Mexico’s Drug Money Addiction

Counternarcotics, Terrorism & Intelligence
Cash Wars II: Mexico’s Drug Money Addiction

Illegal finance animates Mexico’s narco-cartels. So why isn’t it being attacked?

By: Jana Schroeder
Homeland Security Today

Four years after Mexican President Felipe Calderón launched his war on the country’s drug cartels, his strategy has increasingly come under fire. Some in Mexico have questioned the wisdom of sending the army into the streets to fight this battle. This important institution is now immersed in a quagmire from which it is difficult to emerge free from the corruption that contaminates everything within the reach of the drug-trafficking trade.

Over 28,000 Mexicans have been killed, with bloody gang wars breaking out throughout the country and unprecedented violence and terror affecting the lives of ordinary citizens. And although some drug kingpins have been taken off the playing field and significant drug shipments and weapon arsenals have been seized, it is difficult to claim any battles truly won. In fact, Mexico’s drug gangs have become more firmly entrenched in the organized crime world, with much of their income coming from other illegal activities, such as extortion, kidnapping, smuggling, counterfeiting and human trafficking.

Perhaps the strongest criticism of the Mexican government’s US-backed strategy has been its one-dimensional character: Some in Mexico say the government has focused on sending numerous army troops to fight the cartels, while failing to stop growing drug consumption in Mexico and preventing thousands of young men from poor neighborhoods from joining the ranks of the drug gangs, given the lack of employment opportunities. And security analysts in Mexico are increasingly emphasizing the importance of dismantling the financial networks of organized crime—an area in which the government can claim only minimal progress.

“The Felipe Calderon government has actually done very little to attack the financial nervous system of organized crime,” according to Jose Luis Piñeyro, a professor at the Autonomous Metropolitan University in Mexico City who studies organized crime and security issues. He said that weapons and cash are occasionally confiscated as part of operations against drug trafficking groups, but he has not seen “systematic monitoring aimed at identifying financial operations that may involve money laundering.”

If this were happening, “figures in the political and business world be appearing on television and in the newspapers,” linking them to the country’s organized crime structures. In an interview with Homeland Security Today, Piñeyro commented that the typical image of a drug trafficker in Mexico—whether a drug lord or a hit man—is someone from a rural part of the country with the characteristic attire altered only by expensive jewelry. But he suggested that if the government would truly go after the financial networks that allow the money from illegal activities to permeate the Mexican economy, the images of those arrested and placed before the cameras for the nightly newscast would be quite different. They would include both civilian and military figures, as well as businesspeople who launder money and whose names appear on the titles for properties accumulated by drug traffickers.

Piñeyro said that President Calderón and other government officials “lack the political will” to attack this aspect of organized crime. Furthermore, “no key individual or group within the country’s political elite is willing to shake up the bee’s nest” and “go all the way to the highest political and economic levels” of Mexican society to put a stop to the illegal money flow.

Permeating the economy
Just how much money from organized crime is circulating in Mexico’s economy? According to Piñeyro, estimates range from $25 billion to $35 billion introduced into the Mexican economy annually. He specified that this money flows into the country’s legal formal sectors, as well as informal sectors (mostly small-scale economic activities not registered with the Treasury Department that make up a significant portion of the Mexican economy) and in criminal activities.

According to Samuel González Ruíz, who once served as Mexico’s chief of Prosecutors against Organized Crime and is now a security analyst and law professor at Mexico’s National Autonomous University, the situation is out of control, with dirty money in many economic sectors—far beyond those traditionally infiltrated by organized crime, such as construction, real estate and stolen vehicles. What percentage of the Mexican economy is linked to organized crime?

“My calculation is between 5 percent and 7 percent of the economy—and that’s a lot of money,” said the former prosecutor.

In June of last year, Mexican Treasury Secretary Ernesto Cordero acknowledged that over $10 billion US in “surplus” money appears in Mexican banks annually. He was referring to money that cannot be explained within the dynamics of the country’s economic activities and is thus presumed to come from illegal activities. The Mexican government has attempted to remedy this situation by not allowing dollars to be deposited in Mexican bank accounts.

But organized crime expert Edgardo Buscaglia told Homeland Security Today, “Much of the dirty money coming into Mexico does not come into the formal banking system,” adding, “As you know, most of the banks in Mexico belong to foreigners. And it doesn’t happen that way because foreign banks take a huge risk when they allow their Mexican branches to go wild, so they’re protecting their reputation quite well, especially nowadays.”

