Colombian Black Market Peso Exchange An Instrument of Commerce, or Crime By:
Bill E. Branscum
The Colombian Black Market Peso Exchange [BMPE] has developed over the years to the point that it is widely portrayed, and generally accepted, as being a tool used by narco-traffickers to launder money. The United States government promotes that representation because it is simple, and it makes it possible for them to forfeit intercepted funds, and prosecute narcotics traffickers for money laundering.
The truth is more complicated than that.
Those of us who are involved in the investigation of financial cases should be aware that Colombian narco-traffickers did not establish the BMPE as a system for laundering the proceeds of narco-trafficking; nobody did.
The foundation for the BMPE was laid in the 1960’s by the government of Colombia, albeit inadvertently. The government did two things that gave birth to this system; specifically, they banned the US dollar, and they established high tariffs on imported goods. The idea was to strengthen the value of the Colombian peso, and increase the demand for Colombian goods.
Their intentions notwithstanding, this served to create an underground economy, generally referred to as a “black market,” and it created a black market exchange system where people, known as cambistas, exchanged Colombian pesos [COP] on the streets of Colombia for US dollars on deposit in American financial institutions.
While the term “Black Market” may conjure up visions of the sinister and nefarious, this particular situation was initially a bit more like the difference between the US Postal system and Federal Express in that “everybody was doing it,” and there was a cambista on every street corner. Please note that I am not suggesting that the BMPE is as “legitimate” a system as FedEx – I am not suggesting that at all.
I am merely making the point that the BMPE is, and has long been, a system used by honest citizens and legitimate businessmen on both sides of the border. It has been widely reported that the US Department of Justice identified several of America’s largest businesses using this system, such as; General Electric, Whirl Pool, Bell Helicopters, Phillip Morris, Merrill Lynch, Intel Computers, and many others.
The emergence of the Black Market Peso Exchange was the predictable, and natural, consequence of the Colombian government’s effort to ban US dollars, and enforce tariffs. The Colombian citizen who wanted, or needed, US dollars had two options - they could buy them from the Central Bank at the government established exchange rate, or they could buy them from cambistas on the street at their prevailing rate. Since the government monitored financial institution conversions to enforce the tariffs they put on imports, a businessman who wanted to avoid these tariffs could save money by dealing with the cambistas.
For example, a businessman intending to import a thousand Whirlpool refrigerators could arrange for the Bank of Colombia to transfer a half million dollars to Whirlpool’s account at the Bank of America in the United States. However, to do this he had to accept the government exchange rate, and expect to pay the tariff due upon the importation of the refrigerators, because Colombia’s Central Bank required certification that the appropriate importation documentation was in place.
His alternative was to deal with a cambista. This was not about the exchange rate – the exchange rate was about the same. Dealing with the cambista made it possible to do business without government scrutiny, allowing him to import the refrigerators without paying the tariff.
Narcotics are not the only things smuggled between the countries.
Now let me stop here and make an important point. As financial investigators, we might easily find ourselves looking for an argument that the BMPE actually is, or at least was, a perfectly legitimate exchange system. While I did say that Colombian narco-traffickers did not establish the BMPE, and it was not established as a mechanism for laundering the proceeds of narco-trafficking, I would urge caution in trying to take this argument much further than that.
The mechanics of the Black Market Peso Exchange system is remarkably simple, although the networking involved may be remarkably complex. Fundamentally, the BMPE system is a sort of “honor system” that worked, and continues to work, like this.
The cambista in Colombia is a money broker with connections, and accounts in financial institutions, on both sides of the border.
When a Colombian businessman uses a cambista to send US dollars to Whirlpool to buy refrigerators, the transfer is an illusion. The Colombian pesos stay in Colombia, and the recipient in the United States is paid from a US account that the cambista controls. The transfer is simply a matter of bookkeeping – assuming today’s exchange rate of 2500 to one, $40,000 USD on deposit in the United States is paid to Whirlpool in exchange for $100,000,000 COP on deposit in Medellin.
Although nothing actually traveled between the countries, for all intents and purposes, a $40,000 asset was moved from the United States to Medellin – and that is the important thing to see. The BMPE system, illusory though it is, serves to transport financial assets in the United States to Colombia as effectively as if someone said, “Scottie, beam it up.”
In so doing, the Colombian businessman avoided government monitoring of his acquisition of goods, allowing him to smuggle the refrigerators into Colombia without paying the tariff. This did not necessarily have anything to do with narco-trafficking or money laundering . . . this was all about defrauding the government of Colombia of tariffs that would otherwise be due. Again, we are speaking, “historically.”
