability to
deal with issues such as contraband smuggling, which is
integral to the BMPE money laundering process. Included in the
strategy are the following: a Customs mutual assistance
agreement with Colombia which has been developed and is in the
process of being vetted through the Departments of State and
Justice. This new agreement will provide the framework for U.S.
Customs Service and Colombian Customs to share information on
issues such as the BMPE and trade issues related to contraband
smuggling.
A training, technical assistance and short-term adviser
package has been developed and been funded by the Department of
State/INL. Many of the programs directly impact Colombia's
ability to address the contraband smuggling and BMPE process.
With approved DOJ asset forfeiture funding, Customs will assist
the newly created national tax and Customs police with
targeting and contraband efforts, trade compliance and
investigative techniques training.
Finally, Customs has conducted basic intelligence and post-
seizure analysis training of selected Colombian counterparts
and provided them with PSA software and a database in Spanish.
In addition, the Customs Service recently placed an attache in
Bogota, Colombia. The attache will become an important focal
point for Customs BMPE investigations, facilitating the
exchange of information with the embassy country team as well
as his Colombian law enforcement counterparts.
The BMPE is in no uncertain terms the ultimate nexus of
legitimate and criminal trade activity. As you have heard this
morning, U.S. Customs is doing everything it can to put an end
to it. I will be happy to answer your questions, but I would
like to thank you, Mr. Chairman, for the authorization bill,
which among other things will provide over 360 agents for our
Investigative Bridge Strategy, which should go a long way to
putting a dent in this problem. Thank you.
[The prepared statement of Ms. Tischler follows:]
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Senator Grassley. Well, thank you. Obviously we hope that
we are successful getting that legislation to the President.
Even though I direct--well, first of all, let me say thank you
for both of you for your testimony. I may direct questions to
one of you, but if the other one feels like answering or
supplementing, that is okay with me. I will start with Ms.
Tischler. In your testimony, you mentioned various operations
such as Primero, Casablanca and Double Impact. Was Customs able
to trace the origins of the profits to any particular drug
organization?
Ms. Tischler. Well, as you know, Mr. Chairman, Casablanca
traced the assets directly to the Cali Cartel and Primero
managed to track the assets also to the cartel and some
entrepreneurish sub-cartels, I guess you might call them. I
have to point out that we have been fairly successful in
tracking the origins of the illicit cash not only involved in
BMPE but other methods of laundering back to the cartels. In
over at least the last 20 years, we have had, I think, a
somewhat of a significant impact on the cartels themselves.
Senator Grassley. So the point that you just made referring
to tracing it back to specific cartels, we are not dealing then
with small sized organizations?
Ms. Tischler. No, sir. We are dealing with the large
cartels, but I have to point out that these days since about
1995 when Operation Cornerstone was successfully completed, we
found a lot of entrepreneurs within the context of the old
cartels themselves, and I think it is equally important to sort
of scale up our response. So while we are doing an
investigation, if we find these smaller entrepreneurs, we
obviously try to take their assets as well.
Senator Grassley. What is the status of the Money
Laundering Coordination Center that you spoke of in your
testimony?
Ms. Tischler. The Money Laundering Coordination Center is
up and running at FinCEN. FinCEN has supplied us with a base of
software. It has been functioning as a deconfliction center and
we have started to use it as an analysis tool, as it was
originally intended.
Senator Grassley. And it is up and running?
Ms. Tischler. Yes, sir.
Senator Grassley. Okay. So it has gone way beyond the point
of being an idea on paper?
Ms. Tischler. Yes, sir. We have been very successful
through Treasury and FinCEN support. We have been more or less
on schedule for getting this project together and up and
running.
Senator Grassley. And is it a joint operation with other
U.S. agencies or strictly U.S. Customs?
Ms. Tischler. Customs put it up in conjunction with FinCEN,
but we are now going to be inviting in participation by the
Drug Enforcement Administration, the FBI, IRS and others.
Senator Grassley. Just for the record and anybody
listening, the acronym FinCEN, we have used it, we all know
what it is, but just state for the record.
Ms. Tischler. It belongs to you. Why do you not do it?
Mr. Johnson. The Financial Crimes Enforcement Network.
Senator Grassley. Thank you. In spite of the high stakes,
only a few major corporations appear to be taking steps to
combat money laundering. After the issues of money laundering
and the black market peso exchange were brought to the
attention of both Whirlpool and the GE Corporations, both
launched policies to keep closer tabs on the sales of their
distributors. I would use GE as an example, limiting the number
of goods that it sells to those intending to transport the
goods to other countries. Whirlpool Corporation has stopped
selling through independent distributors in Colombia after it
appeared that peso brokers were buying refrigerators and other
appliances.
Instead, Whirlpool currently only distributes its products
to licensed dealers and registers all of its exports with
Colombian and U.S. authorities. Ms. Tischler, are there other
companies that are following the lead of Whirlpool and GE?
Ms. Tischler. I think a significant amount of outreach has
been done with the major companies. Obviously, the industries
that are most affected, as you have already talked about,
really are the appliance industry, electronics, cigarettes,
things that lend themselves to smuggling and fueling the black
market peso exchange. I think that we have been working with
some of the tobacco companies to get them on board with this
effort so that they are not victimized by this trade.
I have to say also that we have been doing quite a bit of
outreach in places like Miami where a major corporation may not
be involved at all in the BMPE, but there is a distributor/
broker who buys from large distributors and then resells the
stuff in either Panama or Colombia. And so equally we have been
trying to address that problem as well.
Senator Grassley. What are some of these U.S. companies
beyond GE and Whirlpool doing to combat money laundering? You
do not necessarily have to name specific companies but just----
Ms. Tischler. Well, what we have been really trying to push
them into is a similar environment that GE and Whirlpool have
already demonstrated and that is know your client and know
where your money is coming from and keep a lookout for the
signs that you might be used. And that is why we put this
pamphlet together. It basically lists the warning signs and
that is where we are going with it. They, quite frequently when
we talk to the companies, will say, well, we did not know, we
were not aware of the signs, and that is why Commissioner Kelly
thought it was very important to establish this pamphlet for
distribution to all the major corporations.
Senator Grassley. Maybe on this point, Secretary Johnson,
you could fill in as well from your experience.
Mr. Johnson. Outreach is vitally important and, as Ms.
Tischler indicated, there are some companies that are becoming
increasingly vigilant. One of the reasons that Treasury felt it
was important for me to speak as invited to the Association of
Home Appliance Manufacturers is to make sure that, one, we have
emphasized and done what we can to highlight the information
that both Customs and FinCEN have assembled and make sure that
the major appliance manufacturers are alerted to this problem
and can benefit from the steps of some of their corporate
examples.
Senator Grassley. Can you make any sort of judgment of
whether these policies have been successful in curbing the
sales of products to those associated with the exchange?
Mr. Johnson. At this stage with respect to the policies, I
cannot make an assessment as to whether or not they have been
effective. I do know, though, that in other areas, in response
to the FinCEN's earlier advisory, there has been an increased
vigilance on the part of financial institutions about the black
market peso exchange. And in fact, the number of suspicious
activity reports that have been generated as a result of their
responsiveness and sensitivity to the exchange has actually
increased over the last three years.
Senator Grassley. In October 1997, the Colombian government
gave FinCEN a list of 300 Colombian companies that do business
with peso brokers and also during this exchange, the Colombian
government provided us a list of brand names that were bought
from U.S. manufacturers. At the end of '97, FinCEN began
contacting the manufacturers of these goods to discuss ways for
them to avoid drug money. What were some of the recommendations
that FinCEN has provided to U.S. manufacturers to heighten
their level of awareness to avoid drug money?
Mr. Johnson. Some of the recommendations that have been
provided generally by FinCEN include the recommendations that
are listed in the Customs brochure as well as the
recommendations that are listed in the FinCEN advisory which
was also issued today. And that--and I can just highlight some
of the recommendations--is to essentially identify transactions
that do not--seem as if they are outside the normal operations
of the business, where you have large scale transactions that
are paid for by third parties that seem to be unknown or
unrelated to either the entity that is receiving the goods or
any other part of the transaction, where you have transactions
that are paid for by large amounts of cash, transactions that
are paid for by postal money orders, transactions that are paid
for by third party checks. These are the sort of indicia that
FinCEN and Customs have advised others to look for, businesses
to look for as they do their best, and we expect them and hope
that they will do their best not to be unwitting participants
in this system.
Senator Grassley. Have there been any prosecutions of any
U.S. companies who have willingly ignored these warning signs?
Mr. Johnson. In your opening statement and I believe Ms.
Tischler can address in detail the prosecution of a fabric
manufacturer in New York, prosecuted in the Eastern District of
New York, that was a witting participant in this money-
laundering system.
Ms. Tischler. It is in the newspaper today. It is
Mandelblatt & Company and, in fact, Customs and DEA managed to
show where over a million dollars in drug proceeds was, in
fact, laundered through this company. But I have to tell you
offhand that in South Florida for a number of years the
prosecutions have revolved around the import-export community
and the distributors down there. So that I am not aware of any
major corporations that have been brought to task for
participating unwittingly or wittingly in the BMPE.
Senator Grassley. More the small business types?
Ms. Tischler. Yes, sir, but as I am trying to gently point
out, it is very difficult with a large corporate structure to
get your hands around exactly who may or may not be
facilitating the business. It is a lot easier to find that
middleman or person who would, in fact, make the deal with
somebody in the company, similar to the banks in terms of
laundering money, so that quite frequently we have been able to
get after the facilitator, so forth and so on.
Now I think with the new intense scrutiny and the type of
outreach that Treasury and Customs has designed, I think that
maybe we will be able to get around that problem. In other
words, the object is not to put our companies in jail, the
object is to solve the problem.
Senator Grassley. Are there actions that the Colombian
government could take that would increase the competitiveness
of legitimate businesses that have to compete with the
Sanandresitos?
Ms. Tischler. Actually, Ms. Kertzman would probably be
better off answering that question, sir.
Senator Grassley. Okay. Well, we will ask that of her. Just
in case I forget to ask, I will ask her to think about
addressing that when she comes to testify. Some American
companies, and I would give Philip Morris as an example, have
been accused of implicitly supporting the black market peso
exchange in order to increase their market share in Colombia
and avoid paying hefty Colombian taxes. Some Colombians have
gone so far as to threaten to sue Philip Morris arguing that
the volume of advertising that Philip Morris chooses to have in
Colombia is not justified by levels of legitimate sales. How
much validity would there be to that charge? Either one of you
can take----
Mr. Johnson. As a law enforcement agency, it is our typical
practice, whenever there is any sort of allegation of a
criminal charge against a person or company, that unless we can
address that in terms of an indictment or in terms of a
complaint, we simply do not offer opinions on those sorts of
charges.
Senator Grassley. Okay. Does the U.S. government plan, and
maybe you cannot answer either, to take any action against any
of these companies?
Mr. Johnson. I can tell you that a key component of this
strategy is tough and effective law enforcement and to the
extent that there are companies that are witting participants
in this exchange, wittingly facilitating what we think is a
particularly pernicious form of money laundering, one of our
goals is through the combining of our resources, through the
enhancement of our analysis, is to bring effective
investigations and prosecutions. So that if there are those
that are out there that are facilitating this, willingly
facilitating this criminal enterprise, this criminal system,
they should know that we will be vigilant and we are intending
to pursue this matter with a great deal of vigor.
Senator Grassley. According to the Financial Crimes
Information Network, the peso broker is the central link in
what the network says quote, ``is the most efficient and
extensive money laundering system in the Western hemisphere.''
Obviously, there are engines that drive the system. The broker
is a middleman in this process and is the one who buys the
dollars from the drug traffickers or their agents, usually
obtained from the sale of cocaine or heroin by the drug
trafficker, obviously on the streets of the United States or
other parts of the world. What steps are your agencies using to
intercept these middlemen in the process of exchanging U.S.
dollars for Colombian pesos?
Mr. Johnson. As I indicated earlier, we want to attack this
problem at every single one of the choke points and one of the
key choke points is the peso broker himself. And steps may be
taken in the form of undercover operations or the use of
information that is obtained from the government of Colombia to
go after these peso brokers.
Senator Grassley. Define for me in your own words how
successful you feel that Treasury agencies have been in
identifying and prosecuting peso brokers?
Mr. Johnson. Overall I think in terms of moving against the
exchange, Treasury bureaus, particularly Customs and IRS, have
been very successful. But there is more that we can do. As
Assistant Commissioner Tischler just indicated, there have been
over 2,000 prosecutions in connection with the peso exchange at
the Customs Service; over 250 related to the peso exchange at
the IRS; over $800 million has been seized by Customs in
connection with these operations. That is a tremendous,
tremendous record. We are looking to do more.
Senator Grassley. Could you tell us kind of the typical
fine or prison sentence that is levied against the black market
peso exchange?
