Introduction
Fraudulent activities in different companies occur in various forms. The perpetrators of fraud commit such activities based on their interests or other motives, such as retaliation. Since fraud is illegal, the perpetrators must conduct their fraudulent activities behind closed doors to preserve their reputations. There are many types of fraud, and each type has its effects, victims, and follow-up actions. In 2021, the Federal Trade Commission (FTC) examined over 5.7 million reports in the US, and 50% of these were fraud complaints (Insurance Information Institute, n.d.). There are many types of perpetrators, and some fraudulent activity can be committed by individuals, groups, organizations, and authorities. In most cases, fraud and corruption go hand in hand. This text will conduct a case study of Wachovia Bank’s fraudulent activities in 2010. In addition, this text will identify the factors that contributed to these activities and recommend the possible measures that would have been taken to prevent such incidents.
I. The facts of the case
A. Parties involved and background
Wachovia National Bank was founded on June 16, 1879. It had become one of the biggest financial institutions in the US. Some of the services that Wachovia provided were customer banking, asset and wealth management, corporate and investment banking products, brokerage, and auto financing services, among others. In 2008, Wells Fargo & Company acquired Wachovia to establish a robust distribution system of financial services in the North American region. In 2010, it was discovered that Wachovia had been involved in money laundering by helping drug cartels in Mexico between 2004 and 2007 (Sanction Scanner, n.d.). Consequently, the main parties involved in this case were Wachovia and Mexican drug cartels. The cartels used the US dollars from US drug sales to smuggle them across the Mexican border.
On April 10, 2006, Mexican soldiers were on their country’s borders awaiting to intercept a jet from the US. They found more than 125 cases packed with at least five tons of cocaine, valued at $100 million. However, something was discovered through a paper trail behind the jet’s purchase. The US Drug Enforcement Agency (DEA) conducted a 22-month investigation, and it emerged that the Sinaloa drug cartel had bought the plane with the money they had laundered from Wachovia National Bank. Subsequently, Wachovia was put under strict investigation for failure to maintain an effective anti-laundering program. Coincidentally, these activities by Wachovia began in 2004, when there was violence in the US-Mexico border that ignited the current war on narcotics.
B. The modus and effects of fraud
The modus of fraud details how the activities were conducted by the parties involved. The authorities involved in the investigation uncovered billions of US dollars in wire transfers, traveler’s cheques, and cash shipments through Mexican exchanges in Wachovia accounts. Wire transfers are electronic means of money exchange, and they are rarely detectable if they are conducted using obscure technologies. Additionally, the drug cartels used traveler’s cheques to cover up the money as transport fees. Also, the drug cartels used cash shipments by paying the deliverers or shippers using cards or cash and later depositing the account into their accounts. In addition, it was discovered that Wachovia was in business with Casas de Cambio (CDCs) – a Mexican cash exchange company that exchanged US dollars for Mexican pesos and vice versa.
The main effects of these fraudulent activities are economic decline, corruption, drug addiction, and unnecessary deaths. First, drug trafficking activities lead to the economic decline of the involved countries. In this case, Wachovia was responsible for laundering $390 billion through its branches, which is equivalent to about one-third of Mexico’s gross national product. Therefore, a lot of money that could have been used to contribute positively to Mexico’s economy was used in drug-related activities. In addition, drug trafficking leads to economic decline as it reduces people’s productivity. Nagelhout et al. (2017) argue that economic decline is one of the stress factors that lead to drug abuse. Most of the drug addicts in the US are unemployed since they cannot focus on their work.
Second, these activities by Wachovia and the Mexican drug cartels contributed to corruption in the US and Mexican economies. Money laundering and drug trafficking are illegal. Thus, drug cartels pay bribes to law enforcement agencies to allow them to smuggle drugs across the borders. Also, drug cartels practice corruption to allow them to enter into areas that have many legal restrictions against narcotics. Third, these fraudulent activities contributed to drug addiction in the US and Mexico. Mexican cartels have smuggled drugs into the US since the 1960s. Since the early 2000s, drug addiction has risen in the US (McLellan, 2017), especially hard drugs. The Mexican drug cartels that were dealing were laundering money through Wachovia and had smuggled billions of tons of cocaine and other hard drugs into the US.
