A Fake Bank For Money Laundering Run By The Government : Planet Money To catch drug traffickers, the U.S. government tried something it had never tried before. It set up and ran a fake offshore bank for money laundering. Fake name. Fake employees. Real drug money.

A Fake Bank For Money Laundering Run By The Government

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SARAH GONZALEZ, HOST:

Hey everyone. It's Sarah Gonzalez here. I have been going to the trial of Joaquin El Chapo Guzman, infamous drug cartel leader just found guilty of all charges against him - international cocaine distribution, using firearms and laundering all of his drug proceeds, which is the one that we're really interested in. It reminded us of this classic episode that we're going to play for you today about the time the United States tried to stop drug traffickers with a pretty sneaky plan that involved a decoy bank. Now, in the El Chapo trial, we learned about all of the elaborate ways that he moved his drug money around. The U.S. government claims that over his career, he earned $14 billion.

So we're talking tons and tons of heavy money that takes up a lot of space. El Chapo apparently flew a bunch of his drug money out of the United States on his super-stealth private jets that are coated in some material that literally allows them to fly under the radar. And then Chapo would hide all of his drug money in these huge, underground bank-size vaults - because this is not the kind of cash that you can deposit in a regular bank without people asking where it came from. So they had to launder it. They would, like, fill a bunch of prepaid debit cards with as much money as they could. It made it easier to transport. But apparently, El Chapo didn't like this method because it took a really long time to withdraw a million dollars.

Now, the United States has its own tricks, and that's what today's episode is about. Here is David Kestenbaum and Chana Joffe-Walt with a story that originally ran in 2012.

(SOUNDBITE OF ARCHIVED BROADCAST)

DAVID KESTENBAUM, HOST:

Sometime in the early '90s, a man walked into the U.S. Embassy in Ecuador. He said he had information someone would want to hear, information on how to go after some of the most powerful drug traffickers in the world. And this guy said he was willing to help.

CHANA JOFFE-WALT, HOST:

And what happened next was that two special agents in Atlanta got a phone call. Skip Latson with the DEA, the Drug Enforcement Administration, and Bill Bruton with the IRS, heard about this guy and thought, we've got to meet him.

SKIP LATSON: The initial meeting was in Ecuador.

BILL BRUTON: Quito.

LATSON: Quito, Ecuador. Did you go on that trip?

BRUTON: No.

LATSON: Yeah.

BRUTON: You didn't take me.

LATSON: Yeah.

KESTENBAUM: Did you have a code name for this guy, or anything?

LATSON: Yeah. Yeah. He was - it was a code name.

KESTENBAUM: What was his code name?

LATSON: Dan.

JOFFE-WALT: (Laughter). That is the least-creative code name I've ever heard.

LATSON: It is.

JOFFE-WALT: Dan the informant worked as a currency exchanger. He was the guy you went to if you had pesos and you wanted dollars, or vice versa. And Dan told Skip and Bill he was getting a lot of requests from drug traffickers, drug traffickers with a problem. A problem Bill and Skip had never fully appreciated.

LATSON: They were having a very difficult time with just the logistics of laundering millions and millions and millions of dollars every week.

KESTENBAUM: Every week?

LATSON: Well, yes.

KESTENBAUM: Imagine the situation - that drug traffickers are smuggling all this cocaine into the United States. The cocaine gets sold on the street, but there's this problem. People buying cocaine aren't paying with credit cards. They're paying in small bills - 10s, fives and ones. So the drug traffickers have hundreds of thousands or millions of dollars in physical cash. And it just weighs a lot. Bill, the IRS agent, remembers raiding a drug trafficker's house and finding a huge amount of cash.

BRUTON: And I think it was in, like, seven or eight suitcases, and it took 10 of us to carry it, it was so heavy.

JOFFE-WALT: That's so funny. I never thought about that, that just that the actual money would be - that's a unique problem.

BRUTON: It's unique to the illegal industry. The weight of the money is huge. It's absolutely astronomical.

JOFFE-WALT: This was a huge problem for drug traffickers, a problem the traffickers needed solved. They needed someone to take all that heavy cash and turn it into a check, or a wire transfer, something that doesn't weigh 800 pounds.

KESTENBAUM: Basically, the Colombian drug traffickers, they needed a bank. Here's Bill again.