Mr. Johnson. I do not have before me a summary that I could
give you, Mr. Chairman, but I would happily submit such a
summary for the record.
Senator Grassley. Okay.
[The requested information follows:]
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Senator Grassley. There is obviously a fairly sophisticated
system used to launder money. There are a lot of different
players involved and they can be a constantly changing group of
players. Are there any tools that you believe would improve
Treasury's ability to deal with the threat?
Mr. Johnson. Well, among the tools that we are enhancing
and using are the Money Laundering Coordination Center, the
MLCC, that Assistant Commissioner Tischler just discussed. That
is an effective tool. Building on an information exchange
within the federal government is going to be key moving
forward. We have substantial regulatory authorities already in
place at Treasury and we will not be asking at this stage for
more regulatory authorities to go after this system.
Senator Grassley. Would you like to make some
recommendations that you would like to take to reduce the abuse
of the U.S. financial system?
Mr. Johnson. Well, we have in place to make sure that the
financial system is not abused the very strong system that is
put in place by the Bank Secrecy Act and the related acts that
have been passed after the Bank Secrecy Act was first passed.
That is a tremendous tool for us and the regulations that have
sprung out of that, the authorizing act. The currency
transaction reports have been helpful in our investigations.
Suspicious activity reports, which are also a product of the
Bank Secrecy Act, have been helpful in our investigations. But
more importantly than that, both the currency transaction
reporting requirement and the suspicious activity reporting
requirement have formed an important bulwark that makes it more
difficult for would-be money launderers to inject money into
their system.
That is why narco-traffickers have gone to black market
peso exchangers to do a job that is too risky for them to do
themselves. It is the black market peso exchanger that assumes
the risk of trying to inject the money into the system through
structuring of transactions and other means to get it into the
system. The system works well and we are not seeking additional
authorities at this time.
Senator Grassley. Is it difficult to get at this problem
without hurting legitimate innocent businesses that are
exploited in the process?
Mr. Johnson. Well, it is our hope through education that
businesses can take the first steps so that they help
themselves. Clearly, there may be some risk if it ends up that
law enforcement finds out that drug money is going through
their system and they have already shipped their goods and the
money is stopped in some way before they get payment for those
goods. But that is why they ought to be, they should be
vigilant.
Senator Grassley. I just have one more topic before I go to
Senator Sessions. Peso brokers typically inject cash into the
U.S. financial system using runners that are, I am told, are
known as smirfs. They are perhaps unemployed Latin Americans
who open multiple bank accounts in differing names, often using
identity papers that have been forged or purchased from
relatives of deceased Colombians to avoid bank official
suspicion. These smirfs will deposit cash in incremental
amounts in these multiple bank accounts at amounts below
$10,000 threshold that would otherwise trigger a bank report to
the Treasury Department.
How are your respective agencies, specifically you, the
Treasury Department, and within there, the IRS, FinCEN and
Customs, working with bank officials to help them detect these
smirfs?
Mr. Johnson. Well, with respect to bank officials, FinCEN
very often engages in outreach and provides information about
what is going on within the financial community. Law
enforcement also at conferences will give examples of what
smirfs do. And law enforcement as well remains vigilant. I
recall when I first became a federal prosecutor in the Southern
District of New York, one of the first cases that I brought was
a case involving a smirf. That case had been investigated by
the United States Postal Inspection Service. So there are a
number of people watching the smirfs, a number of people, or
little soldiers, as they are commonly called on the street, and
there are a number of investigative agencies that are doing two
things to help and regulatory agencies that are doing two
things to help the banks.
One is education, which is done through outreach that is
done by FinCEN, and the other is through effective enforcement
and that is done by the United States Customs Service, the IRS
and many others including the U.S. Postal Inspection Service
and the DEA.
Senator Grassley. Yeah. In the previous question, you gave
some statistics about the thousands of people being prosecuted.
Are some of these known smirfs and is it a very large
percentage of the people that you are suggesting have been
successfully prosecuted?
Mr. Johnson. The number that I gave in terms of prosecution
is a number that extends back over years. Many of the people
that are included in that number include those that tend to be
lower on the scale, the people known as smirfs. But our goal is
to bring the most effective prosecutions and to do that you
need to work higher up on the food chain, as it were, in the
organization, to go after not just the lower level people, but
the focus of the United States Customs Service has been to work
these cases to go higher up in the food chain and that is
exactly what you saw quite successfully in Operation
Casablanca.
Senator Grassley. Okay. I thank both of you for my part. I
now turn to Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman. Well, I do not
think there is any doubt that for well over 20 years I think
Ms. Tischler mentioned Colombian cartels have sold tremendous
sums of illegal drugs in the United States and have made
profits off of it. Every time somebody buys the smallest amount
of cocaine, a part of that money ends up in the hands of the
Colombian cartel feeding that underground empire. So it is a
very serious thing and we are talking about five or $6 billion
per year profit to Colombia. That is money, American money,
primarily almost totally, in their hands that they have made
profits off of these illegal drugs. So I am very much of the
belief that to the extent that we can reduce that profit, take
away that money, we ought to do so.
And my experience as a federal prosecutor for 15 years is
that the Customs Service has been very effective in doing that,
perhaps the most effective, forfeiture of assets, and I was
very concerned, Ms. Tischler, that you concluded that the House
legislation that is pending that would curb your ability to
forfeit would quote ``virtually shut down that operation.'' If
it is anything like that, we need to give the most careful
scrutiny to it and ought to be very reluctant to undermine your
ability to identify this kind of illegality.
As a matter of fact, the current law of forfeiting assets
requires that the person have it from an illegal source and
that there is knowledge and intent there. It is a pretty high
standard in my view and what we are talking about today is a
very vague problem. And I want to ask some questions about it
as we go along.
You did mention that there were $800 million in cash seized
in the last eight years. That is a little bit high now. That is
not all Customs actual seizures; is it? You got good numbers on
that or what does that include?
Ms. Tischler. Sir, it is not just cash. It is real property
and other assets.
Senator Sessions. Well, $800 million is a lot of money.
Ms. Tischler. Yes, sir.
Senator Sessions. And it helps to--you share that with
local law enforcement officials?
Ms. Tischler. Yes, sir. Yes, sir.
Senator Sessions. And that helps them to be able to
continue to be able to fund their cooperative effort with
federal agencies against drugs?
Ms. Tischler. It certainly does. I know I do not have to
tell you that when the forfeiture funds, both the Justice fund
and what is now the Treasury fund, were established, it was to
make really crime or the attack on crime pay for itself through
utilizing assets that we seized from the traffickers. So I have
been doing this--since 1980 I have been involved in money
laundering. And one of the best tools we have is asset
forfeiture and I truly believe that we have taken assets where
we have done it and dismantled groups because of the cash
because they can replace their cocaine.
Senator Sessions. Well, is it not true that over the last
20 years that more and more restrictions have been placed and
controls over the federal government's agent's ability to seize
assets and they put some pretty strict controls on it now
internally?
Ms. Tischler. Yes, sir.
Senator Sessions. More than it was at the beginning?
Ms. Tischler. Yes, sir.
Senator Sessions. And, in fact, the number of forfeiture
filings are down, is that correct, by the federal government?
Ms. Tischler. I do not know. You would have to ask the
Justice Department. I know that at Customs when we are looking
at taking assets, we have a committee, for instance, at the
agency that actually reviews the circumstances surrounding the
forfeitures and whether or not they would be good forfeitures
in conjunction with the U.S. attorneys out in the districts. So
I feel that there are some like real tight controls that have
resulted over the years from when not only the money laundering
law but the portion of Title 21 that allowed us to, in fact,
effect seizures and forfeitures were first invented and for
good cause. There were some excesses, but I truly believe that
the U.S. attorneys and the agencies themselves take a really
strict look at potential forfeitures in terms of actually what
they are seizing and who they are seizing it from, whether it
is legitimate.
Senator Sessions. Well, I know when we talk about money
laundering, that connotes a criminal act and we have got a
situation it strikes me in Colombia that they used to have 40
percent tariffs which really created this black market. When
you have a tariff that high, you tend to create a black market
and out of that historical background, that now with what--a
ten percent tariff--is that the tariff?
Ms. Tischler. Yeah. I think they have got it down to--but
you know when we first started out in the early 1980s in
Colombia, they had a $20,000 a day restriction on the amount of
U.S. dollars that could go into their financial institutions,
and I know that that was rescinded maybe five or ten years ago.
I am not really sure. And that was when we really started
seeing large amounts of cash outbound from the U.S. directly to
Colombia. Prior to that, we saw it going into Panama. So it is
a very convoluted problem as all countries try to strike a
balance with their trade and with possible illicit enterprises.
You know the type of BMPE that is going on now is not
exactly new. Colombia and other places have had a problem with
smuggled, what they consider contraband to get around their
import laws and----
Senator Sessions. Let us talk about that a little bit. So
you have got a constant problem of it. We have zones in Aruba
and Panama that are popular. America and companies from other
nations are selling products there; is that correct?
Ms. Tischler. Everybody is selling products.
Mr. Johnson. That is correct.
Senator Sessions. And we are suggesting that because a
significant involvement by people from Colombia using money
that came from illegal drug operations to involve themselves in
those duty free zones to buy products to make a profit and
launder their money, I suppose, we are suggesting that American
corporations ought not to sell there, and is that a fair thing
to, a fair burden to place on American corporations, number
one? And number two, do we expect German and Japanese
corporations also not to sell in those zones if we stop?
Mr. Johnson. I do not think we have suggested or directed
to American corporations to steer clear of their zones. We have
suggested they ought to be careful in conducting their
transactions.
Senator Sessions. Well, be careful. That suggests I mean we
know a significant portion of the products bought there are
being bought with drug money proceeds ultimately; do we not?
Mr. Johnson. That has been----
Senator Sessions. I am just trying to get to the basic
question here, the basic moral legal question. If you go to one
of these markets and you sell washing machines or cameras and
you know that some of these people are bringing money that came
from the drug industry, is that something that the U.S. Customs
Service/Treasury Department would object to and condemn them
for?
Mr. Johnson. In the hypothetical that you have posited, if
someone knows that they are getting funds that are part of a
narcotics transaction, they should not be participating in that
transaction.
Senator Sessions. Well, part of a transaction. I do not
know what that means exactly and I do not know what the answer
is, but I am wrestling with this thing. It seems to me that we
may be punishing the American worker by denying them at least
the ability to sell products to these countries that have made
large sums of money off our people from dope. Can we make it
too difficult and could it hurt our ability to export and cost
us jobs while at the same time not really making any progress
against the drug cartels?
Mr. Johnson. Senator Sessions, the struggle that you have
just indicated is, I hope, reflected in the balance that we are
trying to achieve in our approach, which is not just indicating
to companies that there are certain transactions that are
problematic but engaging with our international partners not
just in Colombia but also around the globe because you are
right. If we embark on an approach that just focuses on U.S.
companies and there are other companies around the world that
are perfectly willing to engage in this sort of a transaction,
wittingly or no, then we will not have accomplished what we are
hoping to achieve here which is striking at the heart of this
exchange. That is why we have an approach that just does not
talk about enforcement, that just does not talk about outreach,
outreach to companies here in the United States, but where we
explore broader outreach and where we engage our international
partners through a variety of fora.
Senator Sessions. Well, I guess my question is you are not
prepared--I mean I think we all know that a substantial amount
of money in these Free Trade Zones comes from illegal drug
smuggling. I do not know how much. Some say 25 percent of the
imports to Colombia come out of these zones and are undermining
or around and defeating Colombian tariff laws, but I do not
sense that you are prepared to say therefore that no American
business can do business with those zones; are you?
Mr. Johnson. We are not prepared to say that.
Senator Sessions. But you are saying somehow if you do, you
might not be the best corporate citizen in the world; is that
right?
Mr. Johnson. I----
Senator Grassley. Well, the very least, if they are
knowingly doing it, they are violating U.S. law.
Mr. Johnson. There is a difference between participating
in----
Senator Sessions. Where would the law be? Where would the
violation be?
Mr. Johnson. There is a difference between participating in
a transaction that goes through the zone and knowingly
facilitating a narco-transaction. That is why we have tried to
highlight for companies and for financial institutions certain
red flags about transactions that then may be problematic and
they may not want to become engaged in.
Senator Sessions. Would you be specific on what it is that
would highlight that? Am I using my time too much, Mr.
Chairman?
Senator Grassley. No, no. The only reason I interrupted you
is because--and you further refined what I said, so I was
somewhat mistaken--knowingly participating through these
business endeavors is one thing. I meant to say knowingly
participating in the laundering of money is what the law refers
to; right?
Mr. Johnson. That is correct, sir.
Senator Grassley. So I want to stand corrected on that. I
just wanted to clarify that if they were doing that, they were
violating----
Senator Sessions. I agree.
