U.S. GOVERNMENT PRINTING OFFICE

60–125 WASHINGTON : 1999

S. HRG. 106–198

THE BLACK MARKET PESO EXCHANGE: HOW U.S.

COMPANIES ARE USED TO LAUNDER MONEY

HEARING

BEFORE THE

SENATE CAUCUS ON INTERNATIONAL

NARCOTICS CONTROL

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 21, 1999

(

(II)

SENATE CAUCUS ON INTERNATIONAL NARCOTICS CONTROL

ONE HUNDRED SIXTH CONGRESS

CHARLES E. GRASSLEY, Iowa, Chairman

JOSEPH R. BIDEN, Delaware, Co-Chair

JEFF SESSIONS, Alabama

MIKE DEWINE, Ohio

SPENCER ABRAHAM, Michigan

BOB GRAHAM, Florida

DIANNE FEINSTEIN, California

WM. J. OLSON, Staff Director

SHERYL WALTER, Minority Staff Director

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Sen. Charles E. Grassley ......................................................................................... 1

Sen. Jeff Sessions .................................................................................................... 4

PANEL I

James E. Johnson, Under Secretary of Enforcement, U.S. Department of

Treasury ................................................................................................................ 5

Prepared Statement ......................................................................................... 10

Bonni Tischler, Assistant Commissioner, U.S. Customs Service ......................... 22

Prepared Statement ......................................................................................... 26

PANEL II

Al James, Senior Policy Analyst, Financial Crimes and Enforcement Network 47

Prepared Statement ......................................................................................... 50

PANEL III

‘‘Carlos,’’ A Peso Broker .......................................................................................... 62

Prepared Statement ......................................................................................... 65

PANEL IV

Ms. Fanny Kertzman, Director General of Taxes and Customs, Government

of Colombia ........................................................................................................... 72

Prepared Statement ......................................................................................... 75

Ambassador Michael Skol, President, Skol and Associates ................................. 95

Prepared Statement ......................................................................................... 99

ADDITIONAL RESPONSES

General Electric Response ...................................................................................... 113

(1)

THE BLACK MARKET PESO EXCHANGE: HOW

U.S. COMPANIES ARE USED TO LAUNDER

MONEY

MONDAY, JUNE 21, 1999

U.S. SENATE,

CAUCUS ON INTERNATIONAL NARCOTICS CONTROL,

Washington, DC.

The caucus met, pursuant to notice, at 9:05 a.m., in room SH–

216, Hart Senate Office Building, Hon. Charles E. Grassley (chairman of the caucus) presiding.

Present: Senators Grassley and Sessions.

Senator GRASSLEY. I would say good morning to everybody and

I want to thank you for being out so early at the beginning of a

week. I hope everybody had a good weekend. I want to welcome everybody here and obviously those who have traveled long distances

to be with us, some from other countries, to be here, and also those

who are witnesses and for your preparation and for taking time

away from your responsibilities at your particular agencies for

being here.

Before I say a few things in opening, it is usually better if I

would announce some administrative things so that we do not have

to be repetitive. Number one, members may or may not be in and

out. Sometimes Mondays it is difficult to have members be here,

but even when it is convenient for members to come, they may not

be here for the full period of time. So when that is the case or even

for those of us who will be here for the entire period of time, we

may not have time to ask all of our questions orally so we submit

them for answer in writing and the extent to which we do that, we

would appreciate response within two weeks, and those of you

maybe not familiar with that process, the staff of the caucus I chair

would be very happy to be helpful to you.

Secondly, sometimes people have longer statements than the

time allotted for them for their oral presentations. All of those oral

or written statements will be included in the record totally so you

will not have to ask and then we ask you to summarize and your

total statement will then be printed in the caucus record of this

hearing. It will be available after some period of time, sometimes

longer rather than shorter, for everybody to have a complete record

of today’s hearing. And so from that standpoint, I would appreciate

everybody knowing that that can be included.

I want to, a second time now, thank you for coming. Today we

will examine an issue that is of great concern to me and the Congress and specifically the work of this International Narcotics ConVerDate 11-MAY-2000 09:45 Sep 25, 2000 Jkt 010199 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\60125 pfrm08 PsN: 60125
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trol Caucus of the United States Senate, money laundering and

how the drug cartels are using U.S. and foreign companies to launder their drug proceeds. I am concerned also not only as chairman

of this caucus, but also this is a very big issue in international

trade and I serve as chairman of the Subcommittee on International Trade of the Senate Committee on Finance.

The method of money laundering capitalizes on the black market

peso exchange in Colombia and businesses in the United States,

Japan and other countries abroad, as well. Drug cartels generate

large sums of money from this illicit drug trade. Recent reports

show that the drug trade generates maybe over 55 billion a year.

This money obviously has to be laundered. One of the methods traffickers use is the black market peso exchange network. Drug traffickers use this exchange to help convert billions in U.S. currency

obtained from the street sale of narcotics into pesos so that they

can fuel the drug business at home.

Reports indicate that approximately $5 billion a year is being

laundered and this figure is rapidly growing. Effective money laundering is at the root of any successful drug cartel. It allows cartels

to reap the benefits of their ill-gotten gains by hiding their drug

money through a series of transactions evading detection by law

enforcement and banking officials. Drug traffickers no longer have

the ability to deposit millions of dollars of drug money into bank

accounts as a result of the increased awareness of banks, but we

have only made it just a little more difficult for them to get their

money converted.

We must be sure that we are taking the necessary steps to protect the citizens of our nation by preventing drug traffickers from

then obtaining the profits of their illegal activities. Much has been

done and much has been said about the movement of illegal drugs

into the United States, but the opposite side of the business, getting the profits from drug sales and other illegal enterprises out of

the United States and back into the hands of Colombia drug cartels, does not get as much publicity but is just as important.

During this hearing, we will hear the names of U.S. and foreign

companies that have unwittingly helped fuel the illicit drug trade

with the sales of goods that are exported and eventually sold in Colombia. These goods are being sold legitimately to export companies and businesses in Colombia. However, the problem is this merchandise, whether it be auto parts, computers, or refrigerators or

a lot of other items, is being paid for with cash generated by drug

sales on our streets and even in our school yards.

This happens through a middleman, the dollar peso broker. This

directly translates into a safe and effective method that facilitates

the ability of drug cartels to get drug proceeds back to Colombia

and into their pocketbooks. Cartels have learned a new way to circumvent the safeguard that banks and the governments have put

in place. Today, the black market peso exchange stands as one of

the most potent, effective, and dangerous forms of money laundering techniques employed by the drug cartel. It not only makes

American corporations unwittingly helping to accomplish the narcotic trafficking but perpetuates tax evasion, the growth of contraband, and ultimately the drug trade itself.

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Now this process works this way: cartels collect their cash from

the sale of illegal drugs in our towns and cities; the cartels then

sell their drug money for pesos on the black market peso exchange.

This is accomplished by a dollar/peso broker, a middleman in the

transaction that makes the exchange of drug dollars and pesos happen very smoothly and very quickly. Peso brokers have bank accounts in the United States to facilitate these transactions. The

peso broker assumes the risk of handling the narcotics traffic currency. For this reason, the dollars are usually sold at discount from

the official Colombian dollar/peso exchange rate. The peso broker

sells the dollars to business associates who deal in contraband

goods. They are Colombian importers that deal in smuggling of contraband into Colombia.

This contraband consists mostly of U.S. trade goods. The smugglers need large amounts of U.S. dollars in order to pay for U.S.

and foreign goods that they plan to smuggle into Colombia to evade

Colombian taxes and tariffs. In exchange for pesos from these

smugglers, the peso broker makes payments in U.S. currency for

these goods. The currency for these transactions is now largely supplied by the drug proceeds. The bottom line: the cartel gets pesos,

the Colombian smuggler gets currency to pay for the goods that he

smuggles, the peso broker gets rich, and U.S. businesses, Colombian and U.S. citizens pay the cost. And here is how. Our citizens

pay because drug smuggling is helped, legitimate business in Colombia is forced to close from this unfair competition, and U.S.

companies find themselves facilitating money laundering.

Now, in preparing for this hearing, I and my staff learned how

dangerous this process can be. Potential witnesses who initially

agreed to testify anonymously later changed their mind. They declined because of the threat to them and the well-being of their

families, and we understand that. These witnesses represented not

only peso brokers but Colombian businessmen that can no longer

compete with the price of U.S. goods smuggled into Colombia as a

result of this process that I have outlined. This is despite the guarantee of anonymity that we gave them.

We also learned that a New York fabric company in Manhattan

under investigation by Customs knowingly accepted drug money as

payment for its fabric sales to Colombia. Last year, five people

pleaded guilty to money laundering charges in this particular case.

These cases are very difficult to detect and the investigations are

complex, very long-term and very manpower intensive. An example

that demonstrates this is last year’s culmination of one of the most

successful undercover operations in the history of the Customs

Service. Known as Operation Casablanca, this effort infiltrated and

dismantled a group of international bankers involved in laundering

drug money. The investigation revealed a top money launderer for

the Cali Cartel provided instructions to make a series of deposits

into accounts of cellular phones, computers and other wholesale

companies in Miami. This is typical.

This morning we will hear from several panels that will discuss

how the process works, what can be done about it here in the

United States, but also what can be done about it in Colombia.

There are many courageous people in Colombia fighting this illegal

drug trade. Today we are honored to have Ms. Fanny Kertzman,

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Director General of Taxes and Customs of Colombia. One of our

witnesses will be anonymous and talk firsthand specifically about

his work as a peso broker with drug cartels and how the cartels

conduct the money laundering portions of their drug trade. He has

agreed to testify despite risk and he will answer questions as fully

as possible as long as his identity is not revealed.

We need to address how to deal with this problem. U.S. companies cannot allow their companies to be used, whether knowingly

or not, as a way to fuel the illicit drug trade. I continue to stress

the need for a comprehensive counternarcotics strategy. I urge not

only the administration and U.S. law enforcement and citizens,

parents, clergy, and professionals, all of the above and more, to

help in this fight, but also we must involve U.S. and foreign businesses as well.

It is essential that we in Congress help build an awareness within the business community to better understand this problem and

how to fight it. I am in favor of voluntary compliance rather than

reporting requirements and even more so than more regulations. It

is more or less an enforcement of what is on the books as complicated as that enforcement might be. We must also look to U.S.

law enforcement and the difficulty that they have in detecting

these process. So I hope today that this hearing helps to bring U.S.

companies and others to the table to address this problem and that

is an open invitation from me not only to facilitate that process but

what can we do in government to be better cooperative to U.S. companies and other entities to help accomplish our goal.

Now, if the senator from Alabama would like to have an opening

comment, I would turn to you at this point.

Senator SESSIONS. Thank you. Briefly, Mr. Chairman, I would

like to thank you for looking into this issue. I think it is important.

I have always felt as a prosecutor for a lot of years and a federal

anti-drug prosecutor that has indicted quite a number of Colombians for various crimes involving drugs primarily that you follow

the money. That is a key way to do it. There are some things that

we can do that are effective such as forfeiting the assets of drug

dealers. I strongly believe that that is a key thing and I am somewhat concerned that there is legislation afoot that would reduce

the capacity of the federal government to do that. I think that

would be very unwise. I am open to see what we can do with regard to this market, peso market, but I am not certain that there

is a great deal that we can rightly achieve in this aspect of our efforts. But if it is, it would certainly be a good thing because if you

follow the flow of the money, you can usually find where the criminality occurs. Thank you, Mr. Chairman, for your leadership.

Senator GRASSLEY. Thank you for being a consistent participant

in the work of the caucus and also through our joint membership

on the Judiciary Committee in which a lot of this legislation would

find itself to be enacted and to consider.

Now, our first panel is already at the table. I thank them for

being very prompt. So we welcome James E. Johnson, who is

Under Secretary of Enforcement from the Department of Treasury,

and also testifying is Bonni Tischler, the Assistant Commissioner

for the Office of Investigations, U.S. Customs, and I know that

Commissioner Kelly was originally supposed to testify and that he

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is recovering from surgery and we all wish him a speedy recovery,

but he has also been very cooperative with this caucus, not only in

testifying but in working very closely with us on the issue of legislative authorization as well as our working together to try to meet

the needs of Customs for more money to help them do their job better. So I thank you both for being here, and Mr. Johnson, I will

start with you and please begin at this point.

STATEMENT OF JAMES E. JOHNSON, UNDER SECRETARY OF

ENFORCEMENT, U.S. DEPARTMENT OF THE TREASURY

Mr. JOHNSON. Thank you. Mr. Chairman, Senator Sessions, good

morning. It is a privilege for me to be able to appear before this,

the Caucus on International Narcotics Control, to speak about a

very important issue, and I am happy to be joined by Assistant

Commissioner Bonni Tischler. I have submitted a rather lengthy

statement for the record and with your permission, Mr. Chairman,

I would like to summarize.

As this caucus is aware, international crime constitutes a national security threat. It also is a threat brought home to us directly on our streets, in our schools, within our communities. Such

crime, particularly as it relates to drugs, is the work of international criminal enterprises. I am here to talk today about one of

the systems that these international criminal enterprises uses

which is the Colombian black market peso exchange system. This

system is perhaps the most dangerous and damaging form of

money laundering that we have ever encountered.

Today I wish to share with you how the Department of the

Treasury in concert with other law enforcement agencies, regulators and private sector representatives, is working to disrupt and

dismantle this money laundering system. Mr. Chairman, I would

like to thank this caucus for its leadership and its efforts on this

very important matter. Since the House hearing in 1997, the federal government has maintained its focus on the black market peso

exchange as a major component of its anti-money laundering

strategy.

We have taken several steps designed to enhance our efforts in

this fight. We have worked to design and implement smart and

tough law enforcement initiatives that are focused on the choke

points of the black market peso exchange system. The successes resulting from these initiatives have built upon a foundation of close

cooperation with our international partners in this effort including

and most importantly the government of Colombia.

Here I must acknowledge the outstanding efforts of Ms. Fanny

Kertzman, Colombia’s Director of Revenue and Customs Service.

Ms. Kertzman has worked closely with us, sharing information that

has enabled us to not only understand but to effectively begin to

move against the black market peso exchange. In order to place

these initiatives in their proper context, I would like to take just

a few moments to briefly summarize the operations of this system.

A more detailed account of the workings of the exchange system

will be provided by Alvin C. James, who is a senior policy adviser

for Money Laundering Enforcement at the Financial Crimes Network. He is also an IRS special agent.

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The Colombian black market peso exchange system is primarily

an exchange of currencies, the selling and buying of U.S. dollars.

The two major customers of this system are drug traffickers who

amass millions of U.S. dollars which they are unable to use unless

they are converted to pesos and Colombian importers who need

U.S. dollars in order to pay for illegal imports. Basically we have

a Colombian drug cartel with U.S. dollars in the United States who

need pesos and, on the other hand, you have Colombian importers

with pesos in Colombia who want to very often smuggle goods into

Colombia in contravention of Colombian laws, and they are looking

for United States dollars to pay for those goods. Enter the peso

broker. The Colombian importer or smuggler pays for the dollars

by providing pesos to the broker in Colombia.

For purposes of this example, and I would just give you a quick

example, let us assume that this peso broker is a small-time operator. He gives the importer an IOU in exchange for the pesos. The

IOU will be payable in dollars. The broker then sells the pesos to

the drug trafficker who pays for them by effecting the transfer of

United States dollars to an operative of the broker working in the

United States. Now the peso broker has dollars to pay the Colombian importer for the pesos. But instead of having the peso dealer

deliver the dollars in Colombia and exchanging them for the IOU,

the importer instructs the peso broker to use the dollars that have

been deposited often in a United States financial institution to pay

a U.S. merchant or a U.S. exporter for goods that he has ordered

and that will be smuggled into Colombia.

That completes the transaction and at the end the drug trafficker

has laundered his illegal profits and gets clean pesos in exchange

for dirty drug money. The Colombian importer is paid for merchandise in U.S. dollars purchased on the black market, which allows

him to circumvent Colombian laws, and the peso broker has collected a handsome commission from both the drug trafficker and

the importer.

Now with that as a backdrop, what I would like to do is with the

remainder of my time is focus on what we have done, what we are

doing and what we intend to do to combat this intricate and complex form of money laundering. As I said earlier, in putting together, in assembling and formulating our response to the black

market peso exchange, we have worked to design and implement

smart and tough law enforcement initiatives that are focused on

the choke points of the exchange system. Through these initiatives,

we have ensured our ability and have continued to make solid

cases hitting the black market peso exchange at every choke point.

