Border Town’s Bustle Linked to Drug Traffic : DEA Estimates $200 Million a Year Is Being Laundered in San Ysidro, Called ‘Little Miami’

The main street of this small San Diego community, which abuts the world’s busiest border crossing, bustles like a miniature Wall Street.

Dozens of financial institutions--including a handful of banks and almost 50 currency exchanges, some open 24 hours a day--handle about $5 million daily, much of it in small bills and most of it from across the border.

“Wall Street West” is the nickname given by local businessmen to a busy two-mile commercial stretch of San Ysidro Boulevard.

Federal drug agents have a different name for the area, however. They call it “Little Miami,” and they estimate that 10% of San Ysidro’s financial activity, about $200 million a year, is generated by international drug dealers who--forced from their Florida base--are laundering their profits in California’s financial networks.

The Miami area was the chief clearinghouse for drug money in the United States for several years. A massive federal crackdown there, however, has diverted as much as $15 billion of the $90-billion nationwide illicit drug industry to California, according to investigators and banking industry officials.

Evidence of Laundering

Suspiciously large amounts of money are turning up in the Federal Reserve banks in Los Angeles and San Francisco, federal agents say, evidence that launderers have shifted their operations to California.

Money laundering is a crucial step in narcotics trafficking. Without a series of financial institutions to move his money through, exchanging it and disguising its source, the big drug dealer is, in effect, stuck with millions in small bills.

Federal agents say traffickers have been using a few banks, including Crocker National Bank, one of the nation’s largest, and some of the currency exchanges to channel their drug money into accounts in the United States.

Crocker was fined $2.25 million in August by the Treasury Department, the first major California bank to be penalized for violating the Bank Secrecy Act, a federal law used to ferret out drug dealers by tracking the movements of large amounts of cash.

The fine stemmed from Crocker’s failure to report almost 7,900 cash transactions of more than $10,000, as required by the secrecy act.

Bank of America, the world’s largest commercial bank, has spent much of this year in negotiations with the Treasury Department over its own Bank Secrecy Act violations, but no conclusions have yet been reached, said a spokesman for the San Francisco-based bank.

Now, an investigation by The Times has disclosed that:

- A federal grand jury in San Diego has been investigating money laundering in San Ysidro. Internal documents from Crocker and several other banks and financial institutions with San Diego-area offices have been subpoenaed, according to sources familiar with the investigation.

- Foreign residents suspected by U.S. Customs Service and Drug Enforcement Administration agents of being drug dealers were put by Crocker’s San Ysidro branch on a list of preferred bank customers, such as big retailers, who were exempt from federal rules on reporting large cash transactions, investigators said.

If Crocker knew the individuals were foreigners or drug traffickers, placing them on the exempt list would have been a violation of the Bank Secrecy Act.

At least one of these suspected dealers was sent to prison on a tax-evasion charge after a plea bargain on several drug-trafficking charges.

- Crocker also kept eight San Ysidro currency exchanges on its exempt list--another violation of the Bank Secrecy Act--until last March, just before the bank began negotiations with Treasury officials over the amount of its fine, according to the bank’s attorney.

“It shouldn’t have been,” Crocker General Counsel Harold P. Reichwald said of the bank’s listing of the exchanges. “It clearly shouldn’t have been.”

Exchanges Charged

The bank’s exempt-list violations take on greater importance in light of investigations by federal agents into information that some of San Ysidro’s exchanges are either controlled by drug organizations or are cooperating with drug dealers engaging in money laundering.

A Customs Service raid in 1983 resulted in a dozen of the exchanges being charged with misdemeanor penalties for violating the Bank Secrecy Act’s disclosure requirements. In a second sweep of the exchanges last February, five felony penalties were handed out by a federal judge, again for non-disclosure of cash transactions of more than $10,000.

No exchange has been charged with a felony connected with drug trafficking.

Reichwald said the bank’s decentralized management system caused the exempt-list problems, adding that there was “a lack of understanding” of the federal reporting regulations at the regional level, where the lists were approved.

