• In this special contributor piece, longtime fincrime compliance thought leader Dev Odedra, dissects and condenses more than 550 pages from three seminal annual reports covering illicit narco trafficking trends, threat groups, laundering tactics and the effectiveness of compliance laws at the country level to stop them.
• While not light bathroom perusing, the U.S. International Narcotics Strategy Report (INCSR), a two-part behemoth covering narco trafficking and laundering trends and the National Drug Threat Assessment (NDTA) is required reading for anti-money laundering (AML) compliance professionals, with insight aplenty into foreign and domestic threats.
• A quick snapshot: While drug seizures in recent years have been mixed – in 2019, fentanyl seizures reached the highest recorded levels since at least 2015 as cocaine seizures remained steady and heroin seizures declined – cash seizures soared to nearly $370 million, a jump of more than 60 percent from the prior year.
• As well, in the latest list of “major money laundering jurisdictions,” the controversial list of some 80 countries, including the U.S., U.K., Iran, Russia and others, remained relatively unchanged, dropping Azerbaijan and Bosnia and Herzegovina from the prior year’s iteration.

By Dev Odedra
Independent AML expert, director, Minerva Stratagem Consulting
March 12, 2021

With editing and minor content contributions by ACFCS VP of Content, Brian Monroe

Even before the coronavirus pandemic twisted the world to its whims, US federal investigative agencies over roughly the last year saw seizures of sullied cash surge, even as other drug interdictions remained stable – or even dipped.

The lockdowns and drop in global economic trade and financial throughput, though, didn’t just make it more difficult for criminals to move drugs and launder ill-gotten gains, the pandemic also crimped investigative training and anti-money laundering (AML) capacity building offered by federal investigators – forcing many agencies to drop programs or go virtual.

Those are just a few of the key takeaways, tips and trends from the U.S. Department of State’s just-released 2021 International Narcotics Control Strategy Report (INCSR), an annual mammoth tome covering more than 450 pages grading country-wide counter-financial crime efforts and tracking where drugs are produced, sold and where illicit financial flows are gushing.

The report is broken down into two parts, one focusing on money laundering and AML compliance and the other, narcotics production, trafficking and related financial networks.

Released in parallel, the DEA also unveiled its latest National Drug Threat Assessment (NDTA), adding more depth and dimension to narco laundering techniques and regional hubs in the country where states and cities are succumbing to criminal influence and infiltration.

Overall, the reports give new texture and volume to the corrosiveness of corruption – an endemic challenge in many countries and the anathema of effectiveness – and renew the call for better and broader training on investigations and deeper and more practical education to further knowledge on the more nuanced, dark corners of AML compliance.

A quick snapshot: While drug seizures in recent years have been mixed – in 2019, fentanyl seizures reached the highest recorded levels since at least 2015 as cocaine seizures remained steady and heroin seizures declined – cash seizures soared to nearly $370 million, a jump of more than 60 percent from the prior year.

To read the latest NDTA, click here.

To read the latest INCSR part one on Drug and Chemical Control, click here.

To read the latest INCSR part two on Money Laundering, click here.

The bevy of reports also highlight the increasing diversity of criminals more aggressively using virtual worlds to sell drugs and move funds and the stubborn global bastion, and investigative stumbling block, of a broad range of illicit actors hiding behind anonymous ownership structures in opacity-opposed offshore secrecy havens.

“Increasing the transparency of beneficial ownership remains a central focus of AML efforts, appearing in coverage of some recent high-level corruption allegations in the media,” according to the INCSR.

“Shell companies, many located in offshore centers with secrecy stipulations, are used by drug traffickers, organized criminal organizations, corrupt officials, and some regimes to launder money and evade sanctions,” with a more recent and irritating wrinkle being “Off-the shelf” international business companies (IBCs).

These IBCs can be purchased via the internet and “remain a significant concern by effectively providing anonymity to true beneficial owners,” according to the report, noting that for many countries, making progress to shine a light on corporate opacity is a red badge of courage.

“While this report reflects that beneficial ownership transparency remains a vulnerability in many jurisdictions, it also highlights important steps taken by many governments.”