In fact, Mr. Chairman, you identified one, just one example of Customs very successful approaches in dealing with this problem.

But to pull together the various strands and to pull together the

various efforts against this exchange, a single approach was not required, much more than that. And to that end, in 1998, at Treasury in Treasury Enforcement I established the Black Market Peso

Exchange Working Group. This working group devoted to the development of a comprehensive action plan to combat the black market peso exchange brings together in a coordinated effort the tools

of the Treasury Department, the tools of the Justice Department,

and all of our enforcement bureaus and regulatory agencies, not

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only within the Treasury Department but also external to the department.

This group has developed an internal but innovative action plan

that serves as a blueprint for coordinated, effective attack on the

black market peso exchange. The plan, which is not publicly available, will continue to evolve. The action plan is premised on three

basic principles: coordination and consultation among government

agencies in order to ensure smart and tough enforcement of existing laws against participants in the black market peso exchange;

international cooperation with our key allies; and finally outreach

to the private sector.

Since the early 1980s, we have successfully investigated and successfully prosecuted individuals laundering drug proceeds through

the black market peso exchange. In the past eight years alone,

Customs undercover operations have led to the seizure of $800 million, approximately 2,100 arrests, and the seizure of 100,000

pounds of cocaine. In addition, the IRS has investigated approximately 250 cases also related to the black market peso exchange.

The working group integrates law enforcement and regulatory efforts with intelligence data support. Through the Black Market

Peso Exchange Working Group, we have ensured that each of the

participating agencies is aware of information available to the others, as well as has means of accessing such information. Additionally, and in close coordination with Ms. Kertzman, it has created

an analytical subgroup devoted to the analysis of shared information, not only our information that has been shared, but information that has been shared and received from Colombian authorities.

This subgroup comprised of representatives from the Financial

Crimes Enforcement Network, Customs, Justice, the IRS, and

NDIC, the National Drug Intelligence Center, will join their counterparts in a bilateral task force initiative in Colombia, in Colombia, to review, analyze and discuss specific data that may well further the investigation and prosecution of cases against the black

market peso exchange.

For this and other reasons, I am particularly pleased that Ms.

Kertzman is here with us today and look forward to hearing her

confirmation that this task force will meet in Bogota in the very

near future. Such interagency work at home and abroad complements other resources. Customs, for example, in coordination

with FinCEN has recently established a national Money Laundering Coordination Center to coordinate and make available to

other agencies the intelligence generated from Customs undercover

operations targeting the black market peso exchange. And about

that, I expect you will hear a great deal more from Assistant Commissioner Bonni Tischler.

There is growing recognition that governments must deal firmly

and effectively with increasingly illusive, sophisticated and well organized criminals adept at exploiting opportunities and

vulnerabilities in any anti-money laundering regime. One of the

reasons that the peso exchange has become so prominent is because of the efficacy, the effectiveness, as, Mr. Chairman, you

pointed out, of the Bank Secrecy Act in trying to keep and keeping

out dirty money from our system. It is not easy for them to put

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dirty money in our financial system, and the exchange has developed, at least in part has expanded in response to that.

We must strive to work together, all governments, in a more coordinated fashion. And we must establish mechanisms that ease

the exchange of information, permit, encourage and increase collaboration, and improve cooperation bilaterally and multilaterally.

The department has made important progress in this area. There

is improved internal coordination of international anti-money laundering efforts across a broad range of federal agencies and regulators and programs with regard to the black market peso exchange efforts. For example, the departments of Treasury and Justice co-chaired two days of talks with senior officials from Colombia’s Customs, Foreign Trade and Banking Superintendents offices

on the black market peso exchange. We have not only discussed

what is going on, but we have discussed what steps each could take

separately as well as steps that we could take collectively to combat the problem.

These informal discussions represent an important breakthrough,

ushering in a number of cooperative initiatives and programs important to the law enforcement efforts in both countries. In addition, Treasury in close consultation with Justice and the State Department has begun to work with governments and officials from

the Free Trade Zones of Aruba and Panama. Bringing together all

of these key players in order to bring the collective weight of our

resources, experience and insights to bear on this money laundering system is integral to our overall black market peso exchange

strategy.

The department is also promoting several multilateral initiatives

that build upon these bilateral efforts and complement important

work being undertaken by organizations such as the Financial Action Task Force. FATF, which is what the Financial Action Task

Force is often referred to, brings legal, financial, and law enforcement experts into the policymaking process. Our action plan intends to build on this critical aspect of FATF’s anti-money laundering programs by proposing expansion of the process to incorporate trade and business represents and focusing upcoming meetings on trade related money laundering, a point, Mr. Chairman,

that you made in your opening statement.

Mr. Chairman, it is important for us to keep in mind that money

laundering is a global problem with serious repercussions in other

countries. The United States is not alone in facing this challenge

and we are increasingly dependent on the cooperation of our neighbors. We have a lot of work to do at home, too, particularly in the

private sector. The first step in forming an effective partnership

with the private sector must be to educate the public and the business community about this exchange, this system. FinCEN took an

important first step in July of 1997 by initiating a series of meetings with local and national banks in the Miami area.

These meetings culminated in a final meeting in November 1997,

after which FinCEN published its first advisory describing the

black market peso exchange to the law enforcement and financial

communities. FinCEN is issuing a follow-up to its advisory this

very day that updates the financial community on what we have

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learned as a result of regulatory measures and investigative efforts

undertaken recently.

Also, as a part of our effort to work with the business community, United States Customs Service is launching a national campaign today alerting businesses to the black market peso exchange

system and what to look for in order to avoid being used as part

of the money laundering scheme. In support of these efforts, this

week I will be speaking to the Association of Home Appliance Manufacturers to educate them about this important issue. The Department of Treasury has also begun an education process in the business communities of Colombia, Aruba and Panama. I am pleased

to report that all three governments have displayed great willingness to work with us in developing a coordinated approach to this

problem.

Mr. Chairman, by holding this hearing and recognizing the significance of a highly complex and systematically invasive criminal

operation, the caucus is making an important contribution towards

further informing our country’s debate about one of our most serious national security threats: narcotics related money laundering.

In closing, I believe that our strategy paves the way to make significant inroads against this system. We will seek to employ our

most effective tools to attack the black market peso system at its

choke points. We will work with our international partners and we

will reach out to the financial and business communities to emphasize the important role they can and must continue to play in this

fight. I would be happy to answer any questions you or any other

members of the committee have. Thank you very much.

[The prepared statement of Mr. Johnson follows:]

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Senator GRASSLEY. We will wait till Ms. Tischler testifies before

having a series of questions, but just let me make a statement and

in a sense asking you if this is a fair assumption. As I indicated

in my opening remarks, I do not see this hearing, unless something

dramatic comes out of it contrary wise, to be a call for new laws

or new regulations, and I think your testimony implies the same

thing, that we are talking about the enforcement of existing law,

that we are talking about how do we develop cooperation between

the private and public sectors within the United States and also bilaterally with other countries and also between the private sector

and the governments of those countries and government to government, and enhancing that cooperation to make sure that we get

maximum cooperation in solving this problem.

Mr. JOHNSON. Mr. Chairman, we have many tools available to us

to address this problem and our initial step in developing this plan

and moving forward is to see what we can do to maximize the use

of those tools, the regulatory tools we have, the statutory tools we

have, to maximize the resources of our international partners, and

to get the business community very much engaged in this process.

This has been the primary focus. There may be areas and we

would discuss those with the committee at a later time where we

could tweak the existing laws, but that is not our effort at this

time.

Senator GRASSLEY. And the extent to which usually you look to

Congress for direction, this is also an instance that if the Congress,

and particularly this caucus, and particularly the senators that are

on this caucus individually or collectively can be helpful, also do

not be bashful about suggesting certain things.

Mr. JOHNSON. We will not be.

Senator GRASSLEY. Ms. Tischler.

STATEMENT OF BONNI G. TISCHLER, ASSISTANT

COMMISSIONER, U.S. CUSTOMS SERVICE

Ms. TISCHLER. Thank you, Mr. Chairman and Senator Sessions,

for the opportunity to address you on the black market peso exchange or, as we call it, the BMPE. This trade based system of

laundering drug proceeds has been utilized by Colombia’s drug syndicates for a few years. Its existence, however, has not been widely

publicized or understood outside of the highly specialized world of

federal drug money laundering investigators and drug money

launderers.

The BMPE process starts with a peso broker. For a fee, these

brokers arrange the financial transactions necessary to launder the

drug cartel’s money. Broker activities include receiving and coordinating orders for money, locating sources of U.S. dollars, arranging

pick-ups and directing the placement of funds. Within the broker’s

network are others who perform various services for a percentage

of the broker’s earnings. Those working for the brokers pick up

cash, buy money orders and checks, open checking accounts, transport and smuggle money among other things.

The primary market in Colombia for large blocks of U.S. dollars

is the Colombian importer. In order to purchase goods for import,

the Colombian importer must first acquire U.S. dollars, which are

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cess to U.S. dollars is regulated by Colombian law and administered by their central bank. Before the Colombian Central Bank

will convert pesos to dollars, they require certification that government import permits be obtained, thereby ensuring that the requisite Colombian duties and taxes have all been collected.

The Colombian Foreign Exchange and Trade regime tends to be

expensive and naturally results in exposure to government scrutiny. An alternative, of course, is the underground system of BMPE

brokers which offers the businessman a choice and the drug trafficker an opportunity. A key component to the BMPE money laundering process involves international trade. This is Customs core

business and we are uniquely seated to address this issue. Today

I am announcing a Customs initiative designed to identify and educate those businesses involved in international trade which are at

risk of being victimized by drug money launderers.

An integral part of this program is a brochure which I have both

on display and available to the caucus, developed jointly by the

Customs Office of Investigations and the Office of Strategic Trade.

The brochure will be utilized by Customs special agents and trade

specialists in the business community to do the following: describe

the BMPE process for the trade; highlight red flag or indicators of

BMPE activity; provide U.S. businesses with a point of contact if

they suspect they have been victimized by BMPE related activity.

Customs special agents, intelligence analysts and trade specialists have been analyzing outbound trade data, financial and payment data, including CTRs, CMIRs and the SARs, through the use

of advanced targeting software such as the Numerically Integrated

Profiling System, or as we refer to as NIPS. This will allow us to

target this education and compliance program at those businesses

who are likely to benefit from and utilize this important information.

Moreover, Customs intends to get the word out via other forms,

such as trade publications, industry associations and via our world

wide web site. I am pleased to have the occasion of this hearing

to roll out this initiative and the brochure.

The Customs Service intends to aggressively pursue this educational compliance initiative. However, we are prepared and have

indeed employed other tools available to us to detect and disrupt

drug money laundering utilizing the BMPE. Among those tools are

Customs undercover operations that are directed at the peso

brokering system and which have over the last eight years resulted

in the seizure of more than $800 million in cash and monetary instruments. These operations have also produced more than 2,100

arrests and the seizure of 100,000 pounds of cocaine.

Through an analysis of Customs BMPE investigations, we have

demonstrated that they are 35 times more effective, i.e., seizure

values versus expenditures, than that of all U.S. government counternarcotics programs. It is worth noting that civil forfeiture is a

critical tool in these types of investigations. As a side note, were

legislation such as H.R. 1658, the Civil Asset Reform Bill, offered

by Chairman Hyde, enacted, this aspect of our enforcement efforts

would be virtually shut down.

Customs intends to enhance and improve our undercover investigations by collecting and analyzing the intelligence they produce

24

through a single entity designated the Money Laundering Coordination Center or, as we call it, the MLCC. In addition to coordinating leads, information, and undercover activity and existing investigations, the MLCC will identify and compile a list of active Colombian money brokers along with the traffickers they service;

identify and compile a list of banks, accounts and businesses utilized by those brokers and the traffickers; identify and track trends

and patterns such as the amount and number of contracts let for

money pick-ups in U.S. cities, seizures of money and drugs, as a

result of BMPE operations, and the cost of doing business in each

city and region in the U.S. as well as Europe and Asia. And the

last, but not least, is to deconflict situations where different investigative entities are unknowingly targeting the same suspects,

bank accounts or organizations.

The Customs Service also plans to invite other agencies who are

involved in money laundering investigations to participate in the

MLCC. In November 1998, a working group was convened at Customs to develop a strategy to assist Colombia on a number of issues

including the BMPE. The working group has developed a strategy

for training programs and assistance projects to further expand cooperation between the U.S. and Colombia.

Specific steps have been designed to improve the Colombian customs infrastructure, thereby strengthening their ability to deal

with issues such as contraband smuggling, which is integral to the

BMPE money laundering process. Included in the strategy are the

following: a Customs mutual assistance agreement with Colombia

which has been developed and is in the process of being vetted

through the Departments of State and Justice. This new agreement

will provide the framework for U.S. Customs Service and Colombian Customs to share information on issues such as the BMPE

and trade issues related to contraband smuggling.

A training, technical assistance and short-term adviser package

has been developed and been funded by the Department of State/

INL. Many of the programs directly impact Colombia’s ability to

address the contraband smuggling and BMPE process. With approved DOJ asset forfeiture funding, Customs will assist the newly

created national tax and Customs police with targeting and contraband efforts, trade compliance and investigative techniques training.

Finally, Customs has conducted basic intelligence and post-seizure analysis training of selected Colombian counterparts and provided them with PSA software and a database in Spanish. In addition, the Customs Service recently placed an attache ́ in Bogota, Colombia. The attache will become an important focal point for Customs BMPE investigations, facilitating the exchange of information

with the embassy country team as well as his Colombian law enforcement counterparts.

25

The BMPE is in no uncertain terms the ultimate nexus of legitimate and criminal trade activity. As you have heard this morning,

U.S. Customs is doing everything it can to put an end to it. I will

be happy to answer your questions, but I would like to thank you,

Mr. Chairman, for the authorization bill, which among other things

will provide over 360 agents for our Investigative Bridge Strategy,

which should go a long way to putting a dent in this problem.

Thank you.

[The prepared statement of Ms. Tischler follows:]

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Senator GRASSLEY. Well, thank you. Obviously we hope that we

are successful getting that legislation to the President. Even

though I direct—well, first of all, let me say thank you for both of

you for your testimony. I may direct questions to one of you, but

if the other one feels like answering or supplementing, that is okay

with me. I will start with Ms. Tischler. In your testimony, you

mentioned various operations such as Primero, Casablanca and

Double Impact. Was Customs able to trace the origins of the profits

to any particular drug organization?

Ms. TISCHLER. Well, as you know, Mr. Chairman, Casablanca

traced the assets directly to the Cali Cartel and Primero managed

to track the assets also to the cartel and some entrepreneurish subcartels, I guess you might call them. I have to point out that we

have been fairly successful in tracking the origins of the illicit cash

not only involved in BMPE but other methods of laundering back

to the cartels. In over at least the last 20 years, we have had, I

think, a somewhat of a significant impact on the cartels themselves.

Senator GRASSLEY. So the point that you just made referring to

tracing it back to specific cartels, we are not dealing then with

small sized organizations?

Ms. TISCHLER. No, sir. We are dealing with the large cartels, but

I have to point out that these days since about 1995 when Operation Cornerstone was successfully completed, we found a lot of entrepreneurs within the context of the old cartels themselves, and

I think it is equally important to sort of scale up our response. So

while we are doing an investigation, if we find these smaller entrepreneurs, we obviously try to take their assets as well.

Senator GRASSLEY. What is the status of the Money Laundering

Coordination Center that you spoke of in your testimony?

Ms. TISCHLER. The Money Laundering Coordination Center is up

and running at FinCEN. FinCEN has supplied us with a base of

software. It has been functioning as a deconfliction center and we

have started to use it as an analysis tool, as it was originally intended.

Senator GRASSLEY. And it is up and running?

Ms. TISCHLER. Yes, sir.

Senator GRASSLEY. Okay. So it has gone way beyond the point

of being an idea on paper?

Ms. TISCHLER. Yes, sir. We have been very successful through

Treasury and FinCEN support. We have been more or less on

schedule for getting this project together and up and running.

Senator GRASSLEY. And is it a joint operation with other U.S.

agencies or strictly U.S. Customs?

Ms. TISCHLER. Customs put it up in conjunction with FinCEN,

but we are now going to be inviting in participation by the Drug

Enforcement Administration, the FBI, IRS and others.

Senator GRASSLEY. Just for the record and anybody listening, the

acronym FinCEN, we have used it, we all know what it is, but just

state for the record.

