Freshly washed: drug dealers, corporate swindlers cash in profits as money laundering continues to damage national image.

The murky world of money laundering may not seem too important to the average Mexican. But it should. It is estimated that an amount equivalent to up to 20% of the nation's GDP is tied to criminal activity and washing criminal money undermines the integrity of the nation's financial system.

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Thanks primarily to a booming drug trade, more sophisticated techniques used by launderers, a weak economy and corruption, money laundering remains out of control here. While some folks commit crimes out of a sense of passion or honor and other hoodlums carry out anti-social acts such as vandalism out of sheer bloody-mindedness, the vast majority of modern criminals do it for money.

Any crime for cash beyond petty theft is not as simple as smash-and-grab. Apart from risking being caught red-handed, those who earn their crust illegally face another challenge, namely how to explain their remuneration to the authorities. As criminals obviously cannot list crimes as a source of income, investigators have paid increased attention to following their suspects' financial paper trail. Chicago mobster Al Capone, for example, was finally convicted and imprisoned for tax evasion.

In recent years, a clandestine financial service industry has blossomed around criminals' need to make their ill-gotten gains appear legitimate. And we are not talking chump change: according to the International Monetary Fund (IMF), somewhere between 3% and 5% of global GDP is laundered.

Unfortunately, Mexico, which boasts the world's 11th-largest economy and a GDP in 2003 of US$626 billion, is considered a major home for money launderers, many of whom are tied to the leviathan drug trade.

The nation ranks a lowly 64th on the International Corruption Perceptions Index, a well regarded international measure of corporate and governmental honesty. Its public officials are infamous for accepting bribes. In March, this phenomenon become even more pronounced when several videotapes showed high-profile Mexico City officials and businessmen giving or receiving kickbacks.

One of the subjects is Carlos Ahumada (see related story, page 8), a wealthy and prominent businessman recently arrested in Cuba and being investigated for using his soccer teams (Santos and Leon) to launder millions of pesos.

CRIMINAL ORIGINS

Then there is embezzlement. Those who steal from their companies or the government also need to hide their booty. For example, in the biggest scandal of its type in the past decade, Raul Salinas, the brother of the former President Carlos Salinas, lined his Swiss bank account with US$80 million while serving atop the nation's food distribution agency for the poor, Conasupo.

Many have questioned the ease by which he was able to move such large amounts of money.

Organized crime, human and gun trafficking also contribute to the Mexico's clandestine economy. But none of these activities touches the cash cow that is the illegal drug trade. According to the Federal Attorney General's Office (PGR), drug-related crime makes up more than 30% of all criminal activity.

The drug trade generates around US$30 billion annually. Some 70% of all cocaine originating from South America destined for the United States travels through the Mexico-Central America corridor. Additionally, Mexico is the No. 1 foreign supplier of marijuana to the United States. While the drugs go in one direction, the money from that trade flows in the opposite.

THE LAUNDRY CYCLE SPINS

The 1998 code-named Operation Casablanca, run by the U.S. Treasury Department, uncovered hundreds of millions of dollars of drug money and a massive cross border laundering ring. According to the officials involved, money was collected from couriers for the cartels and deposited in bank accounts in Los Angeles. The money was then wired to Mexican bank accounts where bankers were aware the money was from drug sales, the press reported at the time.

So how exactly does a money launderer conduct his trade? According to Carolina Garces, an associate director and head of the anti-money laundering practice at Kroll, an investigative consulting firm, there are three basic steps to what some call the money "Laundry Cycle."

The first and most difficult step is known as "placing." Here criminal earnings are fed into the mainstream financial system by depositing funds into a bank account or buying corporate stock. Most will mix their dirty money with something cleaner. Cash intensive businesses such as casinos or retail stores are preferable. For example, Capone used, among other businesses, laundromats--hence the term Money Laundering.

Stage two in the modern money launderer's guide is called "layering." Even though the money may no longer be directly in a criminal's hands, the cunning take further measures to cover their tracks. So the funds are moved between accounts, currencies and businesses in what are designed to look like legitimate, albeit complex transactions, each one making the income seem more valid.

There are countless ways to achieve this. One technique, called the "loan back," involves taking out a legitimate bank loan and repaying it over time with criminal income. The final stage is called integration, where criminals finally get their hands on the cash. This could be an income drawn from a legitimate business or interest payments or withdrawals from a foreign currency account. "No matter how much suspicion there may be, once the criminal reaches this stage, it is almost impossible to prove that the money was ever dirty," Garces said.