However, U.S. Customs official Allan Rappoport, who heads the San Diego district, is skeptical.

“There’s no question in my mind that the banks” knew what was in the act, he said. “Either (bank executives) had to have other priorities, or they knew what the drug dealers were doing. It’s hard to believe total naivete.”

Crocker’s management structure was revamped in November, 1984, Reichwald said, and exempt lists now must be approved by the home office in San Francisco.

Three Remain on List

The San Ysidro branch exempt list was trimmed to just three retail businesses in a recent housecleaning, he said, adding that the branch now has just one currency exchange customer and that it is not exempt from federal disclosure requirements.

- Crocker’s San Ysidro branch was under federal surveillance as a possible conduit for drug money as long as five years ago, and bank officials were warned that drug dealers might try to launder money in the branch. From time to time, stakeouts observed couriers for suspected drug dealers depositing cash at the bank, sources said.

John B. M. Place, Crocker’s top officer between 1981 and 1984, the years when many of the currency reporting violations occurred, was reached by telephone at his San Francisco home for comment on whether the bank’s headquarters office was aware of any problems related to the Bank Secrecy Act. Place hung up after a Times reporter identified himself. He subsequently refused to answer questions contained in a registered letter.

The bank’s current chief executive, Frank V. Cahouet, will not comment on the case, according to a bank spokesman. All queries were referred to Reichwald, who said the bank had conducted its own “very thorough-going (internal) examination.”

“We think that we established clearly that there was no specific intent to violate any of the (federal) reporting requirements. . . . I have no evidence that any Crocker employee knew of any wrongdoing.”

The growth of San Ysidro as a center for laundering of drug money began in 1980, when the effects of two unrelated events combined to make the community attractive to international narcotics traffickers.

The first event was an unprecedented federal task force maneuver, code-named Operation Greenback, that cracked down on drug money laundering in Florida, causing drug rings in Mexico and South America to shift their operations to the West Coast.

Greenback agents documented that $2.7 billion had been laundered through Florida financial institutions by seven drug rings. Attorneys, accountants, money brokers, bankers and banks were identified as part of the laundering network. The ongoing Greenback probe has produced 323 indictments and 122 convictions, with about 90 cases pending trial.

The crackdown was initiated after Treasury agents discovered that suspiciously large cash surpluses were being shipped by Florida financial institutions to Federal Reserve banks. Much of the cash was in small bills, and investigators concluded that the money was generated by narcotics traffic.

Now, there are similar telltale signs in California, agents say.

Large cash surpluses have been recorded at the Federal Reserve centers in Los Angeles and San Francisco, which investigators say is evidence that Greenback has caused a shift in laundering operations.

“We see a dramatic rise in the cash surplus” at the Federal Reserve centers, said Gary W. Schons, a member of a special organized crime unit in the state Department of Justice. “Intelligence is telling us it (drug money) is coming here because the heat was on in Florida.”

Western Task Force

A federal task force patterned after the one that crippled money laundering in Miami, consisting primarily of Customs Service and IRS agents with help from the federal drug agency, is working along the San Ysidro border.

Schons explained the appeal of San Ysidro (pop. 13,179), a blue-collar, heavily Latino community across the border from Tijuana (pop. 1 million), as a money laundering center: Latin American drug dealers “blend with the (Latino) community,” he said. “There is branch banking (giving the drug dealers options on where to move their funds). And (California) is the biggest drug consumption marketplace in the world. So why not wholesale here and do all of your business in one place?”

The second event that helped make San Ysidro a magnet for drug profits was the economic crisis that wracked Mexico three years ago. The Mexican government’s subsequent devaluation of the peso triggered a flood of pesos into San Ysidro as Mexicans sought to protect their savings by converting them into dollars.

In the financial chaos, more than 100 currency exchanges sprang up in San Ysidro to exploit the panic in Mexico; at the same time they provided drug dealers with the conduits and camouflage to launder their money, according to federal investigators.

