Dirty Euros Enter U.S. Via Latin America; The African Connection

Source: [Wall Street Journal

 >https://services.wsje.com/ssl/imarketing/index3.asp?AITDDA163]

16th January, 2008

A cocaine boom in Europe and the continent’s strong currency have
combined to fuel a thriving industry: euro laundering.

With the euro approaching $1.50 and soaring demand for cocaine in
countries like Spain and Italy, Europe has become a far more lucrative
place to do business for Latin American drug cartels than in previous years.

To obscure the origins of the funds, and escape government scrutiny in
the process, the cartels use a complex system to launder their proceeds

— much of which is landing on U.S. shores.

In late March, U.S. authorities arrested a man carrying a leather duffel
bag who had just landed at Los Angeles International Airport on a flight
from Santiago, Chile. Inside the bag was more than $1.9 million in cash,
mostly in bundles of €500 and €200 notes. Authorities are struggling to
make a dent in the booming drug trade in Europe. WSJ’s Mark Schoofs tags
along with Spanish police as they search for clues to the source of
cocaine that keeps pouring into the country.

U.S. and Chilean law enforcement officials believe the man was at the
end of a money-laundering trail that begins in Europe. Over a period of
four and a half years, he and his associates flew to the U.S. from Latin
America some 280 times, openly toting more than $244 million worth of
euros into the country, according to documents in a case brought by
federal authorities in U.S. District Court in New York.

The big bills have become so symbolic of the lush life that they have
recently crept into pop culture: The rapper Jay-Z’s video for Blue Magic

— the debut single from his new album “American Gangster” — features a
suitcase full of €500 notes and someone thumbing through a stack of them
as Jay-Z raps the words, “the kilo business.” Hype Williams, director of
the music video, said that he and Jay-Z chose euros because they are
“more valuable” and because they wanted to “one-up” their hip-hop
competitors by showing “the things people are into now.”

The wads of euros carried by people like the man arrested at LAX are
often the spoils of Europe-bound cocaine shipments — many of which
transit through Africa, law-enforcement officials say.

Consumption of the drug has soared in much of Western Europe, according
to a report released last year by the U.N. Office on Drugs and Crime. In
Italy, use of the drug rose to 2.1% of the general population in 2005
from 1.1% just four years earlier. In France, it tripled from 2000 to
2005, from 0.2% to 0.6% of the adult population. Cocaine use in England
doubled from 1998 to 2006, according to Britain’s National Health
Service, to 2.4% among adults.

Some narco-euros are laundered directly in Europe. But officials say the
lion’s share is routed back to South America as cash and eventually ends
up in the U.S.

“This is still a cash business,” says Donald Semesky, the Drug
Enforcement Administration’s head of financial-crimes investigations.

The first step is to convert small bills accumulated from thousands of
street sales into €500 notes, which are easy to transport. Obtaining
large quantities of these conspicuous notes, though, isn’t easy. So drug
traffickers turn to specialized criminal rings — whose members are
often involved in banking and real estate — to gain access to them,
says Jose Manuel Alvarez Luna, chief of the money-laundering section of
the Spanish police.

Spain is the center for such aggregation, according to authorities. A
high-level Spanish banking official says a disproportionate share of the
euro zone’s €500 notes, known as Bin Ladens for their scarcity,
circulate in Spain.

The purpose of money-laundering is to disguise the criminal origins of
ill-gotten gains so the funds appear legitimate. In most cases,
laundering also helps criminals escape the notice of tax collectors and
law-enforcement officials, boosting the value of their illegal proceeds.

Particularly since 9/11, tightened antilaundering regulations, known by
banks as “know your customer” rules, have forced drug cartels to use
more circuitous routes to circulate their funds around the globe.

For starters, the drug cartels do not themselves bring their narco-euros
to the U.S. Instead, they usually sell their euros to South American
black-market currency brokers or to foreign-exchange houses, known in
Spanish as casas de cambio. The casas’ business as currency-exchange
houses gives them a natural cover for moving large amounts of cash.

