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FTR #740 Update on the Meltdown Part 6: The Wachovia File

Beached Craft Bonanza: Running out of Liquidity?

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Listen:
MP3 One Segment


NB: This Flash stream contains both FTRs 740 and 741 in sequence. Each is a 30-minute broadcast.

Introduction: The focal point of the broadcast is a money-laundering operation, in which the now-failed Wachovia Bank laundered a sum equal to a third of Mexico’s GDP on behalf of Mexican drug smuggling cartels. As we see below, the investigation of this link was actively frustrated by officials at Wachovia (now taken over by Wells Fargo). The Mexican money pipeline dried up in the summer of 2007, as the financial meltdown was gaining steam.

One of the operations conducted under the rubric of this relationship was a shipment of more than 5.5 tons of cocaine in a DC-9 that was busted in Mexico. As we have seen in FTR #729, that operation was inextricably linked with the intelligence/drug-smuggling/terrorist milieu investigated by the heroic Daniel Hopsicker.

Money to Burn

Drawing on a magnificent article from The Guardian’s website, the program highlights the profound relationship between the world’s financial industry and drug cartels–a marriage of the overworld and the underworld.

Noting that the financial institutions of the world have long processed monies from the world’s major drug-smuggling interests, the program sets forth the belief on the part of investigators that repeated financial crises have rendered those institutions dependent on the dirty money.

This dependency may well explain Wachovia officials’ obvious collusion with the criminals whose funds they laundered, as well as U.S. regulators’ unwillingness to slap the Wachovia gang with anything more than an economic wrist-slap in levying punitive fines.

Program Highlights Include: Analysis of the relationship of the drug and financial industries set forth by BCCI investigator Robert Mazur; U.N. investigator Antonio Costa’s belief that the world was rescued from a worse financial meltdown through the infusion of funds from drug-trafficking syndicates into the global financial system; the Wachovia operation’s involvement in purchasing aircraft used in drug smuggling; details concerning the methodology of investigator Martin Woods, who uncovered the Wachovia/Sinaloa cartel operation; the details of Wachovia’s persecution of Woods and the suffering he endured as a result; the use of traveler’s checks denominated in euros for the operation.

1. The focal point of the broadcast is a money-laundering operation, in which the now-failed Wachovia Bank laundered a sum equal to a third of Mexico’s GDP on behalf of Mexican drug smuggling cartels. As we see below, the investigation of this link was actively frustrated by officials at Wachovia (now taken over by Wells Fargo). The Mexican money pipeline dried up in the summer of 2007, as the financial meltdown was gaining steam.

One of the operations conducted under the rubric of this relationship was a shipment of more than 5.5 tons of cocaine in a DC-9 that was busted in Mexico. As we have seen in FTR #729, that operation was inextricably linked with the intelligence/drug-smuggling/terrorist milieu investigated by the heroic Daniel Hopsicker.

On 10 April 2006, a DC-9 jet landed in the port city of Ciudad del Carmen, on the Gulf of Mexico, as the sun was setting. Mexican soldiers, waiting to intercept it, found 128 cases packed with 5.7 tons of cocaine, valued at $100m. But something else – more important and far-reaching – was discovered in the paper trail behind the purchase of the plane by the Sinaloa narco-trafficking cartel.

During a 22-month investigation by agents from the US Drug Enforcement Administration, the Internal Revenue Service and others, it emerged that the cocaine smugglers had bought the plane with money they had laundered through one of the biggest banks in the United States: Wachovia, now part of the giant Wells Fargo.

The authorities uncovered billions of dollars in wire transfers, traveller’s cheques and cash shipments through Mexican exchanges into Wachovia accounts. Wachovia was put under immediate investigation for failing to maintain an effective anti-money laundering programme. Of special significance was that the period concerned began in 2004, which coincided with the first escalation of violence along the US-Mexico border that ignited the current drugs war.

Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year’s “deferred prosecution” has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.

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.”

Wachovia was acquired by Wells Fargo during the 2008 crash, just as Wells Fargo became a beneficiary of $25bn in taxpayers’ money. Wachovia’s prosecutors were clear, however, that there was no suggestion Wells Fargo had behaved improperly; it had co-operated fully with the investigation. Mexico is the US’s third largest international trading partner and Wachovia was understandably interested in this volume of legitimate trade.

José Luis Marmolejo, who prosecuted those running one of the casas de cambio at the Mexican end, said: “Wachovia handled all the transfers. They never reported any as suspicious.”

“As early as 2004, Wachovia understood the risk,” the bank admitted in the statement of settlement with the federal government, but, “despite these warnings, Wachovia remained in the business”. There is, of course, the legitimate use of CDCs as a way into the Hispanic market. In 2005 the World Bank said that Mexico was receiving $8.1bn in remittances.

During research into the Wachovia Mexican case, the Observer obtained documents previously provided to financial regulators. It emerged that the alarm that was ignored came from, among other places, London, as a result of the diligence of one of the most important whistleblowers of our time. A man who, in a series of interviews with the Observer, adds detail to the documents, laying bare the story of how Wachovia was at the centre of one of the world’s biggest money-laundering operations.

Martin Woods, a Liverpudlian in his mid-40s, joined the London office of Wachovia Bank in February 2005 as a senior anti-money laundering officer. He had previously served with the Metropolitan police drug squad. As a detective he joined the money-laundering investigation team of the National Crime Squad, where he worked on the British end of the Bank of New York money-laundering scandal in the late 1990s.

Woods talks like a police officer – in the best sense of the word: punctilious, exact, with a roguish humour, but moral at the core. He was an ideal appointment for any bank eager to operate a diligent and effective risk management policy against the lucrative scourge of high finance: laundering, knowing or otherwise, the vast proceeds of criminality, tax-evasion, and dealing in arms and drugs.

Woods had a police officer’s eye and a police officer’s instincts – not those of a banker. And this influenced not only his methods, but his mentality. “I think that a lot of things matter more than money – and that marks you out in a culture which appears to prevail in many of the banks in the world,” he says.