Hefty reports required reading for AML teams, but must be weighed in context

While not light bathroom perusing, the reports are required reading for anti-money laundering (AML) compliance professionals.

These illuminated manuscripts offer insight aplenty into foreign and domestic threats covering illicit narco trafficking trends, threat groups, laundering tactics and the effectiveness of compliance laws at the country level to stop them.

As well, in the latest list of “major money laundering jurisdictions,” the controversial list of some 80 countries, including the U.S., U.K., Iran, Russia and others, remained relatively unchanged.

In the 2021 list, the typical rancor tied to the rankings was more muted than usual, with the U.S. dropping Azerbaijan, Bosnia and Herzegovina.

In the 2020 list, the U.S. added the Kyrgyz Republic and Turkmenistan and dropped Serbia.

In the 2019 list, the U.S. dropped Egypt, Cambodia, Guinea Bissau, the Kyrgyz Republic, Lebanon, Portugal, South Africa, Switzerland, Turkmenistan and Uruguay – a detail that should have been woven in and weighed by compliance professionals in their regional fincrime and compliance risk rankings.

The list, however, is just one data point and should be weighed and viewed in context with other FATF, transparency, corruption and watchdog country risk rankings.

Why?

The INCSR list paints with a very broad brush, mentioning Afghanistan and Iran in the same breath as Canada, the Netherlands, the United States and United Kingdom – one group considered roiling and rogue regimes and another often touted as global AML leaders.

The reports, particularly tied to money laundering, give key insight into country risks for AML, a term that is mentioned more than 700 times.

As well, law enforcement investigative and training focal points could preview national AML priorities as part of updated countercrime rules passed by Congress and concurrent adjustments to prioritize investigative outcomes over rote regulatory tasks.

For the United States, considered a global leader in fincrime compliance rules and enforcement, one of the few positive outcomes of 2020 was Congressional and U.S. Treasury updates under the Anti-Money Laundering Act (AMLA) and a sister advanced notice of proposed rulemaking (ANPR) that retools and refocuses the entire regime.

Some reading of the tea leaves in the reports: in the INCSR tomes covering 2020, 2019 and 2018 tied to laundering, the term “Virtual currency” occurs 82, 63 and 46 times respectively, with the term crypto rising to 20 times, from 11 and 12 mentions in the prior years.

In the latest INCSR, the status of financial crime compliance programs around the world continue to take up quite a bit of ink.

In tandem, and similar to the Paris-based Financial Action Task Force (FATF), which sets global AML standards, the latest INCSR gave more attention to the effectiveness of country financial crime investigations and AML laws, including detailing if the country crushed any large, complex international cases or levied any significant, dissuasive fines for FI compliance failures.

As for the term “effective,” that is one high on the list of priorities, averaging more than 100 times in recent years in INCSR reports tied to laundering trends and AML programs.

Training: A glimpse ahead to future AML priorities?

But in order to truly be effective, countries need advanced training and in certain cases technical assistance to be brought up to global standards.

Overall, foreign training by U.S. investigators and regulators took a hit, with some agencies not able to do any, and others doing everything through virtual classrooms.

Some success stories include the efforts of Immigration and Customs Enforcement, Homeland Security Investigations (ICE HSI) units.

During 2020, ICE HSI provided critical training and technical assistance to the United States’ foreign law enforcement partners, including:

In Canada

• ICE HSI worked with Canadian law enforcement agencies to provide training on cryptocurrency, the dark web, asset forfeiture, and financial investigative techniques.
• ICE HSI deployed personnel to the Canada Border Services Agency’s Trade Fraud and Trade Based Money Laundering Center as well as with Public Safety Canada and the Royal Canadian Mounted Police Financial Crimes Coordination Center to increase information sharing in financial investigations and combatting money laundering.
• ICE HSI partnered with Caribbean law enforcement agencies to provide training on U.S.-based firearm export violations and its ties to narcotic smuggling within the United States.

In Asia and Europe

• ICE HSI trained bank officials and law enforcement partners in Malaysia and France on the ties between cryptocurrency money laundering and those engaged in crimes against children, child exploitation, and overall TBML.

