IRS FOLLOWS THE DRUG INDUSTRY'S CASH FLOW

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. The conversation has been
edited for length and clarity. For more questions and answers with
Zeznock, go to adn.com.

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.