COCAINE BOOM IN EUROPE FUELS NEW LAUNDERING TACTICS

Dirty Euros Enter U.S. Via Latin America; The African Connection

A cocaine boom in Europe and the continent's strong currency have
combined to fuel a thriving industry: euro laundering.

With the euro approaching $1.50 and soaring demand for cocaine in
countries like Spain and Italy, Europe has become a far more
lucrative place to do business for Latin American drug cartels than
in previous years.

To obscure the origins of the funds, and escape government scrutiny
in the process, the cartels use a complex system to launder their
proceeds -- much of which is landing on U.S. shores.

In late March, U.S. authorities arrested a man carrying a leather
duffel bag who had just landed at Los Angeles International Airport
on a flight from Santiago, Chile. Inside the bag was more than $1.9
million in cash, mostly in bundles of €500 and €200 notes.
Authorities are struggling to make a dent in the booming drug trade
in Europe. WSJ's Mark Schoofs tags along with Spanish police as they
search for clues to the source of cocaine that keeps pouring into the country.

U.S. and Chilean law enforcement officials believe the man was at the
end of a money-laundering trail that begins in Europe. Over a period
of four and a half years, he and his associates flew to the U.S. from
Latin America some 280 times, openly toting more than $244 million
worth of euros into the country, according to documents in a case
brought by federal authorities in U.S. District Court in New York.

The big bills have become so symbolic of the lush life that they have
recently crept into pop culture: The rapper Jay-Z's video for Blue
Magic -- the debut single from his new album "American Gangster" --
features a suitcase full of €500 notes and someone thumbing through a
stack of them as Jay-Z raps the words, "the kilo business." Hype
Williams, director of the music video, said that he and Jay-Z chose
euros because they are "more valuable" and because they wanted to
"one-up" their hip-hop competitors by showing "the things people are into now."

The wads of euros carried by people like the man arrested at LAX are
often the spoils of Europe-bound cocaine shipments -- many of which
transit through Africa, law-enforcement officials say.

Consumption of the drug has soared in much of Western Europe,
according to a report released last year by the U.N. Office on Drugs
and Crime. In Italy, use of the drug rose to 2.1% of the general
population in 2005 from 1.1% just four years earlier. In France, it
tripled from 2000 to 2005, from 0.2% to 0.6% of the adult population.
Cocaine use in England doubled from 1998 to 2006, according to
Britain's National Health Service, to 2.4% among adults.

Some narco-euros are laundered directly in Europe. But officials say
the lion's share is routed back to South America as cash and
eventually ends up in the U.S.

"This is still a cash business," says Donald Semesky, the Drug
Enforcement Administration's head of financial-crimes investigations.

The first step is to convert small bills accumulated from thousands
of street sales into €500 notes, which are easy to transport.
Obtaining large quantities of these conspicuous notes, though, isn't
easy. So drug traffickers turn to specialized criminal rings -- whose
members are often involved in banking and real estate -- to gain
access to them, says Jose Manuel Alvarez Luna, chief of the
money-laundering section of the Spanish police.

Spain is the center for such aggregation, according to authorities. A
high-level Spanish banking official says a disproportionate share of
the euro zone's €500 notes, known as Bin Ladens for their scarcity,
circulate in Spain.

The purpose of money-laundering is to disguise the criminal origins
of ill-gotten gains so the funds appear legitimate. In most cases,
laundering also helps criminals escape the notice of tax collectors
and law-enforcement officials, boosting the value of their illegal proceeds.

Particularly since 9/11, tightened antilaundering regulations, known
by banks as "know your customer" rules, have forced drug cartels to
use more circuitous routes to circulate their funds around the globe.

For starters, the drug cartels do not themselves bring their
narco-euros to the U.S. Instead, they usually sell their euros to
South American black-market currency brokers or to foreign-exchange
houses, known in Spanish as casas de cambio. The casas' business as
currency-exchange houses gives them a natural cover for moving large
amounts of cash.