Senator Grassley [continuing]. Existing law.
Senator Sessions. I think that is correct. But I am not
sure a business who sells to a group of people, some of which
he probably rightly should understand have gotten money from
drug dealers, that is not money laundering; is it?
Mr. Johnson. It depends on the business person's state of
mind, but I can give, if you wanted a specific----
Senator Sessions. Well, let me just say let us just take a
real simple. I have a business in downtown Alabama.
Mr. Johnson. Okay.
Senator Sessions. And a guy comes in who is a drug dealer
and wants to buy a TV from me. And I sell it to him. Have I
committed a crime? Have I laundered money for a drug dealer?
Mr. Johnson. If the drug dealer comes in and wants to buy a
TV from you and that is all you know, then you know it is----
Senator Sessions. Pulls out cash, small bills.
Mr. Johnson. If it is over $10,000 of cash and you have not
filed an IRS Form 8300, then you have got a problem. And you
should be careful if this narcotics trafficker, this drug
dealer comes in and, say, has bank checks that are drafts from
banks that have nothing to do, that seem to have nothing to do
with that transaction. You ought to at least be careful. We are
not saying that if you are not careful, then automatically
prosecution will pursue, but we are saying that as part of this
effort, our overall effort to make sure that those who are
selling poison on our streets are not walking away with profits
or goods or other proceeds from that. People ought to be
careful. They ought to have their eyes wide open.
And the Customs brochure which flags certain items that
folks should be careful about and the FinCEN advisory that also
flags certain indicia or factors that financial institutions
ought to be wary of are helpful. They are steps in what we
think is the right direction.
Senator Sessions. Well, I do not think it is a crime under
the main street business scenario I just gave you. I do not
think that is money laundering, although I am somewhat rusty on
those code sections. But it just troubles me. I think we need
to be careful how we do it. We should not overreact because if
we do not watch it, due to the fact that huge sums of money for
years are pouring into Colombia that are drug profits, most of
what we sell to Colombia is going to be purchased at least in
part from drug profits, and I am not sure we do any good for us
or Colombia to refuse to sell to them under those
circumstances. I do believe that we ought to attack this drug
problem with intensity. I believe that the more we break up the
small drug sales on the streets of America, that is fewer
dollars that end up in Colombia to begin with.
The more we drive down demand and drive down usage in the
United States, we reduce them. That is the best way to reduce
their power and wealth. Also, forfeiting their assets under
traditional law and, for heaven sakes, we do not need to
undermine the law we have already got. We probably ought to
look for ways to increase our legitimate money laundering
forfeiture cases and I think if we could continue to study this
black market peso exchange, Mr. Chairman, we may be able to
identify chinks in their armor there and maybe develop further
ways to disturb this industry which is promoting death around
the world for great personal profit. Thank you for your
leadership.
Senator Grassley. I have no further questions, just a
reminder that if other members who could not be here for this
panel have questions, that you would respond in writing. Thank
you very much for your expert testimony and more importantly
thank you for your ongoing experience on this, and your
testimony suggesting doing what you can do to stay on top of
the problem both involving our government as well as the
encouragement of our private sector. Thank you very much.
Mr. Johnson. Thank you, Mr. Chairman.
Senator Grassley. Our next panelist is a person by the name
of Al James. He is Senior Policy Analyst for the Financial
Crimes and Enforcement Network, and I welcome him today, and I
thank him in advance for his testimony. Here is a person that I
think is going to in some detail shed some light on what is an
incredibly complex system as he takes us through step by step
how the process of money laundering works, how it involves the
use of legitimate American business in the process, and the
role played by the broker that exchanges the dollars for pesos.
We welcome you, Mr. James. Thank you very much.
STATEMENT OF AL JAMES, SENIOR POLICY ANALYST, FINANCIAL CRIMES
AND ENFORCEMENT NETWORK
Mr. James. Thank you, Mr. Chairman. I am very honored to be
here this morning to discuss the workings of the Colombian
black market peso exchange system, perhaps the single largest
avenue for the laundering of proceeds of narcotics trafficking
in the United States. I have been a federal law enforcement
officer for over 20 years. I have spent the last eight years
involved in one aspect or another within investigations of the
Colombian black market peso exchange.
Under Secretary Johnson has already introduced to you the
basic workings of this system. My testimony will expand on his
description and also provide you with the many complexities of
this system. I have submitted a statement for the record and
with your permission, Mr. Chairman, I would like to summarize
that statement at this time.
Senator Grassley. Yes, please do.
Mr. James. As an aid to easily understanding the Colombian
black market peso exchange, it is helpful to first look at the
various entities involved in this system. In its simplest form,
this system involved two countries, the United States and
Colombia. The individuals who participate in this system are
the Colombian wholesale narcotics traffickers, Colombian
dollar/peso brokers, the Colombian importer smugglers of trade
goods, U.S. bankers and U.S. suppliers of trade goods.
The commodities involved in this system are the Colombian
narcotics, U.S. dollars, Colombia pesos and trade goods such as
consumer electronics, cigarettes, liquor, household appliances,
auto parts, textiles and footwear.
The scenario begins with a narcotics trafficker in Colombia
who ships drugs to the United States. In the United States,
these drugs are sold for currency even at the wholesale level.
The Colombian trafficker often owns several million dollars in
currency that is being held in a stash house in the United
States. In order for the trafficker to reap the benefits of his
ill-gotten gains, he must convert his currency into a usable
format by placing it in a bank. Due to the Bank Secrecy Act and
U.S. money laundering laws, the trafficker risks detection by
engaging in large currency transactions with U.S. banks.
As an alternative, the trafficker can sell his currency to
a dollar/peso broker in Colombia. The dollar/peso broker pays
the trafficker in pesos in Colombia. It is important to note
that the trafficker steps out of the transaction at this point,
having effectively laundered his funds. The dollar/peso broker
assumes the risk of handling the narcotics currency in the U.S.
For this reason, the dollars are often sold at a substantial
discount from the official Colombian dollar/peso exchange rate.
In turn, the dollar/peso broker sells dollars to otherwise
legitimate Colombian importers who plan to smuggle their
purchases into Colombia in order to evade Colombian taxes and
tariffs. These smugglers pay the dollar/peso broker in pesos in
Colombia. The dollar/peso broker assumes the risk of converting
the currency purchases from the Colombian trafficker to a form
that can be resold to the Colombian importer smuggler. The
dollar/peso broker does this by using operatives in the U.S.
known as smirfs to place this currency in U.S. banks. The
placement is usually accomplished by either structured
transactions to multiple nominee accounts controlled by the
dollar/peso broker or by deposits to the accounts of businesses
who normally receive large amounts of cash.
In some instances, placement occurs by bulk transfers to
Mexico where the currency is deposited into Mexican banks or
foreign banks operating in Mexico. In either case, the money is
returned to the U.S. by way of these banks' foreign
correspondent accounts with U.S. banks. Once the Colombian
importer smuggler pays the dollar/peso broker for the dollars,
the broker transfers those dollars on behalf of the smuggler to
the supplier of trade goods. These transactions may be in the
form of a wire transfer, a check or a bank draft.
Occasionally, the banks are bypassed entirely and currency
is delivered directly to the supplier of trade goods. In each
of these cases, what is important is that none of these
instruments of payment are drawn on the account of the
Colombian importer. It should be noted that the suppliers are
not always in the United States. In addition to the U.S., the
goods may be shipped from Panama or other foreign ports and may
be supplied by Asian and European multinational manufacturers
as well as those based in the United States. In these cases,
the payment transfers may go from the United States placement
accounts to foreign banks in the appropriate destinations.
To complete the cycle, the trade goods are shipped from the
supplier and smuggled into Colombia. In Colombia, these trade
goods make up what we call the contraband market. That market
is comprised predominantly, as I have stated, of consumer
electronics, cigarettes, liquor, household goods, auto parts,
textiles and footwear. These items are generated by
multinational manufacturers based not only in the United States
but Asia and Europe as well. The legitimate business community
in Colombia has suffered serious economic harm because of a
contraband market subsidized by drug money courtesy of the
narcotics traffickers. The cycle is now complete. The
contraband market generates pesos for the Colombian importer
smuggler.
In conclusion, Mr. Chairman, I want to reiterate what a
honor it is for me to appear before this caucus. As a law
enforcement agent, I am personally acquainted with the immense
damage caused to our young, in particular, and our country in
general by narcotics traffickers. I am also very familiar with
the enormous arsenal that they have at their disposal. They are
hiding in the free enterprise system that is designed to assure
our prosperity.
But as Under Secretary Johnson has stated, we are
approaching them and their organizations in new ways, better
armed by technology, in a more coordinated fashion and in
closer cooperation with our colleagues and other law
enforcement agencies here in the United States as well as
abroad. The initiatives outlined here today by Under Secretary
Johnson are very positive, making it more and more difficult
for the narcotics trafficker to take advantage of his ill-
gotten gains.
By understanding these efforts, we may eventually rid our
country of this terrible plague. Thank you, Mr. Chairman, for
this opportunity to address the caucus on this serious
narcotics money laundering problem.
[The prepared statement of Mr. James follows:]
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Senator Grassley. Well, thank you, Mr. James. I appreciate
very much your visual. Would it be fair to say even though I
would not expect you to be an authority on relationships
between Colombia and other drug producing countries with
Europe, for example, but could you possibly, do you think you
could draw the same sort of a relationship between Colombian
and European business people and smirfs there and that sort of
thing? Or is this kind of something that is unique just to the
United States and to Colombia?
Mr. James. It is certainly predominant in the United States
and back to Colombia, Mr. Chairman, but law enforcement
intelligence does indicate that we are beginning to see similar
operations in Europe and Asia. Actually, wherever Colombian
narcotics are sold, this type of system is beginning to spring
up.
Senator Grassley. The Colombian government released
information to the U.S. concerning black market importers and
the manufacturers of their American products. It was hoped that
the United States government could target American firms in the
hopes of persuading them to cease selling to those suspected of
being associated with the peso exchange. FinCEN itself launched
an initiative that was designed to alert American manufacturers
about the exchange. It also distributed an alert to those firms
importing to Colombia complete with warning signs of
transactions involving narco-dollars. How responsive have U.S.
firms been to these warnings?
Mr. James. In my experience and we are just really
beginning this outreach with the U.S. business community, they
have been to a large degree very receptive to these warnings.
Some have taken considerable steps in dealing with this program
individually and they have also been open to working with us in
a partnership to deal with it together.
Senator Grassley. The previous panel testified that
particularly small firms selling products for narco-dollars
have been prosecuted, but I would like to ask you whether or
not you know of the government prosecuting any major
corporation selling products for narco-dollars?
Mr. James. Not to my knowledge, Mr. Chairman, not at this
date.
Senator Grassley. How can it determine when a company has
been negligent or simply been taken advantage of?
Mr. James. This is a very difficult process of proof, Mr.
Chairman, and it turns to either the knowledge on the part of
the company that they are accepting drug dollars or such a
blatant disregard for the possibility that it can be
demonstrated clearly that they should have known that they are
accepting drug dollars. But those elements of proof at this
time are very difficult to come by and, in fact, increasing the
knowledge and awareness of this problem within the business and
financial community will also help us on the other side of that
problem to demonstrate that a particular company in the future
knew or should have known about this system and tried to avoid
it.
Senator Grassley. Let me go to a key aspect of the exchange
and that is the American bank accounts that serve as depository
for drug tainted dollars. One of the difficulties of tracking
these accounts is the fact that the deposits to these accounts
are consistently less than $10,000 so that they obviously fall
below the reporting requirements. These accounts may be held by
isolated individuals who are not themselves directly involved
with the drug trade but serve as agents of the peso brokers. Is
there any pattern of financial activity that you can share with
us in this public forum that would allow FinCEN to identify the
use of these accounts as black market accounts?
Mr. James. Yes, Mr. Chairman. We have conducted a
continuing partnership with the financial community in regard
to this issue actually preceding the hearing in the House in
1997, and although it is very difficult for a bank to identify
these accounts strictly based on the account holder or the
deposits into that account, it is possible to identify it if
you combine that information with the activity going out of the
account. After working with the financial community in that
regard, we are very gratified to see that the suspicious
activity reports filed with the government by the banking
community have increased substantially in identifying specific
black market peso related transactions to alert law enforcement
of this possibility.
Senator Grassley. Okay.
Mr. James. The bankers--excuse me.
Senator Grassley. Well, I think you have answered that
question and I get from your answer there that that is an
initiative of our government to encourage banks to do more. Are
there strategies that banks are pursuing on their own
initiative to identify such accounts?
Mr. James. Yes, there are. The banks are instituting
artificial intelligence programs within their banking computer
systems to further identify black market peso related
transactions where it would be difficult for an individual to
spot these. The computers are being tuned to take advantage of
their expanded knowledge of what these trends and patterns look
like. And once again, when they are identified, to file
suspicious activity reports, alerting law enforcement of this
possibility.