Woods was set apart by his modus operandi. His speciality, he explains, was his application of a “know your client”, or KYC, policing strategy to identifying dirty money. “KYC is a fundamental approach to anti-money laundering, going after tax evasion or counter-terrorist financing. Who are your clients? Is the documentation right? Good, responsible banking involved always knowing your customer and it still does.”

When he looked at Wachovia, the first thing Woods noticed was a deficiency in KYC information. And among his first reports to his superiors at the bank’s headquarters in Charlotte, North Carolina, were observations on a shortfall in KYC at Wachovia’s operation in London, which he set about correcting, while at the same time implementing what was known as an enhanced transaction monitoring programme, gathering more information on clients whose money came through the bank’s offices in the City, in sterling or euros. By August 2006, Woods had identified a number of suspicious transactions relating to casas de cambio customers in Mexico.

Primarily, these involved deposits of traveller’s cheques in euros. They had sequential numbers and deposited larger amounts of money than any innocent travelling person would need, with inadequate or no KYC information on them and what seemed to a trained eye to be dubious signatures. “It was basic work,” he says. “They didn’t answer the obvious questions: ‘Is the transaction real, or does it look synthetic? Does the traveller’s cheque meet the protocols? Is it all there, and if not, why not?'”

Woods discussed the matter with Wachovia’s global head of anti-money laundering for correspondent banking, who believed the cheques could signify tax evasion. He then undertook what banks call a “look back” at previous transactions and saw fit to submit a series of SARs, or suspicious activity reports, to the authorities in the UK and his superiors in Charlotte, urging the blocking of named parties and large series of sequentially numbered traveller’s cheques from Mexico. He issued a number of SARs in 2006, of which 50 related to the casas de cambio in Mexico. To his amazement, the response from Wachovia’s Miami office, the centre for Latin American business, was anything but supportive – he felt it was quite the reverse.

As it turned out, however, Woods was on the right track. Wachovia’s business in Mexico was coming under closer and closer scrutiny by US federal law enforcement. Wachovia was issued with a number of subpoenas for information on its Mexican operation. Woods has subsequently been informed that Wachovia had six or seven thousand subpoenas. He says this was “An absurd number. So at what point does someone at the highest level not get the feeling that something is very, very wrong?”

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. But rather than launch an internal investigation into Woods’s alerts over Mexico, Woods claims Wachovia hung its own money-laundering expert out to dry. The records show that during 2007 Woods “continued to submit more SARs related to the casas de cambio”.

In July 2007, all of Wachovia’s remaining 10 Mexican casa de cambio clients operating through London suddenly stopped doing so. Later in 2007, after the investigation of Wachovia was reported in the US financial media, the bank decided to end its remaining relationships with the Mexican casas de cambio globally. By this time, Woods says, he found his personal situation within the bank untenable; while the bank acted on one level to protect itself from the federal investigation into its shortcomings, on another, it rounded on the man who had been among the first to spot them.

On 16 June Woods was told by Wachovia’s head of compliance that his latest SAR need not have been filed, that he had no legal requirement to investigate an overseas case and no right of access to documents held overseas from Britain, even if they were held by Wachovia.

Woods’s life went into freefall. He went to hospital with a prolapsed disc, reported sick and was told by the bank that he not done so in the appropriate manner, as directed by the employees’ handbook. He was off work for three weeks, returning in August 2007 to find a letter from the bank’s compliance managing director, which was unrelenting in its tone and words of warning.

The letter addressed itself to what the manager called “specific examples of your failure to perform at an acceptable standard”. Woods, on the edge of a breakdown, was put on sick leave by his GP; he was later given psychiatric treatment, enrolled on a stress management course and put on medication.

Late in 2007, Woods attended a function at Scotland Yard where colleagues from the US were being entertained. There, he sought out a representative of the Drug Enforcement Administration and told him about the casas de cambio, the SARs and his employer’s reaction. The Federal Reserve and officials of the office of comptroller of currency in Washington DC then “spent a lot of time examining the SARs” that had been sent by Woods to Charlotte from London.

“They got back in touch with me a while afterwards and we began to put the pieces of the jigsaw together,” says Woods. What they found was – as Costa says – the tip of the iceberg of what was happening to drug money in the banking industry, but at least it was visible and it had a name: Wachovia.

In June 2005, the DEA, the criminal division of the Internal Revenue Service and the US attorney’s office in southern Florida began investigating wire transfers from Mexico to the US. They were traced back to correspondent bank accounts held by casas de cambio at Wachovia. The CDC accounts were supervised and managed by a business unit of Wachovia in the bank’s Miami offices.

“Through CDCs,” said the court document, “persons in Mexico can use hard currency and … wire transfer the value of that currency to US bank accounts to purchase items in the United States or other countries. The nature of the CDC business allows money launderers the opportunity to move drug dollars that are in Mexico into CDCs and ultimately into the US banking system.

“On numerous occasions,” say the court papers, “monies were deposited into a CDC by a drug-trafficking organisation. Using false identities, the CDC then wired that money through its Wachovia correspondent bank accounts for the purchase of airplanes for drug-trafficking organisations.” The court settlement of 2010 would detail that “nearly $13m went through correspondent bank accounts at Wachovia for the purchase of aircraft to be used in the illegal narcotics trade. From these aircraft, more than 20,000kg of cocaine were seized.”

All this occurred despite the fact that Wachovia’s office was in Miami, designated by the US government as a “high-intensity money laundering and related financial crime area”, and a “high-intensity drug trafficking area”. Since the drug cartel war began in 2005, Mexico had been designated a high-risk source of money laundering.

“As early as 2004,” the court settlement would read, “Wachovia understood the risk that was associated with doing business with the Mexican CDCs. Wachovia was aware of the general industry warnings. As early as July 2005, Wachovia was aware that other large US banks were exiting the CDC business based on [anti-money laundering] concerns … despite these warnings, Wachovia remained in business.”

On 16 March 2010, Douglas Edwards, senior vice-president of Wachovia Bank, put his signature to page 10 of a 25-page settlement, in which the bank admitted its role as outlined by the prosecutors. On page 11, he signed again, as senior vice-president of Wells Fargo. The documents show Wachovia providing three services to 22 CDCs in Mexico: wire transfers, a “bulk cash service” and a “pouch deposit service”, to accept “deposit items drawn on US banks, eg cheques and traveller’s cheques”, as spotted by Woods.