Ms. TISCHLER. It belongs to you. Why do you not do it?

Mr. Johnson. The Financial Crimes Enforcement Network.

Senator GRASSLEY. Thank you. In spite of the high stakes, only

a few major corporations appear to be taking steps to combat

35

money laundering. After the issues of money laundering and the

black market peso exchange were brought to the attention of both

Whirlpool and the GE Corporations, both launched policies to keep

closer tabs on the sales of their distributors. I would use GE as an

example, limiting the number of goods that it sells to those intending to transport the goods to other countries. Whirlpool Corporation

has stopped selling through independent distributors in Colombia

after it appeared that peso brokers were buying refrigerators and

other appliances.

Instead, Whirlpool currently only distributes its products to licensed dealers and registers all of its exports with Colombian and

U.S. authorities. Ms. Tischler, are there other companies that are

following the lead of Whirlpool and GE?

Ms. TISCHLER. I think a significant amount of outreach has been

done with the major companies. Obviously, the industries that are

most affected, as you have already talked about, really are the appliance industry, electronics, cigarettes, things that lend themselves to smuggling and fueling the black market peso exchange.

I think that we have been working with some of the tobacco companies to get them on board with this effort so that they are not victimized by this trade.

I have to say also that we have been doing quite a bit of outreach

in places like Miami where a major corporation may not be involved at all in the BMPE, but there is a distributor/broker who

buys from large distributors and then resells the stuff in either

Panama or Colombia. And so equally we have been trying to address that problem as well.

Senator GRASSLEY. What are some of these U.S. companies beyond GE and Whirlpool doing to combat money laundering? You do

not necessarily have to name specific companies but just——

Ms. TISCHLER. Well, what we have been really trying to push

them into is a similar environment that GE and Whirlpool have already demonstrated and that is know your client and know where

your money is coming from and keep a lookout for the signs that

you might be used. And that is why we put this pamphlet together.

It basically lists the warning signs and that is where we are going

with it. They, quite frequently when we talk to the companies, will

say, well, we did not know, we were not aware of the signs, and

that is why Commissioner Kelly thought it was very important to

establish this pamphlet for distribution to all the major corporations.

Senator GRASSLEY. Maybe on this point, Secretary Johnson, you

could fill in as well from your experience.

Mr. JOHNSON. Outreach is vitally important and, as Ms. Tischler

indicated, there are some companies that are becoming increasingly

vigilant. One of the reasons that Treasury felt it was important for

me to speak as invited to the Association of Home Appliance Manufacturers is to make sure that, one, we have emphasized and done

what we can to highlight the information that both Customs and

FinCEN have assembled and make sure that the major appliance

manufacturers are alerted to this problem and can benefit from the

steps of some of their corporate examples.

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Senator GRASSLEY. Can you make any sort of judgment of whether these policies have been successful in curbing the sales of products to those associated with the exchange?

Mr. JOHNSON. At this stage with respect to the policies, I cannot

make an assessment as to whether or not they have been effective.

I do know, though, that in other areas, in response to the FinCEN’s

earlier advisory, there has been an increased vigilance on the part

of financial institutions about the black market peso exchange. And

in fact, the number of suspicious activity reports that have been

generated as a result of their responsiveness and sensitivity to the

exchange has actually increased over the last three years.

Senator GRASSLEY. In October 1997, the Colombian government

gave FinCEN a list of 300 Colombian companies that do business

with peso brokers and also during this exchange, the Colombian

government provided us a list of brand names that were bought

from U.S. manufacturers. At the end of ’97, FinCEN began contacting the manufacturers of these goods to discuss ways for them

to avoid drug money. What were some of the recommendations that

FinCEN has provided to U.S. manufacturers to heighten their level

of awareness to avoid drug money?

Mr. JOHNSON. Some of the recommendations that have been provided generally by FinCEN include the recommendations that are

listed in the Customs brochure as well as the recommendations

that are listed in the FinCEN advisory which was also issued

today. And that—and I can just highlight some of the recommendations—is to essentially identify transactions that do not—seem as

if they are outside the normal operations of the business, where

you have large scale transactions that are paid for by third parties

that seem to be unknown or unrelated to either the entity that is

receiving the goods or any other part of the transaction, where you

have transactions that are paid for by large amounts of cash, transactions that are paid for by postal money orders, transactions that

are paid for by third party checks. These are the sort of indicia that

FinCEN and Customs have advised others to look for, businesses

to look for as they do their best, and we expect them and hope that

they will do their best not to be unwitting participants in this system.

Senator GRASSLEY. Have there been any prosecutions of any U.S.

companies who have willingly ignored these warning signs?

Mr. JOHNSON. In your opening statement and I believe Ms.

Tischler can address in detail the prosecution of a fabric manufacturer in New York, prosecuted in the Eastern District of New York,

that was a witting participant in this money-laundering system.

Ms. TISCHLER. It is in the newspaper today. It is Mandelblatt &

Company and, in fact, Customs and DEA managed to show where

over a million dollars in drug proceeds was, in fact, laundered

through this company. But I have to tell you offhand that in South

Florida for a number of years the prosecutions have revolved

around the import-export community and the distributors down

there. So that I am not aware of any major corporations that have

been brought to task for participating unwittingly or wittingly in

the BMPE.

Senator GRASSLEY. More the small business types?

37

Ms. TISCHLER. Yes, sir, but as I am trying to gently point out,

it is very difficult with a large corporate structure to get your

hands around exactly who may or may not be facilitating the business. It is a lot easier to find that middleman or person who would,

in fact, make the deal with somebody in the company, similar to

the banks in terms of laundering money, so that quite frequently

we have been able to get after the facilitator, so forth and so on.

Now I think with the new intense scrutiny and the type of outreach that Treasury and Customs has designed, I think that maybe

we will be able to get around that problem. In other words, the object is not to put our companies in jail, the object is to solve the

problem.

Senator GRASSLEY. Are there actions that the Colombian government could take that would increase the competitiveness of legitimate businesses that have to compete with the Sanandresitos?

Ms. TISCHLER. Actually, Ms. Kertzman would probably be better

off answering that question, sir.

Senator GRASSLEY. Okay. Well, we will ask that of her. Just in

case I forget to ask, I will ask her to think about addressing that

when she comes to testify. Some American companies, and I would

give Philip Morris as an example, have been accused of implicitly

supporting the black market peso exchange in order to increase

their market share in Colombia and avoid paying hefty Colombian

taxes. Some Colombians have gone so far as to threaten to sue

Philip Morris arguing that the volume of advertising that Philip

Morris chooses to have in Colombia is not justified by levels of legitimate sales. How much validity would there be to that charge?

Either one of you can take——

Mr. JOHNSON. As a law enforcement agency, it is our typical

practice, whenever there is any sort of allegation of a criminal

charge against a person or company, that unless we can address

that in terms of an indictment or in terms of a complaint, we simply do not offer opinions on those sorts of charges.

Senator GRASSLEY. Okay. Does the U.S. government plan, and

maybe you cannot answer either, to take any action against any of

these companies?

Mr. JOHNSON. I can tell you that a key component of this strategy is tough and effective law enforcement and to the extent that

there are companies that are witting participants in this exchange,

wittingly facilitating what we think is a particularly pernicious

form of money laundering, one of our goals is through the combining of our resources, through the enhancement of our analysis,

is to bring effective investigations and prosecutions. So that if there

are those that are out there that are facilitating this, willingly facilitating this criminal enterprise, this criminal system, they

should know that we will be vigilant and we are intending to pursue this matter with a great deal of vigor.

Senator GRASSLEY. According to the Financial Crimes Information Network, the peso broker is the central link in what the network says quote, ‘‘is the most efficient and extensive money laundering system in the Western hemisphere.’’ Obviously, there are

engines that drive the system. The broker is a middleman in this

process and is the one who buys the dollars from the drug traffickers or their agents, usually obtained from the sale of cocaine or

38

heroin by the drug trafficker, obviously on the streets of the United

States or other parts of the world. What steps are your agencies

using to intercept these middlemen in the process of exchanging

U.S. dollars for Colombian pesos?

Mr. JOHNSON. As I indicated earlier, we want to attack this problem at every single one of the choke points and one of the key

choke points is the peso broker himself. And steps may be taken

in the form of undercover operations or the use of information that

is obtained from the government of Colombia to go after these peso

brokers.

Senator GRASSLEY. Define for me in your own words how successful you feel that Treasury agencies have been in identifying and

prosecuting peso brokers?

Mr. JOHNSON. Overall I think in terms of moving against the exchange, Treasury bureaus, particularly Customs and IRS, have

been very successful. But there is more that we can do. As Assistant Commissioner Tischler just indicated, there have been over

2,000 prosecutions in connection with the peso exchange at the

Customs Service; over 250 related to the peso exchange at the IRS;

over $800 million has been seized by Customs in connection with

these operations. That is a tremendous, tremendous record. We are

looking to do more.

Senator GRASSLEY. Could you tell us kind of the typical fine or

prison sentence that is levied against the black market peso exchange?

Mr. JOHNSON. I do not have before me a summary that I could

give you, Mr. Chairman, but I would happily submit such a summary for the record.

Senator GRASSLEY. Okay.

[The requested information follows:]

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Senator GRASSLEY. There is obviously a fairly sophisticated system used to launder money. There are a lot of different players involved and they can be a constantly changing group of players. Are

there any tools that you believe would improve Treasury’s ability

to deal with the threat?

Mr. JOHNSON. Well, among the tools that we are enhancing and

using are the Money Laundering Coordination Center, the MLCC,

that Assistant Commissioner Tischler just discussed. That is an effective tool. Building on an information exchange within the federal

government is going to be key moving forward. We have substantial regulatory authorities already in place at Treasury and we will

not be asking at this stage for more regulatory authorities to go

after this system.

Senator GRASSLEY. Would you like to make some recommendations that you would like to take to reduce the abuse of the U.S.

financial system?

Mr. JOHNSON. Well, we have in place to make sure that the financial system is not abused the very strong system that is put in

place by the Bank Secrecy Act and the related acts that have been

passed after the Bank Secrecy Act was first passed. That is a tremendous tool for us and the regulations that have sprung out of

that, the authorizing act. The currency transaction reports have

been helpful in our investigations. Suspicious activity reports,

which are also a product of the Bank Secrecy Act, have been helpful in our investigations. But more importantly than that, both the

currency transaction reporting requirement and the suspicious activity reporting requirement have formed an important bulwark

that makes it more difficult for would-be money launderers to inject money into their system.

That is why narco-traffickers have gone to black market peso exchangers to do a job that is too risky for them to do themselves.

It is the black market peso exchanger that assumes the risk of trying to inject the money into the system through structuring of

transactions and other means to get it into the system. The system

works well and we are not seeking additional authorities at this

time.

Senator GRASSLEY. Is it difficult to get at this problem without

hurting legitimate innocent businesses that are exploited in the

process?

Mr. JOHNSON. Well, it is our hope through education that businesses can take the first steps so that they help themselves. Clearly, there may be some risk if it ends up that law enforcement finds

out that drug money is going through their system and they have

already shipped their goods and the money is stopped in some way

before they get payment for those goods. But that is why they

ought to be, they should be vigilant.

Senator GRASSLEY. I just have one more topic before I go to Senator Sessions. Peso brokers typically inject cash into the U.S. financial system using runners that are, I am told, are known as smirfs.

They are perhaps unemployed Latin Americans who open multiple

bank accounts in differing names, often using identity papers that

have been forged or purchased from relatives of deceased Colombians to avoid bank official suspicion. These smirfs will deposit

cash in incremental amounts in these multiple bank accounts at

42

amounts below $10,000 threshold that would otherwise trigger a

bank report to the Treasury Department.

How are your respective agencies, specifically you, the Treasury

Department, and within there, the IRS, FinCEN and Customs,

working with bank officials to help them detect these smirfs?

Mr. JOHNSON. Well, with respect to bank officials, FinCEN very

often engages in outreach and provides information about what is

going on within the financial community. Law enforcement also at

conferences will give examples of what smirfs do. And law enforcement as well remains vigilant. I recall when I first became a federal prosecutor in the Southern District of New York, one of the

first cases that I brought was a case involving a smirf. That case

had been investigated by the United States Postal Inspection Service. So there are a number of people watching the smirfs, a number

of people, or little soldiers, as they are commonly called on the

street, and there are a number of investigative agencies that are

doing two things to help and regulatory agencies that are doing two

things to help the banks.

One is education, which is done through outreach that is done by

FinCEN, and the other is through effective enforcement and that

is done by the United States Customs Service, the IRS and many

others including the U.S. Postal Inspection Service and the DEA.

Senator GRASSLEY. Yeah. In the previous question, you gave

some statistics about the thousands of people being prosecuted. Are

some of these known smirfs and is it a very large percentage of the

people that you are suggesting have been successfully prosecuted?

Mr. JOHNSON. The number that I gave in terms of prosecution

is a number that extends back over years. Many of the people that

are included in that number include those that tend to be lower on

the scale, the people known as smirfs. But our goal is to bring the

most effective prosecutions and to do that you need to work higher

up on the food chain, as it were, in the organization, to go after

not just the lower level people, but the focus of the United States

Customs Service has been to work these cases to go higher up in

the food chain and that is exactly what you saw quite successfully

in Operation Casablanca.

Senator GRASSLEY. Okay. I thank both of you for my part. I now

turn to Senator Sessions.

Senator SESSIONS. Thank you, Mr. Chairman. Well, I do not

think there is any doubt that for well over 20 years I think Ms.

Tischler mentioned Colombian cartels have sold tremendous sums

of illegal drugs in the United States and have made profits off of

it. Every time somebody buys the smallest amount of cocaine, a

part of that money ends up in the hands of the Colombian cartel

feeding that underground empire. So it is a very serious thing and

we are talking about five or $6 billion per year profit to Colombia.

That is money, American money, primarily almost totally, in their

hands that they have made profits off of these illegal drugs. So I

am very much of the belief that to the extent that we can reduce

that profit, take away that money, we ought to do so.

And my experience as a federal prosecutor for 15 years is that

the Customs Service has been very effective in doing that, perhaps

the most effective, forfeiture of assets, and I was very concerned,

Ms. Tischler, that you concluded that the House legislation that is

43

pending that would curb your ability to forfeit would quote ‘‘virtually shut down that operation.’’ If it is anything like that, we

need to give the most careful scrutiny to it and ought to be very

reluctant to undermine your ability to identify this kind of illegality.

As a matter of fact, the current law of forfeiting assets requires

that the person have it from an illegal source and that there is

knowledge and intent there. It is a pretty high standard in my

view and what we are talking about today is a very vague problem.

And I want to ask some questions about it as we go along. You did mention that there were $800 million in cash seized in

the last eight years. That is a little bit high now. That is not all

Customs actual seizures; is it? You got good numbers on that or

what does that include?

Ms. TISCHLER. Sir, it is not just cash. It is real property and

other assets.

Senator SESSIONS. Well, $800 million is a lot of money.

Ms. TISCHLER. Yes, sir.

Senator SESSIONS. And it helps to—you share that with local law

enforcement officials?

Ms. TISCHLER. Yes, sir. Yes, sir.

Senator SESSIONS. And that helps them to be able to continue to

be able to fund their cooperative effort with federal agencies

against drugs?

Ms. TISCHLER. It certainly does. I know I do not have to tell you

that when the forfeiture funds, both the Justice fund and what is

now the Treasury fund, were established, it was to make really

crime or the attack on crime pay for itself through utilizing assets

that we seized from the traffickers. So I have been doing this—

since 1980 I have been involved in money laundering. And one of

the best tools we have is asset forfeiture and I truly believe that

we have taken assets where we have done it and dismantled

groups because of the cash because they can replace their cocaine.

Senator SESSIONS. Well, is it not true that over the last 20 years

that more and more restrictions have been placed and controls over

the federal government’s agent’s ability to seize assets and they put

some pretty strict controls on it now internally?

Ms. TISCHLER. Yes, sir.

Senator SESSIONS. More than it was at the beginning?

Ms. TISCHLER. Yes, sir.

Senator SESSIONS. And, in fact, the number of forfeiture filings

are down, is that correct, by the federal government?

Ms. TISCHLER. I do not know. You would have to ask the Justice

Department. I know that at Customs when we are looking at taking assets, we have a committee, for instance, at the agency that

actually reviews the circumstances surrounding the forfeitures and

whether or not they would be good forfeitures in conjunction with

the U.S. attorneys out in the districts. So I feel that there are some

like real tight controls that have resulted over the years from when

not only the money laundering law but the portion of Title 21 that

allowed us to, in fact, effect seizures and forfeitures were first invented and for good cause. There were some excesses, but I truly

believe that the U.S. attorneys and the agencies themselves take

a really strict look at potential forfeitures in terms of actually what

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they are seizing and who they are seizing it from, whether it is legitimate.

