Mo' Money, Mo' Problems

Sunday's front page of The New York Times featured a story about the DEA laundering Mexican cartel cash. I told myself I wouldn't write about the drug war again on this blog, but the story caught my attention. In a previous post I argued that before the US further militarizes the drug war, it should first look to shut down cartel financial networks. I still stand by that argument, but I would like to explore the matter further in this blog entry.

The Sunday NYT article claims that DEA agents have helped smuggle and launder millions of dollars in profits for Mexican criminal organizations. Cartel members would unknowingly transfer cash to undercover agents who, instead of seizing the money and arresting the drug dealers, would deposit the profits in cartel accounts. Former DEA officials were quoted defending the agency's operations by claiming that the laundering schemes had to lead to concrete results, or else the DEA would potentially be the world's largest money launderer. While I understand the intent of these quote, I think their attempts at mixing frankness and opacity just provides additional fodder to conspiracy theorists who believe the DEA, CIA, and FBI are the world's largest drug cartel. After tweeting the NYT DEA money laundering expose, a drug legalization advocate from Australia responded and assured me that this was all part of a plan to capture drug profits for the US government.

Earlier last week, the L.A. Times published an article highlighting the Mexican government's anti-laundering efforts. Whereas the NYT article estimates that $18-39 billion in drug money travels between Mexico and the U.S. annually, the LAT piece places the amount closer to $50 billion — about 3% of Mexico's legitimate GDP. The LAT argues that Mexico's anti-laundering efforts are ineffective because the majority of cartel profits are laundered in the US and other countries.

To me the DEA operation resembles ATF's now (in)famous "Fast and Furious" operation in which the ATF transferred guns to Mexican cartels and allowed them to walk into Mexico. Both the ATF and DEA operations attempt to crack criminal networks: the DEA watches to see where the money goes, and ATF tried to map arms trafficking networks. Unfortunately for the ATF and innocent people in Mexico, the gun-walking operation did not work. The quotes from former DEA officials imply that the agency would not be allowing money to "walk" if it didn't lead to results, otherwise the DEA would simply be guilty of allowing money to reach the hands of criminals who then purchase guns and pay off Mexican law enforcement. Still, though the former DEA officials imply success, they do not define how they measure favorable outcomes. Blogger James Bosworth of Bloggings by Boz raises some important questions about the cost-benefit analysis which informs the DEA's laundering operations:

"I'd like to know how they run the cost-benefit analysis on these operations. Is it worth laundering $10 million in order to seize a $100 million in drug trafficking assets? I think that's a great ROI and would agree. Would it be worth laundering $10 million in order to arrest five guys and get back the $10 million? I'm not sure. Would it be worth laundering $10 million to make arrests that eventually prevent 100 murders in Mexico? I think that's a good question to ask, but I'm not sure something so complex can be measured clearly."

I agree with Bosworth's assessment of the cost-benefit analysis. At this point, the DEA operation raises more questions than it answers. With news that Congressional Republicans are opening an inquiry into the money laundering operation, we may have more information to judge its worth in the near future.

The recent spotlight on US anti-laundering efforts in the drug war reminded me of an excellent article I read last year about laundering and financial institutions. Wachovia, now owned by Wells Fargo, admitted its negligence for failing to spot laundered money from Mexico. Bloomberg reported that between 2004 and 2007, Wachovia handled nearly $380 billion from Mexico which it failed to properly investigate, amounting to the largest ever violation of the Bank Secrecy Act, a law requiring financial institutions to report money laundering. Wachovia's violations were so blatant that the head of the bank's anti-laundering unit quit in disgust after bank officials ignored the evidence that Mexican cartels were using the bank to transfer funds. The Bloomberg article points out that other US banks are also used to launder money, but that the US government lacks the resources and will to fine and prosecute them. In essence, the article argues, American financial institutions are too-big-to-fine: if the US government were to charge banks for failing to follow anti-laundering procedures and regulations, then it could "cause panic in the financial markets."

While it may look bad to have the DEA launder millions of dollars in cartel revenues, does it really have a choice if US banks continue to ignore their responsibilities under the Bank Secrecy Act? The DEA is far too small to track and confiscate $50 billion in drug profits. Instead, private banks should bare the responsibility for making sure criminal organizations do not launder money through their systems. Though some experts disagree, I maintain that cutting off cartel money supplies would be a major step in weakening Mexico's criminal organizations; however, the US and Mexican governments need the cooperation of global financial institutions. Otherwise, the DEA's small scale money-laundering schemes will be about as effective as trying to plug a leaky dam with your pinky finger.