For the purveyors of money laundering services, Mexico makes a very attractive haunt. There are several key benefits that lure launderers to work here. Firstly, with 70% of its trade going to the United States and some US$700 million daily in cross-border commerce (in 2000), there is a big pool in which to hide international money movements.

A MESSED-UP SYSTEM

Another advantage is Mexico's greatest foe, corruption.

"It only takes a few corrupt individuals within even the most reputable organizations to open the floodgates," said Garces. According to the U.S. Drug Enforcement Administration (DEA), each of Mexico's drug cartels may be spending up to US$1 million a week to buy the silence of public officials.

Another problem is the shape of the economy. Carlos Loret de Mola, author of a recent book about the drug trade, estimates that if all the drug money was pulled out of the Mexican financial system, the economy would fall by as much as 63%. With less than 1% growth last year, the Mexican economy relies heavily on capital inflows. Perched precariously on the edge of recession, Mexican politicians, bankers and businessmen may therefore be less motivated to question the origin of investments.

"I know a lot of money that came into the Mexican market after the December 1994 devaluation was narco money," a U.S. stockbroker said in Mexico City soon after the crash. "The business that was generated helped save a lot of banks at the height of the loan-default crisis that followed."

ALL ABOUT BANKING

And it is the banking system that remains very much at the heart of the Mexican money-laundering machine. A recent testimony given by DEA agent Harold Wankel to the U.S. Congress last year stated that DEA sources had found that Mexican drug traffickers "bought large amounts of shares in [Mexican] banks and had placed members on their boards." No specific banks or individuals were named in the testimony.

The Mexican Banking Association recognized that in the year 2000 alone there may have been as many as 3,000 money-laundering transactions, which is ranked 14th in the world in greatest volume of this kind of illicit activity.

Yet, due to the very nature of their work, money launderers are notoriously hard to catch. Ever since it was made illegal under Mexican law in 1990, there have only been a handful of successful convictions. The DEA recently admitted that it has been outfoxed in its attempts to unearth mountains of cash believed to have been stashed by the infamous Arellano Felix family which controls the Tijuana Cartel.

"I'm not happy with the ability we have so far demonstrated in going after the money, given the amount of drugs and revenue estimates," John Walters, head of the White House Office of National Drug Control Policy, said in a recent interview with U.S. media. "We do not have a very good picture how the money is flowing."

An investigation by officials working for the Mexican Stock Exchange found 7,000 suspicious transactions that occurred between 1997 and 2001. But they were unable to clarify the origins any of the movements. They blame lack of clues in the paper trail, stating that 73% of accounts lacked supporting documentation, 26% percent listed no address for the account owner and 87% of files did not include a copy of a client's signature--data required under Mexican anti-laundering laws.

But, despite the uphill struggle, Mexico is making some progress in its fight to stem the flow of polluted pesos. It is one the 33 members of the Financial Action Task Force, an organization created by the United Nations in 1998 to fight money laundering. The group requires its members to follow strict international guidelines in its monitoring, control and investigations of financial transactions.

SOME PROGRESS

The Mexican government has created two operational bodies with this charge: the General Directorate for Transaction Investigations of the Finance Secretariat and the anti-money laundering unit within the PGR. The banking sector itself, since its privatization in the early '90s and subsequent wheeling and dealing in the international market, has made considerable efforts to clean up its act.

"There are two types of bankers, those that are concerned with good control and those that are not," said Guillermo Cruz, partner in charge of the Corporate Governance Group at Deloitte Mexico, a consulting firm. "Because of the need to keep a spotless reputation and maintain high standards expected by foreign investors, the former are winning the battle"

Cruz, an ex-banker in charge of the anti-money laundering group at Banamex, was responsible for provisioning of over 100 guidelines and training 25,000 staff on how to spot suspicious transactions.

"Due to careful profiling, the bank is now able to detect even the most minor suspect transactions which we then send to the authorities. However, we are just are just the agents," Cruz said. "The responsibility also lies with businesses themselves. Under the law, they must take proactive precautions."

It seems that larger corporations, at least, are beginning to take up the gauntlet. A quarter of Kroll's business in Mexico involves advising companies on how to ensure that their cash flow is just as clean when it leaves the business as when it entered.

However, the battle against money laundering remains an uphill one. While current conditions remain, plenty of grimy pesos are being spent disguised as honest income. Just like the supply-and-demand laws that govern the drug trade, ultimately the practice of laundering criminal profits will never be stopped while there remain criminal profits to launder.

Rawdon Messenger is a Mexico City-based freelance writer and columnist for the Evening Standard of London.