In this report, Global Financial Integrity (GFI) presents an analysis of narcotics-related illicit financial flows between the United States and the major narcotics production and transit countries of Mexico and Colombia. The report was commissioned by the Western Hemisphere Drug Policy Commission as part of its mandate to evaluate US drug policies and programs in Latin America and the Caribbean, assess current efforts to reduce the illicit drug supply and address the harms associated with trafficking and drug abuse.
A variety of strategies can and have been used to address drug trafficking in the Western Hemisphere, from manual and aerial crop eradication, to interdiction, illicit crop substitution and other alternate development approaches. While existing strategies have resulted in temporary disruptions to narcotics cultivation and trafficking, they have not been successful in addressing these issues in a comprehensive, lasting manner. At the same time, history has shown that many of these policies have had unintended consequences and caused harm to people, their communities and the environment in very profound ways.
Financial strategies from the anti-money laundering and counter financing of terrorism (AML/CFT) toolkit offer a different lens to view and address the problem of drug trafficking. In this report, GFI argues that AML/CFT is underutilized in current US and regional counter-narcotics efforts and needs to be reprioritized. Effectively responding to the challenges of drug trafficking and transnational organized crime will require a multi-pronged, multi-stakeholder and multi-disciplinary effort that includes AML/CFT, as well as a more comprehensive approach to drug policies that encompasses human rights, public health and development.
The Scope of Narcotics-Related Illicit Financial Flows
While estimating the financial value of illicit activities is methodologically challenging, GFI conducted a comprehensive review of available data and created its own estimates, drawing on a variety of methodologies, to approximate the scale of this issue. The different methodologies utilized indicate that the value of narcotics-related illicit financial flows affecting the United States, Mexico and Colombia is between US$42.3 billion and US$121.6 billion a year. The wide range reflects the difficulty of providing a quantitative data point for illicit financial activity, which by its very definition is hidden. The best estimate would be the midpoint of US$80-90 billion a year in narcotics-related illicit financial flows.
Methods Used to Launder Narcotics Proceeds
This report draws on interviews conducted with experts familiar with the US, Mexican and Colombian contexts. An effort was made to include a variety of perspectives that represent current and former government officials, the financial sector, academics, researchers and civil society groups.
From these interviews and other publicly-available sources, this report identifies bulk-cash smuggling and trade-based money laundering (TBML) as the two primary methods used to shift drug proceeds from one jurisdiction to another. Bulk-cash smuggling involves the physical transportation of large amounts of cash, whereas TBML involves disguising illicit proceeds as legitimate international trade transactions in order to move them across borders and/or launder them into the formal economy.
This report also analyzes the role of facilitators, such as unscrupulous “gatekeepers” who neglect professional and legal responsibilities by allowing dirty money to enter the international financial system. In addition, it highlights the role of corrupt officials, a common thread in narcotics-related money laundering, who both facilitate narcotics-related illicit financial flows, as well as stymie law enforcement efforts.
This report analyzes current efforts by Mexico, Colombia and the United States to address narcotics-related illicit financial flows through prevention, supervision, reporting, investigation and prosecution. Due to the sheer number of illicit groups involved and their tremendous ingenuity and creativity, it is important to consider big-picture, systemic solutions at the policy level. Moreover, viewing the issue of drug trafficking through a financial crime lens opens up a number of policy options, many of which are currently underutilized. Based on the severity of the need, as well as the effectiveness and feasibility of the policy solution, the following recommendations should be prioritized, with a note that while efforts by all countries are important, US strategies received more coverage in this report since it was prepared for a US Congressional Commission:
- To address the role of anonymous companies in financial crimes, the US should enact legislation requiring the collection of information on the real people, or “beneficial owners” behind corporations, LLCs and other similar entities at the time of registration;
- Given the prevalence of TBML and bulk-cash smuggling as ways to launder narcotics proceeds, the US should require beneficial ownership information for all companies involved in cross-border trade, as well as for speedboats and aircraft;
- As unscrupulous “gatekeepers” are a common thread in narcotics-related money laundering, the US should require lawyers, accountants and corporate formation agents to carry out AML/CFT requirements, such as customer due diligence;
- To face the challenge of TBML, the US should strengthen Trade Transparency Units (TTUs), allowing for real-time exchange of information on a pilot basis with trusted partners to examine the impact on enforcement.
- Mexico should re-evaluate how AML/CFT is working for non-financial businesses, a sector that is currently very vulnerable, ensuring that the current approach is effective and appropriate;
- Given the overlap between official corruption and drug-trafficking in Mexico, the US should welcome opportunities to work with Mexico on anti-corruption efforts;
- While Mexico, unlike the United States, has certain beneficial ownership requirements, it is important to strengthen their implementation, especially with regards to verification of the information that is reported;
- Because financial crime investigations and prosecutions remain low, it is important for Mexico to strengthen inter-agency coordination and information flow on AML cases, from reporting to investigation, prosecution and conviction.
- As in Mexico, Colombian non-financial businesses are vulnerable; in this regard, Colombia should re-evaluate how AML/CFT is working for non-financial businesses and ensure that the current approach is effective and appropriate;
- Colombia should create an inter-agency working group to address TBML and clarify agency responsibilities;
- Like Mexico, Colombia has struggled in achieving money laundering convictions; in this regard, it is important to conduct a thorough, internal review to understand why convictions on money laundering charges are so low;
In light of the role of anonymous companies in drug trafficking and money laundering, Colombia should take steps to improve verification of beneficial ownership information, particularly during corporate formation.