But in South America, there are few if any legitimate buyers for the
huge sums of euros that the casas obtain -- directly or indirectly --
from the traffickers. So the casas funnel most of the narco-euros,
sometimes via middlemen, through a chain of exchange houses in
countries like Colombia, Peru, Brazil and Chile, says the DEA's Mr. Semesky.

Often, the drug traffickers will sell their euros for Colombian
pesos, and then the euros entering the U.S. no longer belong to the
drug cartels but to the casa de cambio. In other cases, says Mr.
Semesky, traffickers pay the casas to move funds into one of their
U.S. bank accounts. These funds aren't usually intended for
withdrawal, but rather to pay various debts. This is achieved by
wiring funds to the account of whomever the trafficker wishes to pay.

On a recent night at a bar on Madrid's bustling Gran Via, a
shirtless, tattooed waiter served tables and a buxom drag queen in a
nurse's uniform worked the crowd. In the trendy venue was a man in
his 30s who talked by cellphone with his dealers. A few minutes
later, he stepped outside, leaned into the window of a small car and
handed over €60, or about $90. For that sum, he received one gram of cocaine.

Such street sales have surged. Spain now has a larger percentage of
its population (3%) using cocaine than the U.S. (2.3%), the previous
top per-capita consumer, according to United Nations figures. In the
first half of 2007, a kilo of cocaine sold for €33,000, or about
$43,900, in Madrid, more than triple the $12,500-$14,600 it fetched
in Los Angeles and far more than the $13,000-$26,000 it sold for in
New York, according to the Spanish police and the DEA.

Last year, seven European countries banded together to form the
Maritime Analysis and Operations Center-Narcotics, or MAOC-N, an
international agency dedicated to stopping drug traffic over the
Atlantic. Already, the center is helping to make major busts.

In October, on the high seas off West Africa, Spanish authorities --
acting on a tip from MAOC-N -- seized an aging, cockroach-infested
trawler. Called the Opnor, it allegedly had more than three metric
tons of cocaine hidden below the floor of its cargo hold. Apparently
registered in Panama, the vessel was captained by a grizzled Dutch
man in his late 60s and is believed to have been heading toward Senegal.

The boat was following a typical pattern, authorities say. They
surmise that, if it hadn't been seized, its cocaine would have been
warehoused in West Africa, where crushing poverty, weak law
enforcement and, often, rampant corruption make for an ideal way
station. The traffickers would have then sent the drugs to Europe by
boat, either directly or via North Africa. Increasingly, say Spanish
and American authorities, cocaine is also being flown from North
Africa in small planes landing in Spain and Portugal on clandestine airstrips.

The traffickers were forced to take those routes because Spanish,
Portuguese and British authorities were intercepting boats coming to
Europe directly from South America.

Spain is a favorite entry point because of its proximity to Africa,
its long coastline and its language, which it shares with Colombia
and most other South American countries. Spanish officials say they
seized almost 100 metric tons of cocaine in 2005 and 2006. According
to United Nations statistics, Spain seized more cocaine than any
European nation between 1999 and 2005.

Authorities suspect that Europe's thriving cocaine business likely
provided the euros in the duffel bag of Mauricio Mazza-Alaluf, the
man arrested at LAX in March. Along with a cousin, Luis Mazza-Olmos,
he ran an exchange house in downtown Santiago, Chile, according to
U.S. and Chilean law-enforcement officials.

The probe into the Mazzas began in August 2004, says Christian
Caamano, an investigator for the Investigative Police of Chile. The
tip-off was a Peruvian passenger on a flight from Colombia who
arrived at the Santiago airport carrying a backpack stuffed with
€600,000, according to Mr. Caamano. Alarmed, Chilean authorities
began monitoring such couriers and noticed that they dropped off
their bags full of euros at the Mazzas' exchange house.

Later, the Mazzas' routine evolved: A courier from Colombia,
allegedly carrying European proceeds, would deliver cash at the
Santiago airport to an armored-car service. Personnel would count the
money in a parked truck and turn it over to the Mazzas or one of
their associates, says Hernan Penafiel, the lead prosecutor in a
parallel case brought in Chile against the Mazzas. One of the Mazzas
or their associates would then board a U.S.-bound flight with the
money, Mr. Penafiel says.

