Wachovia Bank sign is seen at a branch in New York. Wachovia settled federal charges that it laundered nearly $400 billion in drug money from Mexican and Colombian traffickers in 2010.
Yesterday Global Financial Integrity released a new report, “Mexico: Illicit Financial Flows, Macroeconomic Imbalances, and the Underground Economy,” which provides an in-depth look at flows of illicit money from Mexico. The study finds that nearly $1 trillion in illicit capital left Mexico from 1970-2010, averaging about $50 billion a year this past decade. Illicit outflows have increased over time – in 1970 only $3 billion of illicit money left the country per year – and experienced particularly large upswings during macroeconomic crises. These flows decreased by more than 50 percent as a share of exports, though this is largely because exports overall increased dramatically as Mexico transformed from a relatively closed to open economy.
The report’s most interesting finding is that this illicit capital is not necessarily or mostly drug money. Instead it comes from Mexico’s large underground economy. In these markets the goods being traded are not necessarily in and of themselves illegal. What’s illegal is the under-the-table way that they are bought or sold. The report finds that the vast majority (80 percent) of the money leaving Mexico does so through a method called “trade mispricing.” This is when a company either undervalues exports or overvalues imports, and agrees with its trading partner (for many this is the same entity or owner) to transfer the balance to a bank account abroad. Just as when a restaurant doing cash business fakes the number of customers it receives to avoid paying taxes, companies doctor their trade records to allow money to flow out of a country untaxed.
In Mexico’s case, economic liberalization in the 1990s had the unintended effect of promoting this type of capital flight. The explosion of trade around NAFTA provided exporters and importers more opportunities than ever to manipulate the rules of the game.
Dealing with this challenge means tackling the informal economy, which both drives and is driven by illicit outflows. Mexico’s regulatory institutions need to catch up to the high volume of trade in the post-NAFTA era, strengthening auditing practices and tax authorities along the way. Another way of chipping away at the underground economy is to shrink the number of people working in it, by creating more formal sector jobs. This is good for workers, who get better social protections in the formal economy, and for businesses, which can get loans and other services needed to grow and expand. More formal sector enterprises will also generate much-needed tax revenue in Mexico (the country with the lowest rate of tax collection in the OECD and among the lowest in Latin America). These extra public funds will pay for more public schools, better roads and stronger police forces, benefiting Mexican society in the long run.
The United States also has a role to play in helping Mexico combat money laundering. As the number one destination of illicit funds from Mexico, U.S. banks could make it a lot harder to move money north by improving transparency and reporting more regularly on private deposits. Getting banks to do their part will require deeper cooperation between the United States and Mexico, with tougher rules and regulations on both sides of the border.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
U.S Air Force worker, helps unload tons of relief aid at Armenia's airport, Colombia (Str Old/Courtesy Reuters).
Last week WOLA released the report “A Cautionary Tale: Plan Colombia’s Lessons for U.S. Policy Toward Mexico and Beyond.” The study is a useful reminder of the real differences between Colombia and Mexico. Unlike Colombia, where security forces fought to assert control over territory left to criminal groups, Mexico has had a strong state presence throughout the country for decades. Whereas violence in Colombia was concentrated in rural areas, in Mexico the highest rates of crime are in population centers and along drug trafficking routes.Their analysis also puts the Colombian experience into historical perspective. The real fight against drug cartels, as opposed to guerrillas and paramilitaries, happened in the 1990s – before Plan Colombia was even on the table. Successes here depended on police work by specialized vetted units, as well as a strong public prosecutor’s office – not sending the military into the streets or hills.
There are a number of good recommendations about how the United States and Mexico can apply these lessons to their joint policy on the drug war going forward. A few stand out.
For Mexico (and other countries dealing with organized crime):
• Don’t rely on the military, as it lacks the investigative capacity and the right training to provide public safety to civilians.
• Measure what matters. Rather than process (e.g. how many arrests or drug kingpins captures) the government should focus on tangible results, such as how many cases are successfully prosecuted, or how much violence and other crimes decline.