In a typical money laundering deal starting in Mexico, a drug dealer would deposit pesos in a Mexico City bank account and have the cash wired to the Tijuana bank account of a San Ysidro currency exchange. The exchange would have the pesos physically carried across the border by a courier to its San Ysidro office, where they would be exchanged for dollars.

Dollars Go to Bank

The dollars would then be carried to a San Ysidro bank, where they would be deposited by the exchange into its own account. From there the drug dealer can have the money wired anywhere in the United States for investment in legitimate businesses or wired into a foreign account for more laundering.

The number of exchanges has declined recently, but there is still incredible financial activity in San Ysidro, given the small size of the community. This has led to closer government and bank industry scrutiny of the sources for the torrent of cash and how it is being moved through financial institutions.

A bank security official who has studied the relationships between the exchanges and the banks in San Ysidro said he believes that one or two of the exchanges are “wholly owned by drug families.”

However, Schons said, drug agents cannot move in because “there’s no law making money laundering a crime.” So, he added, if a drug courier drops off less than $10,000 cash--the disclosure limit of the Bank Secrecy Act--at a currency exchange, it would be very difficult to make an arrest on the spot.

Legislation pending both in Congress and in Sacramento would change this situation, he said.

Legitimate Business

Federal law enforcement officials and local business people estimate that about $5 million a day changes hands in banks and currency exchanges in San Ysidro.

Most of the financial activity is legitimate. One factor is the continuing capital flight from Mexico. Mexican businessmen also use San Ysidro financial outlets in the normal course of their business. Every day, thousands of tourists from both sides of the border use the money exchanges to trade dollars for pesos and vice versa, and thousands of Tijuana residents enter the United States to bank and to shop.

Crocker’s San Ysidro branch is well positioned to capture a big chunk of this business. It is the first bank one encounters when crossing the border and it has traditionally been Crocker’s major financial link to Mexico.

The branch is one of the bank’s top offices in terms of individual deposits, according to present and former Crocker executives.

Even in the 1970s, recalled Ricardo Delacruz, 71, the branch’s now-retired longtime manager, “we had more deposits than any other Crocker branch with the exception of (the main office in) San Francisco. We were a big source of funds for the (Crocker) system.”

Such deposit activity, said another former Crocker executive who requested anonymity, was important to the bank because the millions of pesos being deposited and converted into dollar accounts in San Ysidro were sent north, where the money could be loaned at profitable interest rates by other Crocker branches.

Few Use Credit Cards

An additional problem for law enforcement is that Mexicans generally eschew credit cards for cash, enabling narcotics traffickers, who also deal in cash, usually in small bills, to blend into the community.

“Cash, it’s a (Mexican) way of life,” said Bertha A. Gonzalez, a local businesswoman and publisher of Ahora (Now), San Ysidro’s weekly newspaper. “The drug dealers know how we do business in this area.”

San Ysidro’s development as a money laundering center did not surprise investigators--or bankers--federal sources said.

“It’s what we expected,” said Customs Service official Rappoport, who heads the district that includes San Ysidro. “It’s happening and it’ll happen more.”

Soon after Operation Greenback began in 1980, San Ysidro’s financial community, specifically Crocker, was warned that the pressure would divert drug money to the West Coast, the sources said.

A federal investigator said he had lunch with Crocker’s San Ysidro branch manager, Raul Sandoval, in early 1981, and urged more cooperation with government efforts to catch drug money launderers. “We never heard from (the manager) again,” the agent said.

About the same time, the San Ysidro branch was placed under surveillance, according to interviews with federal investigators, because of reports that couriers employed by money launderers were using the bank.

Two types of federal surveillance were used in 1981, according to investigators. One method was to keep track of what was being reported by Crocker on currency transaction reports to the IRS. Another was through stakeouts tracking couriers who were delivering large sums of cash to the San Ysidro branch and who were suspected of being employed by individuals or organizations trying to launder money, federal investigators said.