Senator SESSIONS. Well, I know when we talk about money laundering, that connotes a criminal act and we have got a situation

it strikes me in Colombia that they used to have 40 percent tariffs

which really created this black market. When you have a tariff that

high, you tend to create a black market and out of that historical

background, that now with what—a ten percent tariff—is that the

tariff?

Ms. TISCHLER. Yeah. I think they have got it down to—but you

know when we first started out in the early 1980s in Colombia,

they had a $20,000 a day restriction on the amount of U.S. dollars

that could go into their financial institutions, and I know that that

was rescinded maybe five or ten years ago. I am not really sure.

And that was when we really started seeing large amounts of cash

outbound from the U.S. directly to Colombia. Prior to that, we saw

it going into Panama. So it is a very convoluted problem as all

countries try to strike a balance with their trade and with possible

illicit enterprises.

You know the type of BMPE that is going on now is not exactly

new. Colombia and other places have had a problem with smuggled, what they consider contraband to get around their import

laws and——

Senator SESSIONS. Let us talk about that a little bit. So you have

got a constant problem of it. We have zones in Aruba and Panama

that are popular. America and companies from other nations are

selling products there; is that correct?

Ms. TISCHLER. Everybody is selling products.

Mr. JOHNSON. That is correct.

Senator SESSIONS. And we are suggesting that because a significant involvement by people from Colombia using money that came

from illegal drug operations to involve themselves in those duty

free zones to buy products to make a profit and launder their

money, I suppose, we are suggesting that American corporations

ought not to sell there, and is that a fair thing to, a fair burden

to place on American corporations, number one? And number two,

do we expect German and Japanese corporations also not to sell in

those zones if we stop?

Mr. JOHNSON. I do not think we have suggested or directed to

American corporations to steer clear of their zones. We have suggested they ought to be careful in conducting their transactions.

Senator SESSIONS. Well, be careful. That suggests I mean we

know a significant portion of the products bought there are being

bought with drug money proceeds ultimately; do we not?

Mr. JOHNSON. That has been——

Senator SESSIONS. I am just trying to get to the basic question

here, the basic moral legal question. If you go to one of these markets and you sell washing machines or cameras and you know that

some of these people are bringing money that came from the drug

industry, is that something that the U.S. Customs Service/Treasury

Department would object to and condemn them for?

Mr. JOHNSON. In the hypothetical that you have posited, if someone knows that they are getting funds that are part of a narcotics

transaction, they should not be participating in that transaction.

45

Senator SESSIONS. Well, part of a transaction. I do not know

what that means exactly and I do not know what the answer is,

but I am wrestling with this thing. It seems to me that we may

be punishing the American worker by denying them at least the

ability to sell products to these countries that have made large

sums of money off our people from dope. Can we make it too difficult and could it hurt our ability to export and cost us jobs while

at the same time not really making any progress against the drug

cartels?

Mr. JOHNSON. Senator Sessions, the struggle that you have just

indicated is, I hope, reflected in the balance that we are trying to

achieve in our approach, which is not just indicating to companies

that there are certain transactions that are problematic but engaging with our international partners not just in Colombia but also

around the globe because you are right. If we embark on an approach that just focuses on U.S. companies and there are other

companies around the world that are perfectly willing to engage in

this sort of a transaction, wittingly or no, then we will not have accomplished what we are hoping to achieve here which is striking

at the heart of this exchange. That is why we have an approach

that just does not talk about enforcement, that just does not talk

about outreach, outreach to companies here in the United States,

but where we explore broader outreach and where we engage our

international partners through a variety of fora.

Senator SESSIONS. Well, I guess my question is you are not prepared—I mean I think we all know that a substantial amount of

money in these Free Trade Zones comes from illegal drug smuggling. I do not know how much. Some say 25 percent of the imports

to Colombia come out of these zones and are undermining or

around and defeating Colombian tariff laws, but I do not sense that

you are prepared to say therefore that no American business can

do business with those zones; are you?

Mr. JOHNSON. We are not prepared to say that.

Senator SESSIONS. But you are saying somehow if you do, you

might not be the best corporate citizen in the world; is that right?

Mr. JOHNSON. I——

Senator GRASSLEY. Well, the very least, if they are knowingly

doing it, they are violating U.S. law.

Mr. JOHNSON. There is a difference between participating in——

Senator SESSIONS. Where would the law be? Where would the

violation be?

Mr. JOHNSON. There is a difference between participating in a

transaction that goes through the zone and knowingly facilitating

a narco-transaction. That is why we have tried to highlight for

companies and for financial institutions certain red flags about

transactions that then may be problematic and they may not want

to become engaged in.

Senator SESSIONS. Would you be specific on what it is that would

highlight that? Am I using my time too much, Mr. Chairman?

Senator GRASSLEY. No, no. The only reason I interrupted you is

because—and you further refined what I said, so I was somewhat

mistaken—knowingly participating through these business endeavors is one thing. I meant to say knowingly participating in the

laundering of money is what the law refers to; right?

46

Mr. JOHNSON. That is correct, sir.

Senator GRASSLEY. So I want to stand corrected on that. I just

wanted to clarify that if they were doing that, they were

violating——

Senator SESSIONS. I agree.

Senator GRASSLEY [continuing]. Existing law.

Senator SESSIONS. I think that is correct. But I am not sure a

business who sells to a group of people, some of which he probably

rightly should understand have gotten money from drug dealers,

that is not money laundering; is it?

Mr. JOHNSON. It depends on the business person’s state of mind,

but I can give, if you wanted a specific——

Senator SESSIONS. Well, let me just say let us just take a real

simple. I have a business in downtown Alabama.

Mr. JOHNSON. Okay.

Senator SESSIONS. And a guy comes in who is a drug dealer and

wants to buy a TV from me. And I sell it to him. Have I committed

a crime? Have I laundered money for a drug dealer?

Mr. JOHNSON. If the drug dealer comes in and wants to buy a

TV from you and that is all you know, then you know it is——

Senator SESSIONS. Pulls out cash, small bills.

Mr. JOHNSON. If it is over $10,000 of cash and you have not filed

an IRS Form 8300, then you have got a problem. And you should

be careful if this narcotics trafficker, this drug dealer comes in and,

say, has bank checks that are drafts from banks that have nothing

to do, that seem to have nothing to do with that transaction. You

ought to at least be careful. We are not saying that if you are not

careful, then automatically prosecution will pursue, but we are saying that as part of this effort, our overall effort to make sure that

those who are selling poison on our streets are not walking away

with profits or goods or other proceeds from that. People ought to

be careful. They ought to have their eyes wide open.

And the Customs brochure which flags certain items that folks

should be careful about and the FinCEN advisory that also flags

certain indicia or factors that financial institutions ought to be

wary of are helpful. They are steps in what we think is the right

direction.

Senator SESSIONS. Well, I do not think it is a crime under the

main street business scenario I just gave you. I do not think that

is money laundering, although I am somewhat rusty on those code

sections. But it just troubles me. I think we need to be careful how

we do it. We should not overreact because if we do not watch it,

due to the fact that huge sums of money for years are pouring into

Colombia that are drug profits, most of what we sell to Colombia

is going to be purchased at least in part from drug profits, and I

am not sure we do any good for us or Colombia to refuse to sell

to them under those circumstances. I do believe that we ought to

attack this drug problem with intensity. I believe that the more we

break up the small drug sales on the streets of America, that is

fewer dollars that end up in Colombia to begin with.

The more we drive down demand and drive down usage in the

United States, we reduce them. That is the best way to reduce

their power and wealth. Also, forfeiting their assets under traditional law and, for heaven sakes, we do not need to undermine the

47

law we have already got. We probably ought to look for ways to increase our legitimate money laundering forfeiture cases and I think

if we could continue to study this black market peso exchange, Mr.

Chairman, we may be able to identify chinks in their armor there

and maybe develop further ways to disturb this industry which is

promoting death around the world for great personal profit. Thank

you for your leadership.

Senator GRASSLEY. I have no further questions, just a reminder

that if other members who could not be here for this panel have

questions, that you would respond in writing. Thank you very

much for your expert testimony and more importantly thank you

for your ongoing experience on this, and your testimony suggesting

doing what you can do to stay on top of the problem both involving

our government as well as the encouragement of our private sector.

Thank you very much.

Mr. JOHNSON. Thank you, Mr. Chairman.

Senator GRASSLEY. Our next panelist is a person by the name of

Al James. He is Senior Policy Analyst for the Financial Crimes and

Enforcement Network, and I welcome him today, and I thank him

in advance for his testimony. Here is a person that I think is going

to in some detail shed some light on what is an incredibly complex

system as he takes us through step by step how the process of

money laundering works, how it involves the use of legitimate

American business in the process, and the role played by the

broker that exchanges the dollars for pesos. We welcome you, Mr.

James. Thank you very much.

STATEMENT OF AL JAMES, SENIOR POLICY ANALYST,

FINANCIAL CRIMES AND ENFORCEMENT NETWORK

Mr. JAMES. Thank you, Mr. Chairman. I am very honored to be

here this morning to discuss the workings of the Colombian black

market peso exchange system, perhaps the single largest avenue

for the laundering of proceeds of narcotics trafficking in the United

States. I have been a federal law enforcement officer for over 20

years. I have spent the last eight years involved in one aspect or

another within investigations of the Colombian black market peso

exchange.

Under Secretary Johnson has already introduced to you the basic

workings of this system. My testimony will expand on his description and also provide you with the many complexities of this system. I have submitted a statement for the record and with your

permission, Mr. Chairman, I would like to summarize that statement at this time.

Senator GRASSLEY. Yes, please do.

Mr. JAMES. As an aid to easily understanding the Colombian

black market peso exchange, it is helpful to first look at the various

entities involved in this system. In its simplest form, this system

involved two countries, the United States and Colombia. The individuals who participate in this system are the Colombian wholesale

narcotics traffickers, Colombian dollar/peso brokers, the Colombian

importer smugglers of trade goods, U.S. bankers and U.S. suppliers

of trade goods.

The commodities involved in this system are the Colombian narcotics, U.S. dollars, Colombia pesos and trade goods such as conVerDate 11-MAY-2000 09:45 Sep 25, 2000 Jkt 010199 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HEARINGS\60125 pfrm08 PsN: 60125
48

sumer electronics, cigarettes, liquor, household appliances, auto

parts, textiles and footwear.

The scenario begins with a narcotics trafficker in Colombia who

ships drugs to the United States. In the United States, these drugs

are sold for currency even at the wholesale level. The Colombian

trafficker often owns several million dollars in currency that is

being held in a stash house in the United States. In order for the

trafficker to reap the benefits of his ill-gotten gains, he must convert his currency into a usable format by placing it in a bank. Due

to the Bank Secrecy Act and U.S. money laundering laws, the trafficker risks detection by engaging in large currency transactions

with U.S. banks.

As an alternative, the trafficker can sell his currency to a dollar/

peso broker in Colombia. The dollar/peso broker pays the trafficker

in pesos in Colombia. It is important to note that the trafficker

steps out of the transaction at this point, having effectively

laundered his funds. The dollar/peso broker assumes the risk of

handling the narcotics currency in the U.S. For this reason, the

dollars are often sold at a substantial discount from the official Colombian dollar/peso exchange rate.

In turn, the dollar/peso broker sells dollars to otherwise legitimate Colombian importers who plan to smuggle their purchases

into Colombia in order to evade Colombian taxes and tariffs. These

smugglers pay the dollar/peso broker in pesos in Colombia. The dollar/peso broker assumes the risk of converting the currency purchases from the Colombian trafficker to a form that can be resold

to the Colombian importer smuggler. The dollar/peso broker does

this by using operatives in the U.S. known as smirfs to place this

currency in U.S. banks. The placement is usually accomplished by

either structured transactions to multiple nominee accounts controlled by the dollar/peso broker or by deposits to the accounts of

businesses who normally receive large amounts of cash.

In some instances, placement occurs by bulk transfers to Mexico

where the currency is deposited into Mexican banks or foreign

banks operating in Mexico. In either case, the money is returned

to the U.S. by way of these banks’ foreign correspondent accounts

with U.S. banks. Once the Colombian importer smuggler pays the

dollar/peso broker for the dollars, the broker transfers those dollars

on behalf of the smuggler to the supplier of trade goods. These

transactions may be in the form of a wire transfer, a check or a

bank draft.

Occasionally, the banks are bypassed entirely and currency is delivered directly to the supplier of trade goods. In each of these

cases, what is important is that none of these instruments of payment are drawn on the account of the Colombian importer. It

should be noted that the suppliers are not always in the United

States. In addition to the U.S., the goods may be shipped from Panama or other foreign ports and may be supplied by Asian and European multinational manufacturers as well as those based in the

United States. In these cases, the payment transfers may go from

the United States placement accounts to foreign banks in the appropriate destinations.

To complete the cycle, the trade goods are shipped from the supplier and smuggled into Colombia. In Colombia, these trade goods

49

make up what we call the contraband market. That market is comprised predominantly, as I have stated, of consumer electronics,

cigarettes, liquor, household goods, auto parts, textiles and footwear. These items are generated by multinational manufacturers

based not only in the United States but Asia and Europe as well.

The legitimate business community in Colombia has suffered serious economic harm because of a contraband market subsidized by

drug money courtesy of the narcotics traffickers. The cycle is now

complete. The contraband market generates pesos for the Colombian importer smuggler.

In conclusion, Mr. Chairman, I want to reiterate what a honor

it is for me to appear before this caucus. As a law enforcement

agent, I am personally acquainted with the immense damage

caused to our young, in particular, and our country in general by

narcotics traffickers. I am also very familiar with the enormous arsenal that they have at their disposal. They are hiding in the free

enterprise system that is designed to assure our prosperity.

But as Under Secretary Johnson has stated, we are approaching

them and their organizations in new ways, better armed by technology, in a more coordinated fashion and in closer cooperation

with our colleagues and other law enforcement agencies here in the

United States as well as abroad. The initiatives outlined here today

by Under Secretary Johnson are very positive, making it more and

more difficult for the narcotics trafficker to take advantage of his

ill-gotten gains.

By understanding these efforts, we may eventually rid our country of this terrible plague. Thank you, Mr. Chairman, for this opportunity to address the caucus on this serious narcotics money

laundering problem.

[The prepared statement of Mr. James follows:]

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Senator GRASSLEY. Well, thank you, Mr. James. I appreciate very

much your visual. Would it be fair to say even though I would not

expect you to be an authority on relationships between Colombia

and other drug producing countries with Europe, for example, but

could you possibly, do you think you could draw the same sort of

a relationship between Colombian and European business people

and smirfs there and that sort of thing? Or is this kind of something that is unique just to the United States and to Colombia?

Mr. JAMES. It is certainly predominant in the United States and

back to Colombia, Mr. Chairman, but law enforcement intelligence

does indicate that we are beginning to see similar operations in Europe and Asia. Actually, wherever Colombian narcotics are sold,

this type of system is beginning to spring up.

Senator GRASSLEY. The Colombian government released information to the U.S. concerning black market importers and the manufacturers of their American products. It was hoped that the United

States government could target American firms in the hopes of persuading them to cease selling to those suspected of being associated

with the peso exchange. FinCEN itself launched an initiative that

was designed to alert American manufacturers about the exchange.

It also distributed an alert to those firms importing to Colombia

complete with warning signs of transactions involving narco-dollars. How responsive have U.S. firms been to these warnings?

Mr. JAMES. In my experience and we are just really beginning

this outreach with the U.S. business community, they have been to

a large degree very receptive to these warnings. Some have taken

considerable steps in dealing with this program individually and

they have also been open to working with us in a partnership to

deal with it together.

Senator GRASSLEY. The previous panel testified that particularly

small firms selling products for narco-dollars have been prosecuted,

but I would like to ask you whether or not you know of the government prosecuting any major corporation selling products for narcodollars?

Mr. JAMES. Not to my knowledge, Mr. Chairman, not at this

date.

Senator GRASSLEY. How can it determine when a company has

been negligent or simply been taken advantage of?