But in South America, there are few if any legitimate buyers for the
huge sums of euros that the casas obtain — directly or indirectly —
from the traffickers. So the casas funnel most of the narco-euros,
sometimes via middlemen, through a chain of exchange houses in countries
like Colombia, Peru, Brazil and Chile, says the DEA’s Mr. Semesky.

Often, the drug traffickers will sell their euros for Colombian pesos,
and then the euros entering the U.S. no longer belong to the drug
cartels but to the casa de cambio. In other cases, says Mr. Semesky,
traffickers pay the casas to move funds into one of their U.S. bank
accounts. These funds aren’t usually intended for withdrawal, but rather
to pay various debts. This is achieved by wiring funds to the account of
whomever the trafficker wishes to pay.

On a recent night at a bar on Madrid’s bustling Gran Via, a shirtless,
tattooed waiter served tables and a buxom drag queen in a nurse’s
uniform worked the crowd. In the trendy venue was a man in his 30s who
talked by cellphone with his dealers. A few minutes later, he stepped
outside, leaned into the window of a small car and handed over €60, or
about $90. For that sum, he received one gram of cocaine.

Such street sales have surged. Spain now has a larger percentage of its
population ( 3% ) using cocaine than the U.S. ( 2.3% ), the previous top
per-capita consumer, according to United Nations figures. In the first
half of 2007, a kilo of cocaine sold for €33,000, or about $43,900, in
Madrid, more than triple the $12,500-$14,600 it fetched in Los Angeles
and far more than the $13,000-$26,000 it sold for in New York, according
to the Spanish police and the DEA.

Last year, seven European countries banded together to form the Maritime
Analysis and Operations Center-Narcotics, or MAOC-N, an international
agency dedicated to stopping drug traffic over the Atlantic. Already,
the center is helping to make major busts.

In October, on the high seas off West Africa, Spanish authorities —
acting on a tip from MAOC-N — seized an aging, cockroach-infested
trawler. Called the Opnor, it allegedly had more than three metric tons
of cocaine hidden below the floor of its cargo hold. Apparently
registered in Panama, the vessel was captained by a grizzled Dutch man
in his late 60s and is believed to have been heading toward Senegal.

The boat was following a typical pattern, authorities say. They surmise
that, if it hadn’t been seized, its cocaine would have been warehoused
in West Africa, where crushing poverty, weak law enforcement and, often,
rampant corruption make for an ideal way station. The traffickers would
have then sent the drugs to Europe by boat, either directly or via North
Africa. Increasingly, say Spanish and American authorities, cocaine is
also being flown from North Africa in small planes landing in Spain and
Portugal on clandestine airstrips.

The traffickers were forced to take those routes because Spanish,
Portuguese and British authorities were intercepting boats coming to
Europe directly from South America.

Spain is a favorite entry point because of its proximity to Africa, its
long coastline and its language, which it shares with Colombia and most
other South American countries. Spanish officials say they seized almost
100 metric tons of cocaine in 2005 and 2006. According to United Nations
statistics, Spain seized more cocaine than any European nation between
1999 and 2005.

Authorities suspect that Europe’s thriving cocaine business likely
provided the euros in the duffel bag of Mauricio Mazza-Alaluf, the man
arrested at LAX in March. Along with a cousin, Luis Mazza-Olmos, he ran
an exchange house in downtown Santiago, Chile, according to U.S. and
Chilean law-enforcement officials.

The probe into the Mazzas began in August 2004, says Christian Caamano,
an investigator for the Investigative Police of Chile. The tip-off was a
Peruvian passenger on a flight from Colombia who arrived at the Santiago
airport carrying a backpack stuffed with €600,000, according to Mr.
Caamano. Alarmed, Chilean authorities began monitoring such couriers and
noticed that they dropped off their bags full of euros at the Mazzas’
exchange house.

Later, the Mazzas’ routine evolved: A courier from Colombia, allegedly
carrying European proceeds, would deliver cash at the Santiago airport
to an armored-car service. Personnel would count the money in a parked
truck and turn it over to the Mazzas or one of their associates, says
Hernan Penafiel, the lead prosecutor in a parallel case brought in Chile
against the Mazzas. One of the Mazzas or their associates would then
board a U.S.-bound flight with the money, Mr. Penafiel says.

