Trump’s Terrorist Label for Cartels Is Putting Banks on Edge

(Bloomberg) -- Donald Trump’s designation of Mexican cartels as terrorist organizations risks creating a chilling effect on financial firms and other companies over fears they could face severe penalties by even unwittingly serving or paying criminals.

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Mexico’s banking industry is particularly likely to take a more conservative approach to lending and other services given its role as a go-between on transactions, according to former officials. The country’s banking sector — dominated by a handful of foreign firms — may curtail business in areas known to be connected to the drug trade, from mining and livestock to transportation and agriculture, they said.

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“This is a challenge to the financial system like it has never seen,” Sandro Garcia, a former top money laundering official at Mexico’s banking regulator and independent consultant, said in an interview. “This is going to be ‘know your customer’ times 10,” he said.

Trump entered office promising to label cartels as foreign terrorist organizations in a bid to extinguish a drug trade that had been killing about 100,000 Americans a year. Banks are deeply wary of the risks of inadvertently financing illicit activities and the steep financial penalties they could face, meaning they’ll probably dial back their involvement even if they’re several layers removed from a transaction.

The banking system has a loan portfolio of 7.5 trillion Mexican pesos ($363 billion) and moves around 14 million interbank transfers per day. Law enforcement officials have said that only a tiny portion is really linked to drug traffickers directly, but another swath of individuals or businesses paying protection fees, ransoms or other under-the-table dealings is almost impossible to calculate.

Some financial institutions provide correspondent bank services, facilitating transactions like processing funds, trade finance and cash management between two parties — making screening for illicit activity more complex. Trump’s designation could hamstring that business and force banks to rewire their risk models, Garcia said.

The biggest lenders in the country are Banco Bilbao Vizcaya Argentaria, Grupo Financiero Banorte, Banco Santander, Citigroup Inc., HSBC Holdings Plc and Bank of Nova Scotia.

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When asked for comment, representatives for most of the banks declined to comment. The country’s banking association ABM said that local banks had solid relationships with US authorities and fully complied with money laundering regulations. They’re analyzing the new designations and will soon issue a position, a spokesperson said.

Beyond Banks

The implications will stretch far beyond just banks, given cartel groups hold sway in vast areas of Mexico and have diversified into extortion rackets as well as networks of front companies. Depending on how far Trump enforces the new order — which will name cartels within 14 days — it could ensnare real estate, gasoline sales, security services, auto parts and other manufacturing operations that may be paying protection or dealing with suppliers who have criminal links.

In a survey from the American Chamber of Commerce of Mexico published last year, six out of 10 firms said they were somewhat or very affected by crime. Of the firms surveyed, 12% said organized crime had taken partial control of the sale, distribution or prices of their products.

“This is going to have a seismic impact on business and politics in Mexico,” said Paul Craine, who previously led the Drug Enforcement Administration in Mexico and is now working as a consultant.

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Under the designation, a company could fall afoul by providing “material support” to a foreign terrorist organization. If a firm pays protection, or deals with a cartel-run front company, or even a supplier that’s being extorted, that could put it in the crosshairs. Proving that has a lower bar than without the designation, according to Craine.

“You look at the amount of money that’s generated by the cartels through, not just drug trafficking, but through all of their criminal business lines, and it’s just so intertwined into the economy,” he said. “You start seeing all the tentacles.”

According to Trump’s order — one of a slew signed on his first day in office — the cartels operate as “quasi-governmental entities, controlling nearly all aspects of society” in some parts of Mexico. Their activities “threaten the safety of the American people, the security of the United States, and the stability of the international order in the Western Hemisphere,” it said. The decree didn’t single out or name specific cartels in Mexico.

Military Force

The designation could pave the way for potential military force in Mexico, though it’s more likely the new US administration will seek to block revenues of the criminal groups, Craine said.

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Trump tried to classify cartels as terrorist organizations in his first term, but dropped the effort after internal pushback. Opponents feared the unintended consequences from essentially accusing one of the top US trading partners of harboring terrorists.

The country’s remittance industry may also be a target, according to Shannon O’Neil, senior fellow for Latin America studies at the Council on Foreign Relations. Immigrants use the system to send more than $60 billion a year back to Mexico, and such payments account for nearly 4% of Mexico’s gross domestic product. The peso’s value against the dollar has long been propped up by that steady flow, though it dropped last year as Trump advanced to an election win.

But here, too, the cartels play a role that US authorities may scrutinize. Some money transfers are sent from the US to relatives to pay migrant smugglers allegedly employed by cartels. Researchers point to surprisingly large rates of transfers from areas in the US with a relatively low number of Mexican migrants that suggest potential money laundering. A crackdown on remittances could embroil companies like Western Union. “There’s a big vulnerability,” O’Neil said.

A representative for Western Union said it takes its compliance responsibilities very seriously, including its role combating illicit activity and terrorist financing.

“Our advanced systems screen transactions in real time against internal and government watchlists,” the representative said. “We also work closely with law enforcement, regulatory authorities, and other government agencies globally to address these risks and foster the integrity of the global financial system.”

The America First Policy Institute, which backed Trump’s return to office, said in a paper issued on Monday that the designations expand the government’s ability to freeze and confiscate cartel-linked assets.

“This authority enables US agencies to pursue broader financial networks, crippling cartel operations by disrupting funding streams and resource distribution,” the institute said.

The extreme application of that idea could ultimately threaten the growth of both countries, said Arturo Sarukhan, a former Mexican ambassador to the US.

“There are surely businesses that are fronts for organized crime,” he said. “But this is such a wide net that either you have an incredibly focused intel operation that allows you to distinguish the good guys from the bad guys or you’re using a musket to kill a mosquito.”

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