Special Report: Money Laundering in Mexico

TNI

November 2005

Special Report: Money Laundering in Mexico
Tim Coone
Latin Trade September 1997

North of the Mexican Pacific Coast fishing port of Guaymas, an eight-lane highway leads to the small tourist town of San Carlos, where a modern marina gives shelter to dozens of luxury yachts. A modern and well-kept launderette has signs in English.

The highway comes to an abrupt halt near two hotels - a Howard Johnson and a Club Med - and afterwards turns into a dirt track winding off through a picturesque and dry Sonoran desert, where coyotes howl in the night and flightless roadrunners scamper through the cactus-strewn landscape.

Maybe 100 cars per hour travel down the highway at "busy" periods, a large proportion of them American campers with license plates showing them to be from just over the border in Arizona or Colorado. Where the track disappears into the desert, an abandoned airfield marks where the famous novel of the US novelist Joseph Heller -Catch 22- was filmed a quarter of a century ago.

But today it is a different drama, with a new Catch 22 plot being enacted out in Sonora state and even much further afield.

Being a thinly populated border state, Sonora has become one of the main staging posts for cocaine heading from Bolivia, Peru and Colombia to the United States. Flown into remote airstrips in twin-engine planes and executive jets, the drugs make their final leg across the US border in false-bottomed road trailers, on the backs of donkeys or perhaps in yachts sailing out of marinas such as at San Carlos. Other drugs grown in Mexico such as marijuana and opium gum, also find their way north in large quantities.

While the drugs go in one direction, the money from that trade comes back in the other, often in the same false-bottomed containers, yachts and donkey-packs in which the drugs went north, according to one investigator with many years of experience of tracking down drug smugglers and money launderers.

Like most investigators into this business, he did not wish to be named. The money is invested in real estate, in the Mexican stock and bond markets, or even in highly-visible public works projects, so as to pay off local politicians for their patronage and protection and help win them some votes at the next election. The local gossip in San Carlos is that its eight-lane highway to nowhere is a product of such money-laundering. It is certainly hard to imagine many coyotes or roadrunners ending up as roadkill under the wheels of juggernauts on that empty, shimmering stretch of tarmac.

Money laundering was defined in 1990 by the US Senate Foreign Relations Sub-committee on Narcotics and Terrorism, as "the conversion of profits of illegal activities into financial assets which appear to have legitimate origins." The profits of the Latin American-US drug trade being laundered through Mexico is conservatively estimated by US and Mexican investigators to amount to some US$10 billion to $15 billion per year, equivalent to around 3% to 5% of Mexico's GDP.

US anti-drug agencies estimate that Mexico-based trafficking organizations control the movement of several hundred metric tons of cocaine, 5-6 metric tons of heroin, and up to 7,000 metric tons of marijuana annually into the United States. This is thought to represent around 50% to 60% of US-bound cocaine shipments from South America, and also makes Mexico the biggest overseas supplier of marijuana to the US market. Given the size of the trade, and the hundreds of billions of dollars involved at street prices, the $10 billion to $15 billion per year estimate of profits being laundered through Mexico could indeed be a considerable underestimate.

For a developing country which has averaged just 4% GDP growth per annum in the five years prior to the 1995 economic crisis, this flood of money therefore represents the difference between growth and stagnation, or worse - recession - at the macro-economic level. This is the Catch 22 of Mexico's fight against the drugs trade: if it were to successfully staunch the flow of laundered money through the Mexican financial system, it could seriously destabilize the economy.

It is difficult to get precise figures on the scale of the business, because by definition the money launderers seek to brush over their tracks. The financially strapped Mexican banks will give no estimates of the scale of the business, let alone admit to being participants in it.

But US officials are clear: "Given the intimate ties between the two countries' financial systems, and in the absence of adequate controls in the Mexican system, Mexico has become a major money laundering center and the preferred international placement point for US dollars," said a report produced last March by the US State Department's Bureau for International Narcotics and Law
Enforcement Affairs. "Drug cartels launder the proceeds of crime in legitimate businesses in both the United States and Mexico."

If the proceeds are as much as $15 billion, that would be the equivalent to around 20% of the entire Mexican banking system's loan portfolio. At the end of 1996, the banking system held a total of $141 billion in assets, of which around half was in loans, the remainder being invested in private and public sector financial bonds and instruments, according to Mexico's National Banking Commission. The liquidity of the banking system must thus be significantly influenced
by these major flows of drug cash through the economy. If these dried up, so would the banks' already tightly stretched credit supply.

Miguel Mancera, the president of Mexico's central bank, when pressed on how significant he thought money-laundering to be in its influence on the Mexican economy, was as dry as his money-supply in his response: "It is very difficult to separate the legitimate transactions from the illegitimate ones," he said.

Given the huge quantities involved, the money in the process of being laundered must enter the banking system at some point through deposits either of cash or monetary instruments, and can thereby be monitored. Reporting of cash transactions over $10,000, is to be implemented later this year under recently approved legislation which will align Mexican financial reporting practice with that of the United States.

The use of Suspicious Activity Reports (SARs) forces the money launderers to resort to "smurfing," as it is known in the United States, where these regulations were first introduced.
"Smurfing" involves the employment of hundreds, and maybe thousands of agents who act as money couriers and who make similarly numerous small-scale transactions of amounts just below the $10,000 reporting limit. In Mexico, foreign exchange houses along the US
border are believed to be the first entry-point of "smurfed" funds into the Mexican banking system.

Larger-scale concentrations of cash have to be disguised before they can enter the banking system if they are to avoid detection and an SAR investigation. This requires legitimate business fronts
which normally handle large cash flows such as supermarkets, pharmaceutical chain stores, franchise operations, and major retail operations. The smuggled, drug-related cash is mixed in with the legitimate sales turnover. It also allows such businesses to compete keenly with other similar businesses which are not in the narcotics trade, thereby underpricing them and forcing them out of business. This can enable the drug traffickers to further concentrate their hold on particular retail market segments.