Most people addicted to drugs abuse them to deal with other stress factors in their lives. Some of them cannot do anything if they have not abused any drugs. Blumstein & Wallman (2020) claim that increased drug addiction leads to more criminal activities. Many addicts do not have reliable employment and commit robbery and other heinous activities to buy drugs. Finally, these fraudulent activities inevitably lead to unnecessary deaths. Drug trafficking leads to the death of law enforcement agents that want to report such activities. In addition, drug trafficking leads to the death of drug addicts whose health has declined to the point that their bodies cannot sustain their drug abuse.
C. Follow-up action
In June 2005, the DEA, the US Attorney’s Office for the Southern District of Florida, and the Internal Revenue Service (IRS) began investigating several wire transfers sent from Mexico to the US (Session 7). These funds were used to buy planes, which were in turn used to distribute drugs from narcotic-producing countries to distribute them in the US. In addition, it was discovered that between 2004 and 2007, at least thirteen million US dollars was laundered through the correspondent accounts at Wachovia to buy planes that were used in the illegal narcotics trade. The investigations traced back these wire transfers to correspondent accounts held by Mexican bureaus of cash exchange – the Casas de Cambio (CDCs) at Wachovia in the US (Sherloc, n.d.). The investigation discovered that these CDCs were managed and supervised by the Wachovia business unit in Miami, Florida.
The investigating agencies determined that Wachovia’s business with the Mexican CDCs was a high risk. The DEA warned financial institutions of CDC-related business and its impact on fraudulent activities in the US. The investigators also found many red flags of large-scale laundering, including structured wire transfers, unusual traveler’s cheques, and significant bulk transactions through planned cash shipments. The DEA, the US Attorney’s Office for the Southern District of Florida, and the IRS also investigated Wachovia’s Bank Secrecy Act compliance program. The US Congress passed the Bank Secrecy Act in 1970, which requires US banks and financial institutions to assist US law enforcement agencies in detecting and preventing money laundering. This investigation discovered that at least $110 million in drug proceeds was funneled through CDC accounts at Wachovia. In 2010, Wachovia reached a deferred prosecution agreement with the US government. As a result, Wachovia had to pay $160 million for its fraudulent activities.
II. Analysis of the case
A. The type of fraud committed
In this case, the type of fraud being committed is money laundering (by Wachovia bank and the Mexican drug cartels) (Session 3). However, Wachovia bank is the main perpetrator as it is the financial institution holding the Mexican CDC accounts that the cartels used for currency exchange. Teichmann (2017) states that money laundering involves concealing the origin of money by converting it to a legal source. In this case, Wachovia and the Mexican drug cartels were concealing the origin of money using wire transfers, traveler’s cheques, and cash shipments. The legal source was the Mexican CDCs at Wachovia’s branches. Nevertheless, money laundering is not new in drug-related activities. Many drug cartels are big organizations that deal with a lot of money. Since drug trafficking is illegal, the cartels have to maintain a clean paper trail in case of any investigations by law enforcement agencies. Therefore, Wachovia was helping the drug cartels have a clean paper trail by exchanging money legally through their accounts.
B. The perpetrator-specific factors that contributed to the fraud
(1) The 2008 banking crisis
The housing bubble of 2008 affected the economies of many countries. During this period, many financial institutions were on the brink of collapse (Jiang et al., 2017). As early as 2004, Wachovia knew the risk of engaging in fraudulent activities. Nevertheless, it remained in business despite the bank Secrecy Act and other federal laws that deter money laundering. In 2008 alone, there were twenty-five bank failures in the US. Consequently, many banks and financial institutions looked for ways to stay in business. Many banks resorted to business with drug cartels. This is because the money from drug cartels was the available liquid investment at the moment. Wachovia was one of them, and it could not let go of the opportunity of money laundering for the Mexican drug cartels.
