AGENTS `REINVESTED' PROFIT IN DRUG-MONEY BUSINESS

Cash-strapped RCMP also put $400,000 into failed Dutch sting

A currency-exchange company set up by the RCMP in Montreal in 1990 made a
$2.5-million profit over four years by laundering money for drug
traffickers.

The Mounties then used $1.15 million of those profits to defray the cost of
their undercover probe of the drug-world figures who were using the
money-changing service.

Set up as the Montreal International Currency Center, the company's
expenses included $400,000 that the Mounties had their undercover officers
``invest'' in another covert company -- located in the Netherlands and
controlled by Dutch police -- for a related undercover operation in 1993.

That investment was subsequently ``written off'' when the overseas
operation failed to get off the ground, according to internal RCMP reports,
memoranda and sworn court testimony from an RCMP officer involved in the
clandestine deals.

The RCMP's Montreal company ran a storefront currency exchange counter in
the downtown business district. It exchanged suspected and known drug money
- -- usually taking in Canadian cash and handing out equivalent amounts in
U.S. dollars and bank drafts.

The officer in charge of the covert operation, Staff Sgt. Yvon Gagnon, said
Norman Inkster, the RCMP commissioner at the time, approved the use of
profits generated by the company to defray the probe's costs as well as the
investment in the Dutch police company.

Mr. Inkster, who retired on June 24, 1994, to take a job at a Toronto-based
consulting firm, said he recalled the covert Montreal currency exchange,
but added that he could say little else about it.

``I recall the plan being presented conceptually. And that, conceptually,
it was approved.''

He said he could not comment further without reviewing the files on the
operation.

``Those files are not in my possession,'' he continued, ``and I have no
opportunity to do that.''

The RCMP Act does not explicitly allow or forbid Canada's national police
force to get drug traffickers to pay for the investigations into their
criminal activities.

One thing is clear: The RCMP used an unconventional technique to raise
money for its covert investigation at a time when Parliament was slashing
the force's operational budgets.

The RCMP brass decided to use the undercover company's profits after
getting a confidential legal opinion from a federal Justice Department
lawyer in 1990.

The legal opinion from lawyer Nancy Irving was delivered to Insp. Bruce
Bowie, a senior RCMP officer in charge of the Drug Enforcement Directorate
at Ottawa headquarters. It was received by Insp. Bowie after the covert
company had already opened its doors in September 1990, RCMP documents
show.

In her report, Ms. Irving stated: ``I am of the opinion that the income
earned by the company for performing its currency exchange services belongs
to the corporation and may be used to pay operating expenses as it sees
fit.''

But the RCMP decided that its company would charge its ``clients'' a
premium of one or two per cent per currency transaction -- over and above
normal market rates -- when officers knew or suspected they were exchanging
drug money.

Ms. Irving declined to state whether this fact was disclosed to her by the
RCMP when she gave the police force her legal opinion.

The surcharges for drug traffickers are not mentioned in a list of
``facts'' outlined in her memorandum to Insp. Bowie.

Ms. Irving did say there was never any discussion with her about the covert
RCMP company ``investing'' its profits in another covert police company
controlled by the government of a foreign country.

The covert RCMP company made its profits exchanging a stunning

$141.5 million Cdn. in known and suspected drug money for 25 criminal
organizations in its four years of operation, internal RCMP investigation
reports show. Police eventually lost track of $125 million of the $141.5
million exchanged by undercover officers.

The Citizen reported yesterday that the Montreal covert operation
facilitated efforts by Colombian drug traffickers, Canadian biker gangs and
the Italian Mafia to import almost 5,000 kilograms of cocaine and sell it
in Central Canada.

Citing internal RCMP documents, the Citizen also revealed that the RCMP was
so short of staff and resources that only a fraction of the suspects who
used the currency exchange to launder and move drug money were
investigated.

Toronto philosopher and author Jane Jacobs examined the consequences of
mixing business considerations and guardian public agencies, such as
policing, in her best-selling 1993 book, Systems of Survival.

Her book was published as the RCMP's covert operation in Montreal was in
full swing: In 1993 alone, the RCMP company exchanged $62 million in known
or suspected drug money, generating handsome commissions to pay its costs.

``I think that's outrageous. It's disturbing,'' Ms. Jacobs said when
details of the RCMP operation were related to her during a recent
interview.

``It looks dangerously as if they ran this thing so they could make an
income (for their covert company) to do the work,'' Ms. Jacobs said.

``I don't think that's a good way to approach crime at all. That you
facilitate crime, that you probably add to it so that you can investigate
crime? No.''

In four years' worth of police reports about the operation, neither the
RCMP officers nor their superiors considered how it might look to the
outside world if it became known that Canada's national police force made
profits helping drug traffickers launder cash, then used this cash to
finance its covert investigations.

On the contrary, the RCMP officers boasted repeatedly in their reports and
internal memos and requests to extend the operation about how the currency
exchange was ``self-financing'' and a ``profitable enterprise.''

