|English | Español||May 24, 2018 | Issue #32|
The Belly of the Snake
Agents Accuse Customs Officials of Blocking Investigations
By Bill Conroy
Former Customs agent Fitzgerald’s lawsuit complaint (830 kb PDF)
Custom’s answer to Fitzgerald’s lawsuit complaint (995 kb PDF)
Note: Acrobat Reader needed to view PDF documents
Drug traffickers must convert, or launder, black-market cash—often in the form of small bills—into “legitimate currency” in order to perpetuate their operations and maintain their power. As a result, federal law enforcement officials say rapid cash movement among accounts or large cash surpluses in the economy can be a sign of money laundering activity.
It’s not enough simply to say that a transaction or account appears suspicious, though; you have to prove that the money was obtained illegally. That is no easy task, especially once the money has made its way through the belly of the snake to the tail end of the money laundering process.
Traffickers are most vulnerable, then, prior to the funds reaching the banking system.
However, Federal law enforcement officials say that the vastness of the U.S./Mexico border makes it very difficult to intercept shipments of U.S. currency from drug sales that are being transported across the border to be laundered through the Mexican banking system. Once the profits of the drug trade make it across the border to Mexico, drug syndicates have a variety of options available to them for converting it into “clean” money. For example, drug traffickers may choose to wire money from a Mexican bank to a U.S. bank, or deliver the cash back to the United States in deposits small enough to avoid kicking in currency transaction reporting requirements—a practice known as “smurfing.”
In order to stop money laundering, you have to plug all the holes in the financial system because, like water, traffickers will always find the place in the system with least resistance.
“We lost the war years ago,” says one executive with a bank located along the Texas/Mexico border. “The only way to solve the problem is to legalize the damn stuff, because we can’t spend enough money to stop it.”
The banker, who asked not to be identified, went on to explain that the United States has a 2,000-mile border with Mexico “and if we stacked all the legal crossing points side-by-side, they might stretch five miles, and that’s where all our law enforcement is concentrated.”
“So how can we stop it?” he asks. “If the big money in the drug trade wants to get into the system, it will find a way…. We ought to legalize the stuff and tax it.”
A small bank in Roma, Texas, offers a case example of how vast sums of money can be moved through the banking systems on both sides of the U.S./Mexican border with few clues as to the sources or ultimate destinations of that money.
Although a large movement of cash through the banking system is not in itself proof that money laundering is occurring, such activity can be a red flag to regulators and law enforcement officials. One means of tracking these cash movements is through an analysis of foreign-deposit account activity.
The Roma lender crossed into red-flag territory in the international banking game in the mid-1990s. The lender—Citizens State Bank – had about $9.3 million in foreign deposits at year end 1995, according to federal banking data. Three months later, that figure had dropped to $151,000. Through the balance of 1996, the lender’s foreign deposits never topped $600,000.
In other words, over a three-month period, at least $9 million in deposits were moved out of the coffers of the bank.
Foreign deposit accounts are perfectly legal and essential to conducting international commerce. According to industry experts, the accounts at Texas banks, for example, are primarily held by Mexican lenders and facilitate the currency exchange (pesos to dollars and vice versa) that is essential to conducting trade and commerce with Mexico.
Roberto A. Salinas, spokesman for the Roma bank, says the source of the foreign deposits at Citizens State Bank was a branch of a Mexican bank located just across the border from Roma in the town of Miguel Aleman, Mexico.
Roma is located along the U.S./Mexico border midway between Brownsville and Laredo. A suspension bridge over the Rio Grande River links Roma with Miguel Aleman.
“We never understood why they were letting it (the deposits) sit in a checking account here,” Salinas says. “They made deposits daily by armored car … and later wired the money to a main account in New York.”
There is no indication that Citizens State Bank did anything improper in handling the deposits from the Mexican bank. In fact, Salinas says the bank filed currency transaction reports almost daily during the period the money was being deposited.
The Mexican bank delivering the deposits to Citizens State Bank was a branch of Bancomer, Mexico’s second largest lender at the time. Manuel Garcia, an executive with Bancomer who oversaw the Miguel Aleman branch and eight other branches in northern Mexico in the mid 1990s, says the amount of money in the account at the Roma bank actually rose to $11 million before it was wired to an account at Chase Manhattan Bank in New York in late February 1996. The Bancomer branch in Miguel Aleman had total deposits of $5.3 million as of the end of February, Garcia says.
