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A Cruel Gambit

On June 25, 2012, in Drug War, by Scott Alexander Meiner

Medical Marijuana Business Daily is reporting that Electronic Merchant Services (EMS) will end payment processing of MasterCard and Visa payments to Medical Marijuana (MMJ) dispensaries on July 1st, 2012. While it is possible that Discover will see this as a market opportunity, it likely foreshadows Discover’s departure from medical marijuana payment processing. And, it signals an incipient, albeit temporary, suspension of candid banking for medical marijuana suppliers.

Electronic Merchant Systems (EMS) –-which provides merchant accounts for medical marijuana companies via a partnership with Chesapeake Bank in Virginia –– informed its MMJ customers of the decision in an email (see full text at the end of this post). The new policy is effective July 1.

The change covers both credit and debit cards, though the email says dispensary clients can still accept MMJ transactions conducted with Discover cards. EMS plans to send out another letter on Wednesday informing medical marijuana merchants to batch and settle all Visa and MasterCard transactions by June 30. EMS and Chesapeake Bank did not immediately return messages left by MMJ Business Daily. Exclusive: Medical Marijuana Dispensaries No Longer Able to Accept Visa, MasterCard as of July 1, Medical Marijuana Business Daily, June 18 2012.

The move is clearly instigated by federal prosecutors. For the last several years, prosecutors have been advising banking institutions that facilitating financial services to medical marijuana suppliers exposes banking institutions (and their bankers) to criminal and civil liability–namely fines and asset forfeiture. Most banks and natural persons are, among other things, at risk to have DOJ prosecutors forfeit any and all assets traceable to medical marijuana.

Larger banking institutions are technically at risk for the same but in practice are predominantly allowed to avoid prosecution by entering into agreements conceding fines and firm-specific consent agreements known as Deferred Prosecution Agreements and Non-Prosecution Agreements (DPAs and NPAs, or together D/NPAs). Regardless of whether the risk and punishment of D/NPAs are sufficiently prohibitive of providing banking to MMJ suppliers, large banking interests have an incentive to concede less lucrative illicit behavior on DOJ stressed positions because prosecutors negotiate the D/NPAs for other more lucrative illicit behavior as well.

Almost all major banks operating in the US have at least one resent D/NPA, are negotiating a D/NPA, or are under investigations that will likely lead to a D/NPA (some banks seem to sign new ones on a near monthly basis). 9 of the 10 largest banks in the US have at least one recent known D/NPA (most have many): Bank of AmericaJP Morgan ChaseCitigroupWells FargoGoldman SachsMorgan StanleyMetlife IncBarclays Group US IncTaunus Corporation/Deutsche Bank. The other, HSBC North America Inc, agreed to a consent order in 2010 to refrain from certain activities, and is expected to enter into at least one D/NPA as a result of HSBC’s alleged roles in numerous questionable activities including allegations of identity theftfacilitating money laundering for Mexican narco-terroristsillegal transactions with Cuban and Iranian clientsfacilitating corruption in Nigeriaet cetera.

HSBC appears to be fairly typical. HSBC acquired significant Mexican drug and money laundering portfolios after Wachovia agreed to halt their Mexican drug and money laundering portfolios at the behest of the DOJ. Wachovia (and now parent Well Fargo) conceded in a 2010 DPA that, Wachovia processed at least $373 billion in unmonitored wire transfers on behalf of Mexican Casas De Cambio (CDCs) and an additional, unmonitored $4.7 billion in bulk cash and $47 billion in remote deposit captures for correspondent banking customers including CDCs (a total of at least $420 billion in unmonitored funds). CDCs are used for legitimate, earnest purposes by many. However, they are also a prime vehicle for Mexican Cartel’s to move money in Mexico and between the US and Mexico. Banks that do substantial business with CDCs are legally obligated to tightly monitor funds. Court documents and quality reporting indicate Wachovia bankers were at least willfully blind and, if rational, knew that they were laundering cash for Mexican Cartels. 1

If federal prosecutors want banks out of openly processing medical marijuana payments, they can use leverage to insist on it. American Express ended MMJ payment processing on April 30, 2011 after being told to do so. Responding to a request for comment, American Express spokesperson Diana Postemsky stated,

“American Express has made a decision to not allow card acceptance for medical marijuana. It is our policy to adhere to the federal law in such matters.” By Dennis Romero, Marijuana Purchases in Southern California Cut Off by American Express?, LA Weekly, May 5 2011.

