Drug Money Saved Banks in Global Crisis?

Wow, so it wasn’t Turbo Timmy, the AIG rescue, the alphabet soup of Fed currency facilities or the currency swaps that saved the global banking system. The marginal suppliers of capital, according to the UN, were drug lords. That means that the UN is saying that the banks went into the money-laundering business on a much greater scale than before as a matter of survival. I would presume if this is accurate, it would also mean terrorist groups were able to more more money through the banking system.

From the Guardian:

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result….

Costa said evidence that illegal money was being absorbed into the financial system was first drawn to his attention by intelligence agencies and prosecutors around 18 months ago. “In many instances, the money from drugs was the only liquid investment capital. In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor,” he said.

Some of the evidence put before his office indicated that gang money was used to save some banks from collapse when lending seized up, he said.

“Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities… There were signs that some banks were rescued that way.” Costa declined to identify countries or banks that may have received any drugs money, saying that would be inappropriate because his office is supposed to address the problem, not apportion blame. But he said the money is now a part of the official system and had been effectively laundered.

“That was the moment [last year] when the system was basically paralysed because of the unwillingness of banks to lend money to one another. The progressive liquidisation to the system and the progressive improvement by some banks of their share values [has meant that] the problem [of illegal money] has become much less serious than it was,” he said…

Gangs are now believed to make most of their profits from the drugs trade and are estimated to be worth £352bn, the UN says. They have traditionally kept proceeds in cash or moved it offshore to hide it from the authorities. It is understood that evidence that drug money has flowed into banks came from officials in Britain, Switzerland, Italy and the US.

The British Bankers Association, not surprisingly, took huffy exception to the report and said it was the central banks that saved the industry. Even if the UN claims are true, central banks no doubt did provide more firepower in aggregate. However, as any economist or investor will tell you, what happens at the margin makes a big difference, and it may pan out that laundered funds were a significant factor.

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  1. bob

    Laundered funds are also funds that cannot be traced back to a legitimate source. They are funds without a pedigree, a home or an owner if the shit hits the fan.

    When laundering money a lack of a proven owner is the point. Who is going to go looking for their laundered money? Someone who does not exist?

    Step off the reservation, into the drug world, and possession is ten tenths of the law. Disagree? Come get it back….

    1. bob

      Amnesty programs also have an equally bad incentive set up. The IRS offering amnesty this year on the swiss money, as well as Italy and his yearly ‘amnesty’ on tax evaders (well heeled mountain climbers anyone?). There are lots of press clips on italian history with ‘tax amnesty’, and no mistake italy was named in the report.

      Sure if you are going to attract people to ‘declare’ that family fortune it might bring in some tax dollars, small amount. The real people dropping the dime on themselves are non-people who have a lot of questionable money in swiss bank accounts. All the amnesty does is make the assumption that the money was at one time legitimate, and tax it.

      The government is offering to launder your money, for a fee (income tax) of course. No questions asked.

      BTW, this means the Mountain climbers are most likely going INTO Italy, from Switzerland.

  2. Dan Duncan

    How can this statement from the article be taken seriously:

    “Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were ‘the only liquid investment capital’ available to some banks on the brink of collapse last year.”

    All we have is a UN Official who has “seen evidence” (whatever the hell that means) BUT he declines “to identify countries or banks that may have received any drugs money, saying that would be inappropriate”.

    I’m not saying this laundering never occurred, but c’mon…. Before anyone starts hyperventilating over the criminal syndicate, can we at least get a little more info?

    Obviously, we are witnessing an epic bludgeoning of the Middle Class by the Government/Banking/Media complex. But unsubstantiated allegations, like Costas’, may prove to be nothing more than a convenient Straw Man on behalf of the Powers.

    “Oh, look at those crazy Progressives. Now they are claiming on the basis of ‘secret evidence’ that Goldman=Gotti and BofA=Gambino. These people cannot be taken seriously.”

    If Costas has evidence that put it out there. Otherwise, taking him seriously marginalizes the entire effort of meaningful reform…because before you know it, Reformers will be equated with the Conspiratorial “Truthers” of 9/11 or Obama’s Birthers.

    And it’s too bad. The Truthers, for example, do bring up some interesting and legitimate questions. [And I hate to admit it, but yeah the “miraculous” find of the the unscathed passport of Satam Al Suqami, one of the alleged 19 Arab terrorists blocks from the Towers is hard to believe. Evidently, as he was smashing into the towers, he removed the passport from his pocket and then it floated several blocks before landing gently several blocks from the towers. Such an occurrence is wildly improbable, yet it’s kind of embarrassing even to question it.]

