Black Market Peso Exchange Fraud

989 words | 4 page(s)

The black market peso trade is a tool used by those engaged in illegal profit making activities. It allows them to evade financial security systems intended to flag illegally obtained American funds. This underground currency exchange is the method of choice for drug cartels. It also provides secondary profits in the exchange itself, as demand for American currency is often greater than the supply. Any attempt to change such a large volume of American dollars at a bank would likely trigger an investigation into the source of funds; therefore the illegal economy has a need for international currency transactions. The market therefore thrives with willing buyers and sellers.

Drug cartels and the black market peso trade
The drug cartels of South America are said to be one of the most successful multinational organizations ever operating in the underground economy (Cunningham 2012). The black market peso trade is a critical part of their strategy, as funds are required in peso form for reinvestment but received in currencies of countries with strict financial controls. Drug Cartels from Latin American countries such as Columbia and Mexico smuggle drugs into destinations in North America and Western Europe, receiving American dollars or Euros in return. It should be noted that there are often currency restrictions on Latin American currencies which restrict the US dollar and Euro, thereby raising demand and making them worth more than official exchange rates (Hoffman 2014). The opportunity is therefore to further increase profits upon exchange back into the Latin American currency of the country of origin. Further, they have little choice; banking and financial controls have significantly increased security in the pursuit of funds related to terrorism and illegal activity. Large amounts of currency from illegal activities can therefore not be exchanged through official channels.

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The black market economy
The underground peso trade is an important part of tax evasion strategies, but it is also part of an infrastructure which supports other illegal activities including the drug trade, human trafficking and illegal arms. In fact, it supports an underground economy in just Mexico and three South American nations which are worth an annual estimate of $13 billion American dollars (Alba 2002).

There are also corporations and brokers that are involved in these illegal transactions. One method of converting the currency involves a broker. This broker uses the American profits to purchase goods from an American company for shipment to Mexico; the American company then makes the shipment to Mexico. The goods are sold in Mexico, providing the broker with laundered cartel money. It is therefore clear that legitimate corporations are participating, perhaps unknowingly, in these activities.

It is money laundering that allows for the investment into further criminal activities as well as unencumbering the funds from potential seizure by international financial systems. Drug cartels have, over the decades, been able to build large networks of suppliers and legitimate businesses that include banking and financial partnerships and relationships (Cunningham 2012). Further, in many countries, including Mexico, the legal framework leaves the banking system vulnerable to money laundering fraud (Ibid.). Once the drug cartel profits have been converted to pesos it becomes easy to absorb the profits into their systems so that it emerges as clean currency.

The response to the black market peso trade
There have been many actions intended to rectify or mitigate the situation. Federal laws and regulations enacted in 1970 to criminalize money laundering have been the foundation of a complex web of responsibilities and checks in the financial system to ensure that such funds are identified and seized (Abel 2001).

Since the events of 9/11 these activities have expanded to ensure that profits from illegal activities are not invested into terrorism (Baldwin 2006). Even banks themselves can be found liable or face criminal penalties for not taking necessary safeguards to ensure that laundered or dirty money does not enter their system (Ibid.). There is international cooperation in the efforts, and long gone are the days when drug traffickers could fly their American profits to Aruba or Costa Rica for a no questions asked deposit.

Accountants and auditors are also called upon with specific responsibilities in the efforts to battle illegal money laundering, including reporting requirements where illegal activity or money laundering is suspected (Abel 2001). Legitimate businesses must of course account for the profits with registration, record keeping and reporting requirements. Government stakeholders include regulatory agencies such the Securities Exchange Commission, the U.S. Department of the Treasury and all levels of law enforcement (Ibid.). Efforts to stop black market trade in pesos and money laundering of drug cartel profits are now focusing on this sort of collaboration.

In order to terminate the black market peso trade and the havoc it creates by supporting and reinforcing the illegal economic networks it is necessary for a broad collaborative effort. No single government or entity has the financial resources to confront black market money laundering of drug cartel profits, however all stakeholders working together can create tighter controls which make it easier to recognize and to reduce illegally laundered funds.

The black market peso exchange is required in order to ensure drug cartel operations and this further support many criminal activities which pose a danger. Ending the operations of drug cartels has been an objective of American law enforcement for decades, however new approaches that include the efforts of all may result in a new capacity to terminate the operations by cutting off their money supply.

  • Abel, A.S. & Gerson, J.S. (2001). ‘The CPAs’ Role in Fighting Money Laundering’, Journal of Accountancy, vol. 191, no. 6, pp. 26-34.
  • Alba, R.M. (2002). “Evolution of methods of money laundering”. Latin America’ Journal of Financial Crime, Vol. 10, no. 2, pp. 137-140.
  • Baldwin, F.N. (2006). “Exposure of financial institutions to criminal liability.” Journal of Financial Crime, vol. 13, no. 4, pp.387-407.
  • Cunningham, W.S. (2012). “Reframing Financial Sector Identity: Options for Reducing Mexican Drug Cartel Economic Power”. Naval War Coll Newport Ri Joint Military Operations Dept.
  • Hoffman, M. (2014). “Argentina: driven black”. World Policy Journal, 31(2), 22-30.

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