American Express enjoys a (relatively) conservative, trusted image. Desire to preserve that image and informed assessments of emerging DOJ priorities probably played roles but the decision came shortly after prosecutors notified American Express that they would be held accountable for processing MMJ payments if they continued. Leverage from various investigations, ongoing litigation over antitrust violations, and that they had only recently retired another Deferred Prosecution Agreement (concerning former subsidiary American Express Bank International) are more plausible explanations than a particular reverence for a particular law.. 2 3 4

What is unclear is what prosecutors hope to achieve by severing the public connection between American banks and medical marijuana–but it looks like a cruel experiment. Immediate foreseeable consequences include more cash, revitalized informal value transfer networks, more alternative banking, and accounts that are no longer directly identified as MMJ business accounts. Funds will be less traceable. The general public and law enforcement will know less about where the money is coming from and to whom the money is going–mechanisms that frustrate opportunity for violent criminal syndicates.5

More cash predicts more robberies.6 Surely security costs will increase but more insidiously, it invites, and rewards, those willing to employ violence. Earnest, otherwise-law-abiding suppliers will find it harder to conduct business–inviting more unscrupulous characters. Tax compliance will drop.7 More cash and more untraced funds predict increased corruption, further alienating the public from law enforcement and diminishing what little remaining confidence our government enjoys. Banks will still want to handle the money but instead of cultivating candor, DOJ prosecutors are promoting incentives to frustrate the efficacy of programs like FinCEN‘s Know Your Customer (KYC) anti-money laundering campaign.8 Ample evidence supports a conclusion that banks will prioritize profits over fidelity to law.

Such conditions ripen the chances of increased organized crime and terrorist involvement. Organized crime and terrorists mean more violence which means more dead people. In a grey or licit market, marijuana consumers can (and mostly do) get product without getting involved with violent types. That marijuana exists in grey markets (as opposed to black markets) likely mitigates, among other things, potential open displays of violence more associated with other drugs. Whatever mitigating factors exist will be reduced if otherwise-law-abiding suppliers get chased out. Mexican Cartels are known to operate in at least 1,286 US communities.

Although Mexican DTOs have been active for some time, they have become more prominent since the decline of the powerful Colombian DTOs beginning in the 1980s. The NDIC, in its 2009 threat assessment, estimated that Mexican DTOs maintain drug distribution networks—or supply drugs to distributors in at least 230 U.S. cities, as illustrated in Figure 2. More recent NDIC estimates reportedly indicate that the DTOs have expanded operations and are present in at least 1,286 U.S. cities. Of these operations, 143 are reported to be controlled directly by DTO members in Mexico. Mexican DTOs annually transport multi-ton quantities of illicit drugs from Mexico into the United States using a variety of multi-modal transportation methods. By Kristin M. Finklea, William J. Krouse, Marc R. Rosenblum, Southwest Border Violence: Issues in Identifying and Measuring Spillover Violence, Congressional Research Service, August 25 2011.

If Mexican Cartels gain a stranglehold over Medical Marijuana, we will likely see the same tactics deployed in Mexico. Mexican Cartels brazenly slaughter each other, law enforcement, journalists, and innocents alike. Much of it is indiscriminate but Mexican Cartels are particularly ruthless when it comes to perceived cooperation with the police and advancing policy objectives. Retributive violence should be a special concern; it carries threats of interfering with our criminal justice system, our economic models, and core liberty interests like free speech and a free press (of attendant concern is the privacy and property rights we keep shedding in the name of giving law enforcement the tools that they need to fight x).

It was telling when the largest daily newspaper in Ciudad Juarez-Mexico, El Diario de Juarez, ran a front-page letter entitled, ¿Qué quieren de nosotros? (What do you want from us?) addressed to the cartels operating Ciudad Juarez-Mexico. The letter acknowledged that the cartels are, at the moment, the ruling authorities in Ciudad Juarez and asked the city’s cartels to let them know what to publish, or not publish, hoping to prevent more of their journalists from being brutally murdered.

Gruesome signature crime tactics of whomever is in power, like abductions and ransoms prevalent during El Teo’s Tijuana-Mexico drug cartel faction’s reign, are predictable. San Diego, CA (where the Mexican Cartels have infiltrated some of the Medical Marijuana market due to fears over enhanced federal enforcement) has already seen its share. Unfortunately, arresting violent cartel leaders does little to stem the violence, or crime, associated with the cartels–it just puts different violent cartel leaders in power.

The situation in Tijuana-Mexico, situated beside San Diego, CA is ghastly.