Senator Grassley. Yeah. Give us some idea how these peso
brokers get people, these smirfs, et cetera, to open accounts
for them in the United States and what type of people, if there
is any characterization you could give about them?
Mr. James. The normal process can take two routes. It can
either be a Colombian tourist coming to the United States who
is absolutely innocent of drug trafficking but may go to a
black market peso broker to buy dollars to fund a trip and that
way the peso broker finds out that individual is coming to the
United States and requests that while they are here they open
one or more bank accounts in the area that they are visiting in
their name, using their correct identification, but then
turning over control of that account to the peso broker. That
accounts for about half of these nominee accounts that we know
of.
The other half are usually opened by individuals who are
peripheral players or actors in the narcotics distribution
networks.
Senator Grassley. So people who are already on the edge of
the law?
Mr. James. Yes, sir.
Senator Grassley. And I suppose also tremendous financial
incentive to do this?
Mr. James. They are paid to do this, absolutely. So are the
Colombian tourists.
Senator Grassley. And paid well, too?
Mr. James. Yes, sir. Usually it is. It is not uncommon for
the peso broker to offer $1000 or $2000 to a Colombian tourist
to open two or three accounts, basically almost funding their
trip to the United States.
Senator Grassley. How many U.S. accounts does a typical
peso broker need in order to conduct business?
Mr. James. The peso brokers are pyramidal in structure and
may handle millions of dollars at a time down to tens of
thousands of dollars at a time. The typical peso broker
smirfing operation that we have encountered usually has 50 to
100 nominee accounts for any particular cell.
Senator Grassley. How many accounts?
Mr. James. 50 to 100 accounts for any particular cell that
is buying black market dollars and then having that cell
deposit them into a series of nominee bank accounts.
Senator Grassley. Now, we want to remember the history of
the black market peso exchange. It is not a product of the drug
cartels, but it existed a long time beforehand as a result of
high tariffs and duty rates that Colombia charges on imports.
How did the peso brokers obtain dollars from the drug cartels
before involved in the exchange?
Mr. James. Actually the dollar, when the black market peso
exchange initially arose, the Colombian peso broker obtained
his dollars not from the drug cartels but from Colombian
exporters who might sell such items as coffee or emeralds or
flowers in the United States. Those sales would generate
dollars and rather than repatriate those dollars to Colombia
through a correspondent banking relationship, the peso broker
would step in, buy the dollars in the United States, deposit
them to his account and in turn pay the Colombian exporter in
pesos in Colombia.
Senator Grassley. Could you shed some light on the fact
that peso brokers get a good cut and then obviously take a good
deal of the profit out of the drug trade? Why don't the drug
cartels deal directly with Colombian importers who need
dollars?
Mr. James. I think that the answer is twofold. First of
all, the Colombian peso broker was there first and he has a
clientele already built up with the Colombian importers and
they were comfortable doing business in that regard. The other
half of the answer is that these Colombian businessmen do not
wish to be associated with the drug cartels either, and
although things have evolved to the point where they surely
must know they are buying drug dollars, they would not wish to
contact the cartel people directly in that regard.
Senator Grassley. You have mentioned that this is the
largest money laundering system known to the U.S. law
enforcement. Are there any other similar systems even though
this one might be classified as the largest?
Mr. James. Yes, Mr. Chairman. The black market peso
exchange is an underground financial system. There are similar
systems throughout the world which arose for similar reasons.
The Hawala system prevalent in the Middle East and India and
the Chinese underground banking system in use in the Far East
are examples of similar systems. All of these underground
financial systems are especially susceptible to money
laundering by criminal enterprises arising from the ethnic area
that gave rise to the financial system. The black market peso
system is the largest because of the huge financial magnitude
of the Colombian narcotics enterprise.
Senator Grassley. How is the narcotics trafficker making a
profit on these dollars if he is selling them for less than
face value?
Mr. James. Mr. Chairman, the narcotics trafficker's
original margin of profit is so large that they can afford to
offer their dollars for sale at substantial discounts in order
to reduce their risk of detection. Even after that substantial
discount, they will still make a tremendous profit on their
proceeds.
Senator Grassley. If a law enforcement officer intercepts
the drug dollars after they have been sold and transferred to a
business account, are they still subject to seizure as drug
proceeds?
Mr. James. While the dollars, Mr. Chairman, may still be
subject to seizure, these circumstances present law enforcement
with a new set of problems. The law enforcement officer in
order to sustain this seizure must prove that the current owner
of the proceeds, that is usually in our case here the supplier
of the trade goods, knew or should have known that these
dollars were generated by an illegal activity. As we have said
here, this often may not, in fact, be the case and even if it
is the case, it is often very difficult to prove.
Senator Grassley. Senator Sessions.
Senator Sessions. Thank you. Mr. Chairman, I was looking at
that diagram or picture there. It is a good thing. It strikes
me as very interesting that the Colombian drug smuggler's cash
American money that his agents receive for the sale of drugs in
the United States, they try to keep that in United States
banks? That is not carried back to Colombia in the form of
cash?
Mr. James. The most general answer is no, Senator Sessions.
That is generally not what they need in Colombia. They need
Colombian pesos. However, as Assistant Commissioner Tischler
described earlier, since the cartels have been fragmented in
the last five or six years, it is very difficult to state
anything in absolutes on this process. And certainly we have
numerous instances of large amounts of currency being bulk
transferred back to Colombia, although that is not the
prevalent means of laundering it.
Senator Sessions. The cartels are fractured but they are
still capable of distributing as much cocaine as we can consume
in the United States?
Mr. James. Yes, sir.
Senator Sessions. Now with regard to the transfer of the
preferred method of transferring American cash to American
banks, that strikes me as--you have been in the FinCEN group--
how long have you been with them?
Mr. James. I have been with FinCEN directly for about one
year, sir. I have been with IRS criminal investigation for 21
years prior to that.
Senator Sessions. Well, it strikes me that is the best
target of actually seizing the money and breaking the cycle.
Would you comment on that? That bank, identifying that as a
deposit from an illegal drug sale, that money would then be
forfeitable as the proceeds of a illegal drug sale. That is a
correct statement of the law on that, if you can prove it?
Mr. James. That is the catch, yes, sir. If you can prove
it.
Senator Sessions. So the question is can we help you or can
you improve your ability to identify those deposits and
increase your seizures in American banks?
Mr. James. Yes, sir, I think we can improve our ability. As
a matter of fact, it has become clear in a series of close and
very cooperative partnership meetings with the American banks
involved in this process that what we need is to bring a third
party, that is the American business community, to the table
along with us. And I believe that the three of us, the three
groups working together, can make some significant inroads in
this process which we have been unable to make to date.
Senator Sessions. When you say bring the business to you,
does that mean to help you obtain the information you need or
are you calling on them to stop selling their products to
people who might otherwise appear to be on the surface
legitimate purchasers of products?
Mr. James. No, Senator Sessions. I appreciate you asking me
that question. We are not advocating that American companies or
any other companies for that matter stop selling trade goods in
this process. The cancer in this process is really the
financing mechanism for that international trade. The demand, I
believe, will exist in Colombia even though the drug dollars
are taken out of the system. If you will, the Colombian will
still want to purchase the computer, the washing machine or
what have you.
So what we need to do is see to it that these goods are not
financed initially with these narcotics dollars and I believe
that is where the business community can help us with
information and policies which will allow them and their
bankers to be more careful about the financing mechanisms that
they accept.
Senator Sessions. Well, I do not know. I do not know
whether you can do that or not. Could the Colombian drug
dealers with their large sums of money, is it difficult for
them to convert that into the euro, for example, and purchase
products from Europe? What kind of controls are available
there?
Mr. James. I must admit, Senator Sessions, that the law
enforcement community is to some degree holding its breath to
see exactly how that is going to work. However, the Financial
Action Task Force sponsored by the G-7 countries has encouraged
and been considerably successful in getting the European
communities to institute financial and currency reporting
mechanisms similar to those in the United States which should
generate the same resistance to this process that we have
encountered here in the U.S. However, since it still happens in
the United States, I believe, of course, it will happen with
the euro as well.
Senator Sessions. Well, are you suggesting that this is a
silver bullet, a major breakthrough, a way that we are going to
deal a new and powerful blow against the cartels?
Mr. James. I am not sure I would describe it at least as
the ultimate silver bullet, but I do believe that by making it
more and more difficult for the Colombian trafficker to reap
the benefits of his ill-gotten gains, we will make serious
inroads in his ability to sell this poison on our streets.
Senator Sessions. Well, we have been working at it for 20
years.
Mr. James. Yes, sir.
Senator Sessions. And we have thought we have had some very
good programs that never seem to have done much, make much of a
dent into this effort, and I do appreciate your work and
dedication to it. It is an often thankless task and often
dangerous and we complain about the government in Colombia, but
the whole of the Colombian Supreme Court virtually was
assassinated. Judges who have stood up against these
traffickers are killed on a routine basis. Police officers have
to be incredibly courageous to do their duty and it is a very,
very difficult thing to think that we are going to solve our
drug problem by focusing on Colombia.
I am not sure where we are headed. I think we must not lose
our own commitment to reduce demand here through law
enforcement and education and treatment and that sort of thing,
but we certainly are dealing with an empire that is powerful
and deadly and rich and I appreciate your work on it. Thank
you, Mr. Chairman.
Mr. James. Thank you.
Senator Grassley. Thank you, Senator Sessions. Mr. James,
that is the last questions we have for you at this particular
moment. And so I want to thank you for your participation and
for particularly the hard work you went to to provide the
visuals for us today for a complete understanding of this.
We are going to ask everybody to stay--you can leave the
table if you want to. We are going to ask everybody to just
stay seated for a minute. We are going to have just a slight
delay. I will explain the delay this way, that our third panel
is someone who has very extensive experience with the black
market peso exchange. The testimony will outline how someone
gets started as a peso broker, how connections are made and why
the system works the way it does and we are going to refer to
our witness as Carlos. Obviously not the real name.
He has agreed to testify only with the agreement that we
keep his identity secret. He will be hidden in order to protect
himself and his family from possible retribution. To
accommodate this, at this point, we are going to ask the
security to close the doors, ask the audience to remain seated,
and also for the cameras to be turned off temporarily or
pointed away from witnesses at this time, especially the camera
behind the dias. So we will just be very patient while this all
takes place at this point.
We are ready to commence now, and I thank you very much for
agreeing to be here today, and as I indicated before you came
in, we are going to refer to you as Carlos. We thank you very
much and would you please begin your testimony and we want you
to feel very comfortable and to know that we will do whatever
we can to make sure that your identity is not known. Would you
begin with your statement, please?
STATEMENT OF ANONYMOUS WITNESS, ``CARLOS'', A PESO BROKER
Carlos. Yes. I am a little bit nervous so I will speak
slowly. I have been in business in Colombia for more than 30
years. I have owned several business companies dealing in
different trades. Before I talk how I deal on the black market
peso exchange, if I could, I would like to describe briefly how
the Colombian black market exchange started.
The birth of the black market was about 30 to 35 years ago.
When I got into business in Colombia, Colombia had and still
has high import tariffs and expensive taxes. Because of the
high taxes and tariffs combined with the fact it was actually
illegal to possess U.S. currency in Colombia, the black market
was created. Back then if you were caught with U.S. dollars,
you could go to prison depending on the amount of dollars you
had. That has changed but today still anyone who wants to
legally import goods into Colombia will have to pay up to 20 to
25 percent in taxes and anywhere from five to 35 percent in
duties and tariffs. This can add an additional 60 percent to
the cost of imported items.
When the government made it legal to possess dollars, a
peso broker like myself had to just make sure you offer a rate
at a better exchange rate than the government so you can make a
profit. In other words, you had to sell it cheaper than what
the government used to sell it.
Now I will explain how I am a dollar/peso broker and how
this system helps launder millions of dollars of drug money for
narcotic traffickers. In the 1980s, I was already buying checks
in U.S. dollars and exchanging them for Colombian pesos. Since
I was already doing business in the United States, a business
friend of mine asked me if I was interested in buying U.S.
dollars in bulk cash in the United States in exchange for being
given Colombian pesos in Colombia. I knew this money belonged
to drug traffickers because of the threat that comes with doing
this business. I will talk about this, the risk, shortly.
Everyone in this black market business knows that U.S. dollars
they are dealing in are from drug sales in the United States.
This was a very lucrative business for me and once you start
it, it is difficult to stop. I learned this business very
quickly.
Narcotic traffickers have a basic need. They need their
drug dollars in the United States laundered and they need pesos
in Colombia. As I said, I started laundering money for drug
traffickers many years ago. I worked with these traffickers,
buying their U.S. currency and laundering their money by
selling their dollars in return for pesos. These drug dollars
are used to buy goods in Miami, New York and other places. The
goods are smuggled into Colombia and sold in the market at
cheap prices. No one can compete with these prices.