Mr. JAMES. This is a very difficult process of proof, Mr. Chairman, and it turns to either the knowledge on the part of the company that they are accepting drug dollars or such a blatant disregard for the possibility that it can be demonstrated clearly that

they should have known that they are accepting drug dollars. But

those elements of proof at this time are very difficult to come by

and, in fact, increasing the knowledge and awareness of this problem within the business and financial community will also help us

on the other side of that problem to demonstrate that a particular

company in the future knew or should have known about this system and tried to avoid it.

Senator GRASSLEY. Let me go to a key aspect of the exchange

and that is the American bank accounts that serve as depository

for drug tainted dollars. One of the difficulties of tracking these accounts is the fact that the deposits to these accounts are consistently less than $10,000 so that they obviously fall below the reportVerDate 11-MAY-2000 09:45 Sep 25, 2000 Jkt 010199 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 E:\HEARINGS\60125 pfrm08 PsN: 60125
57

ing requirements. These accounts may be held by isolated individuals who are not themselves directly involved with the drug trade

but serve as agents of the peso brokers. Is there any pattern of financial activity that you can share with us in this public forum

that would allow FinCEN to identify the use of these accounts as

black market accounts?

Mr. JAMES. Yes, Mr. Chairman. We have conducted a continuing

partnership with the financial community in regard to this issue

actually preceding the hearing in the House in 1997, and although

it is very difficult for a bank to identify these accounts strictly

based on the account holder or the deposits into that account, it is

possible to identify it if you combine that information with the activity going out of the account. After working with the financial

community in that regard, we are very gratified to see that the suspicious activity reports filed with the government by the banking

community have increased substantially in identifying specific

black market peso related transactions to alert law enforcement of

this possibility.

Senator GRASSLEY. Okay.

Mr. JAMES. The bankers—excuse me.

Senator GRASSLEY. Well, I think you have answered that question and I get from your answer there that that is an initiative of

our government to encourage banks to do more. Are there strategies that banks are pursuing on their own initiative to identify

such accounts?

Mr. JAMES. Yes, there are. The banks are instituting artificial intelligence programs within their banking computer systems to further identify black market peso related transactions where it would

be difficult for an individual to spot these. The computers are being

tuned to take advantage of their expanded knowledge of what these

trends and patterns look like. And once again, when they are identified, to file suspicious activity reports, alerting law enforcement

of this possibility.

Senator GRASSLEY. Yeah. Give us some idea how these peso brokers get people, these smirfs, et cetera, to open accounts for them

in the United States and what type of people, if there is any characterization you could give about them?

Mr. JAMES. The normal process can take two routes. It can either

be a Colombian tourist coming to the United States who is absolutely innocent of drug trafficking but may go to a black market

peso broker to buy dollars to fund a trip and that way the peso

broker finds out that individual is coming to the United States and

requests that while they are here they open one or more bank accounts in the area that they are visiting in their name, using their

correct identification, but then turning over control of that account

to the peso broker. That accounts for about half of these nominee

accounts that we know of.

The other half are usually opened by individuals who are peripheral players or actors in the narcotics distribution networks.

Senator GRASSLEY. So people who are already on the edge of the

law?

Mr. JAMES. Yes, sir.

Senator GRASSLEY. And I suppose also tremendous financial incentive to do this?

58

Mr. JAMES. They are paid to do this, absolutely. So are the Colombian tourists.

Senator GRASSLEY. And paid well, too?

Mr. JAMES. Yes, sir. Usually it is. It is not uncommon for the peso broker to offer $1000 or $2000 to a Colombian tourist to open

two or three accounts, basically almost funding their trip to the

United States.

Senator GRASSLEY. How many U.S. accounts does a typical peso

broker need in order to conduct business?

Mr. JAMES. The peso brokers are pyramidal in structure and may

handle millions of dollars at a time down to tens of thousands of

dollars at a time. The typical peso broker smirfing operation that

we have encountered usually has 50 to 100 nominee accounts for

any particular cell.

Senator GRASSLEY. How many accounts?

Mr. JAMES. 50 to 100 accounts for any particular cell that is buying black market dollars and then having that cell deposit them

into a series of nominee bank accounts.

Senator GRASSLEY. Now, we want to remember the history of the

black market peso exchange. It is not a product of the drug cartels,

but it existed a long time beforehand as a result of high tariffs and

duty rates that Colombia charges on imports. How did the peso

brokers obtain dollars from the drug cartels before involved in the

exchange?

Mr. JAMES. Actually the dollar, when the black market peso exchange initially arose, the Colombian peso broker obtained his dollars not from the drug cartels but from Colombian exporters who

might sell such items as coffee or emeralds or flowers in the United

States. Those sales would generate dollars and rather than repatriate those dollars to Colombia through a correspondent banking

relationship, the peso broker would step in, buy the dollars in the

United States, deposit them to his account and in turn pay the Colombian exporter in pesos in Colombia.

Senator GRASSLEY. Could you shed some light on the fact that

peso brokers get a good cut and then obviously take a good deal

of the profit out of the drug trade? Why don’t the drug cartels deal

directly with Colombian importers who need dollars?

Mr. JAMES. I think that the answer is twofold. First of all, the

Colombian peso broker was there first and he has a clientele already built up with the Colombian importers and they were comfortable doing business in that regard. The other half of the answer

is that these Colombian businessmen do not wish to be associated

with the drug cartels either, and although things have evolved to

the point where they surely must know they are buying drug dollars, they would not wish to contact the cartel people directly in

that regard.

Senator GRASSLEY. You have mentioned that this is the largest

money laundering system known to the U.S. law enforcement. Are

there any other similar systems even though this one might be

classified as the largest?

Mr. JAMES. Yes, Mr. Chairman. The black market peso exchange

is an underground financial system. There are similar systems

throughout the world which arose for similar reasons. The Hawala

system prevalent in the Middle East and India and the Chinese unVerDate 11-MAY-2000 09:45 Sep 25, 2000 Jkt 010199 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HEARINGS\60125 pfrm08 PsN: 60125
59

derground banking system in use in the Far East are examples of

similar systems. All of these underground financial systems are especially susceptible to money laundering by criminal enterprises

arising from the ethnic area that gave rise to the financial system.

The black market peso system is the largest because of the huge

financial magnitude of the Colombian narcotics enterprise.

Senator GRASSLEY. How is the narcotics trafficker making a profit on these dollars if he is selling them for less than face value?

Mr. JAMES. Mr. Chairman, the narcotics trafficker’s original margin of profit is so large that they can afford to offer their dollars

for sale at substantial discounts in order to reduce their risk of detection. Even after that substantial discount, they will still make

a tremendous profit on their proceeds.

Senator GRASSLEY. If a law enforcement officer intercepts the

drug dollars after they have been sold and transferred to a business account, are they still subject to seizure as drug proceeds?

Mr. JAMES. While the dollars, Mr. Chairman, may still be subject

to seizure, these circumstances present law enforcement with a

new set of problems. The law enforcement officer in order to sustain this seizure must prove that the current owner of the proceeds, that is usually in our case here the supplier of the trade

goods, knew or should have known that these dollars were generated by an illegal activity. As we have said here, this often may

not, in fact, be the case and even if it is the case, it is often very

difficult to prove.

Senator GRASSLEY. Senator Sessions.

Senator SESSIONS. Thank you. Mr. Chairman, I was looking at

that diagram or picture there. It is a good thing. It strikes me as

very interesting that the Colombian drug smuggler’s cash American money that his agents receive for the sale of drugs in the

United States, they try to keep that in United States banks? That

is not carried back to Colombia in the form of cash?

Mr. JAMES. The most general answer is no, Senator Sessions.

That is generally not what they need in Colombia. They need Colombian pesos. However, as Assistant Commissioner Tischler described earlier, since the cartels have been fragmented in the last

five or six years, it is very difficult to state anything in absolutes

on this process. And certainly we have numerous instances of large

amounts of currency being bulk transferred back to Colombia, although that is not the prevalent means of laundering it.

Senator SESSIONS. The cartels are fractured but they are still capable of distributing as much cocaine as we can consume in the

United States?

Mr. JAMES. Yes, sir.

Senator SESSIONS. Now with regard to the transfer of the preferred method of transferring American cash to American banks,

that strikes me as—you have been in the FinCEN group—how long

have you been with them?

Mr. JAMES. I have been with FinCEN directly for about one year,

sir. I have been with IRS criminal investigation for 21 years prior

to that.

Senator SESSIONS. Well, it strikes me that is the best target of

actually seizing the money and breaking the cycle. Would you comment on that? That bank, identifying that as a deposit from an illeVerDate 11-MAY-2000 09:45 Sep 25, 2000 Jkt 010199 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 E:\HEARINGS\60125 pfrm08 PsN: 60125
60

gal drug sale, that money would then be forfeitable as the proceeds

of a illegal drug sale. That is a correct statement of the law on

that, if you can prove it?

Mr. JAMES. That is the catch, yes, sir. If you can prove it.

Senator SESSIONS. So the question is can we help you or can you

improve your ability to identify those deposits and increase your

seizures in American banks?

Mr. JAMES. Yes, sir, I think we can improve our ability. As a

matter of fact, it has become clear in a series of close and very cooperative partnership meetings with the American banks involved

in this process that what we need is to bring a third party, that

is the American business community, to the table along with us.

And I believe that the three of us, the three groups working together, can make some significant inroads in this process which we

have been unable to make to date.

Senator SESSIONS. When you say bring the business to you, does

that mean to help you obtain the information you need or are you

calling on them to stop selling their products to people who might

otherwise appear to be on the surface legitimate purchasers of

products?

Mr. JAMES. No, Senator Sessions. I appreciate you asking me

that question. We are not advocating that American companies or

any other companies for that matter stop selling trade goods in this

process. The cancer in this process is really the financing mechanism for that international trade. The demand, I believe, will exist

in Colombia even though the drug dollars are taken out of the system. If you will, the Colombian will still want to purchase the computer, the washing machine or what have you.

So what we need to do is see to it that these goods are not financed initially with these narcotics dollars and I believe that is

where the business community can help us with information and

policies which will allow them and their bankers to be more careful

about the financing mechanisms that they accept.

Senator SESSIONS. Well, I do not know. I do not know whether

you can do that or not. Could the Colombian drug dealers with

their large sums of money, is it difficult for them to convert that

into the euro, for example, and purchase products from Europe?

What kind of controls are available there?

Mr. JAMES. I must admit, Senator Sessions, that the law enforcement community is to some degree holding its breath to see exactly

how that is going to work. However, the Financial Action Task

Force sponsored by the G–7 countries has encouraged and been

considerably successful in getting the European communities to institute financial and currency reporting mechanisms similar to

those in the United States which should generate the same resistance to this process that we have encountered here in the U.S.

However, since it still happens in the United States, I believe, of

course, it will happen with the euro as well.

Senator SESSIONS. Well, are you suggesting that this is a silver

bullet, a major breakthrough, a way that we are going to deal a

new and powerful blow against the cartels?

Mr. JAMES. I am not sure I would describe it at least as the ultimate silver bullet, but I do believe that by making it more and

more difficult for the Colombian trafficker to reap the benefits of

61

his ill-gotten gains, we will make serious inroads in his ability to

sell this poison on our streets.

Senator SESSIONS. Well, we have been working at it for 20 years.

Mr. JAMES. Yes, sir.

Senator SESSIONS. And we have thought we have had some very

good programs that never seem to have done much, make much of

a dent into this effort, and I do appreciate your work and dedication to it. It is an often thankless task and often dangerous and we

complain about the government in Colombia, but the whole of the

Colombian Supreme Court virtually was assassinated. Judges who

have stood up against these traffickers are killed on a routine

basis. Police officers have to be incredibly courageous to do their

duty and it is a very, very difficult thing to think that we are going

to solve our drug problem by focusing on Colombia.

I am not sure where we are headed. I think we must not lose

our own commitment to reduce demand here through law enforcement and education and treatment and that sort of thing, but we

certainly are dealing with an empire that is powerful and deadly

and rich and I appreciate your work on it. Thank you, Mr. Chairman.

Mr. JAMES. Thank you.

Senator GRASSLEY. Thank you, Senator Sessions. Mr. James,

that is the last questions we have for you at this particular moment. And so I want to thank you for your participation and for

particularly the hard work you went to to provide the visuals for

us today for a complete understanding of this.

We are going to ask everybody to stay—you can leave the table

if you want to. We are going to ask everybody to just stay seated

for a minute. We are going to have just a slight delay. I will explain the delay this way, that our third panel is someone who has

very extensive experience with the black market peso exchange.

The testimony will outline how someone gets started as a peso

broker, how connections are made and why the system works the

way it does and we are going to refer to our witness as Carlos. Obviously not the real name.

He has agreed to testify only with the agreement that we keep

his identity secret. He will be hidden in order to protect himself

and his family from possible retribution. To accommodate this, at

this point, we are going to ask the security to close the doors, ask

the audience to remain seated, and also for the cameras to be

turned off temporarily or pointed away from witnesses at this time,

especially the camera behind the dias. So we will just be very patient while this all takes place at this point.

We are ready to commence now, and I thank you very much for

agreeing to be here today, and as I indicated before you came in,

we are going to refer to you as Carlos. We thank you very much

and would you please begin your testimony and we want you to feel

very comfortable and to know that we will do whatever we can to

make sure that your identity is not known. Would you begin with

your statement, please?

62

STATEMENT OF ANONYMOUS WITNESS, ‘‘CARLOS’’, A PESO

BROKER

CARLOS. Yes. I am a little bit nervous so I will speak slowly. I

have been in business in Colombia for more than 30 years. I have

owned several business companies dealing in different trades. Before I talk how I deal on the black market peso exchange, if I could,

I would like to describe briefly how the Colombian black market exchange started.

The birth of the black market was about 30 to 35 years ago.

When I got into business in Colombia, Colombia had and still has

high import tariffs and expensive taxes. Because of the high taxes

and tariffs combined with the fact it was actually illegal to possess

U.S. currency in Colombia, the black market was created. Back

then if you were caught with U.S. dollars, you could go to prison

depending on the amount of dollars you had. That has changed but

today still anyone who wants to legally import goods into Colombia

will have to pay up to 20 to 25 percent in taxes and anywhere from

five to 35 percent in duties and tariffs. This can add an additional

60 percent to the cost of imported items.

When the government made it legal to possess dollars, a peso

broker like myself had to just make sure you offer a rate at a better exchange rate than the government so you can make a profit.

In other words, you had to sell it cheaper than what the government used to sell it.

Now I will explain how I am a dollar/peso broker and how this

system helps launder millions of dollars of drug money for narcotic

traffickers. In the 1980s, I was already buying checks in U.S. dollars and exchanging them for Colombian pesos. Since I was already

doing business in the United States, a business friend of mine

asked me if I was interested in buying U.S. dollars in bulk cash

in the United States in exchange for being given Colombian pesos

in Colombia. I knew this money belonged to drug traffickers because of the threat that comes with doing this business. I will talk

about this, the risk, shortly. Everyone in this black market business knows that U.S. dollars they are dealing in are from drug

sales in the United States. This was a very lucrative business for

me and once you start it, it is difficult to stop. I learned this business very quickly.

Narcotic traffickers have a basic need. They need their drug dollars in the United States laundered and they need pesos in Colombia. As I said, I started laundering money for drug traffickers many

years ago. I worked with these traffickers, buying their U.S. currency and laundering their money by selling their dollars in return

for pesos. These drug dollars are used to buy goods in Miami, New

York and other places. The goods are smuggled into Colombia and

sold in the market at cheap prices. No one can compete with these

prices.

Let me describe a typical business day for me. I receive a phone

call from a representative of a drug trafficker. This is a person that

is in charge of laundering the money for the trafficker. This happens sometimes three or four times a day from different traffickers

because I have built my credibility with them. Sometimes he visits

you at the office. As much drug money as the trafficker has from

the sale of his drugs, I can sell that amount for pesos in the black

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market. We make a contract, like a handshake, no paper, and determine what percentage the exchange will be.

When I buy the U.S. currency I buy it for a fraction price or a

discount no matter what the price is on the black market. Sometimes I watch the exchange rate so before I sell these dollars, I

have to watch for a few days to see what the selling price is. It is

a like a stock on the stock exchange. It goes up and down. If the

black market exchange rate and the sale price changes and drops,

the traffickers do not care, they just want the price we fixed before.

When I receive the dollars in the U.S., I have eight to ten days to

give them the equivalent back in the pesos minus my commission.

