The Feds vs. the Mob: trailing dirty money. Recent actions by US underscore strategy in getting at drug traffic and racketeering

Money talks -- especially when it's a cash transaction over $10,000. That's the point at which banks and other financial institutions have to report to the Internal Revenue Service the customer who withdrew or deposited cash. These reports put IRS officials on the scent of money launderers, who then, the IRS hopes, lead to the mobsters who unload the ``dirty'' money in the first place.

``The surest way to get at the mob is to get at the mob's money,'' says James Harmon, director of the President's Commission on Organized Crime. ``Organized crime today uses banks and other financial institutions as routinely, if not as frequently, as legitimate businesses,'' the commission's 1984 report states.

Banks that don't report the cash transactions can get in big trouble. On Feb. 7, for instance, the First National Bank of Boston -- the largest bank in New England and the 16th largest in the United States -- pleaded guilty to a felony charge of ``willfully and knowingly'' failing to report $1.22 billion in cash transactions with nine foreign banks. First National was fined $500,000 -- the largest fine ever slapped on a financial institution for violating currency law.

A few days later it was reported that two companies owned by Boston's Angiulo family, reputed leaders of a large organized-crime ring, held accounts with the bank. The bank put the accounts on an ``exempt list'' of customers whose cash transactions don't need to be reported to the IRS. As of this writing it is not known whether there is any connection between these two events, but now a US Senate subcommittee has announced it will investigate the bank -- which is still being probed by the Justice Department's financial investigative task force here. Government clamps down

The case is significant because, for the last two years, the federal government has focused on cutting off the drug supply by choking the money channels that feed it. Thirteen presidential task forces and 12 Federal Bureau of Investigation task forces, as well as ad hoc groups, are on the laundering trail. As the Feds crack down on financial institutions, ``alternate ways will be found to launder money, and they are going to become more sophisticated, but right now, banks are a very important process,'' says Patrick Walsh, special attorney with the Boston strike force, under the Department of Justice. Mr. Walsh was a key player in Operation Greenback, a successful government attack on money laundering in Florida initiated in 1980.

The term ``laundering'' means covering up the source of money generated by ill-gotten gains (narcotics, racketeering, etc.) to make the money appear legitimate (profits from a normal-looking business, loans, letters of credit, etc.). Although banks play a key role, they are often unaware they are being used by organized crime, experts say. ``We haven't found that bankers [themselves] are principally involved,'' says Charles Domroe, a special FBI agent who is an authority on money laundering.

Drugs are by far the biggest black-market cash generators in the country. In a very general estimate, the presidential commission put annual US profits from the drug trade at $50 billion to $75 billion. Of that, some $5 billion to $15 billion moves overseas each year, and ``once it's in the financial channels of international commerce, it's like looking for a needle in millions of haystacks,'' said Mr. Harmon, the commission's director, at a conference here last week. Infinite ways to wash money

``The ways to launder money are only limited by the imagination of the launderer,'' Harmon says.

The big challenge for launderers is pure bulk -- how to get tons of cash out of the country for payoffs, and how to get the rest back in as profits. Drug dealers pull in wads of 10- and 20-dollar bills from street sales. As this cash works its way up the chain of brokers and wholesalers, it is literally carried about in boxes, suitcases, bags, and small trucks.

When Operation Greenback first started snooping around Florida, recalls Mr. Walsh, investigators discovered people unabashedly approaching teller windows with bags stuffed with cash. They would exchange the cash for larger bills or cashier's checks, or deposit it in phony accounts. Bank officials either did not comply with reporting rules because the rules hadn't been enforced or were bribed by organized crime.

But as the investigation tightened its grip, the wash techniques got more creative. Private planes flew cash to the Caribbean. Couriers with phony names would collect cashier's checks, hand them to the proper party, and be out of the country before the Feds could trace the fake names. A private currency exchange was set up between Miami and Colombia, circumventing the bank system. Crime figures would have runners hit 20 bank branches a day, with $9,000 deposits (only $10,000 and over has to be reported to the IRS). The banks were then instructed to wire the total overseas, usually to a bank in a ``bank secret'' country (such as Switzerland or Panama), which does not have to inform US officials of transactions.

``With a team, you could launder a million, without any problem, in a single day,'' says Richard Wassenaar, assistant commissioner for crime investigation at the IRS. Following the money trail

Launderers are not usually the same people who deliver narcotics. Now, traffickers hire expert lawyers and financial consultants to do the work for them.