Instead, money is laundered through agencies used for sending remittances (money sent from Mexicans working in the United States to their families back home), and, “It goes through currency exchange centers; it goes through many other sectors of the Mexican economy, such as trust funds, that are not even regulated.”

According to Buscaglia, a visiting law and economics professor at Mexico’s Autonomous Institute of Technology (ITAM), “Mexican organized crime groups have diversified within the legal economy in a major way. They have diversified in terms of the number of sectors where they place their assets, and they have diversified countrywide; in other words, they have very much expanded through Asia, Europe, Africa and Latin America. So, Mexican organized crime went multinational in the past few years.”

Even more worrisome, Buscaglia said he has not seen actions by Mexican authorities on the domestic front or internationally “that lead me to believe they’re addressing the scope and the scale of the problem.”

Not only drug money
Buscaglia added that organized crime groups have also “diversified within the criminal world,” generating income from 22 types of crimes, including human trafficking and trafficking of undocumented migrants and weapons, plus kidnapping, extortion, counterfeiting and smuggling. From his point of view, “There is no agency that can actually come out with a reliable figure to estimate the amount of money these people generate annually.”

Buscaglia, who has served as a United Nations expert, designed a methodology for studying organized crime around the world, including the countries of Russia, Nigeria, Pakistan and Afghanistan. His teams have been allowed to study judicial case files and financial intelligence reports on organized crime groups in different countries, including Mexico and Colombia.

Of the 23 types of organized crime identified in the 107 countries studied, all but one can be found in Mexico. The only exception is the trafficking of radioactive material.

From his study of case files handled by the special unit against organized crime in the Mexican Federal Attorney General’s Office, he estimated that between 55 percent and 65 percent of the flow of illegal money coming into the Zetas and La Familia gangs (two of the newest and most violent drug gangs in Mexico) comes from illegal activities other than drugs. And he claimed that three activities alone—extortion, counterfeiting and smuggling—“generate incredible amounts of money, more than drugs.”

Organized crime expert González Ruíz told Homeland Security Today that, as long as organized crime’s financial enterprises remain untouched, these groups will keep operating as usual. He emphasized that the government’s strategy must be more comprehensive and must include the most important area: taking organized crime’s assets away. The former chief of Prosecutors against Organized Crime reported seeing no significant progress thus far.

“How many businesspeople linked to drug trafficking have lost any of their financial resources?” he asked. “How many businesses have been seized? Go to the website for the US Office of Foreign Assets Control (OFAC) and see how many Mexican businesses are listed there—but how many of them have been seized?” He was referring to the Specially Designated Nationals List of enterprises believed to be linked to illegal activities.

To make his point, he gave one example of an enterprise on the US blacklist: a child-care center in the city of Culiacán in northwestern Mexico. It is partly owned by the daughter of Ismael “El Mayo” Zambada, alledgedly one of the top leaders of the Sinaloa drug cartel. The day-care center is licensed by Mexico’s Social Security Institute to take care of children of working parents, and it even receives government funds. In 2007, it was placed on the blacklist by the US Treasury Department, charged with serving as a front for the Sinaloa cartel, but it continues to operate.

Failures of the judicial system
In December 2010, a Mexican federal judge absolved Sandra Avila Beltran, dubbed the “Queen of the Pacific,” of money laundering and other organized crime charges. Arrested in September 2007, she had been accused as a drug cartel leader and a key link between the powerful Sinaloa cartel and the Colombian Norte del Valle Cartel. In the December ruling, the judge considered the evidence provided by the Mexican Attorney General’s Office to be insufficient, and in the same ruling also absolved her Colombian boyfriend, Juan Diego “El Tigre” Espinoza Ramírez. Her boyfriend was acquitted in his absence, however, since he was extradited to the United States in December 2008 and sentenced to six years in prison.

The ruling struck a blow to the Mexican judicial system’s reputation, already known for failing to convict most suspects arrested on drug charges. The ruling came the day after a US diplomatic cable leaked to WikiLeaks allegedly revealed an official at the US embassy in Mexico writing: “Prosecution rates for organized crime-related offenses are dismal; 2 percent of those detained are brought to trial. Only 2 percent of those arrested in Ciudad Juárez [currently described as the world’s most violent city] have even been charged with a crime.”