In the meantime, the phone is ringing and I am being asked if

I have any dollars for sale. These phone calls are from the

contrabandistas and from associates that I know that are businessmen that import U.S. and other goods into Colombia. They do this

by smuggling the goods in order to avoid the high taxes and tariffs

I mentioned earlier. In Colombia, we call these men

contrabandistas. They buy these U.S. dollars, the drug dollars I

have for sale, and pay me in Colombian pesos. They use the drug

dollars in the USA to pay for the U.S. goods they import into Colombia. Many times they bring in containers of goods like appliances or computers or so on. It could be car parts. They avoid paying the government by paying off a Customs official at a port in

Colombia. Other times they just smuggle by boat from Panama or

Aruba.

The process I have described helps to keep the black market

going. Because of taxes, we choose to do business illegally outside

of normal legal channels established by the government of Colombia. Other brokers and I work together to keep the dollar/peso exchange rate favorable to as compared to the exchange rate established by the government of Colombia. When it is said that the

peso/dollar broker sells on the black market, it means he sells the

dollars to the numerous contrabandistas in Colombia who have

need for U.S. dollars in order to pay for the goods and services in

the United States. If a contrabandista needs $500,000, for example,

in U.S. dollars in order to pay for household appliances in the

United States, the contrabandista will call me or another broker

like myself and ask to buy the U.S. dollars I have so he can pay

for appliances in the states.

I sell the contrabandistas U.S. dollars at an exchange rate that

is better than buying pesos from the government but an exchange

rate that is higher than a rate that I contracted with the trafficker.

The trafficker gets pesos, I make money, and the smuggler pays for

his goods in the U.S. The smuggler gives me the bank account information or the information on the company from which he is purchasing appliances and I wire the currency from one of my accounts in the U.S. paying the debt for the appliances. This is usually to a company or a distributor in the U.S. This is how the U.S.

dollars are laundered and changed into pesos without the dollar

ever physically leaving the United States.

I have sent large amounts of currency all over the United States,

particularly to New York and Miami, Florida, to authorized distributors of Sony, Whirlpool, Kodak, General Electric and many

more. 90 percent of the money sent to Whirlpool was for authorized

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distributors in Miami. I have also sent money to companies that

deal in fabrics, yarn, cosmetics and other durable goods. As much

drug money as a trafficker has, I can sell it for pesos.

Now let me talk to you about the risk. I mentioned that the trafficker people give you eight to ten days. These are business days.

Once you agree, you have to deliver him pesos. There is rarely an

exception. Basically after the contract you make, the trafficker has

no more risk. You do. If the trafficker does not receive the money

in time or not at all, they will torture or kill you or your family.

In many cases, they will burn the house down with a relative inside unless they are paid in full.

I personally know a dollar/peso broker like myself who lost several hundred thousand dollars in the U.S. because of the police.

The traffickers sent thugs to his mother’s house and were going to

murder her by burning her house down with her inside. Some brokers I know helped and paid off the debt to save her. Sometimes

people are not so lucky. If they find out you are an informer, they

will kidnap you, even if they are paid. Sometimes the informer is

tortured and killed. When these traffickers are ripped off, they either kidnap you or someone close to you. Then they tie the person

to a pole in a hidden room. They torture you and let you die of starvation in your own filth and waste.

In conclusion, I would like to say that as a result of extremely

high taxes and tariffs, the Colombian government created its own

black market of peso exchange and the contrabandistas. For businessmen, smuggling has become a regular part of the Colombian

business system in order to survive. That is why tons of merchandise is smuggled in by the contrabandistas which results in their

need for U.S. dollars to pay for the smuggled merchandise. There

is no limit to the amount of U.S. currency these contrabandistas

can buy because the number of contrabandistas in the trade is so

numerous. In my opinion, the way to stop this problem is for the

government of Colombia to reduce these ridiculously high tariffs

and taxes. This would allow Colombia’s businessmen to import

goods and operate legally within the Colombian business system.

This would immediately stop the contrabandistas since it would be

no longer profitable to bring in smuggled goods.

[The prepared statement of anonymous witness ‘‘Carlos’’ follows:]

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Senator GRASSLEY. We thank you very much, Carlos, for sharing

your experience with the United States Congress and for your willingness to be here to be a real live example of a very important,

probably the most important, intermediary in this process of getting the American profit from drug trafficking out of our country

home to Colombia.

I understand from your testimony that the traffickers will give

you a large amount of money and then expect you to return a percentage of it to them in pesos within a certain time frame. You said

usually eight to ten business days. Do the traffickers require you

to put up any collateral for the dollars that they ask you to exchange?

CARLOS. The only collateral that you put up is your life, your

family, no other. They think that is more important than properties.

Senator GRASSLEY. So you sacrifice everything, in a sense.

CARLOS. Exactly.

Senator GRASSLEY. Do you always, in the truest sense of the

word, is what you said that you have to put up for collateral your

life and the lives of loved ones, is there some element of trust that

is established over time?

CARLOS. Oh, yes, very much. They will not sell to anybody I

mean off the street. They have to know you, your background, that

you pay well, that you are responsible in that kind of business, and

eventually they will sell you 100,000, next deal will be 200 or 300,

it depends how well you respond to them.

Senator GRASSLEY. And you obviously have had some interchange with other peso brokers, I assume. Do you think that in

your case or in every case, there is no collateral other than as you

say family and friends whose lives are at stake that has to be put

up or in some instances does it take collateral?

CARLOS. No, there is no collateral.

Senator GRASSLEY. Okay. That is good enough.

CARLOS. Oh, okay.

Senator GRASSLEY. Is it more accurate to describe peso brokers

as independent agents working for themselves or as agents of the

drug cartel?

CARLOS. No, independent. Everybody is independent.

Senator GRASSLEY. Do the businessmen, the smugglers that you

call contrabandistas, know where the money is coming from?

CARLOS. 99 percent of them. It is common knowledge in Colombia

that the black market is from drug money.

Senator GRASSLEY. Okay. You indicate in your testimony that

you send money to authorize dealers of U.S. goods, for example,

Whirlpool. What about actual manufacturers or companies that

produce these goods?

CARLOS. Very rarely. It is almost directly distributors through

Miami, New York. Very rarely to the manufacturer himself.

Senator GRASSLEY. You are saying that some companies at least

at the distributor or authorized dealer level know that the goods

are being sold to Colombia. Does this mean that some also know

the source of the money?

CARLOS. About the distributors, I can say some do. Now the manufacturers themselves, I do not know.

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Senator GRASSLEY. How much will a peso broker make on an average transaction?

CARLOS. It can range from one to 1.5 percent.

Senator GRASSLEY. Are money brokers like yourself regulated by

the Colombian government?

CARLOS. No, not at all.

Senator GRASSLEY. You mentioned in your testimony that you

have used wire transfers to pay for goods not only in the United

States but in other foreign countries. What other countries have

you done transactions with?

CARLOS. Japan, Panama, Brazil, Venezuela, many others I don’t

remember, the Orient, South Korea.

Senator GRASSLEY. Yeah. What about Europe?

CARLOS. Yes, but very little. Some to buy some machinery.

Senator GRASSLEY. Okay. Can you tell us specific companies that

receive funds?

CARLOS. Can you repeat the question, please?

Senator GRASSLEY. Could you tell us specific companies that

have received funds?

CARLOS. I can tell you the distributors of Whirlpool, General

Electric, Johnson and Johnson. I can go on to list many others. If

I have more time, I can.

Senator GRASSLEY. I would suggest that what you do then in conjunction with my staff so we preserve your identity make sure that

we have as long of a list as you can give us of companies. I should

say, as you said, distributors of companies that you have done business with, that you know have received specific funds. Do they look

at what amount and which account it is to be credited to?

CARLOS. The distributors just look at the amount. They call the

bank and they see if the money is credited to the account and that

is it.

Senator GRASSLEY. Okay. Senator Sessions.

Senator SESSIONS. Thank you, Carlos, for sharing your insight

into this problem. I think some of our free trade advocates would

agree that high tariffs and high taxes cause black markets to begin

with and I think you have made that point. Let me ask you do you

have any idea what percentage of the sales of these kind of consumer goods that go to Colombia are purchased one way or the

other by drug laundered funds?

CARLOS. The smuggled ones, the smuggled goods?

Senator SESSIONS. Yes. Smuggled ones, I guess, at first.

CARLOS. Yes, the contrabandista. I would say 95 percent.

Senator SESSIONS. What would happen if there were some way

that the United States could stop its businesses from accepting

funds and stop shipping products? Would the brokers be able to

find other countries that would sell the products?

CARLOS. It is not the question of the brokers, the peso brokers.

It is a question of contrabandista. It is a question of the businessman. He will probably buy goods from another country. I am sorry.

They can buy shoes from Brazil, which is a very big article, or some

other things from Venezuela or from South Korea. Many other

countries will sell.

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Senator SESSIONS. Are there some of these distributors who are

openly aware that this is directly drug money or do you try to avoid

explicit recognition of that fact?

CARLOS. Like I said before, it is common knowledge. A lot of

them do know, but if they ask me or they ask the smuggler, they

will probably say it is not. But it is common knowledge and most

of the distributors in Miami or the free zone of Miami are from Colombians, are Colombian owned companies.

Senator SESSIONS. So the free trade zone in Miami, the people

who are making these transactions are many, a large percentage

are native Colombians?

CARLOS. I will not say all of them, but, yes, and they do a lot

of business with Colombia.

Senator SESSIONS. And is that who you deal with yourself?

CARLOS. Mostly distributors—they are all over. To tell you the

truth, it is all over Miami, not only the free zone, distributors in

Miami and a lot from Panama.

Senator SESSIONS. Is it fair to say you often attempt to do business with people who have Colombian connections, distributors of

merchandise?

CARLOS. Yes, again, but I am not the buyer of the merchandise.

The contrabandista is and he tells me who to ship it to.

Senator SESSIONS. And so you do not personally negotiate the

purchase.

CARLOS. I am not a contrabandista.

Senator SESSIONS. Okay. But this is from your information, what

you have learned over the years.

CARLOS. 100 percent.

Senator SESSIONS. You have mentioned the fact that if you do not

follow through on your commitment to drug traffickers that you

and your family’s lives are in danger. Is it fair to say that throughout the nation of Colombia, that law enforcement people and others

who take action against these cartel members, that their lives and

family’s lives are in danger?

CARLOS. I am sorry. I lost—could you rephrase, please?

Senator SESSIONS. Yes. When you deal with a Colombian drug

cartel, you have to follow through on your commitments.

CARLOS. Yes.

Senator SESSIONS. Or you or your family’s life is in danger?

CARLOS. Yes.

Senator SESSIONS. Share for us the extent to which throughout

the nation of Colombia, judges, police, and others who challenge

the cartel, to what extent are their lives and their family’s lives at

risk?

CARLOS. Very much. Lately, the Colombian police have done a

lot. Colombian banks. Now it is very hard to be a Colombian

broker, a peso broker, by the bank’s regulations. I will say the last

two years and with the present person the laws are, banking laws

are very strict. It is not easy to deposit $20,000 or $30,000 in a

bank without being noticeable. Before it was. So now it is very

hard to be a dollar/peso broker in Colombia. It is very dangerous

for Colombian laws.

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Senator SESSIONS. So the Colombian government is making some

successful steps toward making it more difficult to launder these

funds?

CARLOS. Oh, yes, yes, they are.

Senator SESSIONS. And but ultimately you believe the black market will continue. I believe you said to stop this problem, it will be

necessary for the government of Colombia to reduce these ridiculously high tariffs and taxes. Do you think it will continue as long

as you have a 60 percent tax in effect on imported goods?

CARLOS. Yes, I heard that Ms. Fanny Kertzman and maybe it

will help her what I am going to say. In Colombia, when you import something, right off the bat, you have a 16 percent tax, sales

tax, plus the tariffs, plus a lot of other expenses and plus a lot of

other paperwork. If you really want to stop the black market, you

can do it I will not say today, but if you reduce drastically those

tariffs and the taxes, it will last about a month, and everybody

would become legal.

Senator SESSIONS. There would not be any advantage to being illegal; is that correct?

CARLOS. Yes. What I am going to say is going to sound a little

awkward, but these contrabandistas are legit businessmen. Okay.

They buy the funds. I understand this. But they are not, they

would rather do legit business than what they are doing now. Now

it is uncomfortable and these are people who want to make a living

importing merchandise. If the tariffs went down, like in the United

States, you do not have cars smuggled in or textiles. Your tariffs,

I suppose they are very low. So it is not worth it to smuggle anything in. So if the tariffs and taxes were lower, nobody will go

through the hassle of trying to bribe a Customs officer or anything

like that.

Senator SESSIONS. Thank you very much for providing us this

rare insight into how this business actually occurs, Mr. Chairman,

and, Carlos, we thank you for sharing it with us and I understand

the need for the security and we thank you for coming.

CARLOS. Thank you. Yes.

Senator GRASSLEY. One last thank you and would you please

stay seated until we know that everything is all right. And I think

the cameras should be a little more cautious about being turned off

or turned away from the witness. I do not think they were when

we brought the witness in and I would like to have respect for his

security. Even though he is hooded, it is still very important that

we do that. So when the police say that it is okay to proceed, then

we will proceed and when you are out, then I will introduce our

fourth and last witness. Is it okay to proceed now? I want to thank

all in our audience for your cooperation for the safety of Carlos.

FOLLOWUP QUESTION FOR ‘‘CARLOS’’

In your testimony, you mention various companies that do business in the Black

Market Peso exchange. Could you list these companies that have received funds,

and mention some of the items that are sold?

Carlos supplied the following list:

Companies: Sony; Whirlpool; Kodak; General Electric; Madame Shikse &

CIA.LTD; Caja Agraria; Comrecializadora Siglo XXILLDA; Multicentro Del Blumer

C.A.; Surtiblumer C.A.; Motorola; Aiwa Electric; and Toshiba.

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Goods: Scotch (Black Label-Johnny Walker brand); Marlboro Cigarettes; Johnson

and Johnson; Mattel Brand Toys; Cell Phones (manufacturers Erickson and Nokia);

Emerson; Perfume; and Patton Ceiling Fans.

Senator GRASSLEY. Our fourth and final panel consists of Ms.

Fanny Kertzman, Director General of Taxes and Customs for the

Government of Colombia, and also we have another witness, former

U.S. Ambassador to Venezuela, Michael Skol. Mrs. Kertzman was

recently appointed by President Andres Pastrana and I welcome

her and thank you for your courage in appearing before the caucus

today, and Ambassador Skol, you served as ambassador from 1990

to 1993 and you are currently president of Skol and Associates, a

consulting firm here in Washington, D.C.

And before you begin, Ms. Kertzman, I want to thank your ambassador who was here for a short period of time this morning for

his interest in this issue not only for today’s appearance but also

because he has expressed concern over these very issues so many

times that he has visited my office and we very much appreciate

your president’s interest in this issue, his cooperation with our

country, his trying to make very substantive changes within his

own country, but also I think the presence of your ambassador on

these issues before members of Congress is an appreciation or an

expression of that as well.

And my staff reminds me that I pronounced your name wrong.

Mr. Skol.

Mr. SKOL. Thank you, sir.

Senator GRASSLEY. You bet. Ms. Kertzman, would you proceed,

please.

STATEMENT OF HON. FANNY KERTZMAN, DIRECTOR GENERAL

OF TAXES AND CUSTOMS, GOVERNMENT OF COLOMBIA

Ms. KERTZMAN. Thank you very much. I want to thank the Senate Caucus on International Narcotics Control and especially your

chairman, Senator Charles Grassley, Senator Sessions, for the opportunity to address one of the most serious problems facing Colombia which is contraband. The government of Andres Pastrana

has made a point of his fight against corruption in general and one

of the most important points is the fight against contraband. Contraband in Colombia amounts to near $5 billion a year, which

means with a total import of $15 billion a year, it means that almost 25 percent of all the imports that are made into Colombia are

contraband.

And the reason for that is not that the taxes are very high. We

lowered our taxes on imports in 1992 and what happened is that

contraband raised by the result of opening the economy and I think

that the main reason for this huge amount of contraband into the

country is mainly the narcotics trafficking. The problem of narcotics trafficking is not only a problem of the U.S. or only a problem of Colombia. It is a problem for all of us. For Colombians, we

have the harm that is done to our youth just the same as here in

the U.S., but in Colombia, we have the problem of corruption, contraband, the danger that people are—you were asking now this

other witness about the danger that people are in in Colombia. It

is not only the judges, the policemen, the army, it is also us officials of Colombian government that we have to go protected. I have

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about nine guards. My family has about six guards and it is only

because we are fighting against contraband and tax evasion.

It costs, contraband costs to the Colombian state, each year about $840 million in tax revenue and duties that are not paid.

