The Third International Symposium on Global Drug Policy: Paris 2004 (transcript)

“Drugs and Terror”

Dr Loretta Napoleoni, Economist and Terrorism Expert

Presentation given during a The 2004 Paris International Symposium on Drug Policy: Local Innovations and Global Challenges, held in Paris on 25-26 November 2004.

State Sponsored Terrorism

The most important entry in the terror balance of payments is smuggling of drugs. The illicit trade of narcotics is one of the areas where criminal organizations and terror groups have successfully established a commercial co-operation. In a globalised world, both criminal and armed groups utilise the illegal economy, an international network of banks, financial institutions, offshore facilities and brokers, to wash the dirty profits of the drug trade. Narcotics, therefore, are one of the key links between the criminal, illegal and terror economy. The international battle against drugs should be conducted bearing in mind that its huge profits bankrolled not only criminal organizations but armed groups and illicit financial organizations.

The use of illicit drug trade to fund armed organization is not a new phenomenon. During the Cold War, it became a feature of state sponsored terrorism. In the late early 1950s, during the war in Indochina, Marxist armed groups, facing a serious shortage of cash, confiscated Laos’ opium crop, sold it on the open market in Thailand and used the profits to buy arms from China. The French, who struggled to bankroll the Maquis, the counterinsurgency groups created by the Service de Documentation Extérieure et du Contre-Espionage (SDECE), took a page from the enemy’s book and formulated Operation X. The following year, the SDECE secretly negotiated to buy the entire Laotian crop from local tribes, who welcomed both the revenue and the opportunity to strike back at the communists. Soon after the harvest, the opium was loaded on a French DC-3 and transported to South Vietnam. From there it was trucked to Saigon and handed over to a gang of criminals well known to the SDECE for drug trade. Part of the opium was sold directly in Saigon dens and shops, part was purchased by Chinese merchants who exported it to Hong Kong and part was sold to the Union Corse, the Corsican Mafia, who smuggled it to France and to various European and North American markets. Thus the SDECE netted a handsome profit that was channelled to finance the Maquis.

In the 1980s, as the anti-Soviet Jihad progressed, costs soared. There was constant shortage of money along the Afghan pipeline and so the ISI, the Pakistani Secret Service, and CIA began looking for additional sources of income, such as drug smuggling. Afghanistan was already a producer of opium, but it supplied only small neighboring regional markets. The ISI took upon itself the task of increasing production, processing the opium and smuggling heroin to rich Western markets. As the Mujaheedin advanced and conquered new regions, they were told to impose a levy on opium to finance the revolution. To pay the tax farmers began planting more poppies. Drug merchants from Iran, who had moved to Afghanistan after the revolution, offered growers credit in advance of their crops. They also provided the expertise needed to refine opium into heroin. In less than two years, opium production boomed. Soon the narcotics-based economy took over the traditional agrarian economy of Afghanistan and, with the help of the ISI, hundreds of heroin laboratories were opened. Within two years the Pakistan-Afghanistan borderland became the biggest centre for the production of heroin in the world and the single greatest supplier of heroin on American streets, meeting 60 per cent of the US demand for narcotics. Annual profits were estimated between 100 and 200 billion dollars.

The preferred smuggling route went through Pakistan. The ISI used the Pakistani army to carry the drugs across the country, while the BCCI, the Bank of Credit and Commerce International, provided financial and logistical support for the whole operation. Although most of it was sold and consumed in the streets of North America, no investigation from the US narcotics or the DEA was ever carried out; no action was taken to stop the well-documented flow of heroin from Pakistan to the United States. By 1991, yearly production from the tribal area under the control of the Mujaheedin had risen to an astonishing 70 metric tonnes of premium quality heroin, up 35 per cent from the previous year. In 1995, the former CIA director of the Afghan operation, Charles Cogan, admitted that the CIA had indeed sacrificed the drug war to fight the Cold War.

