Banks and Blood Money: Too Big to Fail, Too Big to Prosecute

Ed Vulliamy provides a detailed rendering of life along the US-Mexico border in his book Amexica: War along the Borderline. The central focus is, of course, on the drug cartels and their influence on events on both sides of the border. The magnitude and the extent of the cartels’ dealings are astonishing. Vulliamy’s book was originally issued in 2010. Throughout his writing one fact becomes obvious: there is so much activity and so much money involved that the cartels could not operate without the acquiescence of businesses on both sides of the border. By the time the paperback version came out Vulliamy had evidence of this collusion which he included in an afterword that he titled Blood Money.

An article by Michael Smith for Bloomberg provides details of how US banks aid the cartels in their business dealings. Money and drugs flow north across the border; money and guns return south across the border. One estimate quoted by Vulliamy puts the value of the drug trade at $323 billion per year. Smith provides the estimate that about $29 billion is transported by couriers to Mexico every year. To put this in perspective, he tells us that $29 billion in $100 bills would weigh 319 tons. Clearly, the bulk of the money must be moved electronically. Consequently, the inadvertent or complicit assistance of banks is required.

Smith provides this background.

"The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts."

The cartels attack the system by using legions of collaborators to make numerous small deposits or small transfers. Since the number of such transactions is so large, it produces a signature that banks are capable of detecting, perhaps not instantaneously, but inevitably. The observation of many deposits made in the same day by the same individual is a common indicator.

The Bloomberg article indicates, at best, spotty performance by the banks in detecting this money laundering. Some seem to back off as soon as laundering is detected, while others appear to continue involved at varying levels over long periods. There was one bank, Wachovia, with behavior so egregiously criminal that government prosecutors were forced to take action.

"Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product."

This was not a case of sloppy oversight. Wachovia knew exactly what it was doing.

"The U.S. Treasury has been warning banks about big Mexican-currency-exchange firms laundering drug money since 1996. By 2004, many U.S. banks had closed their accounts with these companies, which are known as casas de cambio."

"Wachovia ignored warnings by regulators and police, according to the deferred-prosecution agreement."

"'As early as 2004, Wachovia understood the risk,’ the bank admitted in court. ‘Despite these warnings, Wachovia remained in the business’."

Smith makes it clear that this is no mere "white collar financial crime."

"Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year -- enough to cover health care for 30.9 million Americans -- in overburdened courts, prisons and hospitals and lost productivity, the department says."

"’It’s the banks laundering money for the cartels that finances the tragedy,’ says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network."

"’If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,’ Woods says."

Given the magnitude of the crime, one would assume that prison sentences and mass terminations would ensue. What actually happened?—essentially nothing.

"Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers...."

"Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009."

"The bank declined to answer specific questions, including how much it made by handling $378.4 billion -- including $4 billion of cash-from Mexican exchange companies."

Why would those involved in such heinous crimes be issued a free pass and be set free to commit more crimes?

"No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again."

Say what?!! Smith provides this explanation.

"Large banks are protected from indictments by a variant of the too-big-to-fail theory."

"Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering."

"The theory is like a get-out-of-jail-free card for big banks, Blum says."

"’There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,’ Blum says. ‘They seem to be willing to do anything that improves their bottom line, until they’re caught’."

The Bloomberg article suggests that ongoing investigations of banks will be necessary and will continue.

Vulliamy adds to the story with this contribution.

"Antonio Maria Costa, executive director of the UN’s Office on Drugs and Crime from May 2002 to August 2010, charts the history of the contamination of the global banking industry by drug and criminal money since his first initiatives to try and curb it while at the European Commission during the 1990s. ‘The connection between organized crime and financial institutions started in the late 1970s and early 1980s,’ he says, ‘when the mafia became globalized with the economy’."

Costa says progress was made in combating the penetration of banks by criminal elements, but these efforts were overcome by events.

"Then two things happened: the financial crisis in Russia, after the emergence of the Russian mafia, and the crises of 2003 and 2007-2008....'With these crises,’ says Costa, ‘the banking sector was short of liquidity, so the banks exposed themselves to the criminal syndicates, who had cash in hand. It was pure quid pro quo: Banks needed cash, and criminal syndicates needed somewhere to put their cash. And we are talking about huge amounts of money.’ Criminal syndicates, he says, ‘will penetrate where there is least resistance, where the banks’ need is greatest. So it was Western Europe in 2003 and the USA and UK in 2007-2008’."

If you weren’t previously outraged at the behavior of our financial institutions—what’s holding you back now?