“For the time period of 1 May 2004 through 31 May 2007, Wachovia processed at least $$373.6bn in CDCs, $4.7bn in bulk cash” – a total of more than $378.3bn, a sum that dwarfs the budgets debated by US state and UK local authorities to provide services to citizens.

The document gives a fascinating insight into how the laundering of drug money works. It details how investigators “found readily identifiable evidence of red flags of large-scale money laundering”. There were “structured wire transfers” whereby “it was commonplace in the CDC accounts for round-number wire transfers to be made on the same day or in close succession, by the same wire senders, for the … same account”.

Over two days, 10 wire transfers by four individuals “went though Wachovia for deposit into an aircraft broker’s account. All of the transfers were in round numbers. None of the individuals of business that wired money had any connection to the aircraft or the entity that allegedly owned the aircraft. The investigation has further revealed that the identities of the individuals who sent the money were false and that the business was a shell entity. That plane was subsequently seized with approximately 2,000kg of cocaine on board.”

Many of the sequentially numbered traveller’s cheques, of the kind dealt with by Woods, contained “unusual markings” or “lacked any legible signature”. Also, “many of the CDCs that used Wachovia’s bulk cash service sent significantly more cash to Wachovia than what Wachovia had expected. More specifically, many of the CDCs exceeded their monthly activity by at least 50%.”

Recognising these “red flags”, the US attorney’s office in Miami, the IRS and the DEA began investigating Wachovia, later joined by FinCEN, one of the US Treasury’s agencies to fight money laundering, while the office of the comptroller of the currency carried out a parallel investigation. The violations they found were, says the document, “serious and systemic and allowed certain Wachovia customers to launder millions of dollars of proceeds from the sale of illegal narcotics through Wachovia accounts over an extended time period. The investigation has identified that at least $110m in drug proceeds were funnelled through the CDC accounts held at Wachovia.”

The settlement concludes by discussing Wachovia’s “considerable co-operation and remedial actions” since the prosecution was initiated, after the bank was bought by Wells Fargo. “In consideration of Wachovia’s remedial actions,” concludes the prosecutor, “the United States shall recommend to the court … that prosecution of Wachovia on the information filed … be deferred for a period of 12 months.”

But while the federal prosecution proceeded, Woods had remained out in the cold. On Christmas Eve 2008, his lawyers filed tribunal proceedings against Wachovia for bullying and detrimental treatment of a whistleblower. The case was settled in May 2009, by which time Woods felt as though he was “the most toxic person in the bank”. Wachovia agreed to pay an undisclosed amount, in return for which Woods left the bank and said he would not make public the terms of the settlement.

After years of tribulation, Woods was finally formally vindicated, though not by Wachovia: a letter arrived from John Dugan, the comptroller of the currency in Washington DC, dated 19 March 2010 – three days after the settlement in Miami. Dugan said he was “writing to personally recognise and express my appreciation for the role you played in the actions brought against Wachovia Bank for violations of the bank secrecy act … Not only did the information that you provided facilitate our investigation, but you demonstrated great personal courage and integrity by speaking up. Without the efforts of individuals like you, actions such as the one taken against Wachovia would not be possible.”

The so-called “deferred prosecution” detailed in the Miami document is a form of probation whereby if the bank abides by the law for a year, charges are dropped. So this March the bank was in the clear. The week that the deferred prosecution expired, a spokeswoman for Wells Fargo said the parent bank had no comment to make on the documentation pertaining to Woods’s case, or his allegations. She added that there was no comment on Sloman’s remarks to the court; a provision in the settlement stipulated Wachovia was not allowed to issue public statements that contradicted it.

But the settlement leaves a sour taste in many mouths – and certainly in Woods’s. The deferred prosecution is part of this “cop-out all round”, he says. “The regulatory authorities do not have to spend any more time on it, and they don’t have to push it as far as a criminal trial. They just issue criminal proceedings, and settle. The law enforcement people do what they are supposed to do, but what’s the point? All those people dealing with all that money from drug-trafficking and murder, and no one goes to jail?”

One of the foremost figures in the training of anti-money laundering officers is Robert Mazur, lead infiltrator for US law enforcement of the Colombian Medellín cartel during the epic prosecution and collapse of the BCCI banking business in 1991 (his story was made famous by his memoir, The Infiltrator, which became a movie).

Mazur, whose firm Chase and Associates works closely with law enforcement agencies and trains officers for bank anti-money laundering, cast a keen eye over the case against Wachovia, and he says now that “the only thing that will make the banks properly vigilant to what is happening is when they hear the rattle of handcuffs in the boardroom”.

Mazur said that “a lot of the law enforcement people were disappointed to see a settlement” between the administration and Wachovia. “But I know there were external circumstances that worked to Wachovia’s benefit, not least that the US banking system was on the edge of collapse.”

What concerns Mazur is that what law enforcement agencies and politicians hope to achieve against the cartels is limited, and falls short of the obvious attack the US could make in its war on drugs: go after the money. “We’re thinking way too small,” Mazur says. “I train law enforcement officers, thousands of them every year, and they say to me that if they tried to do half of what I did, they’d be arrested. But I tell them: ‘You got to think big. The headlines you will be reading in seven years’ time will be the result of the work you begin now.’ With BCCI, we had to spend two years setting it up, two years doing undercover work, and another two years getting it to trial. If they want to do something big, like go after the money, that’s how long it takes.”

But Mazur warns: “If you look at the career ladders of law enforcement, there’s no incentive to go after the big money. People move every two to three years. The DEA is focused on drug trafficking rather than money laundering. You get a quicker result that way – they want to get the traffickers and seize their assets. But this is like treating a sick plant by cutting off a few branches – it just grows new ones. Going after the big money is cutting down the plant – it’s a harder door to knock on, it’s a longer haul, and it won’t get you the short-term riches.”