The money in the Roma account had built up over seven months due to an error on the part of Bancomer’s treasury department, Garcia explains.
“It was an oversight,” Garcia adds. “We did not realize the $11 million was there.”
Garcia was unable to provide information on the number of account holders who controlled the $11 million. Garcia stresses, though, that $11 million is not a lot of money, considering that it had accumulated over seven months in a border region that is heavily reliant on cash-based commerce.
According to a number of Mexican and U.S. observers familiar with the stretch of border near Roma and Miguel Aleman, the area has earned a reputation as a drug trafficking corridor. Garcia, too, says he is aware that drug traffickers are active in the area.
“We read about it in the (Mexican) news,” he says. “... Drug dealing in this area—there is a problem with it.”
Garcia could not say where the $11 million went after it was transferred to the account at Chase Manhattan. Officials with the New York bank declined to comment on the matter, but there is no indication that Chase did anything but conduct a normal business transaction in relation to the wire transfer.
Foreign banks use Chase and other New York money-center banks to settle their accounts, which means it’s likely the $11 million was transferred elsewhere after it cleared through the account at Chase, according to industry insiders.
Regardless of the reason, $11 million is a lot of money to move from a small bank in Mexico to a small bank along the Texas border and then through the U.S. banking system and onto some undisclosed point. But then, as one banking industry observer puts it, “It’s not a crime to be rich.”
However, the anonymous nature of cash does make highly liquid accounts vulnerable to manipulation. Criminals seek out such conduits to camouflage money laundering activity.
Stemming the flow of black-market dollars through these highly liquid banking accounts is a nearly impossible task absent human intelligence. That reality spawned a major undercover sting in the late 1990s called Operation Casablanca.
The three-year undercover investigation culminated in the spring of 1998 with the arrest of more than 100 alleged money launderers and indictments against three Mexican banks. In March 1999, two of those banks, Bancomer S.A. and Banca Serfin S.A., pled guilty to one count each of money laundering—agreeing to civil forfeitures of $9.4 million and $4.2 million, respectively. The banks also agreed to pay a criminal fine of $500,000 each, according to information released by the U.S. Department of Justice. Confia S.A., the third bank, agreed to a civil forfeiture of $12.2 million; criminal charges against the lender were dismissed.
Operation Casablanca, which was the first major U.S. money laundering investigation aimed at foreign lenders, was led by senior Customs Agent William F. Gately.
By all appearances, a major money-laundering snake had been snared. But appearances may have been the very concern that led to Operation Casablanca being cut off at the knees.
According to Gately, the undercover operation suffered an early death. The operation was shut down in 1998, he told the media, after evidence surfaced that implicated high-level Mexican military officials in the drug trade—including Mexico’s Secretary of Defense at the time, General Enrique Cervantes.
If Operation Casablanca was digging up information on entangling alliances between the Mexican government and drug traffickers, it would not be the first time. It also would not be the first time that the U.S. government failed to aggressively pursue such alleged corruption.
According to Charles A. Intriago, publisher of the Miami-based Money Laundering Alert and a former federal prosecutor in Miami, the U.S. government also dropped the ball in a high-profile case involving a former Mexican deputy attorney general, Mario Ruiz Massieu.
A U.S. jury in the mid-1990s found that nearly $8 million of the money deposited by Ruiz Massieu at Texas Commerce Bank (TCB) in Houston came from Mexican drug lords who were seeking protection from prosecution in Mexico.
“The U.S. government is also open to scrutiny in the case since it took no action on the Ruiz Massieu account despite receiving more than 50 (currency transaction) forms from TCB and Ruiz Massieu’s cash courier about the massive flow of currency into the account,” Intriago’s Money Laundering Alert reported in April 1997.
U.S. law enforcement officials “only took action on the case after the Mexican government reported its suspicions about Ruiz Massieu in March 1995,” more than 14 months after Massieu’s activity began, the Money Laundering Alert reported.
Ruiz Massieu, who served as Mexico’s deputy attorney general from 1993 to 1994, died in 1999 in an apparent suicide at his home in New Jersey. He was facing money laundering charges in the United States at the time.