For the United States:
• Take on challenges at home – guns, money, and demand. Since the United States is asking other countries to implement politically difficult policies, policymakers at home should try it themselves – particularly because all these issues feed into the escalating violence Mexico (and other countries) face.
• Make human rights a top priority, not an afterthought. Do more than just require police and military forces to take classes in human rights, and withhold bilateral security cooperation if standards are not met.
• Let USAID take the lead in managing security assistance, not the Department of Defense or even State’s Bureau of International Narcotics and Law Enforcement Affairs, as these are likely to overlook the crucial socioeconomic side of the security problem.
For all involved: protect local populations first. In addition to safeguarding, these governments need to invest in people – protecting them through law enforcement, courts, and social policies, and creating economic alternatives to a life of crime for those that today remain on the margins.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Bundles of confiscated drug money worth two million euros ($2.7 million) are displayed at a police headquarters in Madrid January 18, 2011. (Andrea Comas/Courtesy Reuters).
On Tuesday, the UN Office on Drugs and Crime (UNODC) released a new report on global money laundering, “Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crime.” The upshot? It is really hard to estimate. But, the report does provide some tangibles. Surveying numerous studies, it calculates that illicit global proceeds amount to over $2 trillion dollars every year (roughly 3.6 percent of global GDP), with some $1.6 trillion of this laundered. Within these staggering figures, roughly $870 billion of these revenues relate to drug trafficking and organized crime, and close to $580 billion of those illicit funds are laundered through financial institutions. The study drills down and looks specifically at the global cocaine market, estimated at some $85 billion. Most of this, again, is laundered.
The report provides some hints as to how this happens. Of the $85 billion cocaine market, most (estimated at $61 billion) stays in the retail markets – the United States and Europe primarily. Producers – mostly Andean farmers – receive in total $1 billion, or just over 1 percent of the gross profits. This leaves, by their estimates, roughly $23 billion for those processing and moving the drugs from the fields to the domestic wholesalers. Shipping cocaine from producing regions to transit locations generates at least $8 billion in profits.
When it comes to laundering this money, at least half occurs locally, and most of the rest in nearby countries. In South America, the report estimates that some $13 billion dollars of laundered cocaine money likely flows into and through local banks and local businesses, and roughly $7 billion is probably cleaned nearby, often in the Caribbean. The report also touches on the profound (and mostly negative) impacts of these flows on local economies, including corruption, real estate price distortions, large income disparities, and weaker growth (since criminals aren’t usually looking for long term productive investments in local economies).
The report ends on a fairly pessimistic tone. Drawing on a separate, heavily cited 2009 report from the U.S. Department of Justice’s National Drug Intelligence Center, the UNODC estimates that Mexican and Colombia’s drug-related money laundering may amount to between $18 and $39 billion each year. The authors argue that, unlike taking down kingpins (who are easily replaced), seizing illicit funds has much more severe and long lasting impacts on illicit trade. But, then the report goes on to show that our global ability to find and stop these financial flows is abysmal – estimated at far less than 1 percent – not much different than the fees brokers charge to clients to buy and sell stocks, and less than hedge funds take to manage your (legal) money. With the cost of doing business – at least in terms of money laundering – remaining low, the UN office points out the vital need for international law enforcement to truly step up and follow the money.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Peru's new President Ollanta Humala is sworn in to office in Congress in Lima (Mariana Bazo/Courtesy Reuters).
As President Ollanta Humala assumes office today, it looks as if he has chosen to emulate Lula rather than Chávez. His cabinet is full of moderates, and some even see it as leaning center-right. While growth is expected to continue at about 6 percent, the new administration will face many challenges, in particular security and the increasing presence of transnational crime, as well as high levels of inequality.
This week the Obama administration released a new directive on combating transnational organized crime (TOC). Among its 56 “priority actions” are new and deepened efforts to stop the money laundering and flows supporting these crime networks. New tools include barring TOC members entry into the U.S., freezing assets and other financial sanctions. The document also expands the role of the Justice Department and FBI in investigating transnational crime more generally. Still, many of the nearly five dozen items seem little more than aspirations– such as the commitment to “stop the illicit flow from the United States of weapons.” But generally, this revamped strategy and more focused game plan is welcome.
