SPECIAL REPORT
Money Laundering in Mexico

Drug profits being laundered in Mexico are thought to be as high as US$15
billion annually the equivalent of 5% of the country's GDP.

By TIM COONE

North of the Mexican Pacific Coast fishing port of Guaymas, an eightlane
highway leads to the small tourist town of San Carlos, where a modern
marina gives shelter to dozens of luxury yachts. A modern and wellkept
launderette has signs in English.

The highway comes to an abrupt halt near two hotels a Howard Johnson and
a Club Med and afterwards turns into a dirt track winding off through a
picturesque and dry Sonoran desert, where coyotes howl in the night and
flightless roadrunners scamper through the cactusstrewn landscape.

Maybe 100 cars per hour travel down the highway at "busy" periods, a large
proportion of them American campers with license plates showing them to be
from just over the border in Arizona or Colorado. Where the track
disappears into the desert, an abandoned airfield marks where the famous
novel of the U.S. novelist Joseph Heller Catch 22 was filmed a quarter
of a century ago.

But today it is a different drama, with a new Catch 22 plot being enacted
out in Sonora state and even much further afield.

Being a thinly populated border state, Sonora has become one of the main
staging posts for cocaine heading from Bolivia, Peru and Colombia to the
United States. Flown into remote airstrips in twinengine planes and
executive jets, the drugs make their final leg across the U.S. border in
falsebottomed road trailers, on the backs of donkeys or perhaps in yachts
sailing out of marinas such as at San Carlos. Other drugs grown in Mexico
such as marijuana and opium gum, also find their way north in large
quantities.

While the drugs go in one direction, the money from that trade comes back
in the other, often in the same falsebottomed containers, yachts and
donkeypacks in which the drugs went north, according to one investigator
with many years of experience of tracking down drug smugglers and money
launderers.

Like most investigators into this business, he did not wish to be named.
The money is invested in real estate, in the Mexican stock and bond
markets, or even in highlyvisible public works projects, so as to pay off
local politicians for their patronage and protection and help win them some
votes at the next election. The local gossip in San Carlos is that its
eightlane highway to nowhere is a product of such moneylaundering. It is
certainly hard to imagine many coyotes or roadrunners ending up as roadkill
under the wheels of juggernauts on that empty, shimmering stretch of tarmac.

Money laundering was defined in 1990 by the U.S. Senate Foreign Relations
Subcommittee on Narcotics and Terrorism, as "the conversion of profits of
illegal activities into financial assets which appear to have legitimate
origins." The profits of the Latin AmericanU.S. drug trade being laundered
through Mexico is conservatively estimated by U.S. and Mexican
investigators to amount to some US$10 billion to $15 billion per year,
equivalent to around 3% to 5% of Mexico's GDP.

U.S. antidrug agencies estimate that Mexicobased trafficking
organizations control the movement of several hundred metric tons of
cocaine, 56 metric tons of heroin, and up to 7,000 metric tons of
marijuana annually into the United States. This is thought to represent
around 50% to 60% of U.S.bound cocaine shipments from South America, and
also makes Mexico the biggest overseas supplier of marijuana to the U.S.
market. Given the size of the trade, and the hundreds of billions of
dollars involved at street prices, the $10 billion to $15 billion per year
estimate of profits being laundered through Mexico could indeed be a
considerable underestimate.

For a developing country which has averaged just 4% GDP growth per annum in
the five years prior to the 1995 economic crisis, this flood of money
therefore represents the difference between growth and stagnation, or worse
recession at the macroeconomic level. This is the Catch 22 of Mexico's
fight against the drugs trade: if it were to successfully staunch the flow
of laundered money through the Mexican financial system, it could seriously
destabilize the economy.

It is difficult to get precise figures on the scale of the business,
because by definition the money launderers seek to brush over their tracks.
The financially strapped Mexican banks will give no estimates of the scale
of the business, let alone admit to being participants in it.