Yet some at RCMP headquarters in Ottawa were uncomfortable with the use of
money from criminals in the drug trade to finance criminal investigations.

In sworn testimony before a Quebec provincial court judge in 1995, Sgt.
Gagnon testified that officers at RCMP headquarters -- he did not identify
them -- refused to allow his team to use money from the covert company to
defray all of the RCMP's expenses during the operation.

Sgt. Gagnon provided no further details in his testimony. But in an
interview with the Citizen, he said the issue was hashed out at least a
dozen times during meetings between senior RCMP and Justice Department
officials.

``Morally, would it have been better for us to use public monies and then
order money from the covert company confiscated when the operation ended so
it could be turned over to the government? It's a debate we had on a dozen
or more occasions,'' Sgt. Gagnon said. ``I think we acted in a proper
way.''

Here's how the operation was partly financed by drug world money, according
to internal RCMP documents and sworn testimony from Sgt. Gagnon, who
oversaw ``Operation Contract'':

- - The RCMP's finance department advanced a total of $750,000 in secret
loans to Sgt. Gagnon to start the new covert company, releasing the cash in
three chunks in 1990 and 1991.

- - There were never any formal loan documents signed between the police
force's finance department and the company. Sgt. Gagnon signed a paper
acknowledging he personally owed the police force the money.

There were no other guarantees. Had the covert currency exchange operation
flopped, the company might have declared bankruptcy and taxpayers' money
would have been entirely lost, he said.

- - The RCMP seed money was used by the covert company to buy a defunct
currency exchange already at the downtown Montreal address, as well as new
office furniture, money-counting equipment and a few computers. It was also
used to pay rent, utilities, business taxes and other supplies.

- - Officers running the covert operation, with the approval of the RCMP
brass, decided to charge drug world figures the one-to two-per-cent
commission or surcharge when they exchanged Canadian cash to U.S. currency.

That surcharge was over and above the normal rates charged by the currency
exchange counter, based on the daily spreads between the Canadian and U.S.
dollars on international currency trading markets.

Internal RCMP reports show drug-world figures sometimes grumbled and
haggled about the ``surcharges'' imposed by undercover officers, but most
were only too happy to pay for the fast, efficient service they were
getting as they obtained large sums of U.S. currency and bank drafts at the
exchange.

The commissions generated by deals done for drug traffickers helped
officers pay back the $750,000 RCMP advance within two years. They went on
to make an extra $1.75 million in profit, documents and testimony show.

When the covert company was dissolved in 1997, Sgt. Gagnon said, the sum of
money left in the covert company's bank account had grown to $3 million.

The money was then transferred to federal government coffers, he said.

The covert company's expenses included $50,000 on renovations to its
street-level offices at 1101 de Maisonneuve Blvd W. in Montreal.

The office renovations came in May 1993, after the RCMP decided to modify
its covert currency exchange to a by-appointment-only operation to reduce
the number of suspects who could walk in off the street for service.

The exchange counter was closed to the public seven months after angry
police officers complained they did not have the necessary manpower or
technical resources to investigate all the drug traffickers using the
exchange. Yet internal RCMP documents show that business was quite slow at
the beginning of the covert operation and the police company initially lost
money.

In an internal RCMP report dated Jan. 25, 1991, Superintendent Jacques
Bernard revealed that the business had racked up a loss of $66,746.

``However, when we get as clients the large traffickers who exchange up to
$1 million per week, we think we can recover a very large part of the
expenses (of running the covert company) and even make net profits,'' Supt.
Bernard added.

In a report on Operation 90-26C for the week of April 20 to April 27, 1991,
officers stated that their accountant's report for the period ending March
31 showed they had cut the loss to $46,401.75 since opening.

``It is evident that without the business of the big traffickers, we will
have difficulty self-financing ourselves,'' Insp. Michel Cuerrier wrote.

``However, during the last few weeks, our volume has increased and a few
new customers might make a difference.''

Like any company whose business is slow, the covert company decided to
start advertising and let the mobsters know of their company's services.

Officers made and distributed pamphlets in neighborhoods frequented by
known money launderers and drug traffickers, and they also bought Yellow
Page advertisements, internal RCMP reports show.

And business started picking up, almost immediately.

In an internal RCMP report for the period July 13 to July 20, 1991, Sgt.
Gagnon noted: ``The financial side of the operation has improved
considerably and the quality of the transactions is constantly increasing.
The business is very financially viable.''

He noted that the month of June 1991 yielded a net profit of $34,463,
reducing the accumulated deficit from previous months.

At that point in time, the covert company had an advance from the RCMP's
finance department which totalled $581,900.

``We now have as of this morning $569,246 in currency (in the till). . .
We're short only $12,000 to become self-sufficient for the 1991-92
financial year,'' Sgt. Gagnon added.

Just one week later, interestingly enough, RCMP officers revealed in a
report that its clients at the currency exchange clients now included ``one
of the most important intermediaries of the Medellin cartel in Montreal.''

