The profits of organized crime : the illicit drug trade in Canada
Tax haven countries and territories
Services provided in tax haven countries
Repatriation of the laundered funds
Legislation designed to curb the illicit drug trade
Author: R. T. STAMLER, R. C. FAHLMAN
Pages: 61 to 70
Creation Date: 1983/01/01
Officer in Charge, Drug Enforcement Branch R. C. FAHLMAN
Head, Research and Publications Section, Royal Canadian Mounted Police, Ottawa, Ontario, Canada
Massive funds that are produced from street-level crime are laundered upwards into the criminal organizations for the benefit of their top-level members. The laundering systems used to distribute the proceeds of crime are designed to conceal the size of the organization as well as the identity of its members. Crime syndicates are attracted to criminal activity that produces the highest profits with the lowest risks. Although organized crime syndicates derive profits from a wide variety of criminal activity, their most sought after ventures principally involve the consensual type of crimes, such as drug trafficking, where no one individual can be readily identified as a legal victim for the purpose of recovering the proceeds of a criminal act. A recent survey indicated that illicit drug trafficking accounted for 87 per cent of the cash flow generated from organized crime. When the proceeds are disbursed, the criminals are fee of the usual civil liability respecting the ownership of the proceeds.
Canada currently has several laws which enhance the ability of law-enforcement authorities to trace the proceeds of crime and prosecute those who possess the assets. This legislation has some limitations with respect to seizure and forfeiture of certain types of proceeds. For example, forfeiture of the illegally acquired property is difficult when there is no original legal owner to initiate legal action, and even more difficult if the assets are located abroad.
Organized crime syndicates in Canada, as elsewhere in the world, operate for one purpose only: financial gain and the power that it brings.
Whenever a criminal organization becomes established, it takes on a life of its own. It can survive and continue its operation even though several key members are removed through prosecution and imprisonment, provided its financial assets remain intact. There are several major Canadian organized crime figures currently serving prison terms, yet these persons are still in control of their empires and producing profits from criminal activities.
Drug syndicates operate in every Canadian metropolitan centre. The Royal Canadian Mounted Police has estimated that these organized crime groups receive in excess of $ Can 4 billion annually from illicit drug sales alone.
According to a recent survey, illicit drug trafficking in Canada accounts for 87 per cent of the cash flow generated from organized crime and is one of the most profitable criminal activities. This activity brings together criminal organizations from many countries in order that the illicit commodities can be produced, refined, transported and sold to users throughout the world.
For example, opium farmers in the "Golden Triangle" and "Golden Crescent" regions of Asia receive $ Can 800 - l,500 for 10 kilograms of opium, which, in turn, yields l kilogram of pure heroin. One kilogram of pure heroin produces at least $ Can l 5,000 for the trafficker in the region of the heroin laboratory. When that one kilogram is delivered in Montreal, Toronto or Vancouver, it will sell for $ Can 200,000 at the wholesale level. The final product that emerges after being cut and diluted is a capsule dosage unit containing 3 - 5 per cent heroin that sells for $Can 35 - 45 to the addict population. One kilogram of pure heroin can generate sales totalling $ Can l 5 million.
The same situation exists with respect to cocaine, only the locale and ethnic backgrounds are different. Cocaine is produced from the coca bush, indigenous to South America. The South American coca farmer receives approximately $ Can 2,000 for a 250 kilogram lot of coca leaves that yields l kilogram of pure cocaine hydrochloride, which sells for about $ Can 20,000 in South America. This kilogram of cocaine will sell at the wholesale level in Canada for approximately $ Can l00,000. By the time it has been diluted and reaches the user, however, it will yield 8,000 lots at l2.5 per cent purity, having a retail price of $ Can 200 per lot. This will generate a total of $ Can l,6 million in retail sales.
South America annually produces in excess of l00 tons of cocaine destined for United States and Canadian markets. Cocaine distribution in North America channels funds through the levels of the criminal organization much in the same way that the criminal syndicates move money in south-east and south-west Asia. One cocaine trafficking organization used a specific group to handle the distribution and another to collect the money from illicit drug sales. At no time did the money collectors make contact with those engaged in drug distribution. The money was eventually received by a major travel agency, which then distributed the funds to the syndicate leaders and to those involved in the drug distribution. This travel agency, which had allied offices in South America, arranged for pay-outs to be made from those locations to the traffickers and producers involved at the South American end of the operation. The actual movement of the monies did not take place until long after the entire drug sale had been finalized, the net result being that it was almost impossible to connect a money transaction to a drug transaction.