Finally William Rempel’s new book, At the Devil’s Table, showcases the role one individual can play in the fight against drug cartels. This gripping read chronicles the life of Jorge Salcedo, a Colombian engineer that rose to be head of security for Miguel Rodriguez Orejuela, a godfather of the Cali cartel during its heyday. The tale tells the true story of Salcedo’s introduction to crime, his rise within one of the most powerful drug cartels in the world, and the actions he ultimately took to help bring it down. It shows the power of one courageous individual, but also the challenges of going it alone in the belly of the criminal underworld. While the Cali cartel is now gone, others have willingly taken its place, and Colombian coca and cocaine continue unimpeded.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Supporter of the peace caravan led by Mexican poet Sicilia holds a banner during a rally (Courtesy Reuters).
The U.S.-Mexico Interparliamentary Group convened in DC a couple of weeks ago, an annual meeting of senators and deputies from both sides of the border. Mexican political heavyweights, including Manlio Fabio Beltrones and Francisco Rojas of the PRI, José González Morfín and Josefina Vázquez Mota of the PAN, and Carlos Navarrete and Armando Ríos Piter of the PRD attended, matched on the U.S. side by Senators Tom Udall (D-NM), Kay Bailey Hutchison (R-TX), Bob Menendez (D-NJ), and Representative Connie Mack (R-FL) among others. While topics ranged from immigration to border issues, the main concern for all was security.
Even as the politicians talked of mutual trust and cooperation, Mexico’s fight against drug traffickers is being increasingly questioned on both sides of the border. In Mexico, several politicians – mostly from the PRI– have denounced Calderón’s approach. They dispute the focus of the government’s war, criticize its constitutionality, and challenge the recent track record on impunity, corruption, and economic opportunity.
Independent columnists and analysts too are increasingly vocal. For instance, Eduardo Guerrero of Lantia Consultores argues for a revised focus on crime rather than drugs. He calls for a new strategic framework that targets the most egregious violence and uses force largely to contain groups and erode their structures over time — an anti-crime strategy used in the United States. Ordinary citizens in Mexico have begun to agitate against the government’s strategy – most vocally those following Javier Sicilia, a poet who took on the anti-violence cause after his son and friends were executed by cartel thugs last year. He first led thousands of Mexicans in a march of silence from Cuernavaca to Mexico City, then marched north to the border and violence-stricken Ciudad Juárez. Last week he and others from his group met with President Calderón, who apologized for not having done enough to protect the innocent, but also vowed to continue fighting organized crime.
In many ways the rising criticism is to be expected. Violence has escalated in the last few years, and spread (though is still concentrated in some 10 percent of Mexico’s municipalities). It has also hit average Mexicans more – as organized criminals expand their operations from running drugs into kidnapping, robbery, extortion, and the like. Mexico now is second only to Venezuela in the number of kidnappings in the world – and has over three times as many kidnappings per 100,000 inhabitants as Colombia did during its most violent period. In short, the current strategy has not made the average citizen feel safer on a day to day basis. These critiques also reflect the electoral calendar. Mexico is beginning the ramp up to the 2012 Presidential election, and security is, according to most polls, the number one issue. It is also the issue on which the President has staked his administration, and to which he returns in the vast majority of his speeches and appearances.
What may be a bit more surprising is the escalating critiques to the north, and of the U.S. role in combating this insecurity. Two recent Congressional reports lambast the handling of guns flowing south, while another questions the nature and accountability of counternarcotics spending more generally. Recent testimonies by Alan Bersin and Charles Edwards before the Senate Homeland Security and Governmental Affairs Committee reveal worries about spreading corruption on the northern side of the border, while others debate the extent (and even reality) of “spillover violence.”