And why there is such a high contraband is not to pay duties so

to make unlawful competition to the other producers in Colombia,

but also to launder money as I said. Also there is contraband of

chemical precursors and the contraband of the point of view of export of illegal substances.

The link between narco-trafficking and contraband is very clear.

This merchandise that is smuggled into Colombia is bought with

an exchange rate for the dollar of 1,000 pesos per dollar when the

rate in the market is 1,600 pesos per dollar. That is why it is such

a good business to smuggle goods into Colombia and it adds to the

profits of the narco-traffickers. I have to stress the point that the

dirty dollars are not deposited in Colombian banks. They, you just

heard all the explanation of how it works, but I want to make clear

that in Colombia, it is not possible to open an account in dollars,

only in pesos.

The dollars that come into Colombia sometimes come dollars in

cash. When we caught dollars in cash, it is about $300,000 every

time they are caught at the airports with people, in their luggage

or taped to their bodies, but that is not the most common way of

laundering the profits of narcotics. All the actors in the chain of

contraband are accomplices to this crime. The producer, the manufacturer of the goods here in the U.S. or in Japan or in Korea, who

knows that he is selling the goods to someone that finally will

smuggle them into Colombia.

The distributor who is selling the goods to the smuggler, the peso

broker, the smuggler itself and the consumer in Colombia who buys

the smuggled goods know that the product he is buying was paid

with money from narco-traffickers. All of them are equally guilty

of the same crime, that they are selling goods that are going to be

smuggled into Colombia and paid with dirty money.

With all these problems we have with contraband, I would like

to stress that we are working very closely with U.S. government.

We have received all the cooperation that we need, especially from

the U.S. Customs Service, the Department of the Treasury, Department of Justice, DEA, FBI, FinCEN, OFAC, and in general the

agencies that somehow are related to this issue. We are signing an

agreement with Customs. It is all ready for the signature and I

think it is going to be signed on September that will be interchange

of information between U.S. Customs and the Colombian Customs

and we are working together with them already in the cases, the

specific case of contraband and money laundering.

For the first time in Colombia, there are people in jail for contraband. Contraband is a crime and tax evasion is also a crime in Colombia, but there is no one in jail for tax evasion. Now in Colombia

there are about 20 or 22 people in jail for a case of contraband and

for you it might be a very low figure, but for Colombia it is a record

to have 22 people in jail for contraband.

There also has been some progress with the private sector. We

are trying that the private sector be aware that they cannot sell

their goods to smugglers and there are some companies such as

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Whirlpool Corporation and Daewoo in Korea that have as a policy

not to sell to the contrabandistas. And Whirlpool Corporation just

signed a compliance agreement with the government of Colombia

that they are not selling through the distributors in Miami and in

Panama. They are selling only one unit of every dishwasher or

something like that, and Daewoo has a policy not to sell to the

Sanandresitos in Colombia.

For those who are not aware what the Sanandresitos are, this is

our big malls that exist in Colombia where they sell only smuggled

goods. There are Sanandresitos in every major city in Colombia.

People go to buy appliances and liquor, cigarettes; it is much

cheaper than in the legal market, of course, because they are not

paying taxes. They are very well organized and it is a phenomenon

that I think it exists only in Colombia.

There are cases of contraband that are very clear. The case of tobacco, for example. Nearly 90 percent of the total of cigarettes imported into Colombia are contraband. Local companies have 55 percent of the market. 45 percent of the market is imported cigarettes.

Only ten percent of them are imported legally. 90 percent of all the

cigarettes that come into Colombia are contraband. In the case of

liquor, 85 percent of the total liquor that is imported in Colombia

is contraband.

Six years ago there were 18 legal distributors of imported liquors

in Colombia. Now only three of them remain. They went into bankruptcy because of the unlawful competition of contraband. For Colombia, it is a problem the Colon Free Trade Zone located in Panama. The Panamanian government has been very reluctant to provide figures regarding exports from the free zone, but in Colombia,

we estimate that $1.2 billion a year come from the Colon Free

Trade Zone illegally into Colombia. The Sanandresitos buy their

goods mainly in the Colon Free Trade Zone.

We are trying to work together with U.S. government in this

fight against contraband. We are asking for funds to buy X-ray machines for the ports and the airports. They do not exist. We want

to work together with the U.S. government, but I want to say again

that contraband is not a problem only in Colombia. Such as drug

trafficking, the problem is international problem, not only a problem of U.S. and Colombia, but all the countries. I just want to end

by saying that contraband is the second stage of narco-trafficking.

It is the most efficient way of money laundering and from that

point of view we together have to work on this. Thank you very

much.

[The prepared statement of Ms. Kertzman follows:]

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Senator GRASSLEY. Thank you, Ms. Kertzman. Ambassador Skol.

STATEMENT OF AMBASSADOR MICHAEL SKOL, PRESIDENT,

SKOL AND ASSOCIATES

Mr. SKOL. Mr. Chairman, Senator Sessions, thank you very

much. It is an honor and a pleasure to be here to contribute something to this discussion. The whole issue of contraband/money laundering is so complex, you cannot explain it in a sound bite and I

think that is one of the reasons why there has not been the kind

of activity on the part of people outside of the law enforcement

community in the United States and it is hearings like this and the

accompanying publicity which I think we hope will bring more companies, more people to understand what is going on and therefore

to do something about it.

I also want to say that it is frankly a great honor to be sitting

next to Fanny Kertzman who is one of the great dynamos against

drug trafficking, against money laundering, against contraband in

Colombia. You have heard all about how this system works. What

I want to focus on is the point of view of the business community,

both the American business community and the Colombian business community, and also to say something about business ethics.

What is the right and proper in addition to the commercial thing

to do here?

Let me point out something that has been said over and over

again, but I want to focus especially on it. This process, contraband

money laundering is bad, it is a terrible thing for two very good

reasons. One is that it is an integral part of drug trafficking. Without money laundering, you would not have drug trafficking. For

that reason it must be stopped. But from another point of view, it

is also a terrible thing because of what it has done to legitimate

free enterprise, to the free market, to honest and legitimate business in Colombia or anyplace where this touches upon.

Let me give you an example in a specific industry. I know the

caucus is familiar with the example of the footwear industry, but

it is worth putting on the record what has happened in the last

years. During 1998, some nine million pairs of shoes were ‘‘legally,’’

and I say ‘‘legally’’ in quotes, imported into Colombia. Of these,

some seven million, all imported via Panama’s Colon Free Trade

Zone, were claimed at Customs to be valued at under $2 a pair.

Five of the seven million were valued at under $1 a pair, and of

these about one million were claimed to be worth three cents a

pair. I spelled it out in my testimony because I did not want anyone to think that we had made a typographic error, three cents a

pair.

And these represent only those pairs of shoes which actually

went through Colombian Customs. Of the 40 million pairs of shoes

that are estimated to go through Customs each year, 30 million

pairs are described as pure contraband, pure meaning they do not

go through Customs at all, and the other, most of the other ten

million are undervalued at Customs.

Well, what is the result? What has been the result of all this?

Ten years ago, there were six major shoe factories in the country,

each employing over 1,500 workers. Today, four of the six have

gone bankrupt and the remaining two are operating at 40 percent

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of capacity. Why? It is simple to know why. They cannot compete

with shoes that are deliberately way, way underpriced, under the

manufacturer’s cost by quite a bit. They cannot compete. They go

bankrupt. It is also bad because contraband money laundering by

eliminating much of legitimate in this case shoe manufacturing and

legitimate shoe importing deprives the government of legitimate

taxes and legitimate tariffs.

So it hurts the economy in every imaginable way. What I am

suggesting here is, therefore, when we look at why should businesses, why should we all be involved, government or not, in doing

something very actively and very aggressively about contraband

money laundering, there are two very good reasons, and there is

a confluence of interests. I can tell you that the private, legitimate,

honest, private sector in Colombia has been for years frustrated

that there has not been more interest such as that shown by this

caucus hearing today, more interest, more activity, more awareness

of what is happening to a fellow free market economy in another

country because of this contraband.

I would insist that the U.S. business community or the Japanese

or the European or any of those that are involved in this kind of

activity has, therefore, a double reason to become very actively involved in fighting this kind of activity. There is a moral responsibility not to take part in any way in something which aids drug

trafficking. But there is also in my opinion a business ethics responsibility for the free market, for the private sector community,

the business community in the United States, not to undermine,

actively undermine in any way the business community in another

country which is trying to make a buck legitimately if it possibly

can.

The time is ending when companies could say that they did not

know, they were ignorant, that their products were somehow involved in contraband money laundering. The time is ending because there is now beginning, only in the past year or so, but it

is now accelerating, a program of education, of letting people know

and I very much applaud today’s action announced by Customs in

producing a pamphlet and actively going out, talking to manufacturers, telling them what is going on.

The time is also ending when a company can say, well, what we

can do about it? We are not law enforcement after all; there is no

way we can discover what is going on when the refrigerator or the

pair of shoes finally gets to the last destination who is really paying for it. Well, this is not really true. There have been many examples in the past of how private business either because it was

forced by law or pressured by public opinion or brought to this

stage by its own business ethics to change the way it thinks about

point of sale and where its responsibility ends.

The most important, the most obvious industry is the banking industry. The banking industry because of law and because of selfregulated practice now in many countries around the world, the

United States, Europe, Colombia, the bankers know their customer.

What we are saying is that the bankers and the manufacturers

now have a responsibility also to know their customer’s customer.

And it is possible. There are investigative techniques. The law enforcement community, I am certain, is prepared to help show a

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manufacturing company what is actually happening to its product

downstream down the line.

This is also not so very far different from what has gone on in

the chemical industry. Years ago, European, American chemical

companies insisted that, well, if they were selling acetone or ether

or the things which could be used as precursor chemicals in the

manufacture of drugs, they also had legitimate uses so how could

they know? Well, now they know and now there is an entire process supported by law whereby chemical companies that produce the

precursor chemicals or chemicals that can be used for manufacturing of drugs, there are whole systems so that they find out just

how that acetone, for example, is going to be used when it gets to

Colombia.

Is it being imported by a manufacturer of nail polish remover?

Fine. But not 100 million gallons of nail polish remover. These

things are part of our tradition, part of the way companies and

groups of companies have come to accept their responsibility. And

frankly what is going to do it is not, I hope, I do not think legislation is necessary. What is going to happen, I think, is the gentle

pressure of hearings like this one on companies that do not want

to be identified in any way in the public mind as being connected

downstream with drug, money laundering or the traffic in drugs.

A company which spends tens of millions of dollars a year on buying the services of basketball stars to advertise its goods to children does not want to be identified in any way as doing something

bad to those children.

So know your customer, know your customer’s customer. This is

possible. Another way of doing it, another voluntary way is to sell

the product only through the legitimate distributor in that country,

in this case in Colombia. If you are going to sell refrigerators or

shoes or cigarettes or liquor, make sure that you sell it through

your legitimate distributor in that country and not through Miami

or Aruba or Curacao or the Panama Colon Free Zone.

Now, companies have begun to do this. This is extraordinarily

important. They are showing that (a) it is possible to do these

things and (b) Senator Sessions, they are showing, I think, that

they think they can still make money selling goods legitimately and

making sure that the system does not build and help drug money

laundering. If, for example, a company is asked by its distributor

to send a thousand refrigerators and a thousand washing machines

and a thousand dryers to a customer in Miami, one could ask or

send a private detective or ask Customs or the IRS to figure out

whether that purchaser is building an apartment complex of a

thousand apartments and that is why he needs all of these goods.

If that is the case, bravo for free enterprise. That is great development in the community in Miami. But if this person is not building an apartment complex and has no reason, no demonstrable reason to be purchasing a thousand of each, then certain questions

have been asked. It has been raised here before that certain companies have been doing just these things. General Electric is the most

quoted examples because General Electric happens to be a company long in the lead on ethics issues. Mr. Chairman, I have a copy

that was sent to me yesterday of a letter that was sent to you by

General Electric detailing some of the things that they are doing.

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They are new policies. I hope that you will have this letter entered into the record. I think it would be very useful.

Senator GRASSLEY. I was planning on doing that during my closing remarks.

Mr. SKOL. Oh, I am sorry, sir, but I am glad that you are going

to be doing that. In conclusion, I think there is a great many things

the law enforcement community can do. There are things that governments can do. But I think that the business community of the

United States operating in cooperation with law enforcement in the

United States, the business community in Colombia, and the Colombian government, there is a moral, there is an ethical, there is

a business reason to do it that I think they are capable of doing

it, and the more we talk about it, I think the more they will do it.

Thank you.

[The prepared statement of Mr. Skol follows:]

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Senator GRASSLEY. I would like to call on Senator Sessions to ask

the first round of questions.

Senator SESSIONS. Thank you, Mr. Chairman, and you make a

very persuasive case and I think I understand, Ambassador Skol,

a little more clearly. As I sat down last night for the first time and

read the materials, I was asking myself who are we involving here?

Who are we putting the pressure on and I do think, however, and

Ms. Kertzman, I do think, however, that economics and free trade

and lower prices is a reality. That is life in this world.

And if your taxes and regulations reach a certain level, you can

expect people to figure out a way to get around those taxes, and

to the extent to which that is a factor I think Colombia should look

at that. Would it be possible, Director Kertzman, for Colombia to

license or approve only certain importers, those that they have certified are complying with the law and paying the taxes?

In other words, it seems to me that who should determine who

are the people bringing the dirty money in? A distributor for an

American company or Colombia itself?

Ms. KERTZMAN. The first thing I want to say is that—and I want

to repeat it—is that the tariffs and taxes are not as high in Colombia as you think. The rate of a tax including a value added tax on

the tariff for imports is 16.6 percent. It is not 60. It is, you know,

16. So I think that——

Senator SESSIONS. The ten percent tariff in addition?

Ms. KERTZMAN. No, no. This is why in all the economy, for specific goods, there is value added taxes for many goods, but there

is no value added tax, for example, for food. So if you import food,

there is no value added tax on that and besides the tariffs are different. Tariffs in Columbia range from five percent to 20 percent,

and there are specific tariffs for food again, cereals and rice, just

like——

Senator SESSIONS. What is it on a washing machine?

Ms. KERTZMAN. For a washing machine, it is 20 percent.

Senator SESSIONS. Plus 16 percent.

Ms. KERTZMAN. Plus 16 percent.

Senator SESSIONS. You are talking about 36 percent which is

pretty hefty tax.

Ms. KERTZMAN. Yes, but——

Senator SESSIONS. By American standards even.

Ms. KERTZMAN. No, no, we understand that and we try to have

a policy of lowering tariffs for these kind of goods that we say in

Colombia that they are contrabandistas that they can be smuggled.

But Colombia is part of the Andean Pact so there is a common tariff for the countries for Venezuela, for Ecuador, Peru, Bolivia and

Colombia. So Colombia cannot change its tariffs by itself.

The second question that you said is that we could do something

from the point of view of authorities to let some people import into

Colombia. We could do something like that. We could say that, for

example, Whirlpool Corporation Colombia is the only authorized

company to import goods of Whirlpool. But I think that it goes

against the rules of the organization, for the WTO. I think it goes

against the rules of WTO, but I will have to check on that. But the

problem is that, yes, we decided that we are authorizing only certain importers but there is also open contraband, that it does not

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go through Customs, and it comes from the sea to ports that are

not authorized to function or just they are paying the people in

Customs where we have a big problem of corruption. So we certainly can do things like you say and that is a very good idea, not

to authorize any imports if the people have not paid their taxes,

for example, but still the problem remains that they can avoid all

kind of controls in Colombia.

Mr. SKOL. Senator, if I may add to that, I agree with you completely. If you eliminate all government controls and if you eliminate tariffs and taxes, you will eliminate most contraband. I think

you would eliminate all regular traditional contraband. The problem with drug trafficking connected contraband is that the profits

are so enormous that even if there were no tariffs, even if there

were pure free trade, the drug traffickers and their money

launderers could easily afford to sell pesos, sell dollars, well below

the free market rate. They do not have to compete necessarily with

a distorted market. They can compete.

Senator SESSIONS. I certainly agree with that and that is the corrupting influence of this terrible industry and it is corrupting and

it is dangerous and it does defeat, brings in cash, and honest businesses are at a competitive disadvantage terribly by it and I do not

know how to deal with it. I would just say this, Director Kertzman,

I hear good things about your leadership. I congratulate you for the

courage and determination you are showing.