The situation with respect to cannabis is much the same in terms of the massive profits that can be realized. The principal source of marijuana for Canada is South America, where it is believed that the area under cultivation is capable of producing between 25 and 30 thousand metric tons of high quality marijuana with an estimated value of over $ Can 2 billion. The street value sales will produce a staggering cash flow in the tens of billions of dollars. There are numerous other growing areas in other regions of the world which produce tons of different cannabis products, a fair portion of which is destined for the North American market. This movement adds vast sums of money to the coffers of organized crime.
In one case involving cannabis, a drug trafficker from southern Asia was convicted in Toronto for smuggling hashish into Canada. As a result of the investigation, it was estimated that, when arrested, this individual had already imported over $ Can l0 million worth of hashish into North America.
In another case, a well-known trafficker was convicted in Toronto for importing hashish. This individual admitted that his marijuana and hashish distribution system produced a cash flow in excess of $ Can 50 million.
There are many reasons why money and other valuable securities are moved out of Canada and into jurisdictions that have secret banking privileges. Some reasons are legitimate (or at least not contrary to the criminal law), others are not. These jurisdictions are commonly referred to as tax havens.
Tax havens have grown in popularity in recent times as one of the few means of placing funds beyond the reach of tax collectors. This guarantee to financial privacy became attractive to a wide variety of persons including those whose primary interest was not necessarily to avoid taxes. It was not long before both criminal organizations and individual criminals found the sanctuary of tax havens too inviting to ignore. With the development of multinational banking systems and international business and commerce it became easy to develop sophisticated laundering systems designed to move money, obtained directly from criminal activity into foreign banks protected from intrusion by law enforcement officials. For the criminals, this financial privacy is an indispensable aid in concealing the proceeds of crime. Many countries and territories currently provide this type of protection.
These countries and territories not only provide easy access to banking institutions with secret numbered accounts, but also have extended cor- porate and secrecy laws to allow the establishment of an unlimited number of beneficially owned corporations, which can be operated or manipulated by local agents or lawyers. When these corporate entities are combined with several numbered bank accounts, a maze of financial transactions can be structured in such a way that makes the tracing of assets a very complex task. If questionable funds are then moved from one tax haven jurisdiction to another, the complexities are significantly increased.
The unlawful laundering schemes vary as widely and can be as complex as legitimate business and commercial transactions. Through a variety of transactions cash can be transferred anywhere in the world. This can include the use of corporations, business entities or phoney business transactions, all done under the guise of a legitimate commercial enterprise.
Businesses and financial institutions involved in the exchange of money have been known to accept large amounts of cash, thus facilitating a laundering system. Using a corporation as a front, the criminal will engage a foreign lawyer or business agent who will represent his interests in a country where the criminal's corporation also has status. He will then make a large cash transfer through the money exchange to the foreign account of his corporation. The foreign bank will facilitate the money exchange entity in the transfer, as both the bank and the money exchange carry out daily legitimate money transactions.
Brokerage houses have been utilized to transfer large quantities of cash. If they believe they are executing orders for a potentially important client or respected customer of a foreign bank, they will understandably make themselves available for this service. One scheme involves a foreign bank that unknowingly represents a criminal and places an order with a local broker for a large sum in securities. The bank advises the broker that the funds will be paid for directly in Canada through a courier. The criminal then engages a courier who delivers the money in a variety of forms, including cash, and the securities are sent to the foreign bank, where they are later recovered by the criminal.
Travel agencies with multinational connections have become involved in the movement of large quantities of funds. These agencies are primarily involved in the laundering business and charge fees to move currency from one country to another, but the fees are not significant enough to deter the criminal. Because of the nature of their business they can arrange to transfer large sums of cash directly to another country where they have an affiliate office. There the money can usually be exchanged into foreign currency and moved onward, simply using a banking system. The travel agency may or may not be aware of the true purpose of the transaction.
The simple way to move cash is to hand carry the funds to a foreign country. The most popular method is for the criminal to engage a courier to transport the money out of the country in a suitcase, briefcase or money belt. This system leaves no paper trail. Money couriers are usually lawyers, accountants or businessmen who may operate a money laundering service for a fixed fee. Foreign bank agents will act as money couriers. These agents are salaried employees, usually of large banking institutions, and are based in many of the major cities.
In addition to the usual banking facilities, many banks in tax haven countries provide secret numbered fiduciary accounts where the names of the depositor are held Separately from the accounts themselves. The name may be held by a separate entity, such as a trust company affiliated with the bank. In addition, one banking facility may be made up of numerous corporate entities. For example, the name of the depositor may be held by one corporation, the actual bank account deposited in another, and the investment certificate issued by another. This type of banking system is designed to make it difficult for foreign courts or enforcement agencies to identify money flows within the institution.
