Editor’s Note: We are deeply saddened by the passing of Michael McDonald (February 12, 1948 - October 20, 2016), former ACAMS advisory board member and an AML pioneer. Mike had a distinguished career with the IRS and helped found ACAMS. He truly lived the ACAMS mission of private-public partnership. We would like to share the last interview ACAMS Today was privileged to conduct with Mike.
Michael R. McDonald is a 27-year veteran of the Internal Revenue Service, Criminal Investigation Division. He retired in 1998 and formed a Miami-based consulting firm specializing in international money laundering, Bank Secrecy Act (BSA), USA Patriot Act, asset forfeiture, compliance and related matters. The firm is a network of retired special agents, each with in-depth experience in money laundering investigations. During his tenure with the IRS Criminal Investigation Division, McDonald held several field agent and managerial positions and directed investigative resources in many high profile money laundering task forces. He was the lead manager in the development of the first money laundering task force, Operation Greenback. He was the first IRS coordinator to the Florida/Caribbean Organized Crime Drug Enforcement Task Force and the South Florida High Intensity Drug Trafficking Area Task Force (HIDTA). He became widely known as one of the government's premier experts on money laundering and the BSA.
ACAMS Today: In your career with the IRS you investigated many high profiled cases, which one did you find the most interesting?
Michael R. McDonald: There were several, actually. The first one was a tax evasion investigation involving the construction industry and government corruption of Federal Housing Administration (FHA) officials to get lucrative FHA subsidies. Another was the extensive Miami Strike Force tax evasion investigation of principals with the International Longshoremen's Association that led to a nine-month multi-defendant trial. But honestly, the most interesting and most rewarding was the construction and success of Operation Greenback to attack the financial infrastructure of the Colombian drug cartels operating in Miami. Within Greenback, there were too many high profile cases to single out just one.
AT: What sorts of things still surprise you in the anti-money laundering, counter-terrorist and anti-financial crime fields?
MM: It surprises me that professionals segregate these three terms so much. There are differences of course in the disciplines necessary to work on terrorist financing matters compared to other financial crime, but both fall under the overall anti-money laundering (AML) header. You cannot have terrorist financing without crossing into AML and you cannot have financial crime without crossing into AML.
Terrorist financing is the most challenging of all financial crime/AML issues. It is one of those things that you may not identify until after the fact. This is why you need AML professionals with broad experience and willing to think outside the box when it comes to unusual international financial activity.
Many things change yet stay the same. By that I mean I see a "reinventing of the wheel" on many occasions. For example, there have been a number of articles lately on a "revolutionary new technique" in financial investigations. That technique is to get the criminals to disclose how they laundered their money, hide their assets and identify the financial professionals who were supporting them. This is not new. This is the foundation of criminal investigations and certainly one we used quite successfully in the Operation Greenback days 35 years ago. This is something every federal agent, with every agency, is trained to do from day one.
More people at more levels take these matters seriously. The general public has at least a fundamental knowledge of the terms "money laundering" and "terrorist financing." They may not know many details, but there is an awareness that conducting financial activity to promote criminal acts—all kinds of criminal acts not just drug trafficking—is money laundering.
Finally, banks and bankers still write fat checks paid for by the bank stockholders, sign DPAs and nobody goes to jail for extraordinary financial criminal activity while the little guys do go to jail.
AT: What was the historical context that led to the development of Operation Greenback?
MM: In the mid-1970s, Miami was exploding with the onset of the famous "Miami Vice" era. At this time, the drug of choice in college campuses in the U.S. was marijuana from Mexico. So, what did the U.S. do? They made an agreement with Mexico to spray paraquat on the Mexican marijuana fields. Paraquat is a weed killer and it did a good job at killing out the plants in Mexico; however, all these smart college kids said, "I don't want to smoke grass from Mexico. It might have paraquat on it and I might get cancer and die."
At this time there was a steady influx of Cubans into Miami. Most were hard-working fishermen fishing in the Bahama banks. In an attempt to protect their resources, the Bahamas closed the Bahama Banks to commercial fishing from outside of the Bahamas, which meant that all of these fishermen from Key West to Miami could no longer commercially fish in Bahamian waters. This placed the fishermen in a bit of an economic stress. So, up came a bunch of guys from Colombia and they said "Do we have a deal for you." They had a product, but did not have a way of delivering it, so overnight, Miami became the import capital of the U.S for marijuana from Colombia. Jamaicans tried to get in there, but they could not break in through the Spanish barrier; thus, Colombians cornered the market and that's how we got the term "square grouper." The guys would go out fishing and they would come back with square grouper, which meant bails of marijuana. That's how it all started.
