Mo' Money, Mo' Problems

Sunday's front page of The New York Times featured a story about the DEA laundering Mexican cartel cash. I told myself I wouldn't write about the drug war again on this blog, but the story caught my attention. In a previous post I argued that before the US further militarizes the drug war, it should first look to shut down cartel financial networks. I still stand by that argument, but I would like to explore the matter further in this blog entry.

The Sunday NYT article claims that DEA agents have helped smuggle and launder millions of dollars in profits for Mexican criminal organizations. Cartel members would unknowingly transfer cash to undercover agents who, instead of seizing the money and arresting the drug dealers, would deposit the profits in cartel accounts. Former DEA officials were quoted defending the agency's operations by claiming that the laundering schemes had to lead to concrete results, or else the DEA would potentially be the world's largest money launderer. While I understand the intent of these quote, I think their attempts at mixing frankness and opacity just provides additional fodder to conspiracy theorists who believe the DEA, CIA, and FBI are the world's largest drug cartel. After tweeting the NYT DEA money laundering expose, a drug legalization advocate from Australia responded and assured me that this was all part of a plan to capture drug profits for the US government.

Earlier last week, the L.A. Times published an article highlighting the Mexican government's anti-laundering efforts. Whereas the NYT article estimates that $18-39 billion in drug money travels between Mexico and the U.S. annually, the LAT piece places the amount closer to $50 billion — about 3% of Mexico's legitimate GDP. The LAT argues that Mexico's anti-laundering efforts are ineffective because the majority of cartel profits are laundered in the US and other countries.

To me the DEA operation resembles ATF's now (in)famous "Fast and Furious" operation in which the ATF transferred guns to Mexican cartels and allowed them to walk into Mexico. Both the ATF and DEA operations attempt to crack criminal networks: the DEA watches to see where the money goes, and ATF tried to map arms trafficking networks. Unfortunately for the ATF and innocent people in Mexico, the gun-walking operation did not work. The quotes from former DEA officials imply that the agency would not be allowing money to "walk" if it didn't lead to results, otherwise the DEA would simply be guilty of allowing money to reach the hands of criminals who then purchase guns and pay off Mexican law enforcement. Still, though the former DEA officials imply success, they do not define how they measure favorable outcomes. Blogger James Bosworth of Bloggings by Boz raises some important questions about the cost-benefit analysis which informs the DEA's laundering operations:

"I'd like to know how they run the cost-benefit analysis on these operations. Is it worth laundering $10 million in order to seize a $100 million in drug trafficking assets? I think that's a great ROI and would agree. Would it be worth laundering $10 million in order to arrest five guys and get back the $10 million? I'm not sure. Would it be worth laundering $10 million to make arrests that eventually prevent 100 murders in Mexico? I think that's a good question to ask, but I'm not sure something so complex can be measured clearly."

I agree with Bosworth's assessment of the cost-benefit analysis. At this point, the DEA operation raises more questions than it answers. With news that Congressional Republicans are opening an inquiry into the money laundering operation, we may have more information to judge its worth in the near future.

The recent spotlight on US anti-laundering efforts in the drug war reminded me of an excellent article I read last year about laundering and financial institutions. Wachovia, now owned by Wells Fargo, admitted its negligence for failing to spot laundered money from Mexico. Bloomberg reported that between 2004 and 2007, Wachovia handled nearly $380 billion from Mexico which it failed to properly investigate, amounting to the largest ever violation of the Bank Secrecy Act, a law requiring financial institutions to report money laundering. Wachovia's violations were so blatant that the head of the bank's anti-laundering unit quit in disgust after bank officials ignored the evidence that Mexican cartels were using the bank to transfer funds. The Bloomberg article points out that other US banks are also used to launder money, but that the US government lacks the resources and will to fine and prosecute them. In essence, the article argues, American financial institutions are too-big-to-fine: if the US government were to charge banks for failing to follow anti-laundering procedures and regulations, then it could "cause panic in the financial markets."

While it may look bad to have the DEA launder millions of dollars in cartel revenues, does it really have a choice if US banks continue to ignore their responsibilities under the Bank Secrecy Act? The DEA is far too small to track and confiscate $50 billion in drug profits. Instead, private banks should bare the responsibility for making sure criminal organizations do not launder money through their systems. Though some experts disagree, I maintain that cutting off cartel money supplies would be a major step in weakening Mexico's criminal organizations; however, the US and Mexican governments need the cooperation of global financial institutions. Otherwise, the DEA's small scale money-laundering schemes will be about as effective as trying to plug a leaky dam with your pinky finger.

Response to Increased Violence in Guadalajara

The recent discovery of several dozen bodies in Guadalajara – one of Mexico's wealthiest, largest, and most culturally important cities – is indeed disconcerting. However, I disagree that the recent increases in violence in formerly calm cities signifies an increased threat to the US or Mexican security. An article in this week's Economist sumarizes recent research from David Shirk at the Trans-Border Institute which argues that drug violence may have actually plateaued. While violence may be increasing in Guadalajara and Monterrey, the once ravaged cities of Tijuana and Ciudad Jarez are experiencing less violence than they have in the past. One theory is that the Sinaloa cartel has eliminated its competition in Tijuana and has essentially consolidated its control over Juarez. The increased violence in Monterrey and Guadalajara is likely indicative of a new battlefield for the Sinaloa-Zeta rivalry.

Sharee argues that Mexico's drug violence poses two primary risks to the US: increased illegal immigration and a weak Mexican government and economy. While I agree with Sharee's explanation of the logic of violence between the cartels and the government, I believe the risks he/she highlights are largely overstated. First, although drug violence has been increasing for several years, illegal immigration from Mexico has actually declined over that time. Some of this is due to the recession which crippled the US economy and reduced job opportunities for immigrants. Increased border security may have also played a role. However, some of the decline is due to the heightened danger of crossing the border illegally. Mexican criminal organizations now control the major border crossings, making illegal immigration much more treacherous. Immigrants from Mexico and Central America now cite the border violence as a deterrent from crossing the border. Although asylum requests from Mexico have increased over the last few years, illegal immigration has not.

