Los Zetas and the Smuggling Business: A Tale of Mergers

"redlogarythm" for Borderland Beat

Disclaimer: This publication is about a research report written by Mexican anthropologist Efren Sandoval Hernandez. It includes a financial analysis from Borderland Beat contributor "redlogarythm", who specializes in organized crime financials. Copy editing was done by "MX".

Smuggling model used by Los Zetas

Smuggling/contraband along the northeastern portion of the U.S.-Mexico border has existed for several decades. In the 1930s, the Gulf Cartel patriarch Juan N. Guerra began smuggling alcohol to the U.S. during the Prohibition. Once the alcohol ban ended, his network continued to smuggle goods on both sides of the border for generations. In a country where cartels have permeated each layer of the local economy, this report attempts to explain the smuggling systems that existed across time and how organized crime adopted them.

In the past, Mexico was a country directed by a group of economically conservative politicians convinced by the virtues of a closed economy. Although Mexico shared an extensive border with the world's richest economy, the Mexican government traditionally imposed bans or restrictions to the importation of several U.S. products. Between the 1950s and 1980s, the thousands of people in Mexico got involved in the illegal importation of goods from the U.S. Products such as jeans, cars, washing machines or electric devices were brought by Mexican citizens from American border towns (oftentimes by bribing Mexican customs officials along the way).

Nowadays in Mexico, one can buy stolen fuel offered by criminal organizations. One can hire the services of prostitutes, who work for pimps (padrotes) affiliated to organized crime. One can buy guns, fake DVD's and even exchange dollars/euros for pesos at exchange houses (casas de cambio) managed by the criminal organizations. These activities would fall under Mexico's grey economy, an informal market sector which is free of the state's taxation. In some cases, the informal economy represents a large portion of a country’s gross domestic product (GDP). In some parts of Europe and Latin America, it can be up to 40% of the country’s output.

Many of the products sold in Mexico's informal sector are found in pulgas or tianguis, marketplaces where local merchants offer daily-use products such as food, raw materials or clothing. These markets are widely accessible to middle-class Mexicans since they offer cheap/affordable products that are not available at the same price level in the formal sector. These products are cheap because they were smuggled from the U.S. and were not taxed by the government upon entry. Products in the formal sector are influenced by economic factors like inflation and taxes, which can drastically alter their prices.

Tianguis, flea markets in Mexico where smuggled merchandise is sold at low prices

In most countries of Latin America, the word for such products is contrabando (contraband) but in Mexico these products are referred to as fayuca and represent a formidable amount of the informal sectors of the Mexican border states of Coahuila, Tamaulipas and Nuevo Leon (and in particular the city of Monterrey, which receives most of the fayuca entering Mexico before it is distributed to the whole country).

Terminology

Several decades were needed to develop a well-oiled network of importers. These importers can be divided into two categories: 

1. Chiveros: Small-time merchants who buy products in the U.S. and sell them in flea markets across Mexico. They often move the merchandise in their personal vehicles and work independently. 

2. Pasadores: Well-organized smugglers often working similar to transport unions. Each of these individuals own several vans / trucks that carry large quantities of merchandise purchased in the U.S. The products they have are sold to local merchants (chiveros), who resell them.

The portfolio bought by the Mexican smugglers can be divided into two sectors: 

1. Saldos: The saldos (bargain sales) is merchandise that was not sold or became obsolete/out of season from big U.S. retailers such as WalMart, Sears, etc. They are bought by one third of their value (or even less) and stashed in the Laredo/McAllen warehouses where they are later sold to the chiveros/pasadores. 

2. Used clothes: They are bought by American businessmen who then package it (in pacas) and sell it to Mexican merchants. The city of McAllen concentrates most of this business.

Pacas, or packaged used clothing

Smuggling merchandise to Mexico

Most of these illegal merchants get their products from Texan wholesalers in Laredo and McAllen. Laredo has around 175 wholesale warehouses and McAllen has around 109. Most of the products stashed in these facilities are cheap Asian imports, but there is also plenty of U.S.-made products. 

After purchasing the products in Laredo or McAllen, the chivero/pasador must cross the international border with the merchandise. This can be done in two ways: (1) through the already established border crossing in the Mexican cities of Nuevo Laredo and Reynosa or (2) through the countryside. This second method is not well documented because these routes are controlled by cartels and the smugglers often try to avoid contact with these criminal groups.

It is common for smugglers to bribe Mexican custom authorities at the border in order to avoid paying taxes. Strictly speaking, the activities of the smugglers are semi-legal; they bought the products legally from established American businessmen with the intent of introducing them to Mexico. Since the implementation of NAFTA in 1994, this practice is technically legal if an importer pays taxes. The caveat here is that smugglers do not want to pay taxes at the border because they want to sell their products in Mexico at a relatively low price and still obtain a good margin.

Fayuca, Mexican contraband, seized at border entry

For example, when chiveros return to Mexico on a bus filled with dozens of contraband merchandises, each contribute US$5 or US$6 each to gather US$300 or so to bribe custom personnel waiting at the entry point. The corrupt officials will then not inspect the bags filled with undeclared imported goods that should be taxed. 