At this time I was group supervisor of the Miami Strike Force group, which focused on traditional organized crime: the mafia, corruption with Dade County politics, etc. No one was really looking at the drug money yet. Overnight, the marijuana industry exploded in South Florida and cocaine surfaced as the drug of choice. The smuggling routes and the processing was in place, so the Colombians began to ship cocaine on the same route as marijuana. Cocaine did not replace marijuana completely but heavily, because it had a much higher profit margin. Back then cocaine was going for $52,000 dollars a kilo.
In the late-70s, machine guns, violence, drugs and money took over in South Florida because there was a battle between the Colombians and the Cubans over control of distribution. In 1979, the Deputy Assistant Secretary (Enforcement) of Treasury called a meeting in Washington D.C. to brainstorm on how Treasury could help in South Florida. The IRS wanted us to start working tax cases on these targets. However, tax evasion would not work because the targets were foreign nationals who did not file U.S. tax returns. So, we turned to the never-been-used-before Bank Secrecy Act (BSA). After all, the BSA is designed to trace extraordinary cash activity.
The result was a cash flow study that shocked everyone. Of the entire Federal Reserve System, 99 percent of the cash surplus in the U.S. was coming in from banks in South Florida. This was billions of dollars! I think there were 12,000 currency transaction reports (CTRs) filed nationwide. We identified 12 individuals who were depositing between $250 and $500 million in cash per year into bank accounts in Miami with no CTRs being filed. That was the foundation for Operation Greenback.
In December 1979, Operation Greenback was launched in Miami. The plan was to use the BSA as our primary weapon. IRS (CI) and U.S. Customs were the only two agencies that agreed to join. The Department of Justice Narcotics and Dangerous Drugs Section provided the prosecution resources.
By mid-1980 we made our first seizure of more than $1.2 million in cash. It made headlines. Two weeks later we seized another $1.7 million. People started taking notice and this is how we used the BSA.
Cocaine did not replace marijuana completely but heavily, because it had a much higher profit margin
In 1983, Miami was still exploding dramatically. If we had a foreign national with a large amount of cash, we simply asked: "Where did he get it from?" If he said he brought it in from Colombia it was easy to prove he did not file a CMIR reporting it. So he was subject to arrest, prosecution and forfeiture of the money. If he changed his mind and said he earned it here, we would set up what is called a Termination Tax Assessment and take the cash as an estimated tax payment on his income tax liability. If he said he was collecting it from one party and delivering it to another, we said he was a financial institution (currency exchange or money transmission), did not file a CTR so he was subject to arrest, prosecution and forfeiture of the cash. This is what we called "the rock and the hard place" theory. And it worked.
Soon DEA and the FBI joined and the U.S. Attorney's Office in Miami added experienced prosecutors. Greenback became the model for the Organized Crime Drug Enforcement Task Force (OCDETF) program that was launched in 1982.
If you are bored, you are not doing your job right
It was a Greenback investigation that led to the "smurf" and "smurfing" terminology as money launderers sought new ways to get cash into the banks once the banks started asking "who are you and whose money is this" to file CTRs for transactions of more than $10,000.
AT: Can you discuss your role in that development?
MM: In 1979, I was the group supervisor of the Miami Strike Force group. I attended that meeting in Washington called by Treasury. When the results of the cash flow study were in, I was reassigned to build an investigative strategy using that data. I was the first special agent from IRS (CI) at what later became known as Operation Greenback. I worked closely with Bill "Blue" Logan from U.S. Customs on developing this strategy. Both of us were given the latitude to hand pick the agents to be in Greenback. Naturally, we picked the best available. I was assigned as the group manager of the first Operation Greenback Group. Operation Greenback became operational in January 1980.
During the next few years we seized and forfeited literally hundreds of millions of dollars in drug cash and assets. We prosecuted money launderers, bankers and financial professionals.
I sat with some of the premier money launderers for the Colombian cartels who explicitly explained how the parallel market in foreign exchange developed in Colombia, how it was used to facilitate trade and later moved into facilitating drug money for the cartels. The term "BMPE" evolved as a result of these meetings. This was all pre-1986. There was no "money laundering law" in the U.S and there was no Financial Crimes Enforcement Network (FinCEN).
We developed several undercover operation techniques directed at the money launderers and they proved to be highly successfully.
In 1983, I testified before a Congressional Committee about Operation Greenback, money laundering, the enforcement tools we had and others we needed. Those and future hearings ultimately led to the Money Laundering Control Act of 1986 making money laundering a stand-alone crime.
AT: How have money laundering task forces changed since then?
MM: First of all, money laundering has elevated from a sophistication standpoint even though drug money still starts as cash, lots and lots of cash. The traffickers must still get that cash into the system somehow, somewhere. Gone are the days where someone can bring $1 million in $20 bills into a bank and make a deposit. Gone are the days where someone can bring $500,000 into a money services business (MSB) and have it sent to another country.
