Following the money pays off

An apparently insignificant money-laundering case taken against several Colombian men became one of the most important leads for US investigators pursuing a case against an international banking group, write Carrick Mollenkamp and Brett Wolf

WHEN several Colombian men were indicted in Jan 2010 on money-laundering charges, the case in Brooklyn federal court drew little attention.

It looked like a bust of another nexus of drug traffickers and money launderers, with mainly small-time operatives paying the price for their crimes.

One of the men was Julio Chaparro, a 48-year-old father of four who owned three factories that made children’s clothing in Colombia.

But to US authorities the case was anything but ordinary. Chaparro, prosecutors alleged, helped run a money-laundering ring for drug traffickers that took advantage of lax controls at UK-based international banking group HSBC Holdings plc. It was one of the most important leads for US investigators pursuing a case against the bank that eventually led to a $1.9bn settlement on Dec 11.

Chaparro was “basically putting the orchestra together” and investigators saw “him as a major player in terms of cleaning a lot of money”, said James Hayes, special agent in charge of Homeland Security Investigations at US Immigration and Customs Enforcement in New York. Known as Ice, the agency and its task force led the probe.

The Colombian’s lawyer, Ephraim Savitt, said Chaparro was a middleman in the operation, but disputed the extent of his client’s role, saying he was the “page turner of sheet music for the conductor”.

Chaparro, who was arrested in Colombia in 2010 and extradited to the US in 2011, pleaded guilty to a money-laundering conspiracy count in May and is awaiting sentencing. A HSBC spokesman declined comment.

Much about the trail that drug traffickers used to move US dollars — the proceeds from drug sales — through HSBC and other banks remains unclear. By design, the process is layered to evade detection.

But a review of confidential investigative records that originate from two US attorney office probes and federal court filings in New York and California, as well as interviews with senior law-enforcement officials, shows how investigators tracing the activities of people who allegedly worked with Chaparro were able to expose large-scale money laundering at one of the world’s biggest banks.

The federal law-enforcement task force — named after El Dorado, the mythical city of gold in South America — used wire taps, email, and computer searches, information from at least one inside source, and old-fashioned surveillance, to piece together the ring’s operations.

Drug cartels sold narcotics in the US and routed the cash to Mexico, often using couriers to smuggle it across the border. That cash would then be put into bank accounts at HSBC’s Mexico unit, where large deposits could be made without arousing suspicion, according to US department of justice documents.

In one filing, US prosecutors said, Chaparro and others allegedly utilised accounts at HSBC Mexico to deposit “drug dollars and then wire those funds to... businesses located in the United States and elsewhere. The funds were then used to purchase consumer goods, which were exported to South America and resold to generate ‘clean’ cash”.

In a typical transaction, a middleman in a drug cartel would offer to deliver consumer goods, such as computers or washing machines, to Colombian businesses on favourable terms. Another person in the US would buy the goods from firms using funds from drug trafficking, and fulfil those orders.

Money launderers exploited the laxness of HSBC in policing shadowy money flows, the department of justice said. Failures included not conducting due diligence on customers, not adequately monitoring wire transfers or cash shipments, and not having enough employees to run anti-money-laundering systems. US assistant attorney general Lanny Breuer called the lapses “stunning failures of oversight”.

The situation was so bad, according to the department of justice, that in 2008, the head of HSBC’s Mexican operations was told by Mexican regulators that a local drug lord described the bank as “the place to launder money”.

The Chaparro probe converged over the past two years with two other investigations — led by federal prosecutors and investigators in West Virginia and by the Manhattan district attorney — resulting in last month’s settlement with HSBC.

The bank and its employees avoided criminal indictments, as HSBC agreed instead to a deferred prosecution deal that forces it to strengthen controls and accept a compliance monitor.

Today, Chaparro sits in a federal detention centre in Brooklyn, reading the Bible and awaiting sentencing, said Savitt, a former US prosecutor in Brooklyn.

“He is contrite, regretful, and ashamed about his crimes,” Savitt said. “He wants to serve his time and rejoin his family. He understands that a prison term could prevent that from happening for many years.”

Under federal guidelines, he could face 15 to 18 years in prison.

The El Dorado federal task force serves as an umbrella organisation for about 250 law-enforcement officials from state, local, and federal agencies.

One of its supervisors is Lieutenant Frank DiGregorio, a former New York detective who spent years tracking the so-called Black Market Peso Exchange, which is used to convert dollars to Colombian pesos through trading in goods. DiGregorio and two younger investigators led the case.

The overall probe began in 2007 when investigators analysed how courier companies ferried cash through airports in Miami and Houston. They ultimately tracked that to HSBC’s operations in Mexico and then connected it to funds moving through New York.

A tipping point in the investigation came in 2009 when El Dorado agents arrested a man named Fernando Sanclemente.

Sanclemente, who was charged with allegedly conducting financial transactions tied to narcotics trafficking, is free on bail with a $200,000 bond.

According to a criminal complaint filed against him by Carmela Lana, an El Dorado agent, on Jun 30, 2009, agents followed Sanclemente for over two hours as he drove around Queens in New York to ferry cash from drug sales.

Sanclemente first met with a person for about “30 seconds” on one street corner, and left with a yellow plastic bag. Later that night, he drove to a Dunkin’ Donuts near LaGuardia Airport, where a black cab pulled up and the driver handed him a black bag.

The El Dorado team followed Sanclemente to Laurel Hollow, New York, some 40 minutes away, where the investigators stopped and searched him, finding about $153,000 in the two bags. At Sanclemente’s apartment, investigators said they found ledgers and documents consistent with money laundering.

With the arrest, investigators gained insight into Chaparro’s alleged transactions. At one point, investigators set up undercover bank accounts where they were able to get Chaparro’s network to wire proceeds that could be traced back to HSBC’s Mexico operations.

Federal agents would ultimately home in on $500m that had moved from HSBC Mexico to HSBC’s operations in the US. Between Oct 6, 2008, and April 13, 2009, Chaparro and others conducted money laundering transactions totalling $1.1m tied to narcotics trafficking.

— Reuters

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