The Commercial War Economy of Sendero Luminoso

The most devastating consequences of superpowers interference in the affairs of other nations have been the destabilisation of entire regions and the disintegration of their economies. The shocking legacy of state-sponsored terrorism in Latin America was the proliferation of armed groups and the subsequent birth of terror-run micro-economies. In the 1980s, parts of El Salvador, Nicaragua, Honduras, Colombia and Peru fell under the military control of right and left wing guerrillas. This happened to the people living in the Upper Huallaga valley in Peru. The valley, also known as Selva Alta because of its altitude, which ranges from 1,500 to 6,000 feet, is located on the eastern slopes of the north-eastern Andes. The region was restructured under the agrarian reforms of the late 1960s, which proved to be a great failure. Due to the harsh climate, none of the crops introduced managed to flourish and the local population was on the brink of starvation. Only one marketable plant appeared to be sufficiently resilient to thrive at such an altitude: Erythroxylum Coca. Local people have chewed its leaves for centuries to gain energy and calm hunger. Therefore, when the Colombian drug traffickers came to the valley to buy coca crops the impoverished farmers saw it as a blessing. Almost overnight, farmers became growers, catering for more than their own needs, and almost as quickly they fell victim to the exploitation of the powerful Medellin cartel.

In 1978, under mounting US pressure, the government of Francisco Morales Bermudez attempted to eradicate coca production. The programme was extremely unpopular and never took off. Despite military intervention, coca planting in Selva Alta increased to supply the buoyant drug traffic. In 1980, militants from the Sendero Luminoso armed group (Senderistas) moved to the Upper Huallaga valley and began living with the locals. They soon discovered that the population was harassed both by the drug traffickers and the police. So the Senderistas launched a two-pronged campaign: to undermine government policies, an easy task among a population constantly threatened by Lima, and to defend growers from the Colombian cartel.

During the same year, the Peruvian government introduced another project for coca eradication in the Upper Huallaga valley. The local population was apprehensive about the new agrarian programme that was going to take away their only viable means of survival: coca production. Capitalising on these fears, the Senderistas visited villages and small towns to sympathise with the people and to denounce the United States as the initiator of the reforms. They explained to the growers that cocaine was not a threat to Peru, but to the US. However, Americans did not want to start a war against their own drug dealers and stop the monetary flow generated by the laundering of drug money. Therefore they put pressure upon the Peruvian government to curb coca production. Neither Washington nor Lima, stressed the Senderistas, cared that the livelihood of the entire valley was economically dependent on coca crop. The Sendero Luminoso offered protection against the military, who were about to enforce the new programme, and against the cocaine syndicate, which had been exploiting the growers. Almost enthusiastically, people rallied around the Senderistas. ‘They are professional agitators,’ dismissed the Peruvian Army General Hector John Caro, former chief of the secret police, ‘they are always prepared to act.’ Under Sendero Luminoso’s supervision the growers were organised into unions, a move which allowed them to negotiate better prices.

Employing terror tactics, the Sendero Luminoso began taking military control of the entire valley. A common ploy was to move into a town accompanied by at least 30 armed men, gather the inhabitants together, lecture them and proceed with interrogations to find out who was working for the local authorities or with the gangs. These individuals were then publicly executed and local authority was replaced by general assemblies composed of the Senderistas. Once an area was ‘liberated’, the Senderistas moved to the next town. By 1985 the group had established a strong military presence throughout the entire region. Bridges were blown up to prevent regular troops from reaching the valley and road blocks were established to search every vehicle approaching along the Marginal Highway, the sole communication link to the outside world. Selva Alta soon became a no-go area for police or government troops.

Meanwhile, the growers were content with the valley being under the grip of the Senderistas because they felt protected from the drug traffickers and criminal gangs as well as from the government’s agrarian reforms. Interestingly, the cocaine producers and drug traffickers also welcomed the change because discipline among growers pushed production up. By 1988, 211,000 hectares of the valley were covered with coca plants. In addition, under the Sendero’s rule, shipment procedures were streamlined. It was the Sendero’s responsibility to protect airstrips scattered around the valley, a task it continued to carry out in 2002 without interference. Shipping by small aeroplanes became not only easier, it became more efficient as well.