The Treasury is the chief watchdog of mass money movements in the United States. Since the Florida crackdown, launderers have fanned out from the Sunshine State to other ports. The Treasury tries to keep its eye on this movement by watching the amount of money built up in regional offices of the Federal Reserve Bank (the bankers' bank) compared with the amount of cash transaction reports (CTRs) banks have filed with the IRS. If the Fed bank has much more cash on hand than local banks have been reporting to the IRS, the folks at Treasury start to suspect that all is not being told.

This is exactly what a 1982 Treasury investigation turned up in Massachusetts. The discovery prompted the investigation of the state's banks by the Justice Department's Organized Crime Strike Force in Boston. Since the strike force took over, it has detected two other Massachusetts banks, besides the First National Bank of Boston, that failed to file these reports.

The principal tool to stop the money-wash cycle is the Bank Secrecy Act. Included in the 15-year-old act, under Title 31, is this CTR rule that all cash transactions, domestic or foreign and over $10,000, made through financial institutions be reported on forms to the IRS. Financial institutions (this definition includes brokerages, and can even be an individual) must also file with the Customs Service for cash transported overseas.

As it turns out, though, few institutions adhered to the act, because the government enforced it ``in only isolated cases,'' says J. Michael Nolan Jr., a lawyer with the Morristown, N.J., firm of Pitney, Hardin, Kipp & Szuch, which represents major banks and large corporations. But in 1980 the act was revised, and since then, ``the federal officials, the IRS, and the Department of Justice have begun to enforce it,'' he says.

The proof of this seems to be at the IRS. According to Mr. Wassenaar, the IRS has launched about 700 criminal investigations, but over half of them have been in the last two years. (Wassenaar, however, maintains the IRS has been enforcing the law for 12 years.) To date, the IRS has obtained about 300 indictments and about 180 convictions -- again, with more than half occurring since 1983. On the other hand, the compliance rate of filing the CTRs has also risen dramatically, Wassenaar says. In 1979, the total number of CTRs filed was 121,000. Five years later the number was 535,000. More updating of the law

When the presidential commission filed its report last fall, it laid into the Bank Secrecy Act. To begin with, getting information from the IRS (which sends its data to a central computer at the Treasury), the Treasury, or Customs takes too long.

Says one Justice Department official, ``To me, it's sheer madness for Treasury to say that Justice has to jump through these hoops to get those forms [CTRs, etc].'' Meanwhile, other agencies that could provide essential information, can't work with Treasury because they don't have jurisdiction.

Another problem with the act is its exemption list. Financial institutions do not have to report domestic bank-to-bank transactions or transactions from customers whose normal business involves extensive use of cash, i.e., supermarkets, retail stores, race tracks, etc.

Of course, ``anybody can open up a restaurant to get on the exempt list,'' says Walsh, and that is what front companies are all about. With a front company, sending cash overseas simply becomes a matter of wiring it from its US bank account to a foreign bank.

The Criminal Code of 1984 answers some complaints, but not all. It has changed violations of the act from misdemeanors to felonies. It has also changed the definition of a financial institution to include casinos (which make effective front companies because they handle so much cash). And it has allowed easier access to information. Where to go from here

The various governmental task forces are getting ready to expand their efforts. The IRS, at least, is talking tougher. For one, it is going to start another data bank to include foreign transactions. Wassenaar also says the IRS has started investigating bank exemption lists, looking for front companies.

Bankers, meanwhile, are educating themselves on laundering security measures -- setting up checks and balances and teaching their employees to ``know their customer'' and report suspicious behavior to bank intelligence officers.

Squeezing the finance end is an effective way to cut the Mob's lifeline, but the presidential commission puts greater emphasis on education. US Attorney William Weld in Boston could not agree more: ``We have been squeezing only one end of the balloon. We have been attacking the drug problem on the supply side only and it's very clear that the government should be devoting many more resources to drug prevention and education.'' Drawings: How money can be laundered 1. Drug sales on the street, collected in small bills (usually 20s). 2. The cash works its way up through brokers to a front company owned by organized crime. 3.The front company is exempt from reporting its cash transactions to IRS. (These are cash-generating businesses such as race tracks, bars,restaurants, groceries, etc.) 4.Cash is deposited in the front company's US bank account. 5.The US bank wires dollars to a Panama bank at the request of the front company. Or...a cashier's check is carried by courier overseas. 6.Panama, a ``bank secret'' country, does not have to share transaction information with the US. This bank wires money to Frank's International in the Bahamas. Or,... check is cashed and converted to pesos..as payoff to growers....for smugglers....as a deposit for the next drug shipment 7.Frank's International, Bahamas, (also a ``bank secret'' country), makes a loan to its parent, the front company. These loans are tax free.