Let me describe a typical business day for me. I receive a
phone call from a representative of a drug trafficker. This is
a person that is in charge of laundering the money for the
trafficker. This happens sometimes three or four times a day
from different traffickers because I have built my credibility
with them. Sometimes he visits you at the office. As much drug
money as the trafficker has from the sale of his drugs, I can
sell that amount for pesos in the black market. We make a
contract, like a handshake, no paper, and determine what
percentage the exchange will be.
When I buy the U.S. currency I buy it for a fraction price
or a discount no matter what the price is on the black market.
Sometimes I watch the exchange rate so before I sell these
dollars, I have to watch for a few days to see what the selling
price is. It is a like a stock on the stock exchange. It goes
up and down. If the black market exchange rate and the sale
price changes and drops, the traffickers do not care, they just
want the price we fixed before. When I receive the dollars in
the U.S., I have eight to ten days to give them the equivalent
back in the pesos minus my commission.
In the meantime, the phone is ringing and I am being asked
if I have any dollars for sale. These phone calls are from the
contrabandistas and from associates that I know that are
businessmen that import U.S. and other goods into Colombia.
They do this by smuggling the goods in order to avoid the high
taxes and tariffs I mentioned earlier. In Colombia, we call
these men contrabandistas. They buy these U.S. dollars, the
drug dollars I have for sale, and pay me in Colombian pesos.
They use the drug dollars in the USA to pay for the U.S. goods
they import into Colombia. Many times they bring in containers
of goods like appliances or computers or so on. It could be car
parts. They avoid paying the government by paying off a Customs
official at a port in Colombia. Other times they just smuggle
by boat from Panama or Aruba.
The process I have described helps to keep the black market
going. Because of taxes, we choose to do business illegally
outside of normal legal channels established by the government
of Colombia. Other brokers and I work together to keep the
dollar/peso exchange rate favorable to as compared to the
exchange rate established by the government of Colombia. When
it is said that the peso/dollar broker sells on the black
market, it means he sells the dollars to the numerous
contrabandistas in Colombia who have need for U.S. dollars in
order to pay for the goods and services in the United States.
If a contrabandista needs $500,000, for example, in U.S.
dollars in order to pay for household appliances in the United
States, the contrabandista will call me or another broker like
myself and ask to buy the U.S. dollars I have so he can pay for
appliances in the states.
I sell the contrabandistas U.S. dollars at an exchange rate
that is better than buying pesos from the government but an
exchange rate that is higher than a rate that I contracted with
the trafficker. The trafficker gets pesos, I make money, and
the smuggler pays for his goods in the U.S. The smuggler gives
me the bank account information or the information on the
company from which he is purchasing appliances and I wire the
currency from one of my accounts in the U.S. paying the debt
for the appliances. This is usually to a company or a
distributor in the U.S. This is how the U.S. dollars are
laundered and changed into pesos without the dollar ever
physically leaving the United States.
I have sent large amounts of currency all over the United
States, particularly to New York and Miami, Florida, to
authorized distributors of Sony, Whirlpool, Kodak, General
Electric and many more. 90 percent of the money sent to
Whirlpool was for authorized distributors in Miami. I have also
sent money to companies that deal in fabrics, yarn, cosmetics
and other durable goods. As much drug money as a trafficker
has, I can sell it for pesos.
Now let me talk to you about the risk. I mentioned that the
trafficker people give you eight to ten days. These are
business days. Once you agree, you have to deliver him pesos.
There is rarely an exception. Basically after the contract you
make, the trafficker has no more risk. You do. If the
trafficker does not receive the money in time or not at all,
they will torture or kill you or your family. In many cases,
they will burn the house down with a relative inside unless
they are paid in full.
I personally know a dollar/peso broker like myself who lost
several hundred thousand dollars in the U.S. because of the
police. The traffickers sent thugs to his mother's house and
were going to murder her by burning her house down with her
inside. Some brokers I know helped and paid off the debt to
save her. Sometimes people are not so lucky. If they find out
you are an informer, they will kidnap you, even if they are
paid. Sometimes the informer is tortured and killed. When these
traffickers are ripped off, they either kidnap you or someone
close to you. Then they tie the person to a pole in a hidden
room. They torture you and let you die of starvation in your
own filth and waste.
In conclusion, I would like to say that as a result of
extremely high taxes and tariffs, the Colombian government
created its own black market of peso exchange and the
contrabandistas. For businessmen, smuggling has become a
regular part of the Colombian business system in order to
survive. That is why tons of merchandise is smuggled in by the
contrabandistas which results in their need for U.S. dollars to
pay for the smuggled merchandise. There is no limit to the
amount of U.S. currency these contrabandistas can buy because
the number of contrabandistas in the trade is so numerous. In
my opinion, the way to stop this problem is for the government
of Colombia to reduce these ridiculously high tariffs and
taxes. This would allow Colombia's businessmen to import goods
and operate legally within the Colombian business system. This
would immediately stop the contrabandistas since it would be no
longer profitable to bring in smuggled goods.
[The prepared statement of anonymous witness ``Carlos''
follows:]
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[GRAPHIC] [TIFF OMITTED]60125.030
[GRAPHIC] [TIFF OMITTED]60125.031
Senator Grassley. We thank you very much, Carlos, for
sharing your experience with the United States Congress and for
your willingness to be here to be a real live example of a very
important, probably the most important, intermediary in this
process of getting the American profit from drug trafficking
out of our country home to Colombia.
I understand from your testimony that the traffickers will
give you a large amount of money and then expect you to return
a percentage of it to them in pesos within a certain time
frame. You said usually eight to ten business days. Do the
traffickers require you to put up any collateral for the
dollars that they ask you to exchange?
Carlos. The only collateral that you put up is your life,
your family, no other. They think that is more important than
properties.
Senator Grassley. So you sacrifice everything, in a sense.
Carlos. Exactly.
Senator Grassley. Do you always, in the truest sense of the
word, is what you said that you have to put up for collateral
your life and the lives of loved ones, is there some element of
trust that is established over time?
Carlos. Oh, yes, very much. They will not sell to anybody I
mean off the street. They have to know you, your background,
that you pay well, that you are responsible in that kind of
business, and eventually they will sell you 100,000, next deal
will be 200 or 300, it depends how well you respond to them.
Senator Grassley. And you obviously have had some
interchange with other peso brokers, I assume. Do you think
that in your case or in every case, there is no collateral
other than as you say family and friends whose lives are at
stake that has to be put up or in some instances does it take
collateral?
Carlos. No, there is no collateral.
Senator Grassley. Okay. That is good enough.
Carlos. Oh, okay.
Senator Grassley. Is it more accurate to describe peso
brokers as independent agents working for themselves or as
agents of the drug cartel?
Carlos. No, independent. Everybody is independent.
Senator Grassley. Do the businessmen, the smugglers that
you call contrabandistas, know where the money is coming from?
Carlos. 99 percent of them. It is common knowledge in
Colombia that the black market is from drug money.
Senator Grassley. Okay. You indicate in your testimony that
you send money to authorize dealers of U.S. goods, for example,
Whirlpool. What about actual manufacturers or companies that
produce these goods?
Carlos. Very rarely. It is almost directly distributors
through Miami, New York. Very rarely to the manufacturer
himself.
Senator Grassley. You are saying that some companies at
least at the distributor or authorized dealer level know that
the goods are being sold to Colombia. Does this mean that some
also know the source of the money?
Carlos. About the distributors, I can say some do. Now the
manufacturers themselves, I do not know.
Senator Grassley. How much will a peso broker make on an
average transaction?
Carlos. It can range from one to 1.5 percent.
Senator Grassley. Are money brokers like yourself regulated
by the Colombian government?
Carlos. No, not at all.
Senator Grassley. You mentioned in your testimony that you
have used wire transfers to pay for goods not only in the
United States but in other foreign countries. What other
countries have you done transactions with?
Carlos. Japan, Panama, Brazil, Venezuela, many others I
don't remember, the Orient, South Korea.
Senator Grassley. Yeah. What about Europe?
Carlos. Yes, but very little. Some to buy some machinery.
Senator Grassley. Okay. Can you tell us specific companies
that receive funds?
Carlos. Can you repeat the question, please?
Senator Grassley. Could you tell us specific companies that
have received funds?
Carlos. I can tell you the distributors of Whirlpool,
General Electric, Johnson and Johnson. I can go on to list many
others. If I have more time, I can.
Senator Grassley. I would suggest that what you do then in
conjunction with my staff so we preserve your identity make
sure that we have as long of a list as you can give us of
companies. I should say, as you said, distributors of companies
that you have done business with, that you know have received
specific funds. Do they look at what amount and which account
it is to be credited to?
Carlos. The distributors just look at the amount. They call
the bank and they see if the money is credited to the account
and that is it.
Senator Grassley. Okay. Senator Sessions.
Senator Sessions. Thank you, Carlos, for sharing your
insight into this problem. I think some of our free trade
advocates would agree that high tariffs and high taxes cause
black markets to begin with and I think you have made that
point. Let me ask you do you have any idea what percentage of
the sales of these kind of consumer goods that go to Colombia
are purchased one way or the other by drug laundered funds?
Carlos. The smuggled ones, the smuggled goods?
Senator Sessions. Yes. Smuggled ones, I guess, at first.
Carlos. Yes, the contrabandista. I would say 95 percent.
Senator Sessions. What would happen if there were some way
that the United States could stop its businesses from accepting
funds and stop shipping products? Would the brokers be able to
find other countries that would sell the products?
Carlos. It is not the question of the brokers, the peso
brokers. It is a question of contrabandista. It is a question
of the businessman. He will probably buy goods from another
country. I am sorry. They can buy shoes from Brazil, which is a
very big article, or some other things from Venezuela or from
South Korea. Many other countries will sell.
Senator Sessions. Are there some of these distributors who
are openly aware that this is directly drug money or do you try
to avoid explicit recognition of that fact?
Carlos. Like I said before, it is common knowledge. A lot
of them do know, but if they ask me or they ask the smuggler,
they will probably say it is not. But it is common knowledge
and most of the distributors in Miami or the free zone of Miami
are from Colombians, are Colombian owned companies.
Senator Sessions. So the free trade zone in Miami, the
people who are making these transactions are many, a large
percentage are native Colombians?
Carlos. I will not say all of them, but, yes, and they do a
lot of business with Colombia.
Senator Sessions. And is that who you deal with yourself?
Carlos. Mostly distributors--they are all over. To tell you
the truth, it is all over Miami, not only the free zone,
distributors in Miami and a lot from Panama.
Senator Sessions. Is it fair to say you often attempt to do
business with people who have Colombian connections,
distributors of merchandise?
Carlos. Yes, again, but I am not the buyer of the
merchandise. The contrabandista is and he tells me who to ship
it to.
Senator Sessions. And so you do not personally negotiate
the purchase.
Carlos. I am not a contrabandista.
Senator Sessions. Okay. But this is from your information,
what you have learned over the years.
Carlos. 100 percent.
Senator Sessions. You have mentioned the fact that if you
do not follow through on your commitment to drug traffickers
that you and your family's lives are in danger. Is it fair to
say that throughout the nation of Colombia, that law
enforcement people and others who take action against these
cartel members, that their lives and family's lives are in
danger?
Carlos. I am sorry. I lost--could you rephrase, please?
Senator Sessions. Yes. When you deal with a Colombian drug
cartel, you have to follow through on your commitments.
Carlos. Yes.
Senator Sessions. Or you or your family's life is in
danger?
Carlos. Yes.
Senator Sessions. Share for us the extent to which
throughout the nation of Colombia, judges, police, and others
who challenge the cartel, to what extent are their lives and
their family's lives at risk?
Carlos. Very much. Lately, the Colombian police have done a
lot. Colombian banks. Now it is very hard to be a Colombian
broker, a peso broker, by the bank's regulations. I will say
the last two years and with the present person the laws are,
banking laws are very strict. It is not easy to deposit $20,000
or $30,000 in a bank without being noticeable. Before it was.
So now it is very hard to be a dollar/peso broker in Colombia.
It is very dangerous for Colombian laws.
Senator Sessions. So the Colombian government is making
some successful steps toward making it more difficult to
launder these funds?
Carlos. Oh, yes, yes, they are.
Senator Sessions. And but ultimately you believe the black
market will continue. I believe you said to stop this problem,
it will be necessary for the government of Colombia to reduce
these ridiculously high tariffs and taxes. Do you think it will
continue as long as you have a 60 percent tax in effect on
imported goods?