But U.S. officials are clear: "Given the intimate ties between the two
countries' financial systems, and in the absence of adequate controls in
the Mexican system, Mexico has become a major money laundering center and
the preferred international placement point for U.S. dollars," said a
report produced last March by the U.S. State Department's Bureau for
International Narcotics and Law Enforcement Affairs. "Drug cartels launder
the proceeds of crime in legitimate businesses in both the United States
and Mexico."

If the proceeds are as much as $15 billion, that would be the equivalent to
around 20% of the entire Mexican banking system's loan portfolio. At the
end of 1996, the banking system held a total of $141 billion in assets, of
which around half was in loans, the remainder being invested in private and
public sector financial bonds and instruments, according to Mexico's
National Banking Commission. The liquidity of the banking system must thus
be significantly influenced by these major flows of drug cash through the
economy. If these dried up, so would the banks' already tightly stretched
credit supply.

Miguel Mancera, the president of Mexico's central bank, when pressed on how
significant he thought moneylaundering to be in its influence on the
Mexican economy, was as dry as his moneysupply in his response: "It is
very difficult to separate the legitimate transactions from the
illegitimate ones," he said.

Given the huge quantities involved, the money in the process of being
laundered must enter the banking system at some point through deposits
either of cash or monetary instruments, and can thereby be monitored.
Reporting of cash transactions over $10,000, is to be implemented later
this year under recently approved legislation which will align Mexican
financial reporting practice with that of the United States.

The use of Suspicious Activity Reports (SARs) forces the money launderers
to resort to "smurfing," as it is known in the United States, where these
regulations were first introduced. "Smurfing" involves the employment of
hundreds, and maybe thousands of agents who act as money couriers and who
make similarly numerous smallscale transactions of amounts just below the
$10,000 reporting limit. In Mexico, foreign exchange houses along the U.S.
border are believed to be the first entrypoint of "smurfed" funds into the
Mexican banking system.

Largerscale concentrations of cash have to be disguised before they can
enter the banking system if they are to avoid detection and an SAR
investigation. This requires legitimate business fronts which normally
handle large cash flows such as supermarkets, pharmaceutical chain stores,
franchise operations, and major retail operations. The smuggled,
drugrelated cash is mixed in with the legitimate sales turnover. It also
allows such businesses to compete keenly with other similar businesses
which are not in the narcotics trade, thereby underpricing them and forcing
them out of business. This can enable the drug traffickers to further
concentrate their hold on particular retail market segments.

According to Pascal Feria, the head of the Valley of Mexico Pharmacist's
Association, there is evidence that the money launderers plan to move into
the Mexican pharmaceutical business, opening up their own chains of
pharmacies, as they have done in Colombia. This would bankrupt thousands of
existing pharmaceutical outlets, many of which are small, familyrun
businesses, Feria claimed.

In this respect, the 1994 devaluation in Mexico was a major opportunity for
the recyclers of narcodollars. Major retail businesses could be boughtup
at half the price they were valued at just months before.

"I know a lot of money that came into the Mexican market after the December
1994 devaluation was narcomoney," says a U.S. stockbroker in Mexico City,
who asked not to be named. "The business that was generated helped save a
lot of banks at the height of the loandefault crisis that followed."

Casinos are widely considered another business which are important conduits
for laundering cash and it is noteworthy that Mexico's fiftyeight year ban
on casino operation is currently under review.

A recent study by the Tourism Secretariat (Sectur) of the government
outlines a strategy to develop six new Integrated Tourism Centers (CITs),
involving investments of some $300 million to $400 million each, all
including casinos as centerpiece attractions.

"The negative social aspects of casino operation are well
known...prostitution, heavy alcohol consumption and in some cases drugs.
Linked to the latter it is known that casinos can be places of money
laundering," said a recent discussion paper from The Mexican Federation of
Business Organizations (Coparmex), one of the leading and most powerful
business associations in Mexico.

The heart of Mexico's financial system, its banks, is meanwhile thought to
be within arm'sreach of the money launderers. Testimony given by U.S.
antinarcotics agent Harold D. Wankel to the U.S. Congress last year stated
that Drug Enforcement Administration (DEA) sources had found that Mexican
drug traffickers "had bought large amounts of shares in (Mexican) banks and
had placed members on their boards." No specific banks or individuals were
named in the testimony.