In South America

• ICE HSI assisted the Peruvian National Police in investigating TBML occurring within Peru and trained Colombian military, tax and customs, and financial investigative offices on money laundering and contraband targeting to identify and disrupt illicit financial activity taking place along the country’s remote coasts.

Central America

• ICE HSI provided training on cryptocurrency investigations to Panamanian partners within the Panama National Police, its Public Ministry, and other Panamanian law enforcement bodies.

Why we fight: drug overdose deaths, particularly tied to fentanyl, reach grisly record

At the heart of the combined efforts by AML officers, regulators and investigators to cripple narco networks is the belief that by stopping the flow of drugs, and crushing financial networks, more lives can be saved from the death grip of the opioid epidemic.

At more than 81,000 drug overdose deaths in the US in the 12 months to May 2020^[1], the highest number of drug overdoses ever recorded for a 12-month period, the threat and effects of drug trafficking remain as material as ever.

More than half of these deaths, 45,000, have been from synthetic opioids, namely attributed to Fentanyl.

Although heroin and cocaine remain on continuous supply, the continued and ever-increasing threat of Fentanyl continues.

If anybody wanted to know just how dangerous Fentanyl is, they need only take a look at the CDC (Centers for Disease Control and Prevention) website, which spells it out: “Fentanyl is estimated to be 80 times as potent as morphine and hundreds of times more potent than heroin”^[2].

It is so dangerous that even those handling it as part of trafficking it take extra precautions with protective equipment, so as to not come into direct contact with it.

The INCSR and NDTA make for both enlightening and sobering reading for anti-financial crime professionals on threat to the US from drug trafficking, as well as the financial crime that goes with it.

Anti-financial crime professionals in the US and internationally should not only be cognizant of the drug trafficking landscape but also the financial crime section detailed in the NDTA under ‘Illicit Finance’ and Part 2^[3] of the INCSR, which is dedicated to money laundering.

Part 2 of the INCSR reviews the AML legal and institutional makeup of countries around the world and highlights the most significant actions and steps each has taken to improve their AML regimes.

It covers vulnerabilities and deficiencies of the various regimes and identifies each country’s ability to cooperate in international investigations and notes the US’ provision of AML-related technical assistance.

The ‘Illicit Finance’ section of the NDTA provides more granular insights into methods used to launder proceeds of drug trafficking.

COVID-19

The earlier effects of restrictions due to COVID-19 meant that drug traffickers faced not only difficulties in the distribution of drug flows out of the US, but also the repatriation of funds back to home countries.

The restrictions meant cash movements presented a higher risk of interdiction by law enforcement, whilst TMBL (Trade-Based Money Laundering) methods also become more difficult as more and more businesses deemed ‘non-essential’ were forced to close or risk standing out if they remained open.

Dark web market dealers also faced difficulty earlier on, in terms of supplies, and the dip in Bitcoin price in March 2020 due to the uncertainty caused by the pandemic meant that dealers ran the risk of price volatility wiping out value in their holdings.

Over the longer term, none of this has deterred those trafficking drugs, criminal elements have adapted – as they always do.

Cash is King

A significant volume of illicit proceeds continues to be sent back every year from the US via bulk cash smuggling according to the DEA’s NDTA.

Whilst common methods of bulk cash transfers include privately held vehicles, passengers on commercial flights, both within and leaving the US, where also found to be used in moving cash related to drug trafficking proceeds.

Cash remains king when it comes to drug trafficking and restrictions at the US-Mexico border due to the pandemic. The result: law enforcement agencies saw that US dollars accumulated on the US side.

Transnational criminal organizations (TCOs) continue to “repatriate a significant volume of illicit proceeds every year via bulk cash smuggling, despite the existence of more modern methods of transferring money,” according to the reports.

In 2019, there were more than 3,000 bulk currency seizures in the United States, representing more than $368 million seized, a 62 percent increase in volume from the almost $227 million seized in 2018.

Between 2010 and 2018, the volume of bulk currency seized has steadily dropped, with 2019’s increase being an outlier to this trend. The number of seizure events in 2019 (3,454) was a 39 percent increase from the previous year (2,487), according to the report.

This meant criminal organizations began to increase, not only the frequency, but also the volume of bulk cash shipments across the border.

