Wall Street Is Laundering Drug Money and Getting Away with It

This piece originally appeared at Campaign for America's Future. It has been expanded for this publication.

Too-big-to-fail is a much bigger problem than you thought. We've all read damning accounts of the government saving banks from their risky subprime bets, but it turns out that the Wall Street privilege problem is far more deeply ingrained in the U.S. legal system than the simple bailouts witnessed in 2008. America's largest banks can engage in flagrantly criminal activity on a massive scale and emerge almost completely unscathed. The latest sickening example comes from Wachovia Bank: Accused of laundering $380 billion in Mexican drug cartel money, the financial behemoth is expected to emerge with nothing more than a slap on the wrist thanks to an official government policy which protects megabanks from criminal charges.

Bloomberg's Michael Smith has penned a devastating expose detailing Wachovia's drug-money operations and the government's twisted response. The bank was moving money behind literally tons of cocaine from violent drug cartels. It wasn't an accident. Internal whistleblowers at Wachovia warned that the bank was laundering drug money, higher-ups at the bank actively looked the other way in order to score bigger profits, and the U.S. government is about to let everyone involved get off scott free. The bank will not be indicted, because it is official government policy not to prosecute megabanks. From Smith's story:

No big U.S. bank . . . has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again . . . . Large banks are protected from indictments by a variant of the too-big-to-fail theory. Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets.

Wachovia was acquired by Wells Fargo in late 2008. The bank's penalty for laundering over $380 billion in drug money is going to be a promise not to ever do it again, and a $160 million fine. The fine is so small that Wachovia will almost certainly turn a profit on its drug financing business after legal costs and penalties are taken into account.

International authorities know the banker-drug-dealer connection goes well beyond Wachovia, but governments aren't doing anything about it. A 2009 report by the United Nations Office on Drugs and Crime found that most rules to prevent drug money laundering through banks are being violated. From the report:

"At a time of major bank failures, money doesn't smell, bankers seem to believe. Honest citizens, struggling in a time of economic hardship, wonder why the proceeds of crime – turned into ostentatious real estate, cars, boats and planes – are not seized."

In late 2009, the head of that U.N. office, Antonio Maria Costa, told the press that much interbank lending—short-term loans banks make to each other—was being supported by drug money. As financial markets froze up in 2007 and 2008, banks turned to drug cartels for cash. Without that drug money, many major banks might not have survived.

This scenario is several steps beyond what most of us think about when we debate too-big-to-fail. The government isn't shielding Wachovia from losses on risky bets in the capital markets casinos— it's shielding the bank from the prosecution of outright criminal behavior. The drug money business did not pose risks to the financial system, and Wachovia wasn't losing money on it. Wachovia is simply being shielded from what ought to be the ordinary functioning of the justice system.

Think about what would happen if you or I were accused of laundering $380 billion in drug money. We could not simply settle the allegations out of court in exchange for an apology and a fine. We'd spend the rest of our lives in jail for financing a ruthless, bloody and illegal business. About 22,000 people have been killed in the Mexican drug trade since 2006, and the drug trade itself can't happen without extensive money laundering operations. Moving the money is one of the most difficult and critical elements of any criminal enterprise—without ways to convert crooked cash into seemingly innocuous funds, crooks simply can't operate. Wachovia was doing top-level dirty work for drug dealers.