The office of the comptroller of the currency is still examining whether individuals in Wachovia are criminally liable. Sources at FinCEN say that a so-called “look-back” is in process, as directed by the settlement and agreed to by Wachovia, into the $378.4bn that was not directly associated with the aircraft purchases and cocaine hauls, but neither was it subject to the proper anti-laundering checks. A FinCEN source says that $20bn already examined appears to have “suspicious origins”. But this is just the beginning.

Antonio Maria Costa, who was executive director of the UN’s office on drugs and crime from May 2002 to August 2010, charts the history of the contamination of the global banking industry by drug and criminal money since his first initiatives to try to curb it from the European commission during the 1990s. “The connection between organised crime and financial institutions started in the late 1970s, early 1980s,” he says, “when the mafia became globalised.”

Until then, criminal money had circulated largely in cash, with the authorities making the occasional, spectacular “sting” or haul. During Costa’s time as director for economics and finance at the EC in Brussels, from 1987, inroads were made against penetration of banks by criminal laundering, and “criminal money started moving back to cash, out of the financial institutions and banks. Then two things happened: the financial crisis in Russia, after the emergence of the Russian mafia, and the crises of 2003 and 2007-08.

“With these crises,” says Costa, “the banking sector was short of liquidity, the banks exposed themselves to the criminal syndicates, who had cash in hand.”

Costa questions the readiness of governments and their regulatory structures to challenge this large-scale corruption of the global economy: “Government regulators showed what they were capable of when the issue suddenly changed to laundering money for terrorism – on that, they suddenly became serious and changed their attitude.”

Hardly surprising, then, that Wachovia does not appear to be the end of the line. In August 2010, it emerged in quarterly disclosures by HSBC that the US justice department was seeking to fine it for anti-money laundering compliance problems reported to include dealings with Mexico.

“Wachovia had my résumé, they knew who I was,” says Woods. “But they did not want to know – their attitude was, ‘Why are you doing this?’ They should have been on my side, because they were compliance people, not commercial people. But really they were commercial people all along. We’re talking about hundreds of millions of dollars. This is the biggest money-laundering scandal of our time.

“These are the proceeds of murder and misery in Mexico, and of drugs sold around the world,” he says. “All the law enforcement people wanted to see this come to trial. But no one goes to jail. “What does the settlement do to fight the cartels? Nothing – it doesn’t make the job of law enforcement easier and it encourages the cartels and anyone who wants to make money by laundering their blood dollars. Where’s the risk? There is none.

“Is it in the interest of the American people to encourage both the drug cartels and the banks in this way? Is it in the interest of the Mexican people? It’s simple: if you don’t see the correlation between the money laundering by banks and the 30,000 people killed in Mexico, you’re missing the point.”

Woods feels unable to rest on his laurels. He tours the world for a consultancy he now runs, Hermes Forensic Solutions, counselling and speaking to banks on the dangers of laundering criminal money, and how to spot and stop it. “New York and London,” says Woods, “have become the world’s two biggest laundries of criminal and drug money, and offshore tax havens. Not the Cayman Islands, not the Isle of Man or Jersey. The big laundering is right through the City of London and Wall Street.

“After the Wachovia case, no one in the regulatory community has sat down with me and asked, ‘What happened?’ or ‘What can we do to avoid this happening to other banks?’ They are not interested. They are the same people who attack the whistleblowers and this is a position the [British] Financial Services Authority at least has adopted on legal advice: it has been advised that the confidentiality of banking and bankers takes primacy over the public information disclosure act. That is how the priorities work: secrecy first, public interest second.

“Meanwhile, the drug industry has two products: money and suffering. On one hand, you have massive profits and enrichment. On the other, you have massive suffering, misery and death. You cannot separate one from the other.

“What happened at Wachovia was symptomatic of the failure of the entire regulatory system to apply the kind of proper governance and adequate risk management which would have prevented not just the laundering of blood money, but the global crisis.” [Emphasis added–D.E.]

“How a Big US Bank Laundered Billions from Mexico’s Murderous Drug Gangs” [Observer]; guardian.co.uk; 4/03/2011.

Discussion

11 comments for “FTR #740 Update on the Meltdown Part 6: The Wachovia File”

  1. Consent Orders = Gentlemen’s Justice
    (the purest kind of justice).

    International banks have aided Mexican drug gangs
    DIRTY MONEY
    Despite strict rules, some banks have failed to ‘know their customer’ or ask about the source of large amounts of cash, allowing billions in dirty money from Mexico to be laundered.

    November 27, 2011|By Tracy Wilkinson and Ken Ellingwood, Los Angeles Times

    In a similar case, another banking giant, HSBC Bank, is being monitored by U.S. regulators after a probe last year focused on bulk cash that the bank’s U.S. branch received from Mexican exchange houses, money suspected to be drug proceeds.

    One of the regulators, the U.S. Office of the Comptroller of the Currency, said HSBC had “critical deficiencies” in its 2006-2009 reporting of suspicious activities and its monitoring of bulk-cash transfers.

    The OCC issued a cease-and-desist order against HSBC, noting, “The bank’s compliance program and its implementation are ineffective, and accompanied by aggravating factors, such as highly suspicious activity creating a significant potential for unreported money-laundering or terrorist financing.”

    After U.S. federal prosecutors issued grand jury subpoenas, some believed that regulators might try to use the HSBC case to set an example and prosecute individual bankers. Instead, HSBC agreed to strengthen its compliance program and has said it is cooperating with investigators, without acknowledging wrongdoing, part of a so-called consent order.

    And who says HSBC didn’t acknowledge any wrongdoing?


    Niall Booker, chief executive officer of HSBC North America, said today in a conference call with reporters that he couldn’t comment on “some other investigations by various U.S. governmental agencies” disclosed in the filing.

    He said the company is making its “best endeavours” to meet the requirements of the cease-and-desist orders. “We perhaps didn’t staff the compliance and particularly the AML, BSA functions as vigorously as we should have done,” Booker said, referring to the Bank Secrecy Act and anti-money laundering.

    Possible substandard staffing vigor is a pretty serious admission … when you’re a gentleman.

    At least we can be confident that their internal controls against corruption and bribery are in place. After all, they recently said so:

    HSBC’s Libya links questioned after second leak
    The leak of a second document from the Libyan Investment Authority has again raised questions about HSBC’s links with the North African country’s regime.