Reports in May 2020^[1] stated that in New York cash seizures were up 180 percent when compared with the previous year at the time.

The West Coast was no different.

In the greater Los Angeles area, the cash seizure figures had more than doubled from $4.5 million between March to May in 2019 to $10 million in 2020 over the same period.

Tried and Tested

The NDTA also goes on to highlight that common methods of money laundering drug proceeds continue to be used along with combining old and new methods in further attempts to avoid detection, including casinos, high value assets, trade, crypto and more.

Casinos, which offer the opportunity to gamble high values and volume, remain a common method for drug money launderers.

The ‘Cullen Commission’ in Canada^[1], an inquiry into money laundering in British Columbia, has sparked media headlines, where evidence has been given on the use of casinos to launder significant sums of illicit proceeds, including drug money.

The evidence details the connections between casinos in the British Columbia region and other casinos in Macau and Las Vegas, with connections to international drug traffickers and loan sharks transferring funds between Vancouver, Latin America and Asia through Chinese underground banks^[2].

Other common methods money launderers use to move illicit drug trafficking proceeds include the use of businesses trading high value assets, such as property, vehicles and jewelry.

Where some of these businesses do not have any reporting requirements, this easily allows value to be moved around unnoticed under the cover of business transactions.

The report also highlighted that criminals continue to use impenetrable corporate opacity bastions as bank and investigator stumbling blocks.

The ease with which companies could be set up in the US, often with little information required, has allowed for relatively quick and easy vehicles within which illicit finances could be moved into, held and transferred.

Although the use of shell and front companies has remained a common vehicle of choice to help disguise the source of their illicit funds related to drug trafficking, the recent introduction of National Defense Authorization Act of 2021^[3], a bill passed in January 2021, may be a step in the right direction towards greater transparency and help stop shell corporations being used to facilitate the transfer of illicit funds from corruption to drug trafficking.

Complexity and Combination

Although many tried and tested methods continue to be used to launder drug trafficking proceeds, the NDTA also points out that the complexity of money laundering methodologies has increased today.

Criminal organizations will adapt and combine methods to continue to launder money.

An example given in the NDTA is the use of ‘third-party money brokers.’ Those involved in drug trafficking will look to send funds back outside the US, making use of the networks of accounts and companies created by these brokers, many of which only exist on paper.

This activity can be combined with other methods such as the use of BMPE (Black Market Peso Exchanges) and TBML activity.

The report points out that it can be hard to prove, due to their nature, that these third-party money brokers knew they were helping move illicit funds from drug trafficking activity and as a result tend to avoid the legal consequences of money laundering.

It also notes that such money laundering outfits have increasingly been used “to simplify the acquisition and payment for precursor chemical shipments.”

Whilst BMPE’s are not new, some may remember a FinCEN Advisory in 1997 detailing their use by Colombian drug cartels^[1], yet they continue to be used today and have evolved since.

A recent settlement in January 2021 showed that, whereas previously BMPE’s were used in TMBL schemes, on this occasion a real estate company was used as part of the scheme which resulted in the forfeiture of approximately $30 million to resolve charges of laundering drug money^[2].

Virtual Currencies

Advances in financial technology from mobile Apps and decentralized platforms away from more conventional banking and transacting has led to the rise of Virtual Currencies, such as Bitcoin.

While giving more options to store value in a global and digital, if volatile, format, it has also opened up more options for criminal organizations to transact.

Although the illicit purchase of drugs on the Dark Web has often been associated with tech savvy drug purchasers, large-scale drug traffickers have not typically been associated with using virtual currencies in large amounts currently.

The NDTA does however highlight that money laundering groups are using virtual currency ATM’s (Automated teller Machines) to move illicit proceeds of drug trafficking as these ATM’s accept cash, which is quickly and easily converted to virtual currencies.

Other individuals working with the narco group could then morph the value back from digital to cash at an ATM in another part of the world, typically regions with weak AML laws and law enforcement information sharing treaties with the US.

Although these types of ATM’s are regulated in the US, this has not stopped owners looking to knowingly accept illicit cash to help launder the proceeds of drug trafficking.