According to Pascal Feria, the head of the Valley of Mexico Pharmacist's Association, there is evidence that the money launderers plan to move into the Mexican pharmaceutical business, opening up their own chains of pharmacies, as they have done in Colombia. This would bankrupt thousands of existing pharmaceutical outlets, many of which are small, family-run businesses, Feria claimed.

In this respect, the 1994 devaluation in Mexico was a major opportunity for the recyclers of narco-dollars. Major retail businesses could be bought-up at half the price they were valued at just months before.

"I know a lot of money that came into the Mexican market after the December 1994 devaluation was narco-money," says a US stockbroker in Mexico City, who asked not to be named. "The business that was generated helped save a lot of banks at the height of the loan-default crisis that followed."

Casinos are widely considered another business which are important conduits for laundering cash and it is noteworthy that Mexico's fifty-eight year ban on casino operation is currently under review.

A recent study by the Tourism Secretariat (Sectur) of the government outlines a strategy to develop six new Integrated Tourism Centers (CITs), involving investments of some $300 million to
$400 million each, all including casinos as centerpiece attractions.

"The negative social aspects of casino operation are well known...prostitution, heavy alcohol consumption and in some cases drugs. Linked to the latter it is known that casinos can be places of money laundering," said a recent discussion paper from The Mexican Federation of Business Organizations (Coparmex), one of the leading and most powerful business associations in Mexico.

The heart of Mexico's financial system, its banks, is meanwhile thought to be within arm's-reach of the money launderers. Testimony given by US anti-narcotics agent Harold D. Wankel to the US Congress last year stated that Drug Enforcement Administration (DEA) sources had found that Mexican drug traffickers "had bought large amounts of shares in (Mexican) banks and had placed members on their boards." No specific banks or individuals were named in the testimony.

"Getting bank cooperation at the first stage the cash enters the system is vital. It is where the money launderers are most vulnerable," says one experienced investigator. "Once the money is the banking system, it becomes increasingly harder with every transfer to trace to illicit dealings. After a chain of transfers, the funds appear to be legitimate."

One of the apparently less-sound methods is for government officials to stash away tens of millions of dollars in overseas bank accounts. Raúl Salinas, the elder brother of ex-president Carlos Salinas, has been behind bars since early 1995, held on a series of charges including money-laundering, fraud and conspiracy to murder. The money-laundering charges relate to a period when he was in charge of Conasupo, Mexico's food distribution agency for the poor, and the simultaneous appearance of some $80 million in his personal accounts in Switzerland.

It is a curious fact, however, that many of the most politically-damaging revelations in the case have been in US press reports, apparently fed by leaks from Swiss investigators. Bungling, inefficiency, confusion and stone-walling have characterized much of the successive Mexican Attorney-General's investigations into the 1994 political murders and the Conasupo case, so much so that even the normally-cautious Mexican press is beginning to laugh about it. A cartoon in the daily La Reforma newspaper depicted Jorge Madrazo, the recently-appointed head of the PGR (the fifth in as many years) saying, "We are making advances in the Conasupo investigation. We have taken out a subscription to the New York Times."

An investigation by a Mexican Congressional committee into the Conasupo case was halted last September by the majority of members from the ruling Institutional Revolutionary Party (PRI) that
sat on it, before it was able to delve into the money-laundering aspects of the case, and possible links leading to other prominent Mexican political and business figures.

"What we managed to tap into in the Conasupo investigation proved to me that corruption is systematic," says Adolfo Aguilar Zinser, a leading independent deputy in Congress who was one of the prime movers behind that investigation. "Conasupo is not an isolated or extraordinary event. Money laundering from the drugs trade is a newer phenomenon building upon and reinforcing an existing
corrupt infrastructure. Unless the entire corrupt structure is changed, new and stricter legislation on money-laundering will have little effect."

More intriguing still are the links between the fugitive banker Carlos Cabal Peniche, who is accused by leaders of the opposition Revolutionary Democratic Party (PRD) of having funded the PRI, especially its Tabasco branch, at the same time as being a conduit for the laundering of drug money. Cabal Peniche fled Mexico in late 1994 after being unable to account for $700 million missing from the two banks that he controlled - Banco Cremi and Banco Unión - and which caused both banks to go into receivership. Moreover, Cabal's name has come up in both the Conapsupo case and in the 1994 political murder cases, since he was a confidant of Raul Salinas and the Salinas family.

President Ernesto Zedillo himself has said repeatedly that the drug trade is now Mexico's number one security problem, as did Attorney General Antonio Lozano Grácia, who headed up the fight against organized crime until he was suddenly fired by Zedillo last December. Both now accuse each other of being liars - Lozano maintaining that he had informed the President about witness payments by the prosecution in the Raúl Salinas investigation, President Zedillo insisting he hadn't. The chaos in that investigation resulted in Lozano's sacking and the imprisonment of his chief investigator.

"Persistent corruption at all levels of government, frequent changes in personnel, and lack of follow-through on government commitments have combined to hinder Mexico's ability to implement its anti-drug strategy," said the report from the US State Department.

President Bill Clinton's visit earlier this year Mexico placed the drug trade and money laundering at the top of the agenda.

Whether Mexico's Catch 22 will enable it to live up to US government expectations, remains to be seen. But even if it does, there is mounting skepticism that fighting the money laundering business is a very effective way of tackling the drugs trade. As one leading criminologist wrote several years ago, "The problem of laundering drug profits cannot, ultimately, be resolved unless there are no profits to launder."