Disagreement Over Letter

Then, in a letter to Sandoval on June 8, 1981, the U.S. Treasury’s enforcement section wrote that the San Ysidro branch’s exempt list “does not meet” Bank Secrecy Act requirements, according to correspondence obtained through a federal Freedom of Information Act request.

Sandoval, now a branch manager for the Grossmont Bank in nearby National City, said he did not recall having lunch with a federal agent in 1981 or receiving a warning letter from Treasury.

In any case, he said, “there was never any question” that under his administration, the branch obeyed all federal regulations.

By the end of 1981, however, government sources said, the name of a suspected drug dealer had been found among the more than two dozen customers on the exempt list of the San Ysidro branch.

The suspected drug trafficker, according to federal investigators who have examined Crocker’s records, was Juan Jesus Flores-Lara, a Mexican resident alien who lived in the affluent San Diego County community of La Jolla.

In 1981, Flores-Lara was indicted by a federal grand jury on seven counts, six of which were charges that he ran a marijuana smuggling operation in the late 1970s. The next year, he pleaded guilty on the seventh count, an income tax evasion charge, and the drug counts were dropped as part of a plea bargain. He was sentenced to three years in prison.

Incredulous Agent

“How did an individual like that get on Crocker’s exempt list?” asked an incredulous federal agent. “He didn’t even have a DBA (a legal business name).”

Sandoval, who ran the Crocker branch in San Ysidro between 1979 and 1982, said he did not remember Flores-Lara’s name on any exempt list.

The current Crocker manager in San Ysidro, Albert Gonzales, hired by the bank in 1983 as Sandoval’s replacement, declined to be interviewed.

Crocker counsel Reichwald, responding to a request from The Times, said he checked the San Ysidro branch’s exempt lists back to 1982 and did not see Flores-Lara’s name on them. Reichwald said the lists for 1981 and earlier years--when federal sources said they spotted his name--were not available and probably had been destroyed.

Since 1981, according to interviews with government and Crocker sources, the same branch has had a history of violating the Bank Secrecy Act by placing the names of Mexican nationals and foreign companies on its exempt list.

Under the act, as amended in 1980, foreign citizens and foreign-based companies cannot be exempted from reporting rules unless the company has a U.S. subsidiary.

Several of the foreigners on the Crocker exempt list, going back to 1980 and until the bank cleaned house early this year, were suspected international drug dealers, said federal investigators who have had access to the list in the past and who requested anonymity because of the sensitivity of their positions. They declined to provide specific names or the number of suspected names that they have turned up.

10% May Be Linked

Reichwald said he had no specific knowledge of drug dealers using the San Ysidro branch. All he knew, he said, was that “there were names on the (exempt) list that should not have been.”

Even today, after the Crocker fine and the bank’s efforts to more closely monitor cash transactions, federal investigators said, as much as 10% of the San Ysidro deposits of Crocker and other financial institutions may be linked to the drug trade.

Some of this cash is camouflaged through a maze of financial channels, often even before it reaches San Ysidro. That is not always the case, though. Sometimes, thousands of dollars in cash stuffed into shopping bags is carried into a bank and deposited or converted into other currencies at the exchanges. Unless Bank Secrecy Act disclosure forms are filled out, the transactions cannot be traced by the IRS.

“We know that there are vast sums (of money) coming across the border which are drug-related,” said Kenneth Ingleby, U.S. Customs Service chief investigator for the San Diego region, which includes the Mexican border.

“Some of that money is finding its way into numerous banks. And a portion of that is going into (the San Ysidro branch of) Crocker. . . . Drug traffickers have opened accounts at that branch.”

Reichwald admitted: “We’re used and abused” by drug dealers.

‘A Difficult Road’

Banks are caught between their obligations to help law enforcement, he said, and their legal obligation to ensure customer privacy. “It’s a difficult road to walk very often,” Reichwald said.