Cash deposited into these ATM’s can be mixed with that of revenues from the ATM owners whilst the illicit funds have been converted to virtual currencies that can be used for onward transfers and conversion back to cash.

Strikingly, the report also states such ATM’s “may be unlisted, and unavailable for use by the general public; instead kept hidden away for exclusive use by money launderers and couriers.”

An announcement by the DOJ (Department of Justice) in mid-2020^[3] of charges against a man who ran an illegal virtual currency ATM business highlighted just how much illicit cash could easily be moved through virtual currency ATM’s when unscrupulous owners operate them with no regard for who or how they are set up and used.

In the case, a California man going by the alias ‘Superman29’ owned and ran an illegal virtual currency MSB (Money Service Business) called ‘Herocoin.’

He was accused of intentionally not registering his business with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), a requirement under AML rules.

As well, even after they contacted him asking him to register the operation, he failed to comply with any of the core AML duties, including customer due diligence, risk ranking and suspicious activity reporting requirements.

In all, the business exchanged up to $25 million according to investigators, which included funds on behalf of criminals, through both in-person transactions and Bitcoin ATM kiosks – with transactions running up to $25,000 each and exchange rates well above market rates, some as high as 25 percent.

Other examples of the use of virtual currencies with a drug trafficking nexus include reports where the Head of the Mexican Finance Ministry’s Financial Intelligence Unit (UIF), Santiago Nieto, was quoted in December 2020 saying “There’s a transition to committing crimes in cyberspace, like acquiring cryptocurrencies to launder money … and the pandemic is accelerating it”^[4].

As the adoption of virtual currencies continues to grow, drug traffickers and those that launder drug money will also continue to increase their use of crypto coins.

The NDTA notes DEA reporting has shown times where bulk currency shipments have been completed using virtual currency as opposed to cash, with this money then being integrated into TBML schemes.

The use of virtual currencies in this manner, with tried and tested schemes such as TMBL, suggests a willingness to combine old and new methods to help laundering drug proceeds and shows the willingness of criminal organizations to adopt new technology such as virtual currencies.

Mexico cartels continue exerting influence in U.S. with trafficking, laundering networks

The NDTA also offers a great resource for fincrime compliance officers attempting to better calibrate and calculate domestic and international money laundering risks in the form of a map detailing areas of U.S. influence from the largest cartels, or transnational criminal groups (TCOS), in Mexico.

The illuminating graphic notes that influence stretches far beyond border states like California, Texas and related regions, but has nodes of illicit power dotting dozens of states and cities, from Detroit to Denver, Colorado Springs to Columbia, and more.

Mexican TCOs “generate billions of dollars annually through the sale of illegal drugs in the United States,” according to the report, including using members to transport cash across the border in vehicles, small aircraft, and by couriers.

In addition, they also use “wire transfers, shell and legitimate business accounts, funnel accounts, and structured deposits with money remitters in order to move money while concealing the routing of the illicit proceeds.”

As we highlighted as a trend with criminal groups across the globe, Mexican TCOs also are more aggressively using cryptocurrencies to “further their criminal enterprise” along with engaging Asian money laundering organizations (MLOs) to cleanse ill-gotten gains on behalf of the cartels.  

No End in sight

From the ever-increasing damage caused by Fentanyl in the US to the expanding shift toward larger consignments of cocaine throughout Europe^[1] evidenced by the record seizure of 23 tons of cocaine in February 2021^[2] to recent reports that Asia’s drug lords in the Gold Triangle have started to produce their own precursors rather than importing them^[3], drug trafficking continues to remain a threat.

Anti-financial crime professionals need to ensure they are ready to rise to the challenge of continuing to keep pace with not only understanding the methods used to launder the proceeds of drug trafficking, but also the threats and methods used to traffic the drugs, not only locally but globally.

Dev Odedra is an independent anti-money laundering and financial crime expert.

He has more than a decade of experience in managing financial crime risk in the retail, corporate and investment banking sectors.

His expertise covers investigations, advisory and controls implementation and improvement.

Dev is also a prolific author and gathers and analyzes many of the biggest financial crime compliance news stories on social media to help the community keep abreast of key criminal, regulatory and program trends.

Want to chat with Dev? Feel free to connect with him here.