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Denying illicit revenue

Investigating money laundering by investigating tax evasion

In the mid-1980s, a street-level cocaine dealer, Alejandro Lopez-Guevara, and his gang ran a distribution ring in New York City's lower east side, which generated wealth, amassed assets and destroyed the quality of neighborhood life. The New York City Police Department (NYPD) successfully investigated these activities and identified the ringleaders, and then indicted, arrested and prosecuted the leading conspirator. However, the NYPD was only successful after public outcry following the death of a four-year-old girl. She was the unlikely victim caught in the crossfire of two drug dealers arguing in an apartment hallway when a bullet shot through a unit's wall and killed her while she slept. (See The New York Times article, Behind Bars, Leader of Drug Gang Manages Real Estate Investments, Prosecutors Say, by Michael Brick, May 4, 2007.)

According to the article, a later federal investigation into Lopez-Guevara's finances led to the arrest of two men who "conspired with him to launder money." And during his time in prison, several men visited him to set up money management accounts and organize the purchase of corporate stock and properties in Puerto Rico. His drug business, the source of the money, "generated $150,000 a week in the mid-1980s." And Lopez-Guevara never claimed ownership of the properties or paid federal or state taxes on the proceeds of the sale of said properties.

Crimes such as counterfeiting or trafficking in drugs, humans or arms always will have a global and local impact. It doesn't matter whether they occur in a low-income housing project in the U.S., a jungle in Bolivia, or a business district in New York, Panama, Costa Rica or Puerto Rico — even the most modest enterprise has global impact, requires transnational border crossings and has an endgame.

A fraud examiner's goal in these cases is to conduct a thorough preliminary examination and, if appropriate, refer investigative leads that will help authorities disrupt and dismantle transnational organized crime (TOC).

I've specialized for most of my 23 years of federal law enforcement in money laundering, financial investigations and asset forfeiture. I discovered early in my career that drug trafficking organizations (DTOs) would go to great lengths to keep their proceeds and protect their assets from seizure and forfeiture.

DTOs still commonly utilize intermediaries, real estate and money brokers, financial institutions, money remitters, third parties, shell corporations and many other ruses to conceal the ownerships and true origins of their illegal proceeds. In fact, isn't the endgame of most organized crime to make money? So, shouldn't our endgame target the same goal: to deny the criminals that same illicit revenue (or assets)?

Investigating tax evasion could uncover money laundering

I supervise civil investigators who specialize in fraud, financial and tax evasion investigations. While a typical drug investigation wouldn't necessarily cross jurisdiction lanes into tax and revenue violations, we take a proactive approach to finding delinquent tax activity in our subjects of investigation. Why? To build another pillar of evidence that can be leveraged in my agency's drug investigation. How? By making a referral to the competent counterpart agency that has legal jurisdiction to investigate the alleged tax evasion. We do this at the earliest stage of the case when drug investigators uncover the illegal activity. This helps us get joint agency cooperation and support from the prosecutor's office.

Providing a financial tax investigative lead by making an official referral won't only get the ball rolling to seize illicit assets and recover owed taxes. It will ensure that the proper authorities have the opportunity to look at suspicious activity and confirm whether the suspicious activity lends itself to financing criminal activity. With today's emphasis in the U.S. on joint interagency investigative cooperation, agencies like the IRS, DEA and FBI are now collaborating more than ever to conduct TOC investigations and share TOC intelligence. Actionable intelligence that identifies overt illicit or illegal activity can have evidentiary value. For a fraud examiner, the evidentiary value can lead to prosecution of money laundering and/or tax evasion.

Most financial or tax evasion investigative leads are simple and based on unexplained wealth or a sudden accumulation of assets such as luxury cars or leisure boats, frequent vacations, or an inexplicable lifestyle change for the better or worse. A lead is often very productive after a tax agent preliminarily reviews it and then initiates an administrative, civil or criminal matter. This can start anywhere from an audit to a criminal investigation and can result in fines, penalties, seizures, judgment orders, forfeiture decrees, criminal pleas, etc.

If our investigation leads to a conclusion that the subjects are living beyond their reported means — even if they came into a windfall inheritance or other surprising capital gain — they have to pay taxes. The owner of the deed, title, account or property is liable to pay his or her fair share of personal, property and inheritance taxes. Chances are if we find that fraudsters laundered money to conceal true origin and ownership, we'll also find that they evaded taxes. Because fraudsters won't want to call attention to laundered or unexplained income, they'll minimize the reporting of any income if it was obtained illegally.

To help a tax auditor identify tax evasion or money laundering, the taxing authority investigator should have a basic checklist:

  • Subject: Name, date of birth, Social Security number.
  • Property: Primary address, secondary addresses or known places visited, vehicles used (not necessarily owned).
  • Corporation: Businesses owned and/or operated; observance of suspicious changes in money flow, liquidity, inventories; corporate titles used in the past, changed or used currently, positions of office, frequent changes in corporate charter; indications of employee turnover that's higher than industry normal.
  • Professional and/or social affiliations: This is often overlooked — memberships in fraternities, golf, boating or similar clubs; hobbies, etc.

Even with all of these tools in your arsenal, if you're conducting a financial or money laundering investigation on its own merits, you might encounter a few hurdles.

Overcoming hurdles

When a fraud examiner conducts the first interview, he or she will be trying to gather evidence beyond a reasonable doubt that someone had knowledge and intent to launder money. Assuming that you don't have a confession or cooperation, proving what someone knew or intended to do can be nearly impossible without more incriminating evidence. Even with boxes of financial records, it's hard to impute knowledge and intent onto someone. Fraud examiners should use interviews to connect the dots and corroborate the facts that money has been laundered or a crime is being facilitated. For example, when several bank accounts reflect suspicious deposits and withdrawals from a revenue time frame, the question of the intent should be answered. Productive interviews produce a clear timeline of the illicit activities and who benefited.

Secondly, even if a reasonable person can see the direct link between a straw owner and the true owner of an asset, it still requires a leap of faith to accept the evidence when an innocent third-party owner defense is later petitioned. What prosecutor wants to fight a motion to dismiss a criminal indictment against a property that's in the name of a disabled or senior citizen, or head of household of seven middle-school kids?

Prosecutors are required to make "discovery" to defense attorneys that demonstrate the evidence against their clients. Irrefutable proof that defendants had intent to launder money or evade taxes must be present for prosecutors to confidently move forward. In overcoming this hurdle, prosecution teams should include any criminal investigators from law enforcement agencies, auditors, accountants, compliance officers and the fraud examiners. Witnesses and cooperating individuals should be thoroughly interviewed by members of the prosecution team more than once. Reporting must be thorough and concise, without assumptions; instead, reports should be factually based using evidence and patterns of illegal behavior to draw conclusions.

Seeing the bigger picture

Open your investigative toolbox and use all the tools available. Instead of building a fraud case around only the money laundering nexus, investigate the fraud case looking at both money laundering and tax evasion.

For example, let's look back at the opening case in this article. If NYPD police investigators had partnered with a fraud examiner and DEA and IRS agents in the beginning, they might have found red flags of fraud sooner. It took 20 years to uncover land properties and financial accounts that the criminals used to launder drug proceeds and conceal true origin and ownership. As luck would have it for federal investigators, property payments and segregations of land ownership continued to occur within a criminal enterprise during those 20 years. This made it an ongoing money-laundering scheme, which exempted the five-year statute of limitations. 

Michael A. Cole, CFE, is a senior supervisory special agent with the Department of Justice, Drug Enforcement Administration. He can be reached at: