‘Conceal the source’ is one type of money laundering
The cash turns up in some unlikely places.
During a December search, federal agents discovered $40,000 beneath a spare tire in a car trunk in Lexington. Another $160,000 was found inside the Dartmoor Drive address where the Kia was parked.
In November 2016, Kentucky State Police seized $575,000 from the cab of a tractor-trailer that was pulled over in a traffic stop in Scott County.
And in March 2017, investigators found $302,000 in an apartment on North Mount Tabor Road in Lexington.
All three seizures described in federal court records involved suspected drug-trafficking proceeds that led to charges of money laundering – taking “dirty” money generated by crime and then converting or “laundering” it so that it appears to come from a legitimate source.
Court records document how millions of dollars are collected in Lexington and surrounding communities and shipped out of state to accounts associated with drug cartels. A single money-laundering operation in Scott County collected at least $2 million in an eight-month period.
Lexington isn’t necessarily a hub for money laundering, but the top federal prosecutor for the eastern half of Kentucky said filing charges on money-laundering offenses is indispensable in fighting drug and white-collar crimes.
“We get a lot of bulk-cash smuggling because of the presence of Interstates 64 and 75,” a nexus in the movement of drugs between metro areas like Detroit and Atlanta, said Robert M. Duncan Jr., U.S. attorney for the Eastern District of Kentucky. “Money-laundering charges are tools that we can use effectively in a lot of our complex cases.”
Duncan’s office and the Drug Enforcement Administration in Louisville didn’t have numbers on money-laundering prosecutions. Dan Dodds, assistant special agent in charge of DEA’s Louisville Field Division, said money-laundering investigations in Kentucky and Lexington are “proportionate with other metropolitan areas of the country. DEA conducts numerous proactive investigations specifically targeting the laundering of drug proceeds.”
Money laundering takes two primary forms. Moving money with the intent to disguise the nature, location, source, ownership or control of the funds is known as “concealment,” said Sarah Welling, a University of Kentucky law professor who has written about money laundering.
“Maybe you’re running some of the cash through a legitimate cash business like a diamond store, or maybe you’re buying a house and you’re putting it in your girlfriend’s name, so that it looks like she bought the house legitimately. That’s concealment laundering,” Welling said.
An alternative method reinvests dirty money into criminal activities. That’s known as “promotion laundering.”
“Let’s say you’re a drug dealer and you have to buy houses on a waterway and speedboats and little airplanes,” Welling said. “That’s taking money that’s dirty, money you made dealing drugs, and reinvesting it in your dirty enterprise.”
Money-laundering charges benefit the overall prosecution of a criminal organization “because you get to see the full scope of their activity,” Duncan said.
For example, that tractor-trailer yielding $575,000 helped investigators uncover a wide-ranging money-laundering conspiracy. The truck driver admitted to police that he was a drug-money courier en route to southern Texas and told police he believed the money belonged to a Mexican cartel as payment for drugs.
That traffic stop led investigators to four Central Kentucky women who traveled to Tennessee and North Carolina to make cash deposits into multiple Bank of America and Wells Fargo accounts that funneled money to a cartel. Some of the money was wired to accounts in China, a major source of fentanyl distribution.
One woman was a waitress who made $200 a week, yet she was depositing $7,000 or more in a personal bank account.
Federal law requires American banks to report cash transactions of $10,000 or more to the government. So to skirt the law, money launderers will make multiple transactions just below the $10,000 threshold.
The women in that case and operatives elsewhere who scurry from bank to bank making these structured deposits are known as “smurfs” because, like the little blue cartoon characters, they’re everywhere. Smurfs serve a critical function in the money-laundering network, as Duncan explained.
“Cash takes up space and it’s heavy and you’ve got to have some way to transport it,” Duncan said. “Structuring deposits is one way you can try to conceal the source and the nature of the proceeds, but it’s also a way to cut down on having bulk cash.”
Two of the four “smurf” women — Arlenne Sosa, 23, and Laura Ortiz, 23 — pleaded guilty and were sentenced to three and four years in prison, respectively. Smirna Ortiz, 21, was convicted at trial and was sentenced to eight years in prison. The fourth woman, Brizeida Sosa, pleaded guilty and is scheduled to be sentenced in March. Ciro Macias Martinez, 32, who headed the local drug and money-laundering conspiracy, was sentenced in October to 31 years in prison.
By conducting financial transactions on behalf of criminal organizations, smurfs keep organization leaders removed from those transactions and shield the identities of those leaders. The network of a money-laundering organization often extends into several states.
For example, a Lexington woman was among 75 people indicted nationwide last year in a coast-to-coast drug operation that federal prosecutors called the biggest money-laundering investigation ever in San Diego.
