Financial Crime Issues: Global Illicit Drug Proceeds

Financial Crime Issues: Global Illicit Drug Proceeds

Updated October 23, 2017
Financial Crime Issues: Global Illicit Drug Proceeds
Introduction
U.S. Policy Statement
Revenues generated through illicit drug trafficking account
Pursuant to Section 481 of the Foreign Assistance Act of
for a large proportion of transnational organized crime
1961, as amended (FAA; 22 U.S.C. 2291), it is U.S. policy
proceeds, and curbing the global circulation of such illicit
to address the “unparalleled transnational threat” of drug
financial flows remains a challenge. “Following the money”
trafficking and to ensure that foreign countries adopt
is one of several counternarcotics policy options leveraged
measures to combat money laundering and cooperate
by authorities, including the U.S. government, to disrupt
internationally on “narcotics money laundering
and dismantle drug trafficking organizations both
investigations, prosecutions, and related forfeiture actions.”
domestically and abroad.
Foreign Assistance
Scope of the Problem
In support of U.S. foreign policy objectives, Section 481 of
Drug trafficking-related financial transactions occur at all
the FAA authorizes the President, “notwithstanding any
stages of the illicit supply chain, connecting drug source
other provision of law,” to provide assistance to foreign
activities to retail markets in consumer countries. Before
countries and international organizations to combat drugs or
traffickers can use such ill-gotten wealth as if it were
for other anticrime purposes. Such funds, which Congress
legitimately acquired, drug proceeds must undergo a
provides through annual Department of State and Foreign
process of laundering, which typically involves three key
Operations appropriations for International Narcotics
steps: (1) placement, in which illicit funds are introduced
Control and Law Enforcement, are primarily administered
into the financial system; (2) layering, in which illicit funds
by the U.S. Department of State’s Bureau for International
undergo various techniques to hide the true origins of the
Narcotics and Law Enforcement Affairs (INL).
funds; and (3) integration, at which point illicit funds
appear to be legitimate.
Technical Assistance
Section 129 to the FAA (22 U.S.C. 2151aa) additionally
According to the United Nations (U.N.), illicit drug
authorizes the Secretary of the Treasury to conduct training
proceeds available each year for money laundering through
and technical assistance abroad in support of global
the international financial system may range between 0.4%
financial law enforcement and anticorruption measures,
and 0.6% of global gross domestic product (between $232
among other requirements. Related efforts are currently
billion and $348 billion in 2009).
conducted by Treasury’s Office of Technical Assistance
(OTA). Congress provides funds for such assistance to
Some of the more common laundering methods employed
Treasury in annual Financial Services and General
by drug traffickers involve
Government appropriations.
 bulk cash smuggling and currency exchange;

Reporting Requirement
structuring deposits and withdrawals, including the use
Section 489 of the FAA (22 U.S.C. 2291h) requires the
of nominees and funnel accounts;

State Department to submit to Congress an annual
trade-based money laundering (TBML), including
International Narcotics Control Strategy Report (INCSR),
through the so-called Black Market Peso Exchange; and

which, for nearly three decades, has addressed the
laundering through real estate, front companies, and the
laundering of illicit drug proceeds. Among other provisions,
exploitation of offshore financial services.
current law requires the INCSR to summarize “on a
country-by-country basis” how U.S. agencies are “pursuing
Despite the sheer magnitude of drug-related illicit financial
a common strategy with respect to achieving international
flows, experts view the effectiveness of global efforts to
cooperation against money laundering and ... with respect
seize and freeze laundered drug proceeds to be limited.
to major money laundering countries.”
Congressional Foreign Policy Responses
Through legislation that was first enacted several decades
Major Money Laundering Country, Defined
ago, Congress has identified the restriction of drug-related
Section 481(e) of the FAA (22 U.S.C. 2291(e)) defines
money laundering as a U.S. foreign policy priority and
“major money laundering country” to mean “a
authorized foreign and technical assistance to support
country whose financial institutions engage in currency
international anti-money laundering capacity building.
transactions involving significant amounts of proceeds
Congress has also mandated annual reporting on major
from international narcotics trafficking.”
money laundering countries, authorized targeted financial
sanctions on designated foreign narcotics traffickers, and
established other financial regulatory tools to curb money
INL issued the 2017 INCSR in March, which identified 88
laundering related to drug-trafficking.
foreign “major money laundering countries,” 22 of which
were designated by President Donald J. Trump on
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Financial Crime Issues: Global Illicit Drug Proceeds
September 13, 2017, as major illicit drug producing or
estate transactions in New York City and select major
drug-transit countries, known as the “drug majors.”
metropolitan areas in south Florida, California, and Texas.
Section 311 Special Measures. 31 U.S.C. 5318A (known
The Drug Majors for FY2018
as Section 311 of Title III of the USA PATRIOT Act, P.L.
Afghanistan, The Bahamas, Belize, Bolivia, Burma,
107-56) authorizes Treasury to impose certain regulatory
Colombia, Costa Rica, Dominican Republic, Ecuador,
restrictions, known as “special measures,” upon finding that
El Salvador, Guatemala, Haiti, Honduras, India, Jamaica,
a foreign jurisdiction, financial institution, class of
Laos, Mexico, Nicaragua, Pakistan, Panama, Peru, and
transactions, or type of account is of “primary money
Venezuela
laundering concern.” Among those currently subject to
special measures, several were listed for reported
Targeted Financial Sanctions
involvement in drug trafficking-related money laundering.
Since the 1990s, Treasury has been authorized to block the
Policy Considerations
property and interests in property under U.S. jurisdiction of
significant foreign narcotics traffickers and their
In its 2015 National Money Laundering Risk Assessment
organizations. Such authority is provided pursuant to
study, the Treasury Department emphasizes that the success
Executive Order 12978 (1995), which addressed the
of U.S. anti-money laundering efforts depends on
unusual and extraordinary threat posed by drug trafficking
cooperation with foreign banks, regulators, and law
centered in Colombia, and the Foreign Narcotics Kingpin
enforcement authorities. Where such cooperation and
Designation Act (P.L. 106-120, as amended; 21 U.S.C.
financial transparency are not present, Treasury concludes
1901 et seq.), which authorized designations without
that criminals “will route transactions through jurisdictions
geographic limits. Unless authorized or exempted, U.S.
where they can obscure the financial trail with the help of
corrupt officials or weak regulation and enforcement.”
persons are prohibited from engaging in transactions with