These days, it is not uncommon to discover bodies mutilated, dismembered, burned, or beheaded with messages and warnings. Most of these involve cartel members, including law enforcement officials working for one side or the other. Some murders involve officers who refused to do the cartel’s bidding.   Tijuana residents now find themselves in the crossfire as hit men fire indiscriminately at their targets in restaurants, nightclubs, cafes and other public places.   Women and children are no longer off limits, as demonstrated by the shooting of Tijuana’s Deputy Police Chief Margarito Saldana Rivera, his wife, and two daughters (Marosi, 2008d). By Salvador Montana and Stephen Cooper, Mexico’s Drug Wars: Implications and Perspectives from California and California’s San Joaquin Valley, The International Journal of Continuing Social Work Education, p 48, Vol. 12 No. 2, 2009.

Of course, Mexican Cartels are not the only violent syndicates that would stand to profit or make our lives more unpleasant. The Brother’s Circle, Camorra, Yakuza, American gangs, Triads, et cetera have significant business interests in the United States. Our cities are liable to host violent turf wars whether internecine or between external groups.

Less likely but nonetheless a threat is the risk of Anti-American ideological terrorists getting involved. Organized crime and profit-driven criminal syndicates who deploy terrorist tactics (i.e. Mexican Cartels) are loathsome. But at least they need Americans as consumers. If Anti-American ideological terrorists replace our otherwise-law-abiding suppliers, we face terrorists with large amounts of money in the US-which would give them access to buy and use expensive, destructive things in the US-skipping detection opportunities at points of entry-while reducing our ability to detect, monitor, and apprehend them because we are decreasing the ability to trace marijuana transactions in particular and reducing the general efficacy of anti-money laundering campaigns.

Likely citing increased violence and fears over organized crime and terrorists (whether evident or not), law enforcement will push (as has consistently been done) for larger budgets and enhanced powers of surveillance, search and seizure, and asset forfeiture. Many of these effects will linger long after marijuana prohibition is over.

More unconscionable acts will be excused, more money will be squandered, more stuff will be seized, and more rights will be sacrificed.

None of this will deter (or encourage) a significant percentage of people from trying, purchasing, or using marijuana. People will make up their own minds as they always have (and as they should) about whether they want marijuana in their lives.

Accessed From NORML http://stash.norml.org/bigbook/charts/use-rates-since-1979.jpg June 24 2012

Five Thirty Eight

By Nate Silver, Gallup Poll Is First to Find Plurality Support for Marijuana Legalization, New York Times, October 18 2011

The good news is that this is all clearly coming to an end. Politicians have not (in significant numbers) yet come around but the general public has. Crossing a threshold 50% on supporting general legalization and crossing 80% on Medical Marijuana leaves the DOJ short on clock. If the DOJ pushes Medical Marijuana back to the criminal element, we will have known that whatever MMJ problems exist, it was a lot better than subsidizing violent criminal syndicates.

And then maybe we would come to our collective senses about the rest of it too.