The pasadores must face greater bribe fees since their operations are bigger than those of the chiveros, but since they are more organized group, they are able to negotiate in a much better position with the Mexican border agents. Los Zetas started taxing both the custom agents and the pasadores at a certain point between 2009 and 2010.

Relationship between smugglers

The interactions between the chiveros and the pasadores are very fluid. They have realized that collaborating can be far more productive than competing to see who smuggles the most.

For example, a chivero who does not want to cross the border to get the merchandise by himself/herself could contact a network of pasadores and subscribe a purchase order of about US$2,000. The better organized pasador network would go to McAllen, contact a local wholesaler and purchase US$2,000 of used jeans.

When crossing the border, the non-taxing fee could add another $200. Once in Mexico the pasador hands over the merchandise to the initial chivero, who would repay the principal (US$2,000), the fixed costs (US$200 bribe) and a certain amount of interest (the pasador’s profit).

Los Zetas and their taxation system

By December 2009, this system began to fall apart due to the conflicts between the Gulf Cartel and Los Zetas (though originally working together, both criminal groups broke ties in early 2010). Los Zetas, in their predatory business strategy of imposing taxes to border agents, demand demanding certain percentage for each bribe payment done by chiveros and pasadores.

As a result, custom agents started asking for higher bribes until the chiveros and pasadores were not able to obtain any kind of profit. Paradoxically, the effect they were searching for when smuggling (avoiding import taxes and selling cheap) was overturned by some kind of private tax which would equal the quantity they would be paying if they were legally introducing their products into Mexico.

In the case of the pasadores the situation worsened when Los Zetas started assigning wholesalers and making it mandatory for pasadores to buy their products that would be later smuggled into Mexico. Sandoval illustrates this new business strategy with a real-life example that reflects the great ability of Mexican organized crime to bend basic economic rules for their own benefit.

At a certain point Los Zetas started controlling the illegal import of two goods to Mexico (to protect the identity of those involved, Sandoval refers to these two products as dolls and quilts). Los Zetas started forcing the pasadores to buy these two products from a single Texan wholesaler linked to the cartel.

Mexican state of Tamaulipas, which borders the U.S. state of Texas

Since eventually every single smuggler ended up buying from the same wholesaler out of fear of retaliations from Los Zetas, this wholesaler started selling massive quantities of the two products and was able to get the products he was selling at a very low price (for volume reasons) from supermarkets and other sellers in Los Angeles. Even after transporting the goods from California to Texas they were still cheaper than those sold by other Texan wholesalers.

Los Zetas also taxed chiveros. After a chivero smuggled the products through the border or bought the products from a pasador who smuggled them to Mexico, the chivero would be redirected to a man (representative of Los Zetas) who would asked him for the quantity of clothes he had bought, the means of transport he would use to get the merchandise to the desired location, and the number of people he would be travelling with.

After answering to the questions, the Zetas representative would make the calculations and ask for a certain amount of money to be paid duly. After paying, the chivero would be granted with a pass accrediting he had paid to Los Zetas and letting him to sell the clothes. According to Sandoval, this taxation system is even far more effective than those implemented nationwide some modern/formal economies.

As they did with other of economic areas, Los Zetas exploited their aggressive business model and penetrated a socially-accepted and traditional market which had been functioning for several decades. They became the designers of the market trends and drained profits from each of the participants involved. The pasadores would buy products from a cartel-affiliated business. Their smuggling activities included a cartel taxation. If a chivero bought from products smuggled by a pasador, they still had to pay taxes to the cartel.

Los Zetas diversifying their portfolio

By monopolizing the smuggling market, Los Zetas diversified their portfolio to include drug money and firearms. In his report, Sandoval talks about a chivero from Monterrey who was offered US$5,000 by Los Zetas just to drive her van to the U.S. in one of her daily trips and wait in a parking lot until someone showed up to recover the drugs stashed in her vehicle. This showed that Los Zetas used the smuggling system created by chiveros and pasadores to export drugs into the U.S. This helped minimize liability and reduce the risk of losing men/women on their payroll.

Federal Police seizes Mexican fayuca (contraband)

Sandoval argues that Los Zetas may also use this system to smuggle guns that were purchased by U.S. armed dealers and drug proceeds generated in the U.S. back into Mexico. This means that Los Zetas not only perverted an old-time business through extortion and racketeering, but also re-shaped it for their own convenience.

As in any organized crime study, most of these reasoning is just theory. The absence of empirical facts means that the structure of this smuggling network could be partly true or not true at all. Nevertheless, is it a fact that this smuggling system has been a way of life for thousands of people until Los Zetas entered the business. For Los Zetas, this was (and still is) "business as usual" and business must follow a simple logic: obtain funds quickly and use available structures for their benefit.

Source: Sandoval Hernández, Efrén (April 2012). "Economía de la fayuca y del narcotráfico en el norestede México: Extorsiones, contubernios y solidaridades en las economías transfronterizas". Centro de Investigaciones y Estudios Superiores en Antropología Social Programa Noreste (in Spanish)