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 Business News | April 2008 
Wachovia Is Under Scrutiny In Latin Drug-Money Probe
 Evan Perez & Glenn R. Simpson - Wall Street Journal
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Washington - Federal prosecutors are investigating Wachovia Corp. as part of a broad probe of alleged laundering of drug proceeds by Mexican and Colombian money-transfer companies, according to people familiar with the matter.
Wachovia is one of several large U.S. banks that have come under scrutiny for their relationships with such companies. It is in discussions with the Justice Department about reforms in its compliance system and faces a possible deferred-prosecution agreement that would require extensive federal oversight.
An official of Wachovia said it is cooperating in the probe. Wachovia, based in Charlotte, N.C., and some other U.S. banks severed relationships with Mexican foreign-exchange firms in December and January after authorities began their inquiries. Some have struck agreements with the government to improve their efforts to fight money laundering, avoiding prosecution.
The remittance industry transmits more than $50 billion from the U.S. to Latin America annually, mostly legitimate wages from immigrants caring for their relatives. The banking industry has long sought a foothold in the lucrative industry, which charges high fees to move money. But it is also a natural target for narcotics traffickers seeking a way to move the proceeds of their U.S. drug sales to Latin America without detection.
A spokeswoman for Wachovia, Christy Phillips-Brown, said, "Wachovia is committed to maintaining a strong anti-money-laundering program."
The investigation is the latest headache for the North Carolina bank, which has also been pressured by the credit turmoil and fallout from its 2006 acquisition of a California home lender. Wachovia recently cut its dividend and raised $8 billion in capital to shore up its financial state. And on Friday, it agreed to pay up to $144 million to settle a probe of its ties to telemarketers and payment processors accused of obtaining bank-account data from the elderly and withdrawing money from their accounts. (See related article.)
The government's latest assault on drug-money laundering focuses on casas de cambio, or money-exchange houses, which dot the U.S.-Mexico border to facilitate workers' remittances and other cross-border transfers.
Wachovia built up its ties to casas de cambio as a way to tap the Hispanic market, which doesn't always bank through traditional Main Street outlets. Wachovia served as a larger partner, holding the foreign-exchange houses' deposits and providing back-office services. In 2005, it introduced the Dinero Directo card to facilitate cross-border remittances.
The bank pushed into the business despite well-publicized concerns from U.S. law enforcement that such firms were sometimes used to launder drug money. Wachovia declined to discuss why it pursued this business despite the warnings.
Internal emails and documents filed in federal courts in Miami, Chicago and New York describe former ties between Wachovia and money-changing firms. In a case in U.S. court in Miami, federal agents seized more than $11 million in 23 Wachovia accounts belonging to Casa de Cambio Puebla, a Mexican chain. U.S. and Mexican prosecutors said they believed the money was being laundered, according to legal papers filed by Puebla. Mexican police raided Puebla offices last fall, alleging relationships with a major drug cartel.
Frank Rubino, a Miami lawyer for the owners of Puebla, said the money seized belongs to legitimate clients.
In a case in federal court in New York and Chicago, Wachovia is suing to retrieve $38 million from a firm called Majapara Casa de Cambio. Wachovia contends, among other things, that Majapara was "engaged in illegal loans."
Lawyers for Majapara said in court papers that it is on the verge of bankruptcy, in part because Wachovia cut off the banking relationship, even though there was nothing illicit about its business. Internal emails filed in court show Wachovia executives alerting Majapara officials that "Bulk Cash deposits will not be accepted or collected after Dec. 20, 2007." In response to Majapara's assertion that the bank summarily terminated the relationship, Wachovia's Ms. Phillips-Brown said, "Their claims are without merit."
In a recent affidavit, a U.S. representative for Majapara said that Wachovia had provided the Mexican firm with lines of credit, overdraft privileges and remittance-processing services. Wachovia, the court papers filed by Majapara said, provided "largely unsecured credit well in excess of $100 million on any given day." Majapara said that it previously gave its business to several banks, but that in February 2007, after Wachovia extended its large credit facility, it transferred virtually all of its business to Wachovia.
U.S. and Mexican authorities have cracked down in recent years on the operations of the foreign-exchange firms. The Mexican Attorney General's office says some of them are part of a sophisticated system that funnels drug money through U.S. banks, on to European banks and then back to the U.S. and Latin America. As early as the mid-1990s, U.S. regulators and drug investigators were warning U.S. banks that Mexican casas de cambio presented a significant money-laundering risk.
The status of Wachovia's talks with federal prosecutors about a possible deferred-prosecution agreement couldn't be learned.
In a such an agreement signed with Union Bank of California in September, the Justice Department faulted the bank for "failing to maintain an effective anti-money-laundering program" and failing to report suspicious money-transfer activities.
The case detailed how two since-jailed drug suspects used accounts of Ribadeo Casa de Cambio to transfer millions of dollars in alleged drug proceeds. Federal prosecutors identified $295 million in transfers from various Union Bank accounts to their account, with only $29 million being repaid. In another instance, one person deposited 34 sequentially numbered $1,000 traveler's checks on the same day.
Prosecutors faulted Union Bank for failing to corroborate the legitimacy of the transfers. In addition, according to prosecutors, the bank failed to catch the large volumes of traveler's checks, bulk cash deposits and wire transfers structured to fall below limits requiring reporting.
Union Bank forfeited $21.6 million to settle the allegations. "We are confident we will meet the government's requirements and we have put a lot of effort and energy into that process," said Union Bank spokesman Steve Johnson on Friday.
Several other banks have unwittingly helped to funnel drug money, according to law-enforcement officials. Last August, American Express Bank International, a unit of American Express Co., entered into a federal deferred-prosecution agreement on charges of failing to maintain an effective anti-money-laundering program. The bank forfeited $55 million. Its Miami branch was being used to launder drug profits, according to federal prosecutors. An American Express spokesman had no immediate comment.
Write to Evan Perez at evan.perez(at)wsj.com and Glenn R. Simpson at glenn.simpson(at)wsj.com |
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