Viewed as a whole, the increasing political skepticism (combined with pressures to cut budgets in the U.S. congress) bodes a much heavier lift for continued and deepening cooperation. As both countries go into Presidential elections, these critiques will likely only increase. Much of this questioning is important. All these policies will have long term ramifications for both Mexico and the United States, and as such should be analyzed and debated. But the trick will be to keep these necessary discussions from derailing the relationship and eroding the trust that the two countries built over the past four years, taking us all back to square one.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
US Secretary of State Clinton and Mexican Foreign Minister Espinosa (Saul Loeb / Courtesy Reuters).
Last Friday, Hillary Clinton hosted the Merida Initiative High-Level Consultative Group in Washington. The meeting was the Group’s third, building on previous meetings in November 2008 and March 2010 in Mexico City to deepen the security partnership between the two countries. The meeting brought together cabinet secretaries from both governments, including Defense Secretary Robert Gates, Attorney General Eric Holder, DHS chief Janet Napolitano, Chairman of the Joint Chiefs Mike Mullen, drug czar Gil Kerlikowske, and Ambassador Pascual, as well as Mexico’s Foreign Secretary Patricia Espinosa, Secretary of Governance José Francisco Blake Mora, Secretary of National Defense General Guillermo Galván Galván, top police chief Genaro García Luna, Attorney General Marisela Morales Ibañez, National Security Spokesman Alejandro Poire Romero, and Ambassador Arturo Sarukhan.
Much as the Calderon visit to Washington in March, little new was announced beyond renewed commitments to the current four-pillar strategy and a recognition of shared responsibility. Instead, the main “news” is that security relations continue on the same path. Which begs the question – where are we now after 4 years of US-Mexico security cooperation?
An excellent new paper by Andrew Selee and Eric L. Olson at the Woodrow Wilson Center’s Mexico Institute lays out a concise evaluation and accurate scorecard. On the first pillar, targeting organized crime groups, they argue that while progress has been made in intelligence sharing and the arrest of key leaders in both Mexico and the U.S., a clear strategy to dismantle the cartels’ financial and arms smuggling networks – arguably the most important task ahead to erode future capacity – has yet to emerge. On the second pillar, to strengthen Mexico’s rule of law institutions, they find that police reforms and efforts to clean up Mexico’s courts have been slow and face numerous setbacks, and have failed to filter down from the federal to the state and local levels. On the third pillar, they see positive first steps in the lengthy task of modernizing the U.S.-Mexico border, including new ports of entry and technology to expedite transit and improve security. They find that the least progress has been made on the fourth pillar, as U.S. resources for strengthening communities through job creation and youth engagement has lagged behind other programs. Finally, they name the implicit fifth pillar that should be a key component of measuring success: demand reduction in the U.S.
While no news may be good news out of these high level meetings, Selee and Olson’s analysis suggests the need for much bolder measures and stronger support on both sides of the border, given how much is needed to turn the security tide.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
Soldiers escort four detainees for presentation to the media at a military zone on the outskirts of Monterrey (Tomas Bravo/Courtesy Reuters).
At the Mexican port of Lázaro Cárdenas, containers arrive from China laden with toys and electronics. Some never make it into the hands of customers: they are dumped as worthless merchandise. Their value, instead, lies in a simple bill of sale that allows the buyers – drug trafficking organizations and organized crime syndicates – to launder billions of funds through seemingly legitimate trade.
Drug-related money laundering conjures up images of plastic-wrapped bundles of $20 or $100 bills stashed in car tires and dashboards, or hauled across the U.S.-Mexico border in semi-trailers. It includes tales of storied banks moving billions in sophisticated operations and entangles Western Union and other money transfer companies in the flow of profits south. Some worry that prepaid cards or even “virtual worlds” will be the new avenues for illegally moving billions and billions of dollars.
But trade-based money laundering is likely where the real money is. Less understood and perhaps more pernicious, this includes the stereotypical restaurant that never seems to serve any customers, except for a few toughs at the back table, but “rakes in” profits. But it is much more than that. It can involve jewelry stores, textile factories, travel agencies, or car dealerships. Any type of trade across borders is a potential opportunity for nefarious transactions, buried among the billions of legal ones.
