Mexican drug kingpin Joaquín "El Chapo" Guzmán was jailed for life in the US for international drug smuggling and money laundering. Guzmán, head of the Mexican Sinola Cartel, made so much money from drugs that he once made it on the Forbes Rich List with an estimated wealth of €1bn, with a reported €14bn having been earned during his “career” from the proceeds of crime. With all this money being generated surely one of El Chapo’s biggest headaches was finding ways of laundering it – so how did he do it?
Guzmán’s primary market was the US which meant most of the cartel’s income would have been in US dollars. In order to launder this money, Guzmán would have needed to have found methods of getting the money into the US banking system. Despite US bank’s having controls against money launders – criminals find ways to exploit the system resulting in the proceeds of crime entering the banking systems.
One method Guzmán’s cartel used to get the money into the banks was through the concept of Smurfing. Smurfing is the method of breaking up a transaction involving a large amount of money into smaller transactions below the reporting threshold. In the US, the Banking Secrecy Act (BSA) sets this threshold at USD$10,000. Whilst this method of laundering is relatively easy to identify through transaction monitoring systems and techniques, the size of Guzmán’s cartel could have resulted in tens of thousands of individuals making seemingly random and innocuous payments in the US banking system which would have been more difficult to identify.
Once the money is in the banking systems the money is laundered by people making payments and money transfers to different accounts in different names in different countries - this makes trail difficult, if not nearing impossible to follow the given the likely number of people and payments involved in Guzmán’s criminal network.
Another method Guzmán used to launder vast amounts of money was through trade based money laundering. FATF define trade based money laundering as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins”.
Guzmán once bought large amounts of clothing from the LA fashion district and would ship it to Mexico where it was sold for Mexican Pesos enabling the money of having the image of legitimacy. Although the US law enforcement cracked this racket, it does show the need for cross-industry understanding of money laundering techniques. The Sinola cartel were able to launder money through the fashion industry due to lax understanding and reporting of trade based money laundering in the fashion industry.
The likelihood of drug trafficking and money laundering being seen on the same scale as El Chapo’s cartel any time soon are unlikely; however, whilst there is a demand for narcotics the Mexican and other drug cartels will supply this demand globally and will need to launder the proceeds of crime through the global financial system.
Financial institutions need to ensure their systems and controls to prevent and identify money laundering are fit for purpose and are regularly tested, as well as working collaboratively to monitor and report potential illicit activity. Law enforcement also need to work across different industries to ensure everyone is aware of the risk of a seemingly innocuous industry, such as the fashion industry, being used as a way for criminals to launder the proceeds of crime.
A sobering thought is that whilst Joaquín "El Chapo" Guzmán is locked up in his cell for the rest of his life (unless he escapes again!) global financial institutions are likely to be used to launder his millions for many years to come.