Once on U.S. soil, according to authorities, the Mazzas allegedly
moved their euros with breathtaking openness. Their main tactic was
to dutifully fill out paperwork at customs points and financial
institutions, using real family and business names, according to law
enforcement officials and court documents from the U.S. case.

After the Mazzas or their associates cleared customs at Los Angeles
International Airport, they would transfer their cash to Associated
Foreign Exchange Banknotes Inc., a currency-exchange firm
headquartered in Encino, Calif. AFEX Banknotes then converted the
euros into dollars and wired the dollars to U.S. bank accounts the
Mazzas had opened, according to law-enforcement officials and two
AFEX Banknotes employees.

The Mazzas had accounts with at least three banks in the U.S.,
according to the court documents from the New York case: Israel
Discount Bank of New York; Harris Bank in Chicago; and J.P. Morgan
Chase in Dearborn, Mich. In opening each account, the Mazzas gave
their company's real name and openly described it as a tourism and
currency-exchange agency.

The Mazzas proceeded to move huge sums of money through these
accounts, according to the court documents, often after receiving
faxed instructions, intercepted by Chilean authorities, from people
or entities with suspected ties to Colombian traffickers.

In a single year, according to court documents, the Mazzas wired $133
million into the Harris Bank account and $117 million out. At their
J.P. Morgan Chase account, they wired $35.5 million in and $34
million out in less than three months, and their IDB checking account
recorded more than 2,500 transactions totaling more than $29 million
during 2003 and 2005, according to the court documents.

Asked to comment, Harris Bank said in a written statement that it
"identified suspicious activity" after conducting its own
investigation and "closed the account in accordance with banking
regulations." IDB said in a statement that the events outlined in the
New York case "occurred under former management" and it no longer
maintains accounts for unlicensed money transmitters, including the
Mazzas' casa de cambio. Chase declined to comment.

AFEX Banknotes compliance officer Andrew Scherer says his company is
"mortified" that it may have helped facilitate illegal activity, but
added that it has strong anti-money-laundering policies and has taken
"substantive measures" to improve its anti-money-laundering policies
in the wake of the Mazza case. He declined to be more specific,
citing security concerns.

When Mr. Mazza-Alaluf landed at LAX on March 31, he didn't attempt to
conceal his money. Like he and his associates had done hundreds of
times before, he filled out the standard declaration forms, a
requirement for passengers entering the U.S. carrying more than
$10,000 worth of currency. But this time, he was immediately
arrested. The 55-year-old Chilean maintained his innocence.

Mr. Mazza-Alaluf has pleaded not guilty to federal felony charges of
conspiracy and operating an unlicensed money-transmitting business.
His attorney, Bernard Alan Seidler, calls the charges "a classic case
of the government overreaching."

Arrests in Chile

Chilean authorities nabbed members of the Mazza clan and their
associates in a coordinated operation. They are now in jail in
Santiago, facing money-laundering charges. Their lawyer, Yieninson
Yapur, says they are all innocent. In an email sent via Mr. Yapur,
Mr. Mazza-Olmos said he is a legitimate businessman and has done
nothing illegal.

The U.S. investigation of the Mazza case was conducted by a
multi-agency task force based in New York and led by the DEA and the
Internal Revenue Service. Officials tout it as an important success.
But it's unlikely to significantly restrict the flow of narco-euros
gushing out of Europe.

On a recent afternoon, far from the glitz of the night life on Gran
Via, a homeless addict walked around in a northern Madrid shantytown
with a syringe hanging out of his forearm.

Even as police tore down the surrounding shacks to make way for a new
development, residents hammered away, rebuilding their wood and
cardboard houses. "The demand for cocaine is huge, so knocking these
shacks down does nothing," says Gema Bautista, a social worker with
Fundacion Atenea Grupo GID, which runs a mobile clinic and
needle-exchange program. "The shacks just pop up again."