  1. As part of the deferred prosecution a single count of failing to maintain an effective money launder program was deferred and then waived. Wachovia/Wells Fargo agreed to pay $160 million dollars ($110 million was described as a forfeiture and $50 million as a fine), entered a DOJ monitored and compliance program, and made a promise to refrain from similar future misconduct in exchange for the sole count being dropped at the conclusion of the agreement. No natural persons were prosecuted. And to date, no major bank has been criminally prosecuted beyond a fine and D/NPA since the DOJ formally adopted D/NPA policy in 2003. It is not publicly known how much Wachovia profited off their adventures in Mexico but it seems safe to assume in the billions. Indeed, the very survival of the bank (in whatever incarnation or name) and thus all future division profits may owe to the liquidity provided by drug profits allowing Wachovia to survive reckless wagers like Golden West.
  2. The DOJ Press release lauding enforcement efforts is fairly typical. “Today an established and respected financial institution learned a valuable lesson about its legal responsibilities. American Express and all legitimate banking organizations must take every step possible to avoid becoming entangled in the web of international drug money laundering,” said DEA Administrator Karen P. Tandy. “Today the message is loud and clear: due diligence-don’t take money without it….AEBI operated in certain high-risk jurisdictions and business lines without commensurate systems and controls to detect and report money laundering and other suspicious activity in a timely manner, as well as manage the risks of money laundering, including the potential for illicit drug trafficking-based Black Market Peso Exchange transactions. FinCEN also found that the money services business, a wholly-owned subsidiary of American Express Company, failed to file a significant number of suspicious activity reports.”  Department of Justice, Press Release, American Express Bank International Enters into Deferred Prosecution Agreement and Forfeits $55 million to Resolve Bank Secrecy Act Violations, Aug. 6, 2007.
  3. An undisclosed aspect of the settlement was a secret deal to dismiss American Express Bank International’s Chairman Sergio Masvidal and bank president Simon E. Amich. Their dismissals were orchestrated by John W. Sellers, former Senior Trial Attorney of the DOJ Criminal Division’s Asset Forfeiture and Money Laundering Section. “In a 2010 civil settlement with Masvidal, the Justice Department admitted that the agency violated policy when it secretly joined forces with American Express to ensure that he would be effectively fired following the prosecution of the company’s international banking subsidiary in Miami. Sellers was not mentioned by name in the department’s settlement letter to Masvidal. In 2007, Sellers crafted the secret side deal to the Justice Department’s official criminal settlement with American Express Bank International over its violations of anti-money laundering reporting laws. Under a deferred prosecution agreement to avoid conviction, American Express had to pay the government $65 million for its lax enforcement of compliance laws aimed at flagging drug proceeds and other tainted bank deposits. The side agreement — an August 2007 letter signed by Sellers and a major New York law firm representing American Express — was never disclosed to Masvidal, his colleague, bank president Simon E. Amich, or U.S. District Judge William Zloch in Fort Lauderdale, who approved the deferred prosecution agreement. In his lawsuit, Masvidal said he soon discovered that American Express — concerned about being prosecuted while selling the international banking subsidiary — secretly gave veto power to the Justice Department to decide whether he and the president could remain as employees under any circumstances. In September 2007, the British company Standard Chartered bought American Express Bank International for $823 million, but Masvidal and his colleague were not retained.” By Jay Weaver, Federal prosecutor who secretly targeted top Miami banker faces ethics charges… A U.S. prosecutor who targeted a Miami banker in a money-laundering prosecution of his employer may be disciplined over ethics violation charges, Miami Herald, May 30 2012.
  4. Sellers resigned from the DOJ in 2010, amid a DOJ Office of Professional Responsibility (OPR) probe of the secret side agreement, and joined the Department of Treasury’s oversight of the Troubled Asset Relief Program (TARP). Findings were included in the OPR’s Fiscal Year 2011 Annual Report. “(T)he DOJ attorney engaged in engaged in professional misconduct in reckless disregard of (his) duty to inform the client of decisions requiring informed consent, and to keep the client reasonably informed of the status of the matter. OPR also concluded that the DOJ attorney engaged in professional misconduct in reckless disregard of (his) duty of candor to the court when she filed a settlement agreement purporting to encompass all the terms of agreement between the parties when, only days earlier, the DOJ attorney had executed the side letter. However, OPR concluded that the DOJ attorney did not engage in professional misconduct or exercise poor judgment when, after the affected employee discovered the side letter’s existence, (he) suggested that the employee consider a release of  potential civil claims against the Department. OPR determined that there was no prohibition against such release agreements. The DOJ attorney resigned during the investigation. OPR notified the appropriate state bar authorities of its findings of professional misconduct.” Department of Justice Office of Professional Responsibility,  Fiscal Year 2011 Annual Report, At 36. https://s3.amazonaws.com/s3.documentcloud.org/documents/357210/opr-2011-annual-report.pdf Accessed June 19 2012.
  5. In open licit markets, markets punish, and reward, valued behavior. While consumers would likely prefer, and thus purchase, marijuana derived from non-violent suppliers, a consumer’s interest in self-preservation is its own market force. Purchasing marijuana from non-violent, trusted suppliers is safer. Cartels are limited in their ability to prevent consumers from picking peaceful purveyors–acts of violence drive consumers to competitors if purchasers have a choice.
  6. This is especially true in grey and black markets where property loss victims are often reluctant to involve law enforcement because they potentially subject themselves to additional liability. Robbers’ awareness of the reluctance fuels prevalence.
  7. The DEA makes a big deal out of low tax compliance rates among MMJ dispensaries. Considering that all reported assets are subject to forfeiture, any significant compliance seems high. See The DEA Position on Marijuana
  8. We’d be wise to remember Willie Sutton’s quote. When asked, “Willie, why do you rob banks?” Sutton replied, ”cause that’s where the money is.” FinCEN enforcement strategy often ensnare innocents in surreal accidental structuring cases while neglecting the banks themselves.

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