    But the Truthers put the baby in the bath-water and blew it by shot-gunning ridiculous assertions about Darth Cheney, etc. that kill any remaining credibility.

    It seems like Costas is putting forth an allegation that he knows people will believe…because he knows they WANT to believe it. Yielding to this temptation may feel good, but like most rumors, it’ll end up hurting the believer more than the “sinner”.

  3. Doug Terpstra

    Let’s not be too hasty. Oddly, this doesn’t jibe with what Alan Greenspan said this morning on Meet the Press. (Surprisingly) he downplays any other factor including the (feeble) stimulus, saying that the recovery now well established is due exclusively to the heroic work of the Federal Reserve working up to its limits (not beyond, mind you), and that the wealth “created” in the stock market is certain to lead to robust employment growth.

  4. DownSouth

    It was the largest seizure of cash in the history of drug enforcement: $207 million, mostly in crisp $100 bills, stuffed into walls, closets and suitcases in the Mexico City home of a Chinese-born businessman.

    “Police follow drug trafficking trail to China and beyond”

    The federal Attorney General (PGR) says that the US$205 million in cash seized from a Las Lomas home in Mexico City last month was going to be used to start up a huge methamphetamine laboratory in Toluca.

    It was the biggest cash seizure ever in the war on drugs, according the U.S. DEA. The house where the loot was found belonged to Zhenli Ye Gon, a naturalized Chinese businessman who authorities have linked to wholesale international methamphetamine trafficking…

    The December 2006 seizure enabled authorities to trace the purchase of the eight pill manufacturing machines acquired by Unimed Pharm Chem. The machinery purchased by Ye Gon´s enterprise is the “Rolls Royce” of pill fabrication equipment, according to experts.

    The high-precision machines, manufactured by the German company Fette GMBH, could make between 15 and 50,000 pills per hour. That´s nearly 360,000 pills a day.

    Assuming that Ye Gon planned to install all eight machines in the Toluca factory, that would have given him and his associates the ability to produce almost 3 million tablets per day. That level of production could yield more than 164 million pesos (US$14.9 million) daily on the wholesale market.

    The profits would be even more mind-bending if the product was introduced to the U.S. market.


    And if you’re interested in seeing what $205 million in mostly $100 bills looks like, here are some nice photos:


    1. charcad

      I remember the $200 million cube photo from a couple years ago. It occurred to me then that economists should revise their methods of calculating M0 – M3 to create “Drug Depository” sub-accounts.

      It seems clear the Drug Depository sub-categories should have different multiplier and circulation velocity factors assigned than funds moving within Wal-Mart’s economy. I’m sure there’s a Ph.d thesis for someone in exploring what these should be.

      Personally I think the effect would be anti-inflationary.

    2. craazyman

      Holy Cow. That’s a lot of cash. I feel pain seeing Ben Franklin’s face in that hell hole. Some things just resonate with Metaphor.

      Strange, Mexico seems to be sliding back in violence to Pre-Cortez days. What a fucked up mind cloud hangs like smog over Central America. Wonder if it’s the Volcano gods or the corn gods.

      And now the Chinese bring their special brand of dystopia into the mix.

      As the true proverb says “The dog is turned to his own vomit again, and the sow that was washed, to her wallowing in the mire.”

  5. Jessica6

    You’d almost think from articles like that the drug money wasn’t normally a part of international finance.

    1. craazyman

      Indeed it is. But it may be more risk tolerant — given the enormous profits made during its creation and the desire to launder it — and less inclined to be vacuumed back to its owner in a liquidity crisis.

  6. Doc Holiday

    The concept of a partnership between the drug-world mafia and the shadow-banking world, in collusion with government-backed collusion and conspiracy is making more and more sense! The retarded nature of congress, Treasury, DOJ, IRS, FDIC and the total lack of financial regulation screams of corruption and insider abuse!

    Look at the interesting people involved in this game and then ask how this might be connected to 100’s of banks being closed by FDIC — after a decade of FDIC in-activity and non-regulation. Why, you may ask is FDIC suddenly busy shutting banks, while at the same time, new and inventive shadow banking systems are morphing into place (under the radar)?????


    To be continued

  7. Doc Holiday

    For those un-willing to go to that link, let me help:

    Promontory Interfinancial Network was founded by leading figures in the banking industry to provide financial institutions with profit-enhancing solutions. These Promontory founders – Eugene Ludwig, Alan Blinder, Mark Jacobsen, and Alfred Moses – envisioned a network, comprised of thousands of financial institutions, whose “synthetic size” would help each member institution to compete more efficiently.

