AML Challenges for Mexico
With a large population (over 100 million) and a singular geographical situation, Mexico is a natural corridor for drug trafficking to the US. Mexico is the largest provider of drugs, such as cocaine and methamphetamines, to the US according to the US Department of State. Mexico is also a source of other serious crimes such as human and weapons trafficking.
In recent decades, Mexican authorities have been active in fighting these specific crimes and have made significant strikes against drug cartels and other criminal organizations. However, due to its conditions, Mexico remains vulnerable to money laundering risks and the US Department of State still considers Mexico a jurisdiction of primary concern regarding money laundering.1
The Mexican financial sector is significant, comprising more than 40 commercial banks, with more than 7,000 branches throughout the country; more than 80 insurance companies, 200 credit unions, 28 money exchange houses (casas de cambio) and an undetermined number of unlicensed money exchange offices. Remittances to Mexico, especially from the US, play a significant role in the economy as they reached more than US$20,000m last year.2
The Secretariat of Finance and Public Credit (SHCP) is the main regulator of domestic institutions in anti-money laundering (AML). The Mexican Financial Intelligence Unit, constituted in 1997 under the definition provided by the Egmont Group,3 is also under the SHCP.
Supervision tasks are the responsibility of the Banking and Securities Commission (CNBV), the Insurance and Bonding Commission (CNSF), the Pension Funds Supervisory Commission (CONSAR) and the Tax Administration Service (SAT) regarding money transmitters and money exchange centers.
As a result of the compromises assumed after the endorsement of the United Nations Vienna Convention in 1988, Mexico launched a money laundering offence in 1989. Since its inception and inclusion in the Tax Code (Código Fiscal), the money laundering offence has had a broad predicate underlying activity, meaning that disguising the economic proceeds of any criminal activity could constitute money laundering.
However, the offence of money laundering stood alone with no preventative measures applicable to financial institutions for a long time. It was not until 1993 that the Banking Commission issued the first set of non-mandatory guidelines for financial institutions to prevent money laundering.
In late 1995, the legislative branch passed major amendments to the criminal legal framework ruling the operations of financial institutions and allowing the SHCP to issue mandatory provisions in order to prevent money laundering. These provisions were not issued until 1997.
In 1996, the legislative branch passed major reforms to the criminal legal framework and enacted a money laundering offence (Penal Code, article 400 bis, punishable with imprisonment of up to 15 years), in which money laundering was considered a serious crime. In 2000, Mexico enacted a Law against Organized Crime and considered money laundering a crime that could constitute organized crime (extending imprisonment up to 40 years), as well as allowing the use of advanced investigation techniques such as witness protection and communications tapping.
In early 1997, the SHCP issued the first set of General Provisions to prevent money laundering in banking institutions. In 1999, insurance and bonds companies were also included within the scope of the AML official provisions. New provisions came into effect in late 2000, within the process of Mexico’s admission into the Financial Action Task Force (FATF).4
In May 2004, the SHCP issued a new set of rules applicable to financial institutions, money remitters and unlicensed money exchange centres (centros cambiarios), primarily driven by the pressure of the second round of mutual evaluation executed by the FATF in the past months.5
The regulation of May 2004 did consider the new standards adopted by the FATF in 2003 and introduced, for the first time in Mexico, a requirement to report transactions related to terrorist financing. In November 2006, new regulations applicable to banks and credit institutions came into effect. This new piece introduced more stringent requirements for international wire transfers and cash-based operations.
In 1998, the US government conducted a unilateral sting operation called ‘Casablanca’ aimed to detect money laundering from drugs in Mexico. A number of Mexican bank executives were arrested in Las Vegas, under allegations of facilitating money laundering. The history is long, and although the results of Casablanca in terms of indictments and seizures may be questionable, it certainly left a significant scar in the Mexican financial community.
As a result of pressure created by Casablanca, Mexican authorities looked for international recognition in its efforts to fight AML. Some analysts affirm that because of Casablanca, Mexico joined the Caribbean Financial Action Task Force, as a pre-requisite to apply for a full membership of the FATF, which was eventually granted in 2000.
