Donald Trump’s designation of Mexican cartels as terrorist organizations risks creating a chilling effect on financial firms and other businesses amid fears that they could face severe penalties even for unwittingly serving or paying criminals.
Mexico’s banking sector is particularly prone to taking a more conservative approach in providing loans and other services, given its role as a middleman in transactions, according to former officials. The country’s banking sector — dominated by a handful of foreign companies — could restrict its activity in areas known to be linked to drug trafficking, from mining and livestock to transportation and agriculture, they said.
“It’s a challenge to the financial system like we’ve never seen before,” Sandro Garcia, a former senior money-laundering official at Mexico’s banking regulator and an independent consultant, said in an interview. “This will be like ‘know your customer’ times ten,” he said.
Trump took office promising to label cartels as foreign terrorist organizations in an attempt to extinguish a drug trade that had been killing about 100,000 Americans each year. Banks are deeply concerned about the risks of inadvertently funding illicit activities and the heavy financial penalties they could face, meaning they will likely scale back their involvement even if they are several levels removed from a transaction.
The banking system has a loan portfolio of 7.5 trillion Mexican pesos and moves about 14 million interbank transfers per day. Authorities have said only a small portion is actually directly linked to drug traffickers, but another group of people or companies paying protection fees, ransoms or other under-the-table deals is nearly impossible to calculate.
Trump signed an executive order on his first day in office to designate certain cartels as terrorist organizations. (Fotoarte El Financiero)
Some financial institutions offer correspondent banking services, which facilitate transactions such as funds processing, trade financing and cash management between two parties, making the detection of illicit activity more complex. Trump’s designation could cripple that business and force banks to restructure their risk models, Garcia said.
The country’s largest lenders are Banco Bilbao Vizcaya Argentaria, Grupo Financiero Banorte, Banco Santander, Citigroup Inc., HSBC Holdings Plc and Bank of Nova Scotia.
Representatives for most banks declined to comment. The country’s banking association, ABM, said local banks maintained strong relationships with U.S. authorities and fully complied with money laundering regulations. They are analyzing the new designations and will issue a position soon, a spokesman said.
Declaring cartels as terrorists goes beyond banks
The implications will extend far beyond banks, given that cartels have influence in vast areas of Mexico and have diversified into extortion and front company networks. Depending on the extent to which Trump applies the new order, it could affect the real estate sector, gasoline sales, security services, auto parts and other manufacturing operations that may be paying protection or dealing with suppliers with criminal ties.
In a survey by the American Chamber of Commerce of Mexico published last year, six in ten companies said they were somewhat or very affected by crime. Of the companies surveyed, 12 percent said organized crime had taken partial control of the sale, distribution or pricing of their products.
The Mexican Institute of Financial Executives (IMEF) said the impact on the Mexican banking system would be unpredictable, but likely negative. He stressed that the consequences would include difficulties in making cross-border payments and, therefore, the liquidity of foreign currency in the market would be affected.
Ernesto O’Farrill, president of the Economic Analysis Commission of the Mexican Institute of Public Accountants (IMCP), said that the US government cannot “put its hands” in Mexican banks if there is money laundering, but it could do important work in American institutions.
“The solution to American laws that seek to transfer the constitutional framework to other countries, the only way out is to really work within a framework of cooperation and collaboration, and not in a unilateral manner,” said the expert.
Miguel González, coordinator of the Center for Financial Studies and Public Finances of the UNAM, noted that in financial matters the challenge will be to try to control operations with cryptocurrencies that are highly speculative.
“It is a strategy that seems to be carried out jointly by the two governments and does not refer only to armed actions, but involves joint and coordinated supervision in financial matters, in addition to control in arms trafficking,” he said.
“This will have a seismic impact on business and politics in Mexico,” said Paul Craine, who previously headed the DEA in Mexico and now works as a consultant.
Trump tried to impose this designation on the cartels during his first term, but was dissuaded by Mexican authorities. (Special Photographer/Special Photographer)
Under the designation, a company could be in violation if it provides “material support” to a foreign terrorist organization. If a company pays protection or deals with a front company run by a cartel, or even with a supplier who is being extorted, it could be in the crosshairs. According to Craine, the bar to prove it is lower than without the designation.
“If you look at the amount of money the cartels generate, not just through drug trafficking, but through all their criminal business lines, you see that it is all very intertwined with the economy,” he said. “You start to see all the tentacles.”
According to Trump’s order — one of many signed on his first day in office — cartels operate as “quasi-governmental entities, controlling nearly every aspect of society” in parts of Mexico. Their activities “threaten the safety of the American people, the security of the United States, and the stability of the international order in the Western Hemisphere,” it says. The order does not single out or name specific cartels in Mexico.
Remittances and migrant smuggling are other targets
The designation could pave the way for a potential military force in Mexico, though the new U.S. administration is more likely to seek to block criminal groups’ income, Craine said.
Trump tried to classify cartels as terrorist organizations in his first term, but abandoned the initiative after domestic protests. Opponents feared the unintended consequences of essentially accusing one of America’s top trading partners of harboring terrorists.
The country’s remittance industry may also be a target, according to Shannon O’Neil, a senior fellow for Latin American studies at the Council on Foreign Relations. Migrants use this system to send more than $60 billion a year to Mexico, and those payments account for nearly 4 percent of Mexico’s gross domestic product. The peso’s value against the dollar has long been supported by that steady flow, though it fell last year as Trump surged toward election victory.
But here, too, cartels play a role that U.S. authorities may scrutinize. Some money transfers are sent from the United States to relatives to pay migrant smugglers allegedly employed by the cartels. Investigators point to surprisingly high rates of transfers from areas of the United States with relatively few Mexican migrants, suggesting a potential money laundering situation. A crackdown on remittances could involve companies like Western Union. “There’s a huge vulnerability,” O’Neil said.
The America First Policy Institute, which backed Trump’s return to the presidency, said in a paper released Monday that the designations expand the government’s ability to freeze and seize assets linked to cartels.
“This authority allows U.S. agencies to go after broader financial networks, crippling cartel operations by disrupting funding flows and resource distribution,” the institute said.
The extreme application of that idea could ultimately threaten growth in both countries, said Arturo Sarukhan, a former Mexican ambassador to the United States.
“There are certainly companies that are fronts for organized crime,” he said. “But it’s such a broad network that either you have an incredibly focused intelligence operation that can tell the good guys from the bad guys, or you’re using a musket to kill a mosquito.”
Source: elfinanciero