The Sendero’s activities did not remain limited to the control of coca production. In some areas they also took over other businesses, for example foreign exchange. In Xiòn local banks stopped exchanging dollars into Peruvian Intis for the intermediaries of the Medellin Cartel. Instead, the Sendero Luminoso, for a small commission, provided the Colombians with domestic currency to pay growers. Naturally, bankers were extremely unhappy about these arrangements, but there was nothing they could do because the Sendero Luminoso was the de facto governing authority in the valley. Control over foreign exchange allowed the Senderistas access to a considerable amount of hard cash in a country starved for foreign exchange. Part of the money was used to maintain its authority in Selva Alta and other enclaves; part was allocated to buy weapons to promote the group’s Marxist dream in Peru. The Sendero Luminoso was – before the Colombian FARC – by far the best-armed group in Latin America. Between February and September 1989, for example, it successfully undermined the government’s efforts to eradicate drug trafficking in the valley. In retaliation for the use of the herbicide Spike, which destroyed coca plantations, members of the Sendero Luminoso assaulted a military garrison in the town of Uchiza and shot dead the 50 soldiers who had surrendered after being outnumbered by the Senderistas. That same year the government declared the Upper Huallaga valley a military emergency zone under the control of a zone commander.

In the Upper Huallaga valley, the Sendero Luminoso succeeded in creating a terror-run economy based upon drug revenues, which formed the core of a micro-state. Selva Alta is one of the many ‘state-shells’, de facto state entities created around a war economy generated by the activities of violent armed groups. The Sendero Luminoso’s model is that of a “commercial war economy”, based on the commercialisation of local resources, i.e. coca plantations and trafficking in illegal products such as narcotics. In this model ‘armed groups create economic sanctuaries by gaining military control of economically profitable areas [such as Selva Alta] and develop commercial networks with third parties, i.e. the Colombian drug cartels; they even work in collusion with rival groups. The impact can be positive by contributing to… the protection of illegal sectors, [for example coca production].’ Some of these economies can generate vast amounts of income, as is the case in the Upper Huallaga valley. In the late 1980s, total revenues for Peruvian coca leaves and coca paste yielded an estimated 28 billion dollars in the United States. Of this figure, the share of Peruvian paste producers and local traffickers was 7.48 billion dollars, equivalent to 20 per cent of legitimate Peruvian GNP, which in 1990 was 35 billion dollars. Growers got 240 million dollars for cultivating the coca. Sendero Luminoso’s share of this business in Selva Alta was estimated at 30 million dollars, sufficient to purchase arms and expand its racket of protection and extortion across Peru. The benefits of the commercial war economy are also apparent among the population. The 66,000 families living in the Upper Huallaga valley enjoyed annual average earnings of 3,639 dollars, more than three times the 1,000-dollar per capita average income in the rest of Peru.

The international ramifications of terror-run economies, such as that in the Upper Huallaga valley, are staggering. On a global scale, billions of dollars generated by narcotics have laundered in the United States; in the 1990s between 30 to 40 per cent enter the US economy, while the rest were pumped into the international illegal economy and used to fuel the New Economy of Terror.

The Birth of Narco-terrorism

At dawn on 10 March 1984, a cluster of Colombian police helicopters appeared in the sky near the river Yari, about 700 miles south of Bogota. The camouflage birds landed on the riverbank and opened their bellies. A commando unit of elite anti-terrorist agents leaped out, quickly moving to attack a complex of nearby buildings, which were believed to be a hideout for local drug barons. As they advanced towards the target, the men were ambushed by heavy gunfire coming from the jungle around the clearing. It took them two hours to reach the compound and take control of it. Inside they found 13.8 tons of cocaine with a street value of about 1.2 billion dollars.

The operation was successful in many respects. It destroyed an important drug base in the jungle, it inflicted huge financial losses on the drug barons and, more importantly, it unveiled a dangerous liaison between the FARC and the buoyant Colombian drug business. Investigators soon learned that the gunfire unleashed on the police at Yari had come from a commando unit of 100 FARC men. Documents found inside the buildings confirmed that the FARC was providing drug barons with armed protection.

