Money Laundering Crackdown Flounders in Mexico, But Does it Really Matter?

By Patrick Corcoran

Insight Crime

Despite a gathering consensus around the idea of making financial ops a key part of Mexico's anti-drug strategy, cracking down on money laundering will never be able to make a real impact on organized crime in the country.A series of articles published by the Los Angeles Times last weekend illustrate how Mexican criminal groups use the global system to move billions of dollars from the U.S. to Mexico on an annual basis, with both governments thus far unable to make much of a dent in the illicit flow of cash.

As the Los Angeles Times reports:

Even President Felipe Calderon, who sent the army into the streets to chase traffickers after taking office in 2006, an offensive that has seen 43,000 people die since, concedes that Mexico has fallen short in attacking the financial strength of organized crime.

"Without question, we have been at fault," Calderon said during a meeting last month with drug-war victims. "The truth is that the existing structures for detecting money-laundering were simply overwhelmed by reality."

The report also delivers a series of statistics demonstrating the government's failure to crack down on the proceeds of the drug trade. According to the articles’ authors, the amount of illicit cash seized by Mexican authorities peaked in 2008 at $71.4 million. The figure dropped to less than $60 million in 2009, $24 million in 2010, and the government is on pace to seize just $12 million this year. Estimates of the amount of cash laundered in Mexico run from roughly $10 billion to $45 billion annually, which suggests that in its best year in recent memory, the government was able to seize, at best, no more than 0.7 percent of all the illicit cash in the country.

In light of these statistics, the logical conclusion might be that neither the U.S. nor the Mexican government is doing enough to tamp down on money laundering. However, it’s also worth considering another possibility: the figures are so paltry because anti-money laundering (AML) efforts are exceedingly difficult, which makes it unlikely that AML will ever be a significant tool in the fight against organized crime. Therefore, increasing the government resources dedicated to cracking down on dirty money could divert resources away from more fruitful methods of attacking criminal groups.

The impediments to tracking illicit money were documented for InSight Crime by Alejandro Hope several weeks ago: the small size of the drug trade relative to the economy as a whole -- Mexico’s annual GDP is more than a trillion dollars in nominal terms, and almost $1.6 trillion by purchasing power parity -- makes tracking dirty money akin to searching for a needle in a haystack. Furthermore, the fact that gangsters cannot finance their purchases on credit means that they need to immediately reinvest a high proportion of their revenues to keep themselves in operation. This further reduces the amount of dirty money laundered in the legal economy, and further complicates AML efforts.

Another problem is the size of the informal economy. The IMF, for instance, estimates that 30 percent of Mexico’s economy is informal, and other Latin American nations have a similarly high rate. Such a huge space for cash-only, virtually untraceable transactions offers a ready sanctuary for gangs looking to hide the proceeds of drug sales. Not coincidentally, one of the more significant criminal trends in recent years is gangs like the Zetaa increasingly involving themselves in pirate merchandising.

As the LA Times reported, trade between Mexico and the U.S. provides another avenue for gangs looking to pass illicit cash across the border. But with legitimate commerce between the two nations estimated at $400 billion annually, the playing field will always be tilted toward the gangsters who want to move tens of thousands of dollars at a time.

Even beyond the operational obstacles to cracking down on criminal revenues, there are conceptual problems. Neither Mexico nor the U.S. government has adequately defined the goal of AML: is it to reduce the amount of revenues, or is it to dismantle existing gangs?

If it is merely to reduce the profits, it’s worth noting once again the tiny size of the amounts seized thus far. Is the legislation being proposed going to lead to exponentially larger amounts of dirty cash being seized? The seems an unlikely result. This doesn’t make stricter AML laws a bad idea, but government officials and analysts alike would do well to temper their enthusiasm and weigh the potential benefits against the costs to the legitimate economy.

If the primary goal is to dismantle existing groups, then the question becomes whether AML is successful where other law enforcement tactics -- infiltrating smuggling networks, electronic surveillance, etc. -- fail to bring about a criminal group’s demise. While there may be some isolated instances of this dynamic, they are the exception rather than the rule. In any event, no one arguing for stronger AML provisions is making this case.

An alternative argument for AML laws is that captured criminals and their families should be prevented from enjoying ill-gotten wealth. This may be valid, but it means that attacking dirty money is essentially an after-the-fact, punitive measure rather than the head of the law enforcement spear.

Many analysts point to crackdowns on terrorist financing as evidence of the AML’s potential for organized crime, but there is an important difference between the two: money is a terrorist group’s means to the end, i.e. launching terrorist attacks. Governments do not worry about terrorist groups having large bank accounts, per se, but rather about them being more able to carry out attacks on civilians. AML efforts reduce the ability of terrorist groups to kill civilians, even if they don’t necessarily lead to prosecutions.

The dynamic with organized crime groups is fundamentally different. A large bank account is the end in and of itself for a capo like Joaquin Guzman, alias "El Chapo." Therefore, attacking his assets doesn’t reduce his ability to harm society the way it does for a terrorist boss. If anything, in fact, it does the opposite; a capo could very well compensate for a marginal reduction in his profits by ramping up production of illegal drugs and flooding the market with more merchandise.

Most of the contenders for the 2012 Mexican presidential election --including the overwhelming favorite, Enrique Peña Nieto -- have also paid lip service to the idea that stronger AML efforts are a vital part of the next administration’s security strategy. From the standpoint of politics, this makes sense; calling on the government to go after the criminals’ financial networks sounds determined and serious. But advocates of AML have made little effort to justify what remains a relatively novel and untested approach.

With regard to stopping money laundering, neither the "how" nor the "why" have been fully answered.

Michael Hearns an Anti Money Laundering specialist with over 24 years of AML experience can also be found at www.launderingmoney.com and on twitter at : http://twitter.com/#!/LaunderingMoney