Anchorage Daily News: Alaska's Newspaper

IRS follows the drug industry's cash flow

ACCOUNTING: Agent, team look for out-of-place money.

By MEGAN HOLLAND
Anchorage Daily News

Published: October 31, 2005
Last Modified: October 31, 2005 at 06:43 AM

An accountant can be a criminal's worst enemy.

Terence Zeznock, as the new supervisory special agent of the Alaska field office of the Internal Revenue Service Criminal Investigation unit, is such an enemy to the bad guys.

Zeznock and his nine-member team not only go after people who file false returns and who evade their taxes but also join with the FBI, Bureau of Alcohol, Tobacco, Firearms and Explosives, and Drug Enforcement Administration to make cases against those who defraud banks, launder money and traffick in narcotics.

They get to criminals through their bank accounts and by sniffing out the dirty money and finding their networks.

Zeznock, 50, has spent his 25-year IRS career in Alaska. For 15 of those, he worked on narcotics cases with the DEA.

In a recent interview, he talked about drugs in Alaska, money laundering and how he catches the crooks.

Q. What drugs do we see in Alaska?

A. Cocaine. We see crack cocaine, we see meth. We've actually seen meth so pure that it's termed "ice." We see heroin on a lesser scale. We see MDMA, which is Ecstasy pills.

My part in the narcotics cases is the money laundering. And, what do I see in money laundering transactions? Where does the money come from most often? Cocaine.

Q. What's the flow of drug money look like in Alaska?

A. It's the flow of money leaving. Once drugs have been distributed here, the money is trying to get back out of the state.

There are hubs in other parts of the country where traffickers are trying to get the money out of the country. That's not what Alaska is. Alaska is a point where the narcotics are sold and then the money is trying to get back to someplace in the Lower 48 where the source for Alaska is actually located or where they're trying to buy the house or where they are maintaining their household and trying to buy assets, that kind of stuff.

Basically, narcotics traffickers brought their product here, sold it, and now they have money in Alaska and they want to get it to where they can use it for their own purposes or where they can get it back to their source of narcotics so they can buy more narcotics. I'd say predominately, for Alaska, the jumping-off point for narcotics before it gets to Alaska and where the flow of money goes, is to southern California.

Q. Why southern California?

A. Because it's so close to the southwestern border. It's a porous boarder. And as far as traffickers, the Mexican cartels have a strong prevalence in meth and cocaine.

Q. How are they moving the money?

A. Any way you can figure -- money is put in vehicles and transported, FedExed, mailed. And, of course, people use bank accounts. Wire services. Couriers.

Q. How is the drug market different in Alaska than the Lower 48?

A. The most poignant example is cocaine. In the southwest boarder, cocaine -- in southern California, Arizona -- can be purchased for $12,000 to $15,000 a kilo. Here in Alaska, it can be anywhere from $25,000 to $35,000 a kilo. Transportation is the only additional cost.

Q. Are other drugs also that much more expensive?

A. Everything else is, just like everything in Alaska. An example is British Columbia marijuana. You can purchase it there at $1,500 U.S. per pound. It sells for $3,000 to $4,000 a pound here.

Q. How do you track money laundering?

A. We wouldn't give away all our techniques on how we discover all that information because we don't want to tell the bad guys what we use as tools. But, for the most part, our investigations are historical investigations. It's not "We'll catch them red-handed."

Whether it's cash or assets, there always has to be some sort of transaction, because a narcotics trafficker is always attempting to get his illegal-gotten proceeds into the normal business activities that everybody else carries out -- into a bank account, into an asset, be it real estate, be it a car. They have to buy everything else that everybody else has to buy, but they've got cash that they got illegally. So we are following that flow of money from what was purchased back to the source that it came from.

In addition to that, we are looking at everything. We are looking and have contacts in the community and get phone calls where people are saying this person came to my business and tried to buy this car and pulled out a bag full of cash and the cash smelled like marijuana.

And often, we'll find that that person is a nominee person, that that person isn't really the one that wants to drive the car and is going to drive the car. It's a person, or friend, or relative, or girlfriend who has gone and bought the car so the drug dealer can actually drive it. And in that way, the drug dealers keep their name off the assets and attempt to disguise the ownership and source from the IRS and other law enforcement agencies.

Q. Why not just get these guys on drug charges? Why get them on financial charges? Is that easier than getting them on drug charges?

A. It's all (of those things). If it's a person that we can't get to by straight narcotics charges, we certainly would entertain the opportunity to use tax charges or money laundering charges like we did with Al Capone.

Importantly, though, we prove connections and create the connections so that we can prove conspiracies. Where, if you arrest a courier or the actual trafficker, you have him and anybody he is involved in a transaction with. But if you include money laundering charges, you start reaching out -- the ability of law enforcement to grab the money launderer, the person that purchased assets for them, the associates that are all involved in a conspiracy.