I also believe that Colombia is a wonderful nation and I do not

mean to suggest otherwise. I have worked with policemen from Colombia who testified in cases I prosecuted courageously and with

skill and ability. I believe that it is a historic ally of the United

States. I am very, very troubled by the internal warfare you are

suffering, much of which driven by drug money and kidnapping. I

think this nation should be trying to do more to help Colombia stabilize itself and be supportive in that area and do not mean to be

suggesting that I am trying to blame Colombia for everything that

goes wrong. We do have a mutual problem and we should work together to solve it. Thank you, Mr. Chairman.

Senator GRASSLEY. Before I ask my first question, you stated

that you have to have how many body guards?

Ms. KERTZMAN. I have nine.

Senator GRASSLEY. Nine and your family has——

Ms. KERTZMAN. My kids have six.

Senator GRASSLEY. I was thinking if every United States Senator

had to have that protection, I can name at least one senator who

would not care to be in the United States Senate and I would assume that most would not like that sort of environment. I do not

know how you do your work, but as has been stated and you have

been complimented so much, I want to add mine to your going

above what we would call in this country above and beyond the call

of duty to do good for your people.

What tools if any do you have available to determine if an import

has entered Colombia legally?

Ms. KERTZMAN. Well, we have the information system in Customs and we can look at the import declaration that they make. We

can follow all the trace of the papers. So the system is there. We

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can work on that. So it is very easy to follow the trace of an import

that was made illegally.

Senator GRASSLEY. Okay. The Colombian government has frequently stressed the need for international cooperation to tackle

the challenges of the exchange, the peso exchange, the black market peso exchange. One effort in this direction was the recent decision to share Customs information between our country and your

country. How successful have these efforts proven to be?

Ms. KERTZMAN. Well, we already are working together in two big

cases of smuggling and we are asking U.S. Customs for some information, but this information they are finding out if it is reserved,

if they can give it to us. But anyway we are working together and

we hope that we can sign this agreement between Customs which

would allow them to give us the information that we are requesting

at this point.

The problem that we have with the agreement is that the State

Department said that it should be signed between governments

and not between agencies. It was going to be signed between the

Customs Service and the Colombian Customs. If it has to be signed

between governments, it will take a long time in Colombia to be

implemented because it has to go through Congress and be approved in Congress by a law. So we hope that we are trying to

make this point with the State Department to have the agreement

signed just between agencies. But we are working very, very closely, not only with Customs but also with the Justice Department

and the DEA in specific cases.

Senator GRASSLEY. Did you say that that is our government or

your government that wants it to be government to government as

opposed to agency to agency?

Ms. KERTZMAN. It is your government.

Senator GRASSLEY. That is something that we should try to facilitate. If it is government to government, how much longer would

it take that to be approved by your government then if it has to

go through your congress?

Ms. KERTZMAN. Well, I do not know how long it would take, but

it might be significant that it would not be signed because if it has

go to through Congress, there are people in Congress in Colombia

that do not like this agreement because some of them are somehow

they receive money from the smugglers. So they would not like this

agreement to be signed.

Senator GRASSLEY. It seems to me that we should have this caucus and our staff look into why this is a requirement on the part

of our government and if there is an understanding that that is a

tremendous impediment to the proper agreement that you feel you

have to have to make this exchange of information be facilitated.

Is that right?

Ms. KERTZMAN. Oh, thank you very much. I do not want to make

a point against the U.S. government in this, but it really would be

helpful if the agreement is signed between agencies because, not

because there is some problem with U.S. government here, but because it will be very difficult for the agreement to go through Congress in Colombia.

Senator GRASSLEY. Yeah. Well, and it might be a technicality

that our government does not understand the full impact of and it

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may be something that is so small on somebody’s radar screen that

it is not given the proper attention that it ought to be given, and

by the way I do not think you have to worry about criticizing our

government. We feel free to criticize your government from time to

time.

This is not the time for niceties. What we are trying to do is get

information and get to the bottom of the issue. Well, then, this is

just the end of my first question to you. Then do you kind of feel

like except for this technicality we just talked about, that everything is pretty much in place to get the information and cooperation from the U.S. Customs that you feel you should have?

Ms. KERTZMAN. Yes, we think that there is all the willingness to

give us information and with the agreement it would be easier, but

they are cooperating with us in every possible way.

Senator GRASSLEY. Yeah. Many believe that the black market

peso exchange began largely as a product of the structural economic conditions within Colombia; high tariffs and duty rates and

restrictions on obtaining hard currency forced importers to seek alternative and cheaper means of obtaining dollars. Recently, though,

as you stated, the government of Colombia has slashed tariffs. And

yet the black market peso exchange continues to flourish.

Other than what Ambassador Skol has spoken about, are there

any factors that underlie this trend to reduce tariffs and yet have

the contrabandistas still exist?

Ms. KERTZMAN. I think that the most important incentive for

contraband is not that tariffs are high, as I said, but that narcotrafficking exists and the relation is that the profits from narcotrafficking have to be laundered and they slice the price of the dollar in order to launder it. When the official dollar in Colombia is

1,600 pesos per dollar, the dollar of narco-trafficking is only 1,000

pesos. That is the main issue. That is the key why there is smuggling and why it is linked to contraband. So I think as long as

narco-trafficking exists, there will be contraband because there is

always the economic incentive to launder this money through this

mechanism.

Senator GRASSLEY. Okay. I just have one other little point on

that and then I will move on. The Colombian Central Bank has

made efforts to ease up on restrictions for obtaining U.S. dollars.

Do you think that would reduce the ability of peso brokers to trade

dollars for pesos?

Ms. KERTZMAN. In Colombia, there are two markets for the dollar, what we call the Malcao combiyu [phonetic], which is the market that all the exports and imports of goods have to go through,

and there is also the free market. The free market is everything

different from exports and imports of goods and I do not think that

there are many contras right now for dollars in Colombia and there

are not any plans to make it easier for people to have accounts in

dollars. I do not see any change coming from that. So conditions

from that point of view that will not change in the short term.

Senator GRASSLEY. Colombian authorities have frequently complained that the Panamanian and Aruban free trade zones are primary routes for this contraband going to Colombia. We have heard

testimony earlier today about the importance that peso brokers

place on having these kinds of free trade zones where they can buy

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and sell products. How cooperative have officials from both nations

been in monitoring the transactions that take place within their

zones?

Ms. KERTZMAN. Not cooperative at all. I do not have any information. They do not cooperate giving us information and there is no

formal talks about anything. So we feel that we are completely

alone in this fight.

Senator GRASSLEY. So then that probably means that they have

not enacted any policies to attack contraband purchasing or money

laundering?

Ms. KERTZMAN. I do not know about money laundering. What I

know is about contraband, the case of the Caribbean countries, that

surround Panama, Aruba and Panama, they do not have any willingness to combat contraband.

Senator GRASSLEY. Do you feel that more controls over goods at

free zones could significantly decrease the ability of peso brokers to

do business?

Ms. KERTZMAN. Yes, I think that would be very helpful because

the companies here in the U.S. or in Japan or in Korea can say

that they sell to distributors and after they issue orders they do not

know where the merchandise is going. So that would be a very

good way to fight the contraband.

Senator GRASSLEY. Do you have any recommendations for actions

that you believe the United states should take to reduce its vulnerability to being exploited by these type of money laundering operations? In other words, I am inviting you to give suggestions to our

government or even to be critical.

Ms. KERTZMAN. Yes, thank you for the opportunity and I just

want to say that I totally agree with what Ambassador Skol just

said. He said it is very important that private companies know

their clients so that they have this policy just as in the financial

sector that there is a list of designated narco-traffickers that kind

of have accounts in those banks. There should be a similar policy

here in the U.S. in respect to private companies because they have

to know to whom they are selling their products and just as Ambassador Skol said, there is law enforcement.

If they say that they cannot know, and as it happened with

chemical precursors, just a typical example, that it is possible to

know your client if you want to do it, if you want really to fight

contraband. I think that private companies here in the U.S. should

make a commitment to this and maybe it should be something in

the law, in the U.S. law, because contraband is just the same as

narco-trafficking.

Senator GRASSLEY. And the extent to which American corporations would want to move very strongly in this direction, we have

had a couple of instances of outstanding efforts within the corporation already mentioned today, but the extent to which other companies would want to do this, obviously the extent to which they

needed the cooperation of your government, they would get it, I assume.

Ms. KERTZMAN. Of course they would. I was just saying that I

was not sure if we could allow, for example, all the imports from

the representative of Whirlpool because maybe it could violate

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WTO, but we are willing to help on that and doing whatever is on

our extent to work together on this.

Senator GRASSLEY. I just have a couple questions for you, Ambassador Skol. Many Colombian businessmen who operate through

legitimate channels are facing intensive competitive pressure from

the Sanandresitos who are often able to underprice them. And you

have made that very clear in your own testimony. Because a legitimate businessman must pay government taxes, tariffs and duties,

their products tend to be more expensive and you have made very

clear to us that even though the free market might work with regard to the reduction of tariffs and the fact that the laundered

money can still undercut legitimate business, I would like to have

you tell us how have these businesses reacted to competition provided by the Sanandresitos?

Mr. SKOL. Mr. Chairman, unfortunately many legitimate companies have reacted to competition from Sanandresitos by using the

black market money exchange and hiding their eyes frankly from

that fact and so that they avoid—they save a lot of money. They

avoid taxes. They buy some contraband products. There is a whole

rainbow of differences among companies from the very illegitimate

to the absolutely pure.

Unfortunately, many of the absolutely pure are also the about to

become bankrupt. And there is a cumulative effect of all these illegalities, the corruption, the contraband, the money laundering, the

avoidance of taxes which does make it very difficult for the legitimate businesses to function, but many of them, I would dare say

most of them, are functioning legitimately, want to function legitimately. And today if a Colombian wants a General Electric refrigerator or a Whirlpool dryer, it is going to become very, very difficult to get their first choice illegitimately and the more manufacturers, the more government pressure on the contrabandistas and

on the money launderers, every improvement in each area helps

the other areas.

I hope you will get in the next weeks many letters from American companies, Mr. Chairman, telling you what they have been

doing or what they are about to do. The more that do it, the more

the Colombians will be faced with not being able to get their preferred products. If they want to get cheap stuff at the

Sanandresitos, the Sanandresitos will go out of business. This is

going to take quite a long time and there is a responsibility on the

Colombian government progressively to attack the very nature of

these Sanandresitos. I know it is very difficult for us to understand

why an apparently illegitimate enterprise exists so openly, but it

is imbedded in the political culture. There is a great deal of fear

and it is going to take a lot of action on the part of people like

Fanny Kertzman and others slowly to eradicate these kinds of

things.

Legitimate business people want to do business legitimately.

When they are faced with bankruptcy, they will cut corners, and

I think it is incumbent upon all of us to help them do business legitimately.

Senator GRASSLEY. I presume that cartels threaten, of course, legitimate business in Colombia? Or not so?

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Mr. SKOL. I have never heard of a threat against a legitimate

business doing legitimate business. There are many threats against

business people. They are kidnapped all the time. There is danger

in Colombia, but I have never heard of a consistent threat against

doing legitimate business. It is the workings of the market that

causes legitimate business people to do illegitimate things.

Senator GRASSLEY. How have businesses in neighboring countries reacted to the competition of underpriced contraband?

Mr. SKOL. We do not have any—I do not have any statistics on

this, but I have to assume that probably when you hold this hearing a year from now or two years from now, you will no longer use

the word peso because there will be sucres and bolivianos and

other currencies involved. One has to assume that some of this is

happening. I do not have any statistics on this. It will begin to happen more in other countries as it is cleaned up in Colombia and

then we are going to have to focus on those other countries.

Contraband, pure contraband, has existed throughout South

America and Central America and the Caribbean for years. Paraguay, for example, is a country that if you look at the statistics,

you think that every Paraguayan drinks a case of scotch whiskey

and smokes seven cases of cigarettes every single day. That is not

true, of course. It is all smuggled outside of the country to Brazil

and Argentina. I know of no statistics, but I would be very surprised if drugs were not also using that particular system, in this

case, cigarettes and whiskey, to launder their proceeds.

Senator GRASSLEY. My last question is very general in the sense

that if you were listening to this discussion from the outside, this

is something just between the United States and Colombia. Do you

believe it is broader than that or could be, and if so, do you have

any other examples?

Mr. SKOL. I have no other examples specifically, but I have to assume that it is going on in other countries. I assume it will happen

in other countries. There is certainly contraband and smuggling in

other countries and insofar as other countries are centers of either

drug production or drug movements, then it would be surprising if

it were not going on, but I cannot tell you that it is going on in

other countries.

Senator GRASSLEY. Do you have any further questions?

Senator SESSIONS. No. I would just mention to the Ambassador

and would ask him just briefly, I know of an incident recently

where an American was kidnapped in Venezuela and taken to Colombia for ransom and I know of the destabilization in Colombia

from the rebel forces that have taken over a portion of that country. Would you care to make any brief comments about your concerns for the region and to what extent drug trafficking is a bad

factor in it?

Mr. SKOL. Oh, well, there are two great sources of money, large

fundings, for the guerrilla movements, the two of them in Colombia. One is kidnapping. There is a phrase in Colombia. It is called

commercial terrorism. I never heard of it anywhere else, but it is

kidnapping for money. The other great source is drug trafficking,

protecting and advancing drug trafficking. If it were not for drug

trafficking and drug money laundering and everything we have

been talking about here, the task of the Colombian government to

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make peace with the guerrillas would be half as easy and it is still

extraordinarily complicated and it will take a long time, but drugs

are unquestionably a complicating factor in the problems, the peace

problems in Colombia today.

People too often point to El Salvador or Guatemala and say, well,

let us do the same things, and it only took several years there. Colombia has this additional terrible shadow of drug trafficking,

which funds the guerrilla armies, and while that continues peace

will be even more difficult to achieve.

Senator SESSIONS. Director, would you like to comment on that?

Ms. KERTZMAN. Yes. No, I would like just to say that guerrillas

exist in Colombia, exist from the ’50s. It is a very old problem in

Colombia and they did not start as narco-traffickers, but they started as a real movement and then they moved into delinquency with

kidnappings. They are not directly the narco-traffickers. They have

the business of taking care of the crops of cocaine. They take care

of them. But it seems that they are not directly the narco-traffickers.

Senator GRASSLEY. Okay. We have no further questions. The only

thing is, particularly you, Ms. Kertzman, if there is one last statement or admonition or any sort of suggestion you want to make,

I would give you another opportunity. Do you have anything to say

in closing or I mean the last forum?

Ms. KERTZMAN. No. I mean the only thing that I would like to

say is to thank you very much for your words that you have to me,

both Senator Sessions and you, Mr. Chairman. I want to thank you

very much for that and I want to thank you for the opportunity to

be here and tell all the people here in the United States something

that we already know in Colombia is that contraband is as big a

problem as narco-trafficking and all the countries have to be in this

together. Thank you very much.

Senator GRASSLEY. Yes. In 60 seconds, we will be done. I would

just like to say as the hearing closes maybe one last observation,

and we have heard a lot today about this very important issue and

it ought to be clear to all of us that we in government, both here

as well as in Colombia, and the business communities, and I might

say there in both countries, have a job cut out for us. I would make

clear that the purpose of this hearing is not and was not and will

not in the future to be single out any companies as being involved

in illegal acts.

We have heard the names of several businesses mentioned. It

should be clear, however, that these companies and their products

are being used. The issue for all of us is that our businesses and

financial systems are being exploited by criminals to launder drug

money. We have a shared responsibility working separately and

also together to prevent this, and of course this means dialogue on

what to do that involves government, business, and as part of the

business sector the financial community specifically.

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In this regard, I would draw attention to the efforts, as Ambassador Skol has already stated, of General Electric Company and its

commitment to help and act as a leader. And I would introduce the

aforementioned letter from GE that I received from its general

counsel committing to such an effort and stating their past commitment to it.

[The letter from GE follows:]

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Senator GRASSLEY. I hope that coming out of today’s hearing that

we will see a major initiative by all the parties concerned to develop and implement a very comprehensive strategy. We all bear

a responsibility to ensure that our trade and financial networks are

not vulnerable to the criminal exploitation that we have heard

about today.

And even though I am a small part of the United States government, I would want this caucus and I would expect that this caucus

would be a focal point for facilitating part of this process, to even

encouraging this process, and to some extent even being a judge of

the adequacy after a period of time of whether enough is being

done both by the respective governments and our respective business communities. With that, I adjourn the meeting and thank you

all for your participation.

[Whereupon, at 12:25 p.m., the caucus was adjourned.]

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