The alliance of terrorism and drugs is a recent and deadly phenomenon. Until 1980, the FARC and M19 (Movimiento 19 Avril) were struggling to survive on income from armed robbery and the kidnapping of local businessmen. The number of their followers had dropped to 200, a handful of hard-core militants; recruitment was at a standstill because the two organisations had no cash to spare for salaries and the leaders feared their own extinction. However, they soon learned that in the vast jungle of Colombia there was immense wealth waiting to be gathered. In 1981, Colombia produced 2,500 metric tons of coca leaf; by 1986 this figure, fuelled by North America’s insatiable appetite for drugs, had risen to a whopping 13,000 metric tons. In the mid 1980s, the drug economy contributed 5 billion dollars a year in cash to the Colombian balance of payments. Revenues from cocaine exports well exceeded revenues from coffee and cut flowers, the country’s other two largest foreign exchange earners. The bulk of the drugs business was under the control of a handful of men running powerful cartels. In 1981 the FARC and M19 struck a deal with the Colombian drug mafia: they would provide armed protection against the army in exchange for a share in the coca profits.

The FARC levied a 10 per cent protection tax on all coca growers in areas under its control, which alone netted a monthly income of 3.3 million dollars. By 1984, the FARC and M19 earned 150 million dollars per year from the business of protecting drug smugglers and traffickers. A large percentage of the profits was spent on recruitment, so that by 1988 both groups commanded a militia of 10,000 people, large enough to be feared by members of the government. Another percentage was used to bribe top politicians to ensure that entire areas of Colombia came under rebel control, regions where the regular Colombian army could no longer venture. In the grip of the FARC and M19, the economy of these territories was quickly reduced to drug production and its armed defence. Coca was the single export and source of foreign exchange or income. Business became either ancillary to it or an indirect beneficiary of its profits.

As the alliance between the drug barons, FARC and M19 consolidated, the narco-terror business expanded and partnership was extended to fourth parties. A deal was struck with the Cuban authorities whereby Colombian vessels could use Cuban ports as a stopover for the shipment of drugs to the US. In exchange Cuba received as much as 500,000 dollars in cash for each vessel and the right to sell the Colombians arms for the FARC and M19. The dynamics of the operation were explained by David Perez, an American drug dealer, at his trial in Miami in 1983. The Colombian cargo left Colombia bearing its own flag. When it entered international waters, however, it hoisted the Cuban colours and radioed Cuba with an estimated time of arrival. Once in Cuban waters, several small boats sailed to the ship. The drugs were loaded onto these boats and smuggled to Florida. Often this procedure resulted in barter deals whereby drugs were exchanged for arms. Profits for the Cubans varied from cargo to cargo, depending on the type of drugs; for example a 10-dollar per pound tax was levied on each cargo of marijuana. For a vessel of methaqualone (known in the US as Mandrax), Havana received a third of 7 million dollars. In the 1980s, Castro netted a yearly 200 million dollars in foreign currency from the Colombian drugs and arms smuggling businesses alone.

Domestically, the impact of the Colombian narco-terrorist economy has been tragic. Widespread political corruption, coupled with assassinations, curtailed any serious effort to fight the narco-traffickers. The massive amount of hard cash generated by the cocaine trade tilted the country’s balance of payment into surplus and inevitably sustained business growth. As the drug barons’ rivers of cash trickled down to the economy, it became more and more difficult to attack them as criminals. In the mid 1980s, President Betancour attempted to fight back, only to be faced with the drug barons’ threat to close down 1,800 businesses and to assemble an army of 18,000 people. The weakness of the Colombian government in dealing with the phenomenon of narco-terror is underlined by its unsuccessful attempts to negotiate a peace treaty with the FARC, a desperate gesture which stresses the power this group has attained.

The extraordinary growth of the Colombian drug cartel affected not just the home front, but also produced a serious spillover into neighbouring countries. In Peru, as seen previously, the Sendero Luminoso was able to gain strength and eventually control large regions by mediating between local coca growers and Colombian drug traffickers. In August 2000 the Peruvian government was implicated in an arms smuggling scandal while supplying weapons to the Colombian FARC. It emerged that the Peruvian military had produced a regular purchase order to buy from the Jordanian government 50,000 AK-47 assault rifles made in Bulgaria. The shipment was flown from Amman on a Ukrainian cargo plane with a Russian-Ukrainian crew. The plane flew via the Canary Islands, Mauritania and Granada and, eventually, before landing in Iquitos, Peru, air dropped the arms into the Guainia region, near the border with Venezuela and Brazil, the territory controlled by the FARC. The cargo flew back with narcotics, estimated at up to 40 tons of cocaine, which went partly to Jordanian brokers and partly to the former Soviet Union. The involvement of high-ranking Peruvian government officials in the smuggling contributed to the scandal, which eventually led to the resignation of President Fujimori on 20 November 2000.