Compounding problems for bankers and investigators is the fact that many of San Ysidro’s financial managers learned their trade in Mexico in an atmosphere of bank secrecy, not unlike Switzerland’s, in which customer identities and activities are kept strictly confidential.

Furthermore, Mexico has no laws like the disclosure rules of the Bank Secrecy Act, and Mexican bank officials do not ask what they see as unnecessary questions about their customers.

This attitude was illustrated dramatically by Guadalupe M. (Cha Cha) Alcantar, former branch manager of the Bank of Coronado’s San Ysidro branch. She was indicted last April on 42 counts of filing false currency transaction reports or failing to file such reports in a $20 million money laundering scheme.

Alcantar, according to government affidavits, allowed Mexican nationals who opened as many as 18 accounts at the Bank of Coronado to use her Chula Vista home address on bank records. U.S. Customs Agent Steven J. Trent also detailed in court documents several money laundering deals between Alcantar and residents on both sides of the border.

‘Not a Church’

Last February, according to a government affidavit, when informed by the bank’s security manager that she should have told the FBI about a suspicious new account, Alcantar snapped, “This is a bank, not a church.”

Federal investigators sharply disagree with this view and believe that bank officials should be more open with them in reporting suspicious transactions. Their admonition also applies to savings and loan associations, brokerage houses and currency exchanges, which also come under the jurisdiction of the Bank Secrecy Act, they said.

In short, they said, the act is a major lever to control drug traffic.

“Where large sums of money change hands, there you will find the soft underbelly of organized crime, and that is what the Bank Secrecy Act enables us to attack,” U.S. Customs Service Commissioner William von Raab told Congress two years ago.

The heart of the act is a requirement that currency transaction reports be filed with the IRS for any deposit or withdrawal of more than $10,000. The reports require disclosure of an individual’s address, Social Security number and business. The information is stored in an IRS computer.

‘Didn’t Add Up’

A government analysis of Crocker transaction reports in the 1980-81 time period, for example, showed that the San Ysidro branch had filed only a handful of them with the IRS, even though it had shipped millions of dollars in surplus deposits to Federal Reserve banks in California, a federal source said.

“It just didn’t add up,” the source said.

As a result, the Treasury Department stepped up its investigation of Crocker, resulting in last August’s fine.

This year has seen federal prosecutors mount a massive push to enforce the Bank Secrecy Act nationwide.

The 1985 crackdown, which has produced a number of federal civil penalties but no criminal charges, began with the Bank of Boston last February. In New York, Chase Manhattan Bank, Chemical Bank, Manufacturers Hanover Trust Co. and Irving Trust Co. were also fined for violations.

Then came the Crocker fine for almost 7,900 violations between 1980 and 1985 involving almost $4 billion, most of the cash generated by transactions with six Hong Kong banks. Violations by the San Ysidro branch totaled $24 million. Almost half of the violations were exempt list abuses.

Although the crackdown along the Mexican border and elsewhere continues, financial executives and federal agents familiar with the San Ysidro situation suggested that it remains difficult to screen out drug money.

Said former Crocker San Ysidro manager Delacruz: “All (San Ysidro) banks have been exposed to this and have had (drug) customers unknownst to them. It’s a real high speed, high-pressure business.”

HOW MONEY LAUNDERING WORKS

Money laundering moves profits from drug trafficking through a maze of financial channels to disguise the source. Money is moved several times before emerging in safe bank accounts in New York, Los Angeles of Zurich, from which it can be invested in normal business channels. Here is how a typical money laundering deal, started in Mexico, might work:

1. A drug dealer deposits pesos in a Mexico city bank account. 2. The cash is wired to the Tijuana bank account of a San Ysidro currency exchange. 3. The exchange has the pesos physically delivered across the border by courier to its San Ysidro office. 4. Here the pesos are exchanged for dollars. 5. The dollars are carried to a San Ysidro bank and deposited by the exchange into its own account. 6. From there, the dollars and be wired anywhere in the United States and then invested.