[Senate Hearing 106-198]
[From the U.S. Government Printing 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

                              ----------                              

                           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

                              ----------                              


                         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:]
[GRAPHIC] [TIFF OMITTED]60125.029

[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:]
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    [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.]