listed persons or entities. Violations may result in civil and
criminal penalties. More than 2,300 individuals and entities
Despite numerous U.S. counternarcotics policy initiatives to
are currently subject to sanctions pursuant to these
support foreign governments in detecting and thwarting
authorities. Financial institutions have also been fined and
money laundering, efforts to rid the international financial
subject to prosecution as a result of their violations.
system of illicit drug proceeds are complicated by a
combination of factors, including
Sanctioned Drug Kingpin Organizations
 global demand for illicit drugs;
 corruption that undermines law enforcement;
Revolutionary Armed Forces of Colombia (FARC),
 global movement of goods, people, and wealth that
United Self-Defense Forces of Colombia (AUC),
outstrips authorities’ resources to detect smuggling;
United Wa State Army, Arellano Felix Org., Amezcua
 political obstacles to bilateral or international
Contreras Org., Dawood Ibrahim Org., Gulf Cartel,
cooperation on drug and financial crime matters;
Beltran Leyva Org., ‘Ndrangheta Org., Kurdistan
 uneven global capabilities, resources, information, and
Workers’ Party (PKK), La Familia Michoacana, Los
legal tools to reveal, deter, and prosecute the laundering
Zetas, Sinaloa Cartel, Haji Juma Khan Org., Joumaa
of illicit drug proceeds; and
Money Laundering/Drug Trafficking Org., Meza Flores
 evolving technological innovations that can contribute
Drug Trafficking Org., Los Caballeros Templarios, Los
to a dynamic transnational criminal environment.
Cachiros, Los Urabeños, Shining Path (SL), Los Valles
Drug Trafficking Org., Hassan Drug Trafficking Org.,
Congressional Outlook
Laredo Drug Trafficking Org., Waked Money
Congress has long maintained an interest in both
Laundering Org., Ruelas Torres Drug Trafficking Org.,
counternarcotics and anti-money laundering, particularly
Flores Drug Trafficking Org.
through regular oversight and appropriations. As part of its
continuing interest in such matters, the 115th Congress may
Other Financial Regulatory Tools
seek to evaluate the effectiveness of existing foreign policy
Regulations that address money laundering derive from the
approaches, including the public identification of major
Bank Secrecy Act (BSA) of 1970, as amended (31 U.S.C.
money laundering countries and kingpins as well as
5311 et seq.), and require financial institutions to monitor
providing foreign aid. Congress may also consider whether
and report suspicious financial activity to U.S. authorities.
current efforts respond to emerging cyber-related drug and
As part of this anti-money laundering regulatory regime,
money laundering trends.
the Treasury Department may require heightened scrutiny
of financial activity, including through the following:
For further analysis, see CRS Report R44776, Anti-Money
Laundering: An Overview for Congress and CRS Report
Geographic Targeting Orders (GTOs). 31 U.S.C. 5326
R44541, Trade-Based Money Laundering: Overview and
authorizes Treasury to impose recordkeeping and reporting
Policy Issues.
requirements on domestic financial institutions and
nonfinancial businesses in a particular geographic area to
Liana W. Rosen, Specialist in International Crime and
facilitate law enforcement detection of criminal activity.
Narcotics
Several recent GTOs have been used to further combat the
laundering of illicit drug proceeds, particularly through real
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Financial Crime Issues: Global Illicit Drug Proceeds

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