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Jul 5, 2013 | 10:21 GMT

Money Laundering in Mexico: The Struggle to Track Illicit Gains

Money Laundering in Mexico: The Struggle to Track Illicit Gains
(Ronaldo Schemidt/AFP/GettyImages)
Summary

In its fight against organized crime, the Mexican government is going after what is perhaps most valuable to criminal enterprises: their money and their bank accounts. On June 17, the government confirmed a new money laundering law that will help prevent cartels from washing their proceeds so easily. The law will take effect sometime around March 2014.

The new law will not bring an end to all money laundering operations in Mexico. Money launderers no doubt will adapt to and circumvent the new regulations. They may be able to use existing tactics less affected by the legislation, or they may exploit money laundering avenues outside those of their most reliable associates in the United States. However, improving the economy is a priority for Mexican President Enrique Pena Nieto, and if he can at least make such operations more difficult for criminal organizations and the corrupt businesses with which they transact, he may be able to improve the image of his country's regulatory environment enough to attract more foreign investment to Mexico.

Mexico's political and economic environment has long been conducive to money laundering. Rampant corruption and inefficient regulation and enforcement have prevented previous administrations from effectively redressing the issue. But the blame also lies partly in the sophistication of Mexico's money launderers, who employ a multitude of methods to make their earnings appear legitimate.

Methodology

Money laundering is broadly defined as the process by which illegally obtained earnings are made to appear legitimate. The oldest and simplest form of money laundering — in Mexico as elsewhere — is bulk cash smuggling. In Mexico this is done primarily in U.S. dollars. The advantages of smuggling are that it does not involve a third party or create a paper trail. Using this method, drug dealers sell their product in the United States and deposit the proceeds into U.S. banks. Otherwise, they smuggle the cash across the border and deposit it into Mexican banks.

They also use what is known as trade-based money laundering, which U.S. and Mexican intelligence agencies believe accounts for the highest percentage of laundered money in the world. In trade-based money laundering, criminals disguise money through seemingly legitimate commercial transactions. Transactions could take any number of forms: multiple shipments, phantom shipments or underreporting or overreporting shipments or payments. Frequently this technique involves the collusion of manufacturers and export/import firms, and typically it involves high-value goods that are subject to higher taxes and are in higher demand, such as electronics, luxury cars, textiles, precious metals and counterfeit goods.

Money Laundering in Mexico: The Struggle to Track Illicit Gains   Read more: Money Laundering in Mexico: The Struggle to Track Illicit Gains

Trade-Based Money Laundering

For example, a criminal with $1 million to wash will use a front or shell company to purchase $10,000 worth of, say, computers from an oversees computer company. The computer company, which is privy to the arrangement, will falsify an invoice to show $1 million worth of computers sold, after which it will ship the computers, take a commission and wire the remainder of the money — in this case, $990,000 less the commission and merchandise — to the original front company. The launderer can then sell the computers on the open or black market. Unlike conventional laundering practices, in which criminals sacrifice a portion of their earnings, trade-based money laundering enables criminals to recoup all their expenses by selling the merchandise. In some cases, they even turn a profit.

Trade-based money laundering has grown as global trade, including online commerce, has increased. It provides criminal organizations a relatively low-risk way to wash their funds. Countering this kind of activity requires a lot of coordination, funding and attention from authorities, who simply are unable to interdict in every instance of money laundering. Such challenges ensure that international trade-based money laundering will continue to grow.

Money Laundering in Mexico: The Struggle to Track Illicit Gains

The Mechanics of the Black Market Peso Exchange

Another preferred method of money laundering is the black market peso exchange. Mexican and Colombian criminal groups have long used this method because it is very difficult to detect and prosecute.

In these exchanges, Mexican criminals will smuggle drugs or other goods into the United States and sell them on the street for U.S. dollars. They then sell those dollars to a peso broker, who has connections in Colombia. The peso broker deposits the cash into the U.S. banking system in the form of structured deposits, making sure that these deposits do not exceed $10,000 — the amount at which banks are required to file currency transaction reports to the U.S. government.