Murray (2018) argues that banks are also part of organized crime with large drug cartels. During the 2008 financial crisis, Wachovia was not ready to go out of business. Many drug cartels deal with liquid cash. They do so to avoid their names being associated with any accounts that can be tracked by auditors. Also, many banks depend on liquid cash to provide loans and other financial services. Therefore, many banks work with drug cartels since they have ready money to offer, which they can use for their operations. On the other hand, drug cartels were aware that banks were falling out of business during the financial crisis. Consequently, this is the main perpetrator-specific factor that contributed to the fraudulent activities of Wachovia National Bank.
(2) Increased drug addiction in the US
In the early 2000s, drug addiction was a major problem in the United States. Additionally, most of the addicts could not do without hard drugs such as cocaine, heroin, and marijuana. Most of the people affected were teenagers and youths. Towards the end of the 1960s, Mexico was trafficking drugs on a large scale. By 2007, large Mexican cartels owned at least ninety percent of the cocaine in the US (Council on Foreign Relations, 2022). The drug-related business was also increasing in value. Therefore, the Mexican cartels took the opportunity of Wachovia’s fraudulent activities to offer them an opportunity to work together. Additionally, the economic status of the US was steadily declining towards 2005. High unemployment levels in the US was one of the stress factors that led to increased drug addiction.
In the US, the drug industry generates about $150 billion annually. This can be attributed to the high rate of drug abuse in the country. In this case, cocaine was the main drug being trafficked by the Mexican cartels (Lawlor-Forsyth & Gallant, 2018). People abuse cocaine in many forms. Therefore, it is a prominent drug in the US due to its high. Cocaine is also valued highly in the US. Mexican drug cartels smuggle cocaine into the US and sell it to other organizations that market it to teenagers and youths. Therefore, all these factors culminated in the involvement of Wachovia and the cartels with their fraud. Also, it was smart for the Mexican drug cartels to hide behind one of the most prominent financial institutions in the US.
(3) Capability
In this case, Wachovia and the Mexican drug cartels were capable of committing fraud. The main form of laundering was through the Mexican CDCs. The drug cartels would exchange Mexican pesos for US dollars to get their drugs across the Mexican border. Also, the cartels would exchange US dollars for Mexican pesos to get their money into their country. Wachovia knew what it was doing in this case. The bank did not follow the Bank Secrecy Act, the anti-money laundering governmental program. In addition, the bank did not report any transactions by the Mexican drug cartels as suspicious (Sanction Scanner, n.d.). Therefore, the bank was intentionally involved in money laundering for the cartels and used its resources to commit fraudulent activities.
The drug cartels were also capable of committing fraud. Most money laundering cases are hard to detect due to the advanced paper trail. In addition, laundered money is used for other purposes other than what it is intended for in the financial statements. Therefore, the drug cartels were capable of committing fraud since they had everything to gain from their business with Wachovia. Both parties benefited from their activities also due to technology. Wire transfers, money exchange equipment, and cash shipments can be attributed to technology. Electronic money transfer is hard to detect if the perpetrators use obscure software. Also, the Mexican drug cartels sent the money using shipments and had the ability to exchange currencies for any country that was sustaining their business. Therefore, both parties had the resources and equipment to commit fraud.
C. The factors that contributed to the fraud being discovered
The main factors that led to this fraud being discovered were strict border checkups and thorough investigations. On April 10, 2006, Mexican soldiers were awaiting to intercept a jet that was flying into the Mexican border. They discovered that the jet had at least five tons of cocaine that were at least $100 million (Lawlor-Forsyth, & Gallant, 2018). Most Mexican drug cartels prefer smuggling drugs into the US by air since planes are less suspicious. However, in this case, it seems like the Mexican soldiers were not siding with the Sinaloa drug cartel. Consequently, this implies that there was no corruption in this case. However, the war on drugs at the US-Mexico border had heightened around 2006, which explains why the Mexican soldiers nabbed the plane.