BRUTON: A couple weeks later, Skip and I were sitting down, now in Atlanta. And we're saying, well, let's open up a bank.

KESTENBAUM: Had you ever opened up a bank before?

BRUTON: No. This was the first one.

KESTENBAUM: I mean, you'd never - you didn't have any history. You didn't have - you never worked for a bank, or anything.

BRUTON: No. I never worked for a bank, and my entire career was with, you know, the criminal division of IRS.

JOFFE-WALT: It was sort of like a, if only somebody could do this crazy thing, and then you guys are sitting here later thinking like... what.

BRUTON: Like, maybe we can.

LATSON: Maybe we can.

JOFFE-WALT: (Laughter).

(SOUNDBITE OF MUSIC)

KESTENBAUM: Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.

JOFFE-WALT: And I'm Chana Joffe-Walt. Today's show, Operation Dinero. Two secret government agents go offshore, create a fake bank and launder money for some of the largest and most dangerous drug kingpins around.

(SOUNDBITE OF MUSIC)

KESTENBAUM: We came across Bill and Skip and Operation Dinero because a while back, we here at PLANET MONEY got into the offshore financial world ourselves. We created an offshore company in Belize to try to get an inside look at this whole secret world. And when we were doing that, we discovered that back in the 1990s, the U.S. government had done exactly the same thing. Except the government went way, way further than we did.

JOFFE-WALT: We chose Belize. Bill and Skip, the two government agents wanting to open this fake bank, they chose Anguilla, an island in the Caribbean. And that is where they imagined their future customers were already banking.

BRUTON: Those areas, those offshore accounts, are where people launder money. So it just made sense to offer an offshore bank.

JOFFE-WALT: Operation Dinero wasn't the first project Bill and Skip had worked on together. They had been working together for decades. These two guys are in each other's brains. They know exactly what the other likes for lunch every day. And the day that we met them, they were wearing matching outfits, both in polos and pleated khakis. And for years, Bill and Skip have been chasing the same guys, guys like Pablo Escobar, notorious drug kingpin in Colombia, a man so dangerous, there are many movies all about just how bad this guy was.

(SOUNDBITE OF DOCUMENTARY, "KILLING PABLO")

MIKE BOETTCHER: Assassination...

UNIDENTIFIED PERSON: (Yelling unintelligibly).

BOETTCHER: ...A billion-dollar drug empire, one of the most wanted outlaws of the 20th century.

KENNY MAGEE: Pablo Escobar, in my opinion, is the largest, biggest criminal the world has ever seen or will ever see.

KESTENBAUM: Skip, the special agent with the DEA, thought about Pablo Escobar a lot. He remembers seeing this article in Forbes magazine. Forbes does this list of the richest people in the world, and Pablo Escobar was on it. This criminal was a billionaire, exactly the kind of guy who needs banking services.

JOFFE-WALT: Bill and Skip thought, we should be the ones providing those banking services. We'll see where all the money goes. We'll see how the whole operation works. And so Operation Dinero was a go, and Bill and Skip needed a name for their fake bank to service drug traffickers. And they thought about it, and they thought, well, it should definitely have the word trust in the name. And also, we should use initials. A lot of bank names seem to have initials. So they chose RHM, which, apparently, stands for absolutely nothing, and RHM Trust Bank was born.

BRUTON: And that was the first time that any government agency worldwide had established a bank, the sole purpose of which was to track drug traffickers' money.

JOFFE-WALT: I would imagine that doesn't happen all the time.

BRUTON: And I don't know if it's ever happened since.

LATSON: I dug out some old photos. We had a party at our office when RHM Trust Bank was finally approved.

JOFFE-WALT: You guys are - is that champagne that you have there?

LATSON: No. It's in a federal facility. That's apple juice.

(LAUGHTER)

JOFFE-WALT: Sparkling.

LATSON: Yeah. (Laughter).

KESTENBAUM: Bill and Skip did everything you have to do for a bank before it opens. They printed up brochures, they made some official-looking IDs and fake business cards. But their bank was very different from every other bank, in that their plan was to turn away almost all potential customers. They didn't set up branch offices. There were no ATMs, no smiling bank tellers. Just one office in Atlanta with a telephone and a fax number.

LATSON: We didn't want to deal with anybody else's money except the drug traffickers'.