Shontail Marie Hocker, 42, pleaded guilty to drug-related charges and was not formally accused of money laundering. But a DEA agent’s affidavit said Hocker was believed to be part of a network that laundered drug proceeds through the creation of limited liability corporations, bulk-cash smuggling and the structuring of cash deposits.
In San Diego, investigators developed evidence that the U.S. organization received drugs from Mexico. Investigators believe the laundered proceeds belonged to the Sinaloa drug cartel, once personally directed by Mexican drug lord Joaquin “El Chapo” Guzman, who is now on trial in New York. Investigators seized $6 million in cash as a result of the probe.
Hocker was sentenced last month in Lexington to eight years in prison on charges of conspiracy to distribute 6 kilograms or more of cocaine and possession with intent to distribute 40 grams or more of a substance containing a detectable amount of the painkiller fentanyl. She is appealing her sentence to the U.S. Sixth Circuit Court of Appeals.
In yet another case, a New Jersey man believed to be an international money launderer was indicted in December in Lexington following a DEA investigation in Kentucky.
During the undercover operation, Ramie Dean Douglas, 34, of Englewood, N.J., made arrangements to have bulk cash purportedly generated by the sale of drugs deposited into various bank accounts.
Douglas said he could conduct similar transactions in Europe, and offered to show a confidential source “a new improved method” to launder money, according to a DEA affidavit filed in court. The undercover agent and Douglas used WhatsApp, an encrypted messaging application, to communicate with each other.
During an exchange of text messages with the undercover agent, Douglas indicated that a recently used bank account had “to rest” for fear that the account would be closed by the bank over concerns about money laundering, according to court records.
Douglas also asked whether sources in Kentucky could sell cocaine to people he knew. “During this call, Douglas explained he was acting as the broker for this deal,” according to the affidavit.
But the deal fell through after Douglas said the negotiated price of $30,000 per kilogram of cocaine wasn’t competitive and that his co-conspirators “were no longer interested in pursuing the purchase of this cocaine,” the affidavit said.
Douglas was indicted on one count of conspiracy to commit money laundering, a felony punishable by up to 20 years in prison, a $500,000 fine and up to three years of supervised release. He is scheduled to go on trial in February in federal court in Lexington.
Not all money laundering is connected to drugs. In October, Colton Grubbs of Lexington was sentenced to 30 months in federal prison for, among other offenses, conspiracy to commit money laundering as part of a computer-hacking case.
Grubbs, 21, designed, marketed and sold software that he knew would be used by some customers to remotely access and control their victims’ computers without the victims’ knowledge or consent.
In his plea agreement, Grubbs admitted to selling his software copies for $39.99 apiece to more than 6,000 customers throughout the United States and around the world.
Court documents say the money laundering worked like this: Grubbs agreed that an unnamed co-conspirator would receive Internet payments using PayPal for sales of the software, and then transfer the majority of that money to Grubbs.
In addition to his incarceration, Grubbs had to forfeit the proceeds of his crimes, including 114 bitcoin seized by the FBI. At the time of his October sentencing, the bitcoin was valued at $725,000.
Defense attorneys say it’s not illegal to deal in cash and that sometimes there are legitimate reasons for a person to have a large amount of cash.
“Any time law enforcement finds cash, there’s this presumption that, uh-oh, something illegal is going on here,” Lexington defense attorney Pat Nash said. “But that’s not always the case.
“In other words, a person may well be engaging in some illegal conduct like drugs, but they might have cash for a perfectly legitimate reason that’s separate and apart from any of their drug activities,” Nash said, offering an inheritance, car sale or legitimate job as examples.
Furthermore, law professor Welling said, some people distrust banks and “have been known to stash their money in a mayonnaise jar under the mattress. So the idea that you would have to report to the government if you’re doing a cash transaction, that just sat wrong with many people in places like Kentucky.”
Money-laundering convictions typically can add one to four years to a sentence for the primary offense, Nash said.
Proving such cases isn’t easy. Prosecutors “have to prove that the money was dirty, that the defendant knew it was dirty, and that he did these transactions either to conceal it or to promote the original enterprise,” Welling said. “But you don’t have to prove that he knew it was dirty because of a particular reason, or that he knew that it got generated by drugs or bribery or gambling.”
It takes the combined resources of the DEA, FBI, the Internal Revenue Service and other agencies to investigate money laundering, U.S. Attorney Duncan said.
“There’s a lot of legwork, a lot of sifting through financial documents, a lot of piecing the puzzle together,” Duncan said. “It’s a credit to the folks that we have, both in federal and state and local law enforcement, that we’re able to bring the types of cases and have the sorts of results that we do.”