TRAFFICKERS USE U.S. BUSINESSES, CASH SMUGGLING TO HIDE BILLIONS IN PROFIT

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.

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. He has already sniffed out $89
million in smuggled cash during his eight years on the job.

Kahl and Listo work in an unglamorous world that few Americans would
associate with the war on drugs, but 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 because, at its root, the drug economy has remained largely untouched.

Billions of dollars in drug profits are circulating through legitimate
commercial and financial institutions. The 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.

At companies such as General Electric, employees such as Kahl 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. "I never thought this would happen to me selling air conditioners,"
Kahl said after a man in New York called him in late 1999 to make a $40,000
purchase.

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.

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.

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 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 such as 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 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. 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.

The U.S. government 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 biggest banks, appliance manufacturers, cigarette makers, the
tourist industry and even a company that provides military hardware used in
Colombia's drug war.

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, 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 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 nondrug-related. They 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 for
law-enforcement authorities.

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 such as 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.

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.

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
Robinette of the Customs Service.

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

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 being smuggled 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.

"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,"
Varrone said.

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.

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, Robinette explained.

It was one such BMPE operative, Customs officials suspect, who approached
Kahl at General Electric. Traffickers typically look for ways to convert
their cash into commodities, preferably everyday consumer items such as
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
such as 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.

U.S. 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 raising pressure on the
manufacturers to take action.

Before leaving office last year, Kertzman rattled the U.S. business world
by going public with the names of manufacturers who, she said, should have
known their products were being to launder money. 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 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 caused by 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 bank accounts.

The Customs Service says its undercover agents traced the wire transfers
directly to Colombian drug traffickers. Customs demanded 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.