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Financial Crimes
09/28/2012

Los Angeles-area toy company pleads guilty to money laundering conspiracy

Company's owners agree to forfeit $2 million in proceeds allegedly derived from scheme

LOS ANGELES – A Los Angeles-area toy wholesaler, its two owners and the company's primary bookkeeper pleaded guilty Friday to federal charges related to their participation in an elaborate scheme known as a Black Market Peso Exchange, which enables drug trafficking organizations in Mexico and Colombia to launder proceeds from their drug sales.

The defendants entering guilty pleas before U.S. District Judge R. Gary Klausner included:

  • Woody Toys, based in the City of Industry, which pleaded guilty to one count of money laundering conspiracy and is scheduled be sentenced Nov. 19;
  • The business's owners, Jia "Gary" Hui Zhou, 43, and his wife Dan "Daisy" Xin Li, 43, both of Diamond Bar, who pleaded guilty to conspiring to structure currency transactions with a U.S. financial institution to avoid the bank filing a Currency Transaction Report. They are scheduled to be sentenced Feb. 11; and
  • Woody Toys' primary bookkeeper, Kit Yee "Ella" Lam, 52, of Diamond Bar, who pleaded guilty to failing to file a required Internal Revenue Service Form 8300 showing the receipt of more than $10,000 in cash from Woody Toys' Mexican customers, and who is scheduled to be sentenced Jan. 28.

While Zhou and Li each face statutory maximum sentences of five years in federal prison, plea agreements filed in this case call for Zhou to be sentenced to two years in federal prison, and for Li to be sentenced to one year in prison. Judge Klausner has not yet indicated if he will accept the binding plea agreements. As part of their plea agreements, the couple has agreed to forfeit to the government $2 million in proceeds allegedly derived from the scheme.

"Drug trafficking organizations attempted to weave an intricate web involving Woody Toys to conceal the flow of money from the United States to Mexico and Colombia," said U.S. Attorney André Birotte Jr. "The Department of Justice and law enforcement partners are ramping up the prosecution of Black Market Peso Exchanges involving companies in the United States."

Friday's pleas are the latest developments in an investigation conducted by U.S. Immigration and Customs Enforcement's Homeland Security Investigations (HSI), IRS-Criminal Investigation, and the multi-agency Southern California Drug Task Force, which is headed by the Drug Enforcement Administration (DEA).

A total of eight defendants have been charged in the Woody Toys case, which alleges the use of "structured" cash deposits in the United States to launder illicit proceeds generated by drug trafficking organizations based in Mexico and Colombia. Structured deposits involve amounts of less than $10,000 that are designed to avoid laws requiring that all cash transactions of $10,000 or more be reported to federal authorities. An indictment in this case alleges that, between 2005 and 2011, approximately $3 million in structured, out-of-state cash was deposited into Woody Toys' bank accounts. During that same time, Woody Toys took in approximately $3 million in cash without filing required IRS 8300 Forms.

Three other defendants charged in this case previously pleaded guilty. Judge Klausner will sentence Luis Ernesto Flores Rivera Oct. 15; Jose Miguel Yong-Hinojosa Oct. 16; and Anabel Rufino Dec. 3. The eighth defendant, Jazmin Contreras, is scheduled to plead guilty Oct. 2 to a charge of making a material false statement to the IRS.

Recently, in a related case, prosecutors filed a money laundering conspiracy charge against Nicholas Reyes Gordillo, 43, of San Diego. According to the one-count information, Gordillo delivered $200,000 in drug proceeds to a Los Angeles warehouse in August 2011 where the money was picked up by Woody Toys and credited to the accounts of the company's Mexican toy customers.

"As this case makes clear, businesses that launder profits for drug trafficking organizations will pay a high price for helping further these dangerous criminal enterprises," said Claude Arnold, special agent in charge for HSI Los Angeles. "HSI will continue to aggressively target those whose actions are contributing in no small way to the devastation wrought by the international drug trade."

Leslie P. DeMarco, special agent in charge of IRS-Criminal Investigation's Los Angeles Field Office, stated: "The license to run a toy business is not a license to launder narcotics proceeds. Today's guilty pleas and the agreed-upon $2 million forfeiture send a loud and clear message that IRS-Criminal Investigation is committed to unraveling complex money laundering and cash structuring schemes where individuals and businesses attempt to conceal the true source of their money."

As part of the Black Market Peso Exchange scheme alleged in this case, foreign toy retailers with Colombian and Mexican pesos would contact currency brokers to buy discounted U.S. dollars, which they used to purchase merchandise from Woody Toys. The dollars being "sold" were allegedly proceeds from illegal drug sales that had been deposited in the toy company's accounts or delivered to the business. The Colombian or Mexican pesos the currency broker received from the foreign toy retailer were remitted to the drug trafficking organizations.

"As this case has demonstrated, drug dealers will go to extreme methods to hide their illegal profits," said DEA Acting Special Agent in Charge Jon S. Goldberg. "DEA will continue to work with our law enforcement partners to ensure those involved in this complex web of drug trafficking are brought to justice."

The probe targeting Woody Toys began in November 2010 based on evidence uncovered during a similar investigation targeting another Los Angeles-area toy wholesaler – Angel Toys. Several former employees of Angel Toys subsequently went to work for Woody Toys.

Investigators say schemes of this kind benefit criminal organizations by giving them a means to launder illicit proceeds using international trade. The system also gives foreign retailers access to discounted U.S. currency, which enables the foreign retailers to avoid steep exchange rates and other fees. Finally, for the U.S.-based company, the scheme is a way to substantially increase sales volume and cash flow.

For more information, visit www.ice.gov.