By Carrick Mollenkamp and Brett Wolf
(Reuters) - When several Colombian men were indicted in January 2010 on money-laundering charges, the case in Brooklyn federal court drew little attention.
It looked like a bust of another nexus of drug traffickers and money launderers, with mainly small-time operatives paying the price for their crimes.
One of the men was Julio Chaparro, a 48-year-old father of four who owned three factories that made children's clothing in Colombia.
But to U.S. authorities the case was anything but ordinary. Chaparro, prosecutors alleged, helped run a money-laundering ring for drug traffickers that took advantage of lax controls at UK-based international banking group HSBC Holdings Plc. It was one of the most important leads for U.S. investigators pursuing a case against the bank that eventually led to a $1.9 billion settlement on December 11.
Chaparro was "basically putting the orchestra together" and investigators saw "him as a major player in terms of cleaning a lot of money," said James Hayes, special agent in charge of Homeland Security Investigations at U.S. Immigration and Customs Enforcement in New York. Known as ICE, the agency and its task force led the probe.
The Colombian's lawyer, Ephraim Savitt, said Chaparro was a middleman in the operation, but disputed the extent of his client's role, saying he was the "page turner of sheet music for the conductor."
Chaparro, who was arrested in Colombia in 2010 and extradited to the United States in 2011, pleaded guilty to a money-laundering conspiracy count in May and is awaiting sentencing in 2013.
An HSBC spokesman declined comment.
Much about the trail that drug traffickers used to move U.S. dollars - the proceeds from drug sales - through HSBC and other banks remains unclear. By design, the process is layered to evade detection.
But a review of confidential investigative records that originate from two U.S. Attorney office probes and federal court filings in New York and California, as well as interviews with senior law-enforcement officials, shows how investigators tracing the activities of people who allegedly worked with Chaparro were able to expose large-scale money laundering at one of the world's biggest banks.
The federal law-enforcement task force - named after El Dorado, the mythical city of gold in South America - used wire taps, email and computer searches, information from at least one inside source, and old-fashioned surveillance, to piece together the ring's operations.
SMUGGLED ACROSS BORDER
Drug cartels sold narcotics in the United States and routed the cash to Mexico, often using couriers to smuggle it across the border. That cash would then be put into bank accounts at HSBC's Mexico unit, where large deposits could be made without arousing suspicion, according to U.S. Department of Justice documents.
In one filing, U.S. prosecutors said, Chaparro and others allegedly utilized accounts at HSBC Mexico to deposit "drug dollars and then wire those funds to ... businesses located in the United States and elsewhere. The funds were then used to purchase consumer goods, which were exported to South America and resold to generate ‘clean' cash."
In a typical transaction, a middleman in a drug cartel would offer to deliver consumer goods, such as computers or washing machines, to Colombian businesses on favorable terms. Another person in the United States would buy the goods from firms using funds from drug trafficking, and fulfill those orders.
Money launderers exploited the laxness of HSBC in policing shadowy money flows, the Department of Justice said earlier this month. Failures included not conducting due diligence on customers, not adequately monitoring wire transfers or cash shipments and not having enough employees to run anti-money laundering systems. U.S. Assistant Attorney General Lanny Breuer called the lapses "stunning failures of oversight."
The situation was so bad, according to the Department of Justice, that in 2008, the head of HSBC's Mexican operations was told by Mexican regulators that a local drug lord described the bank as "the place to launder money."
The Chaparro probe, led by ICE and the Justice Department, converged over the past two years with two other investigations - led by federal prosecutors and investigators in West Virginia and by the Manhattan district attorney - resulting in this month's settlement with HSBC.
HSBC and its employees avoided criminal indictments, as the bank agreed instead to a deferred-prosecution deal that forces it to strengthen controls and accept a compliance monitor.
Today, Chaparro sits in a federal detention center in Brooklyn, reading the Bible and awaiting sentencing, said Savitt, a former U.S. prosecutor in Brooklyn, who submitted a list of questions to Chaparro for Reuters.
"He is contrite, regretful and ashamed about his crimes," Savitt said. "He wants to serve his time and rejoin his family. He understands that a prison term could prevent that from happening for many years."
Under federal guidelines, he could face 15 to 18 years in prison.
ON CHAPARRO'S TRAIL
The El Dorado federal task force, based in a building on the west side of Manhattan near Chelsea Piers, serves as an umbrella organization for some 250 law-enforcement officials from state, local and federal agencies.
One of the task-force supervisors is Lieutenant Frank DiGregorio, a former New York detective who spent years tracking the so-called Black Market Peso Exchange, which is used to convert dollars to Colombian pesos through trading in goods. DiGregorio along with two younger investigators - Graham Klein and Carmelo Lana - led the HSBC case.
The overall probe began in 2007 when investigators analyzed how courier companies ferried cash through airports in Miami and Houston, a person familiar with the case said. They ultimately tracked that to HSBC's operations in Mexico and then connected it to funds moving through New York.
A tipping point in the investigation came in 2009 when El Dorado agents arrested a man named Fernando Sanclemente. Two sources familiar with the case say Sanclemente was an operative in Chaparro's network.
Sanclemente, who was charged with allegedly conducting financial transactions tied to narcotics trafficking, is free on bail with a $200,000 bond, according to the latest court docket entry, which dates to January 2012. His lawyer, James Neville, declined to discuss the status of the case.
According to a criminal complaint filed against him by Lana, the El Dorado agent, on June 30, 2009, task force agents followed Sanclemente for more than two hours as he drove around Queens in New York to ferry cash from drug sales.
Sanclemente first met with a person for about "30 seconds" on one street corner, and left with a yellow plastic bag. Later that night, he drove to a Dunkin' Donuts near LaGuardia Airport, where a black livery cab pulled up and the driver handed him a black bag.
The El Dorado team followed Sanclemente to Laurel Hollow, New York, some 40 minutes away, where the investigators stopped and searched him, finding about $153,000 in the two bags. At Sanclemente's apartment, investigators said they found ledgers and documents consistent with money laundering.
With the arrest, investigators gained insight into Chaparro's alleged transactions. At one point, investigators set up undercover bank accounts where they were able to get Chaparro's network to wire proceeds that could be traced back to HSBC's Mexico operations, according to people familiar with the situation and a Department of Justice filing in the HSBC case.
Federal agents would ultimately home in on $500 million that had moved from HSBC Mexico to HSBC's operations in the United States, according to the confidential investigative records.
Between October 6, 2008 and April 13, 2009, Chaparro and others conducted money laundering transactions totaling $1.1 million tied to narcotics trafficking, the indictment against Chaparro alleged.
(Reporting By Carrick Mollenkamp and Brett Wolf of the Compliance Complete service of Thomson Reuters Accelus; Additional reporting by Tomas Sarmiento Cordero in Mexico City and Aruna Viswanatha in Washington; Editing by Paritosh Bansal and Martin Howell)