KESTENBAUM: You didn't want ordinary people coming in and saying, I'd like to open a checking account. And you're like, we're not a real bank.

LATSON: Exactly.

KESTENBAUM: Bill and Skip were in business. And the way it would work is that the drug traffickers would have this cash that needed to be deposited so they'd fax RHM Trust an account number, and they'd send them a beeper number. Yes - faxes, beepers. Remember, this was the '90s.

LATSON: So then whoever's going to pick the money up calls the beeper. The guy calls him back and says, meet me at XYZ street corner at 10:00 tomorrow morning. And what kind of car are you going to be in? Well, I'm going to be in a blue Chevy.

BRUTON: Supposed to give them a code word, being something very simple. This is - I have a package for Amanda. Then they would call, meet and a package would be exchanged - usually suitcases or packages - from trunk to trunk, in a public place.

KESTENBAUM: It's amazing how this is just like every cop show I've ever seen, except that, usually, the government isn't helping the bad guys launder drug money.

JOFFE-WALT: What would happen next is Bill and Skip's guys would take the cash to a local bank, deposit it into an account owned by RHM Trust Bank and then wire the money to wherever the drug traffickers wanted it sent to. And it all worked. The drug people were very happy with RHM Trust Bank. Bill and Skip were getting closer.

KESTENBAUM: They were learning all this stuff about the money-laundering world. There they are, wandering around this dark place, and they start bumping into all these other people who exist in the dark. Like, for instance, turns out they were not the only ones offering financial services to drug dealers. It was a busy place with established rates for doing this kind of thing.

BRUTON: We were competing against other money pickups. So if Skip says, I'm going to charge you 9 percent, well, then you come to me, well, I'm going to charge you 8.5 percent. And you go back to Skip and says, I got somebody 8.5 percent, he say, OK. I'll charge you 8 percent.

KESTENBAUM: You were in a competitive marketplace.

BRUTON: A very competitive market. And we had to make sure we were not so cheap as to be suspicious, but not so high that we wouldn't get customers.

JOFFE-WALT: Word spread, and soon more and more orders were coming in. Which, for Bill and Skip, meant more information.

BRUTON: One of the tricks that I always laughed at, when Skip wanted to find out who the true owner of the money was, he would delay by 24 hours in sending the money.

LATSON: And then we'd get telephone calls and find out that person comes out of the woodwork when it looks like that the money may be in jeopardy. We picked up more information by being a bad bank who didn't handle money quickly and effectively.

KESTENBAUM: That's high net-worth individuals who you were...

BRUTON: High net-worth individuals, yes, in risky adventures.

JOFFE-WALT: Bill and Skip were winning. They had tricked the drug dealers. They'd gained their trust. They had them right where they wanted them. But at the same time, Bill and Skip were becoming more and more aware that they weren't fully understanding the money laundering scheme that they were taking part in. Like, there were constantly things that didn't really make sense. They'd pick up money off the street, and then they'd be told to wire it, not to Colombia, where the drug traffickers were, but to some legitimate American business that was selling, like, tractor parts, or something. It was all very confusing.

BRUTON: There were a lot of smart people involved on that end of it. Ex-bankers, money brokers that had been doing this for generations. And it was, to me, a complicated system.

KESTENBAUM: What Bill and Skip were uncovering is now called the Black Market Peso Exchange system. It was a series of cleverly disguised money transfers to convert the drug money that was stuck in the United States into pesos back in Colombia. It works by hiding the money in the normal flow of trade - in payments for things like tractor parts.

JOFFE-WALT: So Bill and Skip were nearly there. They were inside this complicated marketplace and close to figuring it all out - until, at one moment, they came extremely close to being discovered, not by the drug traffickers but by their own people, by U.S. bank regulators.

So I have to say, David, we don't spend a lot of time on the show talking about how bank regulators are doing a great job. But in this situation, they did exactly what you want bank regulators to do. Regulators at the Office of the Comptroller of the Currency - this is a U.S. regulatory agency that regulates banks - they showed up with some questions about this RHM Trust Bank.

BRUTON: The head of security called me up and said, come on over here. The OCC is here, and they're auditing your account; you better get over here right now. And so I walked over there, talked to the auditor, talked to the...

KESTENBAUM: And what did you tell them (laughter)?