Additionally, the US Attorney’s Office for the Southern District of Florida, DEA, and IRS are top-tier law enforcement agencies that were involved in investigating the fraudulent activities by Wachovia and the Mexican drug cartels (Himaambo, 2017). After the Mexican soldiers intercepted the jet, they followed the paper trail of its purchase and reported the case to the DEA and other drug-fighting agencies. After a 22-month investigation, it was discovered that the plane was purchased with laundered money. In addition, the US Attorney’s Office for the Southern District of Florida was instrumental in the investigation. Most of the Mexican CDCs were controlled and monitored by Wachovia accounts in Miami, Florida. Therefore, the involved agencies took enough time to conduct a strict investigation to uncover all the transactions and audit Wachovia’s financial statements.
III. The measures that would have contributed to the prevention of fraud
A. Development of internal policies and protocols that deter money laundering
The main perpetrator, in this case, is Wachovia. It has the resources available for money laundering, and it has credibility in the US banking industry, which makes it less suspicious in the eyes of law enforcement agencies. Also, Wachovia did not report any suspicious transactions by the Mexican drug cartels. Consequently, this implies that Wachovia did not have any internal policies and protocols that make it challenging to be involved in money laundering (Șcheau et al., 2022). However, this might be negligence since Wachovia was a huge financial institution in the US, implying that the bank knew the consequences of money laundering. Nevertheless, Wachovia took advantage of its business with the Mexican drug cartels to improve during the onset of the financial crisis. Thus, Wachovia should implement internal policies and protocols that can prevent the bank from committing any type of fraud.
The development of internal policies and controls to deter money laundering is practical. Nevertheless, it is a matter of ethics. Financial institutions should be ethical in their operations. In this case, Wachovia should have stuck to its ethical obligation of avoiding any dealings with Mexican drug cartels. This case might be a matter of Wachovia’s weak internal controls and its negligence. In addition, the development of internal policies and controls is cost-effective. In most cases, there would be no money involved in implementing these policies and controls. However, Wachovia is a financial institution that requires internal auditors to scrutinize its financial statements. In addition, the bank should have a financial division that examines its financial records. Therefore, the development of internal policies and controls is effective and feasible since it involves Wachovia, the main perpetrator of fraud in this case.
B. Government regulation
In 1970, the US Congress enforced the Bank Secrecy Act, which requires banks and financial institutions to help US law enforcement agencies to detect and stop fraud. However, Wachovia did not adhere to the Bank Secrecy Act (Greenbaum, 2019). Consequently, it seems like the Bank Secrecy Act was not enough to deter Wachovia from committing fraud. In this case, Wachovia can be assumed to aid in the distribution of drugs in the US, Mexico, and the North American region. Consequently, the US government should find ways to increase the laws against drugs and any business related to narcotics. Essentially, the government should ensure that there are laws to deter drug trafficking and any intermediaries involved in the drug-related business. Government regulation is practical and cost-effective.
Government regulation against drug trafficking in the US is practical due to its authority in the country. However, in this case, since it is an issue that involves the US and Mexico, both governments can work together. This will be advantageous for the war on drugs at the US-Mexico border. Also, it will help foster relations that help combat drug abuse in the US and Mexico. Therefore, it is a matter of both countries making effective collaboration through regulations that combat drug addiction. Additionally, government regulation is also cost-effective in this case. Inevitably, both countries must invest in enforcing practical regulations against drug trafficking and money laundering in both countries. Essentially, the US and Mexican governments can form a united agency against drugs that includes both countries. This implies that both countries will contribute to helping combat drug trafficking and money laundering at the US-Mexico border. Government regulation is feasible due to the authority of law enforcement agencies.
C. Severe sentences for drug trafficking and money laundering
In criminology, there is the aspect of deterrence – where people do not commit heinous activities due to the consequences that other people have encountered. Braga et al. (2018) argue that deterrence has proven effective in crime mitigation. Therefore, the US and Mexican governments should ensure that there are severe sentences for drug trafficking and money laundering. In the US, one gets a minimum of ten years and not more than life when they are found guilty of trafficking more than five kilograms of cocaine. Also, one can get up to 20 years and pay at least $500,000 in fines or twice the property involved in fraud. In Mexico, one can be sentenced ten to twenty-five years in prison for drug trafficking. Also, one can get from fifteen to thirty-five years of money laundering in Mexico.