    > Sorry about double post…. it’s a Large Hadron Collider Thing

  8. Dave Raithel

    Well, that is all very interesting. I caught “The Roaring Twenties” the other night on TCM. (http://www.imdb.com/title/tt0031867/) Hadn’t seen it since I was a kid.

    The narrator claims: 1. The depression of the early 1920’s (http://eh.net/encyclopedia/article/Smiley.1920s.final) was caused, in part, by the Volstead Act throwing all those beer brewers and distillers and the accompanying infrastructure workers (distributors, bar keeps, waiters, etc.) out of work. 2. That the cash flow of the illegal drug trade (alcohol)fueled, in part, the speculation and stock bubbles through the remainder of the decade – gangsters had to put their money somewhere after paying off politicians, purchasing arms, and feigning front companies.

    Could be true, could be false, I don’t know, but it’s an interesting perspective from a film made in 1939 on the recent history preceding it – it says something about how some people saw their past at the least. Makes one wonder if “full employment” would have been achieved after 1923 WITHOUT the illegal drug trade of that time. Gives more substance to the assertion “as any economist or investor will tell you, what happens at the margin makes a big difference…”

    Oh what entanglements we do weave, when repression exceeds what civilization needs ….

  9. doc holiday

    Ok, sorry for a triple post, but yah know, I haven’t had one of these for at least a year and it’s really not me, my keyboard just seems active.

    Ok … what about some new non-compete clause or covenant in America, that eludes to something like that if you were or are a Comptroller, Fed Chairman, Chief of Staff at the Federal Deposit Insurance Corporation, Deputy Assistant Director of the Congressional Budget Office, Vice Chairman of the Board of Governors of the Federal Reserve System, Secretary of the Treasury, etc., etc., that you can’t start your own shadow banking system and front-run global accounting laws and play with derivatives and launder drug money for the mafia?

    That seems like it would be common sense, but somehow that wasn’t written down anywhere, so before this systemic meltdown that involves multi-trillions becomes really bad, maybe there should be some new thinking on ways to control the pending collusion and corruption that may happen, if rules are not in place. The really tough problem is deciding who would do this or who would regulate it, because these catch-22 shadow conspiracy things usually have to be vetted out with full scale revolutions … and although those are messy, that approach may be better than Obama slapping these guys on the butt and saying, heck of a job.

    Full Disclosure: There was no F’ing way I was going to go back and read what I just wrote, so if there are typos or shit like that, I really think that in the scope of all this crap, it doesn’t matter anymore.

  10. LeeAnne

    Alcohol prohibition was ended by a generation that had experienced legal alcohol production and use, and they therefore actually experienced the difference in society before, during and after. They found that the cure produced change that was worse, much worse, than the problem.

    Changes that alarmed the public included the growth of violent organized criminal gangs and increasingly heinous criminal penalties for alcohol offenses.

    Alcohol prohibition was later repealed by a vote of the same public that had demonstrated and voted in favor of it after their experience alerted them to the law’s potential for fascism. The regulation of alcohol resumed, returned to the states where it has remained to this day.

    Drug prohibition is different. It was neither voted in by ‘the people,’ nor have ‘the people’ had any control over drug policy since the Treasury Department was awarded dictatorship rights, (i.e.: the right to rate marijuana the most dangerous drug around), by a Supreme Court decision after 10 years of Treasury Department activism. This Supreme Court decision in favor of the Treasury Department’s desire for total policing control over narcotic drugs and backed up by a group similar to today’s religious right, distorted the clear intention of the Harrison Narcotics Tax Act to simply record and tax narcotic drug distribution, primarily by doctors.

    Current US Drug Prohibition policy which has been exported to the rest of the world has perpetuated an illegal drug industry for close to one hundred years that cannot have failed to taint all governments and all monetary activity in the world since it was clear from the very beginning of US drug laws created against Chinese laborers in San Francisco that highly publicized corruption in the distribution of that which was in demand would create dangerous substitute products and corrupt everyone along the distribution map, particularly government officials, without whom the DRUG TRADE COULD NOT EXIST.

    Is our involvement in Afghanistan a mystery? Whomever is getting the drug profits is in charge of the government. That is irrefutable.

  11. gordon

    Baker and Nordin put together a short summary of their researches into dirty money (“Dirty Money: What the Underworld Understands that Economists Do Not”) in the Jan. 2007 issue of Economists Voice.


    They say: “Each year, at least $1 trillion flows illegally
    and undetected across borders according to our

    From an old comment at Economist’s View:

    “The Mexican bank Banamex (sometimes also called Banco Nacional de Mexico) accounted for roughly half of Citi’s profit in 2007. Banamex was bought by Citi in 2001, after the US Govt. had prosecuted Banamex for money laundering a few years earlier and after allegations that its previous owner (Roberto Hernandez Ramirez, one of the world’s richest men) was personally involved in the drug trade”.