BRUTON: I told him that he had uncovered a covert government operation...

KESTENBAUM: Congratulations (laughter).

BRUTON: ...And please don't tell anybody. And he said he's stopping the audit right then and there. And I - by the time I got back to my car, I got a call from the OCC supervisors saying they were in the process of shredding their notes and everything else they copied but they had already notified the OCC in Washington. And Washington, the next morning, was going to send a fax out to every OCC bank in the world - or in the United States notifying them that RHM Trust Bank was not a bank to do transactions with.

KESTENBAUM: But what happened, then? So they were going to send out this fax.

BRUTON: We stopped the fax. We got there in time. They stopped the facts. And...

KESTENBAUM: Man, your cover was almost blown there.

BRUTON: Almost. Within 24 hours, we would have been in trouble. We would've been stopped.

JOFFE-WALT: RHM Trust Bank existed for a little less than a year, and the drug guys never figured it out. In the end, the thing that killed the bank, it was success.

LATSON: We got to be a little too popular. We were being approached - our informant was being approached for other offers to do illegal things, and that wasn't our target.

KESTENBAUM: They were asking to do stuff. And you were like, we don't know how to do that.

BRUTON: No, no. We were authorized to do A and B, and they're asking us to do C and D. Why can't you do C and D?

KESTENBAUM: And so the correct answer to that question is - we can't because we're actually undercover agents, and we only got approval to do certain kinds of transactions with you. So we can't give you a loan or whatever else you want.

LATSON: That's what we said to each other.

BRUTON: It just got to - starting to be - get a little bit out of hand.

KESTENBAUM: So the decision was made to shut the bank down. And by this point, it had uncovered a drug network that extended to lots of different countries. And the Italian government, in particular, was eager to start making arrests. So Bill and Skip scrambled to coordinate a massive simultaneous bust.

GONZALEZ: After the break, the big bust.

(SOUNDBITE OF MUSIC)

KESTENBAUM: Just like in the movies, you want to pounce on everyone all at once so one guy can't warn his friends and say, hey, the cops just showed up; hide. And so at a specific time, it began; 116 people connected to RHM Trust Bank in four different countries were arrested. Bill saw a video of what happened in Italy.

BRUTON: They showed the police precinct. And there were, like, 20, 30 of these little, teeny international police cars. And all of them scream out of the compound at one time, and they go in all different directions like ants. And they showed, X hours later, them bringing all these fugitives or arrested people back in. But it was quite harrowing.

JOFFE-WALT: What did it feel like to watch that?

BRUTON: I was exhausted. I was exhausted. It was finally over with.

KESTENBAUM: Officials seized nine tons of cocaine and more than $90 million in cash and property. But of the over 100 people arrested, billionaire Pablo Escobar was not in that group. He remained out there. In fact, Skip and Bill did not bring down any of the ringleaders. They say what they did do was make the drug guys wonder about who they could trust. Usually, the secrecy of the offshore world, that is a problem for the government - for guys like Bill and Skip - because it hides all the illegal activity. But this time, it hid them from the bad guys, and it hurt the drug traffickers.

LATSON: I know one thing. They can't trust a bank now. As a result of what happened here, they can't - they have to be careful and think twice if they go to a bank to trust them to handle their financial transactions. It could be another government bank.

KESTENBAUM: Do you guys feel like you're winning the money laundering battle? Or is it just a matter of setting them back for years and they find some other way to do it?

BRUTON: I think we were winning 20 years ago, and I think we're winning today because a win doesn't necessarily mean you stop it. You change their methodology for doing it. And I think that was one of the greatest successes of the bank, that we were able to get them off of a very sophisticated process into bulk shipments.

KESTENBAUM: Bulk shipments - taking all that heavy money and physically sneaking it across the border - to do that, you don't need an offshore bank. You just need a truck.

(SOUNDBITE OF MUSIC)

GONZALEZ: This show originally aired in 2012. And if you want to see that picture of Bill and Skip celebrating their fake bank with sparkling apple cider, you can check out our website npr.org/money. And let us know what you think. You can send us an email - planetmoney@npr.org. And you can find us on Facebook and Twitter and Instagram. We are @planetmoney. I'm Sarah Gonzalez. Thanks for listening.

(SOUNDBITE OF MUSIC)

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