Contraband: Colombia’s Top Money Laundering Tool

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The huge profits on offer have even spurred the development of sophisticated criminal networks that have aligned with political and elite interests. But it’s the growing use of the contraband trade to launder dirty cash that most concerns Colombian authorities.

“We are talking about something that has mutated,” General Gustavo Moreno, the director of Colombia’s Tax and Customs Police (POLFA) told InSight Crime. “The contraband trade is not what it used to be – moving goods from one country to another without paying taxes or tariffs. Today it is a true [criminal] instrument used not just by drug traffickers, but also arms traffickers, human traffickers, extortionists and narco-terrorists.”

Money Laundering Gets “Real”

At the start of the 1980s cocaine boom, when Colombian drug traffickers suddenly began earning more US dollars than they could count, never mind spend, money laundering was a more straightforward affair. Both in the United States and in Colombia, drug lords could dispatch lackeys loaded with cash-stuffed bags to banks, where they could deposit their drug money in accounts without so much as a raised eyebrow.

It was not until 2008 that organized crime began to move away from the financial sector as their first choice tool for laundering dirty cash.

Such techniques were too obvious to last. Both governments began to take action against money laundering, tightening up regulations and placing new obligations on banks to report suspicious activity.

However, in Colombia it was not until 2008 that organized crime began to move away from the financial sector as their first choice tool for laundering dirty cash, authorities believe.

According to Luis Suarez, the director of Colombia’s national anti-money laundering body, the Financial Investigations and Analysis Unit (UIAF), the tipping point was the government’s creation of a new system for identifying and reporting risk of money laundering in businesses and financial institutions.

“This was the clear breaking point that made it so these controls were increasingly closing off the routes used to launder money in the financial system,” Suarez told InSight Crime.

Criminals began to move away from the world of financial services and into the economy of material goods — what the UIAF calls the “real” economy — and in particular, into the smuggling business.

“With these [new] controls, money launderers then passed into the ‘real’ sector as it is offers less controls and obligations, as well as enormous difficulties in carrying out detection work,” said Suarez.

Criminal Profits Hit the Smuggling Trail

Using contraband for money laundering is not a new technique. As far back as the 1980s, drug traffickers used the smuggling hub of the northeastern state of La Guajira to bring in contraband goods via Panama that were paid for with drug dollars. The products were sold on in the markets of the city of Maicao, or in “San Andresitos,” shopping areas that sell heavily discounted contraband goods, which are named for San Andres, an island famed for its duty free shopping.

However, what was once a more local and limited money laundering activity has now evolved into an ever more sophisticated and transnational business.

“[Contraband] is in fashion with criminal businesses and is part of a national and international criminal economic system,” said General Moreno. “This has completely changed the rules of the game.”

“We can’t attack contraband as we are attacking drug trafficking, terrorism and the paramilitaries.”

Some of the items most commonly smuggled into Colombia, like clothing and food, are popular because they can be sourced and sold cheaply, easily, and in bulk. Alcohol and cigarettes are smuggling staples as they are taxed heavily and there is a steady market for them, while the smuggling of gasoline and other products from Venezuela is fueled by the huge price discrepancies between the two neighbors.

The DIAN estimates that 76 percent of smuggling is “technical contraband,” brought into the country through legal channels. The products’ illicit origins are disguised by falsified documents, or they are diverted into the illegal market after entering Colombia legally. However, other products — especially those brought over Colombia’s land borders — are “open contraband,” which evade customs controls.

Much of the contraband entering Colombia originates in Asia, particularly China. Money launderers have an arsenal of methods at their disposal to funnel their dirty cash to where it is needed to make the purchases, using everything from front export/import companies to cash smuggling. In some cases, the contraband is even exchanged directly for drugs as traffickers look to capitalize on the growing Asian cocaine market, the POLFA told InSight Crime. 

The POLFA’s investigations have also revealed that smugglers often first ship containers of contraband to the Colon Free Trade Zone in Panama, where there are networks experienced in disguising the goods’ origins by manipulating or falsifying documentation.

Most contraband then enters Colombia through the Pacific coast port of Buenaventura or the Atlantic ports of Barranquilla, Santa Marta, and Cartagena, while Bogota’s El Dorado airport is also emerging as a major entry point, as the map below indicates.

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For such “technical” contraband, the use of legally constituted front companies is central to both the smuggling and money laundering. “[The smugglers] create different shell companies, some of which last for just a few months,” said General Moreno. “They use them while they carry out these activities importing merchandise then afterwards they disappear.”

However, not all the contraband goods linked to money laundering have such a long journey. Alcohol and cigarettes, for example, still predominantly enter the country through La Guajira. Footage that Colombia’s customs police gave to InSight Crime give a sense of the sheer scale of the trade, showing hundreds of cigarette boxes stacked upon each other, seized by police in La Guajira.