Price mismatches—reporting different values for the same goods – offers a means of concealing the money’s origins. A Mexican front company can send a shipment of computers to the United States, and, by over-invoicing it, can cover both the legitimate cost of the merchandise and the extra laundered funds. In this way, the extra funds are washed clean and enter a U.S. bank account as a formal, legal transaction, skirting the warning flags provided by current financial transparency laws and regulations. The same can happen in the reverse, when drug trafficking organizations want to repatriate their earnings from U.S. street sales. Often they do it through third or even fourth countries, further obscuring the true origins of billions of dollars. Egregious discoveries include Pakistan-made dishtowels imported to the United States for over $150 a piece, and missile and rocket launchers sold for just $50 each, destined for Israel.
Another path is through seemingly normal import/export business transactions. Drug dealers on the U.S. side buy goods (in dollars), ship them to Mexico, where they are sold. The proceeds (now in pesos) are given to their partners. This almost inevitably requires complicit businesses, who can receive a cut worth 3 – 8 percent of the funds passing through the books.
Trade-based money laundering is only likely to increase between the United States and Mexico. New Mexican laws limiting the use of U.S. dollars will push the drug cartels to shift transaction to more “illiquid” assets like goods and real estate. Coming into effect just last fall, already law enforcement agents are seeing the exodus of physical dollars from Mexico. Money changing houses on the U.S. side of the border are beginning to report their inability to keep pesos in stock – another sign that taking dollars straight to Mexico is on the decline.
Trade-based flows are especially worrisome, as they represent quite ingenious and ever changing ways to get money to the bad guys, which then feeds corruption and violence. But even more, trade-based money laundering undermines legitimate business and commerce. With criminal organizations happy to dump imported goods at a discount to get their now “clean” cash, legitimate businesses can’t hope to compete with the “discounts” of twenty, thirty, forty percent often provided. As Mexico (or any other country) struggles to compete in an increasingly globalized world, the last thing it needs is an additional barrier to entrepreneurship, crowding out legal economic activity.
Published in conjunction with Latin America’s Moment at the Council on Foreign Relations.
I published the following CFR expert brief on the U.S.-Mexico summit this week.
The surprise announcement of President Felipe Calderón’s trip to Washington is a chance to right a teetering relationship. On March 2-3, the Mexican president will meet with U.S. President Barack Obama, Speaker of the House John Boehner, and members of the U.S. business community. This trip could prove an important turning point in U.S.-Mexico relations. It will, assuredly, be a defining test of Calderón’s statesmanship.
U.S.-Mexico relations have hit a rough patch. The February 15 attack on two U.S. Immigration and Customs Enforcement (ICE) agents raised the stakes for the U.S. government in Mexico’s drug war. Agents Jaime Zapata and Victor Avila were driving to Mexico City from Monterrey when drug cartel gunmen intercepted, then fired upon their armored SUV. Zapata died and Avila was wounded. Though the details remain unclear–whether it was a carjacking gone wrong, a case of mistaken identity, or a calculated hit–the idea that drug traffickers would target U.S. officials sent chills through the U.S. embassy and beyond. And the attack lays bare the security challenges Mexico faces in securing even the country’s main thoroughfares.
As U.S. officials worked through the ramifications of Zapata’s death, longer-standing simmering grievances within Mexico’s government boiled over. Behind the scenes, many experts and officials recognized the serious damage done to U.S.-Mexico relations by by WikiLeaks’ revelations late last year. Secret cables signed by current Ambassador Carlos Pascual on December 17, 2009, and Deputy Chief of Mission John Feeley on January 29, 2010, in particular presented unfiltered assessments of the strengths and weaknesses of the Mexican government’s security efforts, pointing to a hidebound Mexican army, infighting between Mexico’s various security institutions, and worries about corruption and human rights abuses. While in line with the views of numerous independent analysts–as well as many security officials in their more candid moments–the leaks have embarrassed the Calderón government, and provided fodder for rival politicians as the Mexican electoral arena heats up for 2011 gubernatorial races and the 2012 presidential contest.