    By Harry Wilson, Banking Correspondent

    5:45AM BST 01 Jul 2011

    A document showing the holdings of the Libyan Investment Authority (LIA) revealed the regime deposited more than $1.1bn (£685m) with HSBC in the three months to the end of September last year, making the British lender its largest foreign banker.

    The links between banks and the Libyan government have become the subject of a US inquiry as prosecutors investigate whether bribes were paid in relation to transactions with sovereign wealth funds.

    Documents leaked to pressure group Global Witness show the dealings of major international banks with the LIA, which had assets at the end of September of $64bn.

    A second investment presentation released today shows that the LIA increased the amount of money it held on deposit with HSBC from $293m at the end of June last year to $1.42bn three months later.

    Just over $1bn of Libyan money was held in an HSBC “liquidity account” as of the end of September, while a further $395m was held by the bank’s Luxembourg branch.

    A spokesman for HSBC said: “HSBC has stringent policies and procedures for countering bribery and corruption in all the jurisdictions in which it operates. These apply to dealings with government entities, private organisations and individuals.”

    Posted by Pterrafractyl | November 29, 2011, 7:31 pm
  2. Hopsicker has a new article on Wachovia, drug money-laundering, Art Nadel, and BCCI. Definitely worth a read.

    Posted by Pterrafractyl | February 20, 2012, 8:44 pm
  3. Meet the War on Music: because the War on Drugs just wasn’t stupid enough for the Taliban’s aesthetic sense of projected piousness.

    But don’t worry Drug War, you’re still a really really bad idea.

    Posted by Pterrafractyl | August 27, 2012, 2:18 pm
  4. Here’s one more reminder that the international drug trade didn’t become an integral part of the global financial system on its own. It’s had some help:

    Business Insider
    The Man Who Infiltrated Pablo Escobar’s Cartel Explains What’s Wrong With The Global Banking System
    Michael Kelley | Sep. 7, 2012, 12:56 PM

    Robert Mazur, the U.S. Customs special agent who led one of the most successful undercover operations in U.S. law enforcement history, gave us some insight into international money laundering and said the Federal Reserve needs to do more to help.

    In the 1980s Mazur spent five years infiltrating the highest circles of Colombia’s drug cartels as a money launderer, transforming more than $34 million in cocaine cash into traceable, paper-trailed bank transactions under the pseudonym Bob L. Musella.

    His book, The Infiltrator: My Secret Life Inside the Dirty Banks Behind Pablo Escobar’s Medellín Cartel, explains how “Operation C-Chase” led to the indictment of 85 individuals – including several officials affiliated with the then-seventh largest privately-held bank in the world, the Bank of Credit and Commerce International (BCCI)—and the conviction of General Manuel Noriega.

    Now he is on a mission to “share information with the public about how this money laundering activity has engulfed the will of the financial institutions of the world.”

    Mazur says that “the international community is today doing the same thing that BCCI and their officers were doing 20 years ago”—citing the HSBC money-laundering scandal and the tax havens of the super-rich—and told BI that the problem is much larger than the estimated $2.1 trillion that crime generates each year.

    “What [the corrupt bankers at BCCI] did was market flight capital, and they identified it as basically money seeking secrecy from governments,” Mazur said. “Yes it does include the items that the $2.1 trillion identifies but it’s bigger than that because there are times that you take legal money and use it for an illegal purpose, and that money is as big if not bigger than the illegal money.”

    He calls the practice “a major moneymaker for the banking world” and cites the Standard Chartered scandal, in which bankers “took $250 billion worth of basically legal money and used techniques to hide from governments the fact that the money was being moved in these otherwise-legal transactions on the behalf of sanctioned nations, including Iran.”

    He said the HSBC ruling listed six or seven methods “traditionally used by banks in a big way facilitate relationships with people who want to hide money from governments” and explained that bankers provide these services “to entice these people to bank with them” so that the bank is able to increase their deposits.

    He added that the current regulatory process ignores the fundamental problem, which is that “there are two brains in a bank—there’s this profit brain that’s motivated by earning money … and then we have a compliance department and their whole agenda has nothing to do with profit, it has to do with identifying risk and minimizing it. But when the compliance and the sales brain meet, upper management sides with sales because that’s their gig too—profits. And there has to be a way to try to begin to change that chemistry of the interaction of the two brains.”

    One straightforward ways to do that, according to Mazur, would be to crack down on bankers who solicit shady business—like the ones at HSBC—by putting a few “behind bars for a very long period of time” instead of just giving them a fine.

    A LOT of help.

    Posted by Pterrafractyl | September 28, 2012, 1:09 pm
  5. Yes, that’s quite a pickle:

    Pot legalization puts U.S. bankers in a pickle

    By Brett Wolf

    Thu Nov 8, 2012 6:05pm EST

    ST. LOUIS, Nov 8 (Thomson Reuters Accelus) – Colorado and Washington may have voted to legalize recreational marijuana, but it is far from a green light for banks to provide accounts or other services to the pot industry in those states.

    Financial institutions across the country still face legal risks if they do business with marijuana shops because pot remains illegal under federal law.

    If financial institutions are federally licensed or insured, they must comply with federal regulations, and those regulations are clear about conducting financial transactions with money generated by the sale of narcotics,” said Jim Dowling, a former Internal Revenue Service special agent who also acted as an anti-money laundering advisor to the Office of National Drug Control Policy.

    The ballot measures on Tuesday made Colorado and Washington the first states to permit recreational marijuana sale and use. Medical-marijuana laws have been around in some states for more than a decade.

    California was the first state to legalize medical marijuana in 1996. With the addition of Massachusetts, which passed a medical-marijuana ballot initiative on Tuesday, 18 states and the District of Columbia now have such laws on their books.

    The medical marijuana business was worth $1.7 billion in 2011 and growing, according to a study by financial-analysis firm See Change Strategy.

