Criminal Enforcement Round Up: October Yields a Trio of High-Profile Money Laundering Charges With International Focus

Ballard Spahr LLP

Ballard Spahr LLP

DOJ Charges a U.S. Billionaire, an Alleged International Drug Conspiracy Using Chinese Bank Accounts and a Guatemalan Casino, and a Former Top Mexican Official in the “War on Drugs”

The term “October Surprise” garnered new meaning this year among money laundering enthusiasts with the announcement of three major indictments. All three announcements came on October 15 – at the midpoint of a month of news cycles otherwise dominated by the upcoming United States presidential election. Although these three indictments are all very different from one another in many ways, they all share a core element: the cross-border transfer of allegedly dirty money.

“Largest Ever U.S. Criminal Tax Charge” Bring Money Laundering Charges as Well

The Department of Justice (“DOJ”) unsealed a 39-count indictment returned by a federal grand jury in San Francisco, California, charging billionaire Robert T. Brockman, the Chief Executive Officer of Ohio-based software company Reynolds & Reynolds, with conspiring to defraud the United States, tax evasion, wire fraud, money laundering, failing to file Reports of Foreign Bank and Financial Accounts (“FBARs”), evidence tampering and destruction of evidence. The charges involve an alleged scheme to conceal approximately $2 billion in income from the Internal Revenue Service (“IRS”), which law enforcement officials have said is the largest ever tax charge in the United States. The wire fraud charges do not attempt to “bootstrap” the false tax returns at the heart of the tax evasion scheme into a wire fraud scheme, but rather rest on an alleged scheme to defraud investors in the software company’s debt securities. Still, Brockman’s indictment is yet another example of the potentially powerful overlap of money laundering and tax fraud charges, both of which often implicate the issue of beneficial ownership and the use of shell companies.The indictment describes an elaborate web of cross-border transactions and efforts to conceal. Brockman allegedly directed untaxed capital gains income to undisclosed bank accounts in Bermuda and Switzerland. The indictment further alleges Brockman attempted to conceal his schemes by backdating records and using encrypted communications and code words to communicate with a co-conspirator. Reflecting a staple of both money laundering and tax fraud schemes, he allegedly used nominees to hide his dominion and control over foreign companies and trusts used to further his schemes. In other words, Brockman allegedly hid his beneficial ownership of the offshore entities he used to launder funds, evade taxes, and perpetuate the underlying fraud schemes. The government’s press release pointedly insists that that such “[c]omplexity will not hide crime from law enforcement . . . . Sophistication is not a defense to federal criminal charges. We will not hesitate to prosecute the smartest guys in the room.”

Brockman’s alleged decades-long scheme has no shortage of media-friendly allegations, including lavish spending on vacation homes and yachts. Brockman had a creative flare when it came to naming his many assets: the “Mountain Queen” vacation home, “Frying Pan Canyon Ranch,” and Albula, a yacht aptly named after a river in Switzerland. This creativity extended to Brockman’s approach to managing his offshore accounts. He gave himself the email code “Permit” or “Permit1” and referred to nominees he appointed to manage his offshore structure by names such as “King,” “Bonefish,” and “Snapper.” He also often referred to the IRS as “the house.”

There are three money laundering charges in the indictment: Count Thirty-Five charges “concealment” money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i); Count Thirty-Six charges the rarely-used provision of “tax evasion” money laundering in violation of 18 U.S.C. § 1956(a)(1)(A)(ii); and Count Thirty-Seven charges “international” concealment money laundering in violation of 18 U.S.C. § 1956(a)(2)(B)(i), based on cross-border transfers of funds. The charged wire fraud scheme and an uncharged bank fraud scheme serve as the specified unlawful activities, or SUAs, providing the source of the dirty proceeds that were laundered. The “tax evasion” money laundering count – again, a rarely used prong of the federal money laundering statute – charges that Brockman conducted financial transactions through U.S. and foreign banks which hid his dominion and control over his offshore entities, in order to cheat the IRS out of capital gains taxes.

Drugs, Chinese Currency, Casinos, Crypto, Bribery and a Government Undercover Operation

Another recent DOJ press release announced the unsealing of a superseding indictment charging six individuals with conspiring to launder millions of dollars of drug proceeds on behalf of foreign cartels. The superseding indictment alleges that six defendants, most of whom were born in China and resided primarily outside of the United States, “participated in a years’ long conspiracy to use casinos, front companies, foreign and domestic bank accounts, and bulk cash smuggling to launder money on behalf of drug trafficking organizations.” The superseding indictment specifically charges the defendants with conspiracy to import cocaine into the United States; conspiring to distribute cocaine; conspiring to launder the proceeds of those drug offenses; attempted identity fraud; and bribery of a public official.

The superseding indictment describes how the defendants’ alleged money laundering scheme capitalized on (1) the demand for U.S. Dollars and merchandise in China and (2) the demand for Chinese currency, known as yuan or remnbi (RMB), among Latin American merchants who want to purchase Chinese goods to sell for profit. As part of the alleged complex scheme, drug dealers in the United States took drug profits and either transmitted them to banks in China or used the funds to purchase U.S. goods and ship them to China for resale. The superseding indictment describes how funds were allegedly transmitted to banks in China to finance the purchase of Chinese goods, which were then shipped to Latin American merchants who would sell them for profit through purported legitimate businesses. The government refers to these transfers of funds from “dealers” to “launderers” as “mirror transfers.” The individuals who allegedly arranged these “mirror transfers” were compensated with “commissions” based on the amount of money they were able to exchange in this fashion.

Like the U.S. billionaire Brockman, defendant Xizhi Li also allegedly utilized multiple aliases in connection with the alleged money laundering scheme. He used the alias “Francisco Ley Tan” to obtain bank accounts in Miami, Florida and to purchase a casino in Guatemala City, Guatemala, and used alias screennames on WeChat, a Chinese multi-purpose messaging, social media, and mobile payment application.   Li, operating the casino with the assistance of defendant Jianxing Chen, used the casino along with his co-conspirators to meet with other drug traffickers.

According to the superseding indictment, in order to carry out the “mirror transfer” process, defendants and their co-conspirators traveled to various locations across the United States to collect the profits from drug sales, in addition to transporting cocaine across the country. Upon arrival at locations where the drug proceeds were stored, they presented verification codes, typically including serial numbers from the U.S. or foreign currency, and then the currency would be released to a drug trafficker or representative of a drug trafficking organization to whom the money was owned.

Further, and according to the government’s press release, defendant “Tao Liu planned to bribe a U.S. Department of State official using wire transfers and cryptocurrency to create U.S. passports that he and his associates would use to enter the United States and engage in additional crimes, including money laundering. In fact, this State Department official was an undercover law enforcement agent, and these allegations stem from a seven-month undercover investigation.” Liu’s payments of cryptocurrency went into an account controlled by the U.S. Drug Enforcement Administration.

Former Top Mexican Official Tasked with Waging the “War on Drugs” is Charged with Conspiracy to Distribute and Launder the Proceeds of Those Same Drugs

The final shocking October revelation (in the money laundering context) is that General Salvador Cienfuegos Zepeda, who served as Defense Minister of Mexico from 2012 to 2018, was arrested on October 15, upon arrival at the Los Angeles International Airport. A grand jury sitting in the Eastern District of New York had returned a sealed indictment charging Cienfuegos, who allegedly went by the aliases “El Padrino” and “Zepeda” with drug trafficking and money laundering crimes on August 14, 2019. The indictment does not provide much detail, and the charges basically recite the elements of the offenses. The indictment specifically charges General Zepeda with conspiracy to import into the United States heroin, cocaine, methamphetamine, and marijuana; conspiracy to distribute those same drugs; and conspiring to launder the proceeds of those drug offenses by committing financial transactions involving Mexican and U.S. currency intended to conceal and promote the drug offenses, including through transfers of drug proceeds from the U.S. to Mexico. There are also forfeiture claims.

Although the charging document is very spare, the fact that General Cienfuegos was indicted and arrested is anything but simple. He is the highest ranking Mexican official to be arrested in connection with drug-related corruption. As reported in the New York Times:

The damage to Mexico is hard to overstate. General Cienfuegos’s arrest comes only 10 months after another top Mexican official — who once led the Mexican equivalent of the F.B.I. — was indicted in New York on charges of taking bribes while in office to protect the Sinaloa drug cartel, one of Mexico’s most powerful criminal mafias.

That official, Genaro García Luna, served as the head of Mexico’s Federal Investigation Agency from 2001 to 2005, and for the next six years was Mexico’s secretary of public security, a cabinet-level position. In that role, he had the task of helping the president at the time, Felipe Calderón, create his strategy to battle their country’s drug cartels.

            . . . .

If the men are ultimately convicted, it means that two of the highest ranking and most widely respected commanders ever to oversee the war on drugs in Mexico were corrupted by organized crime — in the service of the very cartels that continue to kill record numbers of Mexicans.

Written by:

Ballard Spahr LLP

Ballard Spahr LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.