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WASHINGTON, D.C. - In the first investigation of its kind, authorities from the United States, the Isle of Man, and Colombia today announced that they have exposed a sophisticated criminal scheme that targeted life insurance companies in the United States, the Isle of Man, and other locations to launder some $80 million worth of Colombian drug proceeds over the past few years.

Called "Operation Capstone," the two-year investigation was spearheaded by the U.S. Customs Service, the U.S. Attorney for the Southern District of Florida, the Isle of Man Customs & Excise Service, and Colombia's Departamento Administrativo de Seguridad (DAS). Her Majesty's Customs & Excise Service (U.K.), Panamanian authorities, and several police departments in South Florida also played critical roles in the case (which was alternatively known as "Operation Basking" in the Isle of Man and as "Operation Fan" in Colombia).

The probe revealed that Colombian drug trafficking organizations, through a small number of insurance brokers, were purchasing investment-grade life insurance policies in the United States, the Isle of Man, and other locations, with cartel associates as the beneficiaries. These policies were funded with tens of millions of dollars worth of drug proceeds sent (in the form of checks and wire transfers) to insurance companies by third parties around the globe.

Once an investment-grade life insurance policy is created, it operates much like a mutual fund. As such, customers can over-fund the policy beyond its face value and make early withdrawals, albeit with substantial penalties. Operation Capstone revealed that cartels were routinely liquidating their drug-financed life insurance policies after relatively short periods of time. The reason is that, despite paying stiff financial penalties for early liquidation, the cartel beneficiaries would receive a check or wire transfer from the insurance company that, on its surface, appeared to be legitimate insurance / investment proceeds. The cartels could then use these "clean" funds virtually unquestioned.

To date, Operation Capstone has resulted in numerous enforcement actions around the globe. U.S. Customs agents in Miami have seized approximately $9.5 million during the course of the investigation. In addition, the Colombian DAS last month arrested 9 individuals in Colombia and seized roughly $20 million worth of insurance policies, bonds, and cash. Shortly after the Colombian arrests and seizures, Panamanian authorities froze $1.2 million in local accounts based on evidence uncovered in Colombia.

In another part of the case, the U.S. Attorney for the Southern District of Florida today announced that a grand jury has indicted 5 Colombian nationals on money laundering violations. Arturo Delgado, Jaime Eduardo Rey Albornoz, Alexander Murillo, Rodrigo Jose Murillo, and Esperanza Romero are accused of laundering approximately $2 million worth of drug proceeds through insurance companies.

The investigation is ongoing and additional arrests and seizures are expected. Authorities in the United States, the Isle of Man, Colombia, and other jurisdictions have identified more than 250 insurance policies that have been linked to drug proceeds.

Kenneth Dam, Deputy Secretary of the U.S. Treasury Department, said: "This investigation demonstrates that insurance companies, like other financial institutions, are susceptible to abuse by criminal organizations. The money laundered through insurance companies in this case constituted proceeds from illegal drug operations, but could have just as easily been money to finance terrorism. The new regulations that have been proposed by the Treasury Department are an important step towards closing down this enormous loophole."

Kenneth Dam, Deputy Secretary of the U.S. Treasury Department, said: "This investigation demonstrates that insurance companies, like other financial institutions, are susceptible to abuse by criminal organizations. The money laundered through insurance companies in this case constituted proceeds from illegal drug operations, but could have just as easily been money to finance terrorism. The new regulations that have been proposed by the Treasury Department are an important step towards closing down this enormous loophole."

Jimmy Gurulé, Under Secretary for Enforcement at the U.S. Treasury Department, said: "Today, we have attacked and disrupted a major money laundering mechanism by which tens of millions of dollars of Colombian drug proceeds have been legitimized through the perversion of the international life insurance markets. This case exemplifies where our anti-drug money laundering efforts should be directed - at financial systems moving millions of dollars through the world's economy, and most importantly, targeting financial professionals whose loss to the traffickers will be much greater than any loss of product. I cannot comment the U.S. and foreign investigators and prosecutors enough for their efforts to bring this case to fruition."