    Mmmmmm…a $1.7 billion pickle of pot proceeds. What a wonderful appetizer for the main course:

    Reuters
    Are the big banks winning?
    By Charles R. Morris
    October 24, 2012

    The Dodd-Frank Act to re-regulate the big banks was intentionally tough. It was passed in the wake of the 2008-2009 financial crash to end cowboy banking; require far more capital and much less leverage, and rein in the trading-desk geniuses who pumped up serial bubbles. Since Congress is a poor forum for crafting such a complex statute, the details were left to the expert regulatory agencies.

    The big banks pay lip-service to the goals of Dodd-Frank — but they’re mounting bitter, rearguard actions in federal courts to block meaningful constraints and regulations on procedural and other grounds. This is an ominous turn of events, since these banks have the legal firepower to overwhelm budget-constrained U.S. regulatory agencies.

    While Dodd-Frank is aimed at preventing another cycle of bubble-and-bust, shrinking the financial sector is crucial for other reasons. One is a mass of evidence demonstrating that hyper-financialized economies have lower growth. Another is the appalling ethical record of large financial companies. The chance of making huge paydays by risking other people’s money, it seems, can sometimes derange moral compasses.

    Drug money laundering, however, may be the most profitable overall. Wachovia Bank, now part of Wells Fargo, signed a settlement to avoid criminal prosecution for improperly and illegally transferring at least $398 billion from Mexico, most of it obviously drug cartel money. The banking subsidiary of American Express engaged in similar laundering on a smaller scale. Another money laundering case, possibly the biggest, is now under negotiation between HSBC and the U.S. authorities.

    Achieving the objectives of Dodd-Frank, therefore, is crucial. Not just to prevent another bubble, but to redirect resources to enhance growth rather than feed the Wall Street casino. And, perhaps, to save the soul of American capitalism.

    Seconds anyone? Thirds? Fourths? Anyone?

    Posted by Pterrafractyl | November 17, 2012, 2:06 am
  6. http://www.guardian.co.uk/world/2012/nov/28/gustl-mollath-hsv-claims-fraud

    German man locked up over HVB bank allegations may have been telling truth

    Gustl Mollath was put in a psychiatric unit for claiming his wife was involved in money-laundering at the Bavarian bank. But seven years on evidence has emerged that could set him free

    Kate Connolly in Berlin
    guardian.co.uk, Wednesday 28 November 2012

    A German man committed to a high-security psychiatric hospital after being accused of fabricating a story of money-laundering activities at a major bank is to have his case reviewed after evidence has emerged proving the validity of his claims.

    In a plot worthy of a crime blockbuster, Gustl Mollath, 56, was submitted to the secure unit of a psychiatric hospital seven years ago after court experts diagnosed him with paranoid personality disorder following his claims that staff at the Hypo Vereinsbank (HVB) – including his wife, then an assets consultant at HVB – had been illegally smuggling large sums of money into Switzerland.

    Mollath was tried in 2006 after his ex-wife accused him of causing her physical harm. He denied the charges, claiming she was trying to sully his name in the light of the evidence he allegedly had against her. He was admitted to the clinic, where he has remained against his will ever since.

    But recent evidence brought to the attention of state prosecutors shows that money-laundering activities were indeed practiced over several years by members of staff at the Munich-based bank, the sixth-largest private financial institute in Germany, as detailed in an internal audit report carried out by the bank in 2003. The report, which has now been posted online, detailed illegal activities including money-laundering and aiding tax evasion. A number of employees, including Mollath’s wife, were subsequently sacked following the bank’s investigation.

    The “Mollath affair”, as it has been dubbed by the German media, has taken on such political dimensions that it now threatens to bring down the government of Bavaria. Under the weight of public and political pressure Horst Seehofer, the prime minister of the rich southern state and a member of the Christian Social Union (CSU) – the sister party to Angela Merkel’s Christian Democrats – has now called for the case to be reopened, amid charges that Mollath was possibly the victim of a gross miscarriage of justice.

    “The judiciary would be well-advised to reassess the case,” Seehofer said this week. “I want them to concentrate on the question of whether everything has been done correctly.”

    His justice minister, Beate Merk, who has refused repeated calls to resign, said she had no doubt the case had been carried out “by the book and quite correctly”.

    Mollath has been inundated with public support in the form of thousands of letters and internet posts, many comparing his fight to that of David versus Goliath. He said he was delighted that what he called the “murky business of the bank” is now emerging, 10 years after he first made his claims.

    “This is precisely what I wanted to achieve all along,” he told the Süddeutsche Zeitung, which brought the audit report to light earlier this month. In an interview in his sparsely furnished room in Bayreuth’s hospital for psychiatry, he pointed out the irony that he had suffered the fate he had repeatedly warned his wife she would face, telling her: ‘Please be careful. One day you will end up in handcuffs and then you’ll be banged up for a few years'”, he said.

    Asked whether it felt any responsibility towards Mollath, a spokeswoman for HVB told the Guardian: “We don’t recognise any connection between the results of our audit report and either the criminal trial or the commitment of Mr Mollath.”

    Asked why the bank kept the report to itself and did not approach the authorities, the spokeswoman added: “In 2003 HVB initiated extensive investigations via internal audits in response to information provided by Mr Mollath on transactions that had taken place a long time before … It was determined that employees had acted contrary to their instructions regarding Swiss banking transactions”.

    But while the findings, it said, had resulted in sackings, the audit “did not produce sufficient evidence indicating criminal conduct … that would have made a criminal charge seem appropriate”.

    Posted by R. Wilson | November 29, 2012, 9:04 pm
  7. Posted by Pterrafractyl | December 12, 2012, 12:16 pm
  8. Uh oh, someone has a slap on the wrist coming! It’s legal spanking for gentlemen:

    JPMorgan faces U.S. order to improve compliance: sources

    By Brett Wolf and Carrick Mollenkamp and Emily Flitter

    NEW YORK | Fri Jan 11, 2013 10:23am EST

    (Reuters) – U.S. regulators are likely to order JPMorgan Chase & Co to correct lapses in how it polices suspect money flows, in an action expected as soon as Friday, people familiar with the situation said.

    The order would be the latest action that U.S. regulators have taken this year to force banks to tighten their anti money- laundering systems, which are supposed to flag suspect transactions from sanctioned countries or those from customers with ties to drug trafficking or terrorism.

