Money Laundering in the United States: The Forgotten Tale of Wachovia Part 2

Continued from part 1.

In 2007, a jet was confiscated in Mexico that contained over $100 million worth of cocaine. The information from this raid showed that Wachovia, then the fourth largest bank in the United States, was used as a gateway to launder up to $378 billion through the U.S. banking system. This is an example of how relaxed financial laws in the United States, in addition to our large economy, create conditions that easily make the U.S. the recipient of up to a third of the world’s money laundered from illicit activities.

KYC strategies, and why they didn’t work

For any bank, one of the primary philosophies behind measures meant to combat money laundering is called KYC, or “know your client.” This means that you spend a great deal of energy focusing on who your clients are and how they are documenting their transfers, especially in red-flag situations. To enact these policies, Wachovia actually had one of the most qualified people for the job, Martin Woods, who was the senior anti-money laundering officer in Wachovia’s London headquarters. Woods had been an officer with the Metropolitan police drug squad and was a detective with the National Crime Squad who specialized in money laundering.

So why didn’t Woods catch the blatantly high amount of money laundering red flags that emerged at Wachovia between 2004 and 2007? Well, he actually did. In August of 2006, Woods reported a large number of red-flag transactions that were made through CDC accounts. According to him, the signs were obvious, which he reported to his superiors. However, these reports were met with disdain. Around this time, Woods discovered that Wachovia had over 6,000 standing subpoenas from Federal law enforcement, regarding transfer activity from Mexico. After the 2007 incident, Wachovia fired Woods, claiming incompetence of their primary anti-money laundering officer.

Wells Fargo acquisition and the 2008 market collapse

During 2008, Federal authorities brought action against Wachovia, which could have made officials within the bank liable for wrongdoing, but the prosecutor also recommended that the prosecution be deferred for 12 months. At the end of this deferral, if no other laws are broken by the bank for that period, then the charges are dropped. During this same period, a merger was being drawn up between Wachovia and Wells Fargo, which would end with Wells Fargo’s acquisition of Wachovia in 2009 (despite taking three years to finalize).

Also during this time, the financial crisis of the banking industry started to enter full swing, with the market finally collapsing late in 2008. At this time, nobody in law enforcement wanted to spend the resources to go after the banks. When the Wachovia sector of Wells Fargo finally paid the $160 million settlement for their role in the money laundering, the Federal government turned around and bailed Wells Fargo out of its impending collapse with a $25 billion bailout. Besides this fact, the penalties paid to Federal authorities were only a fraction of the likely billions that Wachovia made during the same period off of laundered money.

A final look

According to the chief prosecutor on Wachovia’s case, “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.” Despite this fact, Wachovia and the officials that ignored the signs that were reported to them were essentially allowed to walk away without any penalty. Martin Woods had this to say on the case, “The law enforcement people do what they are supposed to do, but what’s the point? All those people dealing with all that money from drug-trafficking and murder, and no one goes to jail?”