Robert C. Bonner, U.S. Customs Service Commissioner, said: "This investigation reveals that there are no limits to which drug traffickers and their money laundering accomplices will go to hide and clean their illegal drug profits. Here, they used life insurance to invest and cleanse their dirty money. The life insurance industry must be ever-vigilant in preventing the use of its industry to launder the profits of criminal syndicates."

Denis Maxwell, Isle of Man Customs & Excise Collector, said: "Once law enforcement had identified this abuse of the Manx Life Market, they worked with Manx Insurance and Pensions Authority to prevent further and future abuse. Operations Basking and Capstone were investigating a sophisticated systemic attack on the global insurance market. We on the Island are very pleased to work with other jurisdictions to deprive criminals of the proceeds of their crimes. It is reassuring that the U.S. Financial Crimes Enforcement Network (FinCEN) is proposing amendments to U.S. procedures, many of which the Isle of Man introduced some time ago. In fact, it was this anti-money laundering legislation which helped ensure that the attack came to the notice of law enforcement."

Proposed New Rules for U.S. Life Insurance Companies
The Treasury Department has already recognized the importance of applying anti-money laundering controls to the life insurance industry. This fall, Treasury's Financial Crimes Enforcement Network (FinCEN) issued proposed rules that, for the first time, would require life insurers and annuity firms to establish anti-money laundering programs and to file suspicious activity reports to the U.S. government, reporting suspected instances of money laundering. In both notices of proposed rulemaking, FinCEN cited examples from Operation Capstone.

The response of the life insurance industry to the proposed regulations has been overwhelmingly positive. While recognizing that instances of money laundering of this magnitude may be infrequent, both the industry and the state insurance regulators have provided extensive information and expertise on insurance products to ensure that Treasury's regulations are appropriate and tailored to prevent future abuse. FinCEN is scheduled to issue its final rules on both proposals in the coming months.

The Global Investigation
Operation Capstone stemmed from a prior long-term investigation into the drug and money laundering activities of the Colombian cartels. During that investigation, U.S. Customs agents in Miami learned that these organizations were laundering large volumes of drug money through the purchase of life insurance policies in Europe, the United States, and offshore jurisdictions. Based upon this information, Customs agents in Miami launched Operation Capstone in late 2000.

Customs agents identified life insurance policies in the Isle of Man, the United States, and elsewhere that were believed to be purchased with drug proceeds. At the same time, the Isle of Man Customs & Excise Service launched an independent, but parallel investigation (called Operating Basking) pursuant to the Island's anti-money laundering laws. When U.S. Customs and Isle of Man Customs & Excise became aware of their mutual targets, they merged their cases and pooled resources.

In the summer of 2001, U.S. Customs agents began working closely with the Colombian DAS, which then launched an investigation of this scheme in their country. Customs agents and officials from the Colombian DAS discovered a network of Colombian insurance brokers who were working on behalf of the cartels and exploiting life insurance companies around the globe to launder narcotics proceeds.

Ultimately, authorities from the United States, the Isle of Man, and Colombia merged their cases.

General Findings
During the course of the inquiry, investigators found that independent insurance sales brokers operating internationally had little or no training in anti-money laundering issues and were easily manipulated to place funds into non-bank financial institutions. The primary focus of the brokers in this case was selling insurance policies, often overlooking potential signs of money laundering by customers, such as a lack of explanation for wealth or unusual methods for the payment of premiums.

Investigators also found that the insurance brokers in this case had a great deal of freedom and control over policies. These brokers often maintained pre-signed payment instructions for early withdrawals, allowing customers to withdraw funds with a telephone call. In addition, the brokers often paid premiums out of their own accounts and were reimbursed by the policyholder, often in cash.

In some cases, the insurance brokers orchestrated payments into and out of a policy without the knowledge of the policyholder.

Furthermore, investigators found that there was limited oversight by the insurance companies in this case over their many brokers and sub-brokers. This, in turn, led a breakdown in "know your customer" and "know your broker" regimes. The insurance companies in this case had little reliable information about some of their customers who had purchased policies through these brokers and sub-brokers.

Investigators also found that legal requirements for insurance companies differed greatly from jurisdiction to jurisdiction. As a result of this situation and deficiencies in the global correspondent banking system, these insurance companies failed to recognize potential indicators of money laundering, such as payment of premiums via third parties, via currency exchange houses, or in the form of consecutively numbered checks and money orders.