Carlos. Yes, I heard that Ms. Fanny Kertzman and maybe it
will help her what I am going to say. In Colombia, when you
import something, right off the bat, you have a 16 percent tax,
sales tax, plus the tariffs, plus a lot of other expenses and
plus a lot of other paperwork. If you really want to stop the
black market, you can do it I will not say today, but if you
reduce drastically those tariffs and the taxes, it will last
about a month, and everybody would become legal.
Senator Sessions. There would not be any advantage to being
illegal; is that correct?
Carlos. Yes. What I am going to say is going to sound a
little awkward, but these contrabandistas are legit
businessmen. Okay. They buy the funds. I understand this. But
they are not, they would rather do legit business than what
they are doing now. Now it is uncomfortable and these are
people who want to make a living importing merchandise. If the
tariffs went down, like in the United States, you do not have
cars smuggled in or textiles. Your tariffs, I suppose they are
very low. So it is not worth it to smuggle anything in. So if
the tariffs and taxes were lower, nobody will go through the
hassle of trying to bribe a Customs officer or anything like
that.
Senator Sessions. Thank you very much for providing us this
rare insight into how this business actually occurs, Mr.
Chairman, and, Carlos, we thank you for sharing it with us and
I understand the need for the security and we thank you for
coming.
Carlos. Thank you. Yes.
Senator Grassley. One last thank you and would you please
stay seated until we know that everything is all right. And I
think the cameras should be a little more cautious about being
turned off or turned away from the witness. I do not think they
were when we brought the witness in and I would like to have
respect for his security. Even though he is hooded, it is still
very important that we do that. So when the police say that it
is okay to proceed, then we will proceed and when you are out,
then I will introduce our fourth and last witness. Is it okay
to proceed now? I want to thank all in our audience for your
cooperation for the safety of Carlos.
Followup Question for ``Carlos''
In your testimony, you mention various companies that do
business in the Black Market Peso exchange. Could you list
these companies that have received funds, and mention some of
the items that are sold?
Carlos supplied the following list:
Companies: Sony; Whirlpool; Kodak; General Electric; Madame
Shikse & CIA.LTD; Caja Agraria; Comrecializadora Siglo XXILLDA;
Multicentro Del Blumer C.A.; Surtiblumer C.A.; Motorola; Aiwa
Electric; and Toshiba.
Goods: Scotch (Black Label-Johnny Walker brand); Marlboro
Cigarettes; Johnson and Johnson; Mattel Brand Toys; Cell Phones
(manufacturers Erickson and Nokia); Emerson; Perfume; and
Patton Ceiling Fans.
Senator Grassley. Our fourth and final panel consists of
Ms. Fanny Kertzman, Director General of Taxes and Customs for
the Government of Colombia, and also we have another witness,
former U.S. Ambassador to Venezuela, Michael Skol. Mrs.
Kertzman was recently appointed by President Andres Pastrana
and I welcome her and thank you for your courage in appearing
before the caucus today, and Ambassador Skol, you served as
ambassador from 1990 to 1993 and you are currently president of
Skol and Associates, a consulting firm here in Washington, D.C.
And before you begin, Ms. Kertzman, I want to thank your
ambassador who was here for a short period of time this morning
for his interest in this issue not only for today's appearance
but also because he has expressed concern over these very
issues so many times that he has visited my office and we very
much appreciate your president's interest in this issue, his
cooperation with our country, his trying to make very
substantive changes within his own country, but also I think
the presence of your ambassador on these issues before members
of Congress is an appreciation or an expression of that as
well.
And my staff reminds me that I pronounced your name wrong.
Mr. Skol.
Mr. Skol. Thank you, sir.
Senator Grassley. You bet. Ms. Kertzman, would you proceed,
please.
STATEMENT OF HON. FANNY KERTZMAN, DIRECTOR GENERAL OF TAXES AND
CUSTOMS, GOVERNMENT OF COLOMBIA
Ms. Kertzman. Thank you very much. I want to thank the
Senate Caucus on International Narcotics Control and especially
your chairman, Senator Charles Grassley, Senator Sessions, for
the opportunity to address one of the most serious problems
facing Colombia which is contraband. The government of Andres
Pastrana has made a point of his fight against corruption in
general and one of the most important points is the fight
against contraband. Contraband in Colombia amounts to near $5
billion a year, which means with a total import of $15 billion
a year, it means that almost 25 percent of all the imports that
are made into Colombia are contraband.
And the reason for that is not that the taxes are very
high. We lowered our taxes on imports in 1992 and what happened
is that contraband raised by the result of opening the economy
and I think that the main reason for this huge amount of
contraband into the country is mainly the narcotics
trafficking. The problem of narcotics trafficking is not only a
problem of the U.S. or only a problem of Colombia. It is a
problem for all of us. For Colombians, we have the harm that is
done to our youth just the same as here in the U.S., but in
Colombia, we have the problem of corruption, contraband, the
danger that people are--you were asking now this other witness
about the danger that people are in in Colombia. It is not only
the judges, the policemen, the army, it is also us officials of
Colombian government that we have to go protected. I have about
nine guards. My family has about six guards and it is only
because we are fighting against contraband and tax evasion.
It costs, contraband costs to the Colombian state, each
year about $840 million in tax revenue and duties that are not
paid. And why there is such a high contraband is not to pay
duties so to make unlawful competition to the other producers
in Colombia, but also to launder money as I said. Also there is
contraband of chemical precursors and the contraband of the
point of view of export of illegal substances.
The link between narco-trafficking and contraband is very
clear. This merchandise that is smuggled into Colombia is
bought with an exchange rate for the dollar of 1,000 pesos per
dollar when the rate in the market is 1,600 pesos per dollar.
That is why it is such a good business to smuggle goods into
Colombia and it adds to the profits of the narco-traffickers. I
have to stress the point that the dirty dollars are not
deposited in Colombian banks. They, you just heard all the
explanation of how it works, but I want to make clear that in
Colombia, it is not possible to open an account in dollars,
only in pesos.
The dollars that come into Colombia sometimes come dollars
in cash. When we caught dollars in cash, it is about $300,000
every time they are caught at the airports with people, in
their luggage or taped to their bodies, but that is not the
most common way of laundering the profits of narcotics. All the
actors in the chain of contraband are accomplices to this
crime. The producer, the manufacturer of the goods here in the
U.S. or in Japan or in Korea, who knows that he is selling the
goods to someone that finally will smuggle them into Colombia.
The distributor who is selling the goods to the smuggler,
the peso broker, the smuggler itself and the consumer in
Colombia who buys the smuggled goods know that the product he
is buying was paid with money from narco-traffickers. All of
them are equally guilty of the same crime, that they are
selling goods that are going to be smuggled into Colombia and
paid with dirty money.
With all these problems we have with contraband, I would
like to stress that we are working very closely with U.S.
government. We have received all the cooperation that we need,
especially from the U.S. Customs Service, the Department of the
Treasury, Department of Justice, DEA, FBI, FinCEN, OFAC, and in
general the agencies that somehow are related to this issue. We
are signing an agreement with Customs. It is all ready for the
signature and I think it is going to be signed on September
that will be interchange of information between U.S. Customs
and the Colombian Customs and we are working together with them
already in the cases, the specific case of contraband and money
laundering.
For the first time in Colombia, there are people in jail
for contraband. Contraband is a crime and tax evasion is also a
crime in Colombia, but there is no one in jail for tax evasion.
Now in Colombia there are about 20 or 22 people in jail for a
case of contraband and for you it might be a very low figure,
but for Colombia it is a record to have 22 people in jail for
contraband.
There also has been some progress with the private sector.
We are trying that the private sector be aware that they cannot
sell their goods to smugglers and there are some companies such
as Whirlpool Corporation and Daewoo in Korea that have as a
policy not to sell to the contrabandistas. And Whirlpool
Corporation just signed a compliance agreement with the
government of Colombia that they are not selling through the
distributors in Miami and in Panama. They are selling only one
unit of every dishwasher or something like that, and Daewoo has
a policy not to sell to the Sanandresitos in Colombia.
For those who are not aware what the Sanandresitos are,
this is our big malls that exist in Colombia where they sell
only smuggled goods. There are Sanandresitos in every major
city in Colombia. People go to buy appliances and liquor,
cigarettes; it is much cheaper than in the legal market, of
course, because they are not paying taxes. They are very well
organized and it is a phenomenon that I think it exists only in
Colombia.
There are cases of contraband that are very clear. The case
of tobacco, for example. Nearly 90 percent of the total of
cigarettes imported into Colombia are contraband. Local
companies have 55 percent of the market. 45 percent of the
market is imported cigarettes. Only ten percent of them are
imported legally. 90 percent of all the cigarettes that come
into Colombia are contraband. In the case of liquor, 85 percent
of the total liquor that is imported in Colombia is contraband.
Six years ago there were 18 legal distributors of imported
liquors in Colombia. Now only three of them remain. They went
into bankruptcy because of the unlawful competition of
contraband. For Colombia, it is a problem the Colon Free Trade
Zone located in Panama. The Panamanian government has been very
reluctant to provide figures regarding exports from the free
zone, but in Colombia, we estimate that $1.2 billion a year
come from the Colon Free Trade Zone illegally into Colombia.
The Sanandresitos buy their goods mainly in the Colon Free
Trade Zone.
We are trying to work together with U.S. government in this
fight against contraband. We are asking for funds to buy X-ray
machines for the ports and the airports. They do not exist. We
want to work together with the U.S. government, but I want to
say again that contraband is not a problem only in Colombia.
Such as drug trafficking, the problem is international problem,
not only a problem of U.S. and Colombia, but all the countries.
I just want to end by saying that contraband is the second
stage of narco-trafficking. It is the most efficient way of
money laundering and from that point of view we together have
to work on this. Thank you very much.
[The prepared statement of Ms. Kertzman follows:]
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Senator Grassley. Thank you, Ms. Kertzman. Ambassador Skol.
STATEMENT OF AMBASSADOR MICHAEL SKOL, PRESIDENT, SKOL AND
ASSOCIATES
Mr. Skol. Mr. Chairman, Senator Sessions, thank you very
much. It is an honor and a pleasure to be here to contribute
something to this discussion. The whole issue of contraband/
money laundering is so complex, you cannot explain it in a
sound bite and I think that is one of the reasons why there has
not been the kind of activity on the part of people outside of
the law enforcement community in the United States and it is
hearings like this and the accompanying publicity which I think
we hope will bring more companies, more people to understand
what is going on and therefore to do something about it.
I also want to say that it is frankly a great honor to be
sitting next to Fanny Kertzman who is one of the great dynamos
against drug trafficking, against money laundering, against
contraband in Colombia. You have heard all about how this
system works. What I want to focus on is the point of view of
the business community, both the American business community
and the Colombian business community, and also to say something
about business ethics. What is the right and proper in addition
to the commercial thing to do here?
Let me point out something that has been said over and over
again, but I want to focus especially on it. This process,
contraband money laundering is bad, it is a terrible thing for
two very good reasons. One is that it is an integral part of
drug trafficking. Without money laundering, you would not have
drug trafficking. For that reason it must be stopped. But from
another point of view, it is also a terrible thing because of
what it has done to legitimate free enterprise, to the free
market, to honest and legitimate business in Colombia or
anyplace where this touches upon.
Let me give you an example in a specific industry. I know
the caucus is familiar with the example of the footwear
industry, but it is worth putting on the record what has
happened in the last years. During 1998, some nine million
pairs of shoes were ``legally,'' and I say ``legally'' in
quotes, imported into Colombia. Of these, some seven million,
all imported via Panama's Colon Free Trade Zone, were claimed
at Customs to be valued at under $2 a pair. Five of the seven
million were valued at under $1 a pair, and of these about one
million were claimed to be worth three cents a pair. I spelled
it out in my testimony because I did not want anyone to think
that we had made a typographic error, three cents a pair.
And these represent only those pairs of shoes which
actually went through Colombian Customs. Of the 40 million
pairs of shoes that are estimated to go through Customs each
year, 30 million pairs are described as pure contraband, pure
meaning they do not go through Customs at all, and the other,
most of the other ten million are undervalued at Customs.
Well, what is the result? What has been the result of all
this? Ten years ago, there were six major shoe factories in the
country, each employing over 1,500 workers. Today, four of the
six have gone bankrupt and the remaining two are operating at
40 percent of capacity. Why? It is simple to know why. They
cannot compete with shoes that are deliberately way, way
underpriced, under the manufacturer's cost by quite a bit. They
cannot compete. They go bankrupt. It is also bad because
contraband money laundering by eliminating much of legitimate
in this case shoe manufacturing and legitimate shoe importing
deprives the government of legitimate taxes and legitimate
tariffs.