Task forces today have instant access to BSA data, especially suspicious activity reports (SARs). This provides leads and investigative opportunities that we did not have in the early days. Remember, there were no SARs in the early Greenback era.
I believe the agents, including the state and local law enforcement resources assigned to these task forces, have heightened skills in tracing and investigating financial activity.
Task forces have also expanded to non-drug financial crimes including the investigations of banks, securities dealers, corruption, human trafficking and the many frauds from Ponzi schemes to health care and mortgage fraud. This is why we have HIFCA locations. Previously all the other task forces were focused exclusively on drug money (i.e., OCDETF and HIDTA).
The technical advancement of the money laundering task forces should put all banks on notice to keep their compliance and AML staff well trained and sufficiently funded.
AT: How can AML professionals avoid complacency?
MM: I don't think complacency exists in the law enforcement community. For the AML professionals in the financial world, all they need to do is Google and Yahoo alerts, FinCEN alerts and check the Department of Justice website weekly for what is going on in the AML world. If you are bored, you are not doing your job right.
The AML professionals should be up-to-date on the emerging trends in money movement to be able to recognize the risk associated with all new products and to be able to understand that unusual does not always mean illegal or wrong. We saw this when prepaid access surfaced, now with virtual currencies and the ability to move value instantly around the world without involving a bank.
AT: How can AML professionals be more proactive and less reactive to a changing AML landscape?
MM: In Greenback we used to sit around over coffee, lots and lots of coffee, and brainstorm on how we would do it (launder the drug money) if we were the bad guys. We would then find out they were already doing that. Then we would figure out the best way to attack that method, and do it.
We used to sit around over coffee, lots and lots of coffee, and brainstorm on how we would do it (launder the drug money) if we were the bad guys
I think every AML professional should be imaginative and look for the unusual. Answer the question "does this make sense?" Dig into beneficial ownership of accounts, corporations and transactions.
The investigative philosophy should be to (A) identify the source of the funds, then (B) identify the ultimate beneficiary. The rest, all that stuff in the middle, is just there to muddy the waters.
AT: What is the secret to longevity in the financial crime prevention industry?
MM: There is no trick here. Financial crime will be here forever. It is not going away and you cannot eliminate it. For $X of gain and X% of risk, there will always be people and organizations willing to take the shot. Increase the risk of getting caught, and you reduce the field of those who will do the crime, but you will never, ever eliminate it.
AT: What do you predict will be the most significant change in how financial crimes are investigated in the future?
MM: I was involved in a think tank in 2000 of intelligence and former law enforcement professionals. Our task was to identify ways to effectively move money for illicit purposes. We came up with some pretty interesting scenarios.
One of the best scenarios that we came up with was: I could operate my business on a yacht in international waters using satellite navigation systems. Why? Because where is the venue? How will the FBI tap into a satellite communication? The venue is where the crime is committed. This crime is committed on extraterritorial waters using satellite communication, so where is it taking place? Now, if the transaction involves dollars and goes through a U.S. bank we have a foot in the door. But what if it doesn't?
So, these technology advances are exploding on us. For instance, eBay has been used to move value for years. I could put a watch for sale on eBay and a co-conspirator of mine in London can buy it for $10,000 using PayPal. Now remember, there is no real watch. This is a sham transaction and he has effectively moved $10,000 in value from London to my account in Miami in dollars. This is a sham transaction, but it is designed to move value. You can't stop these things because they are ahead of the curve and they define the curve. But what we need to do is be knowledgeable enough to pick off these crimes of opportunity.
PayPal now maintains good records. You can go to PayPal and you can get the records of all transactions involving a particular individual and you can build your case off of that. When something bad happens, records are there as a benefit to law enforcement and regulators. That's the value of it. So, law enforcement is going to have to identify the targets first and then they can circle back around and figure out how the money got moved. And if institutions are doing the right thing, law enforcement can then capture that data and use it to pursue or prosecute an individual.
Financial institutions can assist law enforcement by doing what they are supposed to do diligently. If it does not look right or if it does not smell right, follow up on it. Don't just ignore it. If you have wire transfers involving foreign accounts that don't make sense, follow up on it and document it in your file. Don't necessarily close them out because there are a lot of things that don't make sense until you ask the right questions and then they make sense.
The technology world will change everything. Virtual currency is here to stay. It has a legitimate place in the global arena. Professionals need to learn and understand how each works and how to trace transactions. Regulatory coverage is a must.
Mobile transactions, prepaid access and the ability to move funds from one jurisdiction to another in an instant create huge barriers for law enforcement who must proceed along established procedures to trace funds.
AT: Any additional advice you would like to share with the ACAMS membership?
MM: Keep current. Also, we should embrace all licensed and regulated financial institutions with sound compliance and AML programs. If we drive any of them out of business the financial activity they support will go underground and the financial intelligence available to law enforcement will be lost.