As the Mounties counted their profits, their covert operation was helping
expand the clandestine pipeline of money and cocaine moving between
Columbia's cocaine cartels and Canadian biker and mafia gangs which import,
distribute and sell cocaine to users and addicts in Canada.

Another senior Mountie in Montreal, Supt. Jean Bernard, wrote a memorandum
dated June 6, 1991, recommending that the covert operation be extended for
another full year when it came up for renewal in September 1991.

He suggested the time would allow the covert company to generate additional
profits which would reduce the fixed costs of the police operation.

``The extension of the operation, the acquisition of sought after clients
and the constantly flourishing and increasing laundering at this business,
as shown by recent transactions, allow us to hypothetically conclude that a
period of an additional year could generate profits in the range of
$175,000, which would greatly reduce the fixed costs of the operation,'' he
wrote.

The covert company was extended and continued throughout 1991-1992,
exchanging more and more dirty money for known and suspected drug
traffickers and making greater profits to cover the costs of the probe.

In 1992, the Mountie operation began offering special ``after hours''
service to its preferred customers outside normal business hours.

The efforts began to show up on the RCMP company's bottom line.

The Montreal International Currency Center's accumulated profit was
$373,000 at Sept. 30, 1992, more than doubling Supt. Bernard's forecast.

When Sgt. Gagnon asked RCMP brass to yet again approve an extension to the
covert company on Dec. 21, 1992, he noted that his operation ``is in large
part self-sufficient and is even generating profits.''

Of a total of $351,011 in forecast expenses for the company in 1993, the
officer stated, only $44,362 would come from RCMP coffers.

A police accountant noted the Mounties were on the hook to pay close to
$60,000 in taxes for 1992. Financial results were so good, the Mounties
started financial planning to cut income taxes payable in 1993.

The only way to avoid a big tax bill for 1993, Sgt. Gagnon noted, ``would
be to increase our expenses to equal our revenues.''

Enter the related covert operation in the Netherlands.

One of the RCMP's key suspects was a Montrealer named Domenic Tozzi.

Mr. Tozzi had promised undercover officers he and his associates would need
to move $40 million through Canada to Europe and needed a safe, secure
business which could move that kind of money through the banking system.

RCMP officers in Montreal initially proposed to set up a covert Canadian
Crown corporation on Dutch soil which would be used to help Mr. Tozzi.

That proposal was rejected by RCMP headquarters, documents show.

Insp. Bruce Bowie, head of the anti-drug profiteering program at RCMP
headquarters, noted ``we also anticipate numerous difficulties in terms of
incorporating a company on foreign soil.''

The Solicitor-General of Canada's approval would have been required.

Sgt. Gagnon's team was then asked to come up with an alternative plan which
would obviate the need for ministerial approval.

The revised plan called for Dutch police to help the RCMP. The Dutch police
would create a covert company and control everything it did in Amsterdam.

The RCMP's Montreal firm agreed to invest $400,000 Cdn. in the Dutch
entity. The two covert police companies even signed a deal.

It stipulated that if the Dutch covert company exchanged the $40 million
for Mr. Tozzi and his criminal associates, the Dutch covert company would
use commissions generated to refund $400,000 to the RCMP's covert company.

If the Dutch operation had exchanged the $40 million, the covert Dutch
company stood to make a profit of $800,000 Cdn., based on a 2 per cent
special commission.

Sgt. Gagnon and the Dutch officers hoped they would determine where the $40
million came from, where it was going and they would then try to seize it
if and when they had enough evidence to prove it was from drug trafficking.

The covert Dutch police company opened for business in the summer of 1993,
but Mr. Tozzi's plan never came to fruition.

In sworn testimony before a Quebec Court Judge in 1995, Sgt. Gagnon said:
``We never saw the color of the $40 million. So, we were caught making
expenses and never made any money from it.''

The RCMP itself also spent an additional $212,223 from its covert
operations budget on the failed Dutch adventure, which it has never
publicly disclosed.

Mr. Tozzi was subsequently arrested and sentenced to 10 years in jail in
March 1996 after he pleaded guilty to charges that he laundered $27.2
million in drug money and conspired to import cocaine into Canada.

He is now out of jail and is staying at a Montreal half-way house.

Sgt. Gagnon told The Citizen recently that had his covert operation ``not
been self-financing in large part, it never would have been approved.''

Ms. Jacobs, the author and philosopher, thinks that if RCMP officers start
trying to run covert investigations like profit-making businesses,
Canadians will end up with monstrous hybrids that don't serve the public
interest.

Ms. Jacobs said if there were ever an official investigation into the
covert RCMP operation in Montreal, authorities would find ``the
ramifications and harm that they were doing would probably be shocking.''

She added that it is the basic duty of any government which has a police
force to provide enough money necessary to fight the force of crime.

``If the police can't do that and if the government can't do that, all the
fancy things that they also do are pretty superfluous and nonsencial,'' she
said.

Checked-by: (Joel W. Johnson)