To avoid detection, the peso broker finds a Colombian importer that needs U.S. dollars and can purchase goods from U.S. exporters. The peso broker then uses funds from his U.S. bank account to pay the U.S. exporter on behalf of the Colombian importer. The U.S. exporter ships the goods to Colombia, where the Colombian importer sells the goods for pesos. These pesos are used to repay the peso broker. According to the U.S. Treasury Department, black market peso exchange moves an estimated $5 billion in drug proceeds from the United States to Colombia every year. 

Allaying Investor Concerns

Mexico's new money laundering law is designed to counteract these and other methods. First introduced in 2010 by then-President Felipe Calderon, the law is meant to fight organized crime and corrupt business practices in part by limiting large cash transactions for expensive commodities, such as luxury cars, airplanes and real estate.

But because of the amount of money at stake and the corruption inside the Mexican government, pushback was inevitable. And given that so many small businesses in Mexico transact solely in cash, many Mexicans believed the law would hamper economic growth. Lawmakers debated and revised the law before it eventually went to Calderon for approval in October 2012.

Pena Nieto took office in December 2012 on a platform of solving Mexico's labor, education and banking problems. He hoped to divert attention from his country's troubled security situation by showcasing its economic potential. His administration has emphasized the country's economic vitality and has sought to safeguard existing and potential investors from corruption and organized crime. If administered properly, the new law may allay investors' concerns about conducting business in Mexico.

Specifically, the law is designed to reorganize public institutions within the Ministry of Finance, which ultimately will enforce the law, and develop an intelligence system to better identify and track potential and existing money launderers. It will also establish a Special Unit for Financial Analysis attached to the Attorney General's Office.

In addition to restricting the use of cash for high-end purchases, the law also will make it more difficult for criminals to transfer large amounts of cash. It will require Mexican businesses such as banks, money-remittance services, construction companies, lottery distributors, real estate firms and automobile manufacturers and dealers to better monitor suspicious transactions, often referred to as vulnerable activities.

All these organizations will be required to submit monthly reports of suspicious transactions to the Finance Ministry, but what qualifies as "suspicious" varies from business to business. For real estate transactions, the threshold is 8,025 times the minimum wage in Mexico City (roughly $40,000). For car, boat or airplane transactions, the threshold is 3,210 times the minimum wage in Mexico City (roughly $16,000). Credit issuers, financial institutions and individuals and businesses processing credit card transactions will be required to submit a report when a credit card user has spent equal to or more than 1,285 times the minimum wage in Mexico City (roughly $6,400).

According to a provision of the law, these reports must include the contact information of the individuals involved, an explanation of their business relationships, the goods or services provided in the transaction and the origin of the funds. Commonly known as the "know your customer" process, this provision refers to the due diligence that financial institutions and other regulated companies typically conduct to prevent identity theft, financial fraud, money laundering and terrorist financing. If nothing derails the law before 2014, most Mexican businesses will be required to participate in this process.

At the heart of the new law lies the need to stem the flow of laundered U.S. dollars into the Mexican economy. According to the U.S. State Department's 2012 Money Laundering Report, Mexican criminal organizations send between $19 billion and $39 billion to Mexico annually from the United States. These remittances are driven in large part by the proximity of the United States and its relatively robust economy.

The new law may indeed disrupt illegal financial operations in Mexico. But ultimately, its effectiveness will depend partly on the vigilance of Mexican businesses and financial firms, and criminals certainly will try to exploit those that do not enforce the rules strictly. In the meantime, Mexican criminal groups will continue to use reliable money laundering techniques as they search for new methods and new countries with which to partner. The U.S.-Mexican conduit will remain intact for the foreseeable future, but Mexican money launderers have already established ties with criminal enterprises in other countries — notably in Europe and Central and South America. After March 2014, those connections could become even stronger.

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