Although these sentences in both countries are strict, it seems like they are not severe enough. Therefore, the US and Mexican governments should increase the severity of these cases. Increasing severity is practical, but it might not be cost-effective in some cases. The practicality of increasing the severity of drug trafficking and money laundering sentences can be done by adding the consequences of such incidents. For instance, the fines can be increased to ensure the perpetrators pay huge amounts of money according to the extent of their fraud. Therefore, anyone with the intention of committing fraud will think twice. However, increasing the severity of sentences might not be cost-effective in some cases. For instance, if the US and Mexican governments increase the lengths of the sentences for drug trafficking and money laundering, the perpetrators will stay longer in prison. Tonry (2017) states that lengthy sentences contribute to mass incarceration in both countries.
D. Regular cross-communication between banks and financial institutions
Banks and financial institutions know about money laundering cases before any law enforcement agencies. In this case, Wachovia can communicate with other financial institutions regarding money laundering cases in the US. Communication between banks and financial institutions about money laundering cases is important because it allows the banks to monitor new fraudulent trends. However, in this case, many financial institutions in the US were involved with drug cartels in the wake of the financial crisis. Consequently, they might have been communicating about money laundering, but probably about how to evade the law since all the banks were involved in fraud. Therefore, this also comes as a matter of ethics. The banks should stick to their ethical obligations to avoid any business with Mexican drug cartels. Regular cross-communication between banks and financial institutions is practical and cost-effective.
Communication can be practical if banks and financial institutions use cyber systems with secure platforms. Cybersecurity is important in cross-communication to conceal shared information between the involved parties. In addition, banks and financial institutions (including Wachovia) can use blockchain technologies to facilitate communication and keep records of shared information (Mukherjee & Pradhan, 2021). Also, the banks can use the internet and other instant messaging applications to communicate with each other in real-time instead of any money laundering cases (Session 9). Consequently, the ease of regular cross-communication implies that it is cost-effective. The banks might only have to invest in the technologies used in communicating with other financial institutions. In addition, the banks might have to hire employees to communicate with other financial institutions specifically. Therefore, regular cross-communication is feasible since it involves financial institutions that first detect any money laundering cases.
IV. Conclusion
These dealings between Wachovia National Bank and the Mexican drug cartels show that financial institutions can be involved in organized crime (Lawlor-Forsyth & Gallant, 2018). However, in this case, economic turmoil is the main factor that forced Wachovia to commit fraud. Thus, the bank got into business with the Mexican drug cartels since it was on the brink of collapse. In addition, the bank had Mexican CDCs in Miami and other US branches for easier money exchange. Also, drug addiction was increasing in the US during the early 2000s. Thus, the Mexican drug cartels were taking advantage of the growing demand for cocaine and other hard drugs in the US. These factors made these fraudulent activities by Wachovia and the drug cartels successful for three years, that is, from 2004 to 2007.
In addition, there was also corruption in this case. Drug trafficking activities cannot be successful without bribery and other forms of corruption. These fraudulent activities also showed that Wachovia and the drug cartels are profit-driven organizations that do not care about people’s welfare. Therefore, fraudulent activities are intentional and well-planned out in most cases, and the perpetrators know what they are doing. Some of the discussed measures that would have prevented the fraudulent activities by Wachovia and the Mexican drug cartels are practical and cost-effective. In this case, the development of internal policies, government regulation, and regular cross-communication are practical and cost-effective. The US and Mexican governments should be careful with increasing the sentences for drug trafficking and money laundering cases due to mass incarceration. In conclusion, Wachovia’s money laundering cases show that financial institutions can sacrifice their ethics to be involved in crime.
References
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Session 3. Recap – Criminal Fraud.
Session 7. Fraud Risk Management.
Session 9. Old Fraud, New Methods.
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