Most tax havens have a system providing for the incorporation of business and holding entities that will provide a high degree of anonymity to the beneficial owner. These corporations may carry on business transactions within and outside the country. The corporation will be managed by a resident business agent, who will be shown as the resident officer of the corporation. The local lawyers who incorporated the company will remain as the officers and directors on the documents of incorporation. The name of the true or beneficial owner will be kept in secret government files to which foreign courts and officials would have difficulty gaining access. The corporation may carry out banking transactions and be the owner of secret numbered accounts, both within the local jurisdiction or in other tax free jurisdictions.
A foreign trust is a trust created by a person m a country other than his country of residence, normally in a common-law jurisdiction. A foreign trust is a pact that binds the trustee to deal with the trust property for the benefit of designated persons (the beneficiaries).
Lawyers in tax haven countries can be engaged by foreign criminals to incorporate business or holding entities. These entities are specifically allowed to operate tax-free and With a maximum amount of security under the law. The lawyers are permitted to remain as the directors and officers of the company and act for the beneficial owners. They are generally forbidden under the law, through a form of solicitor-client privilege, to divulge the names of the beneficial owners of the corporations. In addition, the beneficial owners maybe foreign tax haven corporations, which will provide double protection. Generally, citizens of tax haven countries are not permitted directly to utilize the facilities of this class of corporation. It is clear that these services are only intended for foreigners who are likely to invest large sums of money and at the same time require anonymity and protection from the enquiring law enforcement agencies in his country of residence.
After money has safely reached the tax haven country and is deposited in the bank in the name of a beneficially owned corporation by means of a delivery of the funds through one of the schemes outlined above, only part of the laundering cycle has been completed. The next stage involves the return of the funds in such a way that it appears that they were legitimately acquired by the criminal.
Some of the procedures identified are described below.
Once the funds have been safely laundered out of Canada by either single or multiple tax haven transfers, the criminal, if he needs to use legitimate funds in Canada, must then effect repatriation. Assuming the funds are in an offshore bank, he will arrange to make an investment in Canada through a small down payment with "clean" money. He then arranges to borrow the balance of the purchase price from the offshore bank or one of his offshore corporations, and repays the loan as if it were a legitimate transaction. In this way, he not only repatriates his money, but also has the opportunity to pay himself interest, which is deductible from the income for Canadian tax purposes. Once the loan is repaid, he can continue to lend himself more funds to acquire additional legitimate assets. This transaction rarely occurs directly with the foreign ban k where the money is deposited. It usually involves several offshore corporations. For example, money in a bank in country A may first go to the corporation of the criminal located in country B, which transfers the money to his Bahamian corporation, which in turn makes the money available to the Canadian lawyer who makes the funds available to the criminal in Canada. His offshore corporation in country C may be a trust and loan company or an insurance company, making the transaction look even more legitimate.
Instead of using a loan-back method, the criminal makes the investment using his foreign offshore company as a front. Legitimate businesses may accept the criminal as a partner, who then makes his investment using laundered funds through his foreign company.
By using laundered funds in a foreign bank, the criminal purchases his own property, business etc. at a highly inflated price and then repatriates more funds to Canada.
Once the criminal has become established in a quasi-legitimate business entity in Canada, he can use this entity to facilitate the laundering of funds in a variety of ways. One of the more common systems includes double invoicing, by over-pricing goods or property which is the subject of the transaction. For example, a Canadian business entity purchases property at an artificially high price from a foreign affiliate. The difference between the artificial price and the real price is deposited in a bank account in one of the tax havens. A reverse situation would involve the Canadian entity selling the property at an artificially low price. The difference is eventually deposited in the same type of bank. A further ramification of this scheme involves simply invoicing non-existent property or merchandise.
Canadian-based crime syndicates and major conspirators involved in criminal activities have developed many laundering schemes that fully utilize the facilities provided by the tax haven countries. The cash flow through these complex quasi-legal facilities is difficult to penetrate even when the entire transaction occurs in Canada. When this is compounded by restrictive foreign laws and inadequate procedures of investigation at the international level, it is virtually impossible to penetrate a carefully designed international money laundering system. Since these laundering systems are used to distribute the proceeds of crime to leading members of the conspiracy or syndicate, it is essential to obtain all the evidence of the laundering scheme in order to establish the identity of the members and prove the full extent of the criminal activity.
It is desirable, therefore, to develop enforcement authority to allow for the examination of records in the foreign jurisdictions within which the movement of illegal proceeds takes place. In addition, broader powers must be sought to ensure the seizure and forfeiture of such proceeds which have been laundered back into Canada, or to cause those proceeds held in foreign jurisdictions to be forfeited.
Tax haven countries and territories must protect their banking systems as well as the names of the beneficial owners of corporations and trusts if an important part of their economy is to survive. The more difficult it is to penetrate these systems, the more successful the country or territory becomes as a tax haven.
