By Michael Zeldin
On the front page of the Sept. 21 Wall Street Journal, Mark Schoofs’ article, “ATMs Become a Handy Tool for Laundering Dirty Cash” discussed a recent case of two individuals, Luis Saavedra and Carlos Roca, alleged to have been the masterminds of an army of micro-structurers whose objective was to make cash deposits into more than 100 New York-based bank accounts. According to the article, the deposits, which amounted to more than $100,000 per day, were made in such small increments (usually just a few hundred to a maximum of $2,000) that they were very difficult for banks and/or law enforcement to detect. Once deposited in the Queens and Manhattan bank accounts, their Colombian-based co-conspirators were able to withdraw the roughly $2 million per month in pesos almost immediately through the ATM network to further the ends of the drug trafficking organization. This micro-structuring scheme was actually a variation on one of the most basic money laundering forms: smurfing.
The term smurfing was coined by the late, great, chief of Operation Greenback, Chuck Saphos, who once remarked that the army of people hired by the money launderers to make small denomination bank deposits reminded him of the Smurf cartoon characters because they were largely indistinguishable and nearly anonymous people. Smurfing, and its more recent variation, micro-smurfing, has been one of the most common ways that money launderers, most often working on behalf of drug organizations, have laundered the proceeds of criminal activity. Understanding this money-laundering typology, and the ways banks continue to try to detect and prevent it, requires a step back in time.
In the early 1980s, the United States Department of Justice determined that the most effective way to disrupt and, ultimately, dismantle drug organizations was to focus on their profits so that drug organizations would suffer lasting injury. To realize this strategy, Operation Greenback was established as a pilot program within the Miami U.S. Attorneys’ Office. Greenback brought together 100 federal law enforcement agents from the U.S. Customs Service, the Drug Enforcement Administration, the Criminal Investigations’ Division of the Internal Revenue Service, and federal prosecutors from the U.S. Attorneys’ Office in Miami and the Department of Justice in Washington, D.C. The agents working undercover soon learned that drug profits – generally in $5, $10 and $20 bills – were collected daily, stored and then wire-transferred offshore to the drug cartel leaders.
But here was the problem: the volume of the money was overwhelming, creating storage and transportation problems ($1 million in $5 and $10 bills weighs 330 pounds; $5 million in $10 and $20 bills weighs 825 pounds). Complicating this was the fact that money launderers had to get their millions in illicit cash into the banking system in amounts under the $10,000 Currency Transaction Report threshold without detection. This required ingenuity and a small army of people willing to go from bank-to-bank to make the daily deposits. Then, and now, money launderers were nothing if not ingenious.
On the other side of the fence, banks faced the threat of criminal charges by Greenback prosecutors for aiding and abetting money launderings if they weren’t vigilant in looking for these structured deposit patterns. Simultaneously, transaction-monitoring software became more readily available, enabling bank compliance officers to detect structured cash deposits in an automated environment. Money launderers had to adapt.
Micro-structuring, as in the Wall Street Journal story, is one adaptation. These mini-smurfs try to defeat the transaction-monitoring systems by making the deposits so small they “fly under the radar” of the detection rules embedded in the software systems. While micro-structuring is indeed difficult to detect and prevent, banks can and should be able to meet this challenge.
Most of the better transaction-monitoring systems on the market today allow banks to program their systems to take account of evolving money laundering trends. In micro-structuring, several rule changes should be considered, lest the banks be accused of not meeting their current regulatory and legal requirements under the U.S. Patriot Act to “know your customers,” monitor transactional activity for evidence of suspicious behavior and file Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network (the Department of Treasury Bureau responsible for gathering and interpreting SAR reports), so that the criminal organizations can be prosecuted by federal, state and local law enforcement agencies.
Specifically, banks should consider:
- Resetting dollar thresholds to look for repetitive cash deposits in the $1,000 to $3,000 transaction band. In Operation Greenback, deposit amounts were typically made in amounts between $8,500 and $9,999. But as banks and regulators have caught on, money launderers have adjusted to using smaller deposit amounts;
- Creating rules that look for cash deposits in any amount followed closely by outbound wire transfers to jurisdictions that pose a high risk for money laundering/drug trafficking. The same is true for cash deposits followed closely by multiple ATM cash withdrawals, especially in the high-risk jurisdictions;
- Employing link-analysis software programs that look for hidden relationships amongst account holders (i.e. same home address, wire transfers to the same beneficiary, etc.). Most smurfing operations open multiple bank accounts, often at the same bank in the names of many different people, making it difficult to determine if there is a relationship among the accounts at the account opening stage. Monies often move among these accounts; and
- Using human intervention – there’s no substitute for it. If bank tellers, the front line in the detection program, are provided ongoing money laundering prevention training, they will have a greater chance of spotting customers like the micro-smurfers, who must appear daily, if not multiple times a day, to make their deposits.
While money laundering detection and prevention is an ongoing and difficult undertaking, banks that apply the most current technology solutions and train their employees on an ongoing basis will be the most successful in helping fight the scourge that is drug trafficking and money laundering. Those that don’t may face civil fines, regulatory enforcement actions and, in the most severe cases, criminal prosecution.
Michael Zeldin is the global head of the anti-money laundering service practice at Deloitte Financial Advisory Services LLP (www.deloitte.com). He was an original member of Operation Greenback and the former chief of the Money Laundering Section of the U.S. Department of Justice.