DRUG FIGHT GOES AFTER TRADE'S MULTIBILLION-DOLLAR ECONOMY

Unlikely Helpers Found On Front Line Of Effort Against Illegal Cash Flow

This is the first in an occasional series of stories examining the hidden
engine that drives a multibillion-dollar illicit trade.

LOUISVILLE, Ky. - In a nondescript cubicle inside a brown office building
not far from Interstate 64, Dwayne Kahl spends his days answering the phone
and doing his best to sell air conditioners for General Electric. If you
want to talk BTUs, Dwayne Kahl is your man.

About 1,100 miles away, a dog named Listo spends his days sniffing around
South Texas border crossings trying to find hidden stashes of dollar bills
in trucks or cars heading for Mexico. When the U.S. government wants to
catch smugglers with illicit cash, Listo is their dog. He has already
sniffed out $89 million in smuggled cash during his eight years on the job.

Mr. Kahl and Listo work in an unglamorous world that few Americans would
associate with the war on drugs, but when it comes to halting the flow of
dollars that feed the international narcotics trade, they are among the
front-line warriors.

Governments can spray drug plantations, blow up laboratories and jail
cartel leaders to reduce the supply of drugs, and they can rehabilitate
users to curb demand. But the international drug problem keeps springing
back to life because, at its root, the drug economy has remained largely
untouched.

Billions of dollars in drug profits are now circulating through legitimate
commercial and financial institutions. The flow of drug money is so
plentiful that traffickers cannot dispose of it quickly enough. They are
now exporting it in bulk to the countries that are supplying drugs to the
U.S. market. So while counternarcotics police use drug-sniffing dogs on the
northbound lanes of U.S. border-entry posts with Mexico, the U.S. Customs
Service has begun using Listo and other dogs on southbound lanes in hopes
of capturing some of the bulk cash being smuggled out.

Large-Scale Purchases

At companies like General Electric, employees are constantly warned to be
on the lookout for would-be customers looking to "launder" drug dollars
through large-scale purchases of everyday consumer items. Mr. Kahl is one
G.E. employee who identified the signs of a suspicious purchase, involving
air conditioners, and halted what the company believes was a
money-laundering attempt.

"I never thought this would happen to me selling air conditioners," Mr.
Kahl said after a man in New York called him in late 1999 to make a $40,000
purchase.

It was an opportunity for Mr. Kahl, a 34-year-old father of two, to boost
his sales figures. But something didn't seem right, particularly when the
purchaser paid his bill with 35 money orders - exactly the kind of tactic a
money launderer would use.

Mr. Kahl could have ignored the signs, but instead he put a halt to it.
Others, however, succumb to the drug trade's financial temptation. They
take the bait, only to find that drug money can be as addictive as the
drugs themselves.

In 1998, the latest year for which statistics were available, Americans
spent $63 billion on illegal drugs, according to White House estimates.
U.S. Treasury officials and independent analysts estimate that the drug
economy generates $400 billion a year in various types of businesses
worldwide. That amount includes billions of dollars spent by governments to
fight the drug trade.

"You have [money] smuggling organizations that are mom-and-pop operations,
and you have others that rival General Motors in their sophistication,"
said Jerry Robinette, a U.S. Customs Service supervisor for
financial-crimes investigations in Houston.

Big Part Of Economy

The financial impact of the drug trade is so profound that Colombia decided
in 1999 to begin including estimates of drug-production proceeds in
calculating the country's gross domestic product. The move caused an uproar
in the U.S. government, but Colombian authorities insisted that they were
following International Monetary Fund guidelines. By including certain
drug-production figures, Colombia was able to boost its
economic-performance figures by more than 1 percent in 1999.

The drug trade is a major generator of employment worldwide, and it's
hardly limited to the peasant farmers who grow coca and opium in southern
Colombia or the smugglers who carry the drugs to the United States from
countries like Mexico, Haiti and the Dominican Republic.

Many legitimate American jobs also depend on the drug trade. According to
government calculations, if the United States were somehow able to
eliminate the drug problem tomorrow, well over $85 billion per year in
income and expenditures would be withdrawn from the U.S. economy, including
not only the amount Americans spend on illegal drugs but also the amount
spent by federal, state and local governments to combat the trade.