The AML measures applicable for financial institutions in Mexico are not very different to those applicable to FATF-aligned jurisdictions. Financial institutions are generally required to:
The Mexican government faces important challenges that are similar to those faced by any other government. The credibility of the AML regime depends to a great extent on the effectiveness of the system, which is measured by the number of criminal convictions for money laundering and the amount of frozen and seized crime-related assets. As of today, convictions and seizures remain low as judged by the FATF in its latest evaluation report of Mexico’s AML regime (2004).
Obviously, the problem described above entails several methodological issues. For instance, there is no clear rule to determine what should be a normal standard to estimate the effectiveness of a system because there is no point of reference as to the amount of money laundering occurring within its territory.
Probably the most important challenge for the Mexican government refers to a non-tangible situation, read citizenship awareness. While the AML measures put in place so far by the SHCP have created a culture among financial institutions (along with the pressure exerted by foreign institutions making businesses in or with Mexican counterparts), it is necessary to extend the scope of the AML culture to the citizens.
People should be fully aware of the negative consequences of money laundering, as well as alert signals that could represent a money laundering operation that should be avoided and where applicable reported.
In this regard, it seems that national strategies are forgetting that, besides official actions to prevent and stop money laundering through financial institutions, the overall regime might be improved by the participation of the citizens.
In addition, customers and users of financial services need to understand that financial institutions will continue to require even more documents in order to verify identity and source of funds (among other things) and that more and more questions will be asked in the future.
Last but not least of the challenges for the government is extensive use of cash, which remains a non-deferrable issue. The Mexican economy is largely based on the use of cash. This could happen for a number of reasons, mainly poor banking penetration, as well as what could be a cultural problem where ‘cash rules’.
Obviously, the extensive use of cash among the population creates several distortions and difficulties in terms of AML monitoring. It also produces millions of reports that could end up in a drawer of the FIU, without a feasible tool to analyze such volume.
That being said, it should be noted that together the Mexican government and the Mexican Bankers Association have launched several promising initiatives to foster the use of financial payment instruments (such as debit cards) as opposed to cash.
The other short-term challenge is issuing regulations for non-financial institutions that can be used for money laundering purposes, as well as gatekeepers, defined as professional activities that could serve, either consciously or not, as active parts in a money laundering scheme.
For the past years, there has been an international tendency to extend AML requirements to non-financial activities, especially to the so-called gatekeepers. In Mexico, this issue entails a legal problem, because without a series of complicated amendments to the legislation governing professional activities, the Mexican government could not impose AML measures to non-financial activities.
The issue is not a new one. Actually, Mexican authorities have envisaged for several years that an AML law, of general application, is the only feasible instrument to reach professional activities. Probably the political conditions last year, and different agendas governing the relationships between the Mexican executive and legislative branches have deferred the issue, but this will not wait much longer.
The private sector also faces important challenges in an environment where AML measures are no longer optional and supervision tends to be more stringent every day. Frequently, AML measures are criticized for being costly to implement, which could ultimately be reflected in costs that eventually will be transferred to the customers.
Financial institutions in Mexico need to embrace stronger policies in AML and recognise the benefits in terms of risk-based procedures that will ultimately protect their reputation. In addition, financial institutions need to find a way to send clearer messages to their employees who are not necessarily convinced of applying adequate preventive, due diligence in their day-to-day business relationships.
Mexican authorities have been constantly been under pressure and the large international movement against money laundering has driven its progress in the AML field. It is clear that Mexico has made a tremendous effort to bring its AML regime up to international standards. Nevertheless, its enforcement, as well as the overall effectiveness of the system, in terms of criminal prosecutions, still faces serious challenges including an amendment to its relevant laws and an effective body of intelligence that significantly increases its outcome.
1See the US Department of State’s 2006 International Narcotics Control Strategy Report.
2According to information of the Central Bank – Banco de Mexico.
3The Egmont Group is an international body that currently groups 101 governmental agencies, called Financial Intelligence Units (FIUs) to foster information exchange and cooperation.
4The FATF is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing.
5The FATF recognizes significant progress of the Mexican AML regime since the last evaluation (1999). However, it also notes deficiencies that Mexico should address in order to achieve full compliance with the group standards.