Middle Eastern money brokers linked to Islamist groups are believed to be involved in the laundering of Latin America narcotics profits. Drug gangs from Peru, Colombia and other South American countries converge in Ciudad del Este to ship drugs and wash their money. Illegal profits are washed through the CC5 account offered by the Central Bank of Brazil to foreigners in Ciudad del Este. Originally this special account was set up to speed up the conversion and transfer of Paraguayan money to Brazilian banks. The whole operation takes less than a day. However, contraband and money laundering are not the sole attractions of Ciudad del Este. The city is also a major hub for Latin America armed organisations to relax and do business at the same time. Members of the IRA, ETA and FARC are regular visitors.

The Black Market Peso Exchange

In the mid 1980s, the Colombian drug smuggling trade contributed about 15 billion dollars per year to the economy of Florida. This huge injection of cash was mostly generated by the laundering of drug money; money that inevitably corrupted Florida’s financial establishment. Cash-hungry banks welcomed highly liquid businesses without asking too many questions. And even though they were legally required to report deposits of over 10,000 dollars in cash, they seldom did so, silently recycling the money.

After 9/11, the Patriot Act and other counter-terrorism financial measures, for example those imposed by the Financial Action Task Force (FATF), have reduced the flow of drug money being laundered in the US. Such measures, however, had a very limited impact, if any, in reducing the activities of both drug traffickers and terror groups handled through the informal banking system. This system can be described as a series of alternative and unregulated networks, through which money moves from country to country. One of these networks is the Black Market Peso Exchange, another one is the hawala. The Black Market Peso Exchange is the system of money laundering most commonly and widely used by the Colombian and other South American drug cartels. The hawala, which is very popular in the Muslim world, is predominantly used by Islamist terror groups. Both networks are extremely elusive to traditional monetary controls because they do not involve the physical movement of cash from one country to another. Ironically both system functions according to principles of globalization and deregularization: they are truly trans-national, they are self-regulated (failure to deliver the cash often results in death) and they are fast (the hawala de facto operates in real time).

In the early days of the Medellin drug cartel, cash was flown back to Colombia by the same planes which took the drugs to America. Once in Colombia, dollars had to be converted into pesos with the help of corrupt bankers. But the process was slow and the drug traffickers had to store huge amounts of cash. Cash storage created several problems. One Colombian drug trafficker, for example, buried so much cash on his property that occasionally, when it rained heavily, the resultant floods washed US dollars downstream, clogging the sewage system . According to Marci Forman, who directs the US custom services financial investigation unit, in Colombia today there are still warehouses full of US currency waiting to be exchanged into pesos . US dollars are of no use to the Colombian drug cartel or to FARC, or to Sendero Luminoso in Peru. Members of these organizations live in secluded areas where they use local currencies and never travel abroad. They need domestic money to pay the growers, to buy protection, to corrupt politicians, to recruit and to purchase arms and explosives.

In the 1990s, to avoid storage problems and guarantee a steady flow of local currency, drug traffickers and terror groups successfully infiltrated the Colombian currency black market and transformed it into their own illegitimate and informal banking system: the Black Market Peso Exchange. The way the system works is fairly simple. The drug traffickers ship and sell the narcotics in the US; in exchange they receive US dollars in cash which they hand over to a money broker inside the US. The broker agrees to exchange it at a discount to the official rate, generally around 40%, and to deliver the corresponding pesos in Colombia within a few weeks. The broker then distributes the cash, which is generally handed over in boxes, suitcases or even inside the trunk of a car, among its vast staff of runners, who deposit it in small amounts into thousands of US bank accounts under their name. Once the money is in the bank, it is ‘clean’.

At the same time the broker has an office in Colombia where legitimate businessmen go to buy foreign products, ranging from US cigarettes to TV sets, products that they acquire in pesos. The purchases are done with an exchange rate which generally is 20% above the official exchange rate. The US money broker buys the goods in the US using the drug money deposited by its runners, often from companies which know the origins of the funds; he then ships the products to his office in Colombia where they are sold in pesos. These pesos are then used to pay back the drug traffickers.

