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Money-laundering methods of drug cartels and the capture of El Chapo

During his 13-year reign as the head of Mexico's Sinaloa drug cartel, Joaquin "El Chapo" Guzman transformed his business from a modest marijuana operation into one of the richest, most powerful organizations in the world – legal or otherwise.

El Chapo's capture on Jan. 8, 2016 also ended an extraordinary chapter in the history of law enforcement, one that saw U.S. DEA agents match wits with an international criminal genius every bit as creative, sophisticated, and intelligent as they were.

Drug cartel leaders may be uneducated in the traditional sense, but as the agents pursuing them know all too well, they are wily strategists and extremely sophisticated business people. Because their business depends on identifying and exploiting loopholes in the world's legal and financial systems, they hire the brightest talent they can find to help them achieve their goals, and pay them extraordinarily well.

Cartels hire teams of computing specialists to hack into data networks along with savvy, talented attorneys to help them skirt the legal system. They work with accountants to exploit the banking systems in the United States and Europe. They employ expert engineers to help them build sophisticated tunnels, watercraft, and other equipment needed to process and smuggle their product across borders. And they have technical specialists that can monitor law enforcement communications networks, allowing them to stay one step ahead of the authorities.

Drug traffickers also have a key advantage over law enforcement: They are not bound by rules, regulations, borders, or constitutions. This freedom from social constraints allows them to do whatever a particular situation requires.

Money is any drug cartel's ultimate goal, which is why a large part of the federal manhunt for El Chapo involved tracking the Sinaloa cartel's financials around the world, in particular all the ways it sought to launder its profits. Even though El Chapo is in jail, the Sinaloa cartel continues to make so much money that one of its biggest challenges is finding ways to convert that revenue into usable currency.

The U.S. banking system is at the center of these laundering efforts. Once illegal money is deposited in a U.S. bank, it is much easier to transfer and hide behind the smoke screen of an apparently legitimate business enterprise. That said, the Sinaloa cartel has invented numerous money-laundering strategies. They prefer a shotgun approach, and use every method they can to stretch the resources of law enforcement as thinly as possible.

Of the many money-laundering methods utilized by drug cartels, "structuring" – depositing amounts smaller than $10,000 to avoid Bank Secrecy Act (BSA) reporting regulations – is the most popular, even though it's also the easiest form of money laundering to detect. Structuring is the most common reason Suspicious Activity Reports (SARs) are filed by banks, but it's also the most direct way to get money into a U.S. bank account. To push the odds in their favor, drug traffickers hire a veritable army of people to deposit small amounts of cash in banks all over the country, in cities large and small. Many get caught, but to the cartels, that's simply the cost of doing business.

The United States was El Chapo's largest market, which presented him with a special set of problems. Once his drugs were smuggled into the U.S. and sold, he had to somehow launder the money. If he couldn't get the money into a bank, he had to figure out how to move it back across the border to Mexico and launder it, or use another strategy besides structuring to deposit it. In one scenario, undeposited cash was smuggled in bulk to Mexico, then shipped back to the U.S. in armored vehicles, using a loophole in declaration rules for armored cars to make the money appear legitimate.

One of the most effective ways to clean large amounts of cash is through what is known as "trade-based money laundering," a technique El Chapo developed into an art form. The simplest trade-based method is to convert money into a commodity. Drug traffickers do this by buying such easily sold items as clothes or electronics from a legitimate company in the U.S., and then selling the items on the other side of the border for pesos. The money is now effectively clean, and can be used for regular commerce.

Trade-based money laundering can involve sophisticated wage scams to move money electronically, or be conducted using old-school methods such as double booking. Trade-based laundering requires a business, preferably a legitimate one, that is willing – knowingly or not – to take illicit cash in exchange for goods. Agents who are trying to identify businesses that are operating as money-laundering fronts look for changes in funding patterns, such as a business that has historically done everything by wire transfer shifting to large cash deposits, or a business that shows a sudden spike in profits for no apparent reason.

One infamous example involving El Chapo's Sinaloa cartel was a 2014 sting in the L.A. fashion district that had 1,000 law enforcement officers executing 75 arrest warrants simultaneously. In that case, the cartel was exploiting the immigrant-heavy garment industry's laxness toward transaction reporting requirements for businesses operating in the United States. This allowed the cartel to buy clothes in large quantities and ship them across the border, where they were sold for pesos. Banks were instrumental in identifying suspicious invoices and other red flags, which led to the raids.

In such cases, cooperation between financial institutions and law enforcement is often the key to piecing the puzzle together. When it comes to money, financiers and bankers are in a better position than law enforcement to notice transactional abnormalities, so developing effective channels of communication between the two sides is paramount in the ongoing effort to combat drug traffickers and terrorists.

One area where law enforcement and finance can help each other in the future is in identifying and recognizing evolving trends. For example, Europe is a popular place for Mexican and Colombian drug traffickers to conduct business now because there is a lack of coordination and communication between countries in the European Union that criminals are exploiting.

Recently, federal officials received word that teenagers in a small country in Central Africa called Equatorial Guinea were suddenly driving Maseratis and other expensive cars down the country's dirt roads. Further investigation revealed that both the Sinaloa drug cartel and Colombia's Medellin cartel are now using this small country as a trafficking gateway to Europe.

Why? Because the predominant language in Equatorial Guinea isn't French or Portuguese – it's Spanish.

Though El Chapo is now in custody, the Sinaloa cartel continues to be one of the largest drug distributors in the world. It operates by identifying and exploiting cracks in the social systems that make global civilization possible. While law enforcement is responsible for filling those cracks, cooperation from the public sector – particularly in the finance industry – is an undeniably important factor in the success of this ongoing battle.

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Videos, white papers, and case studies
you might find interesting:

Capturing El Chapo panel (1:03:33)

Panel discusses the unique challenges of stopping the Sinaloa cartel's expansive drug trade and the capture of El Chapo.

The state of financial crime and the fight to stop it (47:18)

Panel discusses the importance of public and private organizations working together to limit criminal financing.

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