Once on U.S. soil, according to authorities, the Mazzas allegedly moved
their euros with breathtaking openness. Their main tactic was to
dutifully fill out paperwork at customs points and financial
institutions, using real family and business names, according to law
enforcement officials and court documents from the U.S. case.

After the Mazzas or their associates cleared customs at Los Angeles
International Airport, they would transfer their cash to Associated
Foreign Exchange Banknotes Inc., a currency-exchange firm headquartered
in Encino, Calif. AFEX Banknotes then converted the euros into dollars
and wired the dollars to U.S. bank accounts the Mazzas had opened,
according to law-enforcement officials and two AFEX Banknotes employees.

The Mazzas had accounts with at least three banks in the U.S., according
to the court documents from the New York case: Israel Discount Bank of
New York; Harris Bank in Chicago; and J.P. Morgan Chase in Dearborn,
Mich. In opening each account, the Mazzas gave their company’s real name
and openly described it as a tourism and currency-exchange agency.

The Mazzas proceeded to move huge sums of money through these accounts,
according to the court documents, often after receiving faxed
instructions, intercepted by Chilean authorities, from people or
entities with suspected ties to Colombian traffickers.

In a single year, according to court documents, the Mazzas wired $133
million into the Harris Bank account and $117 million out. At their J.P.
Morgan Chase account, they wired $35.5 million in and $34 million out in
less than three months, and their IDB checking account recorded more
than 2,500 transactions totaling more than $29 million during 2003 and
2005, according to the court documents.

Asked to comment, Harris Bank said in a written statement that it
“identified suspicious activity” after conducting its own investigation
and “closed the account in accordance with banking regulations.” IDB
said in a statement that the events outlined in the New York case
“occurred under former management” and it no longer maintains accounts
for unlicensed money transmitters, including the Mazzas’ casa de cambio.
Chase declined to comment.

AFEX Banknotes compliance officer Andrew Scherer says his company is
“mortified” that it may have helped facilitate illegal activity, but
added that it has strong anti-money-laundering policies and has taken
“substantive measures” to improve its anti-money-laundering policies in
the wake of the Mazza case. He declined to be more specific, citing
security concerns.

When Mr. Mazza-Alaluf landed at LAX on March 31, he didn’t attempt to
conceal his money. Like he and his associates had done hundreds of times
before, he filled out the standard declaration forms, a requirement for
passengers entering the U.S. carrying more than $10,000 worth of
currency. But this time, he was immediately arrested. The 55-year-old
Chilean maintained his innocence.

Mr. Mazza-Alaluf has pleaded not guilty to federal felony charges of
conspiracy and operating an unlicensed money-transmitting business. His
attorney, Bernard Alan Seidler, calls the charges “a classic case of the
government overreaching.”

Arrests in Chile

Chilean authorities nabbed members of the Mazza clan and their
associates in a coordinated operation. They are now in jail in Santiago,
facing money-laundering charges. Their lawyer, Yieninson Yapur, says
they are all innocent. In an email sent via Mr. Yapur, Mr. Mazza-Olmos
said he is a legitimate businessman and has done nothing illegal.

The U.S. investigation of the Mazza case was conducted by a multi-agency
task force based in New York and led by the DEA and the Internal Revenue
Service. Officials tout it as an important success. But it’s unlikely to
significantly restrict the flow of narco-euros gushing out of Europe.

On a recent afternoon, far from the glitz of the night life on Gran Via,
a homeless addict walked around in a northern Madrid shantytown with a
syringe hanging out of his forearm.

Even as police tore down the surrounding shacks to make way for a new
development, residents hammered away, rebuilding their wood and
cardboard houses. “The demand for cocaine is huge, so knocking these
shacks down does nothing,” says Gema Bautista, a social worker with
Fundacion Atenea Grupo GID, which runs a mobile clinic and
needle-exchange program. “The shacks just pop up again.”

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