The U.S. law enforcement community, for example, has ballooned in manpower
over the past two decades and has gained an estimated $18 billion in budget
outlays simply to fight the drug war. For 2002 alone, the White House
Office of Drug Control Policy is proposing a budget of more than $19
billion, which is spent to purchase equipment, employ personnel, purchase
advertising and fund all kinds of police training and community outreach
programs aimed at halting the use and sales of illegal drugs.

Prison construction and management also are booming to accommodate the 1.7
million prisoners who have been added to the U.S. prison population since
the mid-1970s. A quarter of those new prisoners were convicted of drug
offenses. More were convicted of violent acts and robberies linked to the
drug trade.

U.S. military contractors also are finding new business opportunities in
Colombia and neighboring countries, selling arms and services to help
nations fend off the drug-induced violence that has pushed Colombia nearly
to a state of full-blown civil war. The U.S. government currently is
spending $1.5 billion in mostly military aid to help Colombia's government
fight the guerrillas and paramilitary militias that support the drug trade.

In the United States, the powerful influence of drug money has penetrated
some of the nation's biggest banks, appliance manufacturers, cigarette
makers, the tourist industry and even a company that provides military
hardware used in Colombia's drug war.

Financing Starts In U.S.

Colombian President Andres Pastrana regularly chides U.S. politicians who
blame the drug problem solely on his country. When viewed from an economic
perspective, he says, the drug problem starts with financing, which means
it starts in the United States.

U.S. drug consumers purchase nearly 100 percent of their cocaine and about
80 percent of their heroin from Colombia. Without U.S. dollars, Mr.
Pastrana and others say, there would be no money for the drug crops,
processing labs, smugglers, guerrilla guns and all the other ingredients
that go into the drug trade.

Having devoted billions of dollars to narcotics interdiction, street-side
drug busts and efforts to dismantle Mexico's and Colombia's biggest
cartels, U.S. authorities have determined in recent years that perhaps the
best strategy is, simply, to go for the money.

Testifying before Congress last year, John C. Varrone, the acting deputy
assistant commissioner of investigations at the Customs Service, said that
from 1997 to 2000, his agency conducted more than 12,000 financial
investigations worldwide - both drug and non-drug related - that led to the
seizure by world governments of almost $1.1 trillion in assets.

Unlike legitimate businesses, trafficking groups cannot simply deposit
their money in the banking system and pay to have it transferred out of the
country in large amounts. Bank accounts provide a written trail that allows
law enforcement authorities to track drug money to its source.

Instead, drug money travels over the Internet as electronic currency,
through the local convenience store as money orders, as precious gems
transported in suitcases, or through major ports like Houston and Miami in
the form of refrigerators, cigarettes and other consumer items.
Increasingly, however, trafficking organizations are using the same methods
to transport money as they use for drugs - large, bulk shipments of dollar
bills.

Money Management

The need for increased sophistication and knowledge of international
finance has led to some startling changes in the way traffickers do
business. Some trafficking groups have sent their financial wizards to top
U.S. business schools to master the intricacies of money management, said
Greg Passic, a Washington money-laundering specialist and Treasury
Department consultant.

One U.S. law enforcement official said a major Mexican cartel has moved the
bulk of its business operations to Houston, apparently determining it is
more efficient to conduct importation, distribution and accounts-receivable
operations from the same central locale where most of its business is
generated.

Last year, law enforcement agencies raided a suburban Houston house where
they found night-vision equipment, a network of surveillance cameras,
equipment to repackage bulk quantities of cocaine and a separate "counting
room" with heat-sealing devices used to package cash for export, said Mr.
Robinette of the Customs Service.

That raid alone netted more than $1 million in seized cash. The follow-up
investigation indicated that the smugglers had handled $30 million or $40
million in the last three or four years, he said.

The days of fast cars, gaudy upholstery and free-spending opulence may be
over. Traffickers keep a close eye on balance sheets, just as any
legitimate company would, said Steve Hooper, acting special agent in charge
of Customs for East Texas. His agents tapped one phone conversation in
which a Colombian boss lashed out at his Houston operatives over a cable
television bill.

"The bad guy's reaction down in Colombia was, 'What the hell do they need
cable TV for?' We were amazed that they were watching the expenses that
closely," Mr. Hooper said.