Second, the threats to Mexico's economy and political stability are real, but we should be careful not to overstate them. While Mexico's tourism industry has suffered due to the grisly headlines coming out of the country, the overall Mexican economy is pretty healthy. FDI in Mexico has not decreased significantly since the drug war began, and its economy has been projected to grow over 5% this year. The real problem with Mexico's economy is that it does not provide enough opportunities to young men who have not succeeded in school. In Mexico these young men are called ninis, because they neither work nor go to school. The Economist notes that there are now over 100 criminal organizations operating within Mexico, a tenfold increase since 2007. Many of the members of these gangs are ninis who have no schooling, no job opportunities, and no hope. As far as governance is concerned, Mexico has a strong central government that is able to provide most basic goods and services to its people in most areas of the country. Although some criminal organizations have tried to influence recent elections, their primary interest is to be left alone. There really isn't any threat that the government will collapse because of drug violence. A larger concern is that the government could lose legitimacy. Already, citizens are tiring of the drug war; some worry that a younger generation of voters who do not remember the worst aspects of PRI leadership could fall for the party's illusion of stability and vote it back into power. The return of the vintage PRI would be a step back for democracy. Only time will tell if the PRI has changed since 2000.

Now, just because I believe we tend to inflate the risks Mexican criminal organizations pose to the US government, it doesn't mean that I think we should ignore the problem. Indeed, the US has helped fuel the violence in Mexico with its massive demand for narcotics and its inability to stem the flow of weapons into Mexican territory. Our own government even knowingly let guns cross into Mexico! As such, I agree with Sharee that the US should work with the Mexican government to address its drug violence. While the Merida Initiative and other "militarized" forms of assistance may be necessary, there is room for real progress on two fronts: cracking down on the financial support for the cartels, and helping Mexico reform it's justice system. In my opinion, the US needs to be more active in closing off the cartels' financial networks. Additionally, DOJ and civil society groups within the US should partner with Mexican organizations to help foster more rapid reforms of the Mexican judicial system. Ultimately, as long as criminals can operate within Mexico with impunity, crime will always pay.

Iran into a trap. . .

Iran stole the headlines earlier this week with allegations that operatives associated with Iran's Quds Force tried to hire a Mexican cartel to assassinate the Saudi ambassador to the U.S. Already, some news outlets are posting alarmist commentary, warning of the nefarious connections between the Quds and the Zetas; others are advocating a more measured response. A recent Financial Times article does a good job articulating the debate between the two sides.

Some, like AEI contributor Jose Cardenas, argue we should assume terrorist organizations are working with Mexican cartels; indeed, we should be surprised if they aren't working together. Others, like Sylvia Longmire, argue that cartels are unlikely to work with terrorists for fear of jeopardizing their lucrative business model by incurring the wrath of the U.S. military. They argue that the paltry sum of $1.5 million wouldn't be enough money to persuade any cartel to execute such a risky plot. In the middle are analysts who argue that while the central command of the Zetas or the Sinaloa Cartel would be unlikely to assist terrorists, the cartels use a diffuse network of gangs to accomplish their goals. These decentralized components might be more likely to take on a terrorist client.

One last group (not mentioned in the FT article) asks whether CS-1, the alleged DEA informant who posed as a Zeta, is a new Curveball. In the run-up to the Iraq war, the U.S. government relied on intelligence from a defected Iraqi codenamed "Curveball." Later, the informant admitted he had falsified his reports. Jefferson Morley of Salon highlights some of problems with the U.S. building its case on the credibility of CS-1, and warns that until his credibility is better established we should be wary of escalating already heightened tensions with Iran.

In my view, the U.S. does not need to worry about a possible Iran-Mexican cartel link. First, as far as we know the Iranians never met with an actual Zeta — only a U.S. informant posing as a cartel representative. None of the information we have about the case shows that Mexican cartels would be willing to work with international terrorist organizations. Second, we have no proof any of the cartels would have the capability to carry out a terrorist attack on U.S. soil, especially in Washington, D.C., a city far from the border. While Mexican crime organizations have a drug trafficking presence in hundreds of U.S. cities, there is little evidence that these networks are capable of staging a violent attack. Lastly, performing an act of international terrorism on U.S. soil would be extremely risky and would threaten their business model. The U.S. would act aggressively to crush any cartel that worked with a terrorist organization. Until the drug trade becomes less lucrative, cartels have every incentive not to work with terrorists.

In the end, it appears the Iranians were duped. We know that Iran has courted different groups elsewhere in Latin America, and it is likely they were trying to do the same in Mexico. However, in doing so they demonstrated a lack of understanding of the capabilities and interests of Mexican criminal organizations. Unless new information surfaces later, indicating Los Zetas (or any other group) actually expressed interest in working with the Iranians, it is probably safe to assume Iran acted haphazardly. Furthermore, by publicizing this story the U.S. government is sending a strong message to both the cartels and terrorist organizations. To potential terrorists, the U.S. government is saying "We've infiltrated the cartels, so don't bother trying to use them to carry out an attack in the U.S." Meanwhile, the Zetas and other groups in Mexico now have further confirmation the U.S. government has infiltrated their operations, which could seed mistrust and discord within those organizations.

This is a bizarre — but fascinating — story. It will be interesting to see what actions the U.S. will take to hold Iran accountable, and whether this leads to any changes in U.S. policy with respect to the drug war in Latin America.