Ruiz Massieu’s death spared Mexican and U.S. officials the embarrassment of having the corruption that allegedly plagued the presidency of Carlos Salinas de Gortari—under whom Ruiz Massieu served—laid out in open court.
The death of Operation Casablanca in 1998 likewise spared the Mexican and U.S. governments the international embarrassment of having a spotlight put on the suspected ties between the Mexican military and drug traffickers. The operation was short-circuited, according to public statements made by Gately, out of fear that it would damage U.S. relations with its southern neighbor. And it didn’t help that Mexican General Cervantes had been billed by the U.S. officials as the United States’ partner in the war on drugs.
In any event, Gately later turned the media spotlight on his boss, John Hensley, who headed Customs’ Los Angeles field office at the time of Casablanca. In an April 16, 2000, broadcast of the CBS news show “60 Minutes,” Customs Commissioner Raymond Kelly said Casablanca was shut down because media leaks were jeopardizing the operation’s undercover status, which put the lives of agents at risk. In that same broadcast, Gately accused Hensley of being one of the sources of the leaks. Although the veracity of that charge is open to debate, Hensley was in favor of bringing the operation to an end in 1998, according to sources and other media reports at the time.
Coincidentally, Hensley is accused of bringing the axe down on Fitzgerald’s railcar investigation in 1999 in Southern California. Nunn lays out the allegation in her July 2001 congressional statement:
“... Further, when pressed to reveal who was ordering this very successful case to be shut down and basically filed away, Darlene’s (Fitzgerald’s) immediate supervisor revealed in a meeting witnessed by a former federal prosecutor who is now a federal judge in the Ninth Circuit that SAC (special agent in charge in Los Angeles) John Hensley had ordered that the case be shut down.
“Ironically, Mr. Hensley had been instrumental in prematurely shutting down Operation Casablanca, the major money laundering case which made national headlines in 1998….”
Fitzgerald and Nunn produce no hard evidence to show that Hensley did anything improper or illegal with respect to Casablanca or the railcar investigation. What would have motivated him to take the actions alleged by Nunn, Gately and others is not clear.
In addition, at least one Customs insider takes issue with Gately’s version of what happened to Operation Casablanca, contending that the information he had implicating Mexican General Cervantes was little more than hearsay. The insider also points out that Casablanca actually was extended five months beyond its original shut-down date of year-end 1997.
A source familiar with the railcar investigation, who asked not to be identified, also questions Fitzgerald’s and Nunn’s charges that their operation was torpedoed. The source says it was simply another case and that the former agents’ allegations were investigated by Customs but not substantiated.
The truth in those cases may never be fully known. But one thing that is clear is that Hensley’s name is a common factor in each. Several sources describe Hensley as “well-connected” and as a real “political” player. His career path demonstrates that he has made friends in high places.
Hensley, who spent 29 years with Customs, held the number two spot in the federal agency in the early 1990s, serving as assistant commissioner of enforcement. He finished his Customs career in the late 1990s, leaving his job as special agent in charge of Customs’ Los Angeles field office to move into the private sector. After serving from 1999-2000 as director of the western operations of Investigative Group International Inc., Hensley accepted Gov. Gray Davis’ appointment to the chairman post at the California Gambling Control Commission. The commission is charged with overseeing and regulating all gaming operations in the state.
In his role as chairman of the gambling-control commission, Hensley again found himself surrounded by storm clouds. In October 2002, the state-sponsored commission and members of the California Nations Indian Gaming Association (CNIGA) became embroiled in a controversy over the management of a trust fund that is used as a revenue-sharing vehicle for Indian tribes in Calfornia. CNIGA is a nonprofit group comprised of representatives from 76 tribal governments.
“California Nations Indian Gaming Association is demanding a legislative audit of the Revenue Sharing Trust Fund that was established by the tribal-state compacts for gaming tribes to share revenues with non-gaming tribes and those with very limited gaming,” states an October 22, 2002, press release issued by CNIGA. “The California Gambling Control Commission, which has fiduciary responsibility for dispersing monies from the Indian Gaming Revenue Sharing Trust Fund account, said in August (2002) it would begin mailing out checks for approximately $188,000 to each of the 75 eligible tribes. None of the tribes have received their checks.”
