How the War on Drugs Destabilized the Global Economy

This is truly, truly fantastic. If you haven’t already read this stunning story from the Guardian: How a big US bank laundered billions from Mexico’s murderous drug gangs. This is, in essence a chronicle how the dark and sordid side of banking and about how one US bank – Wachovia – essentially allowed Mexican drug cartels to launder a whopping $378B.

But this interestingly, is just the tip of the iceberg. It turns out that Mexican money may have been the only thing holding the US financial system together. Check out the following and the last paragraph especially (I’ve bolded it, it is so stunning):

More shocking, and more important, the bank was sanctioned for failing to apply the proper anti-laundering strictures to the transfer of $378.4bn – a sum equivalent to one-third of Mexico’s gross national product – into dollar accounts from so-called casas de cambio (CDCs) in Mexico, currency exchange houses with which the bank did business.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” said Jeffrey Sloman, the federal prosecutor. Yet the total fine was less than 2% of the bank’s $12.3bn profit for 2009. On 24 March 2010, Wells Fargo stock traded at $30.86 – up 1% on the week of the court settlement.

The conclusion to the case was only the tip of an iceberg, demonstrating the role of the “legal” banking sector in swilling hundreds of billions of dollars – the blood money from the murderous drug trade in Mexico and other places in the world – around their global operations, now bailed out by the taxpayer.

At the height of the 2008 banking crisis, Antonio Maria Costa, then head of the United Nations office on drugs and crime, said he had evidence to suggest the proceeds from drugs and crime were “the only liquid investment capital” available to banks on the brink of collapse. “Inter-bank loans were funded by money that originated from the drugs trade,” he said. “There were signs that some banks were rescued that way.”

But the more interesting part of the story, that picks up on the above quote by Antonio Maria Costa, lies deeper in the story:

“In April and May 2007, Wachovia – as a result of increasing interest and pressure from the US attorney’s office – began to close its relationship with some of the casas de cambio.”

and, a paragraph later…

“In July 2007, all of Wachovia’s remaining 10 Mexican casa de cambio clients operating through London suddenly stopped doing so.”

In other words from April through July, with increasing intensity, Wachovia got out of the drug money laundering business. Of course, this just also happens to be at the exact same time that the liquidity crisis starts hitting US banks prompting “The Bank Run We Knew So Little About.”

This is not to say that the financial crises was caused by drug money – it wasn’t. All those crazy mortgages and masses of consumer debt created a house of cards that was teetering away. But it could be that the sudden end to access of vast billions of Latin America drug money did tip the system over the edge.

I say this because here in Canada we have a government that not only does not believe in harm reduction as an effective way to deal with the drug problem, but it intends to pursue a prison focused US style approach to crime that even the most ardent US conservatives are calling a failure. And why does this matter? I mention the above stories because it is worth noting the size, scope and complexity of problem with face. This is a structural, systemic problem, not something that is going to be solved by throwing an additional 1,000 or even 100,000 people in jail. $378B. Through one bank. One third of Mexico’s GDP. And that’s all just pure profit. That’s probably 80 times more than we spend on fighting the war on drugs every year. Through one bank.

And, as the US authorities appear to have demonstrated it may be that the only thing more expensive than losing the war on drugs is winning a major battle – as apparently that can throw the entire global financial system into disarray. So if we think that upping the amount we spend on this war by $1B or even $10B is going to make a lick of difference, we’ve got another thing coming. But I suppose in the mean time, it will secure a few votes.

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