More Cash Smuggled

At Houston's George Bush Intercontinental Airport, Customs agents using
money-sniffing dogs have begun regularly inspecting passengers and luggage
on outbound flights because of an eruption of cash smuggling out of the
city. In one seizure, Customs agents stopped a man at the Houston airport
with $1.1 million in a suitcase. A subsequent investigation determined the
man had transported more than $12 million in a single year.

"We get hits almost every day," said Jeff Daft, a Customs canine
enforcement officer whose cash-sniffing dog, Angus, was inspecting
passengers boarding a Continental flight bound for El Salvador one day in
March.

Said Mr. Varrone, "The Customs Service has identified and seized bulk cash
shipments concealed in aircraft, vessels, vehicles, appliances, water
heaters, stereo equipment, machine parts, even from the internal cavities
of human beings."

Over in Hidalgo, while Listo worked over the outbound cars, Customs
officers and Texas National Guard troops were nearby, operating the
government's most advanced new piece of technology: a gigantic mobile X-ray
machine capable of sweeping over and inspecting the contents of an entire
tractor-trailer rig in less than three minutes.

On the machine's first day on the job last year, it detected $200,000
hidden in a vehicle. Last year, U.S. authorities seized $32 million in cash
just along the southeastern Texas border with Mexico.

But billions of dollars are being laundered through other, more
sophisticated means, experts say.

Peso Exchange

The most notorious and widely used money-laundering network is known as the
Black Market Peso Exchange, or BMPE, which the Treasury Department says is
responsible for moving $4 billion annually between the United States and
Colombia.

The BMPE involves intricate networks of exchanges between cash smugglers,
myriad small bank accounts and commercial enterprises, both legitimate and
illicit, in numerous countries, Mr. Robinette explained.

It was one such BMPE operative, Customs officials suspect, who approached
Mr. Kahl at General Electric. Traffickers typically look for ways to
convert their cash into commodities, preferably everyday consumer items
like VCRs, computers, cigarettes, liquor and home appliances.

Those items are purchased in bulk from legitimate U.S. dealers using cash,
money orders or small-denomination checks. Then they are shipped from ports
like Miami or Houston to warehousing centers such as Panama's Colon Free
Zone, a tax-free international commercial zone that specializes in trade
with the Caribbean, Colombia, Ecuador and Venezuela.

From Colon, the consumer items are shipped to various contraband centers
along Colombia's northern coast, where they are resold to Latin American
consumers as seemingly legitimate goods. Once the items are paid for with
Latin American currency, the cash is effectively laundered, or cleaned, of
its illegal origins.

American manufacturers have been aware of the problem for years, but
legitimate Colombian retailers and the former chief of Colombia's customs
service, Fanny Kertzman, began complaining publicly and raised pressure on
the manufacturers to take action.

Before leaving office last year, Ms. Kertzman rattled the U.S. business
world by going public with the names of manufacturers who, she said, should
have known that their products were being used for money laundering. Among
those she named were General Electric and cigarette maker Phillip Morris.
She said she went public because those companies had resisted changing
their practices.

Phillip Morris is being sued in the United States by Colombian state and
local governments, who allege that the company conspired with smugglers for
years, helping them evade millions of dollars in taxes. The company
adamantly denies the allegations.

At General Electric, corporate attorney Earl Jones said his company has
been aware of the money-laundering issue for years. "It was back as early
as 1993 that this business ... began to develop a policy and educate the
employees on the risks of money laundering," he said. The company's
entanglement in the BMPE was due to international sales arranged by
unauthorized local dealers, he said.

The money-laundering network is not limited simply to appliances. Last
year, at U.S. government request, Panamanian authorities seized a $1.5
million helicopter that had been purchased from Fort Worth-based Bell
Helicopter Textron using 25 third-party wire transfers from 16 different
bank accounts.

The Customs Service says its undercover agents traced the wire transfers
directly to Colombian drug traffickers. Customs demanded that Bell explain
why it did not question the strange succession of payments.

Bell attorneys and spokesmen say their company abided by the law regarding
the methods used to accept payment. All payments were above $10,000 in
value, which meant the government could have traced them, the company says.

But the seizure came at an embarrassing time - just as Congress was
debating whether to include 30 Bell "Super Huey" combat helicopters as part
of last year's aid package specifically to help Colombia fight the war on
drugs.