Contraband goods are usually shipped into La Guajira from the duty free zones in Panama and Caribbean islands such as Aruba. Some enter illegally, brought ashore on small boats that land along La Guajira’s sparsely populated eastern coastline, which smugglers have used for centuries.

However, most contraband goods pass legally through customs at Puerto Nuevo, at La Guajira’s northern tip. They come complete with documents specifying the products are destined for La Guajira’s special customs zone, which covers the area between the towns of Maicao, Uribia and Maaure (see map above). Products enter with rock-bottom import tariffs and taxes on the condition they are sold on in the customs zone, but people are allowed to take a limited quantity of goods out of the area for personal use.

Once the contraband goods are inside Colombia, selling them on is simple.

Smugglers use a method known as “smurfing” to move goods out of the customs zone for resale. This involves using large numbers of people to buy all they can at the legal limit, then collecting the goods all in one place.

The Venezuelan border is another significant entry point for contraband used for money laundering. The UIAF told InSight Crime their investigations suggest that gasoline and cattle smuggling — both of which are common in La Guajira — are often used to launder dirty cash. In the Colombia-Venezuela border town of Cucuta, the POLFA told InSight Crime that the region’s drug trafficking kingpin, Victor Ramon Navarro Serrano, alias “Megateo,” receives contraband in payment for cocaine trafficked into Venezuela.

Once the contraband goods are inside Colombia, selling them on is simple. Colombia has a huge informal economy, which accounts for almost half the nation’s jobs, and goods can be easily disposed of in the sector’s markets, street stalls, and by wandering vendors. Many products can also be sold in small neighborhood stores where state oversight is minimal, or in the “San Andresitos,” which continue to thrive despite attempted crack downs. According to the UIAF, the newly “cleaned” cash is then collected together and makes its way back to criminal networks through standard money laundering instruments such as criminal-owned businesses, property trading, and shell companies.

Contraband and Criminal Convergence

As Colombia’s contraband trade became more sophisticated, new types of smuggling and money laundering operations emerged, involving networks with the capacity to coordinate activities across borders and in both the criminal and legal business worlds.

These smuggling networks need an array of contacts at home and abroad that can handle purchasing, transportation, distribution, sales and the flow of cash required at every step of the contraband chain.

The Colombian authorities say they are only just beginning to understand how these networks function and how they interact with established organized crime groups. But they believe the evolution of the contraband trade is closely linked to wider underworld trends, in particular the diversification of criminal portfolios, and what the UIAF call “criminal convergence.”

Using the contraband trade for money laundering is where many of these diverse groups and their criminal interests overlap.

“All the criminal groups are working with each other cooperatively,” said Suarez. “They don’t have the specializations where you can say these are just drug trafficking groups or human trafficking groups or extortion groups.”

The UIAF believe using the contraband trade for money laundering is where many of these diverse groups and their criminal interests overlap.

“What we are seeing from the information we have is that there are criminal structures that are uniting around the contraband process,” said Suarez.

While Suarez said he couldn’t provide specific examples because investigations were ongoing, there have been media reports that guerrilla group the Revolutionary Armed Forces of Colombia (FARC) and criminal gang the Urabeños are honing in on the contraband trade and the money laundering opportunities it offers.

New Law, New Era?

Efforts to tackle the contraband trade have been gathering pace in Colombia. Both the government and the private sector have launched anti-contraband campaigns, while by September 2014, the reinforced and reformed POLFA had already made seizures worth 97 percent more than the total haul for 2013.

However, tackling the use of contraband for money laundering remains a weak spot. Officials hope this will change if and when the anti-contraband law currently working its way through Congress comes into force.

The law will strengthen institutions working to combat smuggling, including the POLFA, the UIAF and the DIAN, and raise penalties for smugglers. Crucially, it will also draw a legal connection between contraband and money laundering, opening the way for the UIAF to launch full investigations into contraband, and introducing prison sentences of up to 30 years for smugglers convicted of money laundering.

However, General Moreno believes efforts to tackle smuggling and money laundering require not only new laws and more resources, but also a new approach.

“We can’t attack contraband as we are attacking drug trafficking, terrorism and the paramilitaries,” he said. “We can’t just look at organizational components, make seizures and arrests. This is a much broader issue.”

This article is the final part in a four-part series looking at contraband in Colombia. Read part one, a report from Colombia-Venezuela border town Cucuta, a major smuggling hub; part two, on how contraband politics took over northeast Colombia; and part three, which looks at how police confront the smugglers’ so-called “caravans of death.”

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