Using Banking to Tackle Colombia’s Cocaine Problem

June 9th, 2014

Late last month, during peace negotiations in Cuba, Colombia’s Marxist-Leninist rebel army organization, the Revolutionary Armed Forces of Colombia (also known as FARC) signed an agreement with the Colombia government to jointly combat illicit drugs. This is a relatively surprising accord, since many analysts believe FARC receives significant funding from this very trade. Estimates place FARC’s proceeds from the cocaine trade in Colombia around $500 to $600 million annually, mainly through a “tax” FARC places on coca farmers and their coordination of the cocaine smuggling networks.

Under the agreement last month, however, FARC agreed that it would completely divorce itself from the trade. This could represent a step forward for the Colombian government in controlling this illicit industry. In fact, Colombia, along with Peru and Bolivia, dominates the world’s supply of cocaine. In 2009, these three countries together cultivated an estimated 158,800 hectares of coca bush and produced about 1,000 metric tons of cocaine.

This agreement also came about a month after Colombia executed a different strategy for controlling the drug trade: a drug bust. In fact, it was Colombia’s largest drug bust in about a decade and in it officials seized about seven tons of cocaine headed to a Dutch port.

The bust is emblematic of the increasing pressure the world has placed on tracking and seizing illicit drugs before they reach their destinations for consumption. However seizures are unlikely to be an effective way to tackle the world’s drug problem.  One recent paper, for example, found that there is no evidence of a relationship between the amount of cocaine seized by law enforcement officials and the drugs price and demand.

In fact, one of the solutions to the drug problem is not in the coca fields or the streets of urban cities, but rather within the walls of major Western banks.

Take the Norte del Valle Cartel, the organization that eventually lost a two-decade long struggle against the DEA, FBI, and the Colombian government. The Cartel exported millions of pounds of cocaine to the United States and with its huge profits has bought safety for its members. It accomplished all of this with the aid of HSBC, a British bank, on American soil. We know this because at the end of 2012, the U.S. Department of Justice reported that HSBC “willfully failed” to apply money laundering controls to at least $881 million in drug trafficking proceeds, including those from the Norte del Valle Cartel.

In fact, according to a recent analysis by Alejandro Gaviria and Daniel Mejia, less than three percent of the profits from the nation’s cocaine production actually remain in Colombia. The rest of the profits go to criminal syndicates, laundered through Western banks. Of his study’s findings, Gaviria notes: “[H]uge profits are made by criminal distribution networks in consuming countries, and recycled by banks which operate with nothing like the restrictions that Colombia’s own banking system is subject to.”

When authorities caught HSBC red-handed laundering drug proceeds in 2012, no one went to jail. Nor did anyone go to jail in 2011 when the U.S. Drug Enforcement Agency discovered that criminals from Mexico laundered over one hundred million dollars through one of the largest banks in the United States: Wachovia. Jeffrey Sloman, the federal prosecutor on the case noted that “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.” For this crime, the bank paid a fine that totaled less than 2% of its profit in 2009.

Political pressures, massive drug seizures, and the continual domestic effort that Colombia exerts to control the supply of cocaine may together curtail some of the drug trade. These efforts, however, are not sufficient. In fact, the most effective way to root out the scour of cocaine production must include expansions, more stringent oversight, and more intense enforcement of our existing banking regulations. Controlling the flows of money is the best way—maybe the only way—to truly tackle this problem.

Written by Ann Hollingshead

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