The controversy even prompted two tribes involved in gambling in California to file a joint lawsuit in federal court in October 2002 against the state of California. The litigation, filed by the Pechanga and San Manuel bands of Mission Indians, accuses California of allegedly violating the terms of the tribal-state gambling pact.
Carol Klimas, a spokeswoman for the San Manuel band, says one of the claims raised in the litigation centers on the revenue-sharing trust fund, which is managed by the California Gambling Control Commission chaired by Hensley.
“A major claim (in the lawsuit) revolves around the state’s distribution of Revenue Sharing Trust Fund fees to tribes that have limited or no gaming,” states a news release issued by the San Manuel band. “According to the tribes, the state has failed to manage and distribute millions of dollars set aside by successful gaming tribes, including Pechanga and San Manuel, to the poorest tribes as required by the compact.”
One source familiar with the controversy—who asked not to be named—claims that the state gambling commission was simply exercising prudent financial management of the revenue-sharing fund by initially keeping the reins on payouts to assure that the fund would not go into a deficit mode. In any event, the breach-of-contract case filed by the two tribes never made it to trial as it was dismissed by the judge in May 2003.
Hensley declined to comment on Casablanca, the railcar investigation and the California gambling commission controversy when contacted in early December 2002 in California. About a month later, Hensley told Gov. Gray Davis that he planned to step down from the California Gambling Conrol Commission, according to media reports.
Former Customs Agent Fitzgerald, though, did not mince words in an interview discussing her assessment of the links between the outcome of Operation Casablanca and her ill-fated railcar case.
“My railcar case was torpedoed and Operation Casablanca was torpedoed by the same group of people,” Fitzgerald alleges. “... That should have been investigated.”
Fitzgerald’s September 2001 congressional statement asserts further that “for all the allegations that many have made repeated attempts to get someone to investigate, the result has been that only whistleblowers have been placed under investigation.”
“I was completely undermined repeatedly in my efforts to continue this large … rail operation,” Fitzgerald continues. “My help was pulled, my surveillance was pulled, and I was subjected to one frivolous Internal Affairs investigation after another.
“... I also reported documented proof of special agents taking heroin evidence home overnight, and then lying about it under oath in depositions…. The list of corruption, violations of Customs’ policies, etc., etc., goes on and on. Yet, only the honest Customs employees doing their jobs and reporting this behavior have been investigated, harassed, intimidated, threatened and wrongfully disciplined.”
Fitzgerald and Nunn jointly filed a discrimination lawsuit against Customs in U.S. District Court in San Diego, Calif., in March 2001. The lawsuit alleges that they were discriminated against by Customs managers because of their gender and for participating in Equal Employment Opportunity (EEO) legal actions while serving as Customs agents. Among the discriminatory acts they accuse their managers of committing are withholding recognition, training opportunities, career-advancing work assignments, and promotions, as well as equipment and case support.
Nunn and Fitzgerald “endured continued discriminatory and retaliatory acts by (Customs) and its employees, which caused them and their families to suffer great mental anguish and emotional distress, as well as extreme financial hardship,” the lawsuit asserts.
They are seeking monetary damages and “that their names and reputations be cleared through publication to the law enforcement community,” according to the litigation.
Customs, for its part, claims in its answer to the lawsuit that the agency and its employees did not engage in “any wrongful or discriminatory or retaliatory conduct.”
“The employment practices of which (Fitzgerald and Nunn) complain, to the extent undertaken, were undertaken for lawful, valid reasons unrelated to (their) race, color, gender, heritage, national origin, alleged disability or protected (EEO) activities,” states Customs’ pleadings in the litigation, which was still pending in the court system as of the beginning of 2004.
Next in Chapter 3:
A cover-up of record falsifications in drug cases along the Texas/Mexican border is explored. After whistleblowers expose a Customs supervisor for altering drug-bust records, Customs Internal Affairs goes after whistleblowers to find out who leaked information to media. The supervisor is never investigated. This pattern of reprisal is repeated in other cases explored in the book.
Read the rest of Bill Conroy’s Borderline Security:
Bill Conroy has worked as a reporter or editor for the past eighteen years at newspapers in Wisconsin, Arizona, Minnesota and Texas. His investigative reporting over the past five years has focused on corruption and discrimination within federal law enforcement agencies.
- The Fund for Authentic Journalism