It's about showing that there weren't just two guys that were arrested that night with the kilo of cocaine, but that there were 15 people that were involved in the organization. They just didn't happen to be standing there that night. We are able to prove they are participants in the conspiracy because of the flow of money and the recipients of money and the transportation and where all their assets are.

Our goal is to take the complete distribution network out of action, not just to take the figurehead so it can be replaced with another figurehead.

Q. When you catch the drug dealers, are they surprised they are caught by the IRS?

A. I've had drug traffickers tell me that they knew they were going to get caught on narcotics trafficking but being caught on money laundering was awful harsh. Because they knew I was after their assets.

Narcotics proceeds are forfeitable by the government. We've seized houses, boats, motorcycles, cars, cash, home entertainment centers, workout gyms, anything that is of value that was an ill-gotten gain. We seized a ski boat on Big Lake that, I believe, was a $30,000 ski boat that he paid for in cash.

Q. I don't picture drug dealers skiing on Big Lake.

A. Well, you have a lot of free time since you aren't going to your job every day. In the summertime, you can go to Big Lake and ski.

Q. Who are these drug dealers?

A. Most people think it's the guy standing on the corner in a seedy part of town drug trafficking. And that's not necessarily the case. Generally, for the federal investigations that we are pursuing, those guys aren't making enough money for us to come in and pursue it.

It's the guy who is supplying them or supplying 20 other people like them that's generating enough money that it's moved out of the municipal or state level into the federal level that we would pursue it.

It's usually the guy who has a lot of wealth who doesn't have a job. That's the key poignant item for me. The guy has a lot of unexplained wealth is what brings my attention. When we ask him what he does, he says he's a consultant, or, says, "I'm in sales." Those kind of things pique everybody's interest, and it's our responsibility to follow through on it.

Q. What exactly is money laundering?

A. Money laundering is actually a generic term for different types of transactions that are illegal. It can be attempts to conduct transactions in a way that either disguises the source of the money, the ownership of the money, or the purpose of the transaction.

If it's illegal money and they have no job because they are traffickers and they don't spend their time going to a job every day, they are trying to hide that money because they have no legitimate source that they can claim that it's from.

And almost any transaction that you can conduct with narcotics proceeds is going to end up being subject to some federal statute. It's just tough to have drug proceeds and make any type of transaction with it that's going to be legal.

Q. Are there drug dealers in Alaska that pay taxes on their drug dealing?

A. Only one time in my career have I seen where a drug dealer has actually reported income from trafficking on his tax return. And then, he didn't identify it as drug trafficking, he identified it as sales.

Q. What kind of sales?

A. He did not identify what it was. And the reason that fellow did it was because he knew what the law was. The law is it doesn't matter whether it's legal or illegal income, it's includable for tax purposes. You have to pay taxes on drug profits. That's the law.

Q. Did you get that guy?

A. We seized over half a million dollars in cash. And, he pled guilty to money laundering and narcotics trafficking. That was about six, seven years ago.

Q. There's a lot of talk about meth. How big of a problem is it? Where's it coming from?

A. Meth is horrible. It eats the enamel on your teeth and fingers. A person basically goes from being a healthy-looking individual to someone who looks like they came out of a concentration camp in World War II.

There are two different sources that meth comes from here in Alaska. A lot of the larger quantities, the pound quantities, that we see come to Alaska are being manufactured in clandestine labs in southern California.

Then we have small labs where people try to make meth here locally -- be it out in the Valley or be it here in Anchorage. And those people are making small-scale amounts, grams versus pounds.

Q. So the big drug dealers aren't in Alaska?

A. I think Alaska is a market. I don't think Alaska generates its own narcotics, with the exception of some marijuana. My understanding at this point is there is actually a lucrative market in imported marijuana from British Columbia.

So, for the most part, we are a consumer of narcotics here, as opposed to a manufacturer of narcotics.

Q. What's the biggest bust you've ever had?

A. In 2003, we had a drug trafficking case with 44 defendants. We charged over 16 people with money laundering transactions.

Q. How much were they bringing in?

A. The largest seizure was over 10 kilos at one time. And then the amount of money was over $1 million that we had identified as money laundering transactions.

Q. Do you get tips from private people calling in?

A. We do. And people are justly upset. They go to work every day, and they earn a living and they pay taxes and they contribute to the community, and here you have these guys and they have no job and they have these toys and they have all this money that is ill-gotten gain, and they're upset.

Not only is it not fair, but it damages society. What they are doing is a harm to society. It's creating people that can't function because they are addicted to narcotics. And their families suffer, the community suffers, and the government has to support a lot of them.