"Getting bank cooperation at the first stage the cash enters the system is
vital. It is where the money launderers are most vulnerable," says one
experienced investigator. "Once the money is the banking system, it becomes
increasingly harder with every transfer to trace to illicit dealings. After
a chain of transfers, the funds appear to be legitimate."

One of the apparently lesssound methods is for government officials to
stash away tens of millions of dollars in overseas bank accounts. Raul
Salinas, the elder brother of expresident Carlos Salinas, has been behind
bars since early 1995, held on a series of charges including
moneylaundering, fraud and conspiracy to murder. The moneylaundering
charges relate to a period when he was in charge of Conasupo, Mexico's food
distribution agency for the poor, and the simultaneous appearance of some
$80 million in his personal accounts in Switzerland.

It is a curious fact, however, that many of the most politicallydamaging
revelations in the case have been in U.S. press reports, apparently fed by
leaks from Swiss investigators. Bungling, inefficiency, confusion and
stonewalling have characterized much of the successive Mexican
AttorneyGeneral's investigations into the 1994 political murders and the
Conasupo case, so much so that even the normallycautious Mexican press is
beginning to laugh about it. A cartoon in the daily La Reforma newspaper
depicted Jorge Madrazo, the recentlyappointed head of the PGR (the fifth
in as many years) saying, "We are making advances in the Conasupo
investigation. We have taken out a subscription to the New York Times."

An investigation by a Mexican Congressional committee into the Conasupo
case was halted last September by the majority of members from the ruling
Institutional Revolutionary Party (PRI) that sat on it, before it was able
to delve into the moneylaundering aspects of the case, and possible links
leading to other prominent Mexican political and business figures.

"What we managed to tap into in the Conasupo investigation proved to me
that corruption is systematic," says Adolfo Aguilar Zinser, a leading
independent deputy in Congress who was one of the prime movers behind that
investigation. "Conasupo is not an isolated or extraordinary event. Money
laundering from the drugs trade is a newer phenomenon building upon and
reinforcing an existing corrupt infrastructure. Unless the entire corrupt
structure is changed, new and stricter legislation on moneylaundering will
have little effect."

More intriguing still are the links between the fugitive banker Carlos
Cabal Peniche, who is accused by leaders of the opposition Revolutionary
Democratic Party (PRD) of having funded the PRI, especially its Tabasco
branch, at the same time as being a conduit for the laundering of drug
money. Cabal Peniche fled Mexico in late 1994 after being unable to account
for $700 million missing from the two banks that he controlled Banco
Cremi and Banco Union and which caused both banks to go into
receivership. Moreover, Cabal's name has come up in both the Conapsupo case
and in the 1994 political murder cases, since he was a confidant of Raul
Salinas and the Salinas family.

President Ernesto Zedillo himself has said repeatedly that the drug trade
is now Mexico's number one security problem, as did Attorney General
Antonio Lozano Gracia, who headed up the fight against organized crime
until he was suddenly fired by Zedillo last December. Both now accuse each
other of being liars Lozano maintaining that he had informed the
President about witness payments by the prosecution in the Raul Salinas
investigation, President Zedillo insisting he hadn't. The chaos in that
investigation resulted in Lozano's sacking and the imprisonment of his
chief investigator.

"Persistent corruption at all levels of government, frequent changes in
personnel, and lack of followthrough on government commitments have
combined to hinder Mexico's ability to implement its antidrug strategy,"
said the report from the U.S. State Department.

President Bill Clinton's visit earlier this year Mexico placed the drug
trade and money laundering at the top of the agenda.

Whether Mexico's Catch 22 will enable it to live up to U.S. government
expectations, remains to be seen. But even if it does, there is mounting
skepticism that fighting the money laundering business is a very effective
way of tackling the drugs trade. As one leading criminologist wrote several
years ago, "The problem of laundering drug profits cannot, ultimately, be
resolved unless there are no profits to launder."

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