    The action would be in the form of a cease-and-desist order, which regulators use to force banks to improve compliance weaknesses, the sources said.

    JPMorgan will probably not have to pay a monetary penalty, according to one person familiar with the situation.

    Regulators enforcing U.S. anti money-laundering laws are required to issue cease-and-desist orders when they find a bank is violating the Bank Secrecy Act by not keeping up with the surveillance program the law requires. What happens after that, however, varies according to the severity of the bank’s violations.

    The terms of a cease-and-desist order, in some cases, can require a bank to review its prior transactions to determine whether it missed any suspicious activity it should have reported to regulators. If a high-enough number of unreported suspicious transactions are found, the regulators may decide to issue a civil money penalty.

    Britain-based bank Standard Chartered Plc agreed to pay a total of $667 million to U.S. and state regulators to resolve anti-money laundering probes, while HSBC Holdings Plc, also headquartered in Britain, agreed in December to pay $1.9 billion to settle a U.S. inquiry.

    In April, the Comptroller of the Currency identified major lapses in compliance systems at U.S. bank Citigroup Inc, which did not pay a monetary penalty.

    Posted by Pterrafractyl | January 11, 2013, 3:28 pm
  9. Just the cost of doing business:

    Top Japanese bank to pay $250M to NY regulators for laundering $100B, violating sanctions

    By Associated Press, Updated: Thursday, June 20, 11:56 AM

    ALBANY, N.Y. — The Bank of Tokyo Mitsubishi-UFJ Ltd. will pay $250 million to the state of New York for laundering billions of dollars in transactions that violated economic sanctions against countries including Iran, Sudan, and Myanmar, New York financial regulators said Thursday.

    The state’s Department of Financial Services said the bank agreed to the fine and a year of special monitoring for handling the 28,000 U.S. dollar transactions totaling about $100 billion through its New York operation between 2002 and 2007.

    BTMU employees routinely removed information from wire transfer messages that could have identified the government and business entities involved as targets of sanctions, the department said.

    BTMU said Thursday it reported the violations to its regulators and stopped the practice in 2007.

    “Since 2007, BTMU has significantly improved its compliance policies and procedures,” the bank said. “BTMU is committed to conducting business with the highest levels of integrity and regulatory compliance, and to continually improving its policies and procedures.”

    It said it will continue to cooperate with regulators.

    Last year, Britain’s Standard Chartered Bank agreed to pay $340 million to settle New York allegations it violated sanctions by processing billions of U.S. dollar transactions for Iranian interests.

    Posted by Pterrafractyl | June 20, 2013, 11:45 am
  10. This is somewhat fascinating: the US Justice Department recent let HSBC off the hook with a record $1.9 billion wrist slap over HSBC’s extensive money-laundering on behalf of major drug cartels. And the reason no one was prosecuted? Fear that criminal prosecution would topple the bank and, in the process, endanger the financial system. So we’re learning about a new perk that comes with being a too-big-to-fail bank: your executives are apparently too-big-to-jail too:

    Rolling Stone
    Outrageous HSBC Settlement Proves the Drug War is a Joke

    By Matt Taibbi
    POSTED: December 13, 3:25 PM ET

    If you’ve ever been arrested on a drug charge, if you’ve ever spent even a day in jail for having a stem of marijuana in your pocket or “drug paraphernalia” in your gym bag, Assistant Attorney General and longtime Bill Clinton pal Lanny Breuer has a message for you: Bite me.

    Breuer this week signed off on a settlement deal with the British banking giant HSBC that is the ultimate insult to every ordinary person who’s ever had his life altered by a narcotics charge. Despite the fact that HSBC admitted to laundering billions of dollars for Colombian and Mexican drug cartels (among others) and violating a host of important banking laws (from the Bank Secrecy Act to the Trading With the Enemy Act), Breuer and his Justice Department elected not to pursue criminal prosecutions of the bank, opting instead for a “record” financial settlement of $1.9 billion, which as one analyst noted is about five weeks of income for the bank.

    The banks’ laundering transactions were so brazen that the NSA probably could have spotted them from space. Breuer admitted that drug dealers would sometimes come to HSBC’s Mexican branches and “deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows.”

    This bears repeating: in order to more efficiently move as much illegal money as possible into the “legitimate” banking institution HSBC, drug dealers specifically designed boxes to fit through the bank’s teller windows. Tony Montana’s henchmen marching dufflebags of cash into the fictional “American City Bank” in Miami was actually more subtle than what the cartels were doing when they washed their cash through one of Britain’s most storied financial institutions.

    Though this was not stated explicitly, the government’s rationale in not pursuing criminal prosecutions against the bank was apparently rooted in concerns that putting executives from a “systemically important institution” in jail for drug laundering would threaten the stability of the financial system. The New York Times put it this way:

    Federal and state authorities have chosen not to indict HSBC, the London-based bank, on charges of vast and prolonged money laundering, for fear that criminal prosecution would topple the bank and, in the process, endanger the financial system.

    It doesn’t take a genius to see that the reasoning here is beyond flawed. When you decide not to prosecute bankers for billion-dollar crimes connected to drug-dealing and terrorism (some of HSBC’s Saudi and Bangladeshi clients had terrorist ties, according to a Senate investigation), it doesn’t protect the banking system, it does exactly the opposite. It terrifies investors and depositors everywhere, leaving them with the clear impression that even the most “reputable” banks may in fact be captured institutions whose senior executives are in the employ of (this can’t be repeated often enough) murderers and terrorists. Even more shocking, the Justice Department’s response to learning about all of this was to do exactly the same thing that the HSBC executives did in the first place to get themselves in trouble – they took money to look the other way.

    And not only did they sell out to drug dealers, they sold out cheap. You’ll hear bragging this week by the Obama administration that they wrested a record penalty from HSBC, but it’s a joke. Some of the penalties involved will literally make you laugh out loud. This is from Breuer’s announcement:

    As a result of the government’s investigation, HSBC has . . . “clawed back” deferred compensation bonuses given to some of its most senior U.S. anti-money laundering and compliance officers, and agreed to partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.