So it hurts the economy in every imaginable way. What I am
suggesting here is, therefore, when we look at why should
businesses, why should we all be involved, government or not,
in doing something very actively and very aggressively about
contraband money laundering, there are two very good reasons,
and there is a confluence of interests. I can tell you that the
private, legitimate, honest, private sector in Colombia has
been for years frustrated that there has not been more interest
such as that shown by this caucus hearing today, more interest,
more activity, more awareness of what is happening to a fellow
free market economy in another country because of this
contraband.
I would insist that the U.S. business community or the
Japanese or the European or any of those that are involved in
this kind of activity has, therefore, a double reason to become
very actively involved in fighting this kind of activity. There
is a moral responsibility not to take part in any way in
something which aids drug trafficking. But there is also in my
opinion a business ethics responsibility for the free market,
for the private sector community, the business community in the
United States, not to undermine, actively undermine in any way
the business community in another country which is trying to
make a buck legitimately if it possibly can.
The time is ending when companies could say that they did
not know, they were ignorant, that their products were somehow
involved in contraband money laundering. The time is ending
because there is now beginning, only in the past year or so,
but it is now accelerating, a program of education, of letting
people know and I very much applaud today's action announced by
Customs in producing a pamphlet and actively going out, talking
to manufacturers, telling them what is going on.
The time is also ending when a company can say, well, what
we can do about it? We are not law enforcement after all; there
is no way we can discover what is going on when the
refrigerator or the pair of shoes finally gets to the last
destination who is really paying for it. Well, this is not
really true. There have been many examples in the past of how
private business either because it was forced by law or
pressured by public opinion or brought to this stage by its own
business ethics to change the way it thinks about point of sale
and where its responsibility ends.
The most important, the most obvious industry is the
banking industry. The banking industry because of law and
because of self-regulated practice now in many countries around
the world, the United States, Europe, Colombia, the bankers
know their customer. What we are saying is that the bankers and
the manufacturers now have a responsibility also to know their
customer's customer. And it is possible. There are
investigative techniques. The law enforcement community, I am
certain, is prepared to help show a manufacturing company what
is actually happening to its product downstream down the line.
This is also not so very far different from what has gone
on in the chemical industry. Years ago, European, American
chemical companies insisted that, well, if they were selling
acetone or ether or the things which could be used as precursor
chemicals in the manufacture of drugs, they also had legitimate
uses so how could they know? Well, now they know and now there
is an entire process supported by law whereby chemical
companies that produce the precursor chemicals or chemicals
that can be used for manufacturing of drugs, there are whole
systems so that they find out just how that acetone, for
example, is going to be used when it gets to Colombia.
Is it being imported by a manufacturer of nail polish
remover? Fine. But not 100 million gallons of nail polish
remover. These things are part of our tradition, part of the
way companies and groups of companies have come to accept their
responsibility. And frankly what is going to do it is not, I
hope, I do not think legislation is necessary. What is going to
happen, I think, is the gentle pressure of hearings like this
one on companies that do not want to be identified in any way
in the public mind as being connected downstream with drug,
money laundering or the traffic in drugs. A company which
spends tens of millions of dollars a year on buying the
services of basketball stars to advertise its goods to children
does not want to be identified in any way as doing something
bad to those children.
So know your customer, know your customer's customer. This
is possible. Another way of doing it, another voluntary way is
to sell the product only through the legitimate distributor in
that country, in this case in Colombia. If you are going to
sell refrigerators or shoes or cigarettes or liquor, make sure
that you sell it through your legitimate distributor in that
country and not through Miami or Aruba or Curacao or the Panama
Colon Free Zone.
Now, companies have begun to do this. This is
extraordinarily important. They are showing that (a) it is
possible to do these things and (b) Senator Sessions, they are
showing, I think, that they think they can still make money
selling goods legitimately and making sure that the system does
not build and help drug money laundering. If, for example, a
company is asked by its distributor to send a thousand
refrigerators and a thousand washing machines and a thousand
dryers to a customer in Miami, one could ask or send a private
detective or ask Customs or the IRS to figure out whether that
purchaser is building an apartment complex of a thousand
apartments and that is why he needs all of these goods.
If that is the case, bravo for free enterprise. That is
great development in the community in Miami. But if this person
is not building an apartment complex and has no reason, no
demonstrable reason to be purchasing a thousand of each, then
certain questions have been asked. It has been raised here
before that certain companies have been doing just these
things. General Electric is the most quoted examples because
General Electric happens to be a company long in the lead on
ethics issues. Mr. Chairman, I have a copy that was sent to me
yesterday of a letter that was sent to you by General Electric
detailing some of the things that they are doing.
They are new policies. I hope that you will have this
letter entered into the record. I think it would be very
useful.
Senator Grassley. I was planning on doing that during my
closing remarks.
Mr. Skol. Oh, I am sorry, sir, but I am glad that you are
going to be doing that. In conclusion, I think there is a great
many things the law enforcement community can do. There are
things that governments can do. But I think that the business
community of the United States operating in cooperation with
law enforcement in the United States, the business community in
Colombia, and the Colombian government, there is a moral, there
is an ethical, there is a business reason to do it that I think
they are capable of doing it, and the more we talk about it, I
think the more they will do it. Thank you.
[The prepared statement of Mr. Skol follows:]
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Senator Grassley. I would like to call on Senator Sessions
to ask the first round of questions.
Senator Sessions. Thank you, Mr. Chairman, and you make a
very persuasive case and I think I understand, Ambassador Skol,
a little more clearly. As I sat down last night for the first
time and read the materials, I was asking myself who are we
involving here? Who are we putting the pressure on and I do
think, however, and Ms. Kertzman, I do think, however, that
economics and free trade and lower prices is a reality. That is
life in this world.
And if your taxes and regulations reach a certain level,
you can expect people to figure out a way to get around those
taxes, and to the extent to which that is a factor I think
Colombia should look at that. Would it be possible, Director
Kertzman, for Colombia to license or approve only certain
importers, those that they have certified are complying with
the law and paying the taxes?
In other words, it seems to me that who should determine
who are the people bringing the dirty money in? A distributor
for an American company or Colombia itself?
Ms. Kertzman. The first thing I want to say is that--and I
want to repeat it--is that the tariffs and taxes are not as
high in Colombia as you think. The rate of a tax including a
value added tax on the tariff for imports is 16.6 percent. It
is not 60. It is, you know, 16. So I think that----
Senator Sessions. The ten percent tariff in addition?
Ms. Kertzman. No, no. This is why in all the economy, for
specific goods, there is value added taxes for many goods, but
there is no value added tax, for example, for food. So if you
import food, there is no value added tax on that and besides
the tariffs are different. Tariffs in Columbia range from five
percent to 20 percent, and there are specific tariffs for food
again, cereals and rice, just like----
Senator Sessions. What is it on a washing machine?
Ms. Kertzman. For a washing machine, it is 20 percent.
Senator Sessions. Plus 16 percent.
Ms. Kertzman. Plus 16 percent.
Senator Sessions. You are talking about 36 percent which is
pretty hefty tax.
Ms. Kertzman. Yes, but----
Senator Sessions. By American standards even.
Ms. Kertzman. No, no, we understand that and we try to have
a policy of lowering tariffs for these kind of goods that we
say in Colombia that they are contrabandistas that they can be
smuggled. But Colombia is part of the Andean Pact so there is a
common tariff for the countries for Venezuela, for Ecuador,
Peru, Bolivia and Colombia. So Colombia cannot change its
tariffs by itself.
The second question that you said is that we could do
something from the point of view of authorities to let some
people import into Colombia. We could do something like that.
We could say that, for example, Whirlpool Corporation Colombia
is the only authorized company to import goods of Whirlpool.
But I think that it goes against the rules of the organization,
for the WTO. I think it goes against the rules of WTO, but I
will have to check on that. But the problem is that, yes, we
decided that we are authorizing only certain importers but
there is also open contraband, that it does not go through
Customs, and it comes from the sea to ports that are not
authorized to function or just they are paying the people in
Customs where we have a big problem of corruption. So we
certainly can do things like you say and that is a very good
idea, not to authorize any imports if the people have not paid
their taxes, for example, but still the problem remains that
they can avoid all kind of controls in Colombia.
Mr. Skol. Senator, if I may add to that, I agree with you
completely. If you eliminate all government controls and if you
eliminate tariffs and taxes, you will eliminate most
contraband. I think you would eliminate all regular traditional
contraband. The problem with drug trafficking connected
contraband is that the profits are so enormous that even if
there were no tariffs, even if there were pure free trade, the
drug traffickers and their money launderers could easily afford
to sell pesos, sell dollars, well below the free market rate.
They do not have to compete necessarily with a distorted
market. They can compete.
Senator Sessions. I certainly agree with that and that is
the corrupting influence of this terrible industry and it is
corrupting and it is dangerous and it does defeat, brings in
cash, and honest businesses are at a competitive disadvantage
terribly by it and I do not know how to deal with it. I would
just say this, Director Kertzman, I hear good things about your
leadership. I congratulate you for the courage and
determination you are showing.
I also believe that Colombia is a wonderful nation and I do
not mean to suggest otherwise. I have worked with policemen
from Colombia who testified in cases I prosecuted courageously
and with skill and ability. I believe that it is a historic
ally of the United States. I am very, very troubled by the
internal warfare you are suffering, much of which driven by
drug money and kidnapping. I think this nation should be trying
to do more to help Colombia stabilize itself and be supportive
in that area and do not mean to be suggesting that I am trying
to blame Colombia for everything that goes wrong. We do have a
mutual problem and we should work together to solve it. Thank
you, Mr. Chairman.
Senator Grassley. Before I ask my first question, you
stated that you have to have how many body guards?
Ms. Kertzman. I have nine.
Senator Grassley. Nine and your family has----
Ms. Kertzman. My kids have six.
Senator Grassley. I was thinking if every United States
Senator had to have that protection, I can name at least one
senator who would not care to be in the United States Senate
and I would assume that most would not like that sort of
environment. I do not know how you do your work, but as has
been stated and you have been complimented so much, I want to
add mine to your going above what we would call in this country
above and beyond the call of duty to do good for your people.
What tools if any do you have available to determine if an
import has entered Colombia legally?
Ms. Kertzman. Well, we have the information system in
Customs and we can look at the import declaration that they
make. We can follow all the trace of the papers. So the system
is there. We can work on that. So it is very easy to follow the
trace of an import that was made illegally.
Senator Grassley. Okay. The Colombian government has
frequently stressed the need for international cooperation to
tackle the challenges of the exchange, the peso exchange, the
black market peso exchange. One effort in this direction was
the recent decision to share Customs information between our
country and your country. How successful have these efforts
proven to be?
Ms. Kertzman. Well, we already are working together in two
big cases of smuggling and we are asking U.S. Customs for some
information, but this information they are finding out if it is
reserved, if they can give it to us. But anyway we are working
together and we hope that we can sign this agreement between
Customs which would allow them to give us the information that
we are requesting at this point.
The problem that we have with the agreement is that the
State Department said that it should be signed between
governments and not between agencies. It was going to be signed
between the Customs Service and the Colombian Customs. If it
has to be signed between governments, it will take a long time
in Colombia to be implemented because it has to go through
Congress and be approved in Congress by a law. So we hope that
we are trying to make this point with the State Department to
have the agreement signed just between agencies. But we are
working very, very closely, not only with Customs but also with
the Justice Department and the DEA in specific cases.
Senator Grassley. Did you say that that is our government
or your government that wants it to be government to government
as opposed to agency to agency?
Ms. Kertzman. It is your government.
Senator Grassley. That is something that we should try to
facilitate. If it is government to government, how much longer
would it take that to be approved by your government then if it
has to go through your congress?
Ms. Kertzman. Well, I do not know how long it would take,
but it might be significant that it would not be signed because
if it has go to through Congress, there are people in Congress
in Colombia that do not like this agreement because some of
them are somehow they receive money from the smugglers. So they
would not like this agreement to be signed.
Senator Grassley. It seems to me that we should have this
caucus and our staff look into why this is a requirement on the
part of our government and if there is an understanding that
that is a tremendous impediment to the proper agreement that
you feel you have to have to make this exchange of information
be facilitated. Is that right?
Ms. Kertzman. Oh, thank you very much. I do not want to
make a point against the U.S. government in this, but it really
would be helpful if the agreement is signed between agencies
because, not because there is some problem with U.S. government
here, but because it will be very difficult for the agreement
to go through Congress in Colombia.
Senator Grassley. Yeah. Well, and it might be a
technicality that our government does not understand the full
impact of and it may be something that is so small on
somebody's radar screen that it is not given the proper
attention that it ought to be given, and by the way I do not
think you have to worry about criticizing our government. We
feel free to criticize your government from time to time.
This is not the time for niceties. What we are trying to do
is get information and get to the bottom of the issue. Well,
then, this is just the end of my first question to you. Then do
you kind of feel like except for this technicality we just
talked about, that everything is pretty much in place to get
the information and cooperation from the U.S. Customs that you
feel you should have?