In a wide-ranging and sensational interview in El Universal, one of Mexico’s leading newspapers, on February 22, Calderón vented his anger. He accused the U.S. diplomats of “laying it on thick,” distorting and exaggerating their analyses for ulterior motives. He went further, saying the lack of coordination and rivalry was not on the Mexican but the U.S. side, between ICE, Drug Enforcement Agency, and Central Intelligence Agency. The vitriol was so strong that U.S. Homeland Security head Janet Napolitano formally responded the next day, asserting that not only did U.S. agencies work well together, they did so closely with their Mexican counterparts.
Historically, it is remarkable that the two countries have gotten along this well for so long. For decades, the bilateral relationship has had fits and starts–beginning with expansive promises from new presidents, ending with bitter divisions. Domestic politics were often behind the fracture, as Mexico’s ruling Institutional Revolutionary Party (PRI) painted the United States as the great imperialist to justify its excesses and heavy political hand, and U.S. administrations changed course at the first hint of domestic opposition. Just as often personal differences, and real and perceived affronts, sank once promising bilateral ties.
Calderón’s upcoming visit has the potential to break this counterproductive historical cycle, principally by getting the two countries’ conversation back on track. That will require strong leadership from Calderón himself. Can he rise above personal grievances and his not unjustified frustrations with the United States to become the rare Mexican president who succeeds during his term in moving the bilateral relationship forward?
This trip will test U.S. policy and commitment to Mexico. The now often repeated rhetoric of co-responsibility and Secretary of State Hillary Clinton’s heartfelt words of “being a fan” of Calderón are fine, but the United States has to go beyond these niceties. Calderón is right to ask for more–U.S. demand for drugs remains unchanged, illegal guns and illegal gains flow south unabated. Estimates range widely, but tens of thousands of guns and tens of billions of dollars flow south each year. Though the Obama administration recently tried to boost the Bureau of Alcohol, Tobacco, Firearms and Explosives’s ability to track gun sales (specifically multiple assault rifles–AK-47s, AR-15s, and the like), it was struck down by the new Republican-dominated Congress. Boehner will have to square his vocal support for Mexico and the Merida Initiative with his reflexive heeding of the National Rifle Association’s demands.
There is a real possibility that U.S.-Mexico relations could fall into a downward spiral. That would be dire for both nations. Much more than security cooperation hangs in the balance. Mexico is the second largest U.S. export market, the largest source of U.S.-bound migrants, the ancestral home of over thirty million Mexican Americans, and an important partner in multilateral negotiations ranging from world financial markets to climate change. With economies, societies, and communities indelibly intertwined, whether it likes it or not, the United States’ future is tied to Mexico’s.
For those of you who may prefer to read in Spanish, my Foreign Affairs article on Mexico has been translated and appears in the latest issue of Foreign Affairs Latinoamerica, which you can find here.
When the United States thinks about the drug war, most focus on Colombia and Mexico. Yet concerted efforts in these two countries are leading to problems elsewhere. Argentina may be the next victim.
Drugs are available throughout the country, specifically a lower-cost and highly-addictive smokable cocaine residue called paco. News articles highlight the worries of government officials and non-governmental organizations over the social costs of increased drug consumption, both in human lives and increased crime rates. But this may be just the beginning for Argentina. In response to enforcement elsewhere, Argentina is increasingly becoming a drug producing and transit country of methamphetamine in particular, also known as crystal meth or ice.
Last July Mexico outlawed imports of ephedrine and pseudoephedrine, two common cold medicine drugs that are the basis for crystal meth. In response to Mexico’s crackdown, domestic meth production in the United States rose. But the United States is not alone. Production also seems to have moved to countries with less restrictive import rules for these basic ingredients. Two weeks after Mexico’s ban, nine Mexicans and an Argentine were arrested in Buenos Aires for running a meth lab linked to the Sinaloa cartel. Since then, Argentina has experienced several violent episodes – more reminiscent of Mexico’s than Argentina’s recent past. In two separate cases, one in August and one in October, three Argentine narcotraffickers were abducted, handcuffed, and sprayed with bullets; their bodies left to be found days later.
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