    Wow. So the executives who spent a decade laundering billions of dollars will have to partially defer their bonuses during the five-year deferred prosecution agreement? Are you fuc king kidding me? That’s the punishment? The government’s negotiators couldn’t hold firm on forcing HSBC officials to completely wait to receive their ill-gotten bonuses? They had to settle on making them “partially” wait? Every honest prosecutor in America has to be puking his guts out at such bargaining tactics. What was the Justice Department’s opening offer – asking executives to restrict their Caribbean vacation time to nine weeks a year?

    So you might ask, what’s the appropriate financial penalty for a bank in HSBC’s position? Exactly how much money should one extract from a firm that has been shamelessly profiting from business with criminals for years and years? Remember, we’re talking about a company that has admitted to a smorgasbord of serious banking crimes. If you’re the prosecutor, you’ve got this bank by the balls. So how much money should you take?

    How about all of it? How about every last dollar the bank has made since it started its illegal activity? How about you dive into every bank account of every single executive involved in this mess and take every last bonus dollar they’ve ever earned? Then take their houses, their cars, the paintings they bought at Sotheby’s auctions, the clothes in their closets, the loose change in the jars on their kitchen counters, every last freaking thing. Take it all and don’t think twice. And then throw them in jail.

    Sound harsh? It does, doesn’t it? The only problem is, that’s exactly what the government does just about every day to ordinary people involved in ordinary drug cases.

    The institutional bias in the crack sentencing guidelines was a racist outrage, but this HSBC settlement blows even that away. By eschewing criminal prosecutions of major drug launderers on the grounds (the patently absurd grounds, incidentally) that their prosecution might imperil the world financial system, the government has now formalized the double standard.

    They’re now saying that if you’re not an important cog in the global financial system, you can’t get away with anything, not even simple possession. You will be jailed and whatever cash they find on you they’ll seize on the spot, and convert into new cruisers or toys for your local SWAT team, which will be deployed to kick in the doors of houses where more such inessential economic cogs as you live. If you don’t have a systemically important job, in other words, the government’s position is that your assets may be used to finance your own political disenfranchisement.

    On the other hand, if you are an important person, and you work for a big international bank, you won’t be prosecuted even if you launder nine billion dollars. Even if you actively collude with the people at the very top of the international narcotics trade, your punishment will be far smaller than that of the person at the very bottom of the world drug pyramid. You will be treated with more deference and sympathy than a junkie passing out on a subway car in Manhattan (using two seats of a subway car is a common prosecutable offense in this city). An international drug trafficker is a criminal and usually a murderer; the drug addict walking the street is one of his victims. But thanks to Breuer, we’re now in the business, officially, of jailing the victims and enabling the criminals.

    This ruling also raises another interesting question: Given how incredibly dependent the big banks have become on proceeds from drug money laundering, would ending the horrible joke known as the War on Drugs, cold-turkey collapse the financial system? Because that would be some pretty intense drug-money-laundering withdrawal for the banksters to go through.

    Posted by Pterrafractyl | December 28, 2013, 5:16 pm
  11. It looks like Commerzbank’s assumed capital shortfalls ahead of the ECB’s stress tests might be the least of its problems:

    Reuters
    Exclusive: NY targets Commerzbank employees in sanctions accord – sources

    Published: 3:06 AM, September 30, 2014
    Updated: 3:26 AM, September 30, 2014

    NEW YORK – New York’s financial regulator wants some Commerzbank AG employees to be fired as part of a settlement over allegations the German lender improperly processed transactions with Iran and other countries facing U.S. sanctions, according to people familiar with the matter.

    Commerzbank is nearing an agreement to pay some $650 million to U.S. authorities over sanctions-related violations, with almost half going to the regulator, New York’s Department of Financial Services, Reuters has reported.

    The bank, which is 17 percent owned by the German government, would join more than a half dozen foreign banks that have already settled with U.S. authorities for similar wrongdoing.

    In Commerzbank’s case, the department directed the bank to take steps to terminate a handful of employees who engaged in misconduct, one source said. The source did not reveal the names of executives who may face punishment.

    It is also unclear whether the employees will be dismissed or be disciplined in other ways, sources said, in part due to Germany’s strong labor laws and how long ago the alleged misdeeds took place.

    The office told another bank to terminate employees earlier this year. As part of the $8.9 billion agreement struck in June between U.S. authorities and BNP Paribas over sanctions violations, 13 people were fired or separated from the French bank at the regulator’s behest, and another 32 were otherwise disciplined through demotions, compensation and other sanctions, according to the agency.

    Paribas also pleaded guilty to conspiring to violate U.S. sanctions and other charges brought by the Manhattan District Attorney and U.S. prosecutors.

    In its deal, Commerzbank is expected to enter into deferred prosecution agreements with state and federal prosecutors, which would suspend criminal charges, Reuters has reported.

    Besides the New York regulator, authorities involved include the U.S. Department of Justice, the U.S. Attorney in Washington, D.C., the Manhattan District Attorney, the Federal Reserve and the Treasury Department.

    They all declined to comment on negotiations when contacted by Reuters.

    Authorities had been hoping to wrap up the deal by the end of the month, sources said, but that timetable may no longer hold. One recent sticking point has been the New York regulator’s demand that an independent monitor be installed at Commerzbank to oversee its work.

    Such monitors have become a staple of the agency’s settlements, but may carry additional risk for banks. Standard Chartered Bank, which settled a similar sanctions probe with U.S. prosecutors and regulators two years ago for $667 million, paid another $300 million to New York in August and agreed to suspend some businesses after failing to fix problems required under the 2012 deal.

    Another possible complication is that Manhattan U.S. Attorney Preet Bharara has begun probing lax anti-money laundering controls at Commerzbank, according to one source.

    Betsy Feuerstein, a spokeswoman for the Manhattan U.S. Attorney, declined comment.

    In 2012, the Federal Reserve Bank of New York entered into an agreement with Commerzbank that required its New York branch to improve compliance with anti-money laundering laws and regulations. After finding the branch still failed to maintain adequate controls, the Fed Reserve issued a cease and desist order last year.

    Posted by Pterrafractyl | September 29, 2014, 2:20 pm

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