Casas de Cambio

April 27, 2008

The latest bank to be have troubles with the Mexican firms known as casas de cambio is Wachovia. Off the heels of the Golden West fiasco and the settlement they made in Philadelphia regarding telemarketer accounts:

Federal prosecutors are investigating Wachovia Corp. as part of a broad probe of alleged laundering of drug proceeds by Mexican and Colombian money-transfer companies, according to people familiar with the matter.

Wachovia is one of several large U.S. banks that have come under scrutiny for their relationships with such companies. It is in discussions with the Justice Department about reforms in its compliance system and faces a possible deferred-prosecution agreement that would require extensive federal oversight.

An official of Wachovia said it is cooperating in the probe. Wachovia, based in Charlotte, N.C., and some other U.S. banks severed relationships with Mexican foreign-exchange firms in December and January after authorities began their inquiries. Some have struck agreements with the government to improve their efforts to fight money laundering, avoiding prosecution.

This was reported but a few days ago, but this is an old story.

In September, a U.S. registered Gulfstream II business jet carrying 3.3 tons of cocaine crashed in Mexico’s Yucatán Peninsula. A year earlier, a DC-9 aircraft loaded with 5.7 tons of cocaine from Venezuela was seized in Mexico by Mexican soldiers.

Both of the planes were purchased through a Mexican exchange house called Casa de Cambio Puebla, and that’s turning into a problem for Wachovia, the fourth biggest bank in the United States, and Harris Bank, the Chicago unit of Canada’s BMO Financial Group… Casa de Cambio Puebla was founded in 1985 by Mexican businessmen, say court filings, and licensed by Mexican banking regulators. It has 17 branch offices throughout Mexico, 240 employees, and maintained 46 U.S. dollar interbank accounts at Wachovia branches in Miami and New York.

So it just isn’t Wachovia. In August, American Express (nyse: AXP news people ) agreed to pay $65 million, the biggest-ever money-laundering penalty paid by a U.S. financial institution. The penalty was made in connection with Justice Department claims that American Express’ international private banking group was used to launder $55 million of Colombian drug money.

Casas de cambio, or money-exchange houses, are located in Mexican border towns primarily to allow expat workers to send remittances back to their families.. They have been suspected of money laundering for some time, as this story from 1999 shows. Travel books say to avoid them for changing money because the exchange rates aren’t nearly as favorable as at banks or ATMs. This alternatively makes casas de cambio quite profitable to investors in them.

Here are some details on may have happened regarding Casa de Cambio Puebla:

For those readers who have asked me to detail the reasons why the United States Attorney froze funds at Wachovia Bank belonging to the Mexican money transmitter Casa de Cambio Puebla SA, the alleged scheme the MSB was involved in has finally appeared in a money laundering case filed last month in US District Court in Miami against Venezuelan national Pedro Jose Benavides Natera. The defendant, according to the arrest affidavit filed in the case by a Special Agent of the FBI, participated in a complex money laundering scheme to turn illicit profits of Venezuelan drug trafficking organisations into clean funds, which were then used to purchase high-performance turbo-prop aircraft for drug smuggling operations. The MSBs facilitated the money laundering, according to the allegations. What is important about this case is that it focuses on Venezuelan, not Colombian, drug trafficking organisations, which are of late being targeted by US law enforcement. A number of Venezuelan-owned aircraft have been seized in the US during the past year, and rumours are flying that several indictments of Venezuelan nationals have been issued, and remain sealed pending the arrest of these individuals on American soil. It would appear that US has decided to ignore Venezuelan-based drug trafficking organisations no longer. One wonders how many foreign vacationers to Disneyworld unexpectedly end up in the US Marshals holding cells in Orlando this year.

Briefly, the scheme went like this:

  • The drug proceeds were sent from Venezuela to four different casas de cambios in Mexico, including Puebla.
  • At those MSBs, cooperating individuals sent the funds on to the US, into so called “buffer” accounts, operated by individuals who, for a fee, would serve as fronts for the drug traffickers. The affidavit shows that the traffickers spread the funds amongst the MSBs, to allay suspicion.
  • The buffer account holders would then transfer funds to aircraft brokers, for the purchase of aircraft for the traffickers’ use. Whether the aircraft brokers themselves were involved cannot be determined at this early phase of the case.
  • The US aircraft registrations, after purchase, were cancelled, and the aircraft shipped to front men in Venezuela. One King Air appears to have been seized by law enforcement.

It’s not easy to detect the “bad” transfers.

“All money transfers look alike. Your small funds go into an electronic vat of hundreds of millions of dollars, so often asking us to pick out the laundered money is like trying to pick one particular strand of spaghetti from a bowl,” Hearns explained. “The functionality of the expat sending money home to family or for bills is very different from the functionality of a money-launderer who is trying to hide a trail and make it as convoluted as possible. But on paper the two transfers look alike.”
Unfortunately for Mexican exchange houses and their convenience-addicted customers, Wachovia has decided to solve the dilemma by playing it very safe. In late January, the bank announced that it was terminating its partnerships with many Mexican exchange firms, and closing the accounts involved.
“It’s had a negative, horrible impact,” said Alejandro Espinoza, exchange director at Sterling Casa de Cambio, one of Guadalajara’s largest and most reputable firms. “A lot of exchanges here dealt with Wachovia. The U.S. banks have the mechanisms to detect laundered money and they are in control of that aspect of it. They give us parameters and we comply, but these have started changing very quickly, with them asking for more and more details.”
And while Espinoza describes the services Sterling has always received from North American banks as wonderfully professional, those halcyon days of two-day money transfers may become a thing of the past.
“We’re dealing with our national banks now for transfers and we still haven’t found a partner to send Canadian dollars to Canada. We’re recommending people use their bank for those transactions for now,” says Espinoza.

Reminder from this recent report about the stakes involved with the drug trade:

Gun battles between rival factions of a Mexican drugs cartel have left at least 15 people dead in the city of Tijuana, near the border with the US.

Police said all the dead were from the Arellano Felix cartel, which has come under pressure from a rival gang.

Two were wearing police uniforms or equipment, but are thought to have been gang members, police say.

Drug-related violence is a serious issue across Mexico. Nearly 200 people have been killed in Tijuana this year. The rings carried the icon of Saint Death, a grim reaper figure that gangsters believe protects them, police said.

Banks are supposed to be very diligent. are required to be by law, about detecting money laundering. The short story is the Patriot Act and concerns about funding crooks and especially terrorists. So the banks have been spending a lot of $$$ trying to comply. Now, is the lack of apparent “due diligence” regarding the cases de cambio due to faults in processes and technology used to detect money laundering transactions?

Here’s a short course in money laundering, for your education.


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