Money-Laundering Cop Case Teaches Compliance Lessons
A Houston police officer charged with drug crimes last month in U.S. District Court in New Orleans, La. allegedly used his credit union account to funnel drug money that financed more than $193,000 in loans to buy high-end cars for members of one of the most dangerous Mexican drug cartels.
Noe Juarez was charged with conspiracy to distribute more than five kilograms of cocaine hydrochloride, or crack cocaine, in Louisiana. He also was charged with conspiracy to possess firearms to support drug trafficking crimes in that state, according to court documents. If convicted, he could face a life sentence.
To build their case that Juarez was working with members of the Los Zeta Drug Cartel, federal agents subpoenaed his bank records at the $582 million Houston Police Federal Credit Union. His account showed Juarez made dozens of large cash and check payments, including two or three large cash payments in a day, which should have triggered suspicious activity reports, according to credit union compliance and regulatory experts.
Although Houston Police FCU was not implicated in any wrongdoing, compliance and regulatory experts said this case can provide important lessons for credit unions on suspicious account transactions and how to address their challenges.
Ayn V. Talley, president/CEO of Houston Police FCU, declined to comment for this story because she is prohibited by law to discuss member account information. Additionally, suspicious activity reports are confidential.
Federal authorities began investigating Juarez in September 2010 after they received information from charged and convicted cartel drug dealers turned government informants, who worked out of Houston. In a 2009 CNN report, the U.S. government described Los Zetas as “the most technologically advanced, sophisticated and dangerous cartel operating in Mexico.” The cartel was formed by commandos who deserted the Mexican army.
Los Zeta dealers, who were distributing drugs in Louisiana, told investigators that Juarez was selling the cartel high-powered weapons, bulletproof armor and sensitive law enforcement data regarding license plate numbers and names of individuals.
Investigators also learned that Juarez purchased four high-end vehicles for Los Zeta members for a fee because they did not have legitimate credit. Cartel members gave Juarez wads of cash from drug sales to make the loan payments. He also purchased the insurance and registered the cars under his name and in another individual's name, according to court records.
In August 2006, he received a $37,145 three-year car loan from Houston Police FCU to buy a BMW 325i. The monthly payment was $1,143, according to court documents and testimony of U.S. DEA agents.
But he didn't follow the monthly payment plans on the three-year loan on the BMW that was used to smuggle drugs into the U.S., according to court papers.
Instead, Juarez paid off the loan within five months. On several occasions, he made large payments on the same day. For example, on Nov. 8, 2006, he made two cash payments of $1,200 and one cash payment of $1,600. Six days later, Juarez made a $1,600 payment. On Dec. 1, he also made a cash payment of $1,143 and then another cash payment of $657.
“To me that would be suspicious,” compliance expert Kristen Tatlock, vice president for COMPASS 4 CU in Woodbridge, Va., said. “Part of the whole suspicious activity reporting is knowing your members and being familiar and recognizing when things are out of pattern. It doesn't make sense for a cop to suddenly make cash transactions for those amounts on a loan. And I would say it should have triggered some investigation by the financial institution.”
She noted, however, that Houston Police FCU could have filed a suspicious activity report (SAR) with the federal government, but it will never be known if the credit union did so because SARs are confidential.
As far as when financial institutions should file a SAR for a large cash transaction, the answer is, it depends, according to Steve Hudak, a spokesperson for the Financial Crimes Enforcement Network in Wash., D.C.
“There needs to be a currency transaction report for anything over $10,000 in cash [in one business day] and that is completely objective, but SARs are subjective,” Hudak explained. “Cash transactions are not illegal and the standard for filing a SAR is whether or not there is a suspicion or knowledge of some illegal activity.”
While that may sound simple enough, there are several challenges.
Cindy Williams, vice president of regulatory compliance for PolicyWorks in Des Moines, Iowa, said credit unions, particularly small credit unions, don't think it can happen to them.
Read more: Frontline staff members must be thoroughly trained to recognize red flags ...
“Criminals will often target a small financial institution because they know their monitoring systems are going to be less sophisticated,” Williams said. “Credit unions need to understand that being small does not eliminate the risk and can, in fact, sometimes increase the risk.”
Another challenge is that frontline staff members need to be thoroughly trained and regularly reminded that no one should be above suspicion even if the members are well-known or come into the branch frequently.
“The other thing I found interesting is that even when employees are well-trained, suspicious activity related to loans generally are not on the radar,” Williams said. “So the other challenge is to make employees understand all of the different ways of laundering money.”
After financial institutions file SARs with the federal government, the documents are reviewed by law enforcement officials.
On Feb. 1, 2007, Juarez made a check payment of $16,729.80 that paid off the BMW car loan. According to court records, Houston Police FCU was unable to retrieve a copy of that check.
The last check payment would have been SAR-reportable if the credit union had some reason to question the legality of that check, and whether it was drawn from another financial institution or drawn by a third party, Tatlock said.
In Tatlock's opinion, the Juarez check payment should have triggered some investigation or at least prompted questions from staff.
Williams suggested tellers should be trained on how to engage members when they make large cash transactions. Often, staff members are taught to use humor to break the ice and awkwardness when tellers attempt to find out the source of the funds.
Some credit unions have internal suspicious activity forms that document the teller's conversation with the member that can trigger further investigation by a compliance officer. Examiners also like to see that a credit union has an internal documentation process to flag suspicious activity, Williams noted.
However, because suspicious transaction activity is difficult to track manually, Williams recommended that credit unions invest in a software solution that can keep track of suspicious transactions and red-flag the ones that may require additional investigation or trigger a SAR.
After he paid off the BMW in 2007, Juarez's erratic loan payments continued for a 2008 Cadillac Escalade he purchased for $65,941 and financed through GMAC. He paid that off in 22 months on a 48-month payment plan through his credit union account, making large, four-figure payments. The same payment patterns occurred for a $60,819 GMAC loan for a 2007 Cadillac Escalade, according to court records.
While some of the payments amounted to $2,000, other monthly payments were as high as $5,000, $6,000 and $7,000.
These irregular and high monthly payments raised red flags for federal investigators.
“It's very large sums paid towards – toward the note of the vehicle on Mr. Juarez’ salary, that, you know, paying $7,000, $4,000, $5,000 and eventually at one time $14,000 for – on your car note is quite unusual,” DEA Special Agent Larry Johnson testified in a detention hearing for Juarez last month.
According to the U.S. Bureau of Labor Statistics, the annual mean wage for a Houston police patrol officer is nearly $54,000.
Juarez also moonlighted as a security officer for a popular Houston nightclub, where the cartel members gave him $2,000 to $5,000 during numerous meetings. Those funds were generated from Louisiana drug sales to pay for the car loans, according to court documents.
Federal investigators said the payment history in Juarez's credit union account corroborated the information they were getting from the cartel informants.
“After looking into Mr. Juarez’ bank account, we did see the payments coming in as cash and going out as a check to GMAC to which the  vehicle is financed,” Johnson testified.
Because Juarez was determined to be a flight risk, a U.S. Court judge ordered he remain in jail without bond. His trial is set for June 15.