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U.S. tightens scrutiny of fashion district for money laundering

U.S. tightens scrutiny of fashion district for money laundering
Clothes are on display in the fashion district, where a high volume of wholesale trade with Mexico has been used to convert drug profits into merchandise that can be exported to Mexico and sold for pesos. (Bob Chamberlin / Los Angeles Times)

As the first few customers trickled into downtown Los Angeles' fashion district, two stern-looking men in suits carrying leather portfolios strolled into John Hong's wholesale store, which sells women's skinny jeans. The men, who were federal agents, handed the surprised-looking store owner an order with a U.S. Treasury seal.

Hong's was one of 2,000 fashion district businesses that were warned Thursday that they face heightened scrutiny by federal authorities who are investigating money laundering by Mexican drug cartels.

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The move by the U.S. Treasury Department marks one of the largest such actions ever undertaken by federal authorities and is the latest attempt to clamp down on the financial pipeline for the multibillion-dollar drug trade, federal officials said.

Los Angeles, authorities say, has become the epicenter for laundering narcotics proceeds, and some businesses in the fashion district, with its high volume of wholesale trade with Mexico, have been used to convert drug profits into merchandise that can be exported to Mexico and sold for pesos.

"When we go in and do something of this magnitude in an industry where the cartels are so heavily invested, it stops their business. The question is for how long," said Jere Miles, deputy special agent in charge of Immigration and Customs Enforcement in Los Angeles.

The latest move follows raids involving more than 1,000 agents who swarmed the district last month to conduct search-and-seizure warrants on storefronts, warehouses and homes.

But fashion district representatives decried the latest effort, calling the federal tactic a blunt instrument that would hurt numerous honest businesses, many of which are small, family-run operations. The wide-reaching order, affecting at least half of the district's 4,000 businesses, may give customers the impression that the area is rife with criminal activity, they said.

"This covers the lion's share of our district," said Kent Smith, executive director of the LA Fashion District Business Improvement District. "It casts a wider pall on the district than the raids did."

The orders, known as geographic targeting orders, affect a wide range of businesses, including garment and textile stores, transportation companies, travel agencies, perfume stores, electronic stores, beauty supply stores and other stores with "import" or "export" in their names. It covers about a square-mile area stretching from 8th Street to 16th Street, and from about Santee Street to Central Avenue.

Under the orders, targeted businesses must file detailed reports on cash transactions exceeding $3,000, drastically lower than the normal $10,000 threshold.

The orders take effect Oct. 9 and last for 180 days. Most of the orders were sent via express mail, but about 60 were hand-delivered Thursday morning by federal agents. Authorities said the stores received in-person visits for a reason, but would not elaborate.

In issuing the orders, which the Treasury Department has the authority to do at its own discretion, the U.S. government is seeking to deter businesses from receiving cartel money and to gather information for potential prosecutions, Treasury officials said.

Federal investigators have used the strategy over the last few decades to target drug profits sent from New York and Miami to Colombia, the Dominican Republican and Puerto Rico.

Treasury officials contend that similarly tough reporting rules imposed in 1996 on New York City businesses that help people send money overseas reduced the flow of drug proceeds to Colombia by about 30%. Bulk cash seizures at ports bound for South America dramatically increased, illustrating that the cartels were forced to resort to alternative routes, according to the Treasury Department.

In August, officials announced a targeting order for armored car services and other cash couriers operating near the U.S.-Mexico border.

Drug trade experts said the crackdown would put the cartels on notice that federal investigators were scrutinizing the fashion district but would amount to only a small speed bump for the estimated $19 billion to $29 billion in drug profits sent annually from the U.S. to Mexico.

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David Shirk, a University of San Diego professor who has researched drug violence in Mexico, said the cartels would quickly shift their money-laundering operations to a different industry or another city.

"This is a very agile industry," Shirk said.

Miles, of ICE, said the orders may seem like a burden to the district but honest businesses will benefit. Because traffickers are willing to lose money on trade deals simply to move drug proceeds to Mexico, legitimate businesses face unfair competition from those willing to work with the cartels, he said.

"Our only goal is to try to keep the bad money out of the garment district," he said.

The orders drew mixed reactions in the fashion district Thursday.

At Jean 9, a wood-paneled denim wholesale store, the owner said she was unconcerned by the new federal requirements.

"Just follow the rules," she said, chuckling.

Hong, owner of jeans wholesaler Nine Planet, said the new reporting requirements would inconvenience his customers at a time when business was already tough. It's not uncommon for customers to buy more than $3,000 of merchandise, which would amount to about 200 to 300 pairs of jeans, he said.

"I'm not happy about it," he said, but added that he understood it was necessary. "It protects me, it protects my business and my city."

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