Thousands of documents have been subpoenaed from California banks in a broad federal investigation into the use of electronic transfers of money by drug dealers and tax evaders.
The investigation is part of a nationwide effort by the Internal Revenue Service to trace funds transferred between U.S. banks and financial institutions in five places with strict bank secrecy laws.
The five are Hong Kong, Panama, the Bahamas, the Cayman Islands and the Netherlands Antilles. All five are well-known tax havens where laws protect against disclosure of information regarding bank accounts.
The examination of electronic transfers, which has not been disclosed previously, represents a new tactic by the IRS and Department of Justice to penetrate the multibillion-dollar money-laundering operations of drug kingpins and the elaborate methods used by tax-shelter operators and tax evaders to conceal transactions.
IRS officials in the San Francisco district office, which is conducting the California portion of the investigation, said numerous criminal and civil investigations are under way as a result of records obtained from the banks. They refused to identify any of the targets.
Easy to Conceal Deposits
The subpoenaed records reflect electronic transfers of funds between banks on behalf of customers. The transactions are called wire transfers, and the IRS has dubbed its nationwide investigation the “Wire Transfer Project.”
Alexander D. Seddio, an IRS criminal investigations agent in San Francisco, said the investigation is aimed at identifying patterns of money transfers by people evading taxes through illegal tax shelters and other mechanisms and by drug dealers.
Federal law requires banks to notify the government of transactions of $10,000 or more in cash.
But people trying to conceal transactions can easily make a series of smaller deposits, consolidate the money in one account and wire it to an offshore bank.
Wire transfers also serve another illicit function. Any amount of cash can be deposited in an offshore bank and wired to a U.S. bank, evading the $10,000 U.S. reporting requirement and making the money appear to be legitimate.
In testimony before a Senate panel last February, a convicted money smuggler described using a maze of foreign corporations and offshore banks to launder billions of dollars in drug profits, which was then invested in U.S. real estate, securities and bank deposits.
Obtaining wire-transfer records enables the IRS to construct a pattern of such transactions and begin to build cases against tax evaders and drug dealers.
B of A Subpoenaed
“This gives us a picture from the other side, where the money is going,” Seddio said. “We can identify patterns of deposits where it would otherwise not be reported to us.”
Seddio and Larry Wright, an IRS spokesman, said the project constitutes a major investigation for the San Francisco office and has been under way for several months. They said other IRS jurisdictions are conducting similar inquiries but declined to identify them.
California is a primary focus of the investigation partly because federal investigators believe some drug dealers have moved their money laundering here from southern Florida in recent months.
Among the banks whose records have been subpoenaed are the Bank of America, the state’s largest bank and the nation’s third biggest, and the former Barclays Bank of California. IRS officials said records also have been obtained from other California banks, which they declined to identify.
The outline of the investigation was revealed in a subpoena issued this summer to Bank of America by the U.S. Attorney’s office in San Francisco. The document, which was obtained by The Times, requested copies of all wire transfers to and from the five offshore locations for 1986 and 1987.
A spokesman at B of A’s San Francisco headquarters declined to comment on the subpoena or the volume of records requested. However, an executive at another bank said the B of A subpoena would cover thousands of transactions.
“Bank of America is considered particularly vulnerable to money laundering because the large number of its branches offers anonymity to launderers,” said the subpoena.
B of A has nearly 900 branches. A large number of branches allows people to make deposits to a single account under the $10,000 reporting level from several locations and avoid arousing the suspicion of bank employees, a government investigator explained.
Alleged Violations at Barclays
The banks are not targets of the investigation, but the subpoena pointed out that B of A paid a $4.75-million fine in 1986 because 17,000 cash deposits and transfers in excess of $10,000 were not reported to the government. There is no law covering wire transfers, although legislation pending in Congress would create a similar reporting standard.
A subpoena also was issued for the smaller Barclays Bank of California, now part of Wells Fargo. The IRS obtained Barclays’ records of 1,200 transfers. The subpoena said “numerous” records from Barclays showed violations of IRS laws by taxpayers.
Barclays was acquired recently by San Francisco-based Wells Fargo, where a spokeswoman said the bank does not comment on subpoenas.
In the past three years, the amount of cash flowing into California has increased dramatically, according to records from the Federal Reserve Bank of San Francisco. The resulting cash surplus reflects what investigators believe is the growth of money laundering in the state, according to Seddio.
In 1985, the Federal Reserve’s Los Angeles office took in $165.8 million more than it shipped to banks in Southern California, Arizona and part of Nevada. Last year, the surplus was $2.5 billion.
Offshore Banks Favored
The biggest surplus in the Federal Reserve system remains in Miami, regarded by law enforcement officials as the nation’s money-laundering capital. The 1987 cash surplus there was $5.2 billion, down from $5.9 billion in 1985.
Along with being favored by drug dealers, offshore banks are used frequently by operators of fraudulent tax shelters and other tax evaders to conceal the nature of transactions and avoid paying taxes, according to Wright, the IRS spokesman.
These people often use a check written to an account in a bank-secrecy haven to justify an income tax deduction. Local laws prohibit the U.S. government from learning who owns the account to which the check was written or where the money went from there.
U.S. bank records on wire transfers to and from such offshore locations can provide the IRS with critical information about the financial dealings of people whose activities are otherwise hidden by foreign laws.