The Associated Press reported that records it obtained “show that three-quarters of those arrested for drug crimes during the administration of President Felipe Calderon have been let go. …Among those are 11 mayors who were arrested in a dramatic 2009 sweep against more than 30 officials accused of protecting the La Familia cartel in western Michoacan state. One by one, the officials have been released for lack of evidence, and only one, a mayor, remains in prison.”

Organized crime expert Buscaglia told Homeland Security Today he believes Mexico’s judicial system—including judges, prosecutors and police—has become paralyzed. He views the Mexican state as a jigsaw puzzle in which “every piece belongs to a different organized crime group.” This means, he said, that judges, prosecutors and police forces are all highly infiltrated by the country’s organized crime groups.

He emphasized that “the level of violence in Mexico can only be explained by the competition of organized crime groups to capture pieces of the state.” This creates a context in which “judges working for the Zetas are being killed by the Sinaloa [cartel], “prosecutors working for Sinaloa are being killed by the Zetas” and so on.

And he added that he does not believe the escalating levels of violence among organized crime groups in Mexico can be blamed on US drug consumption. “In Canada, you have huge flows of drugs, you have a domestic market and you have an exporting market to the US,” adding that Asian organized crime groups are quite active in Canada. “But those groups cannot capture the Canadian state in the same way that groups capture the Mexican state,” and “you don’t see the levels of violence in Canada that you see in Mexico.” He pointed to Great Britain and other countries that have large markets for drug consumption—without generating violence next door.

Buscaglia had harsh words for politicians of all colors in Mexico. “It’s very easy to capture the Mexican state. Politicians do not want to establish barriers to organized crime because it’s very profitable in Mexico to not establish such barriers.

“If you’re not touching their money,” he said, organized crime groups will “allocate more of their intact money to buying more prosecutors, buying more police, buying higher up and generating more violence.

“Organized crime always penetrates the high-level political domain,” Buscaglia emphasized, adding that, if this is not the case in Mexico, then it is “the first country in history where you do not find links between high-level corruption and organized crime.”

Illegal money in election campaigns
As for businesspeople who allow dirty money to flow through their enterprises, Buscaglia said, “In order to protect themselves from prosecution, they usually immediately start to engage in illegal campaign finance.” He added that “that’s the way you protect yourself. You start throwing money at politicians and you get huge amounts of protection.” That is why, for example, “you see Mexicans not acting for years against mining companies that are actually in the hands of family members of top organized crime members.

“What I’m saying is that there is an impunity pact that basically makes all those legal businesses untouchable, because all those legal businesses fund campaigns; it’s as simple as that,” he concluded.

A look at the costs of election campaigns in Mexico is enough to cause suspicion. Buscaglia rated political campaigns in Mexico among the top 10 most expensive in the world.

According to González Ruíz, political parties in Mexico are spending between US $300 and $500 million each on presidential campaigns. The country’s three major political parties each receives about $60 million in public funds, but he asks, “Where does the rest come from?”

There is an office in the Mexican Attorney General’s Office created especially to address electoral crimes. But Buscaglia told Homeland Security Today that he did not know of a single case in which Mexican electoral prosecutors “have indicted a criminal organization or members of criminal organizations that have been funding campaigns, and in which that evidence has landed within a case file supporting a judge’s guilty verdict. Not one case!” He emphasized that this is common practice in the United States and in European countries, where “you’ll find dozens of cases every year of high-level political corruption that are being addressed by prosecutors.”

Any end in sight?
Buscaglia insisted that organized crime can be “contained,” and “the word is contained—it never disappears.” He used the example of a country even like Sweden, where organized crime is involved in trafficking cars and cigarettes.

But one of the problems is that “Mexico is a very weak state,” he emphasized. “I wouldn’t call it a failed state, but it’s a weak state.” And now, “Organized crime in Mexico has become a transnational threat for the United States.” He expected the United States to take steps to see that Mexico makes progress in this area; however, he insisted that “no amount of money coming from the US can take the place of political actors in Mexico making the decision to change the rules of the game.”

Former organized crime prosecutor González Ruíz had his own theory.

Mexico’s private enterprise sector has begun to calculate the damages to Mexico from escalating levels of insecurity. These damages include diminishing levels of foreign investment, and some believe Mexico’s competitiveness in international markets is being affected. The damages also encompass both direct costs in beefing up security and indirect costs from theft and extortion.

“When politicians and businesspeople finally realize,” González Ruiz said, “that this disaster we have on our hands is costing more than what any ill-gained benefits or any illegal money funneled into the economy can compensate for, then they’ll understand that it’s time to put an end to the fiesta of organized crime.” HST