Mexico's Dirty Cash

(International Relations and Security Network, 20/04/2009)


With billions of dollars being laundering through the Mexican financial system every year, authorities in Mexico and in the US seem to overlook this essential factor in the gun and drug trade between the two countries.


Estimates vary, but between the International Monetary Fund (IMF), the US Drug Enforcement Administration (DEA), the Mexican Attorney General’s office (PGR), and other independent sources, cash smuggled in bulk - or through remittance systems - varies from US$10 billion to US$45 billion a year in illicit funds, with US$25 billion as the average that many agree as a realistic sum. The PGR targets five major drug trafficking organizations (DTOs) in Mexico, and each one potentially earns as much as US$5 billion a year.


From what many in both the US and Mexico have said, the Mexican financial system facilitates the movement of this money, rather than impedes it.


The system


According to the Washington Post, 10 percent of Mexico’s financial system operates with funds earned from criminal activity, often referred to simply as “dirty money.”


Within the Mexican government, the role of investigation falls upon the PGR, but Mexico’s National Bank Commission (CNBV) controls access to the information on the flow of money through Mexico’s financial systems, the Post concluded.


When the PGR needs this information, it must make a formal request to the CNBV, and that request can be denied. If the PGR contests the denial, a judge must decide to allow access or not. This time consuming process gives a suspect plenty of time to move dirty money out of a suspicious account.

This lack of cooperation has, in part, resulted in a very poor success rate for the PGR’s already limited number of money laundering cases.


Between 2004 and 2007, the PGR investigated only 149 cases of money laundering in Mexico. In 2007, there were 14 convictions, but many of these cases were based on evidence gathered by police apprehension of individuals caught with large amounts of illicit cash, not by investigation of bank accounts and the illicit movement of money.


Egardo Buscaglia, professor of law and economics at the Instituto Technologico Autonomo de Mexico (ITAM), agrees that the lack of cooperation between officials with the Mexican IRS and the federal police is a major hindrance.


“Federal auditors working with those who direct criminal investigations is fundamental to disrupt billions [of dollars] derived from criminal activity,” Buscaglia told ISN Security Watch in a recent correspondence.


Apart from hurdles associated with gathering information, the PGR has only recently received specific legal tools that allow it to seize assets - businesses, bank accounts, possessions, etc. - proven to be associated with criminal activity. The country’s assets forfeiture legislation, as of March 2009, had languished in the Mexican Congress for over six months, essentially pigeon-holed until it was recently passed.


“The recent passage of an asset forfeiture law should make a big difference, if Colombia’s experience is any example,” Shannon O’Neil, a Latin American studies fellow with the Council on Foreign Relations, told ISN Security Watch.


Jeff Ross, formerly with the US Department of the Treasury’s Office of Terrorist Financing and Financial Crimes, points out that, because of the historical issues surrounding corruption in Mexico, asset forfeiture is a more complicated matter than it is in the United States.


High levels of corruption suggest a nightmarish picture of bad cops taking advantage of the assets forfeiture law to plant evidence, make arrests and seize houses, cars and businesses owned by Mexico’s upper class.


Mexico’s government has, however, been working with the US Department of Treasury since 2005, which has produced some results over time, most noted in the significantly increased number of money laundering investigations in 2009, at 450.


Geographic targeting


According to an IMF report from January 2009, Mexico has made a solid start toward passing legislation that criminalizes money laundering, but “money laundering crimes have not been adequately investigated.”


One area where the US and Mexico could surely cooperate is within the practice of geographic targeting.


Ross explained that inside the US, the Treasury Department works with the Justice Department to target geographic areas high on the list of heavy drug trafficking, such as New York, Atlanta, Dallas and Los Angeles.


Financial crime agents then prepare a “geographic targeting order” that focuses on small companies that act as brokers, moving money from the US to destinations abroad.


Ross explained that brokers act as the middle man in money laundering “wash cycles,” whereby the guy on the street hands over his illicit funds to a broker who uses “sometimes hundreds” of bank accounts to hide the source of the money before he places it in a single account, where the money appears to be legitimate.


The order limits brokers in the targeted geographic area from moving more than a very small amount of money. This order restricts businesses from moving up to US$10,000 per wire transfer to only US$750 a wire, overnight.


“This makes washing dirty money nearly impossible, as there are millions of dollars to move a week,” Ross explained.


These orders can cover a period up to 90 days in the US, which forces the targeted brokers to make a move or simply shutter their operations. Justice Department agents keep an eye on their suspects to see what happens.


“Cooperation between Treasury and Justice is essential for this strategy to work,” Ross said.

Many choose to close shop and move out of the targeted region. Others decide to move the cash via bulk smuggling, making them easy targets for stop, search and seizure. A few decide to ignore the order and keep up with business as usual, but they almost immediately face arrest.


The practice of geographic targeting has been very successful in shutting down money laundering efforts inside the US, and it is part of the reason why most of the money earned by Mexican organized crime is shipped in bulk across the border before it is laundered in Mexico.


If Mexico were to adopt such a measure, it would have the tool to cripple organized crime where it most hurts, in the numerous businesses that appear to operate legally in the formal economy where corruption facilitates money laundering.


“Due to high corruption, 78 percent of the formal economic sectors have been infiltrated by organized crime,” Buscaglia said.


Cash: Organized crime’s Achilles’ heel


Criminals know they’re successful when they have a problem with money laundering. It is the Achilles’ heel of any criminal organization because dirty cash is the lifeblood of black markets.

Mexican DTOs must get the cash out of the US and use it for three very important tasks.


First, these groups must pay their suppliers. In the case of cocaine, money needs to move to Colombia. In the case of methamphetamines, money needs to move to the precursor chemical salesmen across the region in Argentina and Paraguay, and across the Pacific, in China and India.

Second, these groups must equip themselves with guns, trucks and all the tools of their trade. Without money, the gun problem that so preoccupies Mexican President Felipe Calderon would not exist.


Yet “we haven’t heard as much about money as about guns, in part because the Mexicans are most publicly concerned about guns,” O’Neil recently told ISN Security Watch.


Finally, these groups must pay their employees and bribes. The Mexican PGR has reported that over 150,000 individuals are directly involved in organized crime in Mexico, and another 300,000 are local marijuana and poppy suppliers. Apart from nearly half a million employees to pay, tens of thousands of local police, politicians, businessmen, street vendors and all manner of corrupted individuals receive regular payments to keep important information flowing, or, more importantly, to ensure the disruption of the government’s activities.


The November 2005 arrest of Ricardo Garcia Urquiza who was considered one of the financial wizards of the Juarez DTO, and the recent arrests of Vicente Carrillo Leyva and Vicente Zambada, two of the so-called “narco juniors” who took over the financial practice of their father’s drug trafficking businesses, certainly affected the flow of illicit cash in Mexico.


Criminals adapt. Sources in Mexico indicate that dirty cash pays the salaries of lower-level DTO employees, and smaller bribes, somewhat alleviating the need for money laundering.


The largess of Mexico’s organized criminal activities hinges on the ability to successfully launder money through hundreds or perhaps even thousands of small and mid-sized businesses across the country. As long as the Mexican government focuses its assets and financial resources on guns and direct confrontation with DTOs, and not on anti-money laundering efforts, it is difficult to see an end game to Calderon’s current offensive on Mexican organized crime.


“When you’ve got a target that does business in the billions of dollars, and you’re only seizing one billion, that’s not good enough,” Ross said, adding, “it makes for a great sound byte, but if eight to twelve billion is moving and you’re only seizing one of it, that’s just the cost of doing business for them.”