To avoid being monitored by the US monetary authorities, bank deposits and purchases are always below the $10,000 limit imposed by the IRS. The technique of breaking down large sums of deposits into several transactions of less than $10,000 is also illegal in the US. In January 2003, two Miami-Dade women were sentenced to six years in prison for using their company, Pride International, an appliance export business, to money launder $5 million of drug money .

The Black Market Peso Exchange is also used by South American professionals, as well as politicians, to send dollars to their children studying in the US. Thus, it functions in a fashion similar to the hawala. It presents the same advantages: it is faster, cheaper and avoids any type of monetary controls.

According to the IRS, from 1999 to 2003, the volume of money laundered via the Black Market Peso Exchange, has risen from $1 to $6 billion . According to Raymond Kelly, Commissioner of the US Custom Service, the Back Market Peso Exchange is “the ultimate nexus between crime and commerce, using global trade to mask global money laundering.”

Money Laundering in Europe

While the Patriot Act had reduced the flow of drug money laundered in the US, it has not hindered this activity, it has simply shifted it towards Europe. European drug enforcement agencies agree that the introduction of a common European currency has facilitated the activity of laundering bulk cash in Europe. The absence of an homogenous money laundering legislation coupled with the proliferation of offshore facilities in Europe, has encouraged organized crime to wash drug money in the Old Continent. The ‘ndragheta, the Calabrian Mafia, is today at the centre of a complex network of drug business which includes imports of cocaine from Colombia, sales of narcotics in Europe and money laundering of the profits. Interestingly, the link between the ‘ndrangheta and the Colombian drug cartel is Mancuso, the new leader of the AUC, the Colombian paramilitary group, who is of Italian origins.

In Italy, in the spring 2004, custom police busted a major operation run by the ‘ndrangheta where drug money was laundered through real estate transactions in Brussels. The cash was shipped in bulk inside containers to Brussels, where it was used to buy existing properties or to fund the construction of new ones. The Italian police estimates that the ‘ndrangheta bought an entire section of Brussels using this method. According to the Italian authorities, before the introduction of the Euro, the recycling of drug money was more expensive because funds had to be exchanged into various currencies. Italian organized crime groups, for example, used a money-exchange in Rome to convert cash denominated in European currencies into dollars. The cost was 50 liras per dollar. In addition, the operation was lengthy as the cash had to be exchanged over a long period of time to avoid alerting the monetary authorities. Italian police concurs that since 9/11, both the Mafia and the ‘ndrangheta are increasingly laundering drug money in Europe. The principal countries were this activity takes place are Belgium and Holland. Total earnings of the four major criminal organization, i.e. mafia, camorra, ‘ndrangheta and sacra corona unita, amounts to 10% of Italian GDP (euro 100 billion).

If Italian organized crime is increasingly using euros to conduct its drug trade activities, this means that the euro is also used along the drug route. ‘It is unfeasible to think that curriers are paid in dollars’, explains an Italian anti-drug covert agent, ‘when the sales and the money laundering in Europe is conducted in euros.” The agent also confirmed that the bulk of the drugs sold in Europe comes from Afghanistan and Central Asia, but there is an increasing amount of Colombian cocaine which also finds its way into the Old Continent, and that drug smuggling is an area where crime and terror have forged a joint-venture. In December 2003, for example, the US navy blocked a cargo sailing in the Persian Gulf. When they inspected it they discovered that it was carrying two tons of hashish and that it was operated by suspected al Qaeda’s affiliates. The drug was stored in 54 bags, which weighted about 70 pounds each. Its street value ranges from $8 to 10 million dollars .

Conclusion

The fight against drug smuggling should take into account the ramification of the illicit trade of narcotics, how it sustains terror groups and fuels the illegal economy. In 2004-2005, with a record opium crop from Afghanistan heading for Europe, Europe may be heading for a period of rising criminality and terror activity. Any policy to curb terror should involve the fight against illegal drug trade. As long as governments will continue to ignore the link between drugs and terror, they are putting their own citizens in danger of new terror attacks. Terror needs money and one way to reduce their monetary life-line is to eradicate the trade of illegal drugs from society.

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