The financial flow resulting from street-level illicit drug sales was not subject to investigation in Canada prior to 1998. In that year the Government, supported by the Royal Canadian Mounted Police, launched a programme designed to trace and identify the money flow from illicit drug transactions. The programme became operational in 1982. Specially trained investigators with experience in both commercial crime and drug enforcement techniques were selected to work on the programme, and special units were established in every major Canadian city.
The investigations are already producing results. In addition to seizure of the funds which are closely connected to the drug transactions, many sophisticated laundering systems are being identified. These laundering systems include the use of complex corporate and business transactions through banks, trust companies, real estate firms, stock brokers and money changers. They have identified underground commercial systems that have been in use for generations.
The evidence derived from the financial investigations has broadened the scope of criminal prosecutions in Canada through the identification of top members of the criminal organizations, namely the planners and organizers who rarely come into contact with illicit drugs, but who always arrange to receive the proceeds of illicit transactions. Tracing the proceeds, through the examination of business records, both within Canada and in foreign jurisdictions, is a vital first step to a financial investigation.
The evidence will serve two purposes: first, it may provide evidence of the original crime or a secondary crime connected with the movement of the funds; and secondly, it may give rise to the seizure and forfeiture of the funds or assets themselves.
To fulfil only the first purpose requires a great deal of co-operation between the countries and jurisdictions through which the money laundering system operates. Only through positive interpretation of the laws and a genuine desire by all enforcement officials who become involved will positive results be achieved. This level of co-operation is not always forthcoming and can lead to a dead end after a long and costly investigation. After a successful first stage investigation which produces the evidence that connects the crime to the possession of the assets, it is desirable to effect the seizure and forfeiture of the assets.
This second objective may prove to be more difficult. By the very nature of a successful laundering scheme, the money from criminal activity is moved from place to place, from one jurisdiction, organization or entity to another, constantly changing in form until it is converted into some asset of value which may be tangible or intangible personal property or real property. In this process it may be combined with other funds which originate from some other illicit source or from a legitimate enterprise. By the time the property is located it may be an ongoing business entity, producing additional profits, employing many persons and owning many fixed assets.
Experience has shown that through the application of the many existing laws, seizure and forfeiture or other punitive measures can be effected if proof of the source of the funds is established. Therefore, the first stage of the financial investigation, tracing, identifying the money flows and gathering evidence of the laundering scheme, is vital in attempting subsequently to prosecute the individual and seize and forfeit the proceeds. In this respect a willingness to co-operate is the decisive factor in the successful conclusion of a financial investigation.
Canada currently has several laws which facilitate the process of tracing the proceeds of crime and prosecuting those who possess the assets. These laws, combined with the laws of conspiracy, give law enforcement authorities in Canada significant powers to search for and seize evidence relating to the possession of any asset which was obtained either directly or indirectly from a serious crime, wherever it may have occurred. The object of the crime is the secondary offence of possession. The laws of conspiracy in Canada make it an offence for anyone, whether in Canada or elsewhere, to conspire to possess the proceeds of crime in Canada. Thus, two or more persons who at the time of the offence are outside Canada, agree to possess assets which are directly or indirectly, in whole or in part, the proceeds of a serious (indictable) offence, commit an offence within Canada and the evidence which exists in Canada in relation to that offence may be seized.
Although this law seems wide in application, it has some serious limitations with respect to seizure and forfeiture of certain types of proceeds. Real property and intangible assets, such as debts, are not always seizable, even though the person or persons may be convicted for possessing such property. When this class of property is in addition the proceeds of illicit drug sales, or other forms of consensual crimes, the problem of forfeiture becomes even more difficult, since there is no original legal owner to initiate legal action for the return of such property once it has been located. In addition, there are no freezing powers to prevent the disbursement of such funds. The entire process is even further complicated if the assets are located outside Canada. Thus, even following a successful prosecution, forfeiture of the property may prove impossible.
Canada is currently examining ways of improving the ability of law enforcement authorities to cause the freezing or seizure and subsequent forfeiture of all assets of value which are established to be the proceeds of criminal activity. The ability to recover the evidence of complex multi-jurisdictional laundering schemes is also an element of the study. The use of bilateral and multilateral law enforcement agreements and treaties may help to overcome major differences in legal systems and procedures. The expanded use and recognition of an investigational type of letters rogatory, such as is currently in force in the European Economic Community, is also under consideration. This could involve a procedure to invoke search powers on the basis of investigative letters rogatory in the countries through which laundering schemes are operated. The use of the bankruptcy process to shift the legal title of property illegally acquired through crime of a consensual type and ensure the seizure, management and liquidation of complex business enterprises created with the proceeds of crime may also be resorted to in certain cases, both domestically and internationally.
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