Remittances and Money Laundering in Mexico

(International Relations and Security Network, 20/11/2006)


Editor's Note: This is the final installment of a three-part series on the impact of microfinance programs and in one region of the Americas: Andes, Central America and Mexico.


Remittances sent from the US to Mexico exceed informal finances that flow from developed to developing nations around the world by billions of dollars. Mexicans working both legally and illegally inside the US sent an estimated US$28.1 billion to relatives in Mexico in 2005 alone. Money sent home to countries in Latin America and the Caribbean represent 70 percent of the world’s total amount of remittances. Most of this money originates in the US, where the formal financial sector remains reticent to remittance senders and companies because of worries over terrorist financing and money laundering.


The US Treasury Department includes all financial transfers within the realm of the formal financial structure. It applies controls against money laundering and terrorist financing to help detect and disrupt illicit fund transfers. These controls may lead to heavy fines or legal action that US banks would prefer to avoid rather than capture a part of remittance transfers.


Financial literacy, a term that refers to educating remittance senders and recipients so they feel more comfortable using the formal financial system, has been promoted by the US government, non-governmental organizations and some banks as the key to bringing remittance users and formal banking systems closer together. Yet programs that promote financial literacy within the US remain on passive footing, providing information in Spanish online for a community in which some members may not be familiar with computers, much less the internet.


In Mexico, there is currently some initiative to offer financial literacy programs, but security is a problem. Some 61 percent of households that receive remittances fall into the bottom 20 percent of non-remittance income. They are poor families that in many cases live in areas controlled by Mexico’s narco-trafficking organizations, making it difficult for the government or other organizations to reach remittance users.


Narco-trafficking and money laundering


Narco-trafficking analysts, US Drug Enforcement Administration agents and other security officials throughout the Americas generally agree that Mexican organized crime has a near monopoly on the lower half of the cocaine procurement chain that stretches from Colombian coca farms to street retailers in the US.


Colombian narco-traffickers tend to sell their cocaine to Mexican organizations, preferring to focus on coca leaf crops, cocaine production, securing transport between Colombia and Mexico and managing money laundering operations. The Mexican traffickers focus on maintaining supply from Colombia, smuggling cocaine north of the border, and getting the money out.


Money laundering efforts are largely initiated by Mexican actors, so it would seem that remittances play an important role in hiding the origination of illegal wealth. But money launderers prefer to employ bulk cash transfers. Cash packages are taped to human smugglers, who easily walk across the border from the US to Mexico. In other cases, smugglers shovel cash into 40-foot containers, sending it back to Mexico on flatbed trucks.


Of the many methods used to launder money earned by the sale of cocaine and other drugs inside the US, cash remittances are not the top choice for money laundering experts, according to the treasury department.


“The vast majority of illicit funds we see flowing from the United States to Latin America via remittances tend to be laundered proceeds,” US Treasury Department spokesperson Molly Millerwise told ISN Security Watch, adding that “while remittances can be used by bad actors to move money, they are generally not an efficient method for laundering.”


Commenting on the formal financial sector’s other worry, terrorism finance, Millerwise said: “While there is believed to be terrorist financing in Latin America, remittances from the US to Latin America are not a prevalent means for financing terrorism in the region.”


Growing remittances


The changing nature and increasing migration from Mexico to the US has evolved to the point that the governments of both countries may soon put more attention on an ever important social challenge that will require a policy solution.


More Mexicans are moving to the US every year, sending home an increasingly significant amount of money. As long as this money remains outside the formal financial sector, the economies of both countries are negatively affected.


Latino immigrants make up some 6.6 percent of all US households, according to the Inter-American Development bank (IADB). And according to the US Census Bureau, 1.2 percent of the household population in Pennsylvania, two percent of the population in Indiana and nearly one percent of the population in Ohio is Latino. None of these states had Latino populations five years ago.


Latino migrants from Mexico no longer stop in border states, but head directly to where there is work. And once they pay off debt accrued from their journey, they almost always begin sending money home, often as much as US$300 a month.


The IABD reports that remittances from the US to Latin America will total more than US$45 billion in 2006 - 51 percent higher than the total amount registered in 2004.


Remittances flow from nearly every state in the US, and most transfers head directly to Mexico.


Promoting financial literacy


In a May meeting between the US Treasury Department and the World Bank, Assistant Secretary for International Monetary and Financial Policy Mark Sobel highlighted the need for greater financial literacy among remittance senders.


“Inadequate financial access and financial literacy are issues for many countries, including the United States,” Sobel said. “Bringing un-banked residents into the financial mainstream and raising financial literacy of US residents are priorities for the US government.”


The Financial Literacy and Education Commission, created in 2003, launched a national strategy three years later, which, according to Sobel, is constructed to improve the financial education and financial literacy of all US residents. A website and hotline have been made available in both Spanish and English, and a multimedia campaign is currently under development.


Yet such initiatives seem to fall short of reaching the community most in need, one that remains offline. Part of the challenge is getting around the illegal immigrant conundrum. Still another challenge moves beyond remittance senders to remittance receivers, a community perhaps more in need of financial literacy.


Maria Jaramillo, the executive director of the remittances program with international micro-finance consulting organization ACCION International, recently told ISN Security Watch that her group considered financial literacy an important factor that would help bring remittance recipients closer to the formal banking sector.


“We think financial literacy is an important component to create awareness that remittances can be assets, capital that [recipients] have to create opportunity,” Jaramillo said.


“Because of dependency on remittances, [recipients] have a reduced ability to think beyond tomorrow.” Jaramillo explained that the one project that many remittance recipients focus on was the construction of a house for the family. Once the house has been built, however, there is little consideration of another equity-building endeavor.


Financial literacy remains elusive for many remittance recipients in Mexico. Part of the challenge is the country's security problem. Yet US banks should not remain reticent to edge themselves closer the remittance community because bank leaders are worried about money laundering or terrorism financing.


The benefits of banking remittance senders and recipients far outweighs the risk associated with working in these communities. As the gross number of remittances climb further into the billions, figuring as a higher percentage of annual gross domestic product, the economic security of recipient countries begins to be a final factor that among all others should spur the formal financial sector to find ways to formalize remittance flows.