Ms. Kertzman. Yes, we think that there is all the
willingness to give us information and with the agreement it
would be easier, but they are cooperating with us in every
possible way.
Senator Grassley. Yeah. Many believe that the black market
peso exchange began largely as a product of the structural
economic conditions within Colombia; high tariffs and duty
rates and restrictions on obtaining hard currency forced
importers to seek alternative and cheaper means of obtaining
dollars. Recently, though, as you stated, the government of
Colombia has slashed tariffs. And yet the black market peso
exchange continues to flourish.
Other than what Ambassador Skol has spoken about, are there
any factors that underlie this trend to reduce tariffs and yet
have the contrabandistas still exist?
Ms. Kertzman. I think that the most important incentive for
contraband is not that tariffs are high, as I said, but that
narco-trafficking exists and the relation is that the profits
from narco-trafficking have to be laundered and they slice the
price of the dollar in order to launder it. When the official
dollar in Colombia is 1,600 pesos per dollar, the dollar of
narco-trafficking is only 1,000 pesos. That is the main issue.
That is the key why there is smuggling and why it is linked to
contraband. So I think as long as narco-trafficking exists,
there will be contraband because there is always the economic
incentive to launder this money through this mechanism.
Senator Grassley. Okay. I just have one other little point
on that and then I will move on. The Colombian Central Bank has
made efforts to ease up on restrictions for obtaining U.S.
dollars. Do you think that would reduce the ability of peso
brokers to trade dollars for pesos?
Ms. Kertzman. In Colombia, there are two markets for the
dollar, what we call the Malcao combiyu [phonetic], which is
the market that all the exports and imports of goods have to go
through, and there is also the free market. The free market is
everything different from exports and imports of goods and I do
not think that there are many contras right now for dollars in
Colombia and there are not any plans to make it easier for
people to have accounts in dollars. I do not see any change
coming from that. So conditions from that point of view that
will not change in the short term.
Senator Grassley. Colombian authorities have frequently
complained that the Panamanian and Aruban free trade zones are
primary routes for this contraband going to Colombia. We have
heard testimony earlier today about the importance that peso
brokers place on having these kinds of free trade zones where
they can buy and sell products. How cooperative have officials
from both nations been in monitoring the transactions that take
place within their zones?
Ms. Kertzman. Not cooperative at all. I do not have any
information. They do not cooperate giving us information and
there is no formal talks about anything. So we feel that we are
completely alone in this fight.
Senator Grassley. So then that probably means that they
have not enacted any policies to attack contraband purchasing
or money laundering?
Ms. Kertzman. I do not know about money laundering. What I
know is about contraband, the case of the Caribbean countries,
that surround Panama, Aruba and Panama, they do not have any
willingness to combat contraband.
Senator Grassley. Do you feel that more controls over goods
at free zones could significantly decrease the ability of peso
brokers to do business?
Ms. Kertzman. Yes, I think that would be very helpful
because the companies here in the U.S. or in Japan or in Korea
can say that they sell to distributors and after they issue
orders they do not know where the merchandise is going. So that
would be a very good way to fight the contraband.
Senator Grassley. Do you have any recommendations for
actions that you believe the United states should take to
reduce its vulnerability to being exploited by these type of
money laundering operations? In other words, I am inviting you
to give suggestions to our government or even to be critical.
Ms. Kertzman. Yes, thank you for the opportunity and I just
want to say that I totally agree with what Ambassador Skol just
said. He said it is very important that private companies know
their clients so that they have this policy just as in the
financial sector that there is a list of designated narco-
traffickers that kind of have accounts in those banks. There
should be a similar policy here in the U.S. in respect to
private companies because they have to know to whom they are
selling their products and just as Ambassador Skol said, there
is law enforcement.
If they say that they cannot know, and as it happened with
chemical precursors, just a typical example, that it is
possible to know your client if you want to do it, if you want
really to fight contraband. I think that private companies here
in the U.S. should make a commitment to this and maybe it
should be something in the law, in the U.S. law, because
contraband is just the same as narco-trafficking.
Senator Grassley. And the extent to which American
corporations would want to move very strongly in this
direction, we have had a couple of instances of outstanding
efforts within the corporation already mentioned today, but the
extent to which other companies would want to do this,
obviously the extent to which they needed the cooperation of
your government, they would get it, I assume.
Ms. Kertzman. Of course they would. I was just saying that
I was not sure if we could allow, for example, all the imports
from the representative of Whirlpool because maybe it could
violate WTO, but we are willing to help on that and doing
whatever is on our extent to work together on this.
Senator Grassley. I just have a couple questions for you,
Ambassador Skol. Many Colombian businessmen who operate through
legitimate channels are facing intensive competitive pressure
from the Sanandresitos who are often able to underprice them.
And you have made that very clear in your own testimony.
Because a legitimate businessman must pay government taxes,
tariffs and duties, their products tend to be more expensive
and you have made very clear to us that even though the free
market might work with regard to the reduction of tariffs and
the fact that the laundered money can still undercut legitimate
business, I would like to have you tell us how have these
businesses reacted to competition provided by the
Sanandresitos?
Mr. Skol. Mr. Chairman, unfortunately many legitimate
companies have reacted to competition from Sanandresitos by
using the black market money exchange and hiding their eyes
frankly from that fact and so that they avoid--they save a lot
of money. They avoid taxes. They buy some contraband products.
There is a whole rainbow of differences among companies from
the very illegitimate to the absolutely pure.
Unfortunately, many of the absolutely pure are also the
about to become bankrupt. And there is a cumulative effect of
all these illegalities, the corruption, the contraband, the
money laundering, the avoidance of taxes which does make it
very difficult for the legitimate businesses to function, but
many of them, I would dare say most of them, are functioning
legitimately, want to function legitimately. And today if a
Colombian wants a General Electric refrigerator or a Whirlpool
dryer, it is going to become very, very difficult to get their
first choice illegitimately and the more manufacturers, the
more government pressure on the contrabandistas and on the
money launderers, every improvement in each area helps the
other areas.
I hope you will get in the next weeks many letters from
American companies, Mr. Chairman, telling you what they have
been doing or what they are about to do. The more that do it,
the more the Colombians will be faced with not being able to
get their preferred products. If they want to get cheap stuff
at the Sanandresitos, the Sanandresitos will go out of
business. This is going to take quite a long time and there is
a responsibility on the Colombian government progressively to
attack the very nature of these Sanandresitos. I know it is
very difficult for us to understand why an apparently
illegitimate enterprise exists so openly, but it is imbedded in
the political culture. There is a great deal of fear and it is
going to take a lot of action on the part of people like Fanny
Kertzman and others slowly to eradicate these kinds of things.
Legitimate business people want to do business
legitimately. When they are faced with bankruptcy, they will
cut corners, and I think it is incumbent upon all of us to help
them do business legitimately.
Senator Grassley. I presume that cartels threaten, of
course, legitimate business in Colombia? Or not so?
Mr. Skol. I have never heard of a threat against a
legitimate business doing legitimate business. There are many
threats against business people. They are kidnapped all the
time. There is danger in Colombia, but I have never heard of a
consistent threat against doing legitimate business. It is the
workings of the market that causes legitimate business people
to do illegitimate things.
Senator Grassley. How have businesses in neighboring
countries reacted to the competition of underpriced contraband?
Mr. Skol. We do not have any--I do not have any statistics
on this, but I have to assume that probably when you hold this
hearing a year from now or two years from now, you will no
longer use the word peso because there will be sucres and
bolivianos and other currencies involved. One has to assume
that some of this is happening. I do not have any statistics on
this. It will begin to happen more in other countries as it is
cleaned up in Colombia and then we are going to have to focus
on those other countries.
Contraband, pure contraband, has existed throughout South
America and Central America and the Caribbean for years.
Paraguay, for example, is a country that if you look at the
statistics, you think that every Paraguayan drinks a case of
scotch whiskey and smokes seven cases of cigarettes every
single day. That is not true, of course. It is all smuggled
outside of the country to Brazil and Argentina. I know of no
statistics, but I would be very surprised if drugs were not
also using that particular system, in this case, cigarettes and
whiskey, to launder their proceeds.
Senator Grassley. My last question is very general in the
sense that if you were listening to this discussion from the
outside, this is something just between the United States and
Colombia. Do you believe it is broader than that or could be,
and if so, do you have any other examples?
Mr. Skol. I have no other examples specifically, but I have
to assume that it is going on in other countries. I assume it
will happen in other countries. There is certainly contraband
and smuggling in other countries and insofar as other countries
are centers of either drug production or drug movements, then
it would be surprising if it were not going on, but I cannot
tell you that it is going on in other countries.
Senator Grassley. Do you have any further questions?
Senator Sessions. No. I would just mention to the
Ambassador and would ask him just briefly, I know of an
incident recently where an American was kidnapped in Venezuela
and taken to Colombia for ransom and I know of the
destabilization in Colombia from the rebel forces that have
taken over a portion of that country. Would you care to make
any brief comments about your concerns for the region and to
what extent drug trafficking is a bad factor in it?
Mr. Skol. Oh, well, there are two great sources of money,
large fundings, for the guerrilla movements, the two of them in
Colombia. One is kidnapping. There is a phrase in Colombia. It
is called commercial terrorism. I never heard of it anywhere
else, but it is kidnapping for money. The other great source is
drug trafficking, protecting and advancing drug trafficking. If
it were not for drug trafficking and drug money laundering and
everything we have been talking about here, the task of the
Colombian government to make peace with the guerrillas would be
half as easy and it is still extraordinarily complicated and it
will take a long time, but drugs are unquestionably a
complicating factor in the problems, the peace problems in
Colombia today.
People too often point to El Salvador or Guatemala and say,
well, let us do the same things, and it only took several years
there. Colombia has this additional terrible shadow of drug
trafficking, which funds the guerrilla armies, and while that
continues peace will be even more difficult to achieve.
Senator Sessions. Director, would you like to comment on
that?
Ms. Kertzman. Yes. No, I would like just to say that
guerrillas exist in Colombia, exist from the '50s. It is a very
old problem in Colombia and they did not start as narco-
traffickers, but they started as a real movement and then they
moved into delinquency with kidnappings. They are not directly
the narco-traffickers. They have the business of taking care of
the crops of cocaine. They take care of them. But it seems that
they are not directly the narco-traffickers.
Senator Grassley. Okay. We have no further questions. The
only thing is, particularly you, Ms. Kertzman, if there is one
last statement or admonition or any sort of suggestion you want
to make, I would give you another opportunity. Do you have
anything to say in closing or I mean the last forum?
Ms. Kertzman. No. I mean the only thing that I would like
to say is to thank you very much for your words that you have
to me, both Senator Sessions and you, Mr. Chairman. I want to
thank you very much for that and I want to thank you for the
opportunity to be here and tell all the people here in the
United States something that we already know in Colombia is
that contraband is as big a problem as narco-trafficking and
all the countries have to be in this together. Thank you very
much.
Senator Grassley. Yes. In 60 seconds, we will be done. I
would just like to say as the hearing closes maybe one last
observation, and we have heard a lot today about this very
important issue and it ought to be clear to all of us that we
in government, both here as well as in Colombia, and the
business communities, and I might say there in both countries,
have a job cut out for us. I would make clear that the purpose
of this hearing is not and was not and will not in the future
to be single out any companies as being involved in illegal
acts.
We have heard the names of several businesses mentioned. It
should be clear, however, that these companies and their
products are being used. The issue for all of us is that our
businesses and financial systems are being exploited by
criminals to launder drug money. We have a shared
responsibility working separately and also together to prevent
this, and of course this means dialogue on what to do that
involves government, business, and as part of the business
sector the financial community specifically.
In this regard, I would draw attention to the efforts, as
Ambassador Skol has already stated, of General Electric Company
and its commitment to help and act as a leader. And I would
introduce the aforementioned letter from GE that I received
from its general counsel committing to such an effort and
stating their past commitment to it.
[The letter from GE follows:]
[GRAPHIC] [TIFF OMITTED]60125.057
[GRAPHIC] [TIFF OMITTED]60125.058
[GRAPHIC] [TIFF OMITTED]60125.059
[GRAPHIC] [TIFF OMITTED]60125.060
Senator Grassley. I hope that coming out of today's hearing
that we will see a major initiative by all the parties
concerned to develop and implement a very comprehensive
strategy. We all bear a responsibility to ensure that our trade
and financial networks are not vulnerable to the criminal
exploitation that we have heard about today.
And even though I am a small part of the United States
government, I would want this caucus and I would expect that
this caucus would be a focal point for facilitating part of
this process, to even encouraging this process, and to some
extent even being a judge of the adequacy after a period of
time of whether enough is being done both by the respective
governments and our respective business communities. With that,
I adjourn the meeting and thank you all for your participation.
[Whereupon, at 12:25 p.m., the caucus was adjourned.]