On the other hand, in order to effectuate this illusory transfer, the cambista depended upon the ability to purchase US dollars in the United States at a reasonable rate, from Colombians who controlled those dollars, and wanted to convert them to pesos in Colombia. Now who do you suppose they could find in Colombia, with a whole lot of US dollars in the United States, that they would prefer to have pesos at home?
Do names like “Escobar” and “Ochoa” come to mind?
Colombia long since lifted the ban on US dollars, but cash is a commodity and, as with all commodities, the law of supply and demand prevails. Lifting the ban on US dollars was expected to reduce the black market demand for them, and it would have, if it were not for the fact that narcotics traffickers had an over abundant supply of cash in the United States that they were beginning to have trouble moving.
In 1970, Congress enacted the Bank Secrecy Act (BSA), also called the Currency and Foreign Transactions Reporting Act. Nevertheless, during the late 1980’s, and early 1990’s the American drug trade flourished, resulting in “cash flow” problems for narcotics traffickers – simply stated, they were drowning in it. Bulk cash was delivered by truck to special counting rooms in Miami banks, and banks elsewhere, where counting machines lined the walls. The sheer volume of the cash involved created serious logistics problems for the Colombian cartels.
The cartels’ objective was a very simple, circular transaction. They endeavored to transport the narcotics from Colombia to the United States, make the transactions necessary to sell it on the streets, exchanging the precious powder for US currency, and then get that currency back to Colombia so they could spend it.
This was the “la vuelta,” or “the round,” as it was referred to on the streets.
In 1980, the war on the proceeds of narcotics trafficking began in earnest. The Internal Revenue Service, the Customs Service and the Bureau of Narcotics and Dangerous Drugs (as the DEA was then called) joined together to pool their enforcement authorities and resources into a task force called Operation Greenback.
Through Operation Greenback, the government became aware of the BMPE, and Congress responded by enacting laws targeting “The Round.” In 1984, Congress enacted the Comprehensive Crime Control Act, and followed that with the Money Laundering Control Act in 1986 which criminalized “money laundering” and provided for the forfeiture of laundered funds.
It was a wild time, and it was raining money in Miami attributable to the “cocaine cowboys. The Medellin Cartel alone was reported to be making about sixty million dollars a day. Law enforcement officials became more and more aware of the ocean of cash, and they shifted their enforcement efforts accordingly.
In April 1990, the Financial Crimes Enforcement Network (FinCEN) was established by Treasury Order Number 105-08. They targeted the money, and the financial institution who were turning a blind eye to government mandated currency transaction reporting requirements.
Perhaps most importantly, the government began focusing on the attorneys who specialized in defending the cartels, seizing and forfeiting their legal fees as the proceeds of crime. If you weren’t involved, you simply cannot imagine the wailing, and gnashing of teeth. This strategy may well have been the single most effective thing that the government ever did in the “War on Drugs.”
The narco-traffickers problems were not limited to the United States. An international Financial Action Task Force was formed to bring together the most powerful nations, to put pressure on every financial institution in the world, to adopt anti-money laundering initiatives. The FATF was very effective.
Compared to the $207 million dollar cache pictured above, that was seized in 2007, the 2008 seizure of the $26.2 million dollars pictured below, almost looks “paltry.”
If you are swimming in cash, and the banks won’t take it without filing Currency Transaction Reports, and/or Suspicious Activity Reports, what do you do? You cannot just carry it around in the trunk, or store it in a closet – there is no “presumption of innocence” where cash is concerned.
By the time that the Colombian government lifted the ban on US dollars, the change in policy had little effect on the BMPE, because the over abundant supply of cash in America had made it possible for cambistas to sell cash in America to Colombians at a very favorable exchange rate.
For example, the Colombian physician sending his children to an American University could fund the transactions through the Central Bank, or through a cambista, where his money would buy twenty percent more US dollars.
The latter day question is, “by taking advantage of the convenience and economy offered by the cambista, would the physician paying for his daughter’s tuition at Princeton University be unlawfully participating in a money laundering scheme?” The government argues that it would.
The bottom line is, the Colombian Black Market Peso Exchange was not the creation of narcotics traffickers, and others interested in laundering money. The government of Colombia inadvertently created a black market demand for US currency, giving rise to the BMPE as a mechanism for the avoidance of tariffs, but the BMPE changed over the years to accommodate the growing needs of narcotics traffickers, and money launderers.
Money Laundering cases are defensible, but as an investigator, it is incumbent upon you to do the research, and understand the landscape, if you hope to make a meaningful contribution to your defense team.
Bill E. Branscum, Investigator