    I have suspected for a while that the extreme reluctance of Govts. all over the world to countenance bank nationalisation (remember when everybody was calling for nationalisation?) arose from their fear of what the Govt. accountants would find by way of money laundering and tax avoidance.

  12. Bruce Krasting

    Rubbish. Try and deposit 20k in currency at the local bank. I don’t care where you are. This is not easy anymore.

    $350b? All subject to forfeiture? It does not work that way.

    1. Yves Smith Post author


      You appear to be generalizing from your experience and that of those in your circle. I would submit that major drug lords, many of whom employ what amount to standing armies and have been known to murder judges to get their way, are in a somewhat different category than you are.

      To the extent they want or need to get money into banks, they presumably already have established routes (as in business front where it would be reasonable for the business to make cash deposits). So what one would expect to see was increased activity through established channels, and perhaps the establishment of new, parallel channels.

    2. Skippy


      Just like the fiscal reform before us now, the old drug reform was/is a side show.

      If someone has a hard asset/financial asset for sale drug monies can flow from offshore banks to buy said assets, even at at loss or inflated value just to get a toe hold in the USA….can you say:


      Much of Liechtenstein’s terrain is mountainous, making it a winter sports destination. Many cultivated fields and small farms characterize its landscape both in the north (Unterland, lower land) and in the south (Oberland, upper land). The country has a strong financial sector located in the capital, Vaduz, and has been identified as a tax haven. It is a member of the European Free Trade Association. Liechtenstein is not part of the European Union.

      Are you aware of the franchises with in the USA started by drug monies for the intent of distribution/laundering of monies. Hell even one brand name soft drink has nefarious connections via distribution handlers….ohh the story’s I could tell about a lake in Vermont and mad rum ski resort.

      Miami banksters were cool with the cocaine trade till the ethnic bagmen went public berko. See all the stuff built then…big piles of coke man and it segways straight into the S&L garbage…small banks started in the Midwest that traditionally turned over a few MM to 15/25mm YoY, but as always the bag holders go to jail and not the tall boys eh!

      In ending…old school accounting is gone, just put what ya like, match it with all kinds of fraudulent transaction papers err binary proof ya like. The trick is to be at the top ie the Exchanger and not anywhere down the food chain, never handle the goods or the drity money, just the cream after the laundry is done.

      PS always check you out at ZH and injoy your view points ta.

      1. bob

        Funny stuff, know the lake and the ski resort. The locals have taken to calling it the center of the world. Everywhere I travel I seem to find at least someone who knows of it, and now here. That’s why they call it the center of the world, everyone can visit, but you can’t stay.

        Look at what the ski hill is up to lately. Supposedly Koreans paying for it.

        1. Skippy

          The one thing people which resort to criminal largess need more than the money it self is *respectability* or the final wash if you like. Now not all that reside around this location or its sister towns/city’s are criminal, just saying that if one looks far back enough a theme can be found. Romanticized through out the ages too lol.

          The hill you say, well looks like I’ll have to back door some info via relatives with patrol contacts….BBL.

          1. bob

            When I was very young I can remember exploring tunnels and hidden rooms in very old, respectable Victorian looking houses. The explanation for their existence was always ‘part of the underground railroad’.

            Most of these houses dated to the early part of the 1900’s. It took me a while to realize what they were really for.



    Coke Enneday: The Mystery of the Leaping Fish 1916

    The Mystery of the Leaping Fish is a 1916 short film starring Douglas Fairbanks and Bessie Love. In this unusually broad comedy for Fairbanks, the acrobatic leading man plays “Coke Enneday,” a cocaine-shooting detective parody of Sherlock Holmes given to injecting himself with cocaine from a bandolier of syringes worn across his chest and liberally helping himself to the contents of a hatbox-sized round container of white powder labeled “COCAINE” on his desk. The movie, written by D.W. Griffith, Tod Browning, and Anita Loos, displays a surreally lighthearted attitude toward cocaine and opium. Fairbanks otherwise lampoons Sherlock Holmes with checkered detective hat, coat, and even car, along with the aforementioned propensity for injecting cocaine whenever he feels momentarily down, then laughing with delight. In addition to observing visitors at his door on what appears to be a closed-circuit television referred to in the title cards as his “scientific periscope,” a clocklike sign on the wall reminds him to choose between EATS, DRINKS, SLEEPS, and DOPE.


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