A few weeks ago, Justin flagged an Oregon case alleging money laundering through the Black Market Peso Exchange, one of the most successful and efficient laundering schemes in the world.  The Black Market Peso Exchange is a trade-based money laundering technique commonly used by narcotics traffickers based in Colombia and Mexico. The central feature is the use of a money trader to ensure that the revenue from drug sales in the U.S. doesn’t actually cross any borders. Instead, those dollars are used to purchase any number of legitimate commodities from unsuspecting businesses on behalf of legitimate South American businesspersons whose legitimate imports are used to obtain pesos for the drug cartels.

This system involves several key advantages for the trafficker:

  • Avoiding the risk of having large quantities of cash detected at international borders
  • Avoiding the type of large cash deposits that trigger reporting requirements for financial institutions in many jurisdictions
  • Achieving quick access to pesos

The scheme works after the activity with the highest risk—smuggling the narcotics into the U.S. and selling them there—has already occurred. But now the cartels, which are often based in Colombia or Mexico, have a problem: they have massive sums of U.S. dollars in cash in the United States, but no easy means to transport or deposit that cash, which would be more useful in the form of pesos.  That’s where the money trader comes in.  The money traders are the linchpin of the Black Market Peso Exchange. They are usually based in Colombia, with agents operating in the United States.

The cartel will provide its U.S. cash to the money trader’s agent in the United States. Afterward, the money trader will provide the equivalent amount in pesos—minus an appropriate commission of course—to the cartel. As far as the cartel is concerned, that’s basically it. In exchange for a commission to the money trader, the cartel has avoided the costs and dangers of attempting to smuggle U.S. cash across the border or undertake the structured deposits needed to deposit that cash in a U.S. bank without triggering reports under the Bank Secrecy Act and related anti-money laundering laws. The cartel has also converted its money into usable pesos.

But where has the money trader acquired all of these clean pesos that can be exchanged in Colombia for dollars given to the trader’s agent in the United States? Those tend to come from legitimate Colombian importers who have pesos, but reap advantages over Colombia’s tight restrictions on the possession of foreign currency from having the money trader buy consumer goods such as electronics with the U.S. dollars from the cartels. The money trader takes another commission from the legitimate importers, who now have dollar-bought goods in exchange for the pesos they’ve given to the money trader.

In this system, the money trader takes on considerable risk for his or her commissions, and the cartel also places considerable trust in the trader, whose U.S. agent takes possession of the drug cash with no immediate money or goods given to the cartel or their U.S. associates. One non-pecuniary factor underlying this trust is the fact that cartel associates have often threatened the trader to ensure that the exchange goes smoothly. By offloading the drug cash and associated risk on the money trader, the cartel has gained access usable pesos in Colombia whose source (the legitimate importers) helps to effectively mask the illegitimacy underlying the entire scheme.

In future posts, we’ll